As filed with the Securities and Exchange
Commission on March 1, 1995
File No. 2-85921
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. _____
Post-Effective Amendment No. 23 X
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 22 X
_________________
ALLIANCE MORTGAGE SECURITIES INCOME 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)
Registrant's 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 10105
(Name and address of agent for service)
It is proposed that this filing will become effective
(check appropriate box)
<PAGE>
X immediately upon filing pursuant to paragraph (b)
----
____ on (date) pursuant to paragraph (b)
____ 60 days after filing pursuant to paragraph (a)
____ on (date) pursuant to paragraph (a) of rule 485.
Registrant has registered an indefinite number of its shares of
Common Stock pursuant to Rule 24f-2 under the Investment Company
Act of 1940. Registrant's Rule 24f-2 notice for its fiscal year
ended December 31, 1994 was filed on February 24, 1995.
<PAGE>
CROSS REFERENCE SHEET
(as required by Rule 404(c))
N-1A ITEM NO. LOCATION IN PROSPECTUS
(Caption)
PART A
Item 1. Cover Page Cover Page
Item 2. Synopsis The Funds at a Glance
Item 3. Condensed Financial
Information Financial Highlights
Item 4. General Description of
Registrant Description of the Fund;
General Information
Item 5. Management of the Fund Management of the Fund;
General Information
Item 6. Capital Stock and Other
Securities Dividends, Distributions
and Taxes; General
Information
Item 7. Purchase of Securities Being
Offered Purchase and Sale of
Shares; General
Information
Item 8. Redemption or Repurchase Purchase and Sale of
Shares
Item 9. Pending Legal Proceedings Not Applicable
LOCATION IN STATEMENT OF
PART B ADDITIONAL INFORMATION
(Caption)
Item 10. Cover Page Cover Page
Item 11. Table of Contents Cover Page
Item 12. General Information Description of the Fund;
General Information
Item 13. Investment Objectives and
Policies Description of the Fund
<PAGE>
CROSS REFERENCE SHEET
(as required by Rule 404(c))
LOCATION IN STATEMENT OF
N-1A ITEM NO. ADDITIONAL INFORMATION
(Caption)
PART B
(Continued)
Item 14. Management of the Registrant Management of the Fund
Item 15. Control Persons and Principal
Holders of Securities Management of the Fund;
General Information
Item 16. Investment Advisory and
Other Services Management of the Fund
Item 17. Brokerage Allocation and
Other Practices Portfolio Transactions
Item 18. Capital Stock and Other
Securities General Information
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered Purchase, Redemption and
Repurchase of Shares
Item 20. Tax Status Dividends, Distributions
and Taxes
Item 21. Underwriters General Information
Item 22. Calculation of Performance
Data General Information
Item 23. Financial Statements Financial Statements;
Report of Independent
Auditors
<PAGE>
- - - --------------------------------------------------------------------------------
THE ALLIANCE
- - - --------------------------------------------------------------------------------
BOND FUNDS
- - - --------------------------------------------------------------------------------
P.O. Box 1520, Secaucus, New Jersey 07096-1520
Toll Free (800) 221-5672
For Literature: Toll Free (800) 227-4618
Prospectus and Application
March 1, 1995
U.S. Government Funds
- - - --Alliance Short-Term U.S. Government Fund
- - - --U.S. Government Portfolio
Mortgage Funds
- - - --Alliance Mortgage Strategy Trust
- - - --Alliance Mortgage Securities Income Fund
Multi-Market Funds
- - - --Alliance World Income Trust
- - - --Alliance Short-Term Multi-Market Trust
- - - --Alliance Multi-Market Strategy Trust
Global Bond Funds
- - - --Alliance North American Government Income Trust
- - - --Alliance Global Dollar Government Fund
Corporate Bond Fund
- - - --Corporate Bond Portfolio
<TABLE>
<CAPTION>
Table of Contents Page
<S> <C>
The Funds at a Glance.................................. 2
Expense Information.................................... 4
Financial Highlights................................... 7
Glossary............................................... 13
Description of the Funds............................... 14
Investment Objectives and Policies................ 14
Additional Investment Practices................... 20
Certain Fundamental Investment Policies........... 31
Risk Considerations............................... 32
Purchase and Sale of Shares............................ 36
Management of the Funds................................ 39
Dividends, Distributions and Taxes..................... 41
General Information.................................... 42
Appendix A: Bond Ratings............................... A-1
Appendix B: General Information About Canada,
Mexico and Argentina.............................. B-1
</TABLE>
Adviser
Alliance Capital Management L.P.
1345 Avenue Of The Americas
New York, New York 10105
The Alliance Bond Funds provide a broad selection of investment alternatives to
investors seeking high current income. The U.S. Government Funds invest mainly
in U.S. Government securities and the Mortgage Funds invest in mortgage-related
securities, while the Multi-Market Funds diversify their investments among debt
markets around the world and the Global Bond Funds invest primarily in foreign
government securities. The Corporate Bond Fund invests primarily in corporate
debt securities.
Each fund or portfolio (each a "Fund") is, or is a series of, an open-end
management investment company. This Prospectus sets forth concisely the
information which a prospective investor should know about each Fund before
investing. A "Statement of Additional Information" for each Fund that provides
further information regarding certain matters discussed in this Prospectus and
other matters that may be of interest to some investors has been filed with the
Securities and Exchange Commission and is incorporated herein by reference. For
a free copy, call or write Alliance Fund Services, Inc. at the indicated address
or "Literature" telephone number.
Each Fund offers three classes of shares that may be purchased at the investor's
choice at a price equal to their net asset value (i) plus an initial sales
charge imposed at the time of purchase (the "Class A shares"), (ii) with a
contingent deferred sales charge imposed on most redemptions made within three
years of purchase (the "Class B shares"), or (iii) without any initial or
contingent deferred sales charge (the "Class C shares"), except that Alliance
World Income Trust offers only one class of shares which may be purchased at a
price equal to its net asset value without any initial or contingent deferred
sales charge. See "Purchase and Sale of Shares."
An investment in these securities is not a deposit or obligation of, or
guaranteed or endorsed by, any bank and is not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other agency.
Investors are advised to read this Prospectus carefully and to retain it for
future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
ALLIANCE(R)
Mutual funds without the Mystery./SM/
(R)/SM These are registered marks used under licenses from the owner, Alliance
Capital Management L.P.
<PAGE>
The Funds At A Glance
The following summary is qualified in its entirety by the more detailed
information contained in this Prospectus.
The Funds' Investment Manager Is . . .
Alliance Capital Management L.P. ("Alliance"), a global investment manager
providing diversified services to institutions and individuals through a broad
line of investments including 103 mutual funds. Since 1971, Alliance has earned
a reputation as a leader in the investment world with over $121 billion in
assets under management. Alliance provides investment management services to 29
of the FORTUNE 100 companies.
U.S. Government Funds
Short-Term U.S. Government Fund
Seeks . . . High current income consistent with preservation of capital.
Invests primarily in . . . A diversified portfolio of U.S. Government
securities.
U.S. Government Portfolio
Seeks . . . As high a level of current income as is consistent with safety of
principal.
Invests solely in . . . A diversified portfolio of U.S. Government securities
backed by the full faith and credit of the United States.
Mortgage Funds
Mortgage Strategy Trust
Seeks . . . The highest level of current income, consistent with low volatility
of net asset value, that is available from a portfolio of mortgage-related
securities of the highest quality.
Invests primarily in . . . A diversified portfolio of adjustable and fixed-rate
mortgage-related securities that are U.S. Government securities or rated AAA by
S&P or Aaa by Moody's or, if not rated, are of equivalent investment quality.
The Fund's portfolio is structured to achieve low volatility of net asset value
approximating that of a portfolio investing exclusively in two-year U.S.
Treasury securities.
Mortgage Securities Income Fund
Seeks . . . A high level of current income consistent with prudent investment
risk.
Invests primarily in . . . A diversified portfolio of mortgage-related
securities.
Multi-Market Funds
World Income Trust
Seeks . . . The highest level of current income that is available from a
portfolio of high-quality debt securities having remaining maturities of not
more than one year.
Invests primarily in . . . A non-diversified portfolio of debt securities
denominated in the U.S. Dollar and selected foreign currencies. The Fund
maintains at least 35% of its net assets in U.S. Dollar-denominated securities.
Short-Term Multi-Market Trust
Seeks . . . The highest level of current income through investment in a
portfolio of high-quality debt securities having remaining maturities of not
more than three years.
Invests primarily in . . . A non-diversified portfolio of debt securities
denominated in the U.S. Dollar and selected foreign currencies. While the Fund
normally will maintain a substantial portion of its assets in debt securities
denominated in foreign currencies, the Fund will invest at least 25% of its net
assets in U.S. Dollar-denominated securities.
Multi-Market Strategy Trust
Seeks . . . The highest level of current income that is available from a
portfolio of high-quality debt securities having remaining maturities of not
more than five years.
Invests primarily in . . . A non-diversified portfolio of debt securities
denominated in the U.S. Dollar and selected foreign currencies. The Fund
expects to maintain at least 70% of its assets in debt securities denominated in
foreign currencies, but not more than 25% of the Fund's total assets may be
invested in debt securities denominated in a single currency other than the U.S.
Dollar.
Global Bond Funds
North American Government Income Trust
Seeks . . . The highest level of current income that is available from a
portfolio of investment grade debt securities issued or guaranteed by the
governments of the United States, Canada and Mexico.
Invests primarily in . . . A non-diversified portfolio of government securities
denominated in the U.S. Dollar, the Canadian Dollar and the Mexican Peso, and
expects to maintain at least 25% of its assets in securities denominated in the
U.S. Dollar. In addition, the Fund may invest up to 25% of its total assets in
debt securities issued by governmental entities in Argentina.
2
<PAGE>
Global Dollar Government Fund
Seeks . . . Primarily a high level of current income and, secondarily, capital
appreciation.
Invests primarily in . . . A non-diversified portfolio of sovereign debt
obligations and in U.S. and non-U.S. corporate fixed-income securities.
Substantially all of the Fund's assets are invested in lower-rated securities.
Corporate Bond Fund
Corporate Bond Portfolio
Seeks . . . Primarily to maximize income over the long term consistent with
providing reasonable safety in the value of each shareholder's investment;
secondarily, the Fund 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.
Invests primarily in . . . A diversified portfolio of corporate bonds issued by
domestic and foreign issuers that give promise of relatively attractive yields.
A Word About Risk . . .
The prices of the shares of the Alliance Bond Funds will fluctuate as the daily
prices of the individual bonds in which they invest fluctuate, so that your
shares, when redeemed, may be worth more or less than their original cost.
Price fluctuations may be caused by changes in the general level of interest
rates or changes in bond credit quality ratings. Changes in interest rates have
a greater effect on bonds with longer maturities than those with shorter
maturities. The prices of non-U.S. Dollar denominated bonds also fluctuate with
changes in foreign exchange rates. Investment in the Global Bond Funds, the
Multi-Market Funds and any other Fund that may invest a significant amount of
its assets in non-U.S. securities involves risks not associated with Funds that
invest primarily in securities of U.S. issuers. While the Funds invest
principally in bonds and fixed-income securities, in order to achieve their
investment objectives, the Funds may at times use certain types of derivative
instruments, such as options, futures, forwards and swaps. These instruments
involve risks different from, and, in certain cases, greater than, the risks
presented by more traditional investments. These risks are fully discussed in
this Prospectus. See "Description of the Funds-Additional Investment Practices"
and "--Risk Considerations."
Getting Started . . .
Shares of the Funds are available through your financial representative and most
banks, insurance companies and brokerage firms nationwide. Shares of each Fund
can be purchased for a minimum initial investment of $250, and subsequent
investments can be made for as little as $50. For detailed information about
purchasing and selling shares, see "Purchase and Sale of Shares." In addition,
the Funds offer several time and money saving services to investors. Be sure to
ask your financial representative about:
Automatic Reinvestment
Automatic Investment Program
Retirement Plans
Shareholder Communications
Dividend Direction Plans
Auto Exchange
Systematic Withdrawals
Check-writing
A Choice Of Purchase Plans
Telephone Transactions
24 Hour Information
ALLIANCE (R)
Mutual funds without the Mystery./SM/
(R)/SM These are registered marks used under licenses from the owner, Alliance
Capital Management L.P.
3
<PAGE>
- - - --------------------------------------------------------------------------------
EXPENSE INFORMATION
- - - --------------------------------------------------------------------------------
Shareholder Transaction Expenses are one of several factors to consider when you
invest in a Fund. The following tables summarize your maximum transaction costs
from investing in a Fund, other than World Income, and annual operating expenses
for each class of shares of each Fund. World Income, which has only one class
of shares, has no sales charge on purchases or reinvested dividends, deferred
sales charge, redemption fee or exchange fee. For each Fund, the "Examples"
below show the cumulative expenses attributable to a hypothetical $1,000
investment, assuming a 5% annual return, in each class for the periods
specified.
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class C Shares
-------------- -------------- --------------
<S> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of
offering price).................... 4.25%(a) None None
Sales charge imposed on dividend
reinvestments...................... None None None
Deferred sales charge (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower)................. None 3.0% None
during the
first year,
decreasing 1.0%
annually to 0%
after the
third year (b)
Exchange fee........................ None None None
</TABLE>
(a) Reduced for larger purchases. See "Purchase and Sale of Shares--How to Buy
Shares" --page 36.
(b) Class B shares of each Fund automatically convert to Class A shares after
six years. See "Purchase and Sale of Shares--How to Buy Shares" --page 36.
<TABLE>
<CAPTION>
Annual Operating Expenses Examples
- - - ---------------------------------------------------------- -------------------------------------------------------------
Short-Term U.S.
Government Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees(b)(after
waiver) None None None After 1 year $ 56 $ 51 $ 21 $ 21
12b-1 fees .30% 1.00% 1.00% After 3 years $ 85 $ 76 $ 66 $ 66
Other expenses(a)(b)(after After 5 years $116 $113 $113 $113
reimbursement) 1.10% 1.10% 1.10% After 10 years $203 $209 $209 $243
---- ---- ----
Total fund operating
expenses(b) 1.40% 2.10% 2.10%
==== ==== ====
<CAPTION>
U. S. Government Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees .54% .54% .54% After 1 year $ 52 $ 47 $ 17 $ 17
12b-1 fees .30% 1.00% 1.00% After 3 years $ 74 $ 64 $ 54 $ 54
Other expenses(a) .18% .18% .16% After 5 years $ 96 $ 93 $ 93 $ 92
---- ---- ---- After 10 years $162 $167 $167 $201
Total fund operating
expenses 1.02% 1.72% 1.70%
==== ==== ====
<CAPTION>
Mortgage Strategy Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees .65% .65% .65% After 1 year $ 56 $ 51 $ 21 $ 21
12b-1 fees .30% 1.00% 1.00% After 3 years $ 83 $ 75 $ 65 $ 64
Other expenses(a) .39% .43% .39% After 5 years $113 $112 $112 $110
---- ---- ---- After 10 years $197 $205 $205 $237
Total fund operating
expenses 1.34% 2.08% 2.04%
==== ==== ====
<CAPTION>
Mortgage Securities Income Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees .48% .48% .48% After 1 year $ 55 $ 50 $ 20 $ 20
12b-1 fees .30% 1.00% 1.00% After 3 years $ 82 $ 73 $ 63 $ 62
Other expenses(a) .51% .52% .49% After 5 years $110 $108 $108 $106
---- ---- ---- After 10 years $192 $198 $198 $230
Total fund operating
expenses 1.29% 2.00% 1.97%
---- ---- ----
</TABLE>
Please refer to the footnotes on page 5.
4
<PAGE>
<TABLE>
<CAPTION>
Annual Operating Expenses Examples
- - - ---------------------------------------------------------- -------------------------------------------------------------
<S> <C> <C> <C>
World Income
Management fees(c)(after
waiver) .49% After 1 year $ 17
12b-1 fees(c)(after
waiver) .68% After 3 years $ 54
Other expenses(c) .53% After 5 years $ 92
---- After 10 years $201
Total fund operating
expenses(c) 1.70%
=====
<CAPTION>
Short-Term
Multi-Market Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees .55% .55% .55% After 1 year $ 54 $ 49 $ 19 $ 19
12b-1 fees .30% 1.00% 1.00% After 3 years $ 77 $ 68 $ 58 $ 58
Other expenses(a) .28% .30% .28% After 5 years $102 $100 $100 $ 99
---- ---- ---- After 10 years $174 $181 $181 $215
Total fund operating
expenses 1.13% 1.85% 1.83%
==== ==== ====
<CAPTION>
Multi-Market
Strategy Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees(d) .60% .60% .60% After 1 year $ 56 $ 51 $ 21 $ 21
12b-1 fees .30% 1.00% 1.00% After 3 years $ 85 $ 76 $ 66 $ 65
Other expenses After 5 years $116 $113 $113 $112
Interest expense .11% .10% .09% After 10 years $204 $210 $210 $241
Other operating
expenses(a) .40% .40% .39%
--- --- ----
Total other expenses .51% .51% .48%
---- ---- -----
Total fund operating
expenses(e) 1.41% 2.11% 2.08%
==== ==== ====
<CAPTION>
North American
Government Income Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees(f) .69% .69% .68% After 1 year $ 59 $ 54 $ 24 $ 24
12b-1 fees .30% 1.00% 1.00% After 3 years $ 94 $ 85 $ 75 $ 75
Other expenses After 5 years $131 $129 $129 $128
Interest expense .33% .34% .33% After 10 years $235 $241 $241 $273
Other operating
expenses(a) .38% .38% .38%
--- --- ---
Total other expenses .71% .72% .71%
---- ---- ----
Total fund operating
expenses(g) 1.70% 2.41% 2.39%
==== ==== ====
<CAPTION>
Global Dollar Government Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees(h) .75% .75% .75% After 1 year $ 58 $ 54 $ 24 $ 24
12b-1 fees .30% 1.00% 1.00% After 3 years $ 92 $ 83 $ 73 $ 73
Other expenses After 5 years $127 $126 $126 $125
Interest expense 0.00% 0.00% 0.00% After 10 years $228 $234 $234 $268
Other operating
expenses(a) .58% .60% .59%
---- ---- -----
Total other expenses .58% .60% .59%
---- ---- ----
Total fund operating
expenses 1.63% 2.35% 2.34%
==== ==== ====
<CAPTION>
Corporate Bond Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees .63% .63% .63% After 1 year $ 55 $ 50 $ 20 $ 20
12b-1 fees .30% 1.00% 1.00% After 3 years $ 82 $ 73 $ 63 $ 62
Other expenses(a) .37% .37% .36% After 5 years $111 $108 $108 $107
---- ---- ---- After 10 years $193 $198 $198 $232
Total fund operating
expenses 1.30% 2.00% 1.99%
==== ==== ====
</TABLE>
- - - --------------------------------------------------------------------------------
+ Assumes redemption at end of period and, with respect to shares held ten
years, conversion of Class B shares to Class A shares after six years.
++ Assumes no redemption at end of period and, with respect to shares held ten
years, conversion of Class B shares to Class A shares after six years.
(a) These expenses include a transfer agency fee payable to Alliance Fund
Services, Inc., an affiliate of Alliance, based on a fixed dollar amount
charged to the Fund for each shareholder's account.
(b) Net of voluntary fee waivers and expense reimbursements. Absent such
waivers and reimbursements, annualized management fees would have been
.55%, annualized other expenses would have been 2.10% for Class A, 2.05%
for Class B and 2.09% for Class C and annualized total fund operating
expenses would have been 2.95% for Class A, 3.60% for Class B and 3.64% for
Class C.
(c) Net of voluntary fee waivers. Absent such waivers, management fees would
have been .65%, Rule 12b-1 fees would have been .90% and total fund
operating expenses would have been 2.08%.
(d) Represents .60 of 1% of the average daily value of the Fund's adjusted
total net assets.
(e) Excluding interest expense, total fund operating expenses would have been
for Class A, 1.30%, for Class B, 2.01% and for Class C, 1.99%.
(f) Represents .65 of 1% of the average daily value of the Fund's adjusted
total net assets.
(g) Excluding interest expense, total fund operating expenses would have been
for Class A, 1.37%, for Class B, 2.07% and for Class C, 2.06%.
(h) Reflects management fee in effect during the Fund's current fiscal year.
5
<PAGE>
The purpose of the tables on pages 4 and 5 is to assist the investor in
understanding the various costs and expenses that an investor in a Fund will
bear directly or indirectly. Long-term shareholders of a Fund may pay aggregate
sales charges totaling more than the economic equivalent of the maximum initial
sales charges permitted by the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. See "Management of the Funds-
Distribution Services Agreements." The Rule 12b-1 fee for each class comprises a
service fee not exceeding .25% of the aggregate average daily net assets of the
Fund attributable to the class and an asset-based sales charge equal to the
remaining portion of the Rule 12b-1 fee. With respect to each of Multi-Market
Strategy and North American Government Income, "interest expense" represents
interest paid by the Fund on borrowings for the purpose of making additional
portfolio investments. Such borrowings are intended to enable each of those
Funds to produce higher net yields to shareholders than the Funds could pay
without such borrowings. See "Risk Considerations-Effects of Borrowing."
Excluding interest expense, total fund operating expenses of each of Multi-
Market Strategy and North American Government Income would be lower (see notes
(e) and (g) above) and the cumulative expenses shown in the Examples above with
respect to those Funds would be lower. The information shown in the table for
Short-Term U.S. Government reflects annualized expenses based on the Fund's most
recent fiscal period. The management fee rate of Global Dollar Government is
higher than that paid by most other investment companies, but Alliance believes
the fee is comparable to those paid by investment companies of similar
investment orientation. The expense ratios for Class B and Class C shares of
Multi-Market Strategy and North American Government Income are higher than the
expense ratios of most other mutual funds, but are comparable to the expense
ratios of mutual funds whose shares are similarly priced. The Examples set forth
above assume reinvestment of all dividends and distributions and utilize a 5%
annual rate of return as mandated by Commission regulations. The Examples should
not be considered representative of past or future expenses; actual expenses may
be greater or less than those shown.
6
<PAGE>
- - - --------------------------------------------------------------------------------
Financial Highlights
- - - --------------------------------------------------------------------------------
The tables on the following pages present, for each Fund, per share income and
capital changes for a share outstanding throughout each period indicated. The
information in the tables for Short-Term U.S. Government has been audited by
Price Waterhouse LLP, the independent accountants for the Fund, and for U.S.
Government, Mortgage Strategy, Mortgage Securities Income, World Income, Short-
Term Multi-Market, Multi-Market Strategy, North American Government Income,
Global Dollar Government and Corporate Bond has been audited by Ernst & Young
LLP, the independent auditors for each Fund. A report of Price Waterhouse LLP or
Ernst & Young LLP, as the case may be, on the information with respect to each
Fund appears in the Fund's Statement of Additional Information. The following
information for each Fund should be read in conjunction with the financial
statements and related notes which are included in the Fund's Statement of
Additional Information.
Further information about a Fund's performance is contained in the Fund's annual
report to shareholders, which may be obtained without charge by contacting
Alliance Fund Services, Inc. at the address or the "Literature" telephone number
shown on the cover of this Prospectus.
7
<PAGE>
<TABLE>
<CAPTION>
Net Net Net
Asset Realized and Increase
Value Unrealized (Decrease) in Dividends From Distributions
Beginning Of Net Investment Gain (Loss) On Net Asset Value Net Investment From Net
Fiscal Year or Period Period Income (Loss) Investments From Operations Income Realized Gains
- - - --------------------- ------------ -------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Short-Term U.S. Government+
Class A
Period Ended 8/31/94**....... $ 9.77 $ .14 $ (.09) $ .05 $ (.12) $ 0.00
Year Ended 4/30/94........... 10.22 .35 (.29) .06 (.42) 0.00
5/4/92+ to 4/30/93........... 10.00 .46 .34 .80 (.46) (.12)
Class B
Period Ended 8/31/94**....... $ 9.88 $ .10 $ (.07) $ .03 $ (.11) $ 0.00
Year Ended 4/30/94........... 10.31 .40 (.39) .01 (.35) 0.00
5/4/92+ to 4/30/93........... 10.00 .38 .33 .71 (.38) (.02)
Class C
Period Ended 8/31/94**....... $ 9.87 $ .10 $ (.07) $ .03 $ (.11) $ 0.00
8/2/93++ to 4/30/94.......... 10.34 .26 (.42) (.16) (.25) 0.00
U.S. Government
Class A
Year Ended 6/30/94........... $ 8.64 $ .65 $ (.80) $ (.15) $ (.65) $ 0.00
Year Ended 6/30/93........... 8.34 .69 .29 .98 (.68) 0.00
Year Ended 6/30/92........... 8.01 .70 .35 1.05 (.72) 0.00
Year Ended 6/30/91........... 8.14 .81 (.11) .70 (.83) 0.00
Year Ended 6/30/90........... 8.49 .86 (.38) .48 (.83) 0.00
Year Ended 6/30/89........... 8.51 .89 (.03) .86 (.88) 0.00
Year Ended 6/30/88........... 8.90 .93 (.39) .54 (.93) 0.00
Year Ended 6/30/87........... 9.24 .98 (.34) .64 (.98) 0.00
12/1/85+ to 6/30/86.......... 9.45 .63 (.21) .42 (.63) 0.00
Class B
Year Ended 6/30/94........... $ 8.64 $ .59 $ (.80) $ (.21) $ (.59) $ 0.00
Year Ended 6/30/93........... 8.34 .62 .30 .92 (.62) 0.00
9/30/91++ to 6/30/92......... 8.25 .49 .09 .58 (.49) 0.00
Class C
Year Ended 6/30/94........... $ 8.64 $ .59 $ (.81) $ (.22) $ (.59) $ 0.00
4/30/93++ to 6/30/93......... 8.56 .10 .08 .18 (.10) 0.00
Mortgage Securities Income
Class A
Year Ended 12/31/94.......... $ 9.29 $ .57 $ (1.13) $ (.56) $ (.58) $ 0.00
Year Ended 12/31/93.......... 9.08 .67 .23 .90 (.67) 0.00
Year Ended 12/31/92.......... 9.21 .77 (.09) .68 (.81) 0.00
Year Ended 12/31/91.......... 8.79 .88 .41 1.29 (.87) 0.00
Year Ended 12/31/90.......... 8.76 .87 .03 .90 (.87) 0.00
Year Ended 12/31/89.......... 8.81 .97 (.05) .92 (.97) 0.00
Year Ended 12/31/88.......... 9.03 .99 (.23) .76 (.98) 0.00
Year Ended 12/31/87.......... 9.74 1.00 (.68) .32 (1.00) (.03)
Year Ended 12/31/86.......... 9.97 1.06 (.02) 1.04 (1.06) (.21)
Year Ended 12/31/85.......... 9.54 1.22 .43 1.65 (1.22) 0.00
Class B
Year Ended 12/31/94.......... $ 9.29 $ .51 $(1.14) $(.63) $ (.51) $ 0.00
Year Ended 12/31/93.......... 9.08 .61 .22 .83 (.60) 0.00
1/30/92++ to 12/31/92........ 9.16 .68 (.08) .60 (.68) 0.00
Class C
Year Ended 12/31/94.......... $ 9.29 $ .51 $(1.14) $(.63) $ (.51) $ 0.00
5/3/93++ to 12/31/93......... 9.30 .40 0.00 .40 (.40) 0.00
Mortgage Strategy
Class A
Year Ended 11/30/94.......... $ 9.94 $ .42 $ (.32) $ .10 $ (.48) $ (.01)
Year Ended 11/30/93.......... 9.84 .57 .11 .68 (.58) 0.00
6/1/92+ to 11/30/92.......... 10.00 .35 (.17) .18 (.34) 0.00
Class B
Year Ended 11/30/94.......... $ 9.94 $ .39 $ (.35) $ .04 $ (.42) $ (.01)
Year Ended 11/30/93.......... 9.84 .49 .12 .61 (.51) 0.00
6/1/92+ to 11/30/92.......... 10.00 .31 (.17) .14 (.30) 0.00
Class C
Year Ended 11/30/94.......... $ 9.94 $ .37 $ (.33) $ .04 $ (.42) $ (.01)
5/3/93++ to 11/30/93......... 9.98 .27 (.03) .24 (.28) 0.00
World Income
Year Ended 10/31/94.......... $ 1.90 $ .18 $ (.12) $ .06 $ (.05) $ 0.00
Year Ended 10/31/93.......... 1.91 .22 (.16) .06 (.07) 0.00
Year Ended 10/31/92.......... 1.98 .19 (.17) .02 (.09) 0.00
12/3/90+ to 10/31/91......... 2.00 .14 (.03) .11 (.13) 0.00
- - - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the footnotes on page 12.
8
<PAGE>
<TABLE>
<CAPTION>
Distributions Total Net Assets
In Excess Total Investment At End Of
of Net Return Dividends Net Asset Return Period
Investment of and Value End Based on Net (000's
Income Capital Distributions of Period Asset Value (b) Omitted)
------------- ----------- ------------- --------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Short-Term U.S. Government+
Class A
Period Ended 8/31/94**....... $ (.03)(a) $ 0.00 $ (.15)(c) $9.67 .53% $2,272
Year Ended 4/30/94........... (.09)(a) 0.00 (.51)(c) 9.77 .52 2,003
5/4/92+ to 4/30/93........... 0.00 0.00 (.58)(c) 10.22 8.20 6,081
Class B
Period Ended 8/31/94**....... $ (.02)(a) $ 0.00 $ (.13)(c) $9.78 .28 % $6,281
Year Ended 4/30/94........... (.09)(a) 0.00 (.44)(c) 9.88 .03 7,184
5/4/92+ to 4/30/93........... 0.00 0.00 (.40)(c) 10.31 7.22 1,292
Class C
Period Ended 8/31/94**....... $ (.02)(a) $ 0.00 $ (.13)(c) $9.77 .28 % $7,128
8/2/93++ to 4/30/94.......... (.06)(a) 0.00 (.31)(c) 9.87 (1.56) 8,763
U.S. Government
Class A
Year Ended 6/30/94........... $0.00 $ 0.00 $ (.65) $7.84 (1.93)% $482,595
Year Ended 6/30/93........... 0.00 0.00 (.68) 8.64 12.23 527,968
Year Ended 6/30/92........... 0.00 0.00 (.72) 8.34 13.52 492,448
Year Ended 6/30/91........... 0.00 0.00 (.83) 8.01 8.97 491,910
Year Ended 6/30/90........... 0.00 0.00 (.83) 8.14 5.99 510,675
Year Ended 6/30/89........... 0.00 0.00 (.88) 8.49 10.87 532,525
Year Ended 6/30/88........... 0.00 0.00 (.93) 8.51 6.41 529,909
Year Ended 6/30/87........... 0.00 0.00 (.98) 8.90 7.00 496,600
12/1/85+ to 6/30/86.......... 0.00 0.00 (.63) 9.24 4.53 128,870
Class B
Year Ended 6/30/94........... $0.00 $ 0.00 $ (.59) $7.84 (2.63)% $756,282
Year Ended 6/30/93........... 0.00 0.00 (.62) 8.64 11.45 552,471
9/30/91++ to 6/30/92......... 0.00 0.00 (.49) 8.34 6.95 32,227
Class C
Year Ended 6/30/94........... $0.00 $ 0.00 $ (.59) $7.83 (2.75)% $231,859
4/30/93++ to 6/30/93......... 0.00 0.00 (.10) 8.64 2.12 67,757
Mortgage Securities Income
Class A
Year Ended 12/31/94.......... $0.00 $ (.02) $ (.60) $8.13 (6.14)% $553,889
Year Ended 12/31/93.......... (.02) 0.00 (.69) 9.29 10.14 848,069
Year Ended 12/31/92.......... 0.00 0.00 (.81) 9.08 7.73 789,898
Year Ended 12/31/91.......... 0.00 0.00 (.87) 9.21 15.44 544,171
Year Ended 12/31/90.......... 0.00 0.00 (.87) 8.79 11.01 495,353
Year Ended 12/31/89.......... 0.00 0.00 (.97) 8.76 10.98 556,077
Year Ended 12/31/88.......... 0.00 0.00 (.98) 8.81 8.64 619,572
Year Ended 12/31/87.......... 0.00 0.00 (1.03) 9.03 3.49 682,650
Year Ended 12/31/86.......... 0.00 0.00 (1.27) 9.74 11.18 756,730
Year Ended 12/31/85.......... 0.00 0.00 (1.22) 9.97 18.35 609,566
Class B
Year Ended 12/31/94.......... $0.00 $ (.02) $ (.53) $8.13 (6.84)% $921,418
Year Ended 12/31/93.......... (.02) 0.00 (.62) 9.29 9.38 1,454,303
1/30/92++ to 12/31/92........ 0.00 0.00 (.68) 9.08 7.81 1,153,957
Class C
Year Ended 12/31/94.......... $0.00 $ (.02) $ (.53) $8.13 (6.84)% $ 58,338
5/3/93++ to 12/31/93......... (.01) 0.00 (.41) 9.29 4.38 91,724
Mortgage Strategy
Class A
Year Ended 11/30/94.......... $ 0.00 $ (.04) $ (.53) $9.51 1.03% $ 43,173
Year Ended 11/30/93.......... 0.00 0.00 (.58) 9.94 7.02 59,215
6/1/92+ to 11/30/92.......... 0.00 0.00 (.34) 9.84 1.84 24,186
Class B
Year Ended 11/30/94.......... $0.00 $ (.03) $ (.46) $9.52 .42% $136,458
Year Ended 11/30/93.......... 0.00 0.00 (.51) 9.94 6.27 168,157
6/1/92+ to 11/30/92.......... 0.00 0.00 (.30) 9.84 1.50 149,188
Class C
Year Ended 11/30/94.......... $0.00 $ (.03) $ (.46) $9.52 .42% $141,838
5/3/93++ to 11/30/93......... 0.00 0.00 (.28) 9.94 2.40 228,703
World Income
Year Ended 10/31/94.......... $0.00 $ (.03) $ (.08) $1.88 3.27% $103,310
Year Ended 10/31/93.......... 0.00 0.00 (.07) 1.90 3.51 149,623
Year Ended 10/31/92.......... 0.00 0.00 (.09) 1.91 1.26 318,716
12/3/90+ to 10/31/91......... 0.00 0.00 (.13) 1.98 6.08 1,059,222
<CAPTION>
Ratio of Net
Ratio Investment
Of Expenses Income (Loss) Portfolio
To Average To Average Turnover
Net Assets Net Assets Rate
----------- ------------- ---------
<S> <C> <C> <C>
Short-Term U.S. Government+
Class A
Period Ended 8/31/94**....... 1.40%(d) 3.98% 144%
Year Ended 4/30/94........... 1.27(d) 4.41 55
5/4/92+ to 4/30/93........... 1.00*(d) 4.38* 294
Class B
Period Ended 8/31/94**....... 2.10%(d) 3.22% 144%
Year Ended 4/30/94........... 2.05(d) 3.12 55
5/4/92+ to 4/30/93........... 1.75*(d) 3.36* 294
Class C
Period Ended 8/31/94**....... 2.10%(d) 3.26% 144%
8/2/93++ to 4/30/94.......... 2.10*(d) 2.60* 55
U.S. Government
Class A
Year Ended 6/30/94........... 1.02% 7.76% 188%
Year Ended 6/30/93........... 1.10 8.04 386
Year Ended 6/30/92........... 1.12 8.43 418
Year Ended 6/30/91........... 1.07 10.02 402
Year Ended 6/30/90........... 1.09 10.35 455
Year Ended 6/30/89........... 1.11 10.70 148
Year Ended 6/30/88........... 1.14 10.70 149
Year Ended 6/30/87........... 1.07(d) 10.36 255
12/1/85+ to 6/30/86.......... 1.01*(d) 9.30* 193
Class B
Year Ended 6/30/94........... 1.72% 7.04% 188%
Year Ended 6/30/93........... 1.81 7.25 386
9/30/91++ to 6/30/92......... 1.80* 7.40* 418
Class C
Year Ended 6/30/94........... 1.70% 6.97% 188%
4/30/93++ to 6/30/93......... 1.80* 6.00* 386
Mortgage Securities Income
Class A
Year Ended 12/31/94.......... 1.29% 6.77% 438%
Year Ended 12/31/93.......... 1.00 7.20 622
Year Ended 12/31/92.......... 1.18 8.56 555
Year Ended 12/31/91.......... 1.16 9.92 439
Year Ended 12/31/90.......... 1.12 10.09 393
Year Ended 12/31/89.......... 1.13 11.03 328
Year Ended 12/31/88.......... 1.11 10.80 239
Year Ended 12/31/87.......... 1.15 10.79 211
Year Ended 12/31/86.......... 1.00 10.86 190
Year Ended 12/31/85.......... .87 12.30 164
Class B
Year Ended 12/31/94.......... 2.00% 6.05% 438%
Year Ended 12/31/93.......... 1.70 6.47 622
1/30/92++ to 12/31/92........ 1.67* 5.92* 555
Class C
Year Ended 12/31/94.......... 1.97% 6.06% 438%
5/3/93++ to 12/31/93......... 1.67* 5.92* 622
Mortgage Strategy
Class A
Year Ended 11/30/94.......... 1.34%(e) 4.78% 375%
Year Ended 11/30/93.......... 1.54 (e) 5.66 499
6/1/92+ to 11/30/92.......... 1.44*(d)(e) 6.58*(d) 101
Class B
Year Ended 11/30/94.......... 2.08%(e) 4.12% 375%
Year Ended 11/30/93.......... 2.26 (e) 4.98 499
6/1/92+ to 11/30/92.......... 2.13*(d)(e) 6.01*(d) 101
Class C
Year Ended 11/30/94.......... 2.04%(e) 4.10% 375%
5/3/93++ to 11/30/93......... 1.58*(e) 3.70* 499
World Income
Year Ended 10/31/94.......... 1.70%(d) 3.96%(d) N/A
Year Ended 10/31/93.......... 1.54 (d) 5.14 (d) N/A
Year Ended 10/31/92.......... 1.59 (d) 7.21 (d) N/A
12/3/90+ to 10/31/91......... 1.85*(d) 7.29*(d) N/A
- - - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the footnotes on page 12.
9
<PAGE>
<TABLE>
<CAPTION>
Net Net Net
Asset Realized and Increase
Value Unrealized (Decrease) in Dividends From Distributions
Beginning Of Net Investment Gain (Loss) On Net Asset Value Net Investment From Net
Fiscal Year or Period Period Income (Loss) Investments From Operations Income Realized Gains
- - - --------------------- ------------ -------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Short-term Multi-Market
Class A
Year Ended 10/31/94 $ 9.25 $ .93 $ (.86) $ .07 $ 0.00 $0.00
Year Ended 10/31/93 9.25 .92 (.32) .60 (.60) 0.00
Year Ended 10/31/92 9.94 .91 (.86) .05 (.72) (.02)
Year Ended 10/31/91 9.89 .97 .06 1.03 (.97) (.01)
Year Ended 10/31/90 9.69 1.09 .19 1.28 (1.08) 0.00
5/5/89+ to 10/31/89 9.70 .53 (.01) .52 (.53) 0.00
Class B
Year Ended 10/31/94 $ 9.25 $ .94 $ (.93) $ .01 $ 0.00 $0.00
Year Ended 10/31/93 9.25 .87 (.34) .53 (.53) 0.00
Year Ended 10/31/92 9.94 .84 (.86) (.02) (.65) (.02)
Year Ended 10/31/91 9.89 .89 .07 .96 (.90) (.01)
2/5/90++ to 10/31/90 9.77 .74 .12 .86 (.74) 0.00
Class C
Year Ended 10/31/94 $ 9.25 $ .58 $ (.57) $ .01 $ 0.00 $0.00
5/3/93++ to 10/31/93 9.18 .28 .05 .33 (.26) 0.00
Multi-Market Strategy
Class A
Year Ended 10/31/94 $ 8.94 $ .85 $(1.08) $ (.23) $ (.09) $0.00
Year Ended 10/31/93 8.85 1.02 (.26) .76 (.67) 0.00
Year Ended 10/31/92 9.91 1.00 (1.23) (.23) (.81) (.02)
5/29/91+ to 10/28/91 10.00 .42 (.09) .33 (.42) 0.00
Class B
Year Ended 10/31/94 $ 8.94 $ .88 $(1.18) $ (.30) $ (.08) $0.00
Year Ended 10/31/93 8.85 .92 (.22) .70 (.61) 0.00
Year Ended 10/31/92 9.91 1.04 (1.34) (.30) (.74) (.02)
5/29/91+ to 10/28/91 10.00 .39 (.09) .30 (.39) 0.00
Class C
Year Ended 10/31/94 $ 8.94 $ .46 $ (.75) $ (.29) $ (.09) $0.00
5/3/93++ to 10/31/93 8.76 .32 .16 .48 (.30) 0.00
North American Government Income
Class A
Year Ended 11/30/94 $10.35 $1.02 $(2.12) $(1.10) $(.91) $0.00
Year Ended 11/30/93 9.70 1.09 .66 1.75 (1.09) (.01)
3/27/92+ to 11/30/92 10.00 .69 (.31) .38 (.68) 0.00
Class B
Year Ended 11/30/94 $10.34 $ .96 $(2.13) $(1.17) $ (.84) $0.00
Year Ended 11/30/93 9.70 1.01 .67 1.68 (1.02) (.01)
3/27/92+ to 11/30/92 10.00 .64 (.31) .33 (.63) 0.00
Class C
Year Ended 11/30/94 $10.34 $ .96 $(2.12) $(1.16) $(.84) $0.00
5/3/93++ to 11/30/93 10.04 .58 .30 .88 (.58) 0.00
Global Dollar Government
Class A
2/25/94+ to 8/31/94 $10.00 $ .45 $ (.86) $ (.41) $ (.45) $0.00
Class B
2/25/94+ to 8/31/94 $10.00 $ .42 $ (.86) $ (.44) $ (.42) $0.00
Class C
2/25/94+ to 8/31/94 $10.00 $ .42 $ (.86) $ (.44) $ (.42) $0.00
Corporate Bond
Class A
Year Ended 6/30/94 $14.15 $1.11 $(1.36) $ (.25) $(1.11) $(.25)
Year Ended 6/30/93 12.01 1.25 2.13 3.38 (1.24) 0.00
Year Ended 6/30/92 11.21 1.06 .82 1.88 (1.08) 0.00
Year Ended 6/30/91 11.39 1.11 (.06) 1.05 (1.23) 0.00
Year Ended 6/30/90 12.15 1.24 (.86) .38 (1.14) 0.00
Year Ended 6/30/89 11.82 1.12 .32 1.44 (1.11) 0.00
Year Ended 6/30/88 12.24 1.10 (.38) .72 (1.14) 0.00
Nine Months Ended 6/30/87 12.25 .86 (.06) .80 (.81) 0.00
Year Ended 9/30/86 11.52 1.20 .73 1.93 (1.20) 0.00
Year Ended 9/30/85 10.50 1.24 1.04 2.28 (1.26) 0.00
Year Ended 9/30/84 11.11 1.25 (.60) .65 (1.26) 0.00
Class B
Year Ended 6/30/94 $14.15 $1.02 $(1.37) $ (.35) $(1.04) $(.25)
1/8/93++ to 6/30/93 12.47 .49 1.69 2.18 (.50) 0.00
Class C
Year Ended 6/30/94 $14.15 $1.02 $(1.37) $ (.35) $(1.05) $(.25)
5/30/93++ to 6/30/93 13.63 .16 .53 .69 (.17) 0.00
- - - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the footnotes on page 12.
10
<PAGE>
<TABLE>
<CAPTION>
Distributions Total Net Assets
In Excess Total Investment At End Of
of Net Return Dividends Net Asset Return Period
Investment of and Value End Based on Net (000's
Fiscal Year or Period Income Capital Distributions of Period Asset Value (b) Omitted)
- - - --------------------- ------------- ---------- ------------- --------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Short-term Multi-Market
Class A
Year Ended 10/31/94 $ 0.00 $ (.61) $ (.61) $ 8.71 .84% $ 593,677
Year Ended 10/31/93 0.00 0.00 (.60) 9.25 6.67 953,571
Year Ended 10/31/92 0.00 0.00 (.74) 9.25 .49 1,596,903
Year Ended 10/31/91 0.00 0.00 (.98) 9.94 10.91 2,199,393
Year Ended 10/31/90 0.00 0.00 (1.08) 9.89 13.86 1,346,035
5/5/89+ to 10/31/89 0.00 0.00 (.53) 9.69 5.57 210,294
Class B
Year Ended 10/31/94 $ 0.00 $ (.55) $ (.55) $ 8.71 (.12)% 1,003,633
Year Ended 10/31/93 0.00 0.00 (.53) 9.25 5.91 1,742,703
Year Ended 10/31/92 0.00 0.00 (.67) 9.25 (.24) 2,966,071
Year Ended 10/31/91 0.00 0.00 (.91) 9.94 10.11 3,754,003
2/5/90++ to 10/31/90 0.00 0.00 (.74) 9.89 9.07 1,950,330
Class C
Year Ended 10/31/94 $ 0.00 $ (.55) $ (.55) $ 8.71 (.12)% $ 8,136
5/3/93++ to 10/31/93 0.00 0.00 (.26) 9.25 3.66 5,538
Multi-Market Strategy
Class A
Year Ended 10/31/94 $ 0.00 $ (.58) $ (.67) $ 8.04 (2.64)% $ 52,385
Year Ended 10/31/93 0.00 0.00 (.67) 8.94 9.01 82,977
Year Ended 10/31/92 0.00 0.00 (.83) 8.85 (2.80) 141,526
5/29/91+ to 10/28/91 0.00 0.00 (.42) 9.91 3.68 143,594
Class B
Year Ended 10/31/94 $ 0.00 $ (.52) $ (.60) $ 8.04 (3.35)% $ 233,896
Year Ended 10/31/93 0.00 0.00 (.61) 8.94 8.25 431,186
Year Ended 10/31/92 0.00 0.00 (.76) 8.85 (3.51) 701,465
5/29/91+ to 10/28/91 0.00 0.00 (.39) 9.91 3.36 662,981
Class C
Year Ended 10/31/94 $ 0.00 $ (.52) $ (.61) $ 8.04 (3.34)% $ 1,252
5/3/93++ to 10/31/93 0.00 0.00 (.30) 8.94 5.54 718
North American Government Income
Class A
Year Ended 11/30/94 $ 0.00 $ (.21) $(1.12) $8.13 (11.32)% $303,538
Year Ended 11/30/93 0.00 0.00 (1.10) 10.35 18.99 268,233
3/27/92+ to 11/30/92 0.00 0.00 (.68) 9.70 3.49 61,702
Class B
Year Ended 11/30/94 $ 0.00 $ (.21) $(1.05) $8.13 (11.89)% $1,639,602
Year Ended 11/30/93 0.00 0.00 (1.03) 10.35 18.15 1,313,591
3/27/92+ to 11/30/92 0.00 0.00 (.63) 9.70 3.30 216,317
Class C
Year Ended 11/30/94 $ 0.00 $ (.21) $(1.05) $8.13 (11.89)% $369,714
5/3/93++ to 11/30/93 0.00 0.00 (.58) 10.34 9.00 310,230
Global Dollar Government
Class A
2/25/94+ to 8/31/94 $ 0.00 $ 0.00 $ (.45) $9.14 (3.77)% $ 10,995
Class B
2/25/94+ to 8/31/94 $ 0.00 $ 0.00 $ (.42) $9.14 (4.17)% $ 47,030
Class C
2/25/94+ to 8/31/94 $ 0.00 $ 0.00 $ (.42) $9.14 (4.16)% $ 10,404
Corporate Bond
Class A
Year Ended 6/30/94 $ (.03) $ 0.00 $(1.39) $12.51 (2.58)% $ 219,182
Year Ended 6/30/93 0.00 0.00 (1.24) 14.15 29.62 216,171
Year Ended 6/30/92 0.00 0.00 (1.08) 12.01 17.43 60,356
Year Ended 6/30/91 0.00 0.00 (1.23) 11.21 9.71 62,268
Year Ended 6/30/90 0.00 0.00 (1.14) 11.39 3.27 68,049
Year Ended 6/30/89 0.00 0.00 (1.11) 12.15 12.99 52,381
Year Ended 6/30/88 0.00 0.00 (1.14) 11.82 6.24 37,587
Nine Months Ended 6/30/87 0.00 0.00 (.81) 12.24 7.32 41,072
Year Ended 9/30/86 0.00 0.00 (1.20) 12.25 17.19 45,178
Year Ended 9/30/85 0.00 0.00 (1.26) 11.52 22.66 40,631
Year Ended 9/30/84 0.00 0.00 (1.26) 10.50 6.44 36,435
Class B
Year Ended 6/30/94 $ (.01) $ 0.00 $(1.30) $12.50 (3.27)% $ 184,129
1/8/93++ to 6/30/93 0.00 0.00 .50 14.15 17.75 55,508
Class C
Year Ended 6/30/94 $ 0.00 $ 0.00 $(1.30) $12.50 (3.27)% $ 50,860
5/30/93++ to 6/30/93 0.00 0.00 (.17) 14.15 5.08 5,115
<CAPTION>
Ratio of Net
Ratio Investment
Of Expenses Income (Loss) Portfolio
To Average To Average Turnover
Fiscal Year or Period Net Assets Net Assets Rate
- - - --------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Short-term Multi-Market
Class A
Year Ended 10/31/94 1.13% 7.28% 109%
Year Ended 10/31/93 1.16 8.26 182
Year Ended 10/31/92 1.10 9.00 133
Year Ended 10/31/91 1.09 9.64 146
Year Ended 10/31/90 1.18 10.81 152
5/5/89+ to 10/31/89 1.14* 10.83* 10
Class B
Year Ended 10/31/94 1.85 % 6.58 % 109 %
Year Ended 10/31/93 1.87 7.57 182
Year Ended 10/31/92 1.81 8.28 133
Year Ended 10/31/91 1.81 8.87 146
2/5/90++ to 10/31/90 1.86* 9.90* 152
Class C
Year Ended 10/31/94 1.83% 6.50% 109%
5/3/93++ to 10/31/93 1.82* 7.19* 182
Multi-Market Strategy
Class A
Year Ended 10/31/94 1.41%(f) 7.17% 605%
Year Ended 10/31/93 1.94 (f) 9.17(g) 200
Year Ended 10/31/92 2.53 (f) 10.58(g) 239
5/29/91+ to 10/28/91 2.81*(f) 10.17*(g) 121
Class B
Year Ended 10/31/94 2.11%(f) 6.33% 605%
Year Ended 10/31/93 2.64 (f) 8.46(g) 200
Year Ended 10/31/92 3.24 (f) 9.83(g) 239
5/29/91+ to 10/28/91 3.53*(f) 9.40*(g) 121
Class C
Year Ended 10/31/94 2.08%(f) 6.10% 605%
5/3/93++ to 10/31/93 2.44*(f) 7.17*(g) 200
North American Government Income
Class A
Year Ended 11/30/94 1.70%(f) 11.22% 131%
Year Ended 11/30/93 1.61 (f) 10.77 254
3/27/92+ to 11/30/92 2.45*(d)(f) 10.93*(d) 86
Class B
Year Ended 11/30/94 2.41%(f) 10.53% 131%
Year Ended 11/30/93 2.31 (f) 10.01 254
3/27/92+ to 11/30/92 3.13*(d)(f) 10.16*(d) 86
Class C
Year Ended 11/30/94 2.39%(f) 10.46% 131%
5/3/93++ to 11/30/93 2.21*(f) 9.74* 254
Global Dollar Government
Class A
2/25/94+ to 8/31/94 .75%*(d) 9.82%* 100%
Class B
2/25/94+ to 8/31/94 1.45%*(d) 9.11%* 100%
Class C
2/25/94+ to 8/31/94 1.45%*(d) 9.05%* 100%
Corporate Bond
Class A
Year Ended 6/30/94 1.30% 7.76% 372%
Year Ended 6/30/93 1.39 9.29 579
Year Ended 6/30/92 1.48 8.98 610
Year Ended 6/30/91 1.44 9.84 357
Year Ended 6/30/90 1.51 10.70 480
Year Ended 6/30/89 1.84 9.53 104
Year Ended 6/30/88 1.81 9.24 98
Nine Months Ended 6/30/87 1.27 9.17 95
Year Ended 9/30/86 1.08 9.80 240
Year Ended 9/30/85 1.15 11.00 142
Year Ended 9/30/84 1.18 11.88 10
Class B
Year Ended 6/30/94 2.00% 7.03% 372%
1/8/93++ to 6/30/93 2.10* 7.18* 579
Class C
Year Ended 6/30/94 1.99% 6.98% 372%
5/30/93++ to 6/30/93 2.05* 5.51* 579
- - - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the footnotes on page 12.
11
<PAGE>
+ Prior to July 22, 1993, Equitable Capital Management Corporation
("Equitable") served as the investment adviser to The Alliance Portfolios
(the "Trust"), of which Short-Term U.S. Government is a series. On July 22,
1993, Alliance acquired the business and substantially all of the assets of
Equitable and became investment adviser of the Trust.
+ Commencement of operations.
++ Commencement of distribution.
* Annualized.
** Reflects newly adopted fiscal year end.
(a) Includes with respect to Short-Term U.S. Government a return of capital for
the year ended April 30, 1994 of $(0.08) for Class A, $(0.08) for Class B
and $(0.05) for Class C and for the period ended August 31, 1994 of $(0.03)
for Class A and $(0.02) for Class B and Class C.
(b) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at the net asset value during the period, and a
redemption on the last day of the period. Initial sales charge or
contingent deferred sales charge is not reflected in the calculation of
total investment return. Total investment returns calculated for periods of
less than one year are not annualized.
(c) "Total dividends and distributions" includes dividends in excess of net
investment income and return of capital. Short-Term U.S. Government had
dividends in excess of net investment income with respect to Class A
shares, for the year ended April 30, 1994, of $(.01); with respect to Class
B shares, $(.01); and with respect to Class C shares, $(.01).
(d) Net of expenses assumed and/or waived/reimbursed. If Short-Term U.S.
Government had borne all expenses, the expense ratios would have been with
respect to Class A shares, 2.20% (annualized) for 1993, 2.17% for the year
ended April 30, 1994 and 2.95% (annualized) for the period ended August 31,
1994; with respect to Class B shares, 4.81% (annualized) for 1993, 3.21%
for the year ended April 30, 1994 and 3.60% (annualized) for the period
ended August 31, 1994; and with respect to Class C shares, 3.10%
(annualized) for the year ended April 30, 1994 and 3.64% (annualized) for
the period ended August 31, 1994. If U.S. Government had borne all
expenses, the expense ratios would have been 1.22% for 1986 and 1.09% for
1987. If Mortgage Strategy had borne all expenses, the expense ratios would
have been with respect to Class A shares, 1.55% (annualized) for 1992; and
with respect to Class B shares, 2.28% (annualized) for 1992. The ratio of
net investment income to average net assets would have been with respect to
Class A shares, 6.47% (annualized) for 1992; and with respect to Class B
shares, 5.86% (annualized) for 1992. If World Income had borne all
expenses, the expense ratios would have been 1.87% for 1992, 1.92% for 1993
and 2.08% for 1994. If North American Government Income had borne all
expenses, the expense ratios would have been with respect to Class A
shares, 2.49% (annualized) for 1992; and with respect to Class B shares,
3.16% (annualized) for 1992. If Global Dollar Government had borne all
expenses, the expense ratios would have been with respect to Class A
shares, 1.91% (annualized); with respect to Class B shares, 2.63%
(annualized); and with respect to Class C shares, 2.59% (annualized).
(e) Includes interest expenses. If Mortgage Strategy had not borne interest
expenses, the ratio of expenses to average net assets would have been with
respect to Class A shares, 1.42% (annualized) for 1992, 1.33% for 1993 and
1.20% for 1994; with respect to Class B shares, 2.10% (annualized) for
1992, 2.07% for 1993 and 1.91% for 1994; and with respect to Class C
shares, 1.74% (annualized) for 1993 and 1.89% for 1994.
(f) Includes interest expenses. If Multi-Market Strategy had not borne interest
expenses, the ratio of expenses to average net assets would have been with
respect to Class A shares, 1.33% (annualized) for 1991, 1.33% for 1992,
1.40% for 1993 and 1.30% for 1994; with respect to Class B shares, 2.05%
(annualized) for 1991, 2.05% for 1992, 2.11% for 1993 and 2.01% for 1994;
and with respect to Class C shares, 2.11% (annualized) for 1993 and 1.99%
for 1994. If North American Government Income had not borne interest
expenses, the ratio of expenses (net of interest expenses) to average net
assets would have been with respect to Class A shares, 1.66% (annualized)
for 1992, 1.33% for 1993 and 1.37% for 1994; with respect to Class B
shares, 2.35% (annualized) for 1992, 2.04% for 1993 and 2.07% for 1994;
and with respect to Class C shares, 2.04% (annualized) for 1993 and 2.06%
for 1994.
(g) Includes loan fees. If Multi-Market Strategy had not incurred loan fees,
the ratio of net investment income to average net assets would have been
with respect to Class A shares, 11.65% (annualized) for 1991, 11.78% for
1992 and 9.73% for 1993; with respect to Class B shares, 10.88%
(annualized) for 1991, 11.02% for 1992 and 8.99% for 1993; and with respect
to Class C shares, 7.50% (annualized) for 1993.
12
<PAGE>
- - - --------------------------------------------------------------------------------
Glossary
- - - --------------------------------------------------------------------------------
The following terms are frequently used in this Prospectus. Many of these terms
are explained in greater detail under "Description of the Funds--Additional
Investment Practices" and in Appendix A.
Bonds are fixed, floating and variable rate debt obligations.
Debt securities are bonds, debentures, notes, bills and repurchase agreements.
Fixed-income securities are debt securities, convertible securities and
preferred stocks and include 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, to take another example, 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.
Lower-rated securities are fixed-income securities rated Ba and BB or below, or
determined by Alliance to be of equivalent quality and are commonly referred to
as "junk bonds."
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.
Convertible securities are bonds, debentures, corporate notes and preferred
stocks that are convertible into common and preferred stock.
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 (see below). U.S. Government securities
not backed by the full faith and credit of the United States include
certificates issued by FNMA and FHLMC (see below).
Mortgage-related securities are pools of mortgage loans that are assembled for
sale to investors (such as mutual funds) by various governmental, government-
related and private organizations. These securities include:
ARMS, which are adjustable-rate mortgage securities,
SMRS, which are stripped mortgage-related securities,
CMOs, which are collateralized mortgage obligations,
GNMA certificates, which are securities issued by the Government National
Mortgage Association,
FNMA certificates, which are securities issued by the Federal National
Mortgage Association, and
FHLMC certificates, which are securities issued by the Federal Home Loan
Mortgage Corporation.
Interest-only or IO securities 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 another of which is the principal-only or PO class, which class
receives only the principal payments on the underlying obligation. POs are
similar to, and are sometimes referred to as, zero coupon securities, which are
debt securities issued without interest coupons.
Foreign government securities are securities issued or guaranteed, as to payment
of principal and interest, by a foreign government or any of its political
subdivisions, authorities, agencies or instrumentalities.
Sovereign debt obligations are foreign government debt securities, loan
participations between foreign governments and financial institutions and
interests in entities organized and operated for the purpose of restructuring
the investment characteristics of foreign government securities.
World Bank is the commonly used name for the International Bank for
Reconstruction and Development.
LIBOR is the London Interbank Offered Rate.
Moody's is Moody's Investors Service, Inc.
S&P is Standard & Poor's Corporation.
Duff & Phelps is Duff & Phelps Credit Rating Co.
Fitch is Fitch Investors Service, Inc.
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.
Qualifying bank deposits are certificates of deposit, bankers' acceptances and
interest-bearing savings deposits of banks having total assets of more than $1
billion and which are members of the Federal Deposit Insurance Corporation.
Rule 144A securities are securities that may be resold pursuant to Rule 144A
under the Securities Act of 1933, as amended (the "Securities Act").
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.
13
<PAGE>
- - - --------------------------------------------------------------------------------
DESCRIPTION OF THE FUNDS
- - - --------------------------------------------------------------------------------
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.
No Fund will change a non-fundamental objective or policy without notifying its
shareholders. There is no guarantee that any Fund will achieve its investment
objective.
INVESTMENT OBJECTIVES AND POLICIES
U.S. GOVERNMENT FUNDS
The U.S. Government Funds are diversified investment companies that have been
designed to offer investors high current income consistent with preservation of
capital by investing primarily in U.S. Government securities.
Alliance Short-Term U.S. Government Fund
Alliance Short-Term U.S. Government Fund ("Short-Term U.S. Government") seeks
high current income consistent with preservation of capital by investing
primarily in a portfolio of U.S. Government securities. Under normal
circumstances, the Fund maintains an average dollar-weighted portfolio maturity
of not more than three years and invests at least 65% of its total assets in
U.S. Government securities and repurchase agreements and forward commitments
relating to U.S. Government securities. The Fund's investment objective is not
fundamental.
In addition to investing in U.S. Government securities, the Fund may invest a
portion of its assets in securities of non-governmental issuers. Although these
investments will be of high quality at the time of purchase, they generally
involve higher levels of credit risk than do U.S. Government securities, as well
as the risk (present with all fixed-income securities) of fluctuations in value
as interest rates change. The Fund will not be obligated to dispose of any
security whose credit quality falls below high quality.
The Fund may also (i) invest in certain SMRS, (ii) invest in variable, floating
and inverse floating rate instruments, (iii) make short sales "against the box,"
(iv) enter into various hedging transactions, such as interest rate swaps, caps
and floors, (v) enter into reverse repurchase agreements, (vi) purchase and sell
futures contracts for hedging purposes, (vii) purchase and sell call and put
options on futures contracts or on securities, for hedging purposes or to earn
additional income, (viii) make secured loans of portfolio securities, (ix) enter
into repurchase agreements, and (x) purchase securities for future delivery. The
Fund may not invest more than 15% of its total assets in illiquid securities or
more than 5% of its total assets in securities the disposition of which is
restricted under Federal securities laws (excluding, to the extent permitted by
applicable law, Rule 144A securities). For additional information on the use,
risks and costs of these practices, see "Additional Investment Practices."
U.S. Government Portfolio
U.S. Government Portfolio ("U.S. Government") seeks as high a level of current
income as is consistent with safety of principal. As a matter of fundamental
policy, the Fund pursues its objective by investing solely in U.S. Government
securities that are backed by the full faith and credit of the U.S. Government.
These include U.S. Treasury securities, including zero coupon Treasury
securities, and GNMA certificates, including certain SMRS and variable and
floating rate instruments. The average weighted maturity of the Fund's portfolio
of U.S. Government securities is expected to vary between one year or less and
30 years. For additional information on the use, risks and cost of these
practices, see "Additional Investment Practices." The Fund's investment
objective is not fundamental.
Counsel to the Fund has advised the Fund that, in their view, shares of the Fund
are a legal investment for, among other investors, (i) savings and loan
associations and commercial banks chartered under the laws of the United States,
(ii) savings and loan associations chartered under the laws of Alabama, Arizona,
Arkansas, Colorado, Connecticut, Delaware, Illinois, Louisiana, Maine, Missouri,
Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, Oklahoma, Pennsylvania,
Tennessee, Utah, Washington and Wyoming, (iii) credit unions chartered under the
laws of Alaska*, California, Florida*, Maine, Nevada, New York, Ohio and Utah
and (iv) commercial banks chartered under the laws of Alabama, Alaska, Arizona,
California, Colorado, Connecticut, Delaware, Idaho, Indiana, Kentucky,
Louisiana, Maine, Maryland, Michigan, Minnesota, Missouri, Nebraska, Nevada, New
Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oregon, Rhode
Island, Tennessee, Texas, Washington and West Virginia. Institutions in the
asterisked(*) states should obtain prior state regulatory approval before
investing in shares of the Fund. In addition, the Fund believes that it is
currently a legal investment for savings and loan associations, credit unions
and commercial banks chartered under the laws of certain other states.
MORTGAGE FUNDS
The Mortgage Funds are diversified investment companies that have been designed
to offer investors high current income from investment in mortgage-related
securities.
Alliance Mortgage Strategy Trust
Alliance Mortgage Strategy Trust, Inc. ("Mortgage Strategy") seeks the highest
level of current income, consistent with low volatility of net asset value, that
is available from a portfolio of mortgage-related securities of the highest
quality. As a matter of fundamental policy the Fund normally has at least 65% of
the value of its total assets invested in mortgage-related securities. The Fund
will purchase only those mortgage-related securities that are triple-A
securities or U.S. Government securities. The Fund's portfolio is structured to
achieve low volatility of net asset value approximating that of
14
<PAGE>
a portfolio investing exclusively in two-year U.S. Treasury securities. The Fund
invests primarily in ARMS and fixed-rate mortgage securities and is designed to
provide a more consistent and less volatile net asset value than that
characteristic of a mutual fund investing primarily in fixed-rate mortgage
securities and a higher yield than that of a mutual fund investing in ARMS.
The Fund believes that because of the nature of its assets, it is not exposed to
any material risk of loss as a result of default on its portfolio securities.
The Fund is, however, exposed to the risk that the prices of such securities
will fluctuate, in some cases significantly, as interest rates change.
Mortgage-related securities in which the Fund may invest include (i) pass-
through mortgage-related securities, including pass-through securities backed by
ARMS and issued by GNMA, FNMA, FHLMC and by private organizations, (ii) CMOs and
multi-class pass-through securities, including floating rate CMOs that are ARMS,
(iii) SMRS, (iv) high coupon fixed-rate mortgage securities, and (v) foreign
mortgage-related securities. For a description of these mortgage-related
securities, see "Additional Investment Practices--Mortgage-Related Securities."
The Fund expects that new types of ARMS, other mortgage-related securities,
asset-backed securities and other securities in which the Fund may invest will
be developed from time to time and will consider investing in such new types of
securities.
The Fund may invest up to 35% of its total assets in (i) triple-A asset-backed
securities, (ii) non-mortgage-related U.S. Government securities, including
certain zero coupon Treasury securities, (iii) Treasury securities issued by
private corporate issuers, (iv) qualifying bank deposits, (v) prime commercial
paper or, if not rated, issued by companies which have outstanding triple-A debt
issues and (vi) triple-A debt securities secured by mortgages on commercial real
estate or residential rental properties.
The Fund may also (i) enter into futures contracts and purchase and write
options on futures contracts, (ii) enter into forward commitments for the
purchase or sale of securities, (iii) enter into interest rate swaps, caps and
floors, (iv) invest in Eurodollar instruments, (v) purchase and write put and
call options on foreign currencies, (vi) invest in variable, floating and
inverse floating rate instruments, (vii) enter into repurchase agreements
pertaining to the types of securities in which it invests, (viii) use reverse
repurchase agreements and dollar rolls and (ix) make secured loans of its
portfolio securities. For additional information on the use, risks and costs of
these practices, see "Additional Investment Practices."
Alliance Mortgage Securities Income Fund
Alliance Mortgage Securities Income Fund, Inc. ("Mortgage Securities Income")
seeks a high level of current income to the extent consistent with prudent
investment risk. The Fund invests primarily in a diversified portfolio of
mortgage-related securities, including CMOs, and, as a matter of fundamental
policy, maintains at least 65% of its total assets in mortgage-related
securities.
The Fund expects that governmental, government-related or private entities may
create mortgage loan pools offering pass-through investments in addition to
those described in this Prospectus. The mortgages underlying these securities
may be instruments whose principal or interest payments may vary or whose terms
to maturity may differ from customary long-term fixed-rate mortgages. As new
types of mortgage-related securities are developed and offered to investors, the
Fund will consider making investments in such new types of securities. The Fund
may invest up to 20% of its total assets in lower-rated mortgage-related
securities. See "Risk Considerations--Securities Ratings" and "--Investment in
Lower-Rated Fixed-Income Securities." The average weighted maturity of the
Fund's portfolio of fixed-income securities is expected to vary between two and
ten years.
The Fund may invest up to 35% of the value of its total assets in (i) U.S.
Government securities, (ii) qualifying bank deposits, (iii) prime commercial
paper or, if not rated, issued by companies which have an outstanding high
quality debt issue, (iv) high grade debt securities secured by mortgages on
commercial real estate or residential rental properties, and (v) high grade
asset-backed securities.
The Fund may also (i) invest in repurchase agreements pertaining to the types of
securities in which it invests, (ii) enter into forward commitments for the
purchase or sale of securities, (iii) purchase put and call options written by
others and write covered put and call options on the types of securities in
which the Fund may invest for hedging purposes, (iv) enter into interest rate
swaps, caps and floors, (v) enter into interest rate futures contracts, (vi)
invest in variable floating and inverse floating rate instruments, and (vii)
lend portfolio securities. The Fund will not invest in illiquid securities if,
as a result, more than 10% of its total assets would be illiquid. For additional
information on the use, risk and costs of these practices, see "Additional
Investment Practices."
MULTI-MARKET FUNDS
The Multi-Market Funds are non-diversified investment companies that have been
designed to offer investors a higher yield than a money market fund and less
fluctuation in net asset value than a longer-term bond fund.
Alliance World Income Trust
Alliance Short-Term Multi-Market Trust
Alliance Multi-Market Strategy Trust
Alliance World Income Trust, Inc. ("World Income"), Alliance Short-Term Multi-
Market Trust, Inc. ("Short-Term Multi-Market") and Alliance Multi-Market
Strategy Trust, Inc. ("Multi-Market Strategy") each seek the highest level of
current income, consistent with what Alliance considers to be prudent investment
risk, that is available from a portfolio of high quality debt securities having
remaining maturities of not more than, with respect to World Income, one year,
with respect to Short-Term Multi-Market, three years, and with respect to Multi-
Market Strategy, five years. Each Fund seeks high current yields by investing in
a portfolio of debt securities
15
<PAGE>
denominated in the U.S. Dollar and selected foreign currencies. The Multi-Market
Funds seek investment opportunities in foreign, as well as domestic, securities
markets. World Income, which is not a money market fund, will maintain at least
35% of its net assets in U.S. Dollar-denominated securities. Short-Term Multi-
Market will normally maintain a substantial portion of its assets in debt
securities denominated in foreign currencies but will invest at least 25% of its
net assets in U.S. Dollar-denominated securities. Multi-Market Strategy normally
expects to maintain at least 70% of its assets in debt securities denominated in
foreign currencies.
In pursuing their investment objectives, the Multi-Market Funds seek to minimize
credit risk and fluctuations in net asset value by investing only in short-term
debt securities. Normally, a high proportion of these Funds' portfolios consists
of money market instruments. Alliance actively manages the Multi-Market Funds'
portfolios in accordance with a multi-market investment strategy, allocating a
Fund's investments among securities denominated in the U.S. Dollar and the
currencies of a number of foreign countries and, within each such country, among
different types of debt securities. Alliance adjusts each Multi-Market Fund's
exposure to each currency such that the percentage of assets invested in
securities of a particular country or denominated in a particular currency
varies in accordance with Alliance's assessment of the relative yield and
appreciation potential of such securities and the relative strength of a
country's currency. Fundamental economic strength, credit quality and interest
rate trends are the principal factors considered by Alliance in determining
whether to increase or decrease the emphasis placed upon a particular type of
security or industry sector within the Fund's investment portfolio. None of the
Multi-Market Funds invests more than 25% of its net assets in debt securities
denominated in a single currency other than the U.S. Dollar.
The returns available from short-term foreign currency-denominated debt
instruments can be adversely affected by changes in exchange rates. Alliance
believes that the use of foreign currency hedging techniques, including "cross-
hedges" (see "Additional Investment Practices--Forward Foreign Currency Exchange
Contracts"), can help protect against declines in the U.S. Dollar value of
income available for distribution to shareholders and declines in the net asset
value of a Fund's shares resulting from adverse changes in currency exchange
rates. For example, the return available from securities denominated in a
particular foreign currency would diminish in the event the value of the U.S.
Dollar increased against such currency. Such a decline could be partially or
completely offset by an increase in value of a cross-hedge involving a forward
exchange contract to sell a different foreign currency, where such contract is
available on terms more advantageous to a Fund than a contract to sell the
currency in which the position being hedged is denominated. It is Alliance's
belief that cross-hedges can therefore provide significant protection of net
asset value in the event of a general rise in the U.S. Dollar against foreign
currencies. However, a cross-hedge cannot protect against exchange rate risks
perfectly, and if Alliance is incorrect in its judgment of future exchange rate
relationships, a Fund could be in a less advantageous position than if such a
hedge had not been established.
Each Multi-Market Fund invests in debt securities denominated in the currencies
of countries whose governments are considered stable by Alliance. In addition to
the U.S. Dollar, such currencies include, among others, the Australian Dollar,
Austrian Schilling, British Pound Sterling, Canadian Dollar, Danish Krone, Dutch
Guilder, European Currency Unit ("ECU"), French Franc, Irish Pound, Italian
Lira, Japanese Yen, Mexican Peso, New Zealand Dollar, Norwegian Krone, Spanish
Peseta, Swedish Krona, Swiss Franc and German Mark.
An issuer of debt securities purchased by a Fund may be domiciled in a country
other than the country in whose currency the instrument is denominated. In
addition, the Multi-Market Funds may purchase debt securities denominated in one
currency the principal amounts of which and value of interest payments on which
are determined with reference (or "linked") to another currency. In this regard,
as of the date of this Prospectus each Fund has invested in U.S. Dollar
denominated securities issued by Mexican issuers and/or Peso-linked securities.
The value of these investments may fluctuate inversely in correlation with
changes in the Peso-Dollar exchange rate and with the general level of interest
rates in Mexico, and, when added to a Multi-Market Fund's investments in Mexican
Peso denominated securities, may exceed 25% of the value of the Fund's net
assets. For a general description of Mexico, see Appendix B and each Fund's
Statement of AdditionalInformation.
Each Multi-Market Fund may invest in debt securities denominated in the ECU,
which is a "basket" consisting of specified amounts of the currencies of certain
of the member states of the European Union, a twelve-nation organization engaged
in cooperative economic activities. The specific amounts of currencies
comprising the ECU may be adjusted by the Council of Ministers of the European
Union to reflect changes in relative values of the underlying currencies.
Each Multi-Market Fund may invest in debt securities issued by supranational
organizations including the World Bank, which was chartered to finance
development projects in developing member countries; the European Union; the
European Coal and Steel Community, which is an economic union of various
European nations' steel and coal industries; and the Asian Development Bank,
which is an international development bank established to lend funds, promote
investment and provide technical assistance to member nations in the Asian and
Pacific regions.
Each Multi-Market Fund seeks to minimize investment risk by limiting its
portfolio investments to debt securities of high quality, and World Income will
invest 65% (and normally substantially all) of its total assets in high quality
income-producing debt securities. Accordingly, the Multi-Market Funds' portfolio
securities will consist of (i) U.S. Government securities, (ii) high quality
foreign government securities, (iii) obligations issued by supranational
entities and corporate debt securities having a triple-A rating, with respect to
World
16
<PAGE>
Income, or a high quality rating, with respect to Short-Term Multi-Market and
Multi-Market Strategy, (iv) certificates of deposit and bankers' acceptances
issued or guaranteed by, or time deposits maintained at, banks (including
foreign branches of foreign banks) having total assets of more than $1 billion,
with respect to World Income, or $500 million, with respect to Short-Term Multi-
Market and Multi-Market Strategy, and determined by Alliance to be of high
quality, and (v) prime commercial paper or, if not rated, issued by U.S. or
foreign companies having outstanding high quality debt securities.
As a matter of fundamental policy, each Multi-Market Fund concentrates at least
25% of its total assets in debt instruments issued by domestic and foreign
companies engaged in the banking industry, including bank holding companies.
Such investments may include certificates of deposit, time deposits, bankers'
acceptances, and obligations issued by bank holding companies, as well as
repurchase agreements entered into with banks (as distinct from non-banks) in
accordance with the policies set forth with respect to the Funds in "Additional
Investment Practices--Repurchase Agreements." See "Risk Considerations--
Investment in the Banking Industry."
Each Multi-Market Fund may also (i) invest in indexed commercial paper, (ii)
enter into futures contracts and purchase and write options on futures
contracts, (iii) purchase and write put and call options on foreign currencies,
(iv) purchase or sell forward foreign currency exchange contracts, (v) with
respect to Short-Term Multi-Market and Multi-Market Strategy, enter into
interest rate swaps, caps and floors, (vi) invest in variable, floating and
inverse floating rate instruments, (vii) make secured loans of its portfolio
securities, and (viii) enter into repurchase agreements. A Multi-Market Fund
will not invest in illiquid securities if as a result more than 10% of its
assets would be so invested. For additional information on the use, risks and
costs of these practices, see "Additional Investment Practices." Multi-Market
Strategy maintains borrowings of approximately 25% of its total assets less
liabilities (other than the amount borrowed). See "Risk Considerations-Effects
of Borrowing."
GLOBAL BOND FUNDS
The Global Bond Funds are non-diversified investment companies that have been
designed to offer investors a high level of current income through investments
primarily in foreign government securities.
Alliance North American Government Income Trust
Alliance North American Government Income Trust, Inc. ("North American
Government Income") seeks the highest level of current income, consistent with
what Alliance considers to be prudent investment risk, that is available from a
portfolio of debt securities issued or guaranteed by the United States, Canada
and Mexico, their political subdivisions (including Canadian provinces but
excluding states of the United States), agencies, instrumentalities or
authorities ("Government securities"). The Fund invests in investment grade
securities denominated in the U.S. Dollar, the Canadian Dollar and the Mexican
Peso and expects to maintain at least 25% of its assets in securities
denominated in the U.S. Dollar. In addition, the Fund may invest up to 25% of
its total assets in debt securities issued by governmental entities of Argentina
("Argentine Government securities"). The Fund expects that it will not retain a
debt security which is down-graded below BBB or Baa, or, if unrated, determined
by Alliance to have undergone similar credit quality deterioration, subsequent
to purchase by the Fund. The average weighted maturity of the Fund's portfolio
of fixed-income securities is expected to vary between one year or less and 30
years.
Alliance believes that the increasingly integrated economic relationship among
the United States, Canada and Mexico, characterized by the reduction and
projected elimination of most barriers to free trade among the three nations and
the growing coordination of their fiscal and monetary policies, will over the
long term benefit the economic performance of all three countries and promote
greater correlation of currency fluctuation among the U.S. and Canadian Dollars
and the Mexican Peso. See, however, Appendix B and the Fund's Statement of
Additional Information with respect to the current economic crisis and Peso
devaluation in Mexico.
Alliance will actively manage the Fund's assets in relation to market conditions
and general economic conditions and adjust the Fund's investments in an effort
to best enable the Fund to achieve its investment objective. Thus, the
percentage of the Fund's assets invested in a particular country or denominated
in a particular currency will vary in accordance with Alliance's assessment of
the relative yield and appreciation potential of such securities and the
relationship of the country's currency to the U.S. Dollar. The Fund invests at
least, and normally substantially more than, 65% of its total assets in
Government securities. To the extent that its assets are not invested in
Government securities, however, the Fund may invest the balance of its total
assets in investment grade debt securities issued by the governments of
countries located in Central and South America or any of their political
subdivisions, agencies, instrumentalities or authorities, provided that such
securities are denominated in their local currencies. The Fund will not invest
more than 10% of its total assets in debt securities issued by the governmental
entities of any one such country, except that the Fund may invest up to 25% of
its total assets in Argentine Government securities. The Fund will normally
invest at least 65% of its total assets in income-producing securities. For a
general description of Canada, Mexico and Argentina, see Appendix B and the
Fund's Statement of Additional Information.
Canadian Government securities include the sovereign debt of Canada or any of
its provinces and Government of Canada bonds and Government of Canada Treasury
bills. Canada Treasury bills are debt obligations with maturities of less than
one year. A new issue of Government of Canada bonds frequently consists of
several different bonds with maturities ranging from one to 25 years.
All Canadian provinces have outstanding bond issues and several provinces also
guarantee bond issues of provincial authorities, agents and Crown corporations.
Each new issue yield is based upon a spread from an outstanding Government of
Canada issue of comparable term and coupon. Many Canadian municipalities,
municipal financial authorities and
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Crown corporations raise funds through the bond market in order to finance
capital expenditures. Unlike U.S. municipal securities, which have special tax
status, Canadian municipal securities have the same tax status as other Canadian
Government securities and trade similarly to such securities. The Canadian
municipal market may be less liquid than the provincial bond market.
Canadian Government securities in which the Fund may invest include a modified
pass-through vehicle issued pursuant to the program established under the
National Housing Act of Canada. Certificates issued pursuant to this program
benefit from the guarantee of the Canada Mortgage and Housing Corporation, a
federal Crown corporation that is (except for certain limited purposes) an
agency of the Government of Canada whose guarantee is an unconditional
obligation of the Government of Canada in most circumstances (similar to that of
GNMA in the United States).
Mexican Government securities denominated and payable in the Mexican Peso
include (i) Cetes, which are book-entry securities sold directly by the Mexican
Government on a discount basis and with maturities that range from seven to 364
days, (ii) Bondes, which are long-term development bonds issued directly by the
Mexican Government with a minimum term of 364 days, and (iii) Ajustabonos, which
are adjustable-rate bonds with a minimum three-year term issued directly by the
Mexican Government with the face amount adjusted each quarter by the quarterly
inflation rate.
The Fund may invest up to 25% of its total assets in Argentine Government
securities that are denominated and payable in the Argentine Peso. Argentine
Government securities include (i) Bono de Inversion y Crecimiento ("BIC"), which
are investment and growth bonds issued directly by the Argentine Government with
maturities of up to ten years, (ii) Bono de Consolidacion Economica ("BOCON"),
which are economic consolidation bonds issued directly by the Argentine
Government with maturities of up to ten years and (iii) Bono de Credito a la
Exportacion ("BOCREX"), which are export credit bonds issued directly by the
Argentine government with maturities of up to four years. To date, Argentine
Government securities are not rated by either S&P, Moody's, Duff & Phelps or
Fitch. Alliance, however, believes, that there are Argentine Government
securities that are of investment grade quality.
The Fund may also (i) enter into futures contracts and purchase and write
options on futures contracts for hedging purposes, (ii) purchase and write put
and call options on foreign currencies, (iii) purchase or sell forward foreign
currency exchange contracts, (iv) write covered put and call options and
purchase put and call options on U.S. Government and foreign government
securities traded on U.S. and foreign securities exchanges, and write put and
call options for cross-hedging purposes, (v) enter into interest rate swaps,
caps and floors, (vi) enter into forward commitments for the purchase or sale of
securities, (vii) invest in variable, floating and inverse floating rate
instruments, (viii) make secured loans of its portfolio securities, and (ix)
enter into repurchase agreements. The Fund will not invest in illiquid
securities if as a result 10% of its net assets would be so invested. For
additional information on the use, risks and costs of these practice, see
"Additional Investment Practices." The Fund also maintains borrowings of
approximately one-third of the Fund's total assets less liabilities (other than
the amount borrowed). See "Risk Considerations--Effects of Borrowing."
Alliance Global Dollar Government Fund
Alliance Global Dollar Government Fund, Inc. ("Global Dollar Government") seeks
primarily a high level of current income, and secondarily capital appreciation.
In seeking to achieve these objectives, the Fund invests at least 65% of its
total assets in sovereign debt obligations. The Fund's investments in sovereign
debt obligations will emphasize obligations of a type customarily referred to as
"Brady Bonds" that are issued as part of debt restructurings and that are
collateralized in full as to principal due at maturity by zero coupon U.S.
Government securities ("collateralized Brady Bonds"). See "Additional Investment
Practices--Brady Bonds." The Fund may also invest up to 35% of its total assets
in U.S. and non-U.S. corporate fixed-income securities. See "Risk
Considerations--U.S. Corporate Fixed-Income Securities." The Fund will limit its
investments in sovereign debt obligations and U.S. and non-U.S. corporate fixed-
income securities to U.S. Dollar-denominated securities. Alliance expects that,
based upon current market conditions, the Fund's portfolio of U.S. fixed-income
securities will have an average maturity range of approximately nine to 15 years
and the Fund's portfolio of non-U.S. fixed-income securities will have an
average maturity range of approximately 15 to 25 years. Alliance anticipates
that the Fund's portfolio of sovereign debt obligations will have a longer
average maturity.
Substantially all of the Fund's assets will be invested in lower-rated
securities, which may include securities having the lowest rating for non-
subordinated debt instruments (i.e., rated C by Moody's or CCC or lower by S&P,
Duff & Phelps and Fitch) and unrated securities of comparable investment
quality. These securities are considered to have extremely poor prospects of
ever attaining any real investment standing, to have a current identifiable
vulnerability to default, to be unlikely to have the capacity to pay interest
and repay principal when due in the event of adverse business, financial or
economic conditions, and/or to be in default or not current in the payment of
interest or principal. For a description of bond ratings, see Appendix A. The
Fund may also invest in investment grade securities. Unrated securities will be
considered for investment by the Fund when Alliance believes that the financial
condition of the issuers of such obligations and the protection afforded by the
terms of the obligations themselves limit the risk to the Fund to a degree
comparable to that of rated securities which are consistent with the Fund's
investment objectives and policies. As of August 31, 1994, the percentages of
the Fund's assets invested in securities rated (or considered by Alliance to be
of equivalent quality to securities rated) in particular rating categories were
14.3% in A and above, 3.0% in Baa or BBB, 35.4% in Ba or BB, 39.1% in B, 6.6% in
Caa or CCC, and 1.6% non-rated. See "Risk Considerations--Securities Ratings,"
"--Investment in Fixed-
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Income Securities Rated Baa and BBB," "--Investment in Lower-Rated Fixed-Income
Securities" and Appendix A.
With respect to its investments in sovereign debt obligations and non-U.S.
corporate fixed-income securities, the Fund will emphasize investments in
countries that are considered at the time of purchase to be emerging or
developing countries by the World Bank. A substantial part of the Fund's initial
investment focus is expected to be in securities or obligations of Argentina,
Brazil, Mexico, Morocco, the Philippines and Venezuela because these countries
are now, or are expected by Alliance at a future date to be, the principal
participants in debt restructuring programs (including, in the case of
Argentina, Mexico, the Philippines and Venezuela, issuers of currently
outstanding Brady Bonds) that, in Alliance's opinion, will provide the most
attractive investment opportunities for the Fund. See Appendix A to the Fund's
Statement of Additional Information for information about those six countries.
Alliance anticipates that other countries that will provide initial investment
opportunities for the Fund include, among others, Bolivia, Costa Rica, the
Dominican Republic, Ecuador, Jordan, Nigeria, Panama, Peru, Poland, Thailand,
Turkey and Uruguay. See "Additional Investment Practices--Brady Bonds."
The Fund may invest up to 30% of its total assets in the sovereign debt
obligations and corporate fixed-income securities of issuers in any one of
Argentina, Brazil, Mexico, Morocco, the Philippines or Venezuela, each of which
is an emerging market country, and the Fund will limit investments in the
sovereign debt obligations of each such country (or of any other single foreign
country) to less than 25% of its total assets. The Fund expects that it will not
invest more than 10% of its total assets in the sovereign debt obligations and
corporate fixed-income securities of issuers in any other single foreign country
and is not required to invest any minimum amount of its assets in the securities
or obligations of issuers located in any particular country.
A substantial portion of the Fund's investments will be in (i) securities which
were initially issued at discounts from their face values ("Discount
Obligations") and (ii) securities purchased by the Fund at a price less than
their stated face amount or, in the case of Discount Obligations, at a price
less than their issue price plus the portion of "original issue discount"
previously accrued thereon, i.e., purchased at a "market discount."
The Fund may also (i) invest in structured securities, (ii) invest in fixed and
floating rate loans that are arranged through private negotiations between an
issuer of sovereign debt obligations and one or more financial institutions and
in participations in and assignments of these types of loans, (iii) invest in
other investment companies, (iv) invest in warrants, (v) enter into interest
rate swaps, caps and floors, (vi) enter into forward commitments for the
purchase or sale of securities, (vii) make secured loans of its portfolio
securities, (viii) enter into repurchase agreements pertaining to the types of
securities in which it invests, (ix) use reverse repurchase agreements and
dollar rolls, (x) enter into standby commitment agreements, (xi) make short
sales of securities or maintain a short position, (xii) write put and call
options on securities of the types in which it is permitted to invest and write
call options for cross-hedging purposes, (xiii) purchase and sell exchange-
traded options on any securities index composed of the types of securities in
which it may invest, and (xiv) invest in variable, floating and inverse floating
rate instruments. The Fund may also at any time, with respect to up to 35% of
its total assets, temporarily invest funds awaiting reinvestment or held for
reserves for dividends and other distributions to shareholders in U.S. Dollar-
denominated money market instruments. For additional information on the use,
risks and costs of these practices, see "Additional Investment Practices." While
the Fund does not currently intend to do so, it reserves the right to borrow an
amount not to exceed one-third of the Fund's assets less liabilities (other than
the amount borrowed). See "Risk Considerations--Effects of Borrowing."
CORPORATE BOND FUND
Corporate Bond Portfolio
Corporate Bond Portfolio ("Corporate Bond") is a diversified investment company
that seeks primarily to maximize income over the long term consistent with
providing reasonable safety in the value of each shareholder's investment, and
secondarily to increase its capital through appreciation of its investments in
order to preserve and, if possible, increase the purchasing power of each
shareholder's investment. In pursuing these objectives, the Fund's policy is to
invest in readily marketable securities which give promise of relatively
attractive yields, but which do not involve substantial risk of loss of capital.
The Fund 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 shareholders. Although the Fund also follows a policy of
maintaining at least 65% of its total assets invested in corporate bonds, it is
permitted to invest in securities of non-corporate issuers.
There is no minimum rating requirement applicable to the Fund's investments in
fixed-income securities, except the Fund expects that it will not retain a
security that is downgraded below B, or if unrated, determined by Alliance to
have undergone similar credit quality deterioration subsequent to 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 remainder of the Fund's assets may be
invested in lower-rated fixed-income securities. See "Risk Considerations--
Securities Ratings," "--Investment in Fixed-Income Securities Rated Baa and
BBB," "--Investment in Lower-Rated Fixed-Income Securities" and Appendix A.
During the fiscal year ended June 30, 1994, on a weighted average basis, the
percentages of the Fund's assets invested in securities rated (or considered by
Alliance to be of equivalent quality to securities rated) in particular rating
categories were 22% in A and above, 46% in Baa or BBB, 19% in Ba or BB, and 10%
in B. The Fund did not invest in securities rated below B by each of Moody's,
S&P, Duff & Phelps and Fitch or, if not rated, considered by Alliance to be of
equivalent quality to securities so rated.
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The Fund has complete flexibility as to the types of securities in which it will
invest and the relative proportions thereof, and 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. However,
substantially all of the Fund's investments will be income producing. The
average weighted maturity of the Fund's portfolio of fixed-income securities is
expected to vary between one year or less and 30 years.
The Fund may invest up to 50% of the value of its total assets in foreign debt
securities which will consist primarily of corporate fixed-income securities and
sovereign debt obligations. Not more than 15% of the Fund's total assets may be
invested in these other sovereign debt obligations, which may be lower rated and
considered to be predominantly speculative as regards the issuer's capacity to
pay interest and repay principal.
The Fund may also (i) invest in structured securities, (ii) 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, (iii) for hedging
purposes, purchase put and call options written by others and write covered put
and call options on the types of securities in which the Fund may invest, (iv)
for hedging purposes, enter into various hedging transactions, such as interest
rate swaps, caps and floors, (v) invest in variable, floating and inverse
floating rate instruments, (vi) invest in zero coupon and pay-in-kind
securities, and (vii) invest in CMOs and multi-class pass-through. As a matter
of fundamental policy, the Fund will not purchase illiquid securities. For
additional information on the use, risks and costs of these practices, see
"Additional Investment Practices."
ADDITIONAL INVESTMENT PRACTICES
Some or all of the Funds may engage in the following investment practices to the
extent described in this Prospectus. See the Statement of Additional Information
of each Fund for a further discussion of the uses, risks and costs of engaging
in these practices.
Derivatives. The Funds may use derivatives in furtherance of their investment
objectives. Derivatives are financial contracts whose value depends on, or is
derived from, the value of an underlying asset, reference rate or index. These
assets, rates, and indices may include bonds, stocks, mortgages, commodities,
interest rates, currency exchange rates, bond indices and stock indices.
Derivatives can be used to earn income or protect against risk, or both. For
example, one party with unwanted risk may agree to pass that risk to another
party who is willing to accept the risk, the second party being motivated, for
example, by the desire either to earn income in the form of a fee or premium
from the first party, or to reduce its own unwanted risk by attempting to pass
all or part of that risk to the first party.
Derivatives can be used by investors such as the Funds to earn income and
enhance returns, to hedge or adjust the risk profile of a portfolio, and either
in place of more traditional direct investments or to obtain exposure to
otherwise inaccessible markets. Each of the Funds is permitted to use
derivatives for one or more of these purposes, although most of the Funds
generally use derivatives primarily as direct investments in order to enhance
yields and broaden portfolio diversification. Each of these uses entails greater
risk than if derivatives were used solely for hedging purposes. Derivatives are
a valuable tool which, when used properly, can provide significant benefit to
Fund shareholders. Alliance is not an aggressive user of derivatives with
respect to any of the Funds. However, a Fund may take a significant position in
those derivatives that are within its investment policies if, in Alliance's
judgement, this represents the most effective response to current or anticipated
market conditions. The Multi-Market Funds in particular generally make extensive
use of carefully selected forwards and other derivatives to achieve the currency
hedging that is an integral part of their investment strategy. Alliance's use of
derivatives is subject to continuous risk assessment and control from the
standpoint of each Fund's investment objectives and policies.
Derivatives may be (i) standardized, exchange-traded contracts or (ii)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments--options, futures,
forwards and swaps--from which virtually any type of derivative transaction can
be created.
. Options--An option, which may be standardized and exchange-traded, or
customized and privately negotiated, is an agreement that, for a premium
payment or fee, gives the option holder (the buyer) the right but not the
obligation to buy or sell the underlying asset (or settle for cash an amount
based on an underlying asset, rate or index) at a specified price (the
exercise price) during a period of time or on a specified date. A call option
entitles the holder to purchase, while 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 would be obligated to sell (in the case of a call option)
or to purchase (in the case of a put option) the underlying asset (or settle
for cash an amount based on an underlying asset, rate or index).
. Futures--A futures contract is an agreement that obligates the buyer to buy
and the seller to sell a specified quantity of an underlying asset (or settle
for cash the value of a contract based on an underlying asset, rate or index)
at a specific price on the contract maturity date. Futures contracts are
standardized, exchange-traded instruments and are fungible (i.e., considered
to be perfect substitutes for each other). This fungibility allows futures
contracts to be readily offset or cancelled through the acquisition of equal
but opposite positions, which is the primary method
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in which futures contracts are liquidated. A cash-settled futures contract
does not require physical delivery of the underlying asset but instead is
settled for cash equal to the difference between the values of the contract on
the date it is entered into and its maturity date.
. Forwards--A forward contract is an obligation by one party to buy, and the
other party to sell, a specific quantity of an underlying commodity or other
tangible asset for an agreed upon price at a future date. Forward contracts
are customized, privately negotiated agreements designed to satisfy the
objectives of each party. A forward contract usually results in the delivery
of the underlying asset upon maturity of the contract in return for the agreed
upon payment.
. Swaps--A swap is a customized, privately negotiated agreement that obligates
two parties to exchange a series of cash flows at specified intervals (payment
dates) based upon or calculated by reference to changes in specified prices or
rates (interest rates in the case of interest rate swaps, currency exchange
rates in the case of currency swaps) for a specified amount of an underlying
asset (the "notional" principal amount). The payment flows are netted against
each other, with the difference being paid by one party to the other. Except
for currency swaps, the notional principal amount is used solely to calculate
the payment streams but is not exchanged. With respect to currency swaps,
actual principal amounts of currencies may be exchanged by the counterparties
at the initiation, and again upon the termination, of the transaction.
Debt instruments that incorporate one or more of these building blocks for the
purpose of determining the principal amount of and/or rate of interest payable
on the debt instruments are often referred to as "structured securities." An
example of this type of structured security is indexed commercial paper. The
term is also used to describe certain securities issued in connection with the
restructuring of certain foreign obligations. See "Indexed Commercial Paper" and
"Structured Securities" below. The term "derivative" is also 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 also involve risks
different from, and, in certain cases, greater than, the risks presented by more
traditional investments. Following is a general discussion of important risk
factors and issues concerning the use of derivatives that investors should
understand before investing in a Fund.
. Market Risk--This is the general risk attendant to all investments that the
value of a particular investment will change in a way detrimental to the
Fund's interest.
. Management Risk--Derivative products are highly specialized instruments that
require investment techniques and risk analyses different from those
associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument but also of the derivative
itself, without the benefit of observing the performance of the derivative
under all possible market conditions. In particular, the use and complexity of
derivatives require the maintenance of adequate controls to monitor the
transactions entered into, the ability to assess the risk that a derivative
adds to a Fund's portfolio and the ability to forecast price, interest rate or
currency exchange rate movements correctly.
. Credit Risk--This is the risk that a loss may be sustained by a Fund as a
result of the failure of a another party to a derivative (usually referred to
as a "counterparty") to comply with the terms of the derivative contract. The
credit risk for exchange-traded derivatives is generally less than for
privately negotiated derivatives, since the clearing house, which is the
issuer or counterparty to each exchange-traded derivative, provides a
guarantee of performance. This guarantee is supported by a daily payment
system (i.e., margin requirements) operated by the clearing house in order to
reduce overall credit risk. For privately negotiated derivatives, there is no
similar clearing agency guarantee. Therefore, the Funds consider the
creditworthiness of each counterparty to a privately negotiated derivative in
evaluating potential credit risk.
. Liquidity Risk--Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many
privately negotiated derivatives), it may not be possible to initiate a
transaction or liquidate a position at an advantageous price.
. Leverage Risk--Since many derivatives have a leverage component, adverse
changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss generally is related
to a notional principal amount, even if the parties have not made any initial
investment. Certain derivatives have the potential for unlimited loss,
regardless of the size of the initial investment.
. Other Risks--Other risks in using derivatives include the risk of mispricing
or improper valuation of derivatives and the inability of derivatives to
correlate perfectly with underlying assets, rates and indices. Many
derivatives, in particular privately negotiated derivatives, are complex and
often valued subjectively. Improper valuations can result in increased cash
payment requirements to counterparties or a loss of value to a Fund.
Derivatives do not always perfectly or even highly correlate or track the
value of the assets, rates or indices they are designed to closely track.
Consequently, a Fund's use of derivatives may not always be an effective means
of, and sometimes could be counterproductive to, furthering the Fund's
investment objective.
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Derivatives Used by the Funds. Following is a description of specific
derivatives currently used by one or more of the Funds.
Options on Securities. In purchasing an option on securities, a Fund would be in
a position to realize a gain if, during the option period, the price of the
underlying securities increased (in the case of a call) or decreased (in the
case of a put) by an amount in excess of the premium paid; otherwise the Fund
would experience a loss not greater than the premium paid for the option. Thus,
a Fund would realize a loss if the price of the underlying security declined or
remained the same (in the case of a call) or increased or remained the same (in
the case of a put) or otherwise did not increase (in the case of a put) or
decrease (in the case of a call) by more than the amount of the premium. If a
put or call option purchased by a Fund were permitted to expire without being
sold or exercised, its premium would represent a loss to the Fund.
A Fund may write a put or call option in return for a premium, which is retained
by the Fund whether or not the option is exercised. Except with respect to
uncovered call options written for cross-hedging purposes, none of the Funds
will write uncovered call or put options. A call option written by a Fund is
"covered" if the Fund owns the underlying security, has an absolute and
immediate right to acquire that security upon conversion or exchange of another
security it holds, or holds a call option on the underlying security with an
exercise price equal to or less than that of the call option it has written. A
put option written by a Fund is covered if the Fund holds a put option on the
underlying securities with an exercise price equal to or greater than that of
the put option it has written.
The risk involved in writing an uncovered put option is that there could be a
decrease in the market value of the underlying securities. If this occurred, a
Fund could be obligated to purchase the underlying security at a higher price
than its current market value. Conversely, 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, whereas the risk of loss from writing an uncovered call option is
potentially unlimited.
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 from other hedging strategies.
Short-Term U.S. Government, Mortgage Securities Income, North American
Government Income, Global Dollar Government and Corporate Bond generally
purchase or write privately negotiated options on securities. A Fund that
purchases or writes privately negotiated options on securities will effect such
transactions only with investment dealers and other financial institutions (such
as commercial banks or savings and loan institutions) deemed creditworthy by
Alliance, and Alliance has adopted procedures for monitoring the
creditworthiness of such counterparties. 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. See "Illiquid Securities"
below. Neither Mortgage Securities Income nor Corporate Bond will purchase an
option on a security if, immediately thereafter, the aggregate cost of all
outstanding options purchased by such Fund would exceed 2% of the Fund's total
assets. Nor will either such Fund write an option if, immediately thereafter,
the aggregate value of the Fund's portfolio securities subject to outstanding
options would exceed 15% of the Fund's total assets.
Options on Securities Indices. An option on a securities index is similar to an
option on a security except that, rather than taking or making delivery of a
security at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the chosen index is greater than (in the case of a call) or
less than (in the case of a put) the exercise price of the option.
Options on Foreign Currencies. A Fund invests in options on foreign currencies
that are privately negotiated or traded on U.S. or foreign exchanges for the
purpose of protecting against declines in the U.S. Dollar value of foreign
currency denominated portfolio securities and against increases in the U.S.
Dollar cost of securities to be acquired. The purchase of an option on a foreign
currency may constitute an effective hedge against fluctuations in exchange
rates, although if rates move adversely, a Fund may forfeit the entire amount of
the premium plus related transaction costs.
Warrants. Global Dollar Government may invest in warrants, which are option
securities permitting their holders to subscribe for other securities. Global
Dollar Government may invest in warrants for debt securities or for equity
securities that are acquired in connection with debt instruments. Warrants do
not carry with them dividend or voting rights with respect to the underlying
securities, or any rights in the assets of the issuer. As a result, an
investment in warrants may be considered more speculative than certain other
types of investments. In addition, the value of a warrant does not necessarily
change with the value of the underlying securities, and a warrant ceases to have
value if it is not exercised prior to its expiration date.
Futures Contracts and Options on Futures Contracts. Futures contracts that a
Fund may buy and sell may include futures contracts on fixed-income or other
securities or foreign
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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 upon
exercise of futures contracts. Options on futures contracts written or purchased
by a Fund will be traded on U.S. or foreign exchanges and, except with respect
to Short-Term U.S. Government, will be used only for hedging purposes.
Mortgage Strategy, World Income, Short-Term Multi-Market, Multi-Market Strategy,
and North American Government Income will not enter into a futures contract or
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. Nor will Mortgage Strategy, Mortgage Securities Income, World
Income, Short-Term Multi-Market, Multi-Market Strategy or North American
Government Income do so if immediately thereafter the aggregate of initial
margin deposits on all the outstanding futures contracts of the Fund and
premiums paid on outstanding options on futures contracts would exceed 5% of the
market value of the total assets of the Fund. In addition, Mortgage Securities
Income will not enter into (i) options on futures contracts, (ii) any futures
contract other than one on fixed-income securities or based on interest rates,
or (iii) any futures contract if immediately thereafter the sum of the then
aggregate futures market prices of financial instruments required to be
delivered under open futures contract sales and the aggregate futures market
prices of instruments required to be delivered under open futures contract
purchases would exceed 30% of the value of the Fund's total assets.
Eurodollar Instruments. Eurodollar instruments are essentially U.S. Dollar-
denominated futures contracts or options thereon that are linked to LIBOR.
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. Mortgage
Strategy intends to use Eurodollar futures contracts and options thereon to
hedge against changes in LIBOR (to which many short-term borrowings and floating
rate securities in which the Fund invests are linked).
Forward Foreign Currency Exchange Contracts. Each Fund that purchases or sells
forward contracts on foreign currencies ("forward contracts") attempts to
minimize the risk to it 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 ("transaction hedge"). When a Fund believes that a foreign currency
may suffer a substantial decline against the U.S. Dollar, it may enter into a
forward sale contract to sell an amount of that foreign currency approximating
the value of some or all of the Fund's portfolio securities denominated in such
foreign currency, or when the Fund believes that the U.S. Dollar may suffer a
substantial decline against a foreign currency, it may enter into a forward
purchase contract to buy that foreign currency for a fixed dollar amount
("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 ("cross-hedge").
Forward Commitments. Forward commitments are forward contracts for the purchase
or sale of securities, including 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. At the time a Fund enters into a forward commitment, it records the
transaction and thereafter reflects the value of the security purchased or, if a
sale, the proceeds to be received, in determining its net asset value. Any
unrealized appreciation or depreciation reflected in such valuation would be
canceled if the required conditions did not occur and the trade were canceled.
The use of forward commitments helps a Fund to protect against anticipated
changes in interest rates and prices. For instance, in periods of rising
interest rates and falling bond prices, a Fund might sell securities in its
portfolio on a forward commitment basis to limit its exposure to falling bond
prices. In periods of falling interest rates and rising bond prices, a Fund
might sell a security in its portfolio and purchase the same or a similar
security on a when-issued or forward commitment basis, thereby obtaining the
benefit of currently higher cash yields. No forward commitments will be made by
Mortgage Strategy, North American Government Income or Global Dollar Government
if, as a result, the Fund's aggregate forward commitments under such
transactions would be more than 30% of its total assets.
A Fund's right to receive or deliver a security under a forward commitment may
be sold prior to the settlement date. The Funds enter into forward commitments,
however, only with the intention of actually receiving securities or delivering
them, as
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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 incur a gain or loss.
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. Short-
Term Multi-Market, Multi-Market Strategy and North American Government Income
may enter into interest rate swaps involving payments to the same currency or in
different currencies. Short-Term U.S. Government, Mortgage Strategy, Mortgage
Securities Income, Global Dollar Government and Corporate Bond will not enter
into an interest rate swap, cap or floor transaction unless the unsecured senior
debt or the claims-paying ability of the other party thereto is then rated in
the highest rating category of at least one nationally recognized rating
organization. Each of Short-Term Multi-Market, Multi-Market Strategy and North
American Government Income will enter into interest rate swap, cap or floor
transactions with its respective custodian, and with other counterparties, but
only if: (i) for transactions with maturities under one year, such other
counterparty has outstanding prime commercial paper; or (ii) for transactions
with maturities greater than one year, the counterparty has outstanding high
quality debt securities.
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.
Standby Commitment Agreements. Standby commitment agreements are similar to put
options that commit a Fund, for a stated period of time, to purchase a stated
amount of a security that may be issued and sold to the Fund at the option of
the issuer. The price and coupon of the security are fixed at the time of the
commitment. At the time of entering into the agreement, the Fund is paid a
commitment fee regardless of whether the security ultimately is issued. The
Funds will enter into such agreements only for the purpose of investing in the
security underlying the commitment at a yield and price considered advantageous
and unavailable on a firm commitment basis. The Funds will not enter into
standby commitments with a remaining term in excess of 45 days and will limit
their investments in such commitments so that the aggregate purchase price of
the securities subject to the commitments does not exceed 20% of their
respective assets.
There is no guarantee that the security subject to a standby commitment will be
issued. In addition, the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
is at the option of the issuer, a Fund will bear the risk of capital loss in the
event the value of the security declines and may not benefit from an
appreciation in the value of the security during the commitment period if the
issuer decides not to issue and sell the security to the Fund.
Indexed Commercial Paper. Indexed commercial paper may have its principal linked
to changes in foreign currency exchange rates whereby its principal amount is
adjusted upwards or downwards (but not below zero) at maturity to reflect
changes in the referenced exchange rate. Each Fund that invests in such
commercial paper may do so without limitation. A Fund will purchase such
commercial paper with the currency in which it is denominated and, at maturity,
will receive interest and principal payments thereon in that currency, but the
amount of principal payable by the issuer at maturity will change in proportion
to the change (if any) in the exchange rate between the two specified currencies
between the date the instrument is issued and the date the instrument matures.
While such commercial paper entails the risk of loss of principal, the potential
for realizing gains as a result of changes in foreign currency exchange rates
enables a Fund to hedge (or cross-hedge) against a decline in the U.S. Dollar
value of investments denominated in foreign currencies while providing an
attractive money market rate of return. A Fund will purchase such commercial
paper for hedging purposes only, not for speculation.
Mortgage-Related Securities. The mortgage-related securities in which a Fund may
invest typically are securities representing interests in pools of mortgage
loans made to home owners. Mortgage-related securities bear interest at either a
fixed rate or an adjustable rate determined by reference to an index rate. The
mortgage loan pools may be assembled for sale to investors (such as a Fund) by
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governmental or private organizations. Mortgage-related securities issued by
GNMA are backed by the full faith and credit of the United States; those issued
by FNMA and FHLMC are not so backed.
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. However, private
issuers sometimes obtain committed loan facilities, lines of credit, letters of
credit, surety bonds or other forms of liquidity and credit enhancement to
support the timely payment of interest and principal with respect to their
securities if the borrowers on the underlying mortgages fail to make their
mortgage payments. The ratings of such non-governmental securities are generally
dependent upon the ratings of the providers of such liquidity and credit support
and would be adversely affected if the rating of such an enhancer were
downgraded. A Fund may buy mortgage-related securities without credit
enhancement if the securities meet the Fund's investment standards. Although the
market for mortgage-related securities is becoming increasingly liquid, those of
certain private organizations may not be readily marketable.
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. 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.
Collateralized mortgage obligations (CMOs) are the predominant type of "pay-
through" mortgage-related security. CMOs are designed to reduce the risk of
prepayment for investors by issuing multiple classes of securities, each having
different maturities, interest rates and payment schedules, and with the
principal and interest on the underlying mortgages allocated among the several
classes in various ways. The collateral securing the CMOs may consist of a pool
of mortgages, but may also consist of mortgage-backed bonds or pass-through
securities. 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 adjustable-rate mortgage
securities (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 adjustable-rate mortgages or fixed-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). Furthermore, 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.
Stripped mortgage-related securities (SMRS) are mortgage-related securities that
are usually structured with two classes of securities collateralized by a pool
of mortgages or a pool of mortgaged-backed bonds or pass-through securities,
with each class receiving different proportions of the principal and interest
payments from the underlying assets. A common type of SMRS has one class of
interest-only securities (IOs) receiving all of the interest payments from the
underlying assets, while the other class of securities, principal-only
securities (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, none of the Funds relies on IOs
and POs as the principal means of furthering its investment objective.
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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 prepayment
of the underlying mortgages. If property owners make unscheduled prepayments of
their mortgage loans, these prepayments will result in the early payment of the
applicable mortgage-related securities. In that event a Fund may be unable to
invest the proceeds from the early payment of the mortgage-related securities in
an investment that provides as high a yield as the mortgage-related securities.
Consequently, early payment associated with mortgage-related securities causes
these securities to experience significantly greater price and yield volatility
than 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. During
periods of rising interest rates, the rate of mortgage prepayments usually
decreases, thereby tending to increase the life of mortgage-related securities.
If the life of a mortgage-related security is inaccurately predicted, a Fund may
not be able to realize the rate of return it expected.
As with fixed-income securities generally, the value of mortgage-related
securities can also be adversely affected by increases in general interest rates
relative to the yield provided by such securities. Such adverse effect is
especially possible with fixed-rate mortgage securities. If the yield available
on other investments rises above the yield of the fixed-rate mortgage securities
as a result of general increases in interest rate levels, the value of the
mortgage-related securities will decline. Although the negative effect could be
lessened if the mortgage-related securities were to be paid earlier (thus
permitting a Fund to reinvest the prepayment proceeds in investments yielding
the higher current interest rate), as described above the rate of mortgage
prepayments and early payment of mortgage-related securities generally tends to
decline during a period of rising interest rates.
Although the value of ARMS may not be affected by rising interest rates as much
as the value of fixed-rate mortgage securities is affected by rising interest
rates, ARMS may still decline in value as a result of rising interest rates.
Although, as described above, the yield on ARMS varies 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.
Mortgage Strategy may invest up to 15% of the value of its total assets in
mortgage-related securities denominated in U.S. Dollars or in foreign currencies
and issued or guaranteed by foreign governments or issued by foreign non-
governmental issuers, provided that such foreign mortgage-related securities are
triple-A rated. The percentage of Mortgage Strategy's assets invested in foreign
mortgage-related securities will vary and its portfolio of foreign mortgage-
related securities may include those of a number of foreign countries or,
depending upon market conditions, those of a single country. See "Risk
Considerations--Foreign Investment."
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.
There have also been proposals to cap the interest rate that a credit card
issuer may charge. 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. Furthermore, 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.
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
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the full faith and credit of the U.S. Government, such as securities
issued by 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 FNMA and FHLMC,
and governmental 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
amounts with principal payments at maturity or specified call dates. For
information regarding GNMA, FNMA and FHLMC certificates and CMOs, see "Mortgage-
Related Securities" above.
U.S. Government securities also include zero coupon securities and principal-
only securities and certain 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 IO class and a PO
class. See "Mortgage-Related Securities" above and "Zero Coupon and Principal-
Only Securities" below. 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 a Fund that holds the securities.
U.S. Government securities are considered among the safest of fixed-income
investments. As a result, however, their yields are generally lower than the
yields available from other fixed-income securities.
Zero Coupon and Principal-Only Securities. Zero coupon securities and principal-
only (PO) securities are debt securities that have been issued without interest
coupons or stripped of their unmatured interest coupons, and include receipts or
certificates representing interests in such stripped debt obligations and
coupons. Such a security pays no interest to its holder during its life. Its
value to an investor consists of the difference between its face value at the
time of maturity and the price for which it was acquired, which is generally an
amount significantly less than its face value. Such securities usually trade at
a deep discount from their face or par value and are subject to greater
fluctuations in market value in response to changing interest rates than debt
obligations of comparable maturities and credit quality that make current
distributions of interest. On the other hand, because there are no periodic
interest payments to be reinvested prior to maturity, these securities eliminate
reinvestment risk and "lock in" a rate of return to maturity.
Zero coupon Treasury securities are U.S. Treasury bills issued without interest
coupons. Principal-only Treasury securities are U.S. Treasury notes and bonds
that have been stripped of their unmatured interest coupons, and receipts or
certificates representing interests in such stripped debt obligations and
coupons. 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 instruments are generally held by a bank in a custodial or
trust account). The staff of the Commission has indicated that, in its view,
these receipts or certificates should be considered as securities issued by the
bank or brokerage firm involved and, therefore, should not be included in a
Fund's categorization of U.S. Government securities. The Funds disagree with the
staff's position but will not treat such securities as U.S. Government
securities until final resolution of the issue.
Current federal tax law requires that a holder (such as a Fund) of a zero coupon
security accrue a portion of the discount at which the security was purchased as
income each year even though the holder receives no interest payment in cash on
the security during the year. As a result, in order to make the distributions
necessary for a Fund not to be subject to federal income or excise taxes, the
Fund might be required to pay out as an income distribution each year an amount,
obtained by liquidation of portfolio securities or borrowings if necessary,
greater than the total amount of cash that the Fund has actually received as
interest during the year. Each Fund believes, however, that it is highly
unlikely that it would be necessary to liquidate portfolio securities or borrow
money in order to make such required distributions or to meet its investment
objective. For a discussion of the tax treatment of zero coupon Treasury
securities, see "Dividends, Distributions and Taxes--Zero Coupon Treasury
Securities" in the Statement of Additional Information of each Fund that is
permitted to invest in such securities.
Corporate Bond may also 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.
Variable, Floating and Inverse Floating Rate Instruments. Fixed-income
securities may have fixed, variable or floating
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rates of interest. Variable and floating rate securities pay interest at rates
that are adjusted periodically, according to a specified formula. A "variable"
interest rate adjusts at predetermined intervals (e.g., daily, weekly or
monthly), while a "floating" interest rate adjusts whenever a specified
benchmark rate (such as the bank prime lending rate) changes.
A Fund may invest in fixed-income securities that pay interest at a coupon rate
equal to a base rate, plus additional interest for a certain period of time if
short-term interest rates rise above a predetermined level or "cap." The amount
of such an additional interest payment typically is calculated under a formula
based on a short-term interest rate index multiplied by a designated factor.
Leveraged inverse floating rate debt instruments are sometimes known as inverse
floaters. The interest rate on an inverse floater resets in the opposite
direction from the market rate of interest to which the inverse floater is
indexed. An inverse 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.
Structured Securities. Structured securities in which Global Dollar Government
and Corporate Bond may invest represent interests in entities organized and
operated solely for the purpose of restructuring the investment characteristics
of sovereign debt obligations, with respect to Global Dollar Government, or
foreign government securities, with respect to Corporate Bond. This type of
restructuring involves the deposit with or purchase by an entity, such as a
corporation or trust, of specified instruments (such as commercial bank loans or
Brady Bonds) and the issuance by that entity of one or more classes of
structured securities backed by, or representing interests in, the underlying
instruments. The cash flow on the underlying instruments may be apportioned
among the newly issued structured securities to create securities with different
investment characteristics such as varying maturities, payment priorities and
interest rate provisions, and the extent of the payments made with respect to
structured securities is dependent on the extent of the cash flow on the
underlying instruments. Because structured securities typically involve no
credit enhancement, their credit risk generally will be equivalent to that of
the underlying instruments. Structured securities of a given class may be either
subordinated or unsubordinated to the right of payment of another class.
Subordinated structured securities typically have higher yields and present
greater risks than unsubordinated structured securities. Global Dollar
Government may invest up to 25% of its total assets, and Corporate Bond may
invest without limit, in these types of structured securities.
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 sovereign debt obligations, with respect to Global
Dollar Government, or foreign government securities, with respect to Corporate
Bond, is restricted by the governing documentation as to the nature of the
assignee such that the only way in which the Fund may acquire an interest in a
loan is through a participation and not an assignment. A Fund may have
difficulty disposing of assignments and participations because to do so it will
have to assign such securities to a third party. Because there is no liquid
market for such securities, such securities 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 securities and a Fund's ability
to dispose of particular assignments or participations 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 assignments and participations also may make it more
difficult for the Fund to assign a value to these securities for purposes of
valuing the Fund's portfolio and calculating its net asset value.
Global Dollar Government may invest up to 25%, and Corporate Bond may invest up
to 15%, of their total assets, in loan participations and assignments. The
government that is the borrower on the loan will be considered by a Fund to be
the issuer of a loan participation or assignment for purposes of its fundamental
investment policy that it may 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).
Brady Bonds. Brady Bonds are created through the exchange of existing commercial
bank loans to foreign entities for new obligations in connection with debt
restructurings under a plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady (the "Brady Plan"). Brady Bonds have been issued only
recently, and, accordingly, do not have a long payment history. They may be
collateralized or uncollateralized and issued in various currencies (although
most are U.S. Dollar-denominated) and they are actively traded in the over-the-
counter secondary market.
U.S. Dollar-denominated, collateralized Brady Bonds, which may be fixed-rate par
bonds or floating rate discount bonds,
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are generally collateralized in full as to principal due at maturity by U.S.
Treasury zero coupon obligations that have the same maturity as the Brady Bonds.
Interest payments on these Brady Bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments based on the applicable interest
rate at that time and is adjusted at regular intervals thereafter. Certain Brady
Bonds are entitled to "value recovery payments" in certain circumstances, which
in effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having up to four valuation
components: (i) collateralized repayment of principal at final maturity, (ii)
collateralized interest payments, (iii) uncollateralized interest payments, and
(iv) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In the event of a
default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments that would have then 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.
Convertible Securities. Convertible securities include bonds, debentures,
corporate notes and preferred stocks that are convertible into common stock.
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 stock, although the higher
yield tends to make the convertible security less volatile than the underlying
common stock. As with debt securities, the market value of convertible
securities tends to decline as interest rates increase 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. For a
description of these risks, see "Risk Considerations--Investment in Lower-Rated
Fixed-Income Securities."
Short Sales. A short sale is effected by selling a security that a Fund does not
own, or if the Fund owns the security, it is not to be delivered upon
consummation of the sale. A short sale is "against the box" if a Fund owns or
has the right to obtain without payment securities identical to those sold
short. Short-Term U.S. Government and Global Dollar Government each may make
short sales only against the box and only for the purpose of deferring
realization of gain or loss for U.S. federal income tax purposes. In addition,
each of these Funds may not make a short sale if, as a result, more than 10% of
net assets (taken at market value), with respect to Global Dollar Government,
and 10% of total assets, with respect to Short-Term U.S. Government, would be
held as collateral for short sales. If the price of the security sold short
increases between the time of the short sale and the time a Fund replaces the
borrowed security, the Fund will incur a loss; conversely, if the price
declines, the Fund will realize a capital gain. Certain special federal income
tax considerations may apply to short sales entered into by a Fund. See
"Dividends, Distributions and Taxes" in the relevant Fund's Statement of
Additional Information.
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. A Fund requires continual
maintenance of collateral in an amount equal to, or in excess of, the resale
price. If a vendor defaults on its repurchase obligation, a Fund would suffer a
loss to the extent that the proceeds from the sale of the collateral were less
than the repurchase price. If a vendor goes bankrupt, a Fund might be delayed
in, or prevented from, selling the collateral for its benefit. There is no
percentage restriction on any Fund's ability to enter into repurchase
agreements, except that Short-Term U.S. Government may enter into repurchase
agreements on not more than 25% of its total assets. The Funds 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),
although Mortgage Strategy, World Income, Short-Term Multi-Market, Multi-Market
Strategy, North American Government Income and Global Dollar Government
currently enter into repurchase agreements only with their custodians and such
primary dealers.
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 only advantageous if the
interest cost to a
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Fund of the reverse repurchase transaction is less than the cost of otherwise
obtaining the cash.
Dollar rolls involve sales by a Fund of securities for delivery in the current
month and the Fund's simultaneously contracting to repurchase substantially
similar (same type and coupon) securities on a specified future date. During the
roll period, a Fund forgoes principal and interest paid on the securities. A
Fund is compensated by the difference between the current sales price and the
lower forward price for the future purchase (often referred to as the "drop") as
well as by the interest earned on the cash proceeds of the initial sale.
Reverse repurchase agreements and dollar rolls involve the risk that the market
value of the securities a Fund is obligated to repurchase under the agreement
may decline below the repurchase price. In the event the buyer of securities
under a reverse repurchase agreement or dollar roll files for bankruptcy or
becomes insolvent, a Fund's use of the proceeds of the agreement may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls are speculative techniques and
are considered borrowings by the Funds. Short-Term U.S. Government may enter
into reverse repurchase agreements with commercial banks and registered broker-
dealers in order to increase income, in an amount up to 33-1/3% of its total
assets. Under normal circumstances, Mortgage Strategy does not expect to engage
in reverse repurchase agreements and dollar rolls with respect to greater than
50% of its total assets. Reverse repurchase agreements and dollar rolls together
with any borrowings by Global Dollar Government will not exceed 33% of its total
assets less liabilities (other than amounts borrowed). See "Risk Considerations-
Effects of Borrowing."
Loans of Portfolio Securities. A Fund may make secured loans of portfolio
securities to brokers, dealers and financial institutions, provided that cash,
liquid high-grade debt securities or bank letters of credit equal to at least
100% of the market value of the securities loaned is deposited and maintained by
the borrower with the Fund. The risks in lending portfolio securities, as with
other extensions of credit, consist of possible loss of rights in the collateral
should the borrower fail financially. In determining whether to lend securities
to a particular borrower, Alliance will consider all relevant facts and
circumstances, including the creditworthiness of the borrower. While securities
are on loan, the borrower will pay the Fund any income earned thereon and the
Fund may invest any cash collateral in portfolio securities, thereby earning
additional income, or receive an agreed upon amount of income from a borrower
who has delivered equivalent collateral. Each Fund will have the right to regain
record ownership of loaned securities to exercise beneficial rights such as
voting rights, subscription rights and rights to dividends, interest or
distributions. A Fund may pay reasonable finders', administrative and custodial
fees in connection with a loan. A Fund will not lend portfolio securities in
excess of 25%, with respect to Short-Term U.S. Government, and 20%, with respect
to each of Mortgage Strategy, Mortgage Securities Income, World Income, Short-
Term Multi-Market, Multi-Market Strategy, North American Government Income and
Global Dollar Government, of its total assets, nor will a Fund lend portfolio
securities to any officer, director, employee or affiliate of the Fund or
Alliance.
Illiquid Securities. Subject to any more restrictive applicable investment
policies, none of the Funds will maintain more than 15% of its net assets in
illiquid securities. Illiquid securities generally include (i) direct placements
or other securities that are subject to legal or contractual restrictions on
resale or for which there is no readily available market (e.g., when trading in
the security is suspended or, in the case of unlisted securities, when market
makers do not exist or will not entertain bids or offers), including many
currency swaps and any assets used to cover currency swaps, (ii) over-the-
counter options and assets used to cover over-the-counter options, and (iii)
repurchase agreements not terminable within seven days. Rule 144A securities
that have legal or contractual restrictions on resale but have a readily
available market are not deemed illiquid. Alliance will monitor the liquidity of
each Fund's Rule 144A portfolio securities under the supervision of the
Directors of that Fund. A Fund that invests in illiquid securities may not be
able to sell such securities and may not be able to realize their full value
upon sale.
Investment in Other Investment Companies. Global Dollar Government may invest in
other investment companies whose investment objectives and policies are
consistent with those of the Fund. Under the 1940 Act, the Fund may invest not
more than 10% of its total assets in securities of other investment companies.
In addition, under the 1940 Act the Fund may not own more than 3% of the total
outstanding voting stock of any investment company and not more than 5% of the
value of the Fund's total assets may be invested in the securities of any
investment company. If the Fund acquired shares in investment companies,
shareholders would bear both their proportionate share of expenses in the Fund
(including management and advisory fees) and, indirectly, the expenses of such
investment companies (including management and advisory fees).
Future Developments. A Fund may, following written notice to its shareholders,
take advantage of other investment practices that are not currently contemplated
for use by the Fund or are not available but may yet be developed, to the extent
such investment practices are consistent with the Fund's investment objective
and legally permissible for the Fund. Such investment practices, if they arise,
may involve risks that exceed those involved in the practices described above.
Defensive Position. For temporary defensive purposes, each Fund may invest in
certain types of short-term, liquid, high grade or high quality (depending on
the Fund) debt securities. These securities may include U.S. Government
securities, qualifying bank deposits, money market instruments, prime commercial
paper and other types of short-term debt securities including notes and bonds.
For Funds that may invest in foreign countries, such securities may also include
short-term, foreign-currency denominated securities of the type mentioned above
issued by foreign governmental entities, companies and supranational
organizations. For a complete
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description of the types of securities in which a Fund may invest while in a
temporary defensive position, see the Fund's Statement of Additional
Information.
Portfolio Turnover. Portfolio turnover rates are set forth under "Financial
Highlights." These rates of portfolio turnover are greater than those of most
other investment companies. A high rate of portfolio turnover involves
correspondingly greater brokerage and other expenses than a lower rate, which
must be borne by the Fund and its shareholders. High portfolio turnover also may
result in the realization of substantial net short-term capital gains. See
"Dividends, Distributions and Taxes" in each Fund's Statement of Additional
Information.
CERTAIN FUNDAMENTAL INVESTMENT POLICIES
Each Fund has adopted certain fundamental investment policies listed below,
which may not be changed without the approval of its shareholders. Additional
investment restrictions with respect to a Fund are set forth in its Statement of
Additional Information.
Short-Term U.S. Government may not (i) invest more than 5% of its total assets
in the securities of any one issuer (other than U.S. Government securities and
repurchase agreements relating thereto), although up to 25% of the Fund's total
assets may be invested without regard to this restriction, or (ii) invest 25% or
more of its total assets in the securities of any one industry.
U.S. Government may not (i) borrow money except from banks for temporary or
emergency purposes and then only in an amount not exceeding 5% of the value of
its total assets at the time the borrowing is made, (ii) make loans to other
persons, (iii) effect a short sale of any security, (iv) purchase securities on
margin, but it may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities, or (v) write, purchase or sell
puts, calls or combinations thereof.
Mortgage Strategy may not (i) invest more than 5% of its total assets in the
securities of any one issuer or own more than 10% of the outstanding voting
securities of such issuer (other than U.S. Government securities), except that
up to 25% of the value of the Fund's total assets may be invested without regard
to the 5% and 10% limitations, (ii) invest 25% or more of its total assets in
securities of companies engaged principally in any one industry, except that
this restriction does not apply to investments in the mortgage and mortgage-
financed industry (in which more than 25% of the value of the Fund's total
assets will, except for temporary defensive positions, be invested) or U.S.
Government securities, (iii) borrow money except from banks for emergency or
temporary purposes in an amount not exceeding 5% of the value of the total
assets of the Fund, except that the Fund may engage in reverse repurchase
agreements and dollar rolls in an amount up to 50% of the Fund's total assets,
and (iv) pledge, hypothecate, mortgage or otherwise encumber its assets, except
to secure permitted borrowings.
Mortgage Securities Income may not (i) invest more than 5% of the value of its
total assets in the securities of any one issuer (other than U.S. Government
securities), except that up to 25% of the value of the Fund's total assets may
be invested without regard to this limitation, (ii) invest more than 25% of the
value of its total assets in the securities of issuers conducting their
principal business activities in a single industry, except that this limitation
shall not apply to investments in the mortgage and mortgage-financed industry
(in which more than 25% of the value of the Fund's total assets will, except for
temporary defensive positions, be invested) or U.S. Government securities, (iii)
borrow money except from banks for temporary or emergency purposes, including
the meeting of redemption requests which might require the untimely disposition
of securities, borrowing in the aggregate may not exceed 15%, and borrowing for
purposes other than meeting redemptions may not exceed 5% of the value of the
Fund's total assets (including the amount borrowed) less liabilities (not
including the amount borrowed) at the time the borrowing is made, outstanding
borrowings in excess of 5% of the value of the Fund's total assets will be
repaid before any subsequent investments are made, (iv) pledge, hypothecate,
mortgage or otherwise encumber its assets, except in an amount of not more than
15% of the value of its total assets to secure borrowings for temporary or
emergency purposes and except as provided in (vi) below, provided, however, that
this limitation does not apply to deposits made in connection with the entering
into and holding of interest rate futures contracts, (v) invest more than 10% of
the value of its total assets in the aggregate in illiquid securities or other
illiquid investments and repurchase agreements maturing in more than seven days,
or (vi) lend its portfolio securities if immediately after such a loan more than
20% of the value of the Fund's total assets would be subject to such loans.
World Income may not (i) invest 25% or more of its total assets in securities of
companies engaged principally in any one industry other than the banking
industry except that this restriction does not apply to U.S. Government
securities, (ii) borrow money except from banks for temporary or emergency
purposes, including the meeting of redemption requests which might require the
untimely disposition of securities; borrowing in the aggregate may not exceed
15%, and borrowing for purposes other than meeting redemptions may not exceed 5%
of the value of the Fund's total assets (including the amount borrowed) less
liabilities (not including the amount borrowed) at the time the borrowing is
made; securities will not be purchased while borrowings in excess of 5% of the
value of the Fund's total assets are outstanding, or (iii) pledge, hypothecate,
mortgage or otherwise encumber its assets, except to secure permitted
borrowings.
Short-Term Multi-Market may not (i) invest 25% or more of its total assets in
securities of companies engaged principally in any one industry other than the
banking industry, except that this restriction does not apply to U.S. Government
securities, (ii) borrow money except from banks for temporary or emergency
purposes, including the meeting of redemption requests which might require the
untimely disposition of securities; borrowing in the aggregate may not exceed
15%, and borrowing for purposes other than meeting redemptions
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may not exceed 5% of the value of the Fund's total assets (including the amount
borrowed) less liabilities (not including the amount borrowed) at the time the
borrowing is made; securities will not be purchased while borrowings in excess
of 5% of the value of the Fund's total assets are outstanding, or (iii) pledge,
hypothecate, mortgage or otherwise encumber its assets, except to secure
permitted borrowings.
Multi-Market Strategy may not (i) invest 25% or more of its total assets in
securities of companies engaged principally in any one industry other than the
banking industry, except that this restriction does not apply to U.S. Government
securities, (ii) borrow money, except the Fund may, in accordance with
provisions of the 1940 Act, (a) borrow from a bank, if after such borrowing,
there is asset coverage of at least 300% as defined in the 1940 Act, and (b)
borrow for temporary or emergency purposes in an amount not exceeding 5% of the
value of the total assets of the Fund, or (iii) pledge, hypothecate, mortgage or
otherwise encumber its assets, except to secure permitted borrowings.
North American Government Income may not (i) invest 25% or more of its total
assets in securities of companies engaged principally in any one industry except
that this restriction does not apply to U.S. Government securities, (ii) borrow
money, except that the Fund may, in accordance with provisions of the 1940 Act,
(a) borrow from a bank, if after such borrowing, there is asset coverage of at
least 300% as defined in the 1940 Act, and (b) borrow for temporary or emergency
purposes in an amount not exceeding 5% of the value of the total assets of the
Fund, or (iii) pledge, hypothecate, mortgage or otherwise encumber its assets,
except to secure permitted borrowings.
Global Dollar Government may not (i) invest 25% or more of its total assets in
the securities of issuers conducting their principal business activities in any
one industry, except that this restriction does not apply to U.S. Government
securities, (ii) purchase more than 10% of any class of the voting securities of
any one issuer, (iii) borrow money, except the Fund may, in accordance with
provisions of the 1940 Act, (a) borrow from a bank, if after such borrowing,
there is asset coverage of at least 300% as defined in the 1940 Act, and (b)
borrow for temporary or emergency purposes in an amount not exceeding 5% of the
value of the total assets of the Fund, (iv) pledge, hypothecate, mortgage or
otherwise encumber its assets, except to secure permitted borrowings, or (v)
purchase a security if, as a result (unless the security is acquired pursuant to
a plan of reorganization or an offer of exchange), the Fund would own more than
3% of the total outstanding voting stock of any investment company or more than
5% of the value of the Fund's net assets would be invested in securities of any
one or more investment companies.
Corporate Bond may not (i) invest more than 5% of its total assets in the
securities of any one issuer other than U.S. Government securities, or (ii) own
more than 10% of the outstanding voting securities of any issuer.
RISK CONSIDERATIONS
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 generally rise. Conversely,
during periods of rising interest rates, the values of a Fund's securities
generally decline.
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 are reflected in the net asset value of a Fund.
U.S. Corporate Fixed-Income Securities. The U.S. corporate fixed-income
securities in which Global Dollar Government invests may include securities
issued in connection with corporate restructurings such as takeovers or
leveraged buyouts, which may pose particular risks. Securities issued to finance
corporate restructurings may have special credit risks due to the highly
leveraged conditions of the issuer. In addition, such issuers may lose
experienced management as a result of the restructuring. Finally, the market
price of such securities may be more volatile to the extent that expected
benefits from the restructuring do not materialize. The Fund may also invest in
U.S. corporate fixed-income securities that are not current in the payment of
interest or principal or are in default, so long as Alliance believes such
investment is consistent with the Fund's investment objectives. The Fund's
rights with respect to defaults on such securities will be subject to applicable
U.S. bankruptcy, moratorium and other similar laws.
Foreign Investment. 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 such
securities may experience greater price volatility and significantly lower
liquidity than a portfolio invested solely in equity 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 settlements
may in some instances be subject to delays and related 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
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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 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 a Fund. The
liquidity of a Fund's investments in any country in which any of these factors
exists could be affected and Alliance will monitor the effect of any such factor
or factors on a Fund's investments. Furthermore, transaction costs including
brokerage commissions for transactions both on and off the securities exchanges
in many foreign countries are generally higher than in the U.S.
Issuers of securities in foreign jurisdictions are generally not subject to the
same degree of regulation as are U.S. issuers with respect to such matters as
insider trading rules, restrictions on market manipulation, shareholder proxy
requirements and timely disclosure of information. The reporting, accounting and
auditing standards of foreign countries may differ, in some cases significantly,
from U.S. standards in important respects and less information may be available
to investors in foreign securities than to investors in U.S. securities.
Substantially less information is publicly available about certain non-U.S.
issuers than is available about 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 or the
Fund's investments in such country. In the event of expropriation,
nationalization or other confiscation, a Fund could lose its entire investment
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.
World Income may invest a portion of its net assets in securities denominated in
the ECU. There are risks associated with concentration of investments in a
particular region of the world such as Western Europe since the economies and
markets of the countries in the region tend to be interrelated and may be
adversely affected by political, economic and other events in a similar manner.
Alliance believes that, except for currency fluctuations between the U.S. Dollar
and the Canadian Dollar, the matters described above are not likely to have a
material adverse effect on North American Government Income's investments in the
securities of Canadian issuers or investments denominated in Canadian issuers or
investments denominated in Canadian Dollars. The factors described above are
more likely to have a material adverse effect on the Fund's investments in the
securities of Mexican and other non-Canadian foreign issuers, including
investments in securities denominated in Mexican Pesos or other non-Canadian
foreign currencies. If not hedged, however, currency fluctuations could affect
the unrealized appreciation and depreciation of Canadian Government securities
as expressed in U.S. Dollars.
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, which themselves, involve certain special risks.
See "Additional Investment Practices" above.
Sovereign Debt Obligations. No established secondary markets may exist for many
of the sovereign debt obligations in which Global Dollar Government will invest.
Reduced secondary market liquidity may have an adverse effect on the market
price and the Fund's ability to dispose of particular instruments when necessary
to meet its liquidity requirements or in response to specific economic events
such as a deterioration in the creditworthiness of the issuer. Reduced secondary
market liquidity for certain sovereign debt obligations may also make it more
difficult for the Fund to obtain accurate market quotations for the purpose of
valuing its portfolio. Market quotations are generally available on many
sovereign debt obligations only from a limited number of dealers and may not
necessarily represent firm bids of those dealers or prices for actual sales.
By investing in sovereign debt obligations, the Fund will be exposed to the
direct or indirect consequences of political, social and economic changes in
various countries. Political changes in a country may affect the willingness of
a foreign government to make or provide for timely payments of its obligations.
The country's economic status, as reflected,
33
<PAGE>
among other things, in its inflation rate, the amount of its external debt and
its gross domestic product, will also affect the government's ability to honor
its obligations.
The sovereign debt obligations in which the Fund 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 the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Certain governments have not been able to make payments of interest on or
principal of sovereign debt obligations as those payments have come due.
Obligations arising from past restructuring agreements may affect the economic
performance and political and social stability of those issuers.
The 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. To
the extent that a country receives payment for its exports in currencies other
than dollars, its ability to make debt payments denominated in dollars could be
adversely affected. To the extent that a country develops a trade deficit, it
will need to depend on continuing loans from foreign governments, multi-lateral
organizations or private commercial banks, aid payments from foreign governments
and on inflows of foreign investment. The access of a country to these 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.
The Fund is permitted to invest in sovereign debt obligations that are not
current in the payment of interest or principal or are in default so long as
Alliance believes it to be consistent with the Fund's investment objectives. The
Fund may have limited legal recourse in the event of a default with respect to
certain sovereign debt obligations it holds. For example, remedies from defaults
on certain sovereign debt obligations, unlike those on private debt, must, in
some cases, be pursued in the courts of the defaulting party itself. Legal
recourse therefore may be significantly diminished. Bankruptcy, moratorium and
other similar laws applicable to issuers of sovereign debt obligations may be
substantially different from those applicable to issuers of private debt
obligations. The political context, expressed as the willingness of an issuer of
sovereign debt obligations to meet the terms of the debt obligation, for
example, is of considerable importance. In addition, no assurance can be given
that the holders of commercial bank debt will not contest payments to the
holders of securities issued by foreign governments in the event of default
under commercial bank loan agreements.
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 of common stock.
Utilization of leverage, which is usually considered speculative, however,
involves certain risks to a Fund's shareholders. These include a higher
volatility of the net asset value of a Fund's shares of common stock and the
relatively greater effect on the net asset value of the shares. So long as a
Fund is able to realize a net return on its investment portfolio that is higher
than the interest expense paid on borrowings, the effect of leverage will be to
cause the Fund's shareholders to realize a higher current net investment income
than if the Fund were not leveraged. On the other hand, interest rates on U.S.
Dollar-denominated and foreign currency-denominated obligations change from time
to time as does their relationship to each other, depending upon such factors as
supply and demand forces, monetary and tax policies within each country and
investor expectations. Changes in such factors could cause the relationship
between such rates to change so that rates on U.S. Dollar-denominated
obligations may substantially increase relative to the foreign currency-
denominated obligations in which the Fund may be invested. To the extent that
the interest expense on borrowings approaches the net return on a Fund's
investment portfolio, the benefit of leverage to the Fund's shareholders will be
reduced, and 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
than if a Fund were not leveraged. Similarly, the effect of leverage in a
declining market could be a greater decrease in net asset value per share than
if the Fund were not leveraged. 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, thereby reducing 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 either Multi-Market
Strategy or North American Government Income could adversely affect the Funds'
shareholders, as noted above, or in anticipation of such changes, either 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. Either Fund may also reduce the degree to which
it is leveraged by repaying amounts borrowed.
34
<PAGE>
Under the 1940 Act, a Fund is not permitted to borrow unless immediately after
such borrowing there is "asset coverage," as that term is defined and used in
the 1940 Act, of at least 300% for all borrowings of the Fund. In addition,
under the 1940 Act, in the event asset coverage falls below 300%, a Fund must
within three days reduce the amount of its borrowing to such an extent that the
asset coverage of its borrowings is at least 300%. Assuming, for example,
outstanding borrowings representing not more than one-third of a Fund's total
assets less liabilities (other than such borrowings), the asset coverage of the
Fund's portfolio would be 300%; while outstanding borrowings representing 25% of
the Fund's total assets less liabilities (other than such borrowings), the asset
coverage of the Fund's portfolio would be 400%. A Fund will maintain asset
coverage of outstanding borrowings of at least 300% and if necessary will, to
the extent possible, reduce the amounts borrowed by making repayments from time
to time in order to do so. Such repayments could require a Fund to sell
portfolio securities at times considered disadvantageous by Alliance. In the
event that a Fund is required to sell portfolio securities in order to make
repayments, such sales of portfolio securities could cause the Fund to incur
related transaction costs and might cause the Fund to realize gains on
securities held for less than three months. Because not more than 30% of a
Fund's gross income may be derived from the sale or disposition of stocks and
securities held for less than three months to maintain the Fund's tax status as
a regulated investment company, such gains would limit the ability of a Fund to
sell other securities held for less than three months that a Fund might wish to
sell in the ordinary course of its portfolio management and thus might adversely
affect the Fund's yield. See "Dividends, Distributions and Taxes."
Each of Multi-Market Strategy, North American Government Income and Global
Dollar Government may also borrow to repurchase its shares or to meet redemption
requests. In addition, each Fund may borrow for temporary purposes (including
the purposes mentioned in the preceding sentence) in an amount not exceeding 5%
of the value of the assets of the Fund. Borrowings for temporary purposes are
not subject to the 300% asset average limit described above. See "Certain
Fundamental Investment Policies." Short-Term U.S. Government, Multi-Market
Strategy, North American Government Income and Global Dollar Government may also
borrow through the use of reverse repurchase agreements, and Global Dollar
Government also through the use of dollar rolls to the extent permitted by the
1940 Act. See "Investment Objectives and Policies--Reverse Repurchase Agreements
and Dollar Rolls."
Investment in the Banking Industry. Due to the investment policies of Multi-
Market Strategy, World Income and Short-Term Multi-Market with respect to
investments in the banking industry, those Funds will have greater exposure to
the risk factors which are characteristic of such investments. In particular,
the value of and investment return on each Fund's shares will be affected by
economic or regulatory developments in or related to the banking industry.
Sustained increases in interest rates can adversely affect the availability and
cost of funds for a bank's lending activities, and a deterioration in general
economic conditions could increase the exposure to credit losses. The banking
industry is also subject to the effects of: the concentration of loan portfolios
in particular business such as real estate, energy, agriculture or high
technology-related companies; national and local regulation; and competition
within those industries as well as with other types of financial institutions.
In addition, each Fund's investments in commercial banks located in several
foreign countries are subject to additional risks due to the combination in such
banks of commercial banking and diversified securities activities. As discussed
above, however, the Funds will seek to minimize their exposure to such risks by
investing only in debt securities which are determined to be of high quality.
Securities Ratings. The ratings of fixed-income securities by S&P, Moody's, Duff
& Phelps and Fitch are a generally accepted barometer of credit risk. They are,
however, subject to certain limitations from an investor's standpoint. The
rating of an issuer is heavily weighted by past developments and does not
necessarily reflect probable future conditions. There is frequently a lag
between the time a rating is assigned and the time it is updated. In addition,
there may be varying degrees of difference in credit risk of securities within
each rating category.
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, although the market values of securities rated
below investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities.
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
35
<PAGE>
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. Under the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989, federally-insured savings and loan associations were required to have
divested their investments in non-investment grade corporate debt securities by
July 1, 1994. Such divestiture and continuing restrictions on the ability of
such associations to acquire lower-rated securities could have a material
adverse effect on the market and prices of such securities.
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.
However, there can be no assurance that losses will not occur. Since the risk of
default is higher for lower-rated securities, Alliance's research and credit
analysis are a correspondingly more important aspect of its program for managing
a Fund's securities than would be the case if a Fund did not invest in lower-
rated securities. In considering investments for the Fund, Alliance will attempt
to identify those high-yielding securities whose financial condition is adequate
to meet future obligations, has improved, or is expected to improve in the
future. Alliance's analysis focuses on relative values based on such factors as
interest or dividend coverage, asset coverage, earnings prospects, and the
experience and managerial strength of the issuer.
Non-rated Securities. Non-rated securities will also be considered for
investment by North American Government Income, Global Dollar Government and
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.
Non-diversified Status. Each of World Income, Short-Term Multi-Market, Multi-
Market Strategy, North American Government Income and Global Dollar Government
is a "non-diversified" investment company, which means the Fund is not limited
in the proportion of its assets that may be invested in the securities of a
single issuer. However, each Fund intends to conduct its operations so as to
qualify to be taxed as a "regulated investment company" for purposes of the
Code, which will relieve the Fund of any liability for federal income tax to the
extent its earnings are distributed to shareholders. See "Dividends,
Distributions and Taxes" in each Fund's Statement of Additional Information. To
so qualify, among other requirements, each Fund will limit its investments so
that, at the close of each quarter of the taxable year, (i) not more than 25% of
the Fund's total assets will be invested in the securities of a single issuer,
and (ii) with respect to 50% of its total assets, not more than 5% of its total
assets will be invested in the securities of a single issuer and the Fund will
not own more than 10% of the outstanding voting securities of a single issuer. A
Fund's investments in U.S. Government securities are not subject to these
limitations. Because World Income, Short-Term Multi-Market, Multi-Market
Strategy, North American Government Income and Global Dollar Government is each
a non-diversified investment company, it may invest in a smaller number of
individual issuers than a diversified investment company, and an investment in
such Fund may, under certain circumstances, present greater risk to an investor
than an investment in a diversified investment company.
Foreign government securities are not treated like U.S. Government securities
for purposes of the diversification tests described in the preceding paragraph,
but instead are subject to these tests in the same manner as the securities of
non-governmental issuers. In this regard sovereign debt obligations issued by
different issuers located in the same country are often treated as issued by a
single issuer for purposes of these diversification tests. Certain issuers of
structured securities and loan participations may be treated as separate issuers
for the purposes of these tests. Accordingly, in order to meet the
diversification tests and thereby maintain its status as a regulated investment
company, North American Government Income will be required to diversify its
portfolio of foreign government securities in a manner which would not be
necessary if the Fund had made similar investments in U.S. Government
securities.
- - - --------------------------------------------------------------------------------
PURCHASE AND SALE OF SHARES
- - - --------------------------------------------------------------------------------
HOW TO BUY SHARES
You can purchase shares of any of the Funds through broker-dealers, banks or
other financial intermediaries, or directly through Alliance Fund Distributors,
Inc. ("AFD"), each Fund's principal underwriter. The minimum initial investment
in each Fund is $250. The minimum for subsequent investments in each Fund is
$50. Investments of $25 or more are allowed under the automatic investment
program of each Fund. Share certificates are issued only upon request. See the
Subscription Application and Statements of Additional Information for more
information.
Each Fund offers three classes of shares, Class A, Class B and Class C, except
that World Income offers only one class of shares that you can purchase without
any initial sales charge or contingent deferred sales charge ("CDSC").
Class A Shares--Initial Sales Charge Alternative
You can purchase Class A shares at net asset value plus an initial sales charge,
as follows:
36
<PAGE>
<TABLE>
<CAPTION>
as % of Commission to
Net Amount as % of Dealer/Agent as %
Amount Purchased Invested Offering Price of Offering Price
---------------- ---------- -------------- -----------------
<S> <C> <C> <C>
Less than $100,000 4.44% 4.25% 4.00%
$100,000 to
less than $250,000 3.36 3.25 3.00
$250,000 to
less than $500,000 2.30 2.25 2.00
$500,000 to
less than $1,000,000 1.78 1.75 1.50
</TABLE>
On purchases of $1,000,000 or more, you pay no initial sales charge but may pay
a CDSC equal to 1% of the lesser of net asset value at the time of redemption or
original cost if you redeem within one year; Alliance may pay the dealer or
agent a fee of up to 1% of the dollar amount purchased. Certain purchases of
Class A shares may qualify for reduced or eliminated sales charges in accordance
with a Fund's Combined Purchase Privilege, Cumulative Quantity Discount,
Statement of Intention, Privilege for Certain Retirement Plans, Reinstatement
Privilege and Sales at Net Asset Value programs. Consult the Subscription
Application and Statements of Additional Information.
Class B Shares--Deferred Sales Charge Alternative
You can purchase Class B shares at net asset value without an initial sales
charge. However, you may pay a CDSC if you redeem shares within three years
after purchase. Shares obtained from dividend or distribution reinvestment are
not subject to the CDSC. The amount of the CDSC (expressed as a percentage of
the lesser of the current net asset value or original cost) will vary according
to the number of years from the purchase of Class B shares until the redemption
of those shares. The amount of the CDSC for each Fund is as set forth below.
Class B shares of a Fund purchased prior to the date of this Prospectus may be
subject to a different CDSC schedule, which was disclosed in the Fund's
prospectus in use at the time of purchase and is set forth in the Fund's current
Statement of Additional Information.
<TABLE>
<CAPTION>
Year Since Purchase CDSC
------------------- ----
<S> <C>
First......................................... 3.0%
Second........................................ 2.0%
Third......................................... 1.0%
Fourth........................................ None
</TABLE>
Class B shares are subject to higher distribution fees than Class A shares for a
period of six years (after which they convert to Class A shares). The higher
fees mean a higher expense ratio, so Class B shares pay correspondingly lower
dividends and may have a lower net asset value than Class A shares.
Class C Shares--Asset-Based Sales Charge Alternative
You can purchase Class C shares without any initial sales charge or a CDSC. A
Fund will thus receive the full amount of your purchase, and you will receive
the entire net asset value of your shares upon redemption. Class C shares incur
higher distribution fees than Class A shares and do not convert to any other
class of shares of the Fund. The higher fees mean a higher expense ratio, so
Class C shares pay correspondingly lower dividends and may have a lower net
asset value than Class A shares.
Application of the CDSC
Shares obtained from dividend or distribution reinvestment are not subject to
the CDSC on Class A and Class B shares. The CDSC is deducted from the amount of
the redemption and is paid to AFD. The CDSC will be waived on redemptions of
shares following the death or disability of a shareholder or to meet the
requirements of certain qualified retirement plans. See the Statements of
Additional Information.
How the Funds Value Their Shares
The net asset value of each class of shares of a Fund is calculated by dividing
the value of the Fund's net assets allocable to that class by the outstanding
shares of that class. Shares are valued each day the New York Stock Exchange
(the "Exchange") is open as of the close of regular trading (currently 4:00 p.m.
Eastern time). The securities in a Fund are valued at their current market value
determined on the basis of market quotations or, if such quotations are not
readily available, such other methods as the Fund's Directors believe would
accurately reflect fair market value.
General
The decision as to which class of shares is more beneficial to you depends on
the amount and intended length of your investment. If you are making a large
investment, thus qualifying for a reduced sales charge, you might consider Class
A shares. If you are making a smaller investment, you might consider Class B
shares because 100% of your purchase is invested immediately. If you are unsure
of the length of your investment, you might consider Class C shares because
there are no initial or contingent deferred sales charges. Consult your
financial agent. Dealers and agents may receive differing compensation for
selling Class A, Class B or Class C shares. There is no size limit on purchases
of Class A shares. The maximum purchase of Class B shares is $250,000. The
maximum purchase of Class C shares is $5,000,000. The Funds may refuse any order
to purchase shares.
In addition to the discount or commission paid to dealers or agents, AFD from
time to time pays additional cash or other incentives to dealers or agents,
including Equico Securities, Inc., an affiliate of AFD, in connection with the
sale of shares of the Funds. Such additional amounts may be utilized, in whole
or in part, in some cases together with other revenues of such dealers or
agents, to provide additional compensation to registered representatives who
sell shares of the Funds. On some occasions, such cash or other incentives will
be conditioned upon the sale of a specified minimum dollar amount of the shares
of a Fund and/or other Alliance Mutual Funds during a specific period of time.
Such 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
37
<PAGE>
travel by persons associated with a dealer or agent and their immediate family
members to urban or resort locations within or outside the United States. Such
dealer or agent may elect to receive cash incentives of equivalent amount in
lieu of such payments.
HOW TO SELL SHARES
You may "redeem", i.e., sell your shares in a Fund to the Fund on any day the
Exchange is open, either directly or through your financial intermediary. The
price you will receive is the net asset value (less any applicable CDSC for
Class B shares) next calculated after the Fund receives your request in proper
form. Proceeds generally will be sent to you within seven days. However, for
shares recently purchased by check or electronic funds transfer, a Fund will not
send proceeds until it is reasonably satisfied that the check or electronic
funds transfer has been collected (which may take up to 15 days).
Selling Shares Through Your Broker
A Fund must receive your broker's request before 4:00 p.m. Eastern time for you
to receive that day's net asset value (less any applicable CDSC for Class B
shares). Your broker is responsible for furnishing all necessary documentation
to a Fund and may charge you for this service.
Selling Shares Directly to a Fund
Send a signed letter of instruction or stock power form to Alliance Fund
Services, Inc. ("AFS"), each Fund's registrar, transfer agent and dividend-
disbursing agent, along with certificates, if any, that represent the shares you
want to sell. For your protection, signatures must be guaranteed by a bank, a
member firm of a national stock exchange or other eligible guarantor
institution. 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. For details contact:
Alliance Fund Services
P.O. Box 1520
Secaucus, NJ 07096-1520
800-221-5672
Alternatively, a request for redemption of shares for which no stock
certificates have been issued can also be made by telephone to 800-221-5672 by a
shareholder who has completed the Subscription Application or an "Autosell"
application obtained from AFS. Telephone redemption requests must be for a least
$500 and may not exceed $100,000, and must be made between 9 a.m. and 4 p.m. New
York time on a Fund business day. Proceeds of telephone redemptions will be send
by electronic funds transfer. Proceeds of telephone redemptions also may be sent
by check to a shareholder's address of record, but only once in any 30-day
period and in amount not exceeding $25,000. Telephone redemption by check is not
available for shares purchased within 15 calendar days prior to the redemption
request, shares held in nominee or "street name" accounts or retirement plan
accounts or shares held by a shareholder who has changed his or her address of
record within the previous 30 calendar days.
General
The sale of shares is a taxable transaction for federal tax purposes. Under
unusual circumstances, a Fund may suspend redemptions or postpone payment for up
to seven days or longer, as permitted by federal securities law. The Funds
reserve the right to close an account that through redemption has remained below
$200 for 90 days. Shareholders will receive 60 days' written notice to increase
the account value before the account is closed.
During drastic economic or market developments, you might have difficulty
reaching AFS by telephone, in which event you should issue written instructions
to AFS. AFS is not responsible for the authenticity of telephonic requests to
purchase, sell or exchange shares. AFS will employ reasonable procedures to
verify that telephone requests are genuine, and could be liable for losses
resulting from unauthorized transactions if it failed 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 Application. A shareholder's manual
explaining all available services will be provided upon request. To request a
shareholder manual, call 800-227-4618.
HOW TO EXCHANGE SHARES
You may exchange your shares of World Income for Class A shares of other
Alliance Mutual Funds and shares of most Alliance money market funds. You may
exchange your shares of any other Fund for shares of the same class of other
Alliance Mutual Funds (including AFD Exchange Reserves, a money market fund
managed by Alliance). Exchanges of shares are made at the net asset values next
determined, without sales or service charges. Exchanges may be made by telephone
or written request.
Class A and Class B shares will continue to age without regard to exchanges for
the purpose of determining the CDSC, if any, upon redemption and, in the case of
Class B shares, for the purpose of conversion to Class A shares. After an
exchange, your Class B shares will automatically convert to Class A shares in
accordance with the conversion schedule applicable to the Class B shares of the
Alliance Mutual Fund you originally purchased for cash ("original shares"). When
redemption occurs, the CDSC applicable to the original shares is applied.
Please read carefully the prospectus of the mutual fund into which you are
exchanging before submitting the request. Call AFS at 800-221-5672 to exchange
uncertificated shares. An exchange is a taxable capital transaction for federal
tax purposes. The exchange service may be changed, suspended, or terminated on
60 days' written notice.
38
<PAGE>
- - - --------------------------------------------------------------------------------
MANAGEMENT OF THE FUNDS
- - - --------------------------------------------------------------------------------
ADVISER
Alliance, which is a Delaware limited partnership with principal offices at 1345
Avenue of the Americas, New York, New York 10105, has been retained under an
advisory agreement (the "Advisory Agreement") to provide investment advice and,
in general, to conduct the management and investment program of each Fund,
subject to the general supervision and control of the Directors of the Fund.
Alliance is a leading international investment manager supervising client
accounts with assets as of December 31, 1994 totaling more than $121 billion (of
which more than $37 billion represented the assets of investment companies).
Alliance's clients are primarily major corporate employee benefit funds, public
employee retirement systems, investment companies, foundations and endowment
funds. The 51 registered investment companies managed by Alliance comprising 103
separate investment portfolios currently have over one million shareholders. As
of December 31, 1994, Alliance was retained as an investment manager for 29 of
the Fortune 100 companies.
Alliance Capital Management Corporation ("ACMC"), the sole general partner of,
and the owner of a 1% general partnership interest in, Alliance, is an indirect
wholly-owned subsidiary of The Equitable Life Assurance Society of the United
States ("Equitable"), one of the largest life insurance companies in the United
States, which is a wholly-owned subsidiary of The Equitable Companies
Incorporated, a holding company controlled by AXA, a French insurance holding
company. Certain information concerning the ownership and control of Equitable
by AXA is set forth in each Fund's Statement of Additional Information under
"Management of the Fund."
The following table lists the person or persons who are primarily responsible
for the day-to-day management of each Fund's portfolio, the length of time that
each person has been primarily responsible, and each person's principal
occupation during the past five years.
<TABLE>
<CAPTION>
Principal occupation
Employee; time period; during the past
Fund title with ACMC five years
---- ------------------------- --------------------
<S> <C> <C>
Short-Term Paul J. DeNoon since 1993-- Associated with
U.S. Government Vice President Alliance since
January 1992; prior
thereto, a Vice President
at Manufacturers Hanover
Trust
U.S. Government Wayne D. Lyski since 1983 Associated with
--Executive Vice President Alliance
Paul J. DeNoon since (see above)
January 1992-(see above)
Mortgage Strategy Patricia J. Young since Associated with
inception Alliance since
-Senior Vice President March 1992;
prior thereto, a managing
director and portfolio
manager for Hyperion
Capital since March 1991
and a managing director
with Fischer, Francis,
Trees & Watts
Paul A. Ullman Associated with
since inception- Alliance since
Vice President March 1992;
prior thereto, a director
and portfolio manager for
Hyperion Capital since
July 1990 and a Vice
President at Salomon
Brothers Inc.
Mortgage Securities Patricia J. Young since (see above)
Income March 1992--(see above)
Paul A. Ullman since (see above)
March 1992--(see above)
World Income Robert M. Sinche since Associated with
inception--Senior Vice Alliance
President
Douglas J. Peebles since Associated with
inception--Vice President Alliance
Short-Term Robert M. Sinche since (see above)
Multi-Market inception--(see above)
Multi-Market Strategy Robert M. Sinche since (see above)
inception--(see above)
Douglas J. Peebles since (see above)
inception--(see above)
North American Wayne D. Lyski since (see above)
Government Income inception--(see above)
Robert M. Sinche since (see above)
inception--(see above)
Global Dollar Wayne D. Lyski since (see above)
Government inception--(see above)
Corporate Bond Wayne D. Lyski since (see above)
1987--(see above)
Paul J. DeNoon since (see above)
January 1992--(see above)
</TABLE>
DISTRIBUTION SERVICES AGREEMENTS
Rule 12b-1 adopted by the Commission under the 1940 Act permits an investment
company to pay expenses associated with the distribution of its shares in
accordance with a duly
39
<PAGE>
adopted plan. Each Fund has adopted one or more "Rule 12b-1 plans" (for each
Fund, a "Plan") and has entered into a Distribution Services Agreement (the
"Agreement") with AFD. Pursuant to its Plan, a Fund pays to AFD a Rule 12b-1
distribution services fee, which may not exceed for each Fund other than World
Income an annual rate of .30% (.50% with respect to Short-Term U.S. Government)
of the Fund's aggregate average daily net assets attributable to the Class A
shares, 1.00% of the Fund's aggregate average daily net assets attributable to
the Class B shares and 1.00% of the Fund's aggregate average daily net assets
attributable to the Class C shares, and for World Income may not exceed an
annual rate of .90% of the Fund's aggregate average daily net assets, for
distribution expenses. The Directors of Short-Term U.S. Government currently
limit payments with respect to Class A shares under the Plan to .30% of the
Fund's aggregate average daily net assets attributable to Class A shares. The
Plans provide that a portion of the distribution services fee in an amount not
to exceed .25% of the aggregate average daily net assets of each Fund
attributable to each class of shares constitutes a service fee used for personal
service and/or the maintenance of shareholder accounts.
The Plans provide that AFD will use the distribution services fee received from
a Fund in its entirety for payments (i) to compensate broker-dealers or other
persons for providing distribution assistance, (ii) to otherwise promote the
sale of shares of the Fund, and (iii) to compensate broker-dealers, depository
institutions and other financial intermediaries for providing administrative,
accounting and other services with respect to the Fund's shareholders. In this
regard, some payments under the Plans are used to compensate financial
intermediaries with trail or maintenance commissions in an amount equal to, with
respect to each Fund other than World Income, .25%, annualized, with respect to
Class A shares and Class B shares, and 1.00%, annualized, with respect to Class
C shares, and, with respect to World Income, .90%, annualized, of the assets
maintained in a Fund by their customers. Distribution services fees received
from World Income and the other Funds, except Short-Term U.S. Government, with
respect to Class A shares will not be used to pay any interest expenses,
carrying charges or other financing costs or allocation of overhead of AFD.
Distribution services fees received from the Funds, with respect to Class B and
Class C shares, may be used for these purposes. The Plans also provide that
Alliance may use its own resources to finance the distribution of each Fund's
shares.
The Funds are not obligated under the Plans to pay any distribution services fee
in excess of the amounts set forth above. Except as noted below for Short-Term
U.S. Government, with respect to Class A shares of each Fund, distribution
expenses accrued by AFD in one fiscal year may not be paid from distribution
services fees received from the Fund in subsequent fiscal years. AFD's
compensation with respect to Class B and Class C shares under the Plans of the
other Funds is directly tied to the expenses incurred by AFD. Actual
distribution expenses for Class B and Class C shares for any given year,
however, will probably exceed the distribution services fees payable under the
applicable Plan with respect to the class involved and, in the case of Class B
shares, payments received from CDSCs. The excess will be carried forward by AFD
and reimbursed from distribution services fees payable under the Plan with
respect to the class involved and, in the case of Class B shares, payments
subsequently received through CDSCs, so long as the Plan is in effect. Since
AFD's compensation under the Plan of Short-Term U.S. Government is not directly
tied to its expenses incurred, the amount of compensation received by it during
any year may be more or less than its actual expenses.
Unreimbursed distribution expenses incurred as of the end of each Fund's most
recently completed fiscal year, and carried over for reimbursement in future
years in respect of the Class B and Class C shares for all Funds (except Short-
Term U.S. Government), were, as of that time, as follows:
<TABLE>
<CAPTION>
Amount of Unreimbursed Distribution Expenses
(as % of Net Assets of Class)
--------------------------------------------
Class B Class C
-------------------- -------------------
<S> <C> <C> <C> <C>
Short-Term U.S.
Government............... $ 165,033 (2.63%) $ 354,366 (4.97%)
U.S. Government............ $13,948,924 (1.84%) $1,761,762 (.76%)
Mortgage Strategy.......... $ 1,042,848 (.76%) $1,875,176 (1.32%)
Mortgage Securities
Income................... $16,372,116 (1.76%) $1,459,018 (2.50%)
Short-Term Multi-Market.... $12,115,694 (1.20%) $ 798,673 (9.82%)
Multi-Market Strategy...... $ 7,234,301 (3.10%) $ 286,168 (2.29%)
North American
Government Income........ $29,558,594 (1.80%) $2,355,558 (.64%)
Global Dollar Government $ 1,072,560 (2.28%) $ 88,662 (.85%)
Corporate Bond $ 4,172,860 (2.27%) $ 391,688 (.77%)
</TABLE>
The Plans are 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.
The Glass-Steagall Act and other applicable laws may limit the ability of a bank
or other depository institution to become an underwriter or distributor of
securities. However, in the opinion of the Funds' management, based on the
advice of counsel, these laws do not prohibit such depository institutions from
providing services for investment companies such as the administrative,
accounting and other services referred to in the Agreements. In the event that a
change in these laws prevented a bank from providing such services, it is
expected that other service arrangements would be made and that shareholders
would not be adversely affected. The State of Texas requires that shares of a
Fund may be sold in that state only by dealers or other financial institutions
that are registered there as broker-dealers.
40
<PAGE>
- - - --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS
- - - --------------------------------------------------------------------------------
AND TAXES
- - - --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends on shares of a Fund will be declared on each Fund business day from
the Fund's net investment income. Dividends on shares for Saturdays, Sundays and
holidays will be declared on the previous business day. Each Fund pays dividends
on its shares after the close of business on the last business day each month.
At your election (which you may change at least 30 days prior to the record date
for a particular dividend or distribution), dividends and distributions are paid
in cash or reinvested in additional shares without charge.
If you receive an income dividend or capital gains distribution in cash you may,
within 30 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 such 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.
Cash dividends can be paid by check or, if the shareholder so elects,
electronically via the ACH network. There is no sales or other charge in
connection with the reinvestment of dividends and capital gains distributions.
Dividends paid by a Fund, if any, with respect to Class A, Class B and Class C
shares will be calculated in the same manner at the same time on the same day
and will be in the same amount, except that the higher distribution services
fees applicable to Class B and Class C shares, and any incremental transfer
agency costs relating to Class B shares, will be borne exclusively by the class
to which they relate.
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 time 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.
If you buy shares just before a Fund deducts a distribution from its net asset
value, you will pay the full price for the shares and then receive a portion of
the price back as a taxable distribution.
FOREIGN INCOME TAXES
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 for foreign income taxes paid,
but there can be no assurance that any Fund will be able to do so.
U.S. FEDERAL INCOME TAXES
Each Fund intends to qualify to be taxed as a "regulated investment company"
under the Code. To the extent that a Fund distributes its taxable income and net
capital gain to its shareholders, qualification as a regulated investment
company relieves that Fund of federal income and excise taxes on that part of
its taxable income including net capital gains which it pays out to its
shareholders. Dividends out of net ordinary income and distributions of net
short-term capital gains are taxable to the recipient shareholders as ordinary
income. In the case of corporate shareholders, such dividends from certain Funds
may be eligible for the dividends-received deduction, except that the amount
eligible for the deduction is limited to the amount of qualifying dividends
received by the Fund. A corporation's dividends-received deduction will be
disallowed unless the corporation holds shares in the Fund at least 46 days.
Furthermore, the dividends-received deduction will be disallowed to the extent a
corporation's investment in shares of a Fund is financed with indebtedness.
The excess of net long-term capital gains over the net short-term capital losses
realized and distributed by each Fund to its shareholders as capital gains
distributions is taxable to the shareholders as long-term capital gains,
irrespective of the length of time a shareholder may have held his or her stock.
Long-term capital gains distributions are not eligible for the dividends-
received deduction referred to above.
Under the current federal tax law the amount of an income dividend or capital
gains distribution declared by a Fund during October, November or December of a
year to shareholders of record as of a specified date in such a month that is
paid during January of the following year is includable in the prior year's
taxable income of shareholders that are calendar year taxpayers.
Any dividend or distribution received by a shareholder on shares of a Fund will
have the effect of reducing the net asset value of such shares by the amount of
such dividend or distribution. Furthermore, a dividend or distribution made
shortly after the purchase of such shares by a shareholder, although in effect a
return of capital to that particular shareholder, would be taxable to him or her
as described above. If a shareholder held shares six months or less and during
that period received a distribution taxable to such shareholder as long-term
capital gain, any loss realized on the sale of such shares during such six-month
period would be a long-term capital loss to the extent of such distribution.
A dividend or capital gains distribution with respect to shares of a Fund held
by a tax-deferred or qualified plan, such as an
41
<PAGE>
individual retirement account, 403(b)(7) retirement plan or corporate pension or
profit-sharing plan, 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.
Distributions by a Fund may be subject to state and local taxes. U.S.
Government, Mortgage Strategy, Mortgage Securities Income, World Income, Short-
Term Multi-Market, Multi-Market Strategy, North American Government Income and
Corporate Bond are qualified to do business in the Commonwealth of Pennsylvania
and, therefore, are subject to the Pennsylvania foreign franchise and corporate
net income tax in respect of their business activities in Pennsylvania.
Accordingly, shares of such Funds are exempt from Pennsylvania personal property
taxes. These Funds anticipate continuing such business activities but reserve
the right to suspend them at any time, resulting in the termination of the
exemptions.
A Fund will be required to withhold 31% of any payments made to a shareholder if
the shareholder has not provided a certified taxpayer identification number to
the Fund, or the Secretary of the Treasury notifies a Fund that a shareholder
has not reported all interest and dividend income required to be shown on the
shareholder's Federal income tax return.
Shareholders will be advised annually as to the federal tax status of dividends
and capital gains distributions made by a Fund for the preceding year.
Shareholders are urged to consult their tax advisers regarding their own tax
situation.
- - - --------------------------------------------------------------------------------
GENERAL INFORMATION
- - - --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., and subject to seeking best price and execution, a
Fund may consider sales of its shares as a factor in the selection of dealers to
enter into portfolio transactions with the Fund.
ORGANIZATION
Each of the following Funds is a Maryland corporation organized in the year
indicated: U.S. Government Portfolio and Corporate Bond Portfolio (each a series
of Alliance Bond Fund, Inc.) (1973), Alliance Mortgage Strategy Trust, Inc.
(1992), Alliance Mortgage Securities Income Fund, Inc. (1983), Alliance World
Income Trust, Inc. (1990), Alliance Short-Term Multi-Market Trust, Inc. (1989),
Alliance Multi-Market Strategy Trust, Inc. (1991), Alliance North American
Government Income Trust, Inc. (1992) and Alliance Global Dollar Government Fund,
Inc. (1993). Prior to January 4, 1993, Corporate Bond Portfolio was known as
Monthly Income Portfolio. Alliance Short-Term U.S. Government Fund is a series
of The Alliance Portfolios, a Massachusetts business trust that was organized in
1987. Prior to August 2, 1993, The Alliance Portfolios was known as The
Equitable Funds and Short-Term U.S. Government was known as The Equitable Short-
Term U.S. Government Fund.
It is anticipated that annual shareholder meetings will not be held; shareholder
meetings will be held only when required by federal, or in the case of the Funds
organized as Maryland corporations, state law. Shareholders have available
certain procedures for the removal of Directors.
A shareholder in a Fund will be entitled to his or her pro rata share of all
dividends and distributions arising from the Fund's assets and, upon redeeming
shares, will receive the then current net asset value of the Fund represented by
the redeemed shares less any applicable CDSC. The Funds are empowered to
establish, without shareholder approval, additional portfolios, which may have
different investment objectives, and additional classes of shares. If an
additional portfolio or class were established in a Fund, each share of the
portfolio or class would normally be entitled to one vote for all purposes.
Generally, shares of each portfolio and class would vote together as a single
class on matters, such as the election of Directors, that affect each portfolio
and class in substantially the same manner. Class A, Class B and Class C shares
have identical voting, dividend, liquidation and other rights, except that each
class bears its own distribution and transfer agency expenses. Each class of
shares votes separately with respect to a Fund's Rule 12b-1 distribution plan
and other matters for which separate class voting is appropriate under
applicable law. Shares are freely transferable, are entitled to dividends as
determined by the Directors and, in liquidation of a Fund, are entitled to
receive the net assets of the Fund. Since this Prospectus sets forth information
about all the Funds, it is theoretically possible that a Fund might be liable
for any materially inaccurate or incomplete disclosure in this Prospectus
concerning another Fund. Based on the advice of counsel, however, the Funds
believe that the potential liability of each Fund with respect to the disclosure
in this Prospectus extends only to the disclosure relating to that Fund. Certain
additional matters relating to a Fund's organization are discussed in its
Statement of Additional Information.
PENDING LEGAL PROCEEDINGS INVOLVING NORTH AMERICAN GOVERNMENT INCOME
Between January 6 and February 15, 1995, nine complaints were filed by groups
of shareholders of North American Government Income alleging, among other
things, violations of various federal securities laws as well as fraud,
negligence, negligent misrepresentations and omissions, breach of fiduciary duty
and breach of contract in connection with the Fund's investments in Mexican and
Argentine securities. Four of the actions were filed in the United States
District Court for the Southern District of California, and five actions were
filed in the United States District Court for the Southern District of New York.
Each of the actions is brought against the Fund, Alliance and ACMC. Other
defendants named in certain of the complaints are AFS and certain officers of
the fund and ACMC.
42
<PAGE>
Each of the actions seeks to have a plaintiff class certified consisting of all
shareholders of the Fund who purchased or owned shares in the Fund at varying
times between February 1992 and December 1994. The actions seek an unspecified
amount of damages, costs and attorneys' fees. The Fund believes that the
allegations in each of the actions are without merit and intends to vigorously
defend against the claims in the actions.
REGISTRAR, TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
AFS, an indirect wholly-owned subsidiary of Alliance, located at 500 Plaza
Drive, Secaucus, New Jersey 07094, acts as each Fund's registrar, transfer agent
and dividend-disbursing agent for a fee based upon the number of shareholder
accounts maintained for the Fund. The transfer agency fee with respect to Class
B shares will be higher than the transfer agency fee with respect to Class A
shares or Class C shares.
PRINCIPAL UNDERWRITER
AFD, an indirect wholly-owned subsidiary of Alliance, located at 1345 Avenue of
the Americas, New York, New York 10105, is the principal underwriter of shares
of the Funds.
PERFORMANCE INFORMATION
From time to time, the Funds advertise their "yield" and "total return," which
are computed separately for Class A, Class B and Class C shares. A Fund's yield
for any 30-day (or one-month) period is computed by dividing the net investment
income per share earned during such period by the maximum public offering price
per share on the last day of the period, and then annualizing such 30-day (or
one-month) yield in accordance with a formula prescribed by the Commission which
provides for compounding on a semi-annual basis. A Fund may also state in sales
literature an "actual distribution rate" for each class which is computed in the
same manner as yield except that actual income dividends declared per share
during the period in question are substituted for net investment income per
share. The actual distribution rate is computed separately for Class A, Class B
and Class C shares. Advertisements of a Fund's total return disclose its average
annual compounded total return for the periods prescribed by the Commission. A
Fund's total return for each such period is computed by finding, through the use
of a formula prescribed by the Commission, the average annual compounded rate of
return over the period that would equate an assumed initial amount invested to
the value of the investment at the end of the period. For purposes of computing
total return, income dividends and capital gains distributions paid on shares of
a Fund are assumed to have been reinvested when paid and the maximum sales
charges applicable to purchases and redemptions of a Fund's shares are assumed
to have been paid. A Fund will include performance data for each class of its
shares in any advertisement or sales literature using performance data of that
Fund. These advertisements may quote performance rankings or ratings of a Fund
by financial publications or independent organizations such as Lipper Analytical
Services, Inc. and Morningstar, Inc. or compare a Fund's performance to various
indices.
ADDITIONAL INFORMATION
This Prospectus and the Statements of Additional Information, which have been
incorporated by reference herein, do not contain all the information set forth
in the Registration Statements filed by the Funds with the Commission under the
Securities Act. Copies of the Registration Statements 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.
43
<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 payment 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
not rated 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 CORPORATION
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 is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, 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 and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation
A-1
<PAGE>
and CCC the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
CI--The rating CI is reserved for income bonds on which no interest is being
paid.
D--Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
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 claims paying ability. Risk factors are negligible.
AA+, AA, AA--Very high claims paying ability. Protection factors are strong.
Risk is modest, but may vary slightly over time due to economic and/or
underwriting conditions.
A+, A, A--High claims paying ability. Protection factors are average and there
is an expectation of variability in risk over time due to economic and/or
underwriting conditions.
BBB+, BBB, BBB--Adequate claims paying ability. Protection factors are
adequate. There is considerable variability in risk over time due to economic
and/or underwriting conditions.
BB+, BB, BB--Uncertain claims paying ability and less than investment-grade
quality. However, the company is deemed likely to meet these obligations when
due. Protection factors will vary widely with changes in economic and/or
underwriting conditions.
B+, B, B--Possessing risk that policy holder and contract-holder obligations
will not be paid when due. Protection factors will vary widely with changes in
economic and/or underwriting conditions or company fortunes.
CCC--There is substantial risk that policy holder and contract holder
obligations will not be paid when due. Company has been or is likely to be
placed under state insurance department supervision.
DD--Company is under an order of liquidation.
FITCH INVESTORS SERVICE, 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.
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.
A-2
<PAGE>
- - - --------------------------------------------------------------------------------
APPENDIX B:
- - - --------------------------------------------------------------------------------
GENERAL INFORMATION
- - - --------------------------------------------------------------------------------
ABOUT CANADA, MEXICO
- - - --------------------------------------------------------------------------------
AND ARGENTINA
- - - --------------------------------------------------------------------------------
General Information About Canada
Canada consists of a federation of ten Provinces and two federal territories
(which generally fall under federal authority) with a constitutional division of
powers between the federal and Provincial governments. The Parliament of Canada
has jurisdiction over all areas not assigned exclusively to the Provincial
legislatures, and has jurisdiction over such matters as the federal public debt
and property, the regulation of trade and commerce, currency and coinage, banks
and banking, national defense, the postal services, navigation and shipping and
unemployment insurance.
The Canadian economy is based on the free enterprise system with business
organizations ranging from small owner-operated businesses to large
multinational corporations. Manufacturing and resource industries are large
contributors to the country's economic output, but as in many other highly
developed countries, there has been a gradual shift from a largely goods-
producing economy to a predominantly service-based one. Agriculture and other
primary production play a small but key role in the economy. Canada is also an
exporter of energy to the United States in the form of natural gas (of which
Canada has substantial reserves) and hydroelectric power, and has significant
mineral resources. The Canadian economy had experienced little or no growth over
the past several years, and the rate of growth of Canada's gross domestic
product (on an inflation adjusted basis) has declined.
Canadian Dollars are fully exchangeable into U.S. Dollars without foreign
exchange controls or other legal restriction. Since the major developed country
currencies were permitted to float freely against one another, the range of
fluctuation in the U.S. Dollar/Canadian Dollar exchange rate has been narrower
than the range of fluctuation between the U.S. Dollar and most other major
currencies. Recently, however, Canada has experienced a weakening of its
currency. Through January 31, 1995, the Canadian Dollar decreased in value
compared to the U.S. Dollar by approximately 21% from October 1991 and
approximately 5% from September 1994. The range of fluctuation that occurred in
the past is not necessarily indicative of the range of fluctuation that will
occur in the future. Future rates of exchange cannot be predicted.
General Information About The United Mexican States
The United Mexican States ("Mexico") is a nation formed by 31 states and a
Federal District (Mexico City). The Political Constitution of Mexico, which took
effect on May 1, 1917, established Mexico as a Federal Republic and provides for
the separation of executive, legislative and judicial branches. The President
and the members of the General Congress are elected by popular vote.
While in recent years the Mexican economy has experienced improvement in a
number of areas, including five consecutive years of growth in gross domestic
product and a substantial reduction in the rate of inflation and in public
sector financial deficit, beginning in 1994, Mexico has experienced an economic
crisis that led to the devaluation of the Peso in December 1994. Much of the
past improvement in the Mexican economy has been attributable to a series of
economic policy initiatives initiated by the Mexican government over the past
decade, which seek to modernize and reform the Mexican economy, control
inflation, reduce the financial deficit, increase public revenues through the
reform of the tax system, establish a competitive and stable currency exchange
rate, liberalize trade restrictions and increase investment and productivity,
while reducing the government's role in the economy. In this regard, the Mexican
government has been proceeding with a program for privatizing certain state
owned enterprises, developing and modernizing the securities markets, increasing
investment in the private sector and permitting increased levels of foreign
investment. The recent adoption by Canada, the United States and Mexico of the
North American Free Trade Agreement could also contribute to the growth of the
Mexican economy.
Relatively high rates of interest, inflation, unemployment and, most
recently, the economic crisis that led to the devaluation of the Peso beginning
in December 1994 continue to affect the Mexican economy adversely. Mexico is
currently the second largest debtor nation (among developing countries) to
commercial banks and foreign governments. The successful implementation of the
economic policy initiatives and the growth of the Mexican economy involve
significant structural changes to the Mexican economy and will necessitate
continued economic and fiscal discipline. In addition, as a condition to
receiving assistance from the United States, other countries and certain
international agencies to stabilize the Mexican economy, the Mexican government
has agreed to adhere to a program of strict economic reform. An important aspect
of Mexico's economic policy is the ability of the government to be successful in
its continuing efforts to control its financial deficit, finance its current
account deficit, further reduce inflation and stabilize the Mexican Peso.
Mexico's economy may also be influenced by international economic conditions,
particularly those in the United States, and by world prices for oil and other
commodities. There is no assurance that Mexico's economic policy initiatives
will be successful or that succeeding administrations will continue these
initiatives.
In August 1976, the Mexican government established a policy of allowing the
Mexican Peso to float against the U.S. Dollar and other currencies. Under this
policy, the value of the Mexican Peso consistently declined against the U.S.
Dollar. Under economic policy initiatives implemented since
B-1
<PAGE>
December 1987, the Mexican government introduced a series of schedules allowing
for the gradual devaluation of the Mexican Peso against the U.S. Dollar. These
gradual devaluations continued until December 1994. On December 20, 1994, the
Mexican government announced a new policy that would allow a more substantial
yet still controlled devaluation of the Mexican Peso. On December 22, 1994 the
Mexican government announced that it would not continue with the policy
announced two days earlier and would instead permit the Peso to float against
other currencies, resulting in a continued decline against the U.S. Dollar.
In 1982, Mexico imposed strict foreign exchange controls which shortly
thereafter were relaxed and were eliminated in 1991. There is no assurance that
future regulatory actions in Mexico would not affect the Fund's ability to
obtain U.S. Dollars in exchange for Mexican Pesos.
GENERAL INFORMATION ABOUT THE REPUBLIC OF ARGENTINA
The Republic of Argentina ("Argentina") consists of 23 provinces and the federal
capital of Buenos Aires. Its federal constitution provides for an executive
branch headed by a President, a legislative branch and a judicial branch. Each
province has its own constitution, and elects its own governor, legislators and
judges, without the intervention of the federal government.
The military has intervened in the political process on several occasions since
the 1930's and has ruled the country for 22 of the past 62 years. The most
recent military government ruled the country from 1976 to 1983. Four
unsuccessful military uprisings have occurred since 1983, the most recent in
December 1990.
Shortly after taking office in 1989, the country's current President adopted
market-oriented and reformist policies, including a large privatization program,
a reduction in the size of the public sector and an opening of the economy to
international competition.
In the decade prior to the current announcement of a new economic plan in March
1991, the Argentine economy was characterized by low and erratic growth,
declining investment rates and rapidly worsening inflation. Despite its
strengths, which include a well-balanced natural resource base and a high
literacy rate, the Argentine economy failed to respond to a series of economic
plans in the 1980's. The Economy Minister's plan represented a pronounced
departure from its predecessors in calling for raised revenues, reduced
expenditures and a reduced public deficit. The extensive privatization program
commenced in 1989 was accelerated, the domestic economy deregulated and opened
up to foreign trade and the frame-work for foreign investment reformed.
Significant progress was also made in 1992 in rescheduling Argentina's debt with
both external and domestic creditors, which improved fiscal cash flows in the
medium terms and allowed a return to voluntary credit markets. Further reforms
are currently being implemented in order to sustain and continue the progress to
date. There is no assurance that Argentina's economic policy initiatives will be
successful or that succeeding administrations will continue these initiatives.
The Argentine Peso has been the Argentine currency since January 1, 1992. The
rate of exchange from the Argentine Peso to the U.S. Dollar has been
approximately one to one. However, the historic range is not necessarily
indicative of fluctuations that may occur in the exchange rate over time and
there can be no assurance that future rates of exchange can be accurately
predicted. The Argentine foreign exchange market was highly controlled until
December 1989, when a free exchange rate was established for all foreign
currency transactions. Argentina has eliminated restrictions on foreign direct
investment and capital repatriation. On September 8, 1993, legislation was
adopted abolishing previous requirements of a three-year waiting period for
capital repatriation. Under the new legislation, foreign investors will be
permitted to remit profits at any time.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
THIS PROSPECTUS IS INTENDED TO CONSTITUTE AN OFFER BY EACH FUND ONLY OF THE
SECURITIES OF WHICH IT IS THE ISSUER AND IS NOT INTENDED TO CONSTITUTE AN OFFER
BY ANY FUND OF THE SECURITIES OF ANY OTHER FUND WHOSE SECURITIES ARE ALSO
OFFERED BY THIS PROSPECTUS. NO FUND INTENDS TO MAKE ANY REPRESENTATION AS TO THE
ACCURACY OR COMPLETENESS OF THE DISCLOSURE IN THIS PROSPECTUS RELATING TO ANY
OTHER FUND. SEE "GENERAL INFORMATION--ORGANIZATION."
B-2
<PAGE>
- - - --------------------------------------------------------------------------------
ALLIANCE SUBSCRIPTION APPLICATION
- - - --------------------------------------------------------------------------------
Alliance Bond Funds
Short-Term U.S. Government Fund Short-Term Multi-Market Trust
U.S. Government Portfolio Multi-Market Strategy Trust
Mortgage Strategy Trust North American Government Income Trust
Mortgage Securities Income Fund Global Dollar Government Fund
World Income Trust Corporate Bond Portfolio
INFORMATION AND INSTRUCTIONS
To Open Your New Alliance Account
Please complete the application and mail it to:
Alliance Fund Services, Inc., P.O. Box 1520, Secaucus, New Jersey 07096-1520
Signatures - Please Be Sure To Sign the Application (Section 7)
If shares are registered in the name of:
. an individual, the individual should sign.
. joint tenants, both should sign.
. a custodian for a minor, the custodian should sign.
. a corporation or other organization, an authorized officer should sign (please
indicate corporate office or title).
. a trustee or other fiduciary, the fiduciary or fiduciaries should sign (please
indicate capacity).
Registration
To ensure proper tax reporting to the IRS:
. Individuals, Joint Tenants and Gift/Transfer to a Minor:
- Indicate your name exactly as it appears on your social security card.
. Trust/Other:
- Indicate the name of the entity exactly as it appeared on the notice you
received from the IRS when your Employer Identification number was assigned.
Please Note:
. Certain legal documents will be required from corporations or other
organizations, executors and trustees, or if a redemption is requested by
anyone other than the shareholder of record. If you have any questions
concerning a redemption, contact the Fund at the number below.
. In the case of redemptions or repurchases of shares 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.
If We Can Assist You In Any Way, Please Do Not Hesitate To Call Us At:
1-(800)221-5672.
<PAGE>
- - - -------------------------------------------------------------------------------
SUBSCRIPTION APPLICATION
- - - -------------------------------------------------------------------------------
Alliance Bond funds
(see instructions at the front of the application)
- - - -------------------------------------------------------------------------------
1. YOUR ACCOUNT REGISTRATION (Please Print)
- - - -------------------------------------------------------------------------------
[_] INDIVIDUAL OR JOINT ACCOUNT
------------------------------- --------------- ---------------------
Owner's Name (First Name) (MI) (Last Name)
- -
-------------------------------
Social Security Number (Required to open account)
------------------------------- --------------- ---------------------
Joint Owner's Name* (First Name) (MI) (Last Name)
*Joint Tenants with right of survivorship unless otherwise indicated
[_] GIFT/TRANSFER TO A MINOR
------------------------------- --------------- ---------------------
Custodian -- One Name Only (First Name) (MI) (Last Name)
------------------------------- --------------- ---------------------
Minor's (First Name) (MI) (Last Name)
- -
-------------------------------
Minor's Social Security Number (Required to open account)
Under the State of (Minor's Residence) Uniform Gifts/Transfer
---------
to Minor's Act
[_] TRUST ACCOUNT
------------------------------------------------------------------------
Name of Trustee
------------------------------------------------------------------------
Name of Trust
------------------------------------------------------------------------
Name of Trust (cont'd)
------------ ---------------------------------------------------------
Trust Dated Tax ID or Social Security Number (Required to open account)
[_] OTHER
------------------------------------------------------------------------
Name of Corporation, Partnership or other Entity
----------------------
Tax ID Number
- - - -------------------------------------------------------------------------------
2. ADDRESS
- - - -------------------------------------------------------------------------------
-------------------------------------------------------------------------
Street
-------------------------------------------------------------------------
City State Zip Code
-------------------------------------------------------------------------
If Non-U.S., Specify Country
- - - -
--------------------------- -------------------------------------
Daytime Phone Evening Phone
I am a: [_] U.S. Citizen [_] Non-Resident Alien
[_] Resident Alien [_] Other
----------------------------------
++++ ++++
+ +
+ +
For Alliance Use Only
+ +
+ +
++++ ++++
<PAGE>
================================================================================
3. INITIAL INVESTMENT
================================================================================
Minimum: $250; Maximum: Class B only - $250,000; Class C only - $5,000,000. Make
all checks payable to The Alliance Bond Fund in which you are investing.
I hereby subscribe for shares of the following Alliance Bond Fund(s):
<TABLE>
<CAPTION>
Class A Class B Class C
(Initial Sales Dollar (Contingent Deferred Dollar (Asset-based Sales Dollar
Charge) Amount Sales Charge) Amount Charge) Amount
-------------- ------ -------------------- ------ ------------------ ------
<S> <C> <C> <C> <C> <C> <C>
[_] Short-Term U.S. Government [_] (37) ______ [_] (51) ______ [_] (337) ______
[_] U.S. Government [_] (46) ______ [_] (76) ______ [_] (346) ______
[_] Mortgage Strategy [_] (88) ______ [_] (89) ______ [_] (388) ______
[_] Mortgage Securities Income [_] (52) ______ [_] (63) ______ [_] (352) ______
[_] World Income+ [_] (54) ______ not offered ______ not offered ______
[_] Short-Term Multi-Market [_] (70) ______ [_] (68) ______ [_] (370) ______
[_] Multi-Market Strategy [_] (22) ______ [_] (23) ______ [_] (322) ______
[_] North American Government [_] (55) ______ [_] (56) ______ [_] (355) ______
[_] Global Dollar Government [_] (166) ______ [_] (266) ______ [_] (366) ______
[_] Corporate Bond+ [_] (95) ______ [_] (295) ______ [_] (395) ______
</TABLE>
to be purchased with the enclosed check or draft for $
-------------------
+ No checkwriting available on these funds.
+-----------------------------------+
+ DEALER USE ONLY +
+ Wire Confirm No.: +
+-----------------------------------+
================================================================================
4. REDUCED CHARGES (Class A Only)
================================================================================
If you, your spouse or minor children own shares in other Alliance funds, you
may be eligible for a reduced sales charge. Please list below any existing
accounts to be considered and complete the Right of Accumulation section or the
Statement of Intent section.
- - - ------------------- --------------------- ----------------- -----------------
Fund Account Number Fund Account Number
A. Right of Accumulation
[_] Please link the accounts listed above for Right of Accumulation privileges,
so that this and future purchases will receive any discount for which they
are eligible.
B. Statement of Intent
[_] I want to reduce my sales charge by agreeing to invest the following amount
over a 13-month period:
[_] $100,000 [_] $250,000 [_] $500,000 [_] $1,000,000
If the full amount indicated is not purchased within 13 months, I understand an
additional sales charge must be paid from my account.
- - - ------------------- --------------------- ----------------- -----------------
Name on Account Account Number Name on Account Account Number
================================================================================
5. DISTRIBUTION OPTIONS
================================================================================
If no box is checked, all distributions will be reinvested in additional shares
of the Fund
<TABLE>
<S> <C> <C> <C>
Income Dividends: (elect one) [_] Reinvest dividends [_] Pay dividends in cash [_] Use Dividend Direction Plan
Capital Gains Distribution: (elect one) [_] Reinvest capital gains [_] Pay capital gains in cash [_] Use Dividend Direction Plan
</TABLE>
If you elect to receive your income dividends or capital gains distributions in
cash, please enclose a preprinted voided check from the bank account you wish to
have your dividends deposited into.**
If you wish to utilize the Dividend Direction Plan, please designate the
Alliance account you wish to have your dividends reinvested in:
- - - ---------------------------------- --------------------------------------------
Fund Name Existing Account No.
Special Distribution Instructions: [_] Please pay my distributions via check
and send to the address indicated in
Section 2.
[_] Please mail my distributions to the
person and/or address designated below:
- - - ------------------------------------ ------------------------------------------
Name Address
- - - ------------------------------------ ----------------------- -----------------
City State Zip
================================================================================
6. SHAREHOLDER OPTIONS
================================================================================
A. AUTOMATIC INVESTMENT PROGRAM (AIP)**
I hereby authorize Alliance Fund Services, Inc. to draw on my bank account,
on or about the ____ day of each month for a monthly investment in my Fund
account in the amount of $________ (minimum $25 per month). Please attach a
preprinted voided check from the bank account you wish to use.
NOTE: If your bank is not a member of the NACHA, your Alliance account will
be credited on or about the 20th of each month.
The Fund requires signatures of bank account owners exactly as they appear on
bank records.
- - - ---------------------------------- ------- ---------------------- -----------
Individual Account Date Joint Account Date
** Your bank must be a member of the National Automated Clearing House
Association (NACHA).
<PAGE>
B. TELEPHONE TRANSACTIONS
You can call our toll-free number 1-800-221-5672 and instruct Alliance Fund
Services, Inc. in a recorded conversation to purchase, redeem or exchange shares
for your account. Purchase and redemption requests will be processed via
electronic funds transfer (EFT) to and from your bank account.
Instructions: . Review the information in the Prospectus about telephone
transaction services.
. Check the box next to the telephone transaction
service(s) you desire.
. If you select the telephone purchase or redemption
privilege, you must write "VOID" across the face of a
check from the bank account you wish to use and attach
it to this application.
Purchases and Redemptions via EFT**
[_] I hereby authorize Alliance Fund Services, Inc. to effect the purchase
and/or redemption of Fund shares for my account according to my
telephone instructions or telephone instructions from my Broker/Agent,
and to withdraw money or credit money for such shares via EFT from the
bank account I have selected.
The fund requires signatures of bank account owners exactly as they appear on
bank records.
------------------------- -------- --------------------- --------
Individual Account Owner Date Joint Account Owner Date
Telephone Exchanges and Redemptions by Check
Unless I have checked one or both boxes below, these privileges will
automatically apply, and by signing this application, I hereby authorize
Alliance Fund Services, Inc. to act on my telephone instructions, or on
telephone instructions from any person representing himself to be an
authorized employee of an investment dealer or agent requesting a redemption
or exchange on my behalf. (NOTE: Telephone exchanges may only be processed
between accounts that have identical registrations.) Telephone redemption
checks will only be mailed to the name and address of record; and the address
must have no change within the last 30 days. The maximum telephone redemption
amount is $25,000. This service can be enacted once every 30 days.
[_] I do not elect the telephone exchange service.
---
[_] I do not elect the telephone redemption by check service.
---
C. SYSTEMATIC WITHDRAWAL PLAN (SWP)**
In order to establish a SWP, an investor must own or purchase shares of the
Fund having a current net asset value of at least:
. $10,000 for monthly payments;
. $5,000 for bi-monthly payments;
. $4,000 for quarterly or less frequent payments
[_] I authorize this service to begin in ___________, 19__, for the amount of
Month
$__________ ($50.00 minimum)
Frequency: (Please select one) [_] Monthly [_] Bi-Monthly [_] Quarterly
[_] Annually [_] In the months circled: J F M A M J J A S O N D
Please send payments to: (please select one)
[_] My checking account. Select the date of the month on or about which you
wish the EFT payments to be made: ___________. Please enclose a
preprinted voided check to ensure accuracy.
[_] My address of record designated in Section 2.
[_] The payee and address specified below:
-------------------------------- -------------------------------------------
Name of Payee Address
-------------------------------- -------------------------- ---------------
City State Zip
D. AUTO EXCHANGE
[_] I authorize Alliance Fund Services, Inc. to initiate a monthly exchange
for $________($25.00 minimum) on the ______ day of the month, into the
Alliance Fund noted below:
Fund Name:_____________________________________
[_] Existing account number:___________________ [_] New account
Shares exchanged will be redeemed at net asset value computed on the date
of the month selected. (If the date selected is not a fund business day
the transaction will be processed on the prior fund business day.)
Certificates must remain unissued.
================================================================================
7. SHAREHOLDER AUTHORIZATION This section MUST be completed
================================================================================
I certify under penalty of perjury that the number shown in Section 1 of this
form is my correct tax identification number or social security number and that
I have not been notified that this account is subject to backup withholding.
By selecting any of the above telephone privileges, I agree that neither the
Fund nor its Investment Adviser, Principal Underwriter, Transfer Agent or other
Fund Agent will be liable for any loss, injury, damage or expense as a result of
acting upon telephone instructions purporting to be on my behalf, that the Fund
reasonably believes to be genuine, and that neither the Fund nor any such party
will be responsible for the authenticity of such telephone instructions. I
understand that any or all of these privileges may be discontinued by me or the
Fund at any time. I understand and agree that the Fund reserves the right to
refuse any telephone instructions and that my investment dealer or agent
reserves the right to refuse to issue any telephone instructions I may request.
For non-residents only: Under penalties of perjury, I certify that to the best
of my knowledge and belief, I qualify as a foreign person as indicated in
Section 2.
I am of legal age and capacity and have received and read the Prospectus and
agree to its terms.
- - - ----------------------------------- -------------------------------------------
Signature Date
- - - ----------------------------------- ------------------ -----------------------
Signature Date Acceptance Date:
================================================================================
DEALER/AGENT AUTHORIZATION For selected Dealers or Agents ONLY.
================================================================================
We hereby authorize Alliance Fund Services, Inc. to act as our agent in
connection with transactions under this authorization form; and we guarantee the
signature(s) set forth in Section 7, as well as the legal capacity of the
shareholder.
Dealer/Agent Firm ________________ Authorized Signature ______________________
Representative First Name ___________________ MI ____ Last Name ______________
Representative Number __________________________________________________________
Branch Office Address __________________________________________________________
City _______________________________ State ____________ Zip Code _____________
Branch Number _________________________ Branch Phone ( )_____________________
** Your bank must be a member of the National Automated Clearing House
Association (NACHA).
ALLIANCE MORTGAGE SECURITIES
INCOME FUND, INC.
- - - ------------------------------------------------------------------
P.O. Box 1520, Secaucus, New Jersey 07096-1520
Toll Free (800) 221-5672
For Literature: Toll Free (800) 227-4618
- - - ------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1995
- - - ------------------------------------------------------------------
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Fund's
current Prospectus. A copy of the Prospectus may be obtained by
contacting Alliance Fund Services, Inc. at the address or
telephone numbers listed above.
TABLE OF CONTENTS
PAGE
Description of the Fund.........................
Management of the Fund..........................
Expenses of the Fund............................
Purchase of Shares..............................
Redemption and Repurchase of Shares.............
Shareholder Services............................
Net Asset Value.................................
Dividends, Distributions and Taxes..............
Portfolio Transactions..........................
General Information.............................
Appendix A (Mortgage-Related Securities)........
Appendix B (Futures Contracts)..................
Financial Statements............................
Report of Independent Auditors..................
- - - ------------------------------------------------------------------
DESCRIPTION OF THE FUND
- - - ------------------------------------------------------------------
Except as otherwise indicated, the investment policies of
Alliance Mortgage Securities Income Fund, Inc. (the "Fund") are
not "fundamental policies" and may, therefore, be changed by the
Board of Directors without a shareholder vote. However, the Fund
will not change its investment policies without contemporaneous
written notice to its shareholders. The Fund's investment
objective may not be changed without shareholder approval. There
can be, of course, no assurance that the Fund will achieve its
investment objective.
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide
shareholders a high level of current income to the extent
consistent with prudent investment risk.
HOW THE FUND PURSUES ITS OBJECTIVE
In seeking to achieve its objective, the Fund will invest
primarily in a diversified portfolio of mortgage-related
securities, and, as a matter of fundamental investment policy,
will have at least 65% of the value of its total assets invested
in mortgage-related securities, except when the Fund assumes a
temporary defensive position. This fundamental investment policy
may not be changed without shareholder approval. For this purpose
(and for the purpose of changing the Fund's investment
restrictions and approving the Fund's advisory agreement, each as
more fully described below), "shareholder approval" means the
affirmative vote of (i) 67% or more of the shares represented at a
meeting at which more than 50% of the outstanding shares are
present in person or by proxy, or (ii) more than 50% of the
outstanding shares, whichever is less.
MORTGAGE-RELATED SECURITIES. The mortgage-related securities
in which the Fund principally invests provide funds for mortgage
loans made to residential home buyers. These include securities
which represent interests in pools of mortgage loans made by
lenders such as savings and loan institutions, mortgage bankers,
commercial banks and others. Pools of mortgage loans are
assembled for sale to investors (such as the Fund) by various
governmental, government-related and private organizations.
Interests in pools of mortgage-related securities differ from
other forms of debt securities, which normally provide for
periodic payment of interest in fixed amounts with principal
payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both
2
interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual
borrowers on their residential mortgage loans, net of any fees
paid to the issuer or guarantor of such securities. Additional
payments are caused by repayments of principal resulting from the
sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some
mortgage-related securities, such as securities issued by the
Government National Mortgage Association ("GNMA"), are described
as "modified pass-through." These securities entitle the holder to
receive all interest and principal payments owed on the mortgage
pool, net of certain fees, regardless of whether or not the
mortgagor actually makes the payment.
The average life of pass-through pools varies with the
maturities of the underlying mortgage instruments. In addition, a
pool's term may be shortened by unscheduled or early payments of
principal and interest on the underlying mortgages. The
occurrence of mortgage prepayments is affected by factors
including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social
and demographic conditions. As prepayment rates of individual
pools vary widely, it is not possible to accurately predict the
average life of a particular pool. For pools of fixed-rate
30-year mortgages, common industry practice is to assume that
prepayments will result in a 12-year average life. Pools of
mortgages with other maturities or different characteristics will
have varying average life assumptions. The assumed average life
of pools of mortgages having terms of less than 30 years, is less
than 12 years, but typically not less than 5 years.
Yields on pass-through securities are typically quoted by
investment dealers and vendors based on the maturity of the
underlying instruments and the associated average life assumption.
In periods of falling interest rates the rate of prepayment tends
to increase, thereby shortening the actual average life of a pool
of mortgage-related securities. Conversely, in periods of rising
interest rates the rate of prepayment tends to decrease, thereby
lengthening the actual average life of the pool. Historically,
actual average life has been consistent with the 12-year
assumption referred to above. Actual prepayment experience may
cause the yield to differ from the assumed average life yield.
Reinvestment of prepayments may occur at higher or lower interest
rates than the original investment, thus affecting the yield of
the Fund. The compounding effect from reinvestment of monthly
payments received by the Fund will increase the yield to
shareholders compared with bonds that pay interest semi-annually.
The principal governmental (i.e., backed by the full faith and
credit of the United States Government) guarantor of mortgage-
related securities is GNMA. GNMA is a wholly-owned United States
3
Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith
and credit of the United States Government, the timely payment of
principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of FHA-
insured or VA-guaranteed mortgages.
Government-related (i.e., not backed by the full faith and
credit of the United States Government) guarantors include the
Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation. The Federal National Mortgage Association
("FNMA") is a government-sponsored corporation owned entirely by
private stockholders. It is subject to general regulation by the
Secretary of Housing and Urban Development. FNMA purchases
residential mortgages from a list of approved seller/servicers
which include state and federally-chartered savings and loan
associations, mutual savings banks, commercial banks and credit
unions and mortgage bankers. Pass-through securities issued by
FNMA are guaranteed as to timely payment of principal and interest
by FNMA but are not backed by the full faith and credit of the
United States Government. The Federal Home Loan Mortgage
Corporation ("FHLMC") is a corporate instrumentality of the United
States Government whose stock is owned by the twelve Federal Home
Loan Banks. Participation certificates issued by FHLMC, which
represent interests in mortgages from FHLMC's national portfolio,
are guaranteed by the FHLMC as to the timely payment of interest
and ultimate collection of principal but are not backed by the
full faith and credit of the United States Government.
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. Such issuers may also be the
originators of the underlying mortgage loans as well as the
guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because
there are no direct or indirect government guarantees of payments
in the former pools. However, timely payment of interest and
principal of these pools is supported by various forms of
insurance or guarantees, including individual loan, title, pool
and hazard insurance. The insurance and guarantees are issued by
government entities, private insurers and the mortgage poolers.
Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a
mortgage-related security meets the Fund's investment quality
standards. There can be no assurance that the private insurers
can meet their obligations under the policies. The Fund may buy
mortgage-related securities without insurance or guarantees if
4
through an examination of the loan experience and practices of the
poolers Alliance Capital Management L.P., the Fund's investment
adviser (the "Adviser"), determines that the securities meet the
Fund's quality standards. Although the market for such securities
is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable. The Fund
will not purchase mortgage-related securities or any other assets
which in the Adviser's opinion are illiquid if, as a result, more
than 10% of the value of the Fund's total assets will be illiquid.
In any event, the Fund will not maintain more than 15% of its net
assets in illiquid securities.
The Fund expects under normal circumstances to have
substantially all of its assets invested in high-quality mortgage-
related securities either (i) issued by United States Government
sponsored corporations or (ii) rated A or better by Moody's or S&P
or, if not rated, are of equivalent investment quality as
determined by the Adviser. At times the Fund may invest in
mortgage-related securities not meeting the foregoing investment
quality standards when deemed by the Adviser to be consistent with
the Fund's objective of high current income to the extent
consistent with prudent investment risk; however, no such
investments would be made in excess of 20% of the value of the
Fund's total assets. (Such investments would be considered
mortgage-related securities for purposes of the policy that the
Fund invest at least 65% of the value of its total assets in
mortgage-related securities.) The Adviser will monitor
continuously the ratings of securities held by the Fund and the
creditworthiness of their issuers. For further information about
the characteristics of mortgage-related securities, see Appendix A
and for a description of the ratings used by Moody's, S&P, Duff &
Phelps and Fitch, see Appendix A to the Prospectus.
Mortgage-related securities in which the Fund may invest may
also include collateralized mortgage obligations ("CMOs"). CMOs
are debt obligations issued generally by finance subsidiaries or
trusts that are secured by mortgage-backed certificates,
including, in many carelated guarantors, including GNMA, FNMA and FHLMC,
together with certain funds and other collateral. Although payment of the
principal of and interest on the mortgage-backed certificates
pledged to secure the CMOs may be guaranteed by GNMA, FNMA or
FHLMC, the CMOs represent obligations solely of the issuer and are
not insured or guaranteed by GNMA, FNMA, FHLMC or any other
governmental agency, or by any other person or entity. The
issuers of CMOs typically have no significant assets other than
those pledged as collateral for the obligations.
5
The Fund also expects that governmental, government-related or
private entities may create mortgage loan pools offering pass-
through investments in addition to those described above. The
mortgages underlying these securities may be alternative mortgage
instruments, that is, mortgage instruments whose principal or
interest payments may vary or whose terms to maturity may differ
from customary long-term fixed rate mortgages. As new types of
mortgage-related securities are developed and offered to
investors, the Adviser will, consistent with the Fund's investment
objective, policies and quality standards, consider making
investments in such new types of securities.
OTHER SECURITIES. The Fund may invest up to 35% of the value
of its total assets in (i) securities issued or guaranteed by the
United States Government, its agencies and instrumentalities,
(ii) certificates of deposit, bankers' acceptances and interest-
bearing savings deposits of banks having total assets of more than
$1 billion and which are members of the Federal Deposit Insurance
Corporation, (iii) commercial paper of prime quality rated A-1 or
higher by S&P, Duff & Phelps and Fitch or Prime-1 or higher by
Moody's or, if not rated, issued by companies which have an
outstanding debt issue rated AA or higher by S&P or Aa or higher
by Moody's, and (iv) debt securities which, although not mortgage-
related securities, are secured by mortgages on commercial real
estate or residential rental properties, provided such securities
are rated A or better by Moody's or S&P or, if not rated, are of
equivalent investment quality as determined by the Adviser; such
securities may entitle the holder to participate in income derived
from the mortgaged properties or from sales thereof. When
business or financial conditions warrant, the Fund may take a
temporary defensive position and invest without limit in the
foregoing securities.
ASSET-BACKED SECURITIES. The securitization techniques used
to develop mortgage-related securities are now 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
investments in mortgage-related securities discussed above.
In general, the collateral supporting asset-backed securities
is of shorter maturity than mortgage loans and is less likely to
6
experience unexpected levels of prepayments. As with mortgaged-
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.
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 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. There have also
been proposals to cap the interest rate that a credit card issuer
may charge. 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. Furthermore, 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. Most
issuers of automobile receivables permit the servicers to retain
possession of the underlying obligations. If the servicer were to
sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the
holders of the related automobile receivables. In addition,
because of the large number of vehicles involved in a typical
issuance and the technical requirements of state laws, the trustee
for the holders of the automobile receivables may not have a
perfected security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to
support payments on these securities.
ADDITIONAL INVESTMENT POLICIES AND PRACTICES
DIRECT INVESTMENT IN MORTGAGES. The Fund may invest up to 10%
of the value of its total assets directly in mortgages securing
residential real estate (i.e., the Fund becomes the mortgagee).
Such investments are not "mortgage-related securities" as
described above. They are normally available from lending
institutions which group together a number of mortgages for resale
(usually from 10 to 50 mortgages) and which act as servicing agent
for the purchaser with respect to, among other things, the receipt
of principal and interest payments. (Such investments are also
referred to as "whole loans".) The vendor of such mortgages
receives a fee from the Fund for acting as servicing agent. The
vendor does not provide any insurance or guarantees covering the
repayment of principal or interest on the mortgages. Unlike pass-
through securities, whole loans constitute direct investment in
mortgages inasmuch as the Fund, rather than a financial
intermediary, becomes the mortgagee with respect to such loans
7
purchased by the Fund. At present, such investments are
considered to be liquid by the Adviser. The Fund will invest in
such mortgages only if the Adviser has determined through an
examination of the mortgage loans and their originators (which may
include an examination of such factors as percentage of family
income dedicated to loan service and relationship between loan
value and market value) that the purchase of the mortgages should
not present a significant risk of loss to the Fund. The Fund has
no present intention of making any direct investments in
mortgages.
REPURCHASE AGREEMENTS. The Fund may invest in repurchase
agreements pertaining to the types of securities in which it
invests. 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 one day or a few days later.
The resale price is greater than the purchase price, reflecting an
agreed-upon market rate which is effective for the period of time
the buyer's money is invested in the security and which is not
related to the coupon rate on the purchased security. Such
agreements permit the Fund to keep all of its assets at work while
retaining "overnight" flexibility in pursuit of investments of a
longer-term nature. The Fund maintains procedures for evaluating
and monitoring the creditworthiness of vendors of repurchase
agreements. In addition, the Fund requires continual maintenance
of collateral, in an amount equal to, or in excess of, the market
value of the securities which are the subject of the agreement.
In the event that a vendor defaulted on its repurchase obligation,
the Fund might suffer a loss to the extent that the proceeds from
the sale of the collateral were less than the repurchase price.
In the event of a vendor's bankruptcy, the Fund might be delayed
in, or prevented from, selling the collateral, for the Fund's
benefit. Repurchase agreements may be entered into with member
banks of the Federal Reserve System or "primary dealers" (as
designated by the Federal Reserve Bank of New York) in United
States Government securities. It is the Fund's current practice
to enter into repurchase agreements only with such primary
dealers.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Fund may
purchase securities offered on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. When
such transactions are negotiated, the price, which is generally
expressed in yield terms, is fixed at the time the commitment is
made, but delivery and payment for the securities take place at a
later date. Normally, the settlement date occurs within two
months after the transaction, but delayed settlements beyond two
months may be negotiated. During the period between a commitment
and settlement, no payment is made for the securities purchased by
the purchaser and, thus, no interest accrues to the purchaser from
the transaction.
8
The use of when-issued transactions and forward commitments
enables the Fund to hedge 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. However, if the Adviser were to
forecast incorrectly the direction of interest rate movements, the
Fund might be required to complete such when-issued or forward
transactions at prices less favorable than current market values.
When-issued securities and forward commitments may be sold
prior to the settlement date, but the Fund enters into when-issued
transactions and forward commitments only with the intention of
actually receiving or delivering the securities, as the case may
be. To facilitate such transactions, the Fund's custodian will
maintain, in a separate account of the Fund, portfolio securities
having value equal to, or greater than, any commitments to
purchase securities on a when-issued or forward commitment basis
and, with respect to forward commitments to sell portfolio
securities of the Fund, the portfolio securities themselves. If
the 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
incur a gain or loss. At the time the Fund makes the commitment
to purchase or sell a security on a when-issued or forward
commitment basis, it records the transaction and reflects the
value of the security purchased or, if a sale, the proceeds to be
received, in determining its net asset value. When-issued
securities may include bonds purchased on a "when, as and if
issued" basis under which the issuance of the securities depends
upon the occurrence of a subsequent event, such as approval of a
proposed financing by appropriate authorities. Any significant
commitment of the Fund's assets to the purchase of securities on a
"when, as and if issued" basis may increase the volatility of its
net asset value.
PUTS AND CALLS. The Fund may purchase put and call options
written by others and write covered put and call options overlying
the types of securities in which the Fund may invest. A put
option (sometimes called a "standby commitment") gives the buyer
of such option, upon payment of a premium, the right to deliver a
specified amount of a security to the writer of the option on or
before a fixed date at a predetermined price. A call option
written by the Fund is "covered" if the Fund owns the underlying
security covered by the call or has an absolute and immediate
9
right to acquire that security without additional cash
consideration (or for additional cash consideration held in a
segregated account by its Custodian) upon conversion or exchange
of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the
same principal amount as the call written where the exercise price
of the call held (a) is equal to or less than the exercise price
of the call written or (b) is greater than the exercise price of
the call written if the difference is maintained by the Fund in
cash and liquid high-grade securities in which the Fund can
invest, in a segregated account with its Custodian. A put option
written by the Fund is "covered" if the Fund maintains cash not
available for investment or liquid high-grade securities in which
the Fund can invest, with a value equal to the exercise price in a
segregated account with its Custodian, or else holds a put on the
same security and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater
than the exercise price of the put written. The premium paid by
the purchaser of an option will reflect, among other things, the
relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the
option, supply and demand and interest rates. A call option
(sometimes called a "reverse standby commitment") gives the
purchaser of the option, upon payment of a premium, the right to
call upon the writer to deliver a specified amount of a security
on or before a fixed date, at a predetermined price. The Fund
will not purchase any option if, immediately thereafter, the
aggregate cost of all outstanding options purchased by the Fund
would exceed 2% of the value of its total assets; the Fund will
not write any option if, immediately thereafter, the aggregate
value of the Fund's portfolio securities subject to outstanding
options would exceed 15% of its total assets.
The Fund will purchase put and call options to provide
protection against adverse price or yield effects from anticipated
changes in prevailing interest rates. In purchasing a call
option, the Fund would be in a position to realize a gain if,
during the option period, the price of the security increased by
an amount in excess of the premium paid. It would realize a loss
if the price of the security declined or remained the same or did
not increase during the period by more than the amount of the
premium. By purchasing a put option, the Fund would be in a
position to realize a gain if, during the option period, the price
of the security declined by an amount in excess of the premium
paid. It would realize a loss if the price of the security
increased or remained the same or did not decrease during that
period by more than the amount of the premium. If a put or call
option purchased by the Fund were permitted to expire without
being sold or exercised, its premium would represent a loss to the
Fund.
10
The Fund will seek additional return on its portfolio
securities by writing put and call options covering the types of
securities in which the Fund may invest. When the Fund writes a
put option it maintains in a segregated account cash or readily
marketable securities in an amount adequate to purchase the
underlying security should the put be exercised. When the Fund
writes a call option it must own at all times during the option
period either the underlying securities or an offsetting call
option on the same securities. If a put option written by the
Fund were exercised the Fund would be obligated to purchase the
underlying security at the exercise price. If a call option
written by the Fund were exercised the Fund would be obligated to
sell the underlying security at the exercise price.
The risk involved in writing a put option is that there could
be a decrease in the market value of the underlying security
caused by rising interest rates or other factors. If this
occurred, the option could be exercised and the underlying
security would then be sold to the Fund at a higher price than its
current market value. The risk involved in writing a call option
is that there could be an increase in the market value of the
underlying security caused by declining interest rates or other
factors. If this occurred, the option could be exercised and the
underlying security would then be sold by the Fund at a lower
price than its current market value. These risks could be reduced
by entering into a closing transaction as described below. The
Fund retains the premium received from writing a put or call
option whether or not the option is exercised.
The Fund 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 Fund realizes a profit or loss from a closing sale
transaction if the premium received from the transaction is more
than or less than the cost of the option.
The Fund may terminate its obligation to the holder of an
option written by the Fund through a "closing purchase
transaction." The Fund may not, however, effect a closing purchase
transaction with respect to such an option after it has been
notified of the exercise of such option. The Fund 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 Fund from writing the option.
The Fund generally purchases or writes options, other than
options on futures, in negotiated transactions. The Fund effects
such transactions only with investment dealers and other financial
institutions (such as commercial banks or savings and loan
11
institutions) deemed creditworthy by the Adviser. The Adviser has
also adopted procedures for monitoring the creditworthiness of
such entities. Options purchased or written by the Fund in
negotiated transactions are illiquid and it may not be possible
for the Fund to effect a closing purchase transaction at a time
when the Adviser believes it would be advantageous to do so.
INTEREST RATE TRANSACTIONS. The Fund may, without limit,
enter into interest rate swaps and may purchase or sell interest
rate caps and floors. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio. The Fund may
also enter into these transactions to protect against any increase
in the price of securities the Fund anticipates purchasing at a
later date. The Fund does not intend to use these transactions in
a speculative manner. Interest rate swaps involve the exchange by
the 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. 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 of
interest on a contractually-based principal amount from the party
selling the 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 contractually-based principal amount from the party
selling the interest rate floor.
The Fund 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
usually enter into interest rate swaps 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. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest
rate swap will be accrued on a daily basis and an amount of cash
or high-quality liquid debt securities having an aggregate net
asset value at least equal to the accrued excess will be
maintained in a segregated account by the Fund's custodian. If
the Fund enters into an interest rate swap on other than a net
basis, the Fund will maintain a segregated account in the full
amount accrued on a daily basis of the Fund's obligations with
respect to the swap. The Fund will not enter into any interest
rate swap, cap or floor transaction unless the unsecured senior
debt or the claims-paying ability of the other party thereto is
rated in the highest rating category of at least one nationally
recognized rating organization. The Adviser will monitor the
creditworthiness of counterparties on an ongoing basis. If there
12
were a default by such counterparty, the Fund would have
contractual remedies. 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. The Adviser has determined that, as a result,
the swap market has become relatively liquid. Caps and floors are
more recent innovations for which documentation is not as
standardized and, accordingly, they are less liquid than swaps.
To the extent the Fund sells (i.e., writes) caps and floors, it
will maintain in a segregated account cash or high-quality liquid
debt securities having an aggregate net asset value at least equal
to the full amount, accrued on a daily basis, of the Fund's
obligations with respect to the caps or floors. The use of
interest rate swaps is a highly specialized activity which
involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. If
the Adviser is incorrect in its forecasts of market values,
interest rates and other applicable factors, the investment
performance of the Fund would diminish compared with what it would
have been if these investment techniques were not used. Moreover,
even if the Adviser is correct in its forecasts, there is a risk
that the swap position may correlate imperfectly with the price of
the asset or liability being hedged.
There is no limit on the amount of interest rate swap
transactions that may be entered into by the Fund. These
transactions do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate swaps is limited to the net amount
of interest payments that the Fund is contractually obligated to
make. If the other party to an interest rate swap defaults, the
Fund's risk of loss consists of the net amount of interest
payments that the Fund contractually is entitled to receive. The
Fund may purchase and sell (i.e., write) caps and floors without
limitation, subject to the segregated account requirement
described above.
INTEREST RATE FUTURES CONTRACTS. The Fund also may enter into
contracts for the future delivery of fixed income securities
commonly referred to as "interest rate futures contracts." These
futures contracts will be used only as a hedge against anticipated
interest rate changes. The Fund will not enter into an interest
rate futures contract if immediately thereafter more than 5% of
the value of the Fund's total assets will be committed to margin.
The Fund will also not enter into an interest rate futures
contract if immediately thereafter the sum of the then aggregate
futures market prices of financial instruments required to be
delivered under open futures contract sales and the aggregate
futures market prices of instruments required to be delivered
13
under open futures contract purchases would exceed 30% of the
value of the Fund's total assets. For a detailed discussion of
futures contracts and the risks of investing therein, see
Appendix B.
LENDING OF PORTFOLIO SECURITIES. The Fund may from time to
time lend securities from its portfolio to brokers, dealers and
financial institutions and receive collateral in the form of cash
or United States Government obligations. Under the Fund's current
practices (which are subject to change), the loaned collateral
must be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. In
determining whether to lend securities to a particular broker-
dealer or financial institution, the Adviser will consider all
relevant facts and circumstances, including the creditworthiness
of the broker-dealer or financial institution. The Fund may pay
reasonable finders, administrative and custodial fees in
connection with a loan. The Fund will not lend portfolio
securities in excess of 20% of the value of its total assets, nor
will the Fund lend its portfolio securities to any officer,
director, employee or affiliate of either the Fund or the Adviser.
ILLIQUID SECURITIES. The Fund will not invest in illiquid
securities if immediately after such investment more than 10% of
the Fund's total assets (taken at market value) would be invested
in such securities. In addition, the Fund will not maintain more
than 15% of its net assets in illiquid securities. For this
purpose, illiquid securities include, among others, (a) direct
placements or other securities which are subject to legal or
contractual restrictions on resale or for which there is no
readily available market (e.g., trading in the security is
suspended or, in the case of unlisted securities, market makers do
not exist or will not entertain bids or offers), (b) options
purchased by the Fund over-the-counter and the cover for options
written by the Fund over-the-counter, and (c) repurchase
agreements not terminable within seven days. See "Additional
Investment Policies and Practices," below. Securities that have
legal or contractual restrictions on resale but have a readily
available market are not deemed illiquid for purposes of this
limitation.
Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because
they have not been registered under the Securities Act of 1933, as
14
amended ("Securities Act"), securities which are otherwise not
readily marketable and repurchase agreements having a maturity of
longer than seven days. Securities which have not been registered
under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a
mutual fund might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions within seven
days. A mutual fund might also have to register such restricted
securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a
public offering of securities.
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 bond 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.
During the coming year, the Fund may invest up to 5% of its
total assets in restricted securities issued under Section 4(2) of
the Securities Act, which exempts from registration "transactions
by an issuer not involving any public offering." Section 4(2)
instruments are restricted in the sense that they can only be
resold through the issuing dealer to institutional investors and
in private transactions; they cannot be resold to the general
public without registration.
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
15
institutional buyers interested in purchasing certain restricted
securities held by the Fund, however, could affect adversely the
marketability of such portfolio securities and the Fund might be
unable to dispose of such securities promptly or at reasonable
prices. Rule 144A has already produced enhanced liquidity for
many restricted securities, and market liquidity for such
securities may continue to expand as a result of this regulation
and the consequent inception of the PORTAL System sponsored by the
National Association of Securities Dealers, Inc., an automated
system for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers.
The Adviser, acting under the supervision of the Board of
Directors, will monitor the liquidity of restricted securities in
the Fund's portfolio. In reaching liquidity decisions, the
Adviser will consider, inter alia, 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
Securities and Exchange Commission (the "Commission")
interpretation or position with respect to such type of
securities.
PORTFOLIO TURNOVER. The investment activities described above
are likely to result in the Fund engaging in a considerable amount
of trading of securities held for less than one year. Management
anticipates that the annual turnover in the Fund will be
approximately 600%. An annual turnover rate of 600% occurs, for
example, when all the securities in the Fund's portfolio are
replaced six times in a period of one year. A high rate of
portfolio turnover involves correspondingly greater expenses than
a lower rate, which expenses must be borne by the Fund and its
shareholders. High portfolio turnover also may result in the
realization of substantial net short-term capital gains. See
"Dividends, Distributions and Taxes" and "General Information-
Portfolio Transactions."
16
FUNDAMENTAL INVESTMENT POLICIES
The following investment restrictions may not be changed
without shareholder approval which means the affirmative vote of
(i) 67% or more of the shares represented at a meeting at which
more than 50% of the outstanding shares are present in person or
by proxy, or (ii) more than 50% of the outstanding shares,
whichever is less.
As a matter of fundamental policy, the Fund may not:
(i) invest more than 5% of the value of its total assets in the
securities of any one issuer, other than securities issued or
guaranteed by the United States Government, its agencies or
instrumentalities, except that up to 25% of the value of the
Fund's total assets may be invested without regard to this
limitation; (ii) invest more than 25% of the value of its total
assets in the securities of issuers conducting their principal
business activities in a single industry, except that this
limitation shall not apply to investments in the mortgage and
mortgage-financed industry (in which more than 25% of the value of
the Fund's total assets will, except for temporary defensive
positions, be invested) or securities issued or guaranteed by the
United States Government, its agencies or instrumentalities;
(iii) borrow money except from banks for temporary or emergency
purposes, including the meeting of redemption requests which might
require the untimely disposition of securities; borrowing in the
aggregate may not exceed 15%, and borrowing for purposes other
than meeting redemptions may not exceed 5% of the value of the
Fund's total assets (including the amount borrowed) less
liabilities (not including the amount borrowed) at the time the
borrowing is made; outstanding borrowings in excess of 5% of the
value of the Fund's total assets will be repaid before any
subsequent investments are made; (iv) pledge, hypothecate,
mortgage or otherwise encumber its assets, except in an amount of
not more than 15% of the value of its total assets to secure
borrowings for temporary or emergency purposes and except as
provided in (vi) below, provided, however, that this limitation
does not apply to deposits made in connection with the entering
into and holding of interest rate futures contracts; (v) invest
more than 10% of the value of its total assets in the aggregate in
illiquid securities or other illiquid investments and repurchase
agreements maturing in more than seven days; or (vi) lend its
portfolio securities if immediately after such a loan more than
20% of the value of the Fund's total assets would be subject to
such loans.
In addition, the Fund may not:
1. Make loans except through (i) the purchase of qualified
debt obligations referred to under "Investment Objective and
17
Policies", (ii) entry into repurchase agreements, and (iii) the
lending of portfolio securities; and
2. (a) Purchase or sell real estate, except that it may
invest in mortgage-related securities and whole loans and purchase
and sell securities of companies which deal in real estate or
interests therein; (b) invest in commodities or commodities
contracts, except that it may invest in interest rate futures
contracts; (c) invest in interests in oil, gas or other mineral
exploration or development programs; (d) sell securities short or
purchase securities on margin; (e) act as an underwriter of
securities, except that, subject to investment restriction in the
Prospectus, the Fund may acquire restricted securities under
circumstances in which, if such securities are sold, the Fund
might be deemed to be an underwriter for purposes of the
Securities Act of 1933; (f) invest in companies for the purpose of
exercising control; and (g) invest in the securities of other
investment companies, except securities acquired as a result of a
merger, consolidation or acquisition of assets.
Whenever any investment policy or restriction states a minimum
or maximum percentage of the Fund's assets which may be invested
in any security or other asset, it is intended that such minimum
or maximum percentage limitation be determined immediately after
and as a result of the Fund's acquisition of such security or
other asset. Accordingly, any later increase or decrease in
percentage beyond the specified limitations resulting from a
change in values or net assets will not be considered a violation.
- - - ------------------------------------------------------------------
MANAGEMENT OF THE FUND
- - - ------------------------------------------------------------------
ADVISER
Alliance Capital Management L.P., a New York Stock Exchange
listed company with principal offices at 1345 Avenue of the
Americas, New York, New York 10105, has been retained under an
investment advisory agreement (the "Advisory Agreement") to
provide investment advice and, in general, to conduct the
management and investment program of the Fund under the
supervision and control of the Fund's Board of Directors.
The Adviser is a leading international investment manager
supervising client accounts with assets as of December 31, 1994 of
more than $121 billion (of which more than $37 billion represented
the assets of investment companies). The Adviser's clients are
18
primarily major corporate employee benefit funds, public employee
retirement systems, investment companies, foundations and
endowment funds. The Adviser and its subsidiaries employ
approximately 1,450 employees who operate out of domestic offices
and the overseas offices of subsidiaries in Bombay, Istanbul,
London, Sydney, Tokyo, Toronto, Bahrain, Luxembourg and Singapore.
The 50 registered investment companies comprising 102 separate
investment portfolios managed by the Adviser currently have more
than one million shareholders. As of December 31, 1994, the
Adviser was retained as an investment manager by 29 of the FORTUNE
100 Companies.
Alliance Capital Management Corporation, the sole general
partner of, and the owner of a 1% general partnership interest in,
the Adviser, is an indirect wholly-owned subsidiary of The
Equitable Life Assurance Society of the United States
("Equitable"), one of the largest life insurance companies in the
United States and a wholly-owned subsidiary of The Equitable
Companies Incorporated ("ECI"), a holding company controlled by
AXA, a French insurance holding company. As of December 31, 1994,
ACMC, Inc. and Equitable Capital Management Corporation, each a
wholly-owned direct or indirect subsidiary of Equitable, owned in
the aggregate approximately 59% of the issued and outstanding
units representing assignments of beneficial ownership of limited
partnership interests in the Adviser ("Units"). As of December
31, 1994, approximately 32% and 9% of the Units were owned by the
public and employees of the Adviser and its subsidiaries,
respectively, including employees of the Adviser who serve as
Directors of the Fund.
AXA owns approximately 60% of the outstanding voting shares of
common stock of ECI. AXA is the holding company for an
international group of insurance and related financial services
companies. AXA's insurance operations are comprised of activities
in life insurance, property and casualty insurance and
reinsurance. The insurance operations are diverse geographically
with activities in France, the United States, the United Kingdom,
Canada and other countries, principally in Europe. AXA is also
engaged in asset management, investment banking and brokerage,
real estate and other financial services activities in the United
States and Europe. Based on information provided by AXA, as of
January 1, 1995, 42.3% of the issued shares (representing 54.7% of
the voting power) of AXA were owned by Midi Participations, a
French corporation that is a holding company. The voting shares
of Midi Participations are in turn owned 60% by Finaxa, a French
corporation that is a holding company, and 40% by subsidiaries of
Assicurazioni Generali S.p.A., an Italian corporation ("Generali")
(one of which, Belgica Insurance Holding S.A., a Belgian
corporation, owned 34.1%). As of January 1, 1995, 62.1% of the
issued shares (representing 75.7% of the voting power) of Finaxa
were owned by five French mutual insurance companies (the
19
"Mutuelles AXA") (one of which, AXA Assurances I.A.R.D. Mutuelle,
owned 31.8% of the issued shares) (representing 39.0% of the
voting power), and 26.5% of the issued shares (representing 16.6%
of the voting power) of Finaxa were owned by Banque Paribas, a
French bank ("Paribas"). Including the shares owned by Midi
Participations, as of January 1, 1995, the Mutuelles AXA directly
or indirectly owned 51.3% of the issued shares (representing 65.8%
of the voting power) of AXA. In addition, certain subsidiaries of
AXA own 0.4% of the shares of AXA which are not entitled to be
voted. Acting as a group, the Mutuelles AXA control AXA, Midi
Participations and Finaxa.
Under the Advisory Agreement, the Adviser provides investment
advisory services and order placement facilities for the Fund and
pays all compensation of Directors and officers of the Fund who
are affiliated persons of the Adviser. The Adviser or its
affiliates also, without charge, furnishes the Fund management
supervision and assistance and office facilities. Under the
Advisory Agreement, the Fund pays a quarterly fee to the Adviser
on the first business day of January, April, July and October
equal to .1375 of 1% (approximately .55 of 1% on an annual basis)
of the net asset value of the Fund at the end of the previous
quarter up to $500,000,000 and .125 of l% (approximately .50 of l%
on an annual basis) of the Fund's net asset value in excess of
$500,000,000 at the end of the previous quarter. For the fiscal
years ended December 31, 1992, December 31, 1993 and December 31,
1994, the Adviser received advisory fees of $6,467,890,
$11,651,682 and $9,620,756, respectively.
The Advisory Agreement provides that the Adviser will
reimburse the Fund for its expenses (exclusive of interest, taxes,
brokerage, expenditures pursuant to the Distribution Services
Agreement described below, and extraordinary expenses, all to the
extent permitted by applicable state securities laws and
regulations) which in any year exceed the limits prescribed by any
state in which the Fund's shares are qualified for sale. The Fund
may not qualify its shares for sale in every state. The Fund
believes that presently the most restrictive expenses ratio
limitation imposed by any state in which the Fund has qualified
its shares for sale is 2.5% of the first $30 million of the Fund's
aggregate average daily net assets, 2.0% of the next $70 million
of its average daily net assets and 1.5% of its average daily net
assets in excess of $100 million. Expense reimbursements, if any,
are accrued daily and paid monthly. No such reimbursement was
required for the year ended December 31, 1994.
20
The Advisory Agreement continues in effect for successive
twelve-month periods (computed from each January 1), provided that
such continuance is specifically approved at least annually by the
Fund's Directors or by a majority vote of the holders of the
outstanding voting securities of the Fund, and, in either case, by
a majority of the Directors who are not parties to the Advisory
Agreement or interested persons as defined in the 1940 Act of any
such party. Most recently, the continuance of the Advisory
Agreement until December 31, 1995 was approved by a vote, cast in
person, of the Directors, including a majority of the Directors
who are not parties to the Advisory Agreement or interested
persons of any such party, at a meeting called for that purpose
and held on December 7, 1994.
The Advisory Agreement 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 Adviser on 60 days' written notice,
and will automatically terminate in the event of its assignment.
The Advisory Agreement provides that in the absence of willful
misfeasance, bad faith or gross negligence on the part of the
Adviser, or of reckless disregard of its obligations thereunder,
the Adviser shall not be liable for any action or failure to act
in accordance with its duties thereunder.
Certain other clients of the Adviser may have investment
objectives and policies similar to those of the Fund. The Adviser
may, from time to time, make recommendations which result in the
purchase or sale of a particular security by its other clients
simultaneously with the Fund. If transactions on behalf of more
than one client during the same period increase the demand for
securities being purchased or the supply of securities being sold,
there may be an adverse effect on price or quantity. It is the
policy of the Adviser to allocate advisory recommendations and the
placing of orders in a manner which is deemed equitable by the
Adviser to the accounts involved, including the Fund. When two or
more of the clients of the Adviser (including the Fund) are
purchasing or selling the same security on a given day from the
same broker-dealer, such transactions may be averaged as to price.
The Adviser may act as an investment adviser to other persons,
firms or corporations, including investment companies, and is the
investment adviser to ACM Institutional Reserves, Inc., AFD
Exchange Reserves, The Alliance Fund, Inc., Alliance All-Asia
Investment Fund, Inc., Alliance Balanced Shares, Inc., Alliance
Bond Fund, Inc., Alliance Capital Reserves, Alliance Counterpoint
21
Fund, Alliance Developing Markets Fund, Inc., Alliance Global
Dollar Government Fund, Inc., Alliance Global Small Cap Fund,
Inc., Alliance Government Reserves, Alliance Growth and Income
Fund, Inc., Alliance Income Builder Fund, Inc., Alliance
International Fund, Alliance Mortgage Strategy Trust, 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 Short-Term Multi-
Market Trust, Inc., Alliance Technology Fund, Inc., Alliance
Utility Income Fund, Inc., Alliance Variable Products Series Fund,
Inc., Alliance World Income Trust, Inc., Alliance Worldwide
Privatization Fund, Inc., Fiduciary Management Associates, The
Alliance Portfolios and The Hudson River Trust, all registered
open-end investment companies; ACM Government Income Fund, Inc.,
ACM Government Securities Fund, Inc., ACM Government Spectrum
Fund, Inc., ACM Government Opportunity Fund, Inc., ACM Managed
Income Fund, Inc., ACM Managed Multi-Market Trust, Inc., ACM
Managed Dollar Income Fund, Inc., ACM Municipal Securities Income
Fund, Inc., Alliance All-Market Advantage Fund, Inc., Alliance
Global Environment Fund, Inc., Alliance World Dollar Government
Fund, Inc., Alliance World Dollar Government Fund II, Inc., The
Austria Fund, Inc., The Global Privatization Fund, Inc., The
Korean Investment Fund, Inc., The Southern Africa Fund, Inc. and
The Spain Fund, Inc., all registered closed-end investment
companies; and Alliance Global Bond Fund, SICAV, Alliance Global
Leisure Fund, Alliance Global Growth Trends Portfolio, Alliance
Global Income Fund, Alliance International Currency Reserves,
Alliance International Health Care Fund, SICAV, Alliance
International Technology Fund, SICAV, Alliance Worldwide Income
Fund, India Liberalisation Fund, SICAV, ML-Alliance Asset
Allocation N.V. and The Spanish Smaller Companies Fund, all
foreign investment companies, all foreign companies.
DIRECTORS AND OFFICERS
The Directors and principal officers of the Fund, their ages
and their primary occupations during the past five years are set
forth below. Each such Director and officer is also a director,
trustee or officer of other registered investment companies
sponsored by the Adviser. Unless otherwise specified, the address
of each of the following persons is 1345 Avenue of the Americas,
New York, New York 10105.
22
DIRECTORS
JOHN D. CARIFA,** 49, CHAIRMAN OF THE BOARD AND PRESIDENT, is
the Chief Operating Officer and a Director of ACMC with which he
has been associated since prior to 1990.
RUTH BLOCK, 64, a Director of Ecolab Incorporated (specialty
chemicals) and Amoco Corporation (oil and gas). Previously, she
was an Executive Vice President and Chief Insurance Officer of The
Equitable Life Assurance Society of the United States since prior
to 1990. Her address is Box 4653, Stamford, Connecticut 06903.
DAVID H. DIEVLER, 65, was formerly Chairman of the Board and
President and a Senior Vice President ACMC.
JAMES R. GREENE, 72, is an independent financial consultant
since prior to 1990. He is also a Director of ASARCO,
Incorporated (metals smelting and refining), Bank Leumi Trust Co.,
Buck Engineering Company (manufacturing), American Reliance
Insurance Co. and United Tote (computer software). His address is
134 Buttonwood Drive, Fair Haven, New Jersey 07701.
DR. JAMES M. HESTER, 70, is President of The Harry Frank
Guggenheim Foundation and a Director of Union Carbide Corporation
with which he has been associated since prior to 1990. He was
formerly President of New York University, the New York Botanical
Garden and Rector of the United Nations University. His address
is 45 East 89th Street, Apt. 39C, New York, New York 10128.
CLIFFORD L. MICHEL, 55, is a member in the law firm of Cahill
Gordon & Reindel with which he has been associated since prior to
1990. He is also Chief Executive Officer of Wenonah Development
Company (investments) and a Director of Placer Dome, Inc. (mining)
and Faber-Castell Corporation (writing products). His address is
80 Pine Street, New York, New York 10005.
____________________
** An "interested person" of the Fund as defined in the 1940 Act.
23
EUGENE F. O'NEIL, 71, is Managing Director of O'Neil Asset
Management (private investments) with which he has been associated
since prior to 1990. His address is 24 Byfield Lane, Greenwich,
Connecticut 06830.
ROBERT C. WHITE, 74, is a Vice President and the Chief
Financial Officer of the Howard Hughes Medical Institute with
which he has been associated since prior to 1990. He is also a
Director of MEDSTAT Systems, Inc. (healthcare information) and a
Trustee of St. Clair Fixed-Income Fund, St. Clair Tax-Free Fund
and St. Clair Equity Fund (registered investment companies). His
address is 30835 River Crossing, Bingham Farms, Michigan 48025.
OFFICERS
JOHN D. CARIFA, CHAIRMAN AND PRESIDENT, see biography, above.
PATRICIA J. YOUNG, SENIOR VICE PRESIDENT, 40, is a Senior Vice
President of ACMC with which she has been associated since March
1992. Previously, she was a Managing Director and Portfolio
Manager for Hyperion Capital since March 1991. Prior thereto, she
was a managing Director with Fischer, Francis, Trees & Watts since
prior to 1990.
PAUL A. ULLMAN, VICE PRESIDENT, 37, is a Vice President of
ACMC with which he has been associated since March 1992.
Previously, he was a Director and Portfolio Manager at Hyperion
Capital since July 1990. Prior thereto, he was a Vice President
at Salomon Brothers since prior to 1990.
EDMUND P. BERGAN, JR., SECRETARY, 44, is a Senior Vice
President and General Counsel of Alliance Fund Distributors, Inc.
with which he has been associated since prior to 1990.
GEORGE O. MARTINEZ, ASSISTANT SECRETARY, 35, is a Vice
President and Associate General Counsel of Alliance Fund
Distributors, Inc. with which he has been associated since prior
24
to 1990.
MARK D. GERSTEN, TREASURER AND CHIEF FINANCIAL OFFICER, 44, is
a Vice President of Alliance Fund Distributors, Inc. and a Senior
Vice President of Alliance Fund Services, Inc. with which he has
been associated since prior to 1990.
JOSEPH J. MANTINEO, CONTROLLER, 35, is a Vice President of
Alliance Fund Services, Inc. with which he has been associated
since prior to 1990.
PATRICK J. FARRELL, ASSISTANT CONTROLLER, 35, is a Vice
President of Alliance Fund Services, Inc. with which he has been
associated since prior to 1990.
JUAN RODRIGUEZ, ASSISTANT CONTROLLER, 37, is an Assistant Vice
President of Alliance Fund Services, Inc. with which he has been
associated since prior to 1990.
The Fund does not pay any fees to, or reimburse expenses of,
its Directors who are considered "interested persons" of the Fund.
The aggregate compensation paid by the Fund to each of the
Directors during its fiscal period ended December 31, 1994, and
the aggregate compensation paid to each of the Directors during
calendar year 1994 by all of the registered investment companies
to which the Adviser provides investment advisory services
(collectively, the "Alliance Fund Complex"), are set forth below.
Each of the Directors is a director or trustee of one or more
other registered investment companies in the Alliance Fund
Complex.
25
Pension or
Retirement
Benefits Estimated Total
Accrued Annual Compensation
Aggregate As Part Benefits from the Alliance
Name of Director Compensation of Fund upon Fund Complex,
of the Fund from the Fund Expenses Retirement Including the Fund
________________ _____________ __________ ___________ __________________
Ruth Block $3,707 $-0- $-0- $157,000
John D. Carifa $-0- $-0- $-0- $0
David H. Dievler $-0- $-0- $-0- $0
James R. Greene $4,500 $-0- $-0- $ 77,500
Dr. James M. Hester $3,707 $-0- $-0- $154,500
Clifford L. Michel $2,957 $-0- $-0- $120,500
Eugene F. O'Neil $4,500 $-0- $-0- $ 20,500
Robert C. White $3,740 $-0- $-0- $133,500
As of February 15, 1995, the Directors and officers of the
Fund as a group owned less than 1% of the shares of the Fund.
- - - ------------------------------------------------------------------
EXPENSES OF THE FUND
- - - ------------------------------------------------------------------
DISTRIBUTION SERVICES AGREEMENT
The Fund has entered into a Distribution Services Agreement
(the "Agreement") with Alliance Fund Distributor, Inc., the Fund's
principal underwriter (the "Principal Underwriter"), to permit the
Fund directly or indirectly to pay expenses associated with the
distribution of its shares in accordance with a plan of
distribution included in the Agreement and has been duly adopted
and approved in accordance with Rule 12b-1 adopted by the
Securities and Exchange Commission (the "Commission") under the
1940 Act (the "Rule 12b-1 Plan").
Distribution services fees are accrued daily and paid monthly
and are charged as expenses of the Fund as accrued. The
distribution services fees attributable to the Class B shares and
Class C shares are designed to permit an investor to purchase such
shares through broker-dealers without the assessment of an initial
26
sales charge, and, in the case of Class C shares, without the
assessment of a contingent deferred sales charge, and at the same
time to permit the Principal Underwriter to compensate broker-
dealers in connection with the sale of such shares. In this
regard, the purpose and function of the combined contingent
deferred sales charge and distribution services fee on the Class B
shares, and the distribution services fee on the Class C shares,
are the same as those of the initial sales charge (or contingent
deferred sales charge, when applicable) and distribution services
fee with respect to the Class A shares in that in each case the
sales charge and/or distribution services fee provide for the
financing of the distribution of the Fund's shares.
Under the Agreement, the Treasurer of the Fund reports the
amounts expended under the Rule 12b-1 Plan and the purposes for
which such expenditures were made to the Directors of the Fund for
their review on a quarterly basis. Also, the Agreement provides
that the selection and nomination of Directors who are not
interested persons of the Fund (as defined in the 1940 Act) are
committed to the discretion of the disinterested Directors then in
office.
The Agreement became effective on July 22, 1992, and was
amended as of April 30, 1993 to permit the distribution of an
additional class of shares, Class C shares. The amendment to the
Agreement was approved by the unanimous vote, cast in person, of
the disinterested Directors at a meeting called for that purpose
and held on February 23, 1993, and by the initial holder of Class
C shares of the Fund on April 30, 1993.
The Adviser may from time to time and from its own funds or
such other resources as may be permitted by rules of the
Commission make payments for distribution services to the
Principal Underwriter; the latter may in turn pay part or all of
such compensation to brokers or other persons for their
distribution assistance.
During the Fund's fiscal year ended December 31, 1994, with
respect to Class A shares, distribution services fees for
expenditures payable to the Principal Underwriter amounted to,
$2,121,504 which constituted .30 of 1% of the Fund's average daily
net assets during such fiscal year, and the Adviser made payments
from its own resources aggregating $351,635. Of the $2,473,139
paid by the Fund and the Adviser under the Plan with respect to
Class A shares, $94,094 was spent on advertising, $10,677 on the
printing and mailing of prospectuses for persons other than
current shareholders, $1,940,355 for compensation to broker-
27
dealers, $70,971 for compensation paid to wholesalers of the
Principal Underwriter in respect of sales of the shares of the
Fund and $357,042 was spent on the printing of sales literature,
travel, entertainment, due diligence and other promotional
expenses.
During the Fund's fiscal year ended December 31, 1994, with
respect to Class B shares, distribution services fees for
expenditures payable to the Principal Underwriter amounted to,
$11,940,916 which constituted 1% of the Fund's average daily net
assets during such fiscal year, and the Adviser made payments from
its own resources aggregating $-0-. Of the $2,659,735 paid by
the Fund and the Adviser under the Plan with respect to Class B
shares, $174,046 was spent on advertising, $27,757 on the printing
and mailing of prospectuses for persons other than current
shareholders, $1,801,907 for compensation to broker-dealers,
$104,942 for compensation paid to wholesalers of the Principal
Underwriters in respect of sales of shares of the Fund and
$551,083 was spent on the printing of sales literature, travel,
entertainment, due diligence and other promotional expenses. The
additional $9,281,181 in payments to the Principal Underwriter
will be carried forward and offset against future distribution
service fees payable under the Plan.
During the Fund's fiscal year ended December 31, 1994, with
respect to Class C shares, distribution services fees for
expenditures payable to the Principal Underwriter amounted to,
$847,425 which constituted 1% of the Fund's average daily net
assets during such fiscal year, and the Adviser made payments from
its own resources aggregating $809,029. Of the $1,656,454 paid by
the Fund and the Adviser under the Plan with respect to Class C
shares, $97,235 was spent on advertising, $18,413 on the printing
and mailing of prospectuses for persons other than current
shareholders, $1,113,034 for compensation to broker-dealers,
$72,465 for compensation paid to wholesalers of the Principal
Underwriters in respect of sales of shares of the Fund and
$355,307 was spent on the printing of sales literature, travel,
entertainment, due diligence and other promotional expenses.
The Agreement will continue in effect for successive twelve-
month periods (computed from each January 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
28
in either case, by a majority of the Directors of the Fund who are
not parties to this Agreement or interested persons, as defined in
the 1940 Act, of any such party (other than as directors of the
Fund) and who have no direct or indirect financial interest in the
operation of the Rule 12b-1 Plan or any agreement related thereto.
Most recently the Directors approved the continuance of the
Agreement until December 31, 1995 at their meeting held on
December 7, 1994.
In the event that the Agreement is terminated or not continued
with respect to the Class A shares, Class B shares or Class C
shares, (i) no distribution services fees (other than current
amounts accrued but not yet paid) would be owed by the Fund to the
Principal Underwriter with respect to that class, and (ii) the
Fund would not be obligated to pay the Principal Underwriter for
any amounts expended under the Agreement not previously recovered
by the Principal Underwriter from distribution services fees in
respect of shares of such class or through deferred sales charges.
All material amendments to the Agreement must be approved by a
vote of the Directors or the holders of the Fund's outstanding
voting securities, voting separately by class, and in either case,
by a majority of the disinterested Directors, cast in person at a
meeting called for the purpose of voting on such approval; and the
Agreement may not be amended in order to increase materially the
costs that the Fund may bear pursuant to the Agreement without the
approval of a majority of the outstanding shares of the Fund,
voting separately by class. The Agreement may be terminated (a)
by the Fund without penalty at any time by a majority vote of the
disinterested Directors who have no direct or indirect financial
interest in the Rule 12b-1 Plan, the Agreement or any related
agreement or by a majority vote of the outstanding shares of the
Fund, voting separately by class, or (b) by the Principal
Underwriter. To terminate the Agreement, either party must give
the other party 60 days' written notice; to terminate the Rule
12b-1 Plan only, the Fund is not required to give prior written
notice to the Principal Underwriter. The Agreement will terminate
automatically in the event of its assignment.
TRANSFER AGENCY AGREEMENT
Alliance Fund Services, Inc., an indirect wholly-owned
subsidiary of the Adviser, receives a transfer agency fee per
account holder for each of the Class A, Class B and Class C shares
of the Fund, plus reimbursement for out-of-pocket expenses. The
transfer agency fee with respect to the Class B shares is higher
than the transfer agency fee with respect to the Class A shares or
Class C shares reflecting the additional costs associated with
Class B contingent deferred sales charge. For the fiscal year
29
ended December 31, 1994, the Fund paid Alliance Fund Services,
Inc. $1,593,890 for transfer agency services.
- - - ------------------------------------------------------------------
PURCHASE OF SHARES
- - - ------------------------------------------------------------------
The following information supplements that set forth in the
Fund's Prospectus under the headings "Purchase and Sale of Shares
- - - -- How To Buy Shares, How To Sell Shares, and Shareholder
Services."
GENERAL
Shares of the Fund are offered on a continuous basis at a
price equal to their net asset value plus an initial sales charge
at the time of purchase (the "initial sales charge alternative"),
with a contingent deferred sales charge (the "deferred sales
charge alternative"), or without any initial or contingent
deferred sales charge (the "asset-based sales charge
alternative"), as described below. Shares of the Fund are offered
on a continuous basis through (i) investment dealers that are
members of the National Association of Securities Dealers, Inc.
and have entered into selected dealer agreements with the
Principal Underwriter ("selected dealers"), (ii) depository
institutions and other financial intermediaries or their
affiliates, that have entered into selected agent agreements with
the Principal Underwriter ("selected agents"), or (iii) the
Principal Underwriter. The minimum for initial investments is
$250; subsequent investments (other than reinvestment of dividends
and capital gains distributions in shares) must be in the minimum
amount of $50. As described under "Shareholder Services," the
Fund offers an automatic investment program and a 403(b)(7)
retirement plan which permit investments of $25 or more. The
subscriber may use the Subscription Application found in the
Prospectus for his or her initial investment. Sales personnel of
selected dealers and agents distributing the Fund's shares may
receive differing compensation for selling Class A, Class B or
Class C shares.
Investors may purchase shares of the Fund in the United States
either through selected dealers or agents or directly through the
Principal Underwriter. Shares may also be sold in foreign
countries where permissible. The Fund may refuse any order for
the purchase of shares. The Fund reserves the right to suspend
the sale of the Fund's shares to the public in response to
conditions in the securities markets or for other reasons.
30
The public offering price of shares of the Fund is their net
asset value, plus, in the case of most purchases of Class A
shares, a sales charge which will vary depending on the purchase
alternative chosen by the investor and the amount of the purchase,
as shown in the table below under "Initial Sales Charge
Alternative--Class A Shares." On each Fund business day on which
a purchase or redemption order is received by the Fund and trading
in the types of securities in which the Fund invests might
materially affect the value of Fund shares, the per share net
asset value is computed in accordance with the Fund's Articles of
Incorporation and By-Laws as of the next close of regular trading
on the New York Stock Exchange (the "Exchange") (currently 4:00
p.m. New York time) by dividing the value of the Fund's total
assets, less its liabilities, by the total number of its shares
then outstanding. The respective per share net asset values of
the Class A, Class B and Class C shares are expected to be
substantially the same. Under certain circumstances, however, the
per share net asset values of the Class B and Class C shares may
be lower than the per share net asset value of the Class A shares
as a result of the daily expense accruals of the distribution and
transfer agency fees applicable with respect to the Class B and
Class C shares. Even under those circumstances, the per share net
asset values of the three classes eventually will tend to converge
immediately after the payment of dividends, which will differ by
approximately the amount of the expense accrual differential among
the classes. A Fund business day is any weekday, exclusive of
national holidays on which the Exchange is closed and Good Friday.
For purposes of this computation, the securities in the Fund are
valued 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 Directors believe would
accurately reflect fair market value.
The Fund will accept unconditional orders for shares of to be
executed at the public offering price equal to their net asset
value next determined (plus applicable Class A sales charges), as
described below. Orders received by the Principal Underwriter
prior to the close of regular trading on the Exchange on each day
the Exchange is open for trading are priced at the net asset value
computed as of the close of regular trading on the Exchange on
that day (plus applicable Class A sales charges). In the case of
orders for purchase of shares placed through selected dealers or
agents, the applicable public offering price will be the net asset
value as so determined, but only if the selected dealer or agent
receives the order prior to the close of regular trading on the
Exchange and transmits it to the Principal Underwriter prior to
its close of business that same day (normally 5:00 p.m. New York
time). The selected dealer or agent is responsible for
transmitting such orders by 5:00 p.m. If the selected dealer or
agent fails to do so, the investor's right to that day's closing
31
price must be settled between the investor and the selected dealer
or agent. If the selected dealer or agent receives the order
after the close of regular trading on the Exchange, the price will
be based on the net asset value determined as of the close of
regular trading on the Exchange on the next day it is open for
trading.
Following the initial purchase of Fund shares, a shareholder
may place orders to purchase additional shares by telephone if the
shareholder has completed the appropriate portion of the
Subscription Application or an "Autobuy" application obtained by
calling the "Literature" telephone number shown on the cover of
this Statement of Additional Information. 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. New York 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.
In addition to the discount or commission amount paid to
dealers or agents, the Principal Underwriter from time to time
pays additional cash bonuses or other incentives to dealers or
agents, including Equico Securities, Inc. an affiliate of the
Principal Underwriter, in connection with the sale of shares of
the Fund. Such additional amounts may be utilized, in whole or in
part, to provide additional compensation to registered
representatives who sell shares of the Fund. On some occasions,
such cash or other incentives will be conditioned upon the sale of
a specified minimum dollar amount of the shares of the Fund and/or
other Alliance Mutual Funds, as defined below, during a specific
period of time. On some occasions such cash or other incentives
may take the form of payment for attendance at seminars, meals,
sporting events or theater performance, or payment for travel,
lodging entertainment incurred in connection with travel by
persons associated with a dealer or agent and their immediate
family members to urban or resort locations within or outside the
United States. Such dealer or agent may elect to receive cash
incentives of equivalent amount in lieu of such payments.
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund issues three classes of shares: Class A shares are
sold to investors choosing the initial sales charge alternative,
Class B shares are sold to investors choosing the deferred sales
32
charge alternative, and Class C shares are sold to investors
choosing the asset-based sales charge alternative. The three
classes of shares each represent an interest in the same portfolio
of investments of the Fund, have the same rights and are identical
in all respects, except that (i) Class A shares bear the expense
of the initial sales charge (or contingent deferred sales charge,
when applicable) and Class B shares bear the expense of the
contingent deferred sales charge, (ii) Class B shares and Class C
shares each bear the expense of a higher distribution services fee
and, in the case of Class B shares, higher transfer agency costs,
(iii) each class has exclusive voting rights with respect to
provisions of the Rule 12b-1 Plan pursuant to which its
distribution services fee is paid which relates to a specific
class and other matters for which separate class voting is
appropriate under applicable law, provided that, if the Fund
submits to a vote of both the Class A shareholders and the Class B
shareholders an amendment to the Rule 12b-1 Plan that would
materially increase the amount to be paid thereunder with respect
to the Class A shares, the Class A shareholders and the Class B
shareholders will vote separately by Class, and (iv) only the
Class B shares are subject to a conversion feature. Each class
has different exchange privileges and certain different
shareholder service options available.
The alternative purchase arrangements permit an investor to
choose the method of purchasing shares that is most beneficial
given the amount of the purchase, the length of time the investor
expects to hold the shares, and other circumstances. Investors
should consider whether, during the anticipated life of their
investment in the Fund, the accumulated distribution services fee
and contingent deferred sales charges on Class B shares prior to
conversion, or the accumulated distribution services fee on
Class C shares, would be less than the initial sales charge and
accumulated distribution services fee on Class A shares purchased
at the same time, and to what extent such differential would be
offset by the higher return of Class A shares. Class A shares
will normally be more beneficial than Class B shares to the
investor who qualifies for reduced initial sales charges on
Class A shares, as described below. In this regard, the Principal
Underwriter will reject any order (except orders from certain
retirement plans) for more than $250,000 for Class B shares.
Class C shares will normally not be suitable for the investor who
qualifies to purchase Class A shares at net asset value. In
addition, the Principal Underwriter will reject any order for more
than $5,000,000 for Class C shares.
Class A shares are subject to a lower distribution services
fee and, accordingly, pay correspondingly higher dividends per
33
share than Class B shares or Class C shares. However, because
initial sales charges are deducted at the time of purchase, most
investors purchasing Class A shares would not have all their funds
invested initially and, therefore, would initially own fewer
shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended
period of time might consider purchasing Class A shares because
the accumulated continuing distribution charges on Class B shares
or Class C shares may exceed the initial sales charge on Class A
shares during the life of the investment. Again, however, such
investors must weigh this consideration against the fact that,
because of such initial sales charges, not all their funds will be
invested initially.
Other investors might determine, however, that it would be
more advantageous to purchase Class B shares or Class C shares in
order to have all their funds invested initially, although
remaining subject to higher continuing distribution charges and,
in the case of Class B shares, being subject to a contingent
deferred sales charge for a three-year period. For example, based
on current fees and expenses, an investor subject to the 4.25%
initial sales charge would have to hold his or her investment
approximately seven years for the Class C distribution services
fee to exceed the initial sales charge plus the accumulated
distribution services fee of Class A shares. In this example, an
investor intending to maintain his or her investment for a longer
period might consider purchasing Class A shares. This example
does not take into account the time value of money, which further
reduces the impact of the Class C distribution services fees on
the investment, fluctuations in net asset value or the effect of
different performance assumptions.
Those investors who prefer to have all of their funds invested
initially but may not wish to retain Fund shares for the three-
year period during which Class B shares are subject to a
contingent deferred sales charge may find it more advantageous to
purchase Class C shares.
The Directors of the Fund have determined that currently no
conflict of interest exists between or among the Class A, Class B
and Class C shares. On an ongoing basis, the Directors of the
Fund, pursuant to their fiduciary duties under the 1940 Act and
state laws, will seek to ensure that no such conflict arises.
During the Fund's fiscal periods ended December 31, 1994, 1993
and 1992, the aggregate amount of underwriting commission payable
with respect to shares of the Fund in each year was $1,906,578,
$5,910,718 and $14,447,705, respectively. Of that amount, the
Principal Underwriter, received $68,298, $44,509 and $177,685,
respectively, representing that portion of the sales charges paid
34
on shares of the Fund sold during the year which was not reallowed
to selected dealers (and was, accordingly, retained by the
Principal Underwriter).
During the fiscal period ended December 31, 1994, the
Principal Underwriter received $3,792,887 in contingent deferred
sales charges with respect to Class B shares redemptions.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The public offering price of Class A shares for purchasers
choosing the initial sales charge alternative is the net asset
value plus a sales charge, as set forth below.
INITIAL SALES CHARGE
Discount or
Commission
As % of to Dealers
As % of the or Agents
Net Public As % of
Amount of Amount Offering Offering
Purchase Invested Price Price
_________ ________ ________ __________
Less than
$100,000 4.44% 4.25% 4.00%
$100,000 but
less than
250,000 3.36 3.25 3.00
250,000 but
less than
500,000 2.30 2.25 2.00
500,000 but
less than
1,000,000 1.78 1.75 1.50
- - - --------------------
There is no initial sales charge on transactions of $1,000,000 or
more.
With respect to purchases of $1,000,000 or more, Class A
shares redeemed within one year of purchase will be subject to a
contingent deferred sales charge equal to 1% of the lesser of the
35
cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no sales charge will be imposed
on increases in net asset value above the initial purchase price.
In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions. The
contingent deferred sales charge on Class A shares will be waived
on certain redemptions, and such charge will be applied to
redemptions of shares by shareholders who hold both Class A and
Class B shares, as described below under "Deferred Sales Charge
Alternative--Class B Shares." Proceeds from the contingent
deferred sales charge on Class A shares are paid to the Principal
Underwriter and are used by the Principal Underwriter to defray
the expenses of the Principal Underwriter related to providing
distribution-related services to the Fund in connection with the
sales of Class A shares, such as the payment of compensation to
selected dealers and agents for selling Class A Shares. With
respect to purchases of $1,000,000 or more made through selected
dealers or agents, the Adviser may, pursuant to the Agreement
described above, pay such dealers or agents from its own resources
a fee of up to 1% of the amount invested to compensate such
dealers or agents for their distribution assistance in connection
with such purchases.
Shares issued pursuant to the automatic reinvestment of income
dividends or capital gains distributions are not subject to any
sales charges. The Fund receives the entire net asset value of
its Class A shares sold to investors. The Principal Underwriter's
commission is the sales charge shown above less any applicable
discount or commission "reallowed" to selected dealers and agents.
The Principal Underwriter will reallow discounts to selected
dealers and agents in the amounts indicated in the table above.
The Principal Underwriter may, however, elect to reallow the
entire sales charge to selected dealers and agents for all sales
with respect to which orders are placed with the Principal
Underwriter. A selected dealer who receives reallowance in excess
of 90% of such a sales charge may be deemed to be an "underwriter"
under the Securities Act of 1933, as amended.
Set forth below is an example of the method of computing the
offering price of the Class A shares. The example assumes a
purchase of Class A shares of the Fund aggregating less than
$100,000 subject to the schedule of sales charges set forth in the
Prospectus at a price based upon the net asset value of Class A
shares of the Fund on December 31, 1994.
36
Net Asset Value per Class A Share
at December 31, 1994 $8.13
Per Share Sales Charge - 4.25%
of offering price (4.44% .36
of net asset value per share) ----
Class A Per Share Offering Price $8.49
to the Public =====
An investor choosing the initial sales charge alternative may
under certain circumstances be entitled to pay (i) no initial
sales charge (but be subject in most cases to a contingent
deferred sales charge) or (ii) a reduced initial sales charge.
The circumstances under which an investor may pay a reduced
initial sales charge or no initial sales charge are described
below.
COMBINED PURCHASE PRIVILEGE. Certain persons may qualify for
the sales charge reductions indicated in the schedule of such
charges above by combining purchases of shares of the Fund into a
single "purchase," if the resulting "purchase" totals at least
$100,000. The term "purchase" refers to: (i) a single purchase by
an individual, or to concurrent purchases, which in the aggregate
are at least equal to the prescribed amounts, by an individual,
his or her spouse and their children under the age of 21 years
purchasing shares of the Fund for his, her or their own
account(s); (ii) a single purchase by a trustee or other fiduciary
purchasing shares for a single trust, estate or single fiduciary
account although more than one beneficiary is involved; or (iii) a
single purchase for the employee benefit plans of a single
employer. The term "purchase" also includes purchases by any
"company," as the term is defined in the 1940 Act, but does not
include purchases by any such company which has not been in
existence for at least six months or which has no purpose other
than the purchase of shares of the Fund or shares of other
registered investment companies at a discount. The term
"purchase" does not include purchases by any group of individuals
whose sole organizational nexus is that the participants therein
are credit card holders of a company, policy holders of an
insurance company, customers of either a bank or broker-dealer or
clients of an investment adviser. A "purchase" may also include
shares, purchased at the same time through a single selected
dealer or agent, of any other "Alliance Mutual Fund." Currently,
the Alliance Mutual Funds include:
37
AFD Exchange Reserves
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
Alliance Bond Fund, Inc.
-Corporate Bond Portfolio
-U.S. Government Portfolio
Alliance Counterpoint Fund
Alliance Developing Markets Fund, Inc.
Alliance Global Dollar Government Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Growth and Income Fund, Inc.
Alliance Income Builder Fund, Inc.
Alliance International Fund
Alliance Mortgage Securities Income Fund, Inc.
Alliance Mortgage Strategy Trust, Inc.
Alliance Multi-Market Strategy Trust, Inc.
Alliance Municipal Income Fund II
-Arizona Portfolio
-Florida Portfolio
-Massachusetts Portfolio
-Michigan Portfolio
-Minnesota Portfolio
-New Jersey Portfolio
-Ohio Portfolio
-Pennsylvania Portfolio
-Virginia Portfolio
Alliance Municipal Income Fund, Inc.
-California Portfolio
-Insured California Portfolio
-Insured National Portfolio
-National Portfolio
-New York Portfolio
Alliance New Europe Fund, Inc.
Alliance North American Government Income Trust, Inc.
Alliance Premier Growth Fund, Inc.
Alliance Quasar Fund, Inc.
Alliance Short-Term Multi-Market Trust, Inc.
Alliance Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
Alliance World Income Trust, Inc.
Alliance Worldwide Privatization Fund, Inc.
The Alliance Fund, Inc.
The Alliance Portfolios
-Alliance Growth Fund
-Alliance Conservative Investors Fund
-Alliance Growth Investors Fund
-Alliance Strategic Balanced Fund
-Alliance Short-Term U.S. Government Fund
38
The Hudson River Trust
Prospectuses for the Alliance Mutual Funds may be obtained
without charge by contacting Alliance Fund Services, Inc. at the
address or the "Literature" telephone number shown on the front
cover of this Statement of Additional Information.
CUMULATIVE QUANTITY DISCOUNT (RIGHT OF ACCUMULATION). An
investor's purchase of additional Class A shares of the Fund may
qualify for a Cumulative Quantity Discount. The applicable sales
charge will be based on the total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on the
previous day) of (a) all Class A, Class B and
Class C shares of the Fund held by the investor and
(b) all shares of any other Alliance Mutual Fund
held by the investor; and
(iii) the net asset value of all shares described in
paragraph (ii) owned by another shareholder eligible
to combine his or her purchase with that of the
investor into a single "purchase" (see above).
For example, if an investor owned shares of an Alliance Mutual
Fund worth $200,000 at their then current net asset value and,
subsequently, purchased Class A shares of the Fund worth an
additional $100,000, the initial sales charge for the $100,000
purchase would be at the 2.25% rate applicable to a single
$300,000 purchase of shares of the Fund, rather than the 3.25%
rate.
To qualify for the Combined Purchase Privilege or to obtain
the Cumulative Quantity Discount on a purchase through a selected
dealer or agent, the investor or selected dealer or agent must
provide the Principal Underwriter with sufficient information to
verify that each purchase qualifies for the privilege or discount.
STATEMENT OF INTENTION. Class A investors may also obtain the
reduced initial sales charges shown in the table above by means of
a written Statement of Intention, which expresses the investor's
intention to invest not less than $100,000 within a period of 13
months in Class A shares (or Class A, Class B and/or Class C
shares) of the Fund or any other Alliance Mutual Fund. Each
purchase of shares under a Statement of Intention will be made at
the public offering price or prices applicable at the time of such
39
purchase to a single transaction of the dollar amount indicated in
the Statement of Intention. At the investor's option, a Statement
of Intention may include purchases of shares of the Fund or any
other Alliance Mutual Fund made not more than 90 days prior to the
date that the investor signs the Statement of Intention; however,
the 13-month period during which the Statement of Intention is in
effect will begin on the date of the earliest purchase to be
included.
Investors qualifying for the Combined Purchase Privilege
described above may purchase shares of the Alliance Mutual Funds
under a single Statement of Intention. For example, if at the
time an investor signs a Statement of Intention to invest at least
$100,000 in Class A shares of the Fund, the investor and the
investor's spouse each purchase shares of the Fund worth $20,000
(for a total of $40,000), it will be necessary to invest only a
total of $60,000 during the following 13 months in shares of the
Fund or any other Alliance Mutual Fund, to qualify for the 3.25%
initial sales charge on the total amount being invested (the
initial sales charge applicable to an investment of $100,000).
The Statement of Intention is not a binding obligation upon
the investor to purchase the full amount indicated. The minimum
initial investment under a Statement of Intention is 5% of such
amount. Shares purchased with the first 5% of such amount will be
held in escrow (while remaining registered in the name of the
investor) to secure payment of the higher initial sales charge
applicable to the shares actually purchased if the full amount
indicated is not purchased, and such escrowed shares will be
involuntarily redeemed to pay the additional initial sales charge,
if necessary. Dividends on escrowed shares, whether paid in cash
or reinvested in additional Fund shares, are not subject to
escrow. When the full amount indicated has been purchased, the
escrow will be released. To the extent that an investor purchases
more than the dollar amount indicated on the Statement of
Intention and qualifies for a further reduced initial sales
charge, the sales charge will be adjusted for the entire amount
purchased at the end of the 13-month period. The difference in
the initial sales charge will be used to purchase additional
shares of the Fund subject to the rate of the initial sales charge
applicable to the actual amount of the aggregate purchases.
Investors wishing to enter into a Statement of Intention in
conjunction with their initial investment in Class A shares of the
Fund should complete the appropriate portion of the Subscription
Application found in the Prospectus while current Class A
40
shareholders desiring to do so can obtain a form of Statement of
Intention by contacting Alliance Fund Services, Inc. at the
address or telephone numbers shown on the cover of this Statement
of Additional Information.
CERTAIN RETIREMENT PLANS. Multiple participant payroll
deduction retirement plans may also purchase shares of the Fund or
any other Alliance Mutual Fund at a reduced initial sales charge
on a monthly basis during the 13-month period following such a
plan's initial purchase. The initial sales charge applicable to
such initial purchase of shares of the Fund will be that normally
applicable, under the schedule of the initial sales charges set
forth in this Statement of Additional Information, to an
investment 13 times larger than such initial purchase. The
initial sales charge applicable to each succeeding monthly
purchase will be that normally applicable, under such schedule, to
an investment equal to the sum of (i) the current month's purchase
multiplied by the number of months (including the current month)
remaining in the 13-month period, and (ii) the total purchase
previously made during the 13-month period. Sales charges
previously paid during such period will not be retroactively
adjusted on the basis of later purchases.
REINSTATEMENT PRIVILEGE. A shareholder who has caused any or
all of his or her Class A shares of the Fund to be redeemed or
repurchased may reinvest all or any portion of the redemption or
repurchase proceeds in Class A shares of the Fund at net asset
value without any sales charge, provided that such reinvestment is
made within 120 calendar days after the redemption or repurchase
date. Shares are sold to a reinvesting shareholder at the net
asset value next determined as described above. A reinstatement
pursuant to this privilege will not cancel the redemption or
repurchase transaction; therefore, any gain or loss so realized
will be recognized for Federal tax purposes except that no loss
will be recognized to the extent that the proceeds are reinvested
in shares of the Fund. The reinstatement privilege may be used by
the shareholder only once, irrespective of the number of shares
redeemed or repurchased, except that the privilege may be used
without limit in connection with transactions whose sole purpose
is to transfer a shareholder's interest in the Fund to his or her
individual retirement account or other qualified retirement plan
account. Investors may exercise the reinstatement privilege by
written request sent to the Fund at the address shown on the cover
of this Statement of Additional Information.
41
SALES AT NET ASSET VALUE. The Fund may sell its Class A
shares at net asset value (i.e., without an initial sales charge)
and without a contingent deferred sales charge to certain
categories of investors including: (i) investment advisory clients
of the Adviser or its affiliates; (ii) officers and present or
former Directors or Trustees of the Fund; present or former
directors and trustees of other investment companies managed by
the Adviser; present or retired full-time employees of the
Adviser; officers, directors and present or retired full-time
employees of ACMC, the Principal Underwriter, Alliance Fund
Services, Inc. and their affiliates; officers, directors and
present and full-time employees of selected dealers or agents; or
the spouse, sibling, direct ancestor or direct descendant
(collectively "relatives") of any such person; or any trust,
individual retirement account or retirement plan account for the
benefit of any such person or relative; or the estate of any such
person or relative, if such shares are purchased for investment
purposes (such shares may not be resold except to the Fund);
(iii) certain employee benefit plans for employees of the Adviser,
the Principal Underwriter, Alliance Fund Services, Inc. and their
affiliates; and (iv) persons participating in a fee based program,
sponsored and maintained by a registered broker-dealer and
approved by the Principal Underwriter, pursuant to which persons
pay an asset-based fee to such or its affiliate or agent, for
services in the nature of investment advisory or administrative
services.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Investors choosing the deferred sales charge alternative
purchase Class B shares at the public offering price equal to the
net asset value per share of the Class B shares on the date of
purchase without the imposition of a sales charge at the time of
purchase. The Class B shares are sold without an initial sales
charge so that the Fund will receive the full amount of the
investor's purchase payment.
Proceeds from the contingent deferred sales charge on the
Class B shares are paid to the Principal Underwriter and are used
by the Principal Underwriter to defray the expenses of the
Principal Underwriter related to providing distribution-related
services to the Fund in connection with the sale of the Class B
shares, such as the payment of compensation to selected dealers
and agents for selling Class B shares. The combination of the
contingent deferred sales charge and the distribution services fee
enables the Fund to sell the Class B shares without a sales charge
being deducted at the time of purchase. The higher distribution
services fee incurred by Class B shares will cause such shares to
42
have a higher expense ratio and to pay lower dividends than those
related to Class A shares.
CONTINGENT DEFERRED SALES CHARGE. Class B shares which are
redeemed within three years of purchase will be subject to a
contingent deferred sales charge at the rates set forth below
charged as a percentage of the dollar amount subject thereto. The
charge will be assessed on an amount equal to the lesser of the
cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no sales charge will be imposed
on increases in net asset value above the initial purchase price.
In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
To illustrate, assume an investor purchased 100 shares at $10
per share (at a cost of $1,000) and in the second year after
purchase, the net asset value per share is $12 and, during such
time, the investor has acquired 10 additional shares upon dividend
reinvestment. If at such time the investor makes his or her first
redemption of 50 Class B shares (proceeds of $600), 10 Class B
shares will not be subject to charge because of dividend
reinvestment. With respect to the remaining 40 Class B shares,
the charge is applied only to the original cost of $10 per share
and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged at
a rate of 2.0% (the applicable rate in the second year after
purchase as set forth below).
The amount of the contingent deferred sales charge, if any,
will vary depending on the number of years from the time of
payment for the purchase of Class B shares until the time of
redemption of such shares.
Contingent Deferred
Sales Charge as a %
of Dollar Amount
Year Since Purchase Subject to Charge
First 3.0%
Second 2.0%
Third 1.0%
Fourth None
In determining the contingent deferred sales charge applicable
to a redemption, it will be assumed that the redemption is first
of any shares in the shareholder's Fund account that are not
subject to a contingent deferred sales charge, second of Class B
43
shares held for over three years and third of Class A shares that
are subject to a contingent deferred sales charge held shortest
during the one-year period during which such shares are subject to
the sales charge. When Class B shares acquired in an exchange are
redeemed, the applicable contingent deferred sales charge schedule
will be the schedule that applied to Class B shares of the
Alliance Mutual Fund originally purchased by the shareholder at
the time of their purchase.
The contingent deferred sales charges on Class A and Class B
shares are waived on redemptions of shares (i) following the death
or disability, as defined in the Internal Revenue Code of 1986, as
amended (the "Code"), of a shareholder, (ii) to the extent that
the redemption represents a minimum required distribution from an
individual retirement account or other retirement plan to a
shareholder who has attained the age of 70-1/2 or (iii) that had
been purchased by present or former Directors or Trustees of the
Fund, by the relative of any such person, by any trust, individual
retirement account or retirement plan account for the benefit of
any such person or relative, or by the estate of any such person
or relative.
CONVERSION FEATURE. At the end of the period ending six years
after the end of the calendar month in which the shareholder's
purchase order was accepted, Class B shares will automatically
convert to Class A shares and will no longer be subject to a
higher distribution services fee. Such conversion will be on the
basis of the relative net asset values of the two classes, without
the imposition of any sales load, fee or other charge. The
purpose of the conversion feature is to reduce the distribution
services fee paid by holders of Class B shares that have been
outstanding long enough for the Principal Underwriter to have been
compensated for distribution expenses incurred in the sale of such
shares.
For purposes of conversion to Class A, Class B shares
purchased through the reinvestment of dividends and distributions
paid in respect of Class B shares in a shareholder's account will
be considered to be held in a separate sub-account. Each time any
Class B shares in the shareholder's account (other than those in
the sub-account) convert to Class A, an equal pro-rata portion of
the Class B shares in the sub-account will also convert to
Class A.
The conversion of Class B shares to Class A shares is subject
to the continuing availability of an opinion of counsel to the
effect that (i) the assessment of the higher distribution services
fee and transfer agency costs with respect to Class B shares does
44
not result in the Fund's dividends or distributions constituting
"preferential dividends" under the Code, and (ii) the conversion
of Class B shares to Class A shares does not constitute a taxable
event under federal income tax law. The conversion of Class B
shares to Class A shares may be suspended if such an opinion is no
longer available at the time such conversion is to occur. In that
event, no further conversions of Class B shares would occur, and
shares might continue to be subject to the higher distribution
services fee for an indefinite period which may extend beyond the
period ending six years after the end of the calendar month in
which the shareholder's purchase order was accepted.
ASSET-BASED SALES CHARGE ALTERNATIVE--CLASS C SHARES
Investors choosing the asset-based sales charge alternative
purchase Class C shares at the public offering price equal to the
net asset value per share of the Class C shares on the date of
purchase without the imposition of a sales charge either at the
time of purchase or upon redemption. Class C shares are sold
without an initial sales charge so that the Fund will receive the
full amount of the investor's purchase payment and without a
contingent deferred sales charge so that the investor will receive
as proceeds upon redemption the entire net asset value of his or
her Class C shares. The Class C distribution services fee enables
the Fund to sell Class C shares without either an initial or
contingent deferred sales charge. Class C shares do not convert
to any other class of shares of the Fund and incur higher
distribution services fees than Class A shares, and will thus have
a higher expense ratio and pay correspondingly lower dividends
than Class A shares.
- - - ------------------------------------------------------------------
REDEMPTION AND REPURCHASE OF SHARES
- - - ------------------------------------------------------------------
The following information supplements that set forth in the
Fund's Prospectus under the heading "Purchase and Sale of
Share--How to Sell Shares."
REDEMPTION
Subject only to the limitations described below, the Fund's
Articles of Incorporation require that the Fund redeem the shares
of the Fund tendered to it, as described below, at a redemption
price equal to their net asset value as next computed following
the receipt of shares tendered for redemption in proper form.
Except for any contingent deferred sales charge which may be
applicable to Class A shares or Class B shares, there is no
redemption charge. Payment of the redemption price will be made
45
within seven days after the Fund's receipt of such tender for
redemption.
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 New York Stock Exchange (the "Exchange") is closed
(other than customary weekend and holiday closings) or during
which the Commission determines that trading thereon is
restricted, or for any period during which an emergency (as
determined by the Commission) exists as a result of which disposal
by the Fund of securities owned by it is not reasonably
practicable or as a result of which it is not reasonably
practicable for the Fund fairly to determine the value of its net
assets, or for such other periods as the Commission may by order
permit for the protection of security holders of the Fund.
Payment of the redemption price will be made in cash. The
value of a shareholder's shares on redemption or repurchase may be
more or less than the cost of such shares to the shareholder,
depending upon the market value of the Fund's portfolio securities
at the time of such redemption or repurchase. Redemption proceeds
on Class A shares and Class B shares will reflect the deduction of
the contingent deferred sales charge, if any. Payment (either in
cash or in portfolio securities) received by a shareholder upon
redemption or repurchase of his or her shares, assuming the shares
constitute capital assets in his or her hands, will result in
long-term or short-term capital gains (or loss) depending upon the
shareholder's holding period and basis in respect of the shares
redeemed.
To redeem shares of the Fund for which no stock certificates
have been issued, the registered owner or owners should forward a
letter to the Fund containing a request for redemption. The
signature or signatures on the letter must be guaranteed by an
institution that is an "eligible guarantor" as defined in Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended.
TELEPHONE REDEMPTION BY ELECTRONIC FUNDS TRANSFER. Requests
for redemption of shares for which no stock certificates have been
issued can also be made by telephone at (800) 221-5672 by a
shareholder who has completed the appropriate portion of the
Subscription Application or, in the case of an existing
shareholder, an "Autosell" application obtained from Alliance Fund
Services, Inc. A telephone redemption request must be for at
least $500 and may not exceed $100,000, and must be made between
9:00 a.m. and 4:00 p.m. New York time on a Fund business day as
46
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. Except as noted below, each
Fund shareholder is eligible to request redemption, once in any
30-day period, of Fund shares by telephone at (800) 221-5672
before 4:00 p.m. New York time on a Fund business day in an amount
not exceeding $25,000. Proceeds of such redemptions are remitted
by check to the shareholder's address of record. 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) purchased within 15 calendar days
prior to the redemption request, (iv) held by a shareholder who
has changed his or her address of record within the preceding 30
calendar days or (v) held in any retirement plan account. 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.
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. Neither the Fund nor the Adviser, the
Principal Underwriter or Alliance Fund Services, Inc. will be
responsible for the authenticity of telephone requests for
redemptions that the Fund reasonably believes to be genuine. The
Fund will employ reasonable procedures in order to verify that
telephone requests for redemptions are genuine, including, among
others, recording such telephone instructions and causing written
confirmations of the resulting transactions to be sent to
shareholders. If the Fund did not employ such procedures, it
could be liable for losses arising from unauthorized or fraudulent
telephone instructions. Selected dealers or agents may charge a
commission for handling telephone requests for redemptions.
To redeem shares of the Fund represented by stock
certificates, the investor should forward the appropriate stock
certificate or certificates, endorsed in blank or with blank stock
powers attached, to the Fund with the request that the shares
represented thereby, or a specified portion thereof, be redeemed.
The stock assignment form on the reverse side of each stock
47
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.
REPURCHASE
The Fund may repurchase shares through the Principal
Underwriter or selected dealers or agents. The repurchase price
will be the net asset value next determined after the Principal
Underwriter receives the request (less the contingent deferred
sales charge, if any, with respect to the Class A shares and
Class B shares), except that requests placed through selected
dealers or agents before the close of regular trading on the
Exchange on any day will be executed at the net asset value
determined as of such close of regular trading on that day if
received by the Principal Underwriter prior to its close of
business on that day (normally 5:00 p.m. New York time). The
selected dealer or agent is responsible for transmitting the
request to the Principal Underwriter by 5:00 p.m. If the selected
dealer or agent fails to do so, the shareholder's right to receive
that day's closing price must be settled between the shareholder
and the dealer or agent. A shareholder may offer shares of the
Fund to the Principal Underwriter either directly or through a
selected dealer or agent. Neither the Fund nor the Principal
Underwriter charges a fee or commission in connection with the
repurchase of shares (except for the contingent deferred sales
charge, if any, with respect to Class A shares and Class B
shares). Normally, if shares of the Fund are offered through a
selected dealer or agent, the repurchase is settled by the
shareholder as an ordinary transaction with or through the
selected dealer or agent, who may charge the shareholder for this
service. The repurchase of shares of the Fund as described above
is a voluntary service of the Fund and the Fund may suspend or
terminate this practice at any time.
GENERAL
The Fund reserves the right to close out an account that
through redemption has remained below $200 for at least 60 days
after at least 30 days' written notice to the shareholder
subsequent to such period. No contingent deferred sales charge
will be deducted from the proceeds of this redemption. In the
case of a redemption or repurchase of shares of the Fund recently
purchased by check, redemption proceeds will not be made available
48
until the Fund is reasonably assured that the check has cleared,
normally up to 15 calendar days following the purchase date.
- - - ------------------------------------------------------------------
SHAREHOLDER SERVICES
- - - ------------------------------------------------------------------
The following information supplements that set forth in the
Fund's Prospectus under the heading "Purchase and Sale of Shares
- - - --Shareholder Services."
SHAREHOLDER SERVICES APPLICABLE TO ALL THREE CLASSES
AUTOMATIC INVESTMENT PROGRAM
Investors may purchase shares of the Fund through an automatic
investment program utilizing "pre-authorized check" drafts 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. Drafts may be made in paper form or, if
the investor's bank is a member of the NACHA, in electronic form.
If made in paper form, the draft is normally made on the 20th day
of each month, or the next business day thereafter. If made in
electronic form, drafts can be made on or about a date each month
selected by the shareholder. Investors wishing to establish an
automatic investment program in connection with their initial
investment should complete the appropriate portion of the
Subscription Application found in the Prospectus. Current
shareholders should contact Alliance Fund Services, Inc. at the
address or telephone numbers shown on the cover of this Statement
of Additional Information to establish an automatic investment
program.
EXCHANGE PRIVILEGE
Class A shareholders of the Fund can exchange their Class A
shares for Class A shares of any other Alliance Mutual Fund that
offers Class A shares and for shares of Alliance World Income
Trust, Inc. without the payment of any sales or service charges.
For purposes of applying applicable contingent deferred sales
charge upon the newly acquired Class A shares, the period of time
the Class A shares surrendered in the exchange have been held is
added to the period of time the newly acquired shares have been
held. Prospectuses for each Alliance Mutual Fund may be obtained
by contacting Alliance Fund Services, Inc. at the address shown on
the cover of this Statement of Additional Information or by
49
telephone at (800) 227-4618 or, in Illinois, (800) 227-4170.
Class B shareholders of the Fund can exchange their Class B
shares ("original Class B shares") for Class B shares of any other
Alliance Mutual Fund that offers Class B shares ("new Class B
shares") without the payment of any contingent deferred sales or
service charges. For purposes of computing both the time
remaining before the new Class B shares convert to Class A shares
of that fund and the contingent deferred sales charge payable upon
disposition of the new Class B shares, the period of time for
which the original Class B shares have been held is added to the
period of time for which the new Class B shares have been held.
After an exchange, new Class B shares will automatically convert
into Class A shares in accordance with the conversion schedule
applicable to the Alliance Mutual Fund Class B shares originally
purchased for cash, and when redemption occurs, the contingent
deferred sales charge schedule applicable to the Class B shares
originally purchased for cash is applied.
Class C shareholders of the Fund can exchange their Class C
shares for Class C shares of any other Alliance Mutual Fund that
offers Class C shares.
All exchanges are subject to the minimum investment
requirements and any other applicable terms set forth in the
Prospectus for the Alliance Mutual Fund whose shares are being
acquired. An exchange is effected through the redemption of the
shares tendered for exchange and the purchase of shares being
acquired at their respective net asset values as next determined
following receipt by the Alliance Mutual Fund whose shares are
being exchanged of (i) proper instructions and all necessary
supporting documents as described in such fund's Prospectus, or
(ii) a telephone request for such exchange in accordance with the
procedures set forth in the following paragraph. Exchanges
involving the redemption of shares recently purchased by check
will be permitted only after the Alliance Mutual Fund whose shares
have been tendered for exchange is reasonably assured that the
check has cleared, normally up to 15 calendar days following the
purchase date. Exchanges of shares of Alliance Mutual Funds will
generally result in the realization of a capital gain or loss for
Federal income tax purposes.
Each Fund shareholder, and the shareholder's selected dealer
or agent, are authorized to make telephone requests for exchanges
50
unless Alliance Fund Services, Inc., receives written instruction
to the contrary from the shareholder, or the shareholder declines
the privilege by checking the appropriate box on the Subscription
Application found in the Prospectus. Such telephone requests
cannot be accepted with respect to shares then represented by
stock certificates. Shares acquired pursuant to a telephone
request for exchange will be held under the same account
registration as the shares redeemed through such exchange.
Eligible shareholders desiring to make an exchange should
telephone Alliance Fund Services, Inc. with their account number
and other details of the exchange, at (800) 221-5672 between 9:00
a.m. and 4:00 p.m., New York time, on a Fund business day as
defined above. Telephone requests for exchange received before
4:00 p.m. New York time on a Fund business day will be processed
as of the close of business on that day. During periods of
drastic economic or market developments, such as the market break
of October 1987, it is possible that shareholders would have
difficulty in reaching Alliance Fund Services, Inc. by telephone
(although no such difficulty was apparent at any time in
connection with the 1987 market break). If a shareholder were to
experience such difficulty, the shareho&der 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.
Neither the Alliance Funds nor the Adviser, the Principal
Underwriter or Alliance Fund Services, Inc. will be responsible
for the authenticity of telephone requests for exchanges that the
Fund reasonably believes to be genuine. The Fund will employ
reasonable procedures in order to verify that telephone requests
for exchanges are genuine, including, among others, recording such
telephone instructions and causing written confirmations of the
resulting transactions to be sent to shareholders. If the Fund
did not employ such procedures, it could be liable for losses
arising from unauthorized or fraudulent telephone instructions.
Selected dealers or agents 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.
51
RETIREMENT PLANS
The Fund may be a suitable investment vehicle for part or all
of the assets held in various types of retirement plans, such as
those listed below. The Fund has available forms of such plans
pursuant to which investments can be made in the Fund and other
Alliance Mutual Funds. Persons desiring information concerning
these plans should contact Alliance Fund Services, Inc. at the
"Literature" telephone number on the cover of this Prospectus, or
write to:
Alliance Fund Services, Inc.
Retirement Plans
P.O. Box 1520
Secaucus, N.J. 07096-1520
INDIVIDUAL RETIREMENT ACCOUNT ("IRA"). Individuals who
receive compensation, including earnings from self-employment, are
entitled to establish and make contributions to an IRA. Taxation
of the income and gains paid to an IRA by the Fund 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. Qualified plan
may elect to make their initial investments in shares of the
Alliance Mutual Funds through the Alliance Premier Retirement
Program, which is a qualified plan program available through
certain selected dealers and agents and to qualified plans
established using the forms available from the Fund.
If the aggregate net asset value of shares of the Alliance
Mutual Funds held by the qualified plan reaches $5 million on or
before December 15 in any year, all Class B and C shares of the
Fund held by such plan can be exchanged at the Plan's request,
without any sales charge, for Class A shares of such Fund.
SIMPLIFIED EMPLOYEE PENSION PLAN ("SEP"). Sole proprietors,
partnerships and corporations may sponsor a SEP under which they
52
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 The Equitable Life Assurance Society of the United
States, which serves as custodian or trustee under the retirement
plan prototype forms available from the Fund, charges certain
nominal fees for establishing an account and for annual
maintenance. A portion of these fees is remitted to Alliance Fund
Services, Inc. as compensation for its services to the retirement
plan accounts maintained with the Fund.
Distributions from retirement plans are subject to certain
Code requirements in addition to normal redemption procedures.
For additional information please contact Alliance Fund Services,
Inc.
SYSTEMATIC WITHDRAWAL PLAN
Any shareholder who owns or purchases shares of the Fund
having a current net asset value of at least $4,000 (for quarterly
or less frequent payments), $5,000 (for bi-monthly payments) or
$10,000 (for monthly payments) may establish a systematic
withdrawal plan under which the shareholder will periodically
receive a payment in a stated amount of not less than $50 on a
selected date. Systematic withdrawal plan participants must elect
to have their dividends and distributions from the Fund
automatically reinvested in additional shares of the Fund.
Shares of the Fund owned by a participant in the Fund's
systematic withdrawal plan will be redeemed as necessary to meet
withdrawal payments and such withdrawal payments will be subject
to any taxes applicable to redemptions. See "Dividends,
Distributions and Taxes -- Sales and Redemptions." Shares
acquired with reinvested dividends and distributions will be
liquidated first to provide such withdrawal payments and
thereafter other shares will be liquidated to the extent
necessary, and depending upon the amount withdrawn, the investor's
principal may be depleted. A systematic withdrawal plan may be
terminated at any time by the shareholder or the Fund.
Withdrawal payments will not automatically end when a
shareholder's account reaches a certain minimum level. Therefore,
53
redemptions of shares under the plan may reduce or even liquidate
a shareholder's account and may subject the shareholder to the
Fund's involuntary redemption provisions. See "Redemption and
Repurchase of Shares -- General." Purchases of additional shares
concurrently with withdrawals are undesirable because of sales
charges when purchases are made. While an occasional lump-sum
investment may be made by a shareholder of Class A shares who is
maintaining a systematic withdrawal plan, such investment should
normally be an amount equivalent to three times the annual
withdrawal or $5,000, whichever is less.
For Class A shareholders, Class B shareholders that purchased
their Class B shares under a retirement plan and Class C
shareholders, payments under a systematic withdrawal plan may be
made by check or electronically via the Automated Clearing House
("ACH") network. Investors wishing to establish a systematic
withdrawal plan in conjunction with their initial investment in
shares of the Fund should complete the appropriate portion of the
Subscription Application found in the Prospectus, while current
Fund shareholders desiring to do so can obtain an application form
by contacting Alliance Fund Services, Inc. at the address or the
"Literature" telephone number shown on the cover of this Statement
of Additional Information.
DIVIDEND DIRECTION PLAN
A shareholder who already maintains, in addition to his or her
Class A, Class B or Class C Fund account, a Class A, Class B or
Class C account with one or more other Alliance Mutual Funds may
direct that income dividends and/or capital gains paid on his or
her Class A, Class B or Class C Fund shares be automatically
reinvested, in any amount, without the payment of any sales or
service charges, in shares of the same class of such other
Alliance Mutual Fund(s). Further information can be obtained by
contacting Alliance Fund Services, Inc. at the address or the
"Literature" telephone number shown on the cover of this Statement
of Additional Information. Investors wishing to establish a
dividend direction plan in connection with their initial
investment should complete the appropriate section of the
Subscription Application found in the Prospectus. Current
shareholders should contact Alliance Fund Services, Inc. to
establish a dividend direction plan.
STATEMENTS AND REPORTS
Each shareholder of the Fund receives semi-annual and annual
reports which include a portfolio of investments, financial
statements and, in the case of the annual report, the report of
the Fund's independent auditors, Ernst & Young LLP, as well as a
monthly cumulative dividend statement and a confirmation of each
purchase and redemption. By contacting his or her broker or
54
Alliance Fund Services, Inc., a shareholder can arrange for copies
of his or her account statements to be sent to another person.
SHAREHOLDER SERVICES APPLICABLE TO
CLASS A AND CLASS C SHAREHOLDERS ONLY
CHECKWRITING
A new Class A or Class C investor may fill out the Signature
Card which is included in the Prospectus to authorize the Fund to
arrange for a checkwriting service through State Street Bank and
Trust Company (the "Bank") to draw against Class A or Class C
shares of the Fund redeemed from the investor's account. Under
this service, checks may be made payable to any payee in any
amount not less than $500 and not more than 90% of the net asset
value of the Class A or Class C shares in the investor's account
(excluding for this purpose the current month's accumulated
dividends and shares for which certificates have been issued). A
Class A or Class C shareholder wishing to establish this
checkwriting service subsequent to the opening of his or her Fund
account should contact the Fund by telephone or mail.
Corporations, fiduciaries and institutional investors are required
to furnish a certified resolution or other evidence of
authorization. This checkwriting service will be subject to the
Bank's customary rules and regulations governing checking
accounts, and the Fund and the Bank each reserve the right to
change or suspend the checkwriting service. There is no charge to
the shareholder for the initiation and maintenance of this service
or for the clearance of any checks.
When a check is presented to the Bank for payment, the Bank,
as the shareholder's agent, causes the Fund to redeem, at the net
asset value next determined, a sufficient number of full and
fractional shares of the Fund in the shareholder's account to
cover the check. Because the level of net assets in a
shareholder's account constantly changes due, among various
factors, to market fluctuations, a shareholder should not attempt
to close his or her account by use of a check. In this regard,
the Bank has the right to return checks (marked "insufficient
funds") unpaid to the presenting bank if the amount of the check
exceeds 90% of the assets in the account. Canceled (paid) checks
are returned to the shareholder. The checkwriting service enables
the shareholder to receive the daily dividends declared on the
shares to be redeemed until the day that the check is presented to
the Bank for payment.
55
- - - ------------------------------------------------------------------
NET ASSET VALUE
- - - ------------------------------------------------------------------
Securities, including put and call options, which are traded
over-the-counter and on a national securities exchange will be
valued according to the broadest and most representative market,
and it is expected that for the fixed-income securities and
options in which the Fund invests this ordinarily will be the
over-the-counter market. However, fixed-income securities may be
valued on the basis of prices provided by a pricing service when
such prices are believed by the Adviser to reflect the fair market
value of such securities. The prices provided by a pricing
service take into account institutional size trading in similar
groups of securities and any developments related to specific
securities. Securities not priced in this manner are valued at
the most recent quoted bid price, or, when stock exchange
valuations are used, at the latest quoted sale price on the day of
valuation. If there is no such reported sale, the latest quoted
bid price will be used. Interest rate futures contracts will be
valued in a like manner, except that open futures contracts sales
will be valued using the closing settlement price or, in the
absence of such a price, the most recent quoted asked price.
Portfolio instruments having less than 60 days remaining until
maturity are valued at amortized cost, unless the Board of
Directors determines that such cost does not represent fair value.
Other assets and securities for which no quotations are readily
available will be valued in good faith at fair value using methods
determined by the Board of Directors.
The assets belonging to the Class A shares, the Class B shares
and the Class C shares will be invested together in a single
portfolio. The net asset value of each class will be determined
separately by subtracting the accrued expenses and liabilities
allocated to that class from the assets belonging to that class
pursuant to an order issued by the Commission.
- - - ------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
- - - ------------------------------------------------------------------
The Fund intends to qualify for tax treatment as a "regulated
investment company" under the Code for each taxable year. Such
qualification does not, of course, involve governmental
supervision of management or investment practices or policies.
Investors should consult their own counsel for a complete
understanding of the requirements the Fund must meet to qualify
for such treatment. The information set forth in the Prospectus
and the following discussion relates solely to Federal income
taxes on dividends and distributions by the Fund and assumes that
the Fund qualifies as a regulated investment company. Investors
56
should consult their own counsel for further details and for the
application of state and local tax laws to his or her particular
situation.
Since the Fund 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 Fund's dividends or
distributions will qualify for the dividends-received deduction
for corporations.
The excess of net long-term capital gains over the net short-
term capital losses realized and distributed by the Fund to its
shareholders as capital gains distributions will not be taxable to
the Fund but will be taxable to the shareholders as long-term
capital gains, irrespective of the length of time a shareholder
may have held his or her Fund shares. Any dividend or
distribution received by a shareholder on shares of the Fund
shortly after the purchase of such shares by him or her will have
the effect of reducing the net asset value of such shares by the
amount of such dividend or distribution. If a shareholder has
held shares in the Fund for six months or less and during that
period has received a distribution taxable to the shareholder as a
long-term 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.
Dividends and distributions are taxable in the manner
discussed regardless of whether they are paid to the shareholder
in cash or are reinvested in additional shares of the Fund.
For Federal income tax purposes, when over-the-counter put and
call options which the Fund has purchased expire unexercised, the
premiums paid by the Fund give rise to short- or long-term capital
losses at the time of expiration (depending on the length of time
the Fund held the put or call). When put and call options written
by the Fund expire unexercised, the premiums received by the Fund
give rise to short-term capital gains at the time of expiration.
When the Fund exercises a call, the purchase price of the security
purchased is increased by the amount of the premium paid by the
Fund. When the Fund exercises a put, the proceeds from the sale
of the related security are decreased by the premium paid. When a
put or call written by the Fund is exercised, the purchase price
(selling price in the case of a call) of the security is decreased
(increased in the case of a call) for tax purposes by the premium
received. There may be short- or long-term gains and losses
associated with closing purchase or sale transactions.
57
- - - ------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- - - ------------------------------------------------------------------
Subject to the general supervision of the Board of Directors
of the Fund, the Adviser is responsible for the investment
decisions and the placing of the orders for portfolio transactions
for the Fund. The Fund's portfolio transactions occur primarily
with issuers, underwriters or major dealers acting as principals.
Such transactions are normally on a net basis which do not involve
payment of brokerage commissions. The cost of securities
purchased from an underwriter usually includes a commission paid
by the issuer to the underwriter; transactions with dealers
normally reflect the spread between bid and asked prices.
Premiums are paid with respect to options purchased by the Fund,
and brokerage commissions are payable with respect to transactions
in exchange-traded interest rate futures contracts. During the
fiscal year ended December 31, l994, the Fund incurred no
brokerage commissions.
The Adviser makes the Fund's portfolio decisions and
determines the brokers or dealer to be used in each specific
transaction. Most of the Fund's transactions, including
transactions in listed securities, are executed in the over-the-
counter market by approximately fifteen (15) principal market
maker dealers with whom the Adviser maintains regular contact.
Most transactions made by the Fund will be principal transactions
at net prices and the Fund will incur little or no brokerage
costs. Where possible, securities will be purchased directly from
the issuer or from an underwriter or market maker for the
securities unless the Adviser believes a better price and
execution is available elsewhere. Purchases from underwriters of
newly-issued securities for inclusion in a Portfolio usually will
include a concession paid to the underwriter by the issuer and
purchases from dealers serving as market makers will include the
spread between the bid and asked price.
The Fund has no obligation to enter into transactions in
portfolio securities with any broker, dealer, issuer, underwriter
or other entity. In placing orders, it is the policy of 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, dealer, the Adviser may, in its discretion, purchase and
sell securities through brokers and dealers who provide research,
statistical and other information to the Adviser. Such services
may be used by the Adviser for all of its investment advisory
accounts and, accordingly, not all such services may be used by
the Adviser in connection with the Fund. The supplemental
information received from a dealer is in addition to the services
required to be performed by the Adviser under the Advisory
58
Agreement, and the expenses of the Adviser will not necessarily be
reduced as a result of the receipt of such information.
- - - ------------------------------------------------------------------
GENERAL INFORMATION
- - - ------------------------------------------------------------------
CAPITALIZATION
The authorized capital stock of the Fund currently consists of
600,000,000 shares of Class A Common Stock, $.01 par value,
600,000,000 shares of Class B Common Stock, $.01 par value, and
600,000,000 shares of Class C Common Stock, $.01 par value. Class
A, Class B and Class C shares each represent interests in the
assets of the Fund and have identical voting, dividend,
liquidation and other rights on the same terms and conditions,
except that expenses related to the distribution of each class and
transfer agency expenses of each class are borne solely by each
class and each class of shares has exclusive voting rights with
respect to provisions of the Fund's Rule 12b-1 distribution plan
which pertain to a particular class and other matters for which
separate class voting is appropriate under applicable law,
provided that, if the Fund submits to a vote of both the Class A
shareholders and the Class B shareholders an amendment to the Rule
12b-1 distribution plan that would materially increase the amount
to be paid thereunder with respect to the Class A shares, the
Class A shareholders and the Class B shareholders will vote
separately by class. The Fund has received an order from the
Commission permitting issuance and sale of the three classes of
shares representing interests in the Fund. The issuance and sale
of any additional classes will require an additional order from
the Commission.
There is no assurance that such exemptive relief would be
granted. The Fund's Board of Directors may, without shareholder
approval, increase or decrease the number of authorized but
unissued shares of the Fund's Class A, Class B and Class C Common
Stock.
The Board of Directors is authorized to reclassify and issue
any unissued shares to any number of additional series without
shareholder approval. Accordingly, the Directors in the future,
for reasons such as the desire to establish one or more additional
portfolios of the Fund 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
59
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 Advisory Agreement
and changes in investment policy, shares of each portfolio would
vote as separate series.
Procedures for calling a shareholders meeting for the removal
of Directors of the Fund, similar to those set forth in Section
16(c) of the 1940 Act, are available to shareholders of the Fund.
Meetings of shareholders may be called by 10% of the Fund's
outstanding shareholders. The rights of the holders of shares of
a series may not be modified except by the vote of a majority of
the outstanding shares of such series.
As of the close of business on February 15, 1995, there were
181,288,715 shares of common stock outstanding. Of this amount,
66,518,161 shares were Class A shares, 107,967,976 shares were
Class B shares and shares were 6,802,578 Class C shares. Set
forth below is certain information as to all persons who, of
record or beneficially, held 5% or more of either class of the
Fund's shares outstanding on February 15, 1995.
No. of % of % of % of
Name and Address Shares Class A Class B Class C
Merrill Lynch 23,399,091 -- 21.7% --
Mutual Fund Operations
4800 Deer Lake Dr. East,
3rd Floor
Jacksonville, FL 32246-6466
Merrill Lynch 3,231,603 -- -- 47.5%
Mutual Fund Operations
4800 Deer Lake Dr. East,
3rd Floor
Jacksonville, FL 32246-6466
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110, acts as Custodian for the securities
and cash of the Fund, but plays no part in deciding on the
purchase or sale of portfolio securities.
60
PRINCIPAL UNDERWRITER
Alliance Fund Distributors, Inc., 1345 Avenue of the Americas,
New York, New York l0105, serves as the Fund's Principal
Underwriter and as such may solicit orders from the public to
purchase shares of the Fund. Alliance Fund Distributors, Inc. is
not obligated to sell any specific amount of shares and will
purchase shares for resale only against orders for shares. Under
the Agreement between the Fund and the Principal Underwriter, the
Fund has agreed to indemnify the Principal Underwriter, in the
absence of its willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations thereunder, against certain
civil liabilities, including liabilities under the Securities Act
of 1933.
COUNSEL
Legal matters in connection with the issuance of the shares of
common stock offered hereby are passed upon by Messrs. Seward &
Kissel, One Battery Park Plaza, New York, New York 10004. Seward
& Kissel has relied upon the opinion of Venable, Baetjer and
Howard, 1800 Mercantile Bank & Trust Building, 2 Hopkins Plaza,
Baltimore, Maryland 21201, for matters relating to Maryland law.
INDEPENDENT AUDITORS
Ernst & Young LLP, 787 Seventh Avenue, New York, New York
10019, have been appointed independent auditors for the Fund.
YIELD AND TOTAL RETURN QUOTATIONS
From time to time the Fund advertises its "yield," "actual
distribution rate" and "total return." The Fund will compute its
yield, actual distribution rate and total return separately for
Class A, Class B and Class C shares. The Fund's yield for any 30-
day (or one-month) period is computed by dividing the net
investment income per share earned during such period by the
maximum public offering price per share on the last day of the
period, and then annualizing such 30-day (or one-month) yield in
accordance with a formula prescribed by the Commission which
provides for compounding on a semi-annual basis. The Fund's
"actual distribution rate," which may be advertised in items of
sales literature, is computed in the same manner as yield except
that actual income dividends declared per share during the period
in question are substituted for net investment income per share.
The actual distribution rate is compounded separately for Class A,
Class B and Class C shares. Advertisements of the Fund's total
return disclose its average annual compounded total return for its
most recently completed one- and five-fiscal years (or the period
since the Fund's inception). The Fund's total return for each
such period is computed by finding, through the use of a formula
61
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 such investment at the end of the
period. For purposes of computing total return, income dividends
and capital gains distributions paid on shares of the Fund are
assumed to have been reinvested when received and the maximum
sales charge applicable to purchases of Fund shares is assumed to
have been paid.
The Fund's yield for the month ended December 31, 1994, was
6.78% for Class A shares, 6.45% for Class B shares and 6.45% for
Class C shares. The Fund's actual distribution rate for such
period was 6.95% for Class A shares, 6.48% for Class B shares and
6.48% for Class C shares. The Fund's average annual total return
for the one-year period ended December 31, 1994, was -6.14%; for
the five-year period ended December 31, 1994 was 42.73% and for
the ten-year period December 31, 1994 was 134.35% for Class A
shares, the average annual total return for the one year ended
December 31, 1994 was -6.84% for Class B shares and for the period
from January 30, 1992 (commencement of distributions) through
December 31, 1994, was 9.85%, the average annual total return for
the one year ended December 31, 1994 was -6.84% for Class C shares
and for the one-year period ended December 31, 1994 was -2.79% and
for the period from May 3, 1993 (commencement of distributions)
through December 31, 1994, was -2.79%.
Yield and total return are computed separately for Class A,
Class B and Class C shares. The Fund'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 in the Fund's portfolio, the Fund's average portfolio
maturity and its expenses. Yield and total return information is
useful in reviewing the Fund's performance but such information
may not provide a basis for comparison with bank deposits or other
investments which pay a fixed yield for a stated period of time.
An investor's principal invested in the Fund is not fixed and will
fluctuate in response to prevailing market conditions.
Advertisements quoting performance rankings of the Fund as
measured by financial publications or by independent organizations
such as Lipper Analytical Services, Inc. ("Lipper") and
advertisements presenting the performance information of the Fund
may also from time to time be sent to investors or placed in
newspapers, magazines such as Barron's, Business Week, Changing
Times, Fortune, Forbes, Money Magazine, The New York Times, The
Wall Street Journal or other media on behalf of the Fund. The
Fund has been ranked by Lipper in the category known as "U.S.
mortgage bond funds."
62
In addition, Lipper has ranked the Fund #24 out of #61 for
Class A and #31 out of #61 for Class B and Class C of U.S.
mortgage funds for the period ended January 31, 1995. The
Morningstar ratings and the Lipper rankings may be used in
advertisements and sales literature relating to such Fund.
Additional Information
Any shareholder inquiries may be directed to the shareholder's
broker or to Alliance Fund Services, Inc. at the address or
telephone numbers shown on the front cover of this Statement of
Additional Information. This Statement of Additional Information
does not contain all the information set forth in the Registration
Statement filed by the Fund with the Commission under the
Securities Act of 1933. 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.
63
<PAGE>
Portfolio of Investments
December 31, 1994
<TABLE>
<CAPTION>
Principal
Amount
(000) Value
<S> <C> <C>
MORTGAGE RELATED SECURITIES--98.3%
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION--69.8%
6.50%, 6/15/08-7/15/09 (a) $ 97,892 $ 89,448,870
7.00%, 12/15/22-8/15/24 242,648 217,776,833
7.00% *(c) 140,000 137,410,000
7.50%, 4/15/17-2/15/24 381,432 353,896,286
8.00%, 4/15/17-10/15/24 46,692 44,634,592
8.50%, 5/15/16-12/15/24 223,915 219,996,015
9.00%, 4/15/16 6 6,101
10.00%, 10/01/17-6/01/20 2,111 2,176,801
11.00%, 1/01/01(a) 19 19,418
11.50%, 3/15/10-11/01/15 1,639 1,768,343
12.00%, 2/15/14-12/01/15 461 502,841
12.50%, 3/15/11-5/15/15 438 482,322
13.00%, 1/01/11-11/01/14 949 1,069,770
13.00%, 11/15/99-1/15/00 41 43,229
13.50%, 5/15/10-10/15/14 899 1,022,548
Total Government National
Mortgage Association
(cost $1,128,351,632) 1,070,253,969
COLLATERALIZED MORTGAGE
OBLIGATIONS--14.3%
Donaldson, Luftkin & Jenrette
Series 1994-10 1A
5.755%, 5/25/24(c) 43,670 43,097,882
Series 1994-QE1
6.462%, 4/25/24(c) 18,369 18,196,783
Series 1994-Q12 Cl.A 6.467%,
9/25/24(c) 63,908 64,425,741
Series 1994-QE2 Cl.A 6.587%,
7/25/24(c) 29,668 29,353,248
FNMA Series 1993-196SC 2.891%,
10/25/08 11,763 6,499,159
Saxon Mortgage Securities Corp.
Series 1993-7A
5.972%, 8/25/23(c) 58,919 57,775,557
Total Collateralized Mortgage
Obligations
(cost $223,559,899) 219,348,370
FEDERAL HOME LOAN
MORTGAGE CORP.--7.9%
5.69%, 10/01/24(c)(e) $ 54,463 $ 53,934,690
5.71%, 12/01/24(c)(e) 46,902 46,066,972
11.50%, 10/01/10-6/01/20 5,919 6,246,332
12.25%, 8/01/13-7/01/14 1,242 1,315,946
12.50%, 6/01/19-6/15/19 7,790 8,724,362
12.75%, 6/01/12-2/01/14 393 439,670
13.00%, 5/01/14-12/01/18 3,044 3,439,551
13.50%, 1/01/12-10/01/16 822 934,783
14.75%, 3/01/10 102 116,493
Total Federal Home Loan
Mortgage Corp.
(cost $120,782,367) 121,218,799
FEDERAL NATIONAL MORTGAGE ASSOCIATION--6.2%
5.71%, 12/01/24(e) 86,748 85,438,141
5.87%* 6,300 6,192,703
6.25%* 2,500 2,483,500
12.00%, 2/01/98-7/01/00(a) 87 94,467
Total Federal National
Mortgage Association
(cost $94,228,141) 94,208,811
STRIPPED MORTGAGE BACKED SECURITIES--0.1%
FNMA Series 1990-145B 10.00%,
12/25/20 (Ioette)(b)(d)
(cost $1,874,360) 69 1,814,660
Total Mortgage-Related
Securities
(cost $1,568,796,399) 1,506,844,609
<PAGE>
ASSET BACKED SECURITIES--13.2%
Lehman Card Account Trust
Series 1994-1A2
6.353%, 12/31/00 $85,550 $ 85,353,235
LINCS Series 1994-2 7.292%,
8/10/95 89,100 85,981,500
MBNA Master Credit Card Trust
Series 1994-CA 6.375%,
3/15/03 11,300 11,287,640
World Omni Wholesale Master
Trust Series 1994-1A 5.825%,
10/25/01 $20,600 $ 20,575,280
Total Asset Backed Securities
(cost $206,533,601) 203,197,655
TOTAL INVESTMENTS--111.5%
(cost $1,775,330,000) 1,710,042,264
Other assets less liabilities--(11.5%) (176,396,770)
NET ASSETS--100% $1,533,645,494
</TABLE>
- - - ---------------------------------------------------------------------------
* Securities to be announced at a future date.
(a) 15 year mortgage.
(b) Yield to maturity at 12/31/94.
(c) Adjustable rate mortgages stated interest rate in effect at 12/31/94.
(d) Illiquid Security (See Notes A&E)
(e) Securities segregated to collaterize reverse repurchase agreements
with an aggregate market value of approximately $141,788,000.
Glossary of Terms:
Ioette--Interest only.
LINCS--Linked Certificates.
See notes to financial statements.
<PAGE>
Statement Of Assets And Liabilities
December 31, 1994
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments in securities, at value (cost $1,775,330,000) $1,710,042,264
Cash 2,681,722
Receivable for investment securities sold 109,914,888
Interest receivable 11,433,486
Margin deposits, at value 526,376
Receivable for capital stock sold 428,170
Miscellaneous receivable 1,488,418
Other assets 59,950
Total assets 1,836,575,274
LIABILITIES
Payable for investment securities purchased 146,167,172
Reverse repurchase agreement 141,787,997
Payable for capital stock redeemed 8,410,880
Dividends payable 4,716,760
Payable to advisor 1,329,557
Distribution fee payable 126,025
Accrued expenses 391,389
Total liabilities 302,929,780
NET ASSETS $1,533,645,494
COMPOSITION OF NET ASSETS
Capital stock, at par $ 1,886,582
Additional paid-in capital 1,816,266,321
Distributions in excess of net investment income (4,716,760)
Accumulated net realized loss (214,834,606)
Net unrealized depreciation of investments and futures contracts (64,956,043)
$1,533,645,494
CALCULATION OF MAXIMUM OFFERING PRICE
Class A Shares
Net asset value and redemption price per share
($553,888,826/68,156,025 shares of capital stock issued and
outstanding) $8.13
Sales charge--4.25% of public offering price .36
Maximum offering price $8.49
Class B Shares
Net asset value and offering price per share
($921,418,434/113,326,059 shares of capital stock issued and
outstanding) $8.13
Class C Shares
Net asset value, redemption and offering price per share
($58,338,234/7,176,159 shares of capital stock issued and outstanding) $8.13
</TABLE>
- - - -----------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
Statement Of Operations
Year Ended December 31, 1994
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest $135,681,863
Fee income 24,200,952 $ 159,882,815
EXPENSES
Advisory fee 9,602,296
Distribution fee-Class A 2,121,503
Distribution fee-Class B 11,940,916
Distribution fee-Class C 847,425
Transfer agency 2,360,033
Custodian 541,652
Administrative 312,246
Printing 226,353
Registration 145,758
Audit and legal 104,090
Taxes 101,822
Directors' fees 23,008
Miscellaneous 58,620
Total expenses before interest 28,385,722
Interest expense 6,230,797 34,616,519
Net investment income 125,266,296
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss on investments (211,057,813)
Net change in unrealized appreciation of investments and futures contracts (66,518,327)
Net loss on investments (277,576,140)
NET DECREASE IN NET ASSETS FROM OPERATIONS $(152,309,844)
</TABLE>
Statement Of Changes In Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31
1994 1993
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income $ 125,266,296 $ 151,036,842
Net realized gain (loss) on investments (211,057,813) 63,117,975
Net change in unrealized appreciation of investments (66,518,327) (12,977,674)
Net increase (decrease) in net assets from operations (152,309,844) 201,177,143
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income
Class A (47,603,015) (60,839,106)
Class B (71,792,708) (88,476,279)
Class C (5,089,134) (1,721,457)
Dividends in excess of net investment income
Class A -0- (1,801,767)
Class B -0- (2,620,249)
Class C -0- (50,981)
Tax return of capital distribution
Class A (1,891,214) -0-
Class B (2,852,244) -0-
Class C (202,186) -0-
CAPITAL STOCK TRANSACTIONS
Net increase (decrease) (578,709,664) 404,573,446
Total increase (decrease) (860,450,009) 450,240,750
NET ASSETS
Beginning of year 2,394,095,503 1,943,854,753
End of year $1,533,645,494 $2,394,095,503
</TABLE>
- - - -----------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1994
NOTE A: Significant Accounting Policies
Alliance Mortgage Securities Income Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified open-end investment
company. The Fund offers Class A, Class B and Class C shares. Class A shares
are sold with a front-end sales charge of up to 4.25%. Class B shares are
sold with a contingent deferred sales charge which declines from 3.00% to
zero depending on the period of time the shares are held. Class B shares will
automatically convert to Class A shares six years after the end of the
calendar month of purchase. Class C shares are sold without an initial or
contingent deferred sales charge. All three classes of shares have identical
voting, dividend, liquidation and other rights, except that each class bears
different distribution expenses and has exclusive voting rights with respect
to its distribution plan. The following is a summary of significant
accounting policies followed by the Fund.
1. Security Valuation
Fixed-income securities are valued on the basis of prices provided by a
pricing service and brokers. However, securities which are traded
over-the-counter and on a national securities exchange may be valued
according to the broadest and most representative market. It is expected
that, for the fixed-income securities and options in which the Fund invests,
this ordinarily will be the over-the-counter market. Securities not priced in
this manner are valued at the latest quoted bid price, or when exchange
valuations are used, at the latest quoted sale price on the day of valuation.
If there is no such reported sale, the latest quoted bid price will be used.
Other securities for which quotations are not readily available or illiquid
securities will be valued in good faith at fair value using methods
determined by the Board of Directors. In determining fair value,
consideration is given to cost, operations and other financial data.
Securities which mature in 60 days or less are valued at amortized cost,
which approximates market value.
2. Taxes
It is the Fund's policy to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
investment company taxable income and net realized gains, if applicable, to
shareholders. Therefore, no provisions for federal income or excise taxes are
required.
3. Investment Income and Security Transactions
Interest income is accrued daily. Fee income is generated by participating in
forward commitments, in which the Fund agrees to the delayed settlement of
securities. By agreeing to the delayed settlement of securities, the Fund
receives a fee from the seller. The fee is accrued from the settlement date
of the associated sale transaction to the purchase settlement date. Security
transactions are accounted for on the date the securities are purchased or
sold. The Fund accretes original issue discount as adjustments to interest
income. Security gains or losses are determined on the identified cost basis.
4. Dividends and Distributions
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Income dividends and capital gains distributions are determined in
accordance with income tax regulations. Such amounts may differ from income
and capital gains recorded in accordance with generally accepted accounting
principles. As a result of a tax return of capital distribution a
reclassification was made to decrease additional paid in capital by
$4,945,644.
5. Financial Futures Contracts
The Fund may buy or sell interest rate futures contracts for the purpose of
hedging its portfolio against adverse effects of anticipated movements in the
market. Upon entering into a contract, the Fund deposits and maintains as
collateral a margin deposit such initial margin as required by the exchange
on which the transaction is effected. Pursuant to the contract, the Fund
agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in the value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Fund as unrealized gains or
losses. When the contract is closed, the Fund records a realized gain or loss
equal to the difference between the value of the contract at the time it was
opened and the time it was closed.
<PAGE>
NOTE B: Advisory Fee and Other Transactions with Affiliates
Under the terms of an investment advisory agreement, the Fund pays Alliance
Capital Management L.P., (the "Adviser") an advisory fee at a quarterly rate
equal to .1375 of 1% (approximately .55 of 1% on an annual basis) of the
first $500 million of the Fund's net assets and .125 of 1% (approximately .50
of 1% on an annual basis) of its net assets over $500 million, valued on the
last business day of the previous quarter. The Adviser has agreed, under the
terms of the investment advisory agreement, to reimburse the Fund to the
extent that its aggregate expenses (exclusive of interest, taxes, brokerage,
distribution fee, and extraordinary expenses) in any year exceed 1% of its
average daily net assets for such year. No such reimbursement was required
for the year ended December 31, 1994. Pursuant to the advisory agreement, the
Fund paid $312,246 to the Adviser representing the cost of certain legal and
accounting services provided to the Fund by the Adviser for the year ended
December 31, 1994.
The Fund compensates Alliance Fund Services, Inc. (a wholly- owned subsidiary
of the Adviser) under a Transfer Agency Agreement for providing personnel and
facilities to perform transfer agency services for the Fund. Such
compensation amounted to $1,571,545 for the year ended December 31, 1994.
Alliance Fund Distributors, Inc. (a wholly-owned subsidiary of the Adviser)
serves as the Distributor of the Fund's capital stock. The Distributor
received front-end sales charges of $68,298 from the sales of Class A shares
and $3,792,887 in contingent deferred sales charge imposed upon redemptions
by shareholders of Class B shares for the year ended December 31, 1994.
NOTE C: Distribution Services Agreement
The Fund has adopted a Distribution Services Agreement (the "Agreement")
pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the
Agreement, the Fund pays a distribution fee to the Distributor at an annual
rate of up to .30 of 1% of the Fund's average daily net assets attributable
to Class A shares and 1% of the average daily net assets attributable to
Class B and Class C shares. Such fee is accrued daily and paid monthly. The
Agreement provides that the Distributor will use such payments in their
entirety for distribution assistance and promotional activities. The
Distributor has incurred expenses in excess of the distribution costs
reimbursed by the Fund in the amount of $16,372,116 and $1,459,018 for Class
B and C shares, respectively; such costs may be recovered from the Fund in
future periods so long as the Agreement is in effect. In accordance with the
Agreement, there is no provision for recovery of unreimbursed distribution
costs, incurred by the Distributor, beyond the current fiscal year for Class
A shares. The Agreement also provides that the Adviser may use its own
resources to finance the distribution of the Fund's shares.
NOTE D: Investment Transactions
Purchases and sales of investment securities (excluding short-term
investments) aggregated $9,169,227,083 and $10,513,982,423, respectively, for
the year ended December 31, 1994.
At December 31, 1994 the cost of securities for federal income tax purposes
was the same as the cost for financial reporting purposes. Accordingly, gross
unrealized appreciation of investments was $80,374,903 and gross unrealized
depreciation of investments and financial futures was $145,330,946 resulting in
net unrealized depreciation of $64,956,043. For federal income tax purposes,
the Fund had a capital loss carryforward at December 31, 1994 of $215,166,300
of which $3,776,793 expires in 1998 and $211,389,507 expires in 2002.
<PAGE>
NOTE E: Illiquid Security
<TABLE>
<CAPTION>
Date
Acquired Cost Value
<S> <C> <C> <C>
FNMA Series 1990-145B. 10/29/90 $1,874,360 $1,814,660
</TABLE>
The security shown above is illiquid and has been valued at fair value in
accordance with the procedures discribed in Note A.
The value of the security at December 31, 1994 represents 0.1% of net
assets.
NOTE F: Capital Stock
There are 1,800,000,000 shares of $.01 par value capital stock authorized
designated Class A, Class B and Class C shares. Each class consists of
600,000,000 authorized shares. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Shares Amount
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
Class A 1994 1993 1994 1993
<S> <C> <C> <C> <C>
Shares sold 4,590,689 19,997,415 $ 40,889,085 $ 185,928,556
Shares issued in
reinvestment of
dividends 3,056,141 4,174,239 26,209,764 38,845,054
Shares redeemed (30,797,504) (19,892,875) (261,551,480) (185,308,234)
Net increase
(decrease) (23,150,674) 4,278,779 $(194,452,631) $ 39,465,376
Class B
Shares sold 10,395,450 52,539,225 $ 93,124,118 $ 488,077,762
Shares issued in
reinvestment of
dividends 4,486,737 5,427,008 38,565,381 50,489,944
Shares redeemed (58,134,672) (28,527,598) (495,029,365) (265,857,531)
Net increase
(decrease) (43,252,485) 29,438,635 $(363,339,866) $ 272,710,175
</TABLE>
<TABLE>
<CAPTION>
Year Ended May 3, 1993* Year Ended May 3, 1993*
December 31, to December 31, December 31, to December
Class C 1994 1993 1994 31, 1993
<S> <C> <C> <C> <C>
Shares sold 6,008,369 12,511,499 $ 53,836,318 $116,937,320
Shares issued in
reinvestment of
dividends 433,318 119,876 3,731,183 1,118,470
Shares redeemed (9,142,915) (2,753,988) (78,484,668) (25,657,895)
Net increase
(decrease) (2,701,228) 9,877,387 $(20,917,167) $ 92,397,895
</TABLE>
- - - -----------------------------------------------------------------------------
* Commencement of distribution.
<PAGE>
NOTE G: Repurchase Agreements
The Fund may enter into repurchase agreements, pertaining to the types of
securities in which it invests with member banks of the Federal Reserve
System and with broker dealers who are recognized as primary dealers in U.S.
government securities by the Federal Reserve Bank of New York. The Fund's
Board of Directors has established procedures which are periodically reviewed
by the Board to monitor the creditworthiness of the dealers with which the
Fund enters into repurchase agreement transactions. The Fund always requires
continual maintenance by its custodian for its account in the Federal Reserve
Treasury Book Entry System of collateral in an amount equal or in excess of
the resale price in each agreement.
In the event a vendor defaults on its repurchase obligation, the Fund might
suffer a loss to the extent that the proceeds from the sale of the collateral
were less than the repurchase price.
Note H: Reverse Repurchase Agreements
Under a reverse repurchase agreement, the Fund sells securities and agrees to
repurchase them at a mutually agreed upon date and price.
As of December 31, 1994, the Fund had entered into reverse repurchase
agreements in the amount of $141,787,997 with Lehman Brothers, Inc.
with an interest rate of 6.45-6.55% maturing on January 3, 1995. For the year
ended December 31, 1994, the maximum amount or reverse repurchase agreements
outstanding was $463,325,000, the average amount outstanding was approximately
$194,112,000, and the daily weighted average interest rate was 3.89%.
NOTE I: Futures Contracts
At December 31, 1994, the Fund had entered into exchange traded financial
futures contracts as described below. The Fund bears the market risk that
arises from changes in the value of these financial instruments. At the time
the Fund enters into a futures contract, it is required to make a margin
deposit with its custodian of a specified amount of cash or eligible
securities. Subsequently, gain or loss is recognized and payments are made on
a daily basis between the Fund and the broker as the market price of the
futures contract fluctuates. The aggregate value of cash pledged to cover
margin requirements for open positions at December 31, 1994 was $526,376.
<TABLE>
<CAPTION>
Number of Expiration Unrealized
Type Contracts Position Month Depreciation
<S> <C> <C> <C> <C>
U.S. T-Note 268 Short March, 1995 $ 64,094
Euro $ 105 Short March, 1995 18,375
Euro $ 95 Short June, 1995 49,875
Euro $ 94 Short September, 1995 51,700
Euro $ 92 Short December, 1995 49,550
Euro $ 91 Short March, 1996 40,950
Euro $ 88 Short June, 1996 33,000
Euro $ 69 Short September, 1996 24,150
$331,694
</TABLE>
<PAGE>
Financial Highlights
- - - - -Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Class A
Year Ended December 31,
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Net asset value beginning of year $ 9.29 $ 9.08 $9.21 $ 8.79 $ 8.76
Income From Investment Operations
Net investment income .57 .67 .77 .88 .87
Net realized and unrealized gain
(loss) on investments (1.13) .23 (.09) .41 .03
Net increase (decrease) in net asset
value from operations (.56) .90 .68 1.29 .90
Less: Distributions
Dividends from net investment income (.58) (.67) (.81) (.87) (.87)
Dividends in excess of net
investment income -0- (.02) -0- -0- -0-
Tax return of capital distribution (.02) -0- -0- -0- -0-
Net asset value, end of year $ 8.13 $ 9.29 $9.08 $ 9.21 $ 8.79
Total Return
Total investment return based on net
asset value (a) (6.14)% 10.14% 7.73% 15.44% 11.01%
Ratios/Supplemental Data
Net assets, end of year (000's
omitted) $553,889 $848,069 $789,898 $544,171 $495,353
Ratio of expenses to average net
assets 1.29% 1.00% 1.18% 1.16% 1.12%
Ratio of expenses to average net
assets excluding interest expense .97% -0- -0- -0- -0-
Ratio of net investment income to
average net assets 6.77% 7.20% 8.56% 9.92% 10.09%
Portfolio turnover rate 438% 622% 555% 439 393%
</TABLE>
- - - -----------------------------------------------------------------------------
See footnotes page 11.
<PAGE>
Financial Highlights (cont.)
- - - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
January 30, 1992** Year Ended May 3, 1993**
Year Ended December 31, to December 31, to
1994 1993 December 31, 1992 1994 December 31, 1993
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.29 $9.08 $9.16 $ 9.29 $9.30
Income From Investment
Operations
Net investment income .51 .61 .68 .51 .40
Net realized and unrealized gain
(loss) on investments (1.14) .22 (.08) (1.14) -0-
Net increase (decrease) in net asset
value from operations (.63) .83 .60 (.63) .40
Less: Distributions
Dividends from net investment income (.51) (.60) (.68) (.51) (.40)
Dividends in excess of net
investment income -0- (.02) -0- -0- (.01)
Tax return of capital distribution (.02) -0- -0- (.02) -0-
Net asset value, end of period $8.13 $9.29 $9.08 $ 8.13 $9.29
Total Return
Total investment return based on net
asset value (a) (6.84)% 9.38% 7.81% (6.84)% 4.34%
Ratios/Supplemental Data
Net assets, end of period (000's
omitted) $921,418 $1,454,303 $1,153,957 $58,338 $91,724
Ratio of expenses to average net
assets 2.00% 1.70% 1.67%* 1.97% 1.67%*
Ratio expense to average net assets
excluding interest expense 1.68% -0- -0- 1.69% -0-
Ratio of net investment income to
average net assets 6.05% 6.47% 5.92%* 6.06% 5.92%*
Portfolio turnover rate 438% 613% 555% 438% 622%
</TABLE>
- - - ----------------------------------------------------------------------------
(a) Total investment return is calculated assuming an initial investment
made at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and redemption
on the last day of the period. Initial sales charge or contingent deferred sales
charge is not reflected in the calculation of total investment return. Total
investment return calculated for a period of less than one year is not
annualized. * Annualized.
** Commencement of distribution.
<PAGE>
Report of Ernest & Young LLP
Independent Auditors
To the Shareholders and Board of Directors
Alliance Mortgage Securities Income Fund, Inc.
We have audited the accompanying statement of assets and liabilities of
Alliance Mortgage Securities Income Fund, Inc., including the portfolio of
investments, as of December 31, 1994, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of
the two years in the period then ended and the financial highlights for each
of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1994, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Alliance Mortgage Securities Income Fund, Inc. at December 31, 1994, the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the indicated periods, in conformity with generally
accepted accounting principles.
[Signature of Ernst & Young LLP]
New York, New York
February 13, 1995
<PAGE>
APPENDIX A
MORTGAGE-RELATED SECURITIES
Mortgage-related securities represent an ownership interest in
a pool of residential mortgage loans. These securities are
designed to provide monthly payments of interest and principal to
the investor. The mortgagor's monthly payments to his lending
institution are "passed-through" to investors such as the Fund.
Most issuers or servicers provide guarantees of payments,
regardless of whether or not the mortgagor actually makes the
payment. The guarantees made by issuers or servicers are backed
by various forms of credit, insurance and collateral.
UNDERLYING MORTGAGES
Pools consist of whole mortgage loans or participations in
loans. The majority of these loans are made to purchasers of 1-4
family homes. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among
pools. For example, in addition to fixed-rate fixed-term
mortgages, the Fund may purchase pools of variable rate mortgages,
growing equity mortgages, graduated payment mortgages and other
types.
All servicers apply standards for qualification to local
lending institutions which originate mortgages for the pools.
Servicers also establish credit standards and underwriting
criteria for individual mortgages included in the pools. In
addition, many mortgages included in pools are insured through
private mortgage insurance companies.
LIQUIDITY AND MARKETABILITY
Since the inception of the mortgage-related pass-through
security in 1970, the market for these securities has expanded
considerably. The size of the primary issuance market and active
participation in the secondary market by securities dealers and
many types of investors makes government and government-related
pass-through pools highly liquid. Private conventional pools of
mortgages (pooled by commercial banks, savings and loans
institutions and others, with no relationship with government and
government-related entities) have also achieved broad market
acceptance and consequently an active secondary market has
emerged. However, the market for conventional pools is smaller
and less liquid than the market for the government and government-
related mortgage pools. The Fund may purchase some mortgage-
related securities through private placement, in which case only a
limited secondary market exists, and the security is considered
liquid and therefore subject to investment restriction in the
Prospectus.
A-1
APPENDIX B
FUTURES CONTRACTS
USE OF FUTURES CONTRACTS
Prices of debt securities may be established in both the cash
market and the futures market. In the cash market, debt
securities are purchased and sold with payment for the full
purchase price being made in cash, generally within five business
days after the trade. In the futures market, a contract is made
to purchase or sell a debt security in the future for a set price
on a certain date. Historically, prices established in the future
markets have tended to move generally and in the aggregate in
concert with cash market prices and have maintained fairly
predictable relationships. The Fund may use interest rate futures
solely as a defense, or hedge, against anticipated interest rate
changes and not for speculation. As described below, this would
include the use of future contract sales to protect against
expected increases in interest rates and futures contract
purchases to offset the impact of interest rate declines.
The Fund presently could accomplish a similar result to that
which it hopes to achieve through the use of futures contracts by
selling debt securities with long maturities and investing in debt
securities with short maturities when interest rates are expected
to increase, or conversely, selling short-term debt securities and
investing in long-term debt securities when interest rates are
expected to decline. However, because of the liquidity that is
often available in the futures market, such protection is more
likely to be achieved, perhaps at a lower cost and without
changing the rate of interest being earned by the Fund, through
using futures contracts.
DESCRIPTION OF FUTURES CONTRACTS
A futures contract sale would create an obligation by the
Fund, as seller, to deliver the specific type of financial
instrument called for in the contract at a specified future time
for a specified price. A futures contract purchase would create
an obligation by the Fund, as purchaser, to take delivery of the
specific type of financial instrument at a specified future time
at a specified price. The specific securities delivered or taken,
respectively, at settlement date, would not be determined until at
or near that date. The determination would be in accordance with
the rules of the exchange on which the futures contract sale or
purchase was made.
Although futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts
are closed out before the settlement date without the making or
taking of delivery of securities. Closing out a futures contract
B-1
sale is effected by the Fund entering into a futures contract
purchase of the same aggregate amount of the specific type of
financial instrument and the same delivery date. If the price in
the sale exceeds the price in the offsetting purchase, the Fund
immediately is paid the difference and thus realizes a gain. If
the offsetting purchase price exceeds the sale price, the Fund
pays the difference and realizes a loss. Similarly, the closing
out of a futures contract purchase is effected by the Fund's
entering into a futures contract sale. If the offsetting sale
price exceeds the purchase price, the Fund realizes a gain, and if
the purchase price exceeds the offsetting sale price, the Fund
realizes a loss.
A public market now exists in futures contracts covering
primarily the following financial instruments: long-term United
States Treasury Bonds; GNMA modified pass-through mortgage-backed
securities; three-month United States Treasury Bills and ninety-
day commercial paper. It is expected that other financial
instruments will be subject to futures contracts. There is a
$100,000 minimum for futures contracts in long-term United States
Treasury Bonds and GNMA pass-through securities, and a $1,000,000
minimum for contracts in other kinds of financial instruments.
The Fund may invest in interest rate futures contracts covering
the financial instruments referred to above as well as in new
types of such contracts that become available in the future. As
discussed in more detail below, the Fund will invest in interest
rate futures contracts covering non-mortgage-related securities in
situations where the Adviser believes that the prices of the
futures contracts tend to move in concert with prices of mortgage-
related securities in the Fund's portfolio.
The Fund is required to maintain margin deposits with
brokerage firms through which it enters into futures contracts.
Currently, the initial margin deposit per contract is $1,500 for
Treasury Bills and commercial paper and $2,000 for Treasury Bonds
and GNMA's. Margin balances will be adjusted at least weekly to
reflect unrealized gains and losses on open contracts. In
addition, the Fund will pay a commission on each contract,
including offsetting transactions. Financial futures contracts
are traded in an auction environment on the floors of several
exchanges -- principally, the Chicago Board of Trade, the Chicago
Mercantile Exchange and the New York Futures Exchange. Each
exchange guarantees performance under contract provisions through
a clearing corporation, a nonprofit organization managed by the
exchange membership.
The Commodity Futures Trading Commission (CFTC), a Federal
agency, regulates trading activity on the exchanges pursuant to
the Commodity Exchange Act, as amended. The rules of the CFTC
have provided that an entity such as the Fund would not be a
"pool" if it traded commodity futures contracts solely for hedging
B-2
purposes and pursuant to certain specified restrictions. The Fund
intends to meet these restrictions, which are set forth in the
Prospectus, and therefore the Fund will not operate as a "pool" as
that term is defined by the CFTC.
RISKS IN FUTURES CONTRACTS
One risk in employing futures contracts to protect against
cash market price volatility is the prospect that futures prices
will correlate imperfectly with the behavior of cash prices. The
ordinary spreads between prices in the cash and futures markets,
due to differences in the natures of those markets, are subject to
distortions. First, all participants in the futures market are
subject to margin deposit and maintenance requirements. Rather
than meeting additional margin deposit requirements, investors may
close futures contracts through offsetting transactions which
could distort the normal 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 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
trends by the Adviser may still not result in a successful
transaction.
Another risk is that the Adviser would be incorrect in its
expectation as to the extent of various interest rate movements or
the time span within which the movements take place. Closing out
a futures contract purchase at a loss because of higher interest
rates will generally have one of two consequences depending on
whether, at the time of closing out, the "yield curve" is normal
(long-term rates exceeding short-term). If the yield curve is
normal, it is possible that the Fund will still be engaged in a
program of buying long-term securities. Thus closing out the
futures contract purchase at a loss will reduce the benefit of the
reduced price of the securities purchased. If the yield curve is
inverted, it is possible that the Fund will retain its investments
in short-term securities earmarked for purchase of longer term
securities. Thus, closing out of a loss will reduce the benefit
of the incremental income that the Fund will experience by virtue
of the high short-term rates.
B-3
EXAMPLE OF FUTURES CONTRACT SALE
The Fund would engage in a futures contract sale to maintain
the income advantage from continued holding of a long-term
security while endeavoring to avoid part or all of the loss in
market value that would otherwise accompany a decline in long-term
securities prices. Assume that the market value of a certain
security in the Fund's portfolio tends to move in concert with the
futures market prices of long-term United States Treasury bonds
("Treasury bonds"). The Fund wishes to fix the current market
value of this portfolio security until some point in the future.
Assume the portfolio security has a market value of $100, and the
Fund believes that, because of an anticipated rise in interest
rates, the value will decline to $95. The Fund might enter into
futures contract sales of Treasury bonds for a price of $98. If
the market value of the portfolio security does indeed decline
from $100 to $95, the futures market price for the Treasury bonds
might also decline from $98 to $93.
In that case, the $5 loss in the market value of the portfolio
security would be offset by the $5 gain realized by closing out
the futures contract sale. Of course, the futures market price of
Treasury bonds might well decline to more than $93 or to less than
$93 because of the imperfect correlation between cash and futures
prices mentioned above.
The Fund could be wrong in its forecast of interest rates and
the futures market price could rise above $98. In this case, the
market value of the portfolio securities, including the portfolio
security being protected, would increase. The benefit of this
increase would be reduced by the loss realized on closing out the
futures contract sale.
If interest rate levels did not change, the Fund, in the above
example, could incur a loss of as much as $2 as the time until
expiration of the futures contract elapses (which loss might be
reduced by an offsetting transaction prior to the settlement
date). In each transaction, nominal transaction expenses would
also be incurred.
EXAMPLE OF FUTURES CONTRACT PURCHASE
The Fund would engage in a futures contract purchase when it
is not fully invested in long-term securities but wishes to defer
for a time the purchase of long-term securities in light of the
availability of advantageous interim investments, e.g., short-term
securities whose yields are greater than those available on long-
term securities. The Fund's basic motivation would be to maintain
for a time the income advantage from investing in the short-term
securities; the Fund would be endeavoring at the same time to
B-4
eliminate the effect of all or part of the increases in market
price of the long-term securities that the Fund may purchase.
For example, assume that the market price of a long-term
security that the Fund may purchase, currently yielding 10%, tends
to move in concert with futures market prices of Treasury bonds.
The Fund wishes to fix the current market price (and thus 10%
yield) of the long-term security until the time (four months away
in this example) when it may purchase the security.
Assuming the long-term security has a market price of $100,
and the Fund believes that, because of an anticipated fall in
interest rates, the price will have risen to $105 (and the yield
will have dropped to about 9 1/2%) in four months, the Fund might
enter into futures contracts purchases of Treasury bonds for a
price of $98. At the same time, the Fund would assign a pool of
investments in short-term securities that are either maturing in
four months or earmarked for sale in four months, for purchases of
the long-term security at an assumed market price of $100. Assume
these short-term securities are yielding 15%. If the market price
of the long-term bond does indeed rise from $100 to $105, the
futures market price for Treasury bonds might also rise from $98
to $103. In that case, the $5 increase in the price that the Fund
pays for the long-term security would be offset by the $5 gain
realized by closing out the futures contract purchase.
The Fund could be wrong in its forecast of interest rates;
long-term interest rates might rise to above 10%, and the futures
market price could fall below $98. If short-term rates at the
same time fall to 10% or below, it is possible that the Fund would
continue with its purchase program for long-term securities. The
market prices of available long-term securities would have
decreased. The benefit of this price decrease, and thus yield
increase, will be reduced by the loss realized on closing out the
futures contract purchase.
If, however, short-term rates remained above available long-
term rates, it is possible that the Fund would discontinue its
purchase program for long-term securities. The yields on short-
term securities in the portfolio, including those originally in
the pool assigned to the particular long-term security, would
remain higher than yields on long-term bonds. The benefit of this
continued incremental income will be reduced by the loss realized
on closing out the futures contract purchase.
In each transaction, nominal transaction expenses would also
be incurred.
B-5
TAX TREATMENT
Regulated futures contracts are considered "section 1256
contracts" for U.S. Federal income tax purposes. Section 1256
contracts held by the Fund at the end of each taxable year will be
"marked to market", that is, treated for federal income tax
purposes as though sold for fair market value on the last business
day of such taxable year. Gain or loss realized by the Fund on
section 1256 contracts generally will be considered 60% long-term
and 40% short-term capital gain or loss. The Fund can elect to
exempt its section 1256 contracts which are part of a "mixed
straddle" (as described below) from the application of section
1256.
Any futures contract or other position entered into or held by
the Fund in conjunction with any other position held by the Fund
may constitute a "straddle" for Federal income tax purposes. A
straddle of which at least one, but not all, the positions are
section 1256 contracts will constitute a "mixed straddle." In
general, straddles are subject to certain rules that may affect
the character and timing of the Fund's gains and losses with
respect to straddle positions by requiring, among other things,
that loss realized on disposition of one position of a straddle
not be recognized to the extent that the Fund has unrecognized
gains with respect to the other position in such straddle; that
the Fund's holding period in straddle positions be suspended while
the straddle exists (possibly resulting in gain being treated as
short-term capital gain rather than long-term capital gain); that
losses recognized with respect to certain straddle positions which
are part of a mixed straddle and which are non-section 1256
positions shall be treated as 60 percent long-term capital loss
and 40 percent short-term capital loss; and that losses recognized
with respect to certain straddle positions which would otherwise
constitute short-term capital losses be treated as long-term
capital losses. Various elections are available to the Fund which
may mitigate the effects of the straddle rules, particularly with
respect to mixed straddles. In general, the straddle rules
described above do not apply to any straddles held by the Fund all
of the offsetting positions of which consist of section 1256
contracts.
Under the Federal income tax provisions applicable to
regulated investment companies, at least 90% of the Fund's annual
gross income must be derived from dividends, interest, payments
with respect to loans of securities, and gains from the sale or
other disposition of securities ("qualifying income"). In order
to ensure that the Fund continues to qualify as a regulated
investment company for Federal income tax purposes, less than 30%
of its gross income for any year must be derived from gains
realized on the sale or other disposition of securities held by
the Fund for less than three months. For this purpose, the Fund
B-6
will treat gains realized on the closing out of its futures
contracts as gains derived from the sale of securities. This
treatment could, under certain circumstances, require the Fund to
defer the closing out of futures contracts until after three
months from the date the Fund acquired the contracts, even if it
would be more advantageous to close out the contracts prior to
that time. Any gains realized by the Fund as a result of the
marked-to-market futures contracts held by the Fund at the end of
its taxable year, as described in the preceding paragraph, will in
all instances be treated as derived from the sale of securities
held for the three months or more, regardless of the actual period
for which the Fund has held the futures contracts at the end of
the year.
B-7
00250125.AE3
PART C
OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
(a) FINANCIAL STATEMENTS
Included in the Prospectus:
Financial Highlights
Included in the Statement of Additional Information:
Portfolio of Investments - December 31, 1994.
Statement of Assets and Liabilities - December 31,
1994.
Statement of Operations - year ended December 31,
1994.
Statement of Changes in Net Assets - years ended
December 31, 1993 and December 31, 1994.
Notes to Financial Statements - December 31, 1994.
Financial Highlights
Report of Independent Auditors
Included in Part C of the Registration Statement:
All other schedules are either inapplicable or the
required information is contained in the financial
statements.
(b) EXHIBITS:
(1)(a) Articles of Incorporation of the Registrant -
Incorporated herein by reference as Exhibit 1
to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form
N-1A, filed on April 29, 1988 (File Nos. 2-
85921 and 811-3829).
(b) Articles of Amendment of Articles of
Incorporation of the Registrant -
Incorporated herein by reference as Exhibit
1(b) to Post-Effective Amendment No. 15 to
C-1
Registrant's Registration Statement on Form
N-1A, filed on February 21, 1992 (File Nos.
2-85921 and 811-3829).
(c) Articles of Restatement to Articles of
Incorporation - Incorporated herein by
reference as Exhibit 1(c) to Post-Effective
Amendment No. 17 to Registrant's Registration
Statement on Form N-1A, filed on March 2,
1993 (File Nos. 2-85921 and 811-3829).
(2) By-Laws of the Registrant - Incorporated
herein by reference as Exhibit 2 to Pre-
Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A, filed on
December 23, 1983 (File Nos. 2-85921 and 811-
3829).
(3) Not applicable.
(4)(a) Certificate for shares of Common Stock of
Registrant - Incorporated herein by reference
as Exhibit 4 to Post-Effective Amendment No.
5 to Registrant's Registration Statement on
Form N-1A, filed on April 29, 1988 (File Nos.
2-85921 and 811-3829).
(b) Shares certificate for Class B Shares of
Registrant - Incorporated herein by reference
as Exhibit 4(b) to Post-Effective Amendment
No. 18 to Registrant's Registration Statement
on Form N-1A, filed on April 29, 1994 (File
Nos. 2-85921 and 811-3829).
(c) Shares certificate for Class C Shares of
Registrant - Incorporated herein by reference
as Exhibit 4(c) to Post-Effective Amendment
No. 18 to Registrant's Registration Statement
on Form N-1A, filed on April 29, 1994 (File
Nos. 2-85921 and 811-3829).
(5) Advisory Agreement between the Registrant and
Alliance Capital Management L.P. -
Incorporated herein by reference as Exhibit 5
to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form
C-2
N-1A, filed on April 29, 1988 (File Nos. 2-
85921 and 811-3829).
(5)(a) Advisory Agreement between Registrant and
Alliance Capital Management L.P. -
Incorporated herein by reference as Exhibit
5(a) to Post-Effective Amendment No. 17 to
Registrant's Registration Statement on Form
N-1A, filed on March 2, 1993 (File Nos. 2-
85921 and 811-3829).
(6)(a) Amended Distribution Services Agreement
and (15) between the Registrant and Alliance Fund
Distributors, Inc. - Incorporated herein by
reference as Exhibit 6(a) to Post-Effective
Amendment No. 15 to Registrant's Registration
Statement on Form N-1A, filed on February 21,
1992 (File Nos. 2-85921 and 811-3829).
(6)(b) Amended Distribution Services Agreement
between the Registrant and Alliance Fund
Distributors, Inc. - Incorporated herein by
reference as Exhibit 6(b) to Post-Effective
Amendment No. 15 to Registrant's Registration
Statement on Form N-1A, filed on February 21,
1992 (File Nos. 2-85921 and 811-3829).
(c) Distribution Services Agreement between the
Registrant and Alliance Fund Distributors,
Inc. - Incorporated herein by reference as
Exhibit 6(c) to Post-Effective Amendment No.
17 to Registrant's Registration Statement on
Form N-1A, filed on March 2, 1993 (File Nos.
28921 and 811-3829).
(d) Selected Dealer Agreement between Alliance
Fund Distributors, Inc. and selected dealers
offering shares of Registrant - Incorporated
herein by reference as Exhibit 6(b) to Post-
Effective Amendment No. 10 to Registrant's
Registration Statement on Form N-1A, filed on
April 30, 1990 (File Nos. 2-85921 and 811-
3829).
(e) Selected Agent Agreement to be between
Alliance Fund Distributors, Inc. and selected
agents making available shares of Registrant
- Incorporated herein by reference as Exhibit
6(c) to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form
C-3
N-1A, filed on April 30, 1990 (File Nos. 2-
85921 and 811-3829).
(f) Amended Selected Dealer Agreement between
Alliance Fund Distributors, Inc. and selected
dealers offering shares to Registrant -
Incorporated herein by reference as Exhibit
6(f) to Post Effective Amendment No. 17 to
Registrant's Registration Statement on Form
N-1A, filed on March 2, 1993 (File Nos. 2-
85921 and 811-3829).
(g) Amended Selected Agent Agreement to be
between Alliance Fund Distributors, Inc. and
selected agents making available shares to
Registrant - Incorporated herein by reference
as Exhibit 6(g) to Post-Effective Amendment
No. 17 to Registrant's Registration Statement
on Form N-1A, filed on March 2, 1993 (File
Nos. 2-85921 and 811-3829).
(7) Not applicable.
(8) Custodian Contract between the Registrant and
State Street Bank and Trust Company -
Incorporated herein by reference as Exhibit 8
to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form
N-1A, filed on April 29, 1988 (File Nos.
2-85921 and 811-3829).
(9) Transfer Agency Agreement between Registrant
and Alliance Fund Services, Inc. -
Incorporated herein by reference as Exhibit 9
to Post-Effective Amendment No. 7 to
Registrant's Registration Statement on Form
N-1A, filed on May 1, 1989 (File Nos. 2-85921
and 811-3829).
(10) Not applicable.
(11) Consent of Independent Auditors - Filed
herewith.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) Rule 12b-1 Plan - See Exhibit 6(a) above.
C-4
(16) Schedule for computation of Yield and Total
Return Performance quotation - Incorporated
herein by reference as Exhibit 16 to
Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form
N-1A, filed on April 29, 1988 (File Nos.
2-85921 and 811-3829).
(27) Financial Data Schedule - Filed herewith.
Other Exhibits:
Powers of Attorney of Ruth S. Block, John D.
Carifa, David H. Dievler, James M. Hester,
Clifford L. Michel, Eugene F. O'Neil and Robert C.
White - Incorporated by reference as Other
Exhibits to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A,
filed on April 29, 1988 (File Nos. 2-85921 and
811-3829).
Power of Attorney of James R. Greene -
Incorporated by reference as Other Exhibits to
Post-Effective Amendment No. 10 to Registrant's
Registration Statement on Form N-1A, filed on
April 30, 1990 (File Nos. 2-85921 and 811-3829).
ITEM 25. Persons Controlled by or under Common Control with
Registrant.
None.
ITEM 26. Number of Holders of Securities.
As of February 15, 1995, Registrant had 67,020 record
holders of shares of Common Stock comprised 27,333
Class A Shares, 37,782 Class B Shares and 1,905 Class C
Shares.
ITEM 27. Indemnification
It is the Registrant's 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
C-5
set forth in Article EIGHTH of Registrant's Articles of
Incorporation, filed as Exhibit 1(a) and Section 10 of
the Distribution Services Agreement filed as Exhibit
6(a), all as set forth below. The Adviser's liability
for any loss suffered by the Registrant or its
shareholders is set forth in Section 4 of the Advisory
Agreement filed, 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
predecessor's existence ceased upon consummation of the
transaction.
(3) "Expenses" include attorney's fees.
(4) "Official capacity" means the following:
(i) When used with respect to a
director, the office of director in the
corporation; and
(ii) When used with respect to a person
other than a director as contemplated in
subsection (j), the elective or
appointive office in the corporation held
by the officer, or the employment or
agency relationship undertaken by the
employee or agent in behalf of the
corporation.
(iii) "Official capacity" does not
include service for any other foreign or
domestic corporation or any partnership,
joint venture, trust, other enterprise,
or employee benefit plan.
C-6
(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 matter giving rise to 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 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-7
(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
director's 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 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
director's 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
C-8
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 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 director's good faith belief that the standard
of conduct necessary for indemnification by the
corporation as authorized in this section has been met;
and
C-9
(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.
(h) This section does not limit the corporation's
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 director's 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 director's duties for a purpose reasonably
believed by the director to be in the interest of the
participants and beneficiaries of the plan shall be
C-10
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.
(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 person's 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
C-11
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 REGISTRANT'S 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.
The Advisory Agreement between the Registrant and
Alliance Capital Management L.P. provides that Alliance
Capital Management L.P. will not be liable under such
agreements for any mistake of judgment or in any event
whatsoever except for lack of good faith and that
nothing therein shall be deemed to protect, or purport
to protect, or purport to protect, Alliance Capital
Management L.P. against any liability to Registrant or
its security holders to which it would otherwise be
subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties
thereunder, or by reason of reckless disregard of its
obligations or duties thereunder.
The Distribution Services Agreement between the
Registrant and Alliance Fund Distributors, Inc.
provides that the Registrant will indemnify, defend and
hold Alliance Fund Distributors, Inc., and any person
who controls it within the meaning of Section 15 of the
Securities Act, free and harmless from and against any
and all claims, demands, liabilities and expenses which
Alliance Fund Distributors, Inc. or any controlling
person may incur arising out of or based upon any
alleged untrue statement of a material fact contained
in Registrant's Registration Statement or Prospectus 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 that nothing therein
shall be so construed as to protect Alliance Fund
Distributors against any liability to Registrant or its
security holders to which it would otherwise be subject
by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by
C-12
reason of reckless disregard of its obligations or
duties thereunder.
The foregoing summaries are qualified by the
entire text of Registrant's Articles of Incorporation,
Registrant's By-laws, the Advisory Agreement between
the Registrant and Alliance Capital Management L.P. and
the Distribution Services Agreement between Registrant
and Alliance Fund Distributors, Inc. which are filed as
Exhibits 1(a), 5 and 6(a), respectively in response to
Item 24 and each of which are incorporated by reference
herein.
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 or 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 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
C-13
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.
ITEM 28. Business and Other Connections of Adviser.
The descriptions of Alliance Capital Management L.P.
under the captions "Management of the Fund" in the
Prospectus and in the Statement of Additional
Information constituting Parts A and B, respectively,
of this Registration Statement are incorporated by
reference herein.
The information as to the directors and executive
officers of Alliance Capital Management Corporation,
the general partner of Alliance Capital Management
L.P., set forth in Alliance Capital Management L.P.'s
Form ADV filed with the Securities and Exchange
Commission on April 21, 1988 (File No. 801-32361) and
amended through the date hereof, is incorporated by
reference.
ITEM 29. Principal Underwriters
(a) Alliance Fund Distributors, Inc., the Registrant's
Principal Underwriter in connection with the sale
of shares of the Registrant. Alliance Fund
Distributors, Inc. also acts as Principal
Underwriter or Distributor for the following
investment companies:
C-14
ACM Institutional Reserves, Inc.
AFD Exchange Reserves
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
Alliance Bond Fund, Inc.
Alliance Capital Reserves
Alliance Counterpoint Fund
Alliance Developing Markets Fund, Inc.
Alliance Global Dollar Government Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Government Reserves
Alliance Growth and Income Fund, Inc.
Alliance Income Builder Fund, Inc.
Alliance International Fund
Alliance Mortgage Strategy Trust, 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 Short-Term Multi-Market Trust, Inc.
Alliance Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
Alliance Variable Products Series Fund, Inc.
Alliance World Income Trust, Inc.
Alliance Worldwide Privatization Fund, Inc.
Fiduciary Management Associates
The Alliance Fund, Inc.
The Alliance Portfolios
The Hudson River Trust
(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.
C-15
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES
NAME UNDERWRITER WITH REGISTRANT
Michael J. Laughlin Chairman
Robert L. Errico President
Michael T. Anderson Senior Vice President
Kimberly A. Baumgardner Senior Vice President
Daniel J. Dart Senior Vice President
Byron M. Davis Senior Vice President
Mark D. Gersten Senior Vice President Treasurer and
Chief Financial
Officer
Geoffrey L. Hyde Senior Vice President
Barbara J. Krumseik Senior Vice President
Stephen R. Laut Senior Vice President
William F. O'Grady Senior Vice President
Dusty W. Paschall Senior Vice President
Antonios G. Poleonadkis Senior Vice President
Gregory K. Shannahan Senior Vice President
Joseph F. Sumanski Senior Vice President
James P. Syrett Senior Vice President
Peter J. Szabo Senior Vice President
Richard A. Winge Senior Vice President
Jim A. Yockey Senior Vice President
Edmund P. Bergan, Jr. Senior Vice President, Secretary
Secretary and
General Counsel
Warren W. Babcock III Vice President
C-16
Kenneth F. Barkoff Vice President
Casimir F. Bolanowski Vice President
Kevin T. Cannon Vice President
Leo H. Cook Vice President
Mark J. Dunbar Vice President
Linda A. Finnerty Vice President
William C. Fisher Vice President
Robert M. Frank Vice President
Gerard J. Friscia Vice President
Andrew L. Gangolf Vice President
Troy L. Glawe Vice President
James E. Gunter Vice President
Alan Halfenger Vice President
Steven P. Hecht Vice President
George R. Hrabovsky Vice President
Valerie J. Hugo Vice President
Mark H. Huston Vice President
Robert H. Joseph Vice President
& Controller
Marek E. Lakotko Vice President
Sheila M. Lamb Vice President
Thomas Leavitt, III Vice President
Christopher J. MacDonald Vice President
George O. Martinez Vice President & Assistant
Associate General Secretary
Counsel
John A. McClain Vice President
C-17
Gregory T. McCombs Vice President
Daniel D. McGinley Vice President
Matthew P. Mintzer Vice President
Nicole M. Nolan Vice President
Robert T. Pigozzi Vice President
Bruce W. Reitz Vice President
Dennis A. Sanford Vice President
Raymond S. Scalfani Vice President
William J. Strott Vice President
Richard E. Tambourine Vice President
Nicholas K. Willett Vice President
Neil B. Wood Vice President
Emilie D. Wrapp Vice President
Benji A. Baer Assistant Vice President
Angela F. Bisagna Assistant Vice President
Maria L. Carreras Assistant Vice President
John W. Cronin Assistant Vice President
Richard W. Dabney Assistant Vice President
Gerard P. DiSalvo Assistant Vice President
Sohaila S. Farsheed Assistant Vice President
Leon M. Fern Assistant Vice President
Joseph W. Gibson Assistant Vice President
William B. Hanigan Assistant Vice President
Vicky M. Hayes Assistant Vice President
Daniel M. Hazard Assistant Vice President
John C. Hershock Assistant Vice President
C-18
James J. Hill Assistant Vice President
Kenneth R. Hill Assistant Vice President
Thomas K. Intoccia Assistant Vice President
Edward W. Kelly Assistant Vice President
Donna M. Lamback Assistant Vice President
David P. Lambert Assistant Vice President
Nicholas J. Lapi Assistant Vice President
Michael F. Mahoney Assistant Vice President
Renate S. Mars Assistant Vice President
Daniel G. McCabe Assistant Vice President
Shawn P. McClain Assistant Vice President
Maura A. McGrath Assistant Vice President
Paul J. McIntyre Assistant Vice President
Charles R. Mechler Assistant Vice President
Thomas F. Monnerat Assistant Vice President
Joanna D. Murray Assistant Vice President
Jeanette M. Nardella Assistant Vice President
William E. Noe Assistant Vice President
Marilyn I. Noonan Assistant Vice President
Camilo R. Pedraza Assistant Vice President
Robert E. Powers Assistant Vice President
Patrick J. Pung Assistant Vice President
Carol H. Rappa Assistant Vice President
Karen C. Satterberg Assistant Vice President
Rodney J. Shull Assistant Vice President
Robert M. Smith Assistant Vice President
C-19
Joseph T. Tocyloski Assistant Vice President
Mark R. Manley Assistant Secretary
(c) Not applicable.
ITEM 30. 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 Registrant's Custodian, 225
Franklin Street, Boston, Massachusetts 02110. All
other records so required to be maintained are
maintained at the offices of Alliance Capital
Management L.P., 1345 Avenue of the Americas, New York,
New York 10105.
ITEM 31. Management Services.
Not applicable.
ITEM 32. Undertakings
The Registrant undertakes to furnish each person
to whom a prospectus is delivered with a copy of the
Registrant's latest report to shareholders, upon
request and without charge.
The Registrant undertakes to provide assistance to
shareholders in communications concerning the removal
of any Director of the Fund in accordance with Section
16 of the Investment Company Act of 1940.
C-20
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 requirements for
effectiveness of this amendments to its Registration Statement
pursuant to Rule 485(b) 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 28th day of
February, 1995.
ALLIANCE MORTGAGE SECURITIES INCOME
FUND, INC.
by /s/_____________________________
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/___________________ Chairman and
John D. Carifa President February 28, 1995
2) Principal Financial
and Accounting Officer
/s/___________________ Treasurer and Chief
Mark D. Gersten Financial Officer February 28, 1995
C-21
3) ALL OF THE DIRECTORS
Ruth Block
John D. Carifa
David H. Dievler
James R. Greene
James M. Hester
Clifford L. Michel
Eugene F. O'Neil
Robert C. White
by /s/_____________________ February 28, 1995
(Attorney-in-fact)
Edmund P. Bergan, Jr.
C-22
INDEX TO EXHIBITS
PAGE
11 Consent of Independent Auditors
(27) Financial Data Schedule
C-23
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions
"Financial Highlights" in the Prospectus and "Shareholder
Services - Statements and Reports" and "General Information
- - - - Independent Auditors" in the Statement of Additional
Information and to the use of our report dated February 3,
1995 in this Registration Statement (Form N-1A No. 2-85921)
of Alliance Mortgage Securities Income Fund, Inc.
ERNST & YOUNG LLP
New York, New York
February 24, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 1775330000
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