<PAGE>
This is filed pursuant to Rule 497(c).
File Nos. 033-45328 and 811-06554.
<PAGE>
The Alliance Prospectus and Application
Bond Funds
March 1, 1999
The Alliance Bond Funds provide a U.S. Government Funds
broad selection of investment
alternatives to investors seeking o Alliance Short-Term U.S. Government
high current income. Fund
o Alliance U.S. Government Portfolio
o Alliance Limited Maturity Government
Fund
Mortgage Fund
o Alliance Mortgage Securities Income
Fund
Multi-Market Fund
o Alliance Multi-Market Strategy Trust
Global Bond Funds
o Alliance North American Government
Income Trust
o Alliance Global Dollar Government
Fund
o Alliance Global Strategic Income
Trust
Corporate Bond Funds
o Alliance Corporate Bond Portfolio
o Alliance High Yield Fund
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
Alliance Capital {LOGO]
<PAGE>
- --------------------------------------------------------------------------------
Table Of Contents
- --------------------------------------------------------------------------------
Page
RISK/RETURN SUMMARY ....................................................... 3
U.S. Government Funds ..................................................... 4
Mortgage Fund ............................................................. 7
Multi-Market Fund ......................................................... 8
Global Bond Funds ......................................................... 9
Corporate Bond Funds ...................................................... 12
Summary of Principal Risks ................................................ 14
Principal Risks by Fund ................................................... 16
FEES AND EXPENSES OF THE FUNDS ............................................ 17
GLOSSARY .................................................................. 19
DESCRIPTION OF THE FUNDS .................................................. 20
Investment Objectives and Policies ........................................ 20
Description of Investment Practices ....................................... 26
Additional Risk Considerations ............................................ 37
MANAGEMENT OF THE FUNDS ................................................... 41
PURCHASE AND SALE OF SHARES ............................................... 42
How The Funds Value Their Shares .......................................... 42
How To Buy Shares ......................................................... 42
How To Exchange Shares .................................................... 43
How To Sell Shares ........................................................ 43
DIVIDENDS, DISTRIBUTIONS AND TAXES ........................................ 43
DISTRIBUTION ARRANGEMENTS ................................................. 44
GENERAL INFORMATION ....................................................... 46
FINANCIAL HIGHLIGHTS ...................................................... 47
APPENDIX A: BOND RATINGS .................................................. 54
APPENDIX B: GENERAL INFORMATION ABOUT
CANADA, MEXICO AND ARGENTINA ............................................ 57
The Funds' investment adviser is Alliance Capital Management L.P., a global
investment manager providing diversified services to institutions and
individuals through a broad line of investments including more than 100 mutual
funds.
RISK/RETURN SUMMARY
The following is a summary of certain key information about the Alliance Bond
Funds. You will find additional information about each Fund, including a
detailed description of the risks of an investment in each Fund, after this
Summary.
The Risk/Return Summary describes the Funds' objectives, principal investment
strategies, principal risks and fees. Each Fund's Summary page includes a short
discussion of some of the principal risks of investing in that Fund. A further
discussion of these and other risks is on pages 14-16.
More detailed descriptions of the Funds, including the risks associated with
investing in the Funds, can be found further back in this Prospectus. Please be
sure to read this additional information BEFORE you invest. Each of the Funds
may at times use certain types of investment derivatives such as options,
futures, forwards, and swaps. The use of these techniques involves special risks
that are discussed in this Prospectus.
The Risk/Return Summary includes a table for each Fund showing its average
annual returns and a bar chart showing its annual returns. The table and the bar
chart provide an indication of the historical risk of an investment in each Fund
by showing:
o how the Fund's average annual returns for one, five, and 10 years (or over
the life of the Fund if the Fund is less than 10 years old) compare to
those of a broad based securities market index; and
o changes in the Fund's performance from year to year over 10 years (or over
the life of the Fund if the Fund is less than 10 years old).
A Fund's past performance, of course, does not necessarily indicate how it will
perform in the future.
Other important things for you to note:
o You may lose money by investing in the Funds.
o An investment in the Funds is not a deposit in a bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
3
<PAGE>
U.S. GOVERNMENT FUNDS
The U.S. Government Funds offer a selection of alternatives to investors seeking
high current income consistent with the preservation of capital through
investments primarily in U.S. Government securities.
Alliance Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
OBJECTIVE:
The Fund's investment objective is high current income consistent with the
preservation of capital by investing primarily in a portfolio of U.S. Government
securities.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Fund invests at least 65% of its total assets in U.S. Government securities,
including mortgage-related securities, repurchase agreements and forward
commitments relating to U.S. Government securities. The Fund also may invest a
portion of its assets in securities of non-governmental issuers. The Fund
normally maintains an average dollar-weighted maturity of not more than three
years.
Among the principal risks of investing in the Fund are interest rate risk,
credit risk, and market risk. Because the Fund may invest in mortgage-related
securities, it is subject to the risk that mortgage loans will be prepaid when
interest rates decline, forcing the Fund to reinvest in securities with lower
interest rates. For this and other reasons, mortgage-related securities may
have significantly greater price and yield volatility than traditional debt
securities.
The table and bar chart provide an indication of the historical risk of an
investment in the Fund.
PERFORMANCE TABLE
- --------------------------------------------------------------------------------
Since
1 Year 5 Years Inception
- --------------------------------------------------------------------------------
Class A -0.42% 2.79% 3.74%
- --------------------------------------------------------------------------------
Class B 0.37% 2.97% 3.77%
- --------------------------------------------------------------------------------
Class C 2.24% 2.93% 3.69%
- --------------------------------------------------------------------------------
Lehman Brothers
1-3 Year
Government
Bond Index 6.97% 5.96% 5.99%
- --------------------------------------------------------------------------------
The average annual total returns in the performance table for the periods ended
December 31, 1998 reflect imposition of the maximum front-end or contingent
deferred sales charges and conversion of Class B shares to Class A shares after
the applicable period. Since Inception returns are from inception of Class A and
Class B shares (5/4/92). Index returns are from month-end following inception of
Class A and Class B shares.
Performance information for periods prior to the inception of Class C shares
(8/2/93) is the performance of the Fund's Class A shares adjusted to reflect the
higher expense ratio of Class C shares. The average annual total return for
Class C since its actual inception date was 2.89%. The index return for the
comparable period (which dates from month-end following the Class C inception
date) was 5.86%.
BAR CHART
- --------------------------------------------------------------------------------
The annual returns in the bar chart are for the Fund's Class A shares and do not
reflect sales loads. If sales loads were reflected, returns would be less than
those shown.
[GRAPHIC OMITTED]
[The following table was depicted as a bar graph in the printed material.]
Calendar Year End
89 90 91 92 93 94 95 96 97 98
-- -- -- -- -- -- -- -- -- --
n/a n/a n/a n/a 6.13 -1.70 7.22 4.66 4.54 3.95
You should consider an investment in the Fund as a long-term investment. The
Fund's returns will fluctuate over long and short periods. For example, during
the period shown in the bar chart, the Fund's:
Best quarter was up 2.35%, 1st quarter, 1995; and Worst quarter was down -1.62%,
1st quarter, 1994.
4
<PAGE>
Alliance U.S. Government Portfolio
- --------------------------------------------------------------------------------
OBJECTIVE:
The Fund's investment objective is a high level of current income that is
consistent with prudent investment risk.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Fund invests primarily in U.S. Government securities, including
mortgage-related securities, repurchase agreements and forward contracts
relating to U.S. Government securities. The Fund also may invest in non-U.S.
Government mortgage-related and asset-backed securities. The average weighted
maturity of the Fund's investments varies between one year or less and 30 years.
Among the principal risks of investing in the Fund are interest rate risk,
credit risk, and market risk. Because the Fund may invest in mortgage-related
and asset-backed securities, it is subject to the risk that mortgage loans or
other obligations will be prepaid when interest rates decline, forcing the Fund
to reinvest in securities with lower interest rates. For this and other
reasons, mortgage-related and asset-backed securities may have significantly
greater price and yield volatility than traditional debt securities.
The table and bar chart provide an indication of the historical risk of an
investment in the Fund.
PERFORMANCE TABLE
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Class A 3.94% 4.76% 7.51%
- --------------------------------------------------------------------------------
Class B 4.80% 4.90% 7.29%
- --------------------------------------------------------------------------------
Class C 6.80% 4.90% 7.29%
- --------------------------------------------------------------------------------
Lehman Brothers
Government
Bond Index 9.85% 7.18% 9.17%
- --------------------------------------------------------------------------------
The average annual total returns in the performance table for the periods ended
December 31, 1998 reflect imposition of the maximum front-end or contingent
deferred sales charges and conversion of Class B shares to Class A shares after
the applicable period. Index returns are from 12/31/88.
Performance information for periods prior to the inception of Class B shares
(9/30/91) and Class C shares (5/3/93) is the performance of the Fund's Class A
shares adjusted to reflect the higher expense ratio of Class B and Class C
shares. The average annual total returns for Class B and Class C since their
actual inception dates were 6.38% and 5.12%, respectively. Index returns for the
comparable periods (which date from month-end following applicable Class
inception date) were 8.18% and 7.38%, respectively.
BAR CHART
- --------------------------------------------------------------------------------
The annual returns in the bar chart are for the Fund's Class A shares and do not
reflect sales loads. If sales loads were reflected, returns would be less than
those shown.
[GRAPHIC OMITTED]
[The following table was depicted as a bar graph in the printed material.]
Calendar Year End
89 90 91 92 93 94 95 96 97 98
-- -- -- -- -- -- -- -- -- --
12.52 7.88 15.74 6.03 9.72 -4.38 16.58 0.34 8.55 8.60
You should consider an investment in the Fund as a long-term investment. The
Fund's returns will fluctuate over long and short periods. For example, during
the period shown in the bar chart, the Fund's:
Best quarter was up 7.69%, 2nd quarter, 1989; and Worst quarter was down -3.41%,
1st quarter, 1994.
5
<PAGE>
Alliance Limited Maturity Government Fund
- --------------------------------------------------------------------------------
OBJECTIVE:
The Fund's investment objective is the highest level of current income
consistent with low volatility of net asset value.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Fund invests primarily in U.S. Government securities, including
mortgage-related securities and repurchase agreements relating to U.S.
Government securities. The Fund takes advantage of a wide range of maturities of
debt securities and adjusts the dollar-weighted average maturity of its
portfolio from time to time, depending on Alliance's assessment of relative
yields on securities of different maturities and the expected effect of changes
in interest rates on the market value of the Fund's portfolio. At all times,
however, each of the Fund's securities has either a remaining maturity of not
more than 10 years or a duration not exceeding that of a ten-year Treasury note.
The Fund also may invest up to 35% of its total assets in:
o high-quality asset-backed securities, including mortgage-related
securities that are not U.S. Government securities;
o treasury securities issued by private issuers;
o certificates of deposit, bankers' acceptances, and interest-bearing
savings deposits of banks with assets of more than $1 billion;
o higher quality commercial paper or, if unrated, commercial paper issued by
companies that have high-quality debt issues outstanding; and
o high-quality debt securities of corporate issuers.
Among the principal risks of investing in the Fund are interest rate risk,
credit risk, leveraging risk, liquidity risk and market risk. Because the Fund
may invest in mortgage-related and asset-backed securities, it is subject to the
risk that mortgage loans or other obligations will be prepaid when interest
rates decline, forcing the Fund to reinvest in securities with lower interest
rates. For this and other reasons, mortgage-related and asset-backed
securities may have significantly greater price and yield volatility than
traditional debt securities.
The table and bar chart provide an indication of the historical risk of an
investment in the Fund.
PERFORMANCE TABLE
- --------------------------------------------------------------------------------
Since
1 Year 5 Years Inception
- --------------------------------------------------------------------------------
Class A 2.17% 4.07% 4.48%
- --------------------------------------------------------------------------------
Class B 2.95% 4.21% 4.54%
- --------------------------------------------------------------------------------
Class C 4.96% 4.22% 4.43%
- --------------------------------------------------------------------------------
Lehman Brothers
Government
Bond Index 9.85% 7.18% 7.94%
- --------------------------------------------------------------------------------
The average annual total returns in the performance table for the periods ended
December 31, 1998 reflect imposition of the maximum front-end or contingent
deferred sales charges and conversion of Class B shares to Class A shares after
the applicable period. Since Inception returns are from inception of Class A and
Class B shares (6/1/92). Index returns are from month-end of inception of Class
A and Class B shares.
Performance information for periods prior to the inception of Class C shares
(5/3/93) is the performance of the Fund's Class A shares adjusted to reflect the
higher expense ratio of Class C shares. The average annual total return for
Class C since its actual inception date was 4.21%. The index return for the
comparable period (which dates from month-end following the Class C inception
date) was 7.38%.
BAR CHART
The annual returns in the bar chart are for the Fund's Class A shares and do not
reflect sales loads. If sales loads were reflected, returns would be less than
those shown.
[GRAPHIC OMITTED]
[The following table was depicted as a bar graph in the printed material.]
Calendar Year End
89 90 91 92 93 94 95 96 97 98
-- -- -- -- -- -- -- -- -- --
n/a n/a n/a n/a 6.21 0.26 7.08 4.01 7.03 6.70
You should consider an investment in the Fund as a long-term investment. The
Fund's returns will fluctuate over long and short periods. For example, during
the period shown in the bar chart, the Fund's:
Best quarter was up 4.21%, 3rd quarter, 1998; and Worst quarter was down -0.65%,
4th quarter, 1994.
6
<PAGE>
MORTGAGE FUND
The Mortgage Fund offers investors seeking high current income the alternative
of investing in a diversified portfolio of mortgage-related securities.
Alliance Mortgage Securities Income Fund
- --------------------------------------------------------------------------------
OBJECTIVE:
The Fund's investment objective is a high level of current income to the extent
consistent with prudent investment risk.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Fund invests primarily in a diversified portfolio of mortgage-related
securities, including collateralized mortgage obligations or CMO's. The Fund may
invest up to 20% of its total assets in lower-rated mortgage-related securities.
The average weighted maturity of the Fund's portfolio of debt securities is
expected to vary between two and ten years.
The Fund also may invest up to 35% of its total assets in:
o U.S. Government securities;
o qualifying bank deposits;
o prime commercial paper or, if unrated, commercial paper issued by
companies that have high-quality debt issues outstanding;
o high-grade debt securities secured by mortgages on commercial real estate
or residential rental properties; and
o high-grade asset-backed securities.
Among the principal risks of investing in the Fund are interest rate risk,
credit risk, leveraging risk, derivatives risk, and market risk. Because the
Fund may invest in mortgage-related securities, it is subject to the risk that
mortgage loans will be prepaid when interest rates decline, forcing the Fund to
reinvest in securities with lower interest rates. For this and other reasons,
mortgage-related securities may have significantly greater price and yield
volatility than traditional debt securities.
The table and bar chart provide an indication of the historical risk of an
investment in the Fund.
PERFORMANCE TABLE
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Class A 1.36% 4.39% 7.66%
- --------------------------------------------------------------------------------
Class B 2.07% 4.51% 7.37%
- --------------------------------------------------------------------------------
Class C 4.05% 4.51% 7.37%
- --------------------------------------------------------------------------------
Lehman Brothers
Mortgage-Backed
Securities Index 6.96% 7.23% 9.13%
- --------------------------------------------------------------------------------
The average annual total returns in the performance table for the periods ended
December 31, 1998 reflect imposition of the maximum front-end or contingent
deferred sales charges and conversion of Class B shares to Class A shares after
the applicable period. Index returns are from 12/31/88.
Performance information for periods prior to the inception of Class B shares
(1/30/92) and Class C shares (5/3/93) is the performance of the Fund's Class A
shares adjusted to reflect the higher expense ratio of Class B and Class C
shares. The average annual total returns for Class B and Class C since their
actual inception dates were 5.84% and 4.76%, respectively. Index returns for the
comparable periods (which date from month-end following applicable Class
inception date) were 9.28% and 6.95%, respectively.
BAR CHART
- --------------------------------------------------------------------------------
The annual returns in the bar chart are for the Fund's Class A shares and do not
reflect sales loads. If sales loads were reflected, returns would be less than
those shown.
[GRAPHIC OMITTED]
[The following table was depicted as a bar graph in the printed material.]
Calendar Year End
89 90 91 92 93 94 95 96 97 98
-- -- -- -- -- -- -- -- -- --
11.00 10.95 15.44 7.73 10.14 -6.14 15.35 4.23 8.40 5.82
You should consider an investment in the Fund as a long-term investment. The
Fund's returns will fluctuate over long and short periods. For example, during
the period shown in the bar chart, the Fund's:
Best quarter was up 5.90%, 4th quarter, 1990; and Worst quarter was down -4.30%,
1st quarter, 1994.
7
<PAGE>
MULTI-MARKET FUND
The Multi-Market Fund offers investors seeking high current income the
alternative of investing in a portfolio of securities denominated in the U.S.
Dollar and selected foreign currencies.
Alliance Multi-Market Strategy Trust
- --------------------------------------------------------------------------------
OBJECTIVE:
The Fund's investment objective is the highest level of current income that is
available, consistent with what Alliance considers to be prudent investment
risk, from a portfolio of high-quality debt securities having remaining
maturities of not more than five years.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Fund invests in high-quality debt securities having remaining maturities of
not more than five years, with a high proportion of investments in money market
instruments. The Fund seeks investment opportunities in foreign, as well as
domestic, securities markets. Normally, at least 70% of the Fund's debt
securities will be denominated in foreign currencies. The Fund limits its
investments in a single currency other than the U.S. Dollar to 25% of its net
assets, except for the Euro in which the Fund may invest up to 50% of its net
assets.
The Fund concentrates at least 25% of its total assets in debt instruments
issued by domestic and foreign banking companies. The Fund may use significant
borrowings for leverage. The Fund also may:
o use derivatives strategies;
o invest in prime commercial paper or unrated paper of equivalent quality;
o enter into repurchase agreements; and
o invest in variable, floating, and inverse floating rate securities.
Among the principal risks of investing in the Fund are interest rate risk,
credit risk, market risk, and leveraging risk. The Fund's investments in debt
securities denominated in foreign currencies have foreign risk and currency
risk. In addition, the Fund is "non-diversified" meaning that it invests more
of its assets in a smaller number of issuers than many other funds. Changes
in the value of a single security may have a more significant effect, either
negative or positive, on the Fund's net asset value.
The table and bar chart provide an indication of the historical risk of an
investment in the Fund.
PERFORMANCE TABLE
- --------------------------------------------------------------------------------
Since
1 Year 5 Years Inception
- --------------------------------------------------------------------------------
Class A 1.72% 3.10% 3.47%
- --------------------------------------------------------------------------------
Class B 2.46% 3.17% 3.41%
- --------------------------------------------------------------------------------
Class C 4.25% 3.15% 3.25%
- --------------------------------------------------------------------------------
Merrill Lynch
1-3 Year
Government
Bond Index 6.97% 5.99% 6.50%
- --------------------------------------------------------------------------------
The average annual total returns in the performance table for the periods ended
December 31, 1998 reflect imposition of the maximum front-end or contingent
deferred sales charges and conversion of Class B shares to Class A shares after
the applicable period. Since Inception returns are from inception of Class A and
Class B shares (5/29/91). Index returns are from month-end of inception of Class
A shares.
Performance information for periods prior to the inception of Class C shares
(5/3/93) is the performance of the Fund's Class A shares adjusted to reflect the
higher expense ratio of Class C shares. The average annual total return for
Class C since its actual inception date was 3.95%. The index return for the
comparable period (which dates from month-end following the Class C inception
date) was 5.86%.
BAR CHART
- --------------------------------------------------------------------------------
The annual returns in the bar chart are for the Fund's Class A shares and do not
reflect sales loads. If sales loads were reflected, returns would be less than
those shown.
[GRAPHIC OMITTED]
[The following table was depicted as a bar graph in the printed material.]
Calendar Year End
89 90 91 92 93 94 95 96 97 98
-- -- -- -- -- -- -- -- -- --
n/a n/a n/a -2.49 10.91 -12.77 6.00 16.19 6.71 6.17
You should consider an investment in the Fund as a long-term investment. The
Fund's returns will fluctuate over long and short periods. For example, during
the period shown in the bar chart, the Fund's:
Best quarter was up 5.46%, 2nd quarter, 1995; and Worst quarter was down -8.19%,
4th quarter, 1994.
8
<PAGE>
GLOBAL BOND FUNDS
The Global Bond Funds offer a selection of alternatives to investors seeking a
high level of current income through investments primarily in foreign government
securities.
Alliance North American Government Income Trust
- --------------------------------------------------------------------------------
OBJECTIVE:
The Fund's investment objective is the highest level of current income,
consistent with what Alliance considers to be prudent investment risk, that is
available from a portfolio of debt securities issued or guaranteed by the
governments of the United States, Canada, or Mexico, their political
subdivisions (including Canadian Provinces but excluding states of the United
States), agencies, instrumentalities or authorities.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Fund primarily invests in debt securities issued or guaranteed by: (i) the
federal governments of the United States, Canada, and Mexico; (ii)
government-related entities in the United States, Canada, and Mexico; and (iii)
the provincial governments of Canada and Mexico. The Fund also invests
significantly in debt securities issued by Argentine government entities. The
Fund also may invest in debt securities of other Central and South American
countries. These investments are investment grade securities generally
denominated in each countries' currency, but at least 25% of the Fund's assets
are in U.S. Dollar-denominated securities. The average weighted maturity of the
Fund's portfolio is expected to vary between one year or less and 30 years.
The Fund may use significant borrowings for leverage. The Fund also may:
o use derivative strategies; and
o invest in variable, floating, and inverse floating rate instruments.
Among the principal risks of investing in the Fund are interest rate risk,
credit risk, market risk and leveraging risk. The Fund's investments in debt
securities of Canada, Mexico, and Argentina have foreign risk and currency risk.
Your investment also has the risk that market changes or other events affecting
these countries, including potential instability and unpredictable economic
conditions, may have a more significant effect on the Fund's net asset value. In
addition, the Fund is "non-diversified" meaning that it invests more of its
assets in a smaller number of issuers than many other funds. Changes in the
value of a single security may have a more significant effect, either negative
or positive, on the Fund's net asset value.
The table and bar chart provide an indication of the historical risk of an
investment in the Fund.
PERFORMANCE TABLE
- --------------------------------------------------------------------------------
Since
1 Year 5 Years Inception
- --------------------------------------------------------------------------------
Class A 1.99% 5.88% 7.89%
- --------------------------------------------------------------------------------
Class B 2.90% 5.89% 7.79%
- --------------------------------------------------------------------------------
Class C 4.78% 5.89% 7.70%
- --------------------------------------------------------------------------------
Lehman Brothers
Aggregate Bond
Index 8.69% 7.27% 8.14%
- --------------------------------------------------------------------------------
The average annual total returns in the performance table for the periods ended
December 31, 1998 reflect imposition of the maximum front-end or contingent
deferred sales charges and conversion of Class B shares to Class A shares after
the applicable period. Since Inception returns are from inception of Class A and
Class B shares (3/27/92). Index returns are from month-end of inception of Class
A shares.
Performance information for periods prior to the inception of Class C shares
(5/3/93) is the performance of the Fund's Class A shares adjusted to reflect
the higher expense ratio of Class C shares. The average annual total return
for Class C since its inception date was 7.11%. The index return for the
comparable period (which dates from month-end following the Class C inception
date) was 7.34%.
BAR CHART
- --------------------------------------------------------------------------------
The annual returns in the bar chart are for the Fund's Class A shares and do not
reflect sales loads. If sales loads were reflected, returns would be less than
those shown.
[GRAPHIC OMITTED]
[The following table was depicted as a bar graph in the printed material.]
Calendar Year End
89 90 91 92 93 94 95 96 97 98
-- -- -- -- -- -- -- -- -- --
n/a n/a n/a n/a 18.64 -30.24 31.01 24.20 14.98 6.53
You should consider an investment in the Fund as a long-term investment. The
Fund's returns will fluctuate over long and short periods. For example, during
the period shown in the bar chart, the Fund's:
Best quarter was up 17.24%, 2nd quarter, 1995; and Worst quarter was down
- -23.19%, 4th quarter, 1994.
9
<PAGE>
Alliance Global Dollar Government Fund
- --------------------------------------------------------------------------------
OBJECTIVE:
The Fund's investment objective is a high level of current income and,
secondarily, capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Fund primarily invests in sovereign debt obligations. The Fund invests
substantially all of its assets in lower-rated securities or unrated securities
of equivalent quality. The Fund limits its investments in sovereign debt
obligations of any one country to less than 25% of its total assets.
The Fund may invest up to 35% of its total assets in U.S. and non-U.S. corporate
debt securities. All of the Fund's investments in sovereign and other debt
securities will be U.S. Dollar-denominated. The Fund also may invest up to 30%
of its total assets in emerging markets or developing countries, including
Argentina, Brazil, Mexico, Morocco, the Philippines, Russia, and Venezuela.
The average weighted maturity of the Fund's investments ranges from nine
years to longer than 25 years, depending upon the type of security.
The Fund may use significant borrowings and reverse repurchase agreements and
dollar rolls for leverage. The Fund also may use derivatives strategies;
invest in structured securities; invest in fixed and floating rate loans to
sovereign debt issuers; enter into repurchase agreements; and invest in
variable, floating, and inverse floating rate securities.
Among the principal risks of investing in the Fund are interest rate risk,
credit risk, market risk and leveraging risk. Because the Fund invests in
lower-rated securities, it has significantly more risk than other types of bond
funds and its returns will be more volatile. The Fund's investments in foreign
securities have foreign risk, currency risk and country or geographic risk.
Because the Fund invests in emerging markets and in developing countries, the
Fund's returns will be significantly more volatile and may differ substantially
from returns in the U.S. bond markets generally. Your investment also has the
risk that market changes or other factors affecting emerging markets and
developing countries, including political instability and unpredictable economic
conditions, may have a significant effect on the Fund's net asset value. In
addition, the Fund is "non-diversified" meaning that it invests more of its
assets in a smaller number of issuers than many other funds. Changes in the
value of a single security may have a more significant effect, either negative
or positive, on the Fund's net asset value.
The table and bar chart provide an indication of the historical risk of an
investment in the Fund.
PERFORMANCE TABLE
- --------------------------------------------------------------------------------
Since
1 Year Inception*
- --------------------------------------------------------------------------------
Class A -25.37% 4.39%
- --------------------------------------------------------------------------------
Class B -24.77% 4.49%
- --------------------------------------------------------------------------------
Class C -23.37% 4.52%
- --------------------------------------------------------------------------------
J.P. Morgan Emerging
Markets Bond Index -11.04% 9.70%
- --------------------------------------------------------------------------------
The average annual total returns in the performance table for the periods ended
December 31, 1998 reflect imposition of the maximum front-end or contingent
deferred sales charges and conversion of Class B shares to Class A shares after
the applicable period.
* Inception Dates: 2/25/94 for Class A, Class B, and Class C shares; Index
return is from 2/28/94.
BAR CHART
- --------------------------------------------------------------------------------
The annual returns in the bar chart are for the Fund's Class A shares and do not
reflect sales loads. If sales loads were reflected, returns would be less than
those shown.
[GRAPHIC OMITTED]
[The following table was depicted as a bar graph in the printed material.]
Calendar Year End
89 90 91 92 93 94 95 96 97 98
-- -- -- -- -- -- -- -- -- --
n/a n/a n/a n/a n/a n/a 25.47 39.44 9.01 -22.05
You should consider an investment in the Fund as a long-term investment. The
Fund's returns will fluctuate over long and short periods. For example, during
the period shown in the bar chart, the Fund's:
Best quarter was up 26.16%, 2nd quarter, 1995; and Worst quarter was down
- -28.68%, 3rd quarter, 1998.
10
<PAGE>
Alliance Global Strategic Income Trust
- --------------------------------------------------------------------------------
OBJECTIVE:
The Fund's investment objective is primarily a high level of current income and,
secondarily, capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Fund primarily invests in debt securities of U.S. and non-U.S. companies,
U.S. Government and foreign governments, and supranational entities. The Fund's
foreign investments are generally denominated in foreign currencies. The Fund,
however, generally seeks to hedge currency risk. The Fund normally invests at
least 65% of its total assets in debt securities of companies located in at
least three countries, one of which may be the United States. The Fund limits
its investments in any one foreign country to 25% of its total assets.
The Fund invests at least 65% of its total assets in investment grade
securities, but also may invest up to 35% of its total assets in lower-rated
securities. The average weighted maturity of the Fund's investments varies
between five and 30 years.
The Fund may use significant borrowings and reverse repurchase agreements and
dollar rolls for leverage. The Fund also may:
o use derivatives strategies;
o invest in structured securities;
o invest in Eurodollar instruments and foreign currencies;
o invest in asset-backed and mortgage-related securities;
o enter into repurchase agreements; and
o invest in floating, variable, and inverse floating rate securities.
Among the principal risks of investing in the Fund are interest rate risk,
credit risk, market risk, and leveraging risk. The Fund's investments in foreign
issuers have foreign risk and currency risk. To the extent the Fund invests in
lower-rated securities, your investment is subject to more risk than a fund that
invests primarily in higher-rated securities. The Fund's use of derivatives
strategies has derivatives risk. In addition, the Fund is "non-diversified"
meaning that it invests more of its assets in a smaller number of issuers than
many other funds. Changes in the value of a single security may have a more
significant effect, either negative or positive, on the Fund's net asset value.
The table and bar chart provide an indication of the historical risk of an
investment in the Fund.
PERFORMANCE TABLE
- --------------------------------------------------------------------------------
Since
1 Year Inception
- --------------------------------------------------------------------------------
Class A -2.31% 11.07%
- --------------------------------------------------------------------------------
Class B -2.46% 11.31%
- --------------------------------------------------------------------------------
Class C 0.32% 11.94%
- --------------------------------------------------------------------------------
Lehman Brothers
Aggregate Bond Index 8.69% 7.26%
- --------------------------------------------------------------------------------
The average annual total returns in the performance table for the periods ended
December 31, 1998 reflect imposition of the maximum front-end or contingent
deferred sales charges and conversion of Class B shares to Class A shares after
the applicable period. Since Inception returns are from inception of Class A
shares (1/9/96). Index returns are from month-end of inception of Class A
shares.
Performance information for periods prior to the inception of Class B shares and
Class C shares (3/21/96) is the performance of the Fund's Class A shares
adjusted to reflect the higher expense ratio of Class B and Class C shares. The
average annual total returns for Class B and Class C since their actual
inception dates were 11.60% and 12.19%, respectively. The index return for the
comparable period (which date from month-end following applicable Class
inception date) was 8.68%.
BAR CHART
- --------------------------------------------------------------------------------
The annual returns in the bar chart are for the Fund's Class A shares and do not
reflect sales loads. If sales loads were reflected, returns would be less than
those shown.
[GRAPHIC OMITTED]
[The following table was depicted as a bar graph in the printed material.]
Calendar Year End
89 90 91 92 93 94 95 96 97 98
-- -- -- -- -- -- -- -- -- --
n/a n/a n/a n/a n/a n/a n/a n/a 14.96 1.99
You should consider an investment in the Fund as a long-term investment. The
Fund's returns will fluctuate over long and short periods. For example, during
the period shown in the bar chart, the Fund's:
Best quarter was up 6.86%, 2nd quarter, 1997; and Worst quarter was down -5.68%,
3rd quarter, 1998.
11
<PAGE>
CORPORATE BOND FUNDS
The Corporate Bond Funds offer a selection of alternatives to investors seeking
to maximize current income through investments in corporate bonds.
Alliance Corporate Bond Portfolio
- --------------------------------------------------------------------------------
OBJECTIVE:
The Fund's investment objective is primarily to maximize income over the long
term consistent with providing reasonable safety in the value of each
shareholder's investment, and secondarily to increase its capital through
appreciation of its investments in order to preserve and, if possible, increase
the purchasing power of each shareholder's investment.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Fund primarily invests in corporate bonds. The Fund may invest up to 50% of
its total assets in foreign debt securities, primarily corporate debt securities
and sovereign debt obligations. All of the Fund's investments, whether foreign
or domestic, will be U.S. Dollar denominated. The Fund also may invest in
income-producing equity securities. While the Fund invests primarily (currently
65%) in investment grade debt securities, it also may invest a significant
amount of its total assets in lower-rated debt securities. The average weighted
maturity of the Fund's investments varies between one year or less and 30 years.
The Fund pursues a more aggressive investment strategy than other corporate bond
funds. The Fund's investments tend to have a relatively long average weighted
maturity and duration. The Fund emphasizes both foreign corporate and sovereign
debt obligations, as well as corporate bonds that are expected to benefit from
improvements in their issuers' credit fundamentals.
Among the principal risks of investing in the Fund are interest rate risk,
credit risk, and market risk. Because the Fund emphasizes investments with a
relatively long average maturity and duration, its returns may be more volatile
than other corporate bond funds. To the extent the Fund invests in lower-rated
securities, your investment is subject to more credit risk than a fund that
invests solely in higher-rated securities. The Fund's investments in foreign
debt obligations have foreign risk and currency risk.
The table and bar chart provide an indication of the historical risk of an
investment in the Fund.
PERFORMANCE TABLE
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Class A -4.29% 5.63% 10.65%
- --------------------------------------------------------------------------------
Class B -3.54% 5.82% 10.37%
- --------------------------------------------------------------------------------
Class C -1.63% 5.84% 10.38%
- --------------------------------------------------------------------------------
Lehman Brothers
Aggregate Bond
Index 8.69% 7.27% 9.26%
- --------------------------------------------------------------------------------
The average annual total returns in the performance table for the periods ended
December 31, 1998 reflect imposition of the maximum front-end or contingent
deferred sales charges and conversion of Class B shares to Class A shares after
the applicable period. Index returns are from 12/31/88.
Performance information for periods prior to the inception of Class B shares
(1/8/93) and Class C shares (5/3/93) is the performance of the Fund's Class A
shares adjusted to reflect the higher expense ratio of Class B and Class C
shares. The average annual total returns for Class B and Class C since their
actual inception dates were 9.57% and 7.95%, respectively. Index returns for the
comparable periods (which date from month-end following applicable class
inception date) were 7.45% and 7.34%, respectively.
BAR CHART
- --------------------------------------------------------------------------------
The annual returns in the bar chart are for the Fund's Class A shares and do not
reflect sales loads. If sales loads were reflected, returns would be less than
those shown.
[GRAPHIC OMITTED]
[The following table was depicted as a bar graph in the printed material.]
Calendar Year End
89 90 91 92 93 94 95 96 97 98
-- -- -- -- -- -- -- -- -- --
13.06 5.54 18.05 13.07 31.09 -12.75 27.98 10.02 11.81 -0.03
You should consider an investment in the Fund as a long-term investment. The
Fund's returns will fluctuate over long and short periods. For example, during
the period shown in the bar chart, the Fund's:
Best quarter was up 15.61%, 2nd quarter, 1995; and Worst quarter was down
- -8.42%, 1st quarter, 1994.
12
<PAGE>
Alliance High Yield Fund
- --------------------------------------------------------------------------------
OBJECTIVE:
The Fund's investment objective is to achieve a high total return by maximizing
current income and, to the extent consistent with that objective, capital
appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
The Fund primarily invests in high yield, below investment grade debt
securities, commonly known as "junk bonds." The Fund seeks to maximize current
income by taking advantage of market developments, yield disparities, and
variations in the creditworthiness of issuers.
Among the principal risks of investing in the Fund are interest rate risk,
credit risk, and market risk. Because the Fund invests in lower-rated
securities, it has significantly more risk than other types of bond funds and
its returns will be more volatile. The Fund's investments in foreign securities
have foreign risk and currency risk.
The table and bar chart provide an indication of the historical risk of an
investment in the Fund.
PERFORMANCE TABLE
- --------------------------------------------------------------------------------
Since
1 Year Inception*
- --------------------------------------------------------------------------------
Class A -5.83% 9.72%
- --------------------------------------------------------------------------------
Class B -5.80% 10.21%
- --------------------------------------------------------------------------------
Class C -3.16% 11.86%
- --------------------------------------------------------------------------------
First Boston
High Yield Index 0.58% 5.95%
- --------------------------------------------------------------------------------
The average annual total returns in the performance table for the periods ended
December 31, 1998 reflect imposition of the maximum front-end or contingent
deferred sales charges and conversion of Class B shares to Class A shares after
the applicable period.
* Inception Dates: 4/22/97 for Class A, Class B, and Class C shares; Index
return is from 4/30/97.
BAR CHART
- --------------------------------------------------------------------------------
The annual return in the bar chart is for the Fund's Class A shares and does not
reflect sales loads. If sales loads were reflected, returns would be less than
those shown.
[GRAPHIC OMITTED]
[The following table was depicted as a bar graph in the printed material.]
Calendar Year End
89 90 91 92 93 94 95 96 97 98
-- -- -- -- -- -- -- -- -- --
n/a n/a n/a n/a n/a n/a n/a n/a n/a -1.69
You should consider an investment in the Fund as a long-term investment. The
Fund's returns will fluctuate over long and short periods. For example, during
the period shown in the bar chart, the Fund's:
Best quarter was up 6.29%, 1st quarter, 1998; and Worst quarter was down -9.63%,
3rd quarter, 1998.
13
<PAGE>
SUMMARY OF PRINCIPAL RISKS
The value of your investment in a Fund will change with changes in the values of
that Fund's investments. Many factors can affect those values. In this Summary,
we describe the principal risks that may affect a Fund's portfolio as a whole.
These risks and the Funds subject to the risks appear in a chart at the end of
this section. All Funds could be subject to additional principal risks because
the types of investments made by each Fund can change over time. This Prospectus
has additional descriptions of the types of investments that appear in bold type
in the discussions under "Description of Investment Practices" or "Additional
Risk Considerations." These sections also include more information about the
Funds, their investments, and related risks.
INTEREST RATE RISK
This is the risk that changes in interest rates will affect the value of a
Fund's investments in debt securities, such as bonds, notes, and asset-backed
securities, or other income-producing securities. Debt securities are
obligations of the issuer to make payments of principal and/or interest on
future dates. All of the Funds have interest rate risk. Increases in interest
rates may cause the value of a Fund's investments to decline.
Even Funds, such as the Alliance Short-Term U.S. Government, Alliance U.S.
Government and Alliance Limited Maturity Government, that invest a substantial
portion of their assets in the highest quality debt securities, including U.S.
Government securities, are subject to interest rate risk. Interest rate risk
generally is greater for those Funds that invest a significant portion of their
assets in lower-rated securities or comparable unrated securities such as
Alliance Global Dollar Government, Alliance Global Strategic Income, Alliance
Corporate Bond and Alliance High Yield.
Interest rate risk is generally greater for Funds that invest in debt securities
with longer maturities, such as Alliance North American Government Income,
Alliance Global Dollar Government, Alliance Global Strategic Income and Alliance
Corporate Bond. This risk is compounded for the Funds that invest a substantial
portion of their assets in mortgage-related or other asset-backed securities,
such as Alliance Short-Term U.S. Government, Alliance U.S. Government and
Alliance Mortgage Securities Income. The value of these securities is affected
more by changes in interest rates because when interest rates rise, the
maturities of these type of securities tend to lengthen and the value of the
securities decreases more significantly. In addition, these types of securities
are subject to prepayment when interest rates fall, which generally results in
lower returns because the Funds must reinvest their assets in debt securities
with lower interest rates. Increased interest rate risk also is likely for
Alliance Global Dollar Government, Alliance Global Strategic Income and Alliance
Corporate Bond, which invest in debt securities paying no current interest, such
as zero coupon, principal-only, and interest-only securities, or paying non-cash
interest in the form of other debt securities (payment-in-kind securities).
CREDIT RISK
This is the risk that the issuer or the guarantor of a debt security, or the
counterparty to a derivatives contract, will be unable or unwilling to make
timely payments of interest or principal, or to otherwise honor its obligations.
The degree of risk for a particular security may be reflected in its credit
rating. Credit risk is greater for Funds such as Alliance Mortgage Securities
Income, Alliance Global Dollar Government, Alliance Global Strategic Income,
Alliance Corporate Bond and Alliance High Yield that invest in lower-rated
securities. These debt securities and similar unrated securities (commonly known
as "junk bonds") have speculative elements or are predominantly speculative
credit risks.
Funds such as Alliance Global Dollar Government and Alliance High Yield may be
subject to greater credit risk because they invest in debt securities issued in
connection with corporate restructurings by highly leveraged issuers and in debt
securities not current in the payment of interest or principal or are in
default. Funds such as Alliance Multi-Market Strategy, Alliance North American
Government Income and Alliance Global Dollar Government that invest in foreign
securities also are subject to increased credit risk because of the difficulties
of requiring foreign entities, including issuers of sovereign debt obligations,
to honor their contractual commitments, and because a number of foreign
governments and other issuers are already in default.
MARKET RISK
This is the risk that the value of a Fund's investments will fluctuate as the
bond markets fluctuate and that prices overall will decline over shorter or
longer-term periods. All of the Funds are subject to this risk.
FOREIGN RISK
This is the risk of investments in issuers located in foreign countries. All
Alliance Funds that invest in foreign securities are subject to this risk,
including Alliance Limited Maturity Government, Alliance Multi-Market Strategy,
Alliance North American Government Income, Alliance Global Dollar Government,
Alliance Global Strategic Income, Alliance Corporate Bond and Alliance High
Yield. These Funds' investments in foreign securities may experience more rapid
and extreme changes in value than if they invested solely in securities of U.S.
companies. The securities markets of many foreign countries are relatively
small, with a limited number of companies representing a small number of
securities. In addition, foreign companies usually are not subject to the same
degree of regulation as U.S. companies.
14
<PAGE>
Reporting, accounting, and auditing standards of foreign countries differ, in
some cases significantly, from U.S. standards. Nationalization, expropriation or
confiscatory taxation, currency blockage, political changes, or diplomatic
developments could adversely affect a Fund's investments in a foreign country.
In the event of nationalization, expropriation, or other confiscation, a Fund
could lose its entire investment.
Political, social, and economic changes in a particular country could result in
increased risks for Alliance Global Dollar Government and Alliance Global
Strategic Income, which invest a substantial portion of their assets in
sovereign debt obligations, including Brady Bonds. The investments in emerging
market countries of Alliance North American Government Income and Alliance
Global Dollar Government are likely to involve significant risks. These
countries, such as Mexico, Argentina, Brazil, Morocco, the Philippines, Russia,
and Venezuela, have a history of political and economic instability.
COUNTRY OR GEOGRAPHIC RISK
This is the risk of investments in issuers located in a particular country or
geographic region. Market changes or other factors affecting that country or
region, including political instability and unpredictable economic conditions,
may have a particularly significant effect on a Fund's net asset value. The
Funds particularly subject to this risk are Alliance Multi-Market Strategy and
Alliance North American Government Income.
CURRENCY RISK
This is the risk that fluctuations in the exchange rates between the U.S. Dollar
and foreign currencies may negatively affect the value of a Fund's investments.
Funds such as Alliance Limited Maturity Government, Alliance Multi-Market
Strategy, Alliance North American Government Income, Alliance Global
Strategic Income and Alliance High Yield that invest in securities denominated
in, and receiving revenues in, foreign currencies are subject to currency risk.
DIVERSIFICATION RISK
Most analysts believe that overall risk can be reduced through diversification,
while concentration of investments in a small number of securities increases
risks. Alliance Multi-Market Strategy, Alliance North American Government
Income, Alliance Global Dollar Government, and Alliance Global Strategic Income
are not "diversified." This means they can invest more of their assets in a
relatively small number of issuers with greater concentration of risk. Factors
affecting these issuers can have a more significant effect on the Fund's net
asset value. Similarly, a Fund that concentrates its investments in a particular
industry, such as Alliance Multi-Market Strategy, which invests at least 25% of
its assets in the banking industry, could have increased risks because factors
affecting that industry could have a more significant effect on the value of the
Fund's investments.
LEVERAGING RISK
When a Fund borrows money or otherwise leverages its portfolio, the value of an
investment in that Fund will be more volatile and all other risks will tend to
be compounded. Each Fund may create leverage by using reverse repurchase
agreements, inverse floating rate instruments or derivatives, or by borrowing
money.
DERIVATIVES RISK
All Funds may use derivatives, which are financial contracts whose value depends
on, or is derived from, the value of an underlying asset, reference rate, or
index. Alliance will sometimes use derivatives as part of a strategy designed to
reduce other risks. Generally, however, the Funds use derivatives as direct
investments to earn income, enhance yield, and broaden Fund diversification,
which entail greater risk than if used solely for hedging purposes. In addition
to other risks such as the credit risk of the counterparty, derivatives involve
the risk of difficulties in pricing and valuation and the risk that changes in
the value of the derivative may not correlate perfectly with relevant assets,
rates, or indices. Funds that invest in structured securities, such as Alliance
Global Dollar Government, Alliance Global Strategic Income and Alliance
Corporate Bond, could have increased derivatives risk.
LIQUIDITY RISK
Liquidity risk exists when particular investments are difficult to purchase or
sell, possibly preventing a Fund from selling out of these illiquid securities
at an advantageous price. All of the Funds are subject to liquidity risk because
derivatives and securities involving substantial interest rate and credit risk
tend to involve greater liquidity risk. In addition, liquidity risk tends to
increase to the extent a Fund invests in debt securities whose sale may be
restricted by law or by contract.
MANAGEMENT RISK
Each Fund is subject to management risk because it is an actively managed
investment Fund. Alliance will apply its investment techniques and risk analyses
in making investment decisions for the Funds, but there can be no guarantee that
its decisions will produce the desired results. In some cases, derivative and
other investment techniques may be unavailable or Alliance may determine not to
use them, possibly even under market conditions where their use could benefit a
Fund.
15
<PAGE>
PRINCIPAL RISKS BY FUND
The following chart summarizes the Principal Risks of each Fund. Risks not
marked for a particular Fund may, however, still apply to some extent to that
Fund at various times.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Country or
Interest Credit Market Foreign Geographic Currency Diversifica- Leveraging
Fund Rate Risk Risk Risk Risk Risk Risk tion Risk Risk
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alliance Short-Term
U.S. Government o o o o
- ---------------------------------------------------------------------------------------------------------------------------
Alliance U.S. Government o o o
- ---------------------------------------------------------------------------------------------------------------------------
Alliance Limited
Maturity Government o o o o o o
- ---------------------------------------------------------------------------------------------------------------------------
Alliance Mortgage
Securities Income o o o o
- ---------------------------------------------------------------------------------------------------------------------------
Alliance Multi-Market
Strategy o o o o o o o o
- ---------------------------------------------------------------------------------------------------------------------------
Alliance North American
Government Income o o o o o o o o
- ---------------------------------------------------------------------------------------------------------------------------
Alliance Global
Dollar Government o o o o o o o
- ---------------------------------------------------------------------------------------------------------------------------
Alliance Global
Strategic Income o o o o o o o
- ---------------------------------------------------------------------------------------------------------------------------
Alliance Corporate Bond o o o o o o
- ---------------------------------------------------------------------------------------------------------------------------
Alliance High Yield o o o o o o
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------
Derivatives Liquidity Manage-
Fund Risk Risk ment Risk
- -------------------------------------------------------------------
<S> <C> <C> <C>
Alliance Short-Term
U.S. Government o o o
- -------------------------------------------------------------------
Alliance U.S. Government o o o
- -------------------------------------------------------------------
Alliance Limited
Maturity Government o o o
- -------------------------------------------------------------------
Alliance Mortgage
Securities Income o o o
- -------------------------------------------------------------------
Alliance Multi-Market
Strategy o o o
- -------------------------------------------------------------------
Alliance North American
Government Income Trust o o o
- -------------------------------------------------------------------
Alliance Global
Dollar Government o o o
- -------------------------------------------------------------------
Alliance Global
Strategic Income o o o
- -------------------------------------------------------------------
Alliance Corporate Bond o o o
- -------------------------------------------------------------------
Alliance High Yield o o o
- -------------------------------------------------------------------
</TABLE>
16
<PAGE>
- --------------------------------------------------------------------------------
FEES AND EXPENSES OF THE FUNDS
- --------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Funds.
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investment)
<TABLE>
<CAPTION>
Class A Shares Class B Shares(a) Class B Shares(b) Class C Shares
-------------- ----------------- ----------------- --------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 4.25% None None None
Maximum Deferred Sales Charge (Load)
(as a percentage of original purchase price or
redemption proceeds, whichever is lower) None 3.0% during 4.0% during 1.0% during
the 1st year, the 1st year, the 1st year,
decreasing 1.0% decreasing 1.0% 0% thereafter
annually to 0% annually to 0%
after the 3rd after the 4th
year* year**
Exchange Fee None None None None
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For all Funds except Alliance Global Strategic Income Trust and Alliance
High Yield Fund.
(b) For Alliance Global Strategic Income Trust and Alliance High Yield Fund.
* Class B Shares automatically convert to Class A Shares after 6 years.
** Class B Shares automatically convert to Class A Shares after 8 years.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) and
EXAMPLES
The Examples are to help you compare the cost of investing in a Fund with the
cost of investing in other funds. They assume that you invest $10,000 in a Fund
for the time periods indicated and then redeem all of your shares at the end of
those periods. They also assume that your investment has a 5% return each year,
that the Fund's operating expenses stay the same, and that all dividends and
distributions are reinvested. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
Operating Expenses Examples
- ----------------------------------------------------------- ------------------------------------------------------------------
Alliance Short-Term U.S.
Government Fund Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees .55% .55% .55% After 1 Year $ 603 $ 559 $ 259 $ 359 $ 259
Rule 12b-1 Fees .30% 1.00% 1.00% After 3 Years $ 976 $ 896 $ 796 $ 796 $ 796
Interest Expense .42 .45 .45 After 5 Years $1,373 $1,360 $1,360 $1,360 $1,360
Other Expenses 1.54% 1.63% 1.58% After 10 Years $2,482 $2,554 $2,554 $2,895 $2,895
---- ---- ----
Total Fund Operating Expenses 2.81% 3.63% 3.58%
==== ==== ====
Waiver and/or Expense
Reimbursement +++ (.98)% (1.07)% (1.02)%
---- ---- ----
Net Expenses 1.83% 2.56% 2.56%
==== ==== ====
Alliance U.S. Government
Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
Management Fees .55% .55% .55% After 1 Year $ 528 $ 479 $ 179 $ 279 $ 179
Rule 12b-1 Fees .30% 1.00% 1.00% After 3 Years $ 748 $ 654 $ 554 $ 554 $ 554
Other Expenses .21% .21% .21% After 5 Years $ 985 $ 954 $ 954 $ 954 $ 954
---- ---- ----
Total Fund Operating Expenses 1.06% 1.76% 1.76% After 10 Years $1,664 $1,719 $1,719 $2,073 $2,073
==== ==== ====
Alliance Limited Maturity
Government Fund Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
Management Fees .65% .65% .65% After 1 Year $ 741 $ 686 $ 386 $ 486 $ 386
Rule 12b-1 Fees .30% 1.00% 1.00% After 3 Years $1,389 $1,272 $1,172 $1,172 $1,172
Interest Expense 1.59% 1.45% 1.46% After 5 Years $2,060 $1,976 $1,976 $1,976 $1,976
Other Expenses .73% .74% .73% After 10 Years $3,841 $3,837 $3,837 $4,070 $4,070
---- ---- ----
Total Fund Operating Expenses 3.27% 3.84% 3.84%
==== ==== ====
Alliance Mortgage Securities
Income Fund Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
Management Fees .53% .53% .53% After 1 Year $ 618 $ 571 $ 271 $ 372 $ 272
Rule 12b-1 Fees .30% 1.00% 1.00% After 3 Years $1,023 $ 932 $ 832 $ 835 $ 835
Interest Expense .85% .83% .85% After 5 Years $1,452 $1,420 $1,420 $1,425 $1,425
Other Expenses .31% .32% .31% After 10 Years $2,643 $2,694 $2,694 $3,022 $3,022
---- ---- ----
Total Fund Operating Expenses 1.99% 2.68% 2.69%
==== ==== ====
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Operating Expenses Examples
- ----------------------------------------------------------- ------------------------------------------------------------------
Alliance Multi-Market
Strategy Trust Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees .60% .60% .60% After 1 Year $ 594 $ 544 $ 244 $ 364 $ 264
Rule 12b-1 Fees .30% 1.00% 1.00% After 3 Years $ 950 $ 851 $ 751 $ 811 $ 811
Other Expenses .84% .81% 1.01% After 5 Years $1,329 $1,285 $1,285 $1,385 $1,385
---- ---- ----
Total Fund Operating Expenses 1.74% 2.41% 2.61% After 10 Years $2,389 $2,429 $2,429 $2,944 $2,944
==== ==== ====
Alliance North American
Government Income Trust Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
Management Fees .72% .72% .72% After 1 Year $ 623 $ 578 $ 278 $ 377 $ 277
Rule 12b-1 Fees .30% 1.00% 1.00% After 3 Years $1,037 $ 953 $ 853 $ 850 $ 850
Interest Expense .68% .68% .68% After 5 Years $1,477 $1,454 $1,454 $1,450 $1,450
Other Expenses .34% .35% .34% After 10 Years $2,693 $2,754 $2,754 $3,070 $3,070
---- ---- ----
Total Fund Operating Expenses 2.04% 2.75% 2.74%
==== ==== ====
Alliance Global Dollar
Government Fund Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
Management Fees .75% .75% .75% After 1 Year $ 569 $ 525 $ 225 $ 322 $ 222
Rule 12b-1 Fees .30% 1.00% 1.00% After 3 Years $ 873 $ 794 $ 694 $ 685 $ 685
Other Expenses .43% .47% .44% After 5 Years $1,199 $1,190 $1,190 $1,175 $1,175
---- ---- ----
Total Fund Operating Expenses 1.48% 2.22% 2.19% After 10 Years $2,118 $2,196 $2,196 $2,524 $2,524
==== ==== ====
Alliance Global Strategic
Income Trust Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
Management Fees .75% .75% .75% After 1 Year $ 609 $ 661 $ 261 $ 361 $ 261
Rule 12b-1 Fees .30% 1.00% 1.00% After 3 Years $ 994 $1,002 $ 802 $ 802 $ 802
Other Expenses 1.03% 1.01% 1.02% After 5 Years $1,403 $1,370 $1,370 $1,370 $1,370
---- ---- ----
Total Fund Operating Expenses 2.08% 2.76% 2.77% After 10 Years $2,543 $2,747 $2,747 $2,915 $2,915
==== ==== ====
Waiver and/or Expense
Reimbursement +++ (.19)% (.18)% (.19)%
---- ---- ----
Net Expenses 1.89% 2.58% 2.58%
==== ==== ====
Alliance Corporate Bond
Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
Management Fees .55% .55% .55% After 1 Year $ 528 $ 478 $ 178 $ 278 $ 178
Rule 12b-1 Fees .30% 1.00% 1.00% After 3 Years $ 745 $ 651 $ 551 $ 551 $ 551
Other Expenses .20% .20% .20% After 5 Years $ 980 $ 949 $ 949 $ 949 $ 949
---- ---- ----
Total Fund Operating Expenses 1.05% 1.75% 1.75% After 10 Years $1,653 $1,708 $1,708 $2,062 $2,062
==== ==== ====
Alliance High Yield Fund Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
Management Fees .75% .75% .75% After 1 Year $ 564 $ 616 $ 216 $ 316 $ 218
Rule 12b-1 Fees .30% 1.00% 1.00% After 3 Years $ 858 $ 867 $ 667 $ 667 $ 667
Other Expenses .41% .41% .41% After 5 Years $1,173 $1,144 $1,144 $1,144 $1,144
---- ---- ----
Total Fund Operating Expenses 1.46% 2.16% 2.16% After 10 Years $2,065 $2,284 $ 2,284 $2,462 $2,462
==== ==== ====
Waiver and/or Expense
Reimbursement +++ (.03)% (.03)% (.03)%
---- ---- ----
Net Expenses 1.43% 2.13% 2.13%
==== ==== ====
</TABLE>
+ Assumes redemption at end of period.
++ Assumes no redemption at end of period and, with respect to shares held 10
years, conversion of Class B shares to Class A shares after 6 years, and
for Alliance Global Strategic Income Trust and Alliance High Yield Fund, 8
years.
+++ Reflects Alliance's contractual waiver of a portion of its advisory fee
and/or reimbursement of a portion of the Fund's operating expenses.
18
<PAGE>
- --------------------------------------------------------------------------------
GLOSSARY
- --------------------------------------------------------------------------------
This Prospectus uses the following terms.
TYPES OF SECURITIES
Bonds are fixed, floating, and variable rate debt obligations.
Convertible securities are bonds, debentures, corporate notes, and preferred
stocks that are convertible into common and preferred stock.
Debt securities are bonds, debentures, notes, and bills.
Equity securities are common and preferred stocks, securities convertible into
common and preferred stocks, and rights and warrants to subscribe for the
purchase of common and preferred stocks.
Fixed-income securities are debt securities, convertible securities, and
preferred stocks, including floating rate and variable rate instruments.
Fixed-income securities may be rated (or, if unrated, for purposes of the Funds'
investment policies as may be determined by Alliance to be of equivalent
quality) triple-A (Aaa or AAA), high quality (Aa or AA or above), high grade (A
or above) or investment grade (Baa or BBB or above) by, as the case may be,
Moody's, S&P, Duff & Phelps or Fitch, or may be lower-rated securities, as
defined below. In the case of "split-rated" fixed-income securities (i.e.,
securities assigned non-equivalent credit quality ratings, such as Baa by
Moody's but BB by S&P or Ba by Moody's and BB by S&P but B by Fitch), a Fund
will use the rating deemed by Alliance to be the most appropriate under the
circumstances.
Foreign government securities are securities issued or guaranteed, as to payment
of principal and interest, by a foreign government or any of its political
subdivisions, authorities, agencies or instrumentalities.
Interest-only or IO securities are debt securities that receive only the
interest payments on an underlying debt that has been structured to have two
classes, one of which is the IO class and the other of which is the
principal-only or PO class, that receives only the principal payments on the
underlying debt obligation. POs are similar to, and are sometimes referred to
as, zero coupon securities, which are debt securities issued without interest
coupons.
Mortgage-related securities are pools of mortgage loans that are assembled for
sale to investors (such as mutual funds) by various governmental,
government-related, and private organizations. These securities include:
o ARMS, which are adjustable-rate mortgage securities;
o SMRS, which are stripped mortgage-related securities;
o CMOs, which are collateralized mortgage obligations;
o GNMA certificates, which are securities issued by the Government
National Mortgage Association or GNMA;
o FNMA certificates, which are securities issued by the Federal
National Mortgage Association or FNMA; and
o FHLMC certificates, which are securities issued by the Federal Home
Loan Mortgage Corporation or FHLMC.
Qualifying bank deposits are certificates of deposit, bankers' acceptances, and
interest-bearing savings deposits of banks that have total assets of more than
$1 billion and are members of the Federal Deposit Insurance Corporation.
Rule 144A securities are securities that may be resold under Rule 144A under the
Securities Act.
Sovereign debt obligations are foreign government debt securities, loan
participations between foreign governments and financial institutions, and
interests in entities organized and operated for the purpose of restructuring
the investment characteristics of foreign government securities.
U.S. Government securities are securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. These securities include
securities backed by the full faith and credit of the United States, those
supported by the right of the issuer to borrow from the U.S. Treasury, and those
backed only by the credit of the issuing agency itself. The first category
includes U.S. Treasury securities (which are U.S. Treasury bills, notes and
bonds) and certificates issued by GNMA. U.S. Government securities not backed by
the full faith and credit of the United States include certificates issued by
FNMA and FHLMC.
RATING AGENCIES AND RATED SECURITIES
Duff & Phelps is Duff & Phelps Credit Rating Company.
Fitch is Fitch IBCA, Inc.
Higher quality commercial paper is commercial paper rated at least Prime-2 by
Moody's, A-2 by S&P, Fitch-2 by Fitch, or Duff 2 by Duff & Phelps.
Lower-rated securities are fixed-income securities rated Ba or BB or below, or
determined by Alliance to be of equivalent quality, and are commonly referred to
as "junk bonds."
Moody's is Moody's Investors Service, Inc.
NRSRO is a nationally recognized statistical rating organization.
Prime commercial paper is commercial paper rated Prime-1 or higher by Moody's,
A-1 or higher by S&P, Fitch-1 by Fitch, or Duff 1 by Duff & Phelps.
S&P is Standard & Poor's Ratings Services.
OTHER
1940 Act is the Investment Company Act of 1940, as amended.
Code is the Internal Revenue Code of 1986, as amended.
Commission is the Securities and Exchange Commission.
19
<PAGE>
Duration is a measure that relates the price volatility of a security to changes
in interest rates. The duration of a debt security is the weighted average term
to maturity, expressed in years, of the present value of all future cash flows,
including coupon payments and principal repayments. Thus, by definition,
duration is always less than or equal to full maturity.
Exchange is the New York Stock Exchange.
LIBOR is the London Interbank Offered Rate.
Securities Act is the Securities Act of 1933, as amended.
World Bank is the commonly used name for the International Bank for
Reconstruction and Development.
- --------------------------------------------------------------------------------
Description Of The Funds
- --------------------------------------------------------------------------------
This section of the Prospectus provides a more complete description of each
Fund's investment objectives and principal strategies and risks. Of course,
there can be no assurance that any Fund will achieve its investment objective.
Please note that:
o Additional discussion of the Funds' investments, including the risks of
the investments, can be found in the discussion under Description of
Investment Practices following this section.
o The description of the principal risks for a Fund may include risks
described in the Summary of Principal Risks above. Additional information
about the risks of investing in a Fund can be found in the discussion
under Additional Risk Considerations.
o Additional descriptions of each Fund's strategies, investments, and risks
can be found in a Fund's Statement of Additional Information or SAI.
o Except as noted, (i) the Funds' investment objectives are "fundamental"
and cannot be changed without a shareholder vote, and (ii) the Funds'
investment policies are not fundamental and thus can be changed without a
shareholder vote.
INVESTMENT OBJECTIVES AND POLICIES
U.S. GOVERNMENT FUNDS
The U.S. Government Funds offer investors high current income consistent with
preservation of capital by investing primarily in U.S. Government securities.
Alliance Short-Term U.S. Government Fund
Alliance Short-Term U.S. Government Fund seeks high current income consistent
with the preservation of capital by investing primarily in a portfolio of U.S.
Government securities. The Fund's investment objective is not fundamental. The
Fund invests at least 65% of its total assets in U.S. Government securities,
including mortgage-related securities, repurchase agreements and forward
commitments relating to U.S. Government securities. The Fund normally maintains
an average dollar-weighted portfolio maturity of not more than three years. In
periods of rising interest rates, the Fund may, to the extent it invests in
mortgage-related securities, be subject to the risk that its average
dollar-weighted portfolio maturity may be extended as a result of lower than
anticipated prepayment rates.
The Fund may invest a portion of its assets in securities of non-governmental
issuers. Although these investments will be of high quality at the time of
purchase, they may have higher levels of credit risk than do U.S. Government
securities. Under its policies, the Fund is not obligated to dispose of any
security whose credit quality falls below high quality.
The Fund also may:
o invest in certain SMRS;
o invest in variable, floating, and inverse floating rate instruments;
o make short sales against the box;
o enter into various hedging transactions, such as interest rate swaps,
caps, and floors;
o purchase and sell futures contracts for hedging purposes;
o purchase and sell call and put options on futures contracts or on
securities, for hedging purposes or to earn additional income;
o enter into reverse repurchase agreements;
o purchase securities for future delivery;
o make secured loans of portfolio securities; and
o enter into repurchase agreements.
Alliance U.S. Government Portfolio
Alliance U.S. Government Portfolio seeks a high level of current income that is
consistent with prudent investment risk. As a matter of fundamental policy, the
Fund pursues its objective by investing at least 65% of its total assets in U.S.
Government securities, repurchase agreements and forward contracts relating to
U.S. Government securities. The Fund may invest the remaining 35% of its total
assets in non-U.S. Government mortgage-related and asset-backed securities.
The Fund will not invest in any security rated below BBB or Baa. The Fund may
invest in unrated securities of equivalent quality to the rated securities in
which it may invest, as determined by Alliance. The Fund expects, but is not
required, to dispose of securities that are downgraded below BBB and Baa or, if
unrated, that are determined by Alliance to have undergone similar credit
quality deterioration.
The Fund also may:
o enter into reverse repurchase agreements and dollar rolls;
20
<PAGE>
o enter into various hedging transactions, such as interest rate swaps,
caps, and floors;
o enter into forward contracts;
o purchase and sell futures contracts for hedging purposes;
o purchase call and put options on futures contracts or on securities for
hedging purposes; and
o enter into repurchase agreements.
Alliance Limited Maturity Government Fund
Alliance Limited Maturity Government Fund seeks the highest level of current
income, consistent with low volatility of net asset value. As a matter of
fundamental policy, the Fund normally invests at least 65% of its total assets
in U.S. Government securities, including mortgage-related securities and
repurchase agreements relating to U.S. Government securities.
In pursuing its investment objective and policies, the Fund takes advantage of a
wide range of maturities of debt securities and adjusts the dollar-weighted
average maturity of its portfolio from time to time, depending on its assessment
of relative yields on securities of different maturities and the expected effect
of future changes in interest rates on the market value of the Fund's portfolio.
At all times, however, each security held by the Fund has either a remaining
maturity of not more than ten years or a duration not exceeding that of a
ten-year Treasury note.
The Fund may invest up to 35% of its total assets in:
o high quality asset-backed securities, including mortgage-related
securities that are not U.S. Government securities;
o treasury securities issued by private corporate issuers;
o qualifying bank deposits;
o higher quality commercial paper or, if unrated, issued by companies that
have high quality debt issues outstanding; and
o high quality debt securities of corporate issuers.
The Fund may invest up to 15% of its total assets in high-quality debt
securities denominated in U.S. Dollars or in foreign currencies and issued or
guaranteed by foreign governments or issued by foreign non-governmental issuers.
The amount of Fund investments in foreign debt securities will vary and may
include those of a number of foreign countries or, depending upon market
conditions, those of a single country.
The Fund also may:
o enter into futures contracts and purchase and write options on futures
contracts;
o enter into forward commitments;
o enter into interest rate swaps, caps, and floors;
o invest in Eurodollar instruments;
o purchase and write put and call options on foreign currencies;
o invest in variable, floating, and inverse floating rate instruments;
o use reverse repurchase agreements and dollar rolls;
o make secured loans of its portfolio securities; and
o enter into repurchase agreements.
MORTGAGE FUND
Alliance Mortgage Securities Income Fund
Alliance Mortgage Securities Income Fund seeks a high level of current income to
the extent consistent with prudent investment risk. The Fund maintains at least
65% of its total assets in mortgage-related securities, including CMOs. The
average weighted maturity of the Fund's portfolio of fixed-income securities is
expected to vary between two and ten years.
The Fund expects that governmental, government-related, or private entities may
create mortgage loan pools offering pass-through investments in addition to
those described in this Prospectus. The mortgages underlying these securities
may be instruments whose principal or interest payments may vary or whose terms
to maturity may differ from customary long-term fixed-rate mortgages. As new
types of mortgage-related securities are developed and offered to investors, the
Fund will consider making investments in these new types of securities. The Fund
may invest up to 20% of its total assets in lower-rated mortgage-related
securities.
The Fund may invest up to 35% of its total assets in:
o U.S. Government securities;
o qualifying bank deposits;
o prime commercial paper or, if unrated, issued by companies that have an
outstanding high quality debt issue;
o high-grade debt securities secured by mortgages on commercial real estate
or residential rental properties; and
o high-grade asset-backed securities.
The Fund also may:
o enter into forward commitments;
o purchase put and call options written by others and write covered put and
call options for hedging purposes;
o enter into interest rate swaps, caps, and floors;
o enter into interest rate futures contracts;
o invest in variable, floating, and inverse floating rate instruments;
o make loans of portfolio securities; and
o enter into repurchase agreements.
21
<PAGE>
MULTI-MARKET FUND
Alliance Multi-Market Strategy Trust
Alliance Multi-Market Strategy Trust is a non-diversified investment company
that offers investors a higher yield than a money market fund and less
fluctuation in net asset value than a longer-term bond fund. The Fund seeks the
highest level of current income, consistent with what Alliance considers to be
prudent investment risk, that is available from a portfolio of high-quality debt
securities having remaining maturities of not more than five years. The Fund
invests in a portfolio of debt securities denominated in the U.S. Dollar and
selected foreign currencies. The Fund seeks investment opportunities in foreign,
as well as domestic, securities markets. The Fund normally expects to maintain
at least 70% of its assets in debt securities denominated in foreign currencies.
The Fund limits its investments in a single currency other than the U.S. Dollar
to 25% of its net assets, except for the Euro in which the Fund may invest up to
50% of its net assets.
In pursuing its investment objective, the Fund seeks to minimize credit risk and
fluctuations in net asset value by investing only in short-term debt securities.
Normally, a high proportion of the Fund's portfolio consists of money market
instruments. Alliance actively manages the Fund's portfolio in accordance with a
multi-market investment strategy, allocating the Fund's investments among
securities denominated in the U.S. Dollar and the currencies of a number of
foreign countries and, within each such country, among different types of debt
securities. Alliance adjusts the Fund's exposure to each currency so that the
percentage of assets invested in securities of a particular country or
denominated in a particular currency varies in accordance with Alliance's
assessment of the relative yield and appreciation potential of such securities
and the relative strength of a country's currency. Fundamental economic
strength, credit quality, and interest rate trends are the principal factors
considered by Alliance in determining whether to increase or decrease the
emphasis placed upon a particular type of security or industry sector within a
Fund's investment portfolio.
The returns available from short-term foreign currency-denominated debt
instruments can be adversely affected by changes in exchange rates. Alliance
believes that the use of foreign currency hedging techniques, including
"cross-hedges", can help protect against declines in the U.S. Dollar value of
income available for distribution to shareholders and declines in the net asset
value of the Fund's shares resulting from adverse changes in currency exchange
rates. The Fund invests in debt securities denominated in the currencies of
countries whose governments are considered stable by Alliance.
An issuer of debt securities purchased by the Fund may be domiciled in a
country other than the country in whose currency the instrument is denominated.
In addition, the Fund may purchase debt securities (sometimes referred to as
"linked" securities) that are denominated in one currency while the principal
amounts of, and value of interest payments on, such securities are determined
with reference to another currency.
The Fund seeks to minimize investment risk by limiting its investments to debt
securities of high quality and invests in:
o U.S. Government securities;
o high-quality foreign government securities;
o obligations issued by supranational entities and corporate debt securities
having a high-quality rating;
o certificates of deposit and bankers' acceptances issued or guaranteed by,
or time deposits maintained at, banks (including foreign branches of
foreign banks) having total assets of more than $500 million, and
determined by Alliance to be of high quality; and
o prime commercial paper or unrated commercial paper of equivalent quality
and issued by U.S. or foreign companies having outstanding high-quality
debt securities.
As a matter of fundamental policy, the Fund concentrates at least 25% of its
total assets in debt instruments issued by domestic and foreign companies
engaged in the banking industry, including bank holding companies. These
investments may include certificates of deposit, time deposits, bankers'
acceptances, and obligations issued by bank holding companies, as well as
repurchase agreements entered into with banks.
The Fund also may:
o invest in indexed commercial paper;
o enter into futures contracts and purchase and write options on futures
contracts;
o purchase and write put and call options on foreign currencies;
o purchase or sell forward foreign currency exchange contracts;
o enter into interest rate swaps, caps, and floors;
o invest in variable, floating, and inverse floating rate instruments;
o make secured loans of its portfolio securities; and
o enter into repurchase agreements.
GLOBAL BOND FUNDS
The Global Bond Funds are non-diversified investment companies that offer
investors a high level of current income through investments primarily in
foreign government securities.
22
<PAGE>
Alliance North American Government Income Trust
Alliance North American Government Income Trust seeks the highest level of
current income, consistent with what Alliance considers to be prudent investment
risk, that is available from a portfolio of debt securities issued or guaranteed
by the United States, Canada, and Mexico, their political subdivisions
(including Canadian provinces but excluding states of the United States),
agencies, instrumentalities or authorities ("Government securities"). The Fund
invests in investment grade securities denominated in the U.S. Dollar, the
Canadian Dollar, and the Mexican Peso and expects to maintain at least 25% of
its assets in securities denominated in the U.S. Dollar. In addition, the Fund
may invest up to 25% of its total assets in debt securities issued by
governmental entities of Argentina ("Argentine Government securities").
The Fund invests at least 65%, and normally substantially more, of its assets in
Government securities and income- producing securities. The average weighted
maturity of the Fund's portfolio of fixed-income securities is expected to vary
between one year or less and 30 years. The Fund maintains borrowings of
approximately one-third of its net assets.
The Fund expects that it will not retain a debt security that is downgraded
below BBB or Baa, or, if unrated, determined by Alliance to have undergone
similar credit quality deterioration. The Fund may conclude, under certain
circumstances, such as the downgrading to below investment grade of all of the
securities of a governmental issuer in one of the countries in which the Fund
has substantial investments, that it is in the best interests of the
shareholders to retain its holdings in securities of that issuer.
Alliance believes that the increasingly integrated economic relationship among
the United States, Canada and Mexico, characterized by the reduction and
projected elimination of most barriers to free trade among the three nations and
the growing coordination of their fiscal and monetary policies, will over the
long term benefit the economic performance of all three countries and promote
greater correlation of currency fluctuation among the U.S. and Canadian Dollars
and the Mexican Peso.
Alliance will actively manage the Fund's assets in relation to market conditions
and general economic conditions and adjust the Fund's investments in an effort
to best enable the Fund to achieve its investment objective. Thus, the
percentage of the Fund's assets invested in a particular country or denominated
in a particular currency will vary in accordance with Alliance's assessment of
the relative yield and appreciation potential of such securities and the
relationship of the country's currency to the U.S. Dollar. To the extent that
its assets are not invested in Government securities, however, the Fund may
invest the balance of its total assets in investment grade debt securities
issued by, and denominated in the local currencies of, governments of countries
located in Central and South America or any of their political subdivisions,
agencies, instrumentalities or authorities, provided that such securities are
denominated in their local currencies. The Fund limits its investments in debt
securities issued by the governmental entities of any one country, except for
Argentine Government securities, to 10% of its total assets.
The Fund also may:
o enter into futures contracts and purchase and write options on futures
contracts for hedging purposes;
o purchase and write put and call options on foreign currencies;
o purchase or sell forward foreign currency exchange contracts;
o 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;
o enter into interest rate swaps, caps, and floors;
o enter into forward commitments;
o invest in variable, floating, and inverse floating rate instruments;
o make secured loans of its portfolio securities; and
o enter into repurchase agreements.
Alliance Global Dollar Government Fund
Alliance Global Dollar Government Fund seeks primarily a high level of current
income and secondarily capital appreciation. In seeking to achieve these
objectives, the Fund invests at least 65% of its total assets in sovereign debt
obligations. The Fund's investments in sovereign debt obligations will emphasize
obligations referred to as "Brady Bonds," which are issued as part of debt
restructurings and collateralized in full as to principal due at maturity by
zero coupon U.S. Government securities.
The Fund also may invest up to 35% of its total assets in U.S. and non-U.S.
corporate fixed-income securities. The Fund will limit its investments in
sovereign debt obligations and U.S. and non-U.S. corporate fixed-income
securities to U.S. Dollar-denominated securities. Alliance expects the average
weighted maturity of the Fund's investments will be approximately:
o for U.S. fixed-income securities, nine to 15 years;
o for non-U.S. fixed-income securities, 15 to 25 years; and
o for sovereign debt obligations, longer than 25 years.
Substantially all of the Fund's assets will be invested in lower-rated
securities, which may include securities having the lowest rating for
non-subordinated debt instruments (i.e., rated C by Moody's or CCC or lower by
S&P, Duff & Phelps and Fitch) and unrated securities of equivalent investment
quality. These securities may have extremely
23
<PAGE>
poor prospects of ever attaining any real investment standing and a current
identifiable vulnerability to default, be unlikely to have the capacity to pay
interest and repay principal when due in the event of adverse business,
financial or economic conditions, and be in default or not current in the
payment of interest or principal.
The Fund also may invest in investment grade securities. Unrated securities will
be considered for investment by the Fund when Alliance believes that the
financial condition of the issuers of such obligations and the protection
afforded by the terms of the obligations themselves limit the risk to the Fund
to a degree comparable to that of rated securities which are consistent with the
Fund's investment objectives and policies.
As of December 31, 1998, securities ratings (or equivalent quality) of the
Fund's securities were:
o A and above .52%
o Baa or BBB 10.64%
o Ba or BB 48.50%
o B 36.21%
o CCC 1.18%
o C 2.95%
o Unrated 0%
The Fund's investments in sovereign debt obligations and non-U.S. corporate
fixed-income securities emphasize countries that are considered at the time of
purchase to be emerging markets or developing countries by the World Bank. The
Fund may invest up to 30% of its total assets in securities of issuers in or
obligations of any one of Argentina, Brazil, Mexico, Morocco, the Philippines,
Russia and Venezuela. Alliance expects that these countries are now, or are
expected at a future date to be, the principal participants in debt
restructuring programs (including, in the case of Argentina, Mexico, the
Philippines and Venezuela, issuers of currently outstanding Brady Bonds) that,
in Alliance's opinion, will provide the most attractive investment
opportunities for the Fund. The Fund expects that it will limit investments
in the sovereign debt obligations of each country (or of any other single
foreign country) to less than 25% of its total assets.
Alliance anticipates that other countries that will provide investment
opportunities for the Fund include, among others, Bolivia, Costa Rica, the
Dominican Republic, Ecuador, Jordan, Nigeria, Panama, Peru, Poland, Thailand,
Turkey and Uruguay. The Fund will limit its investments in the sovereign debt
obligations and corporate fixed-income securities of issuers in any other single
foreign country to not more than 10% of its total assets.
The Fund also may:
o invest in structured securities;
o invest in fixed and floating rate loans that are arranged through private
negotiations between an issuer of sovereign debt obligations and one or
more financial institutions and in participations in and assignments of
these types of loans;
o invest in other investment companies;
o invest in warrants;
o enter into interest rate swaps, caps, and floors;
o enter into forward commitments;
o enter into standby commitment agreements;
o make short sales of securities or maintain a short position;
o 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;
o purchase and sell exchange-traded options on any securities index of the
types of securities in which it may invest;
o invest in variable, floating, and inverse floating rate instruments;
o enter into reverse repurchase agreements and dollar rolls;
o make secured loans of its portfolio securities; and
o enter into repurchase agreements.
While it does not currently intend to do so, the Fund reserves the right to
borrow an amount not to exceed one-third of the Fund's net assets.
Alliance Global Strategic Income Trust
Alliance Global Strategic Income Trust seeks primarily a high level of current
income and secondarily capital appreciation. The Fund invests primarily in a
portfolio of debt securities of U.S. and non-U.S. companies and U.S.
Government and foreign government securities and supranational entities,
including lower-rated securities. The Fund also may use derivative instruments
to attempt to enhance income. The Fund expects that the average weighted
maturity of its portfolio of fixed-income securities will vary between five
years and 30 years in accordance with Alliance's changing perceptions of the
relative attractiveness of various maturity ranges.
The Fund normally invests at least 65% of its total assets in fixed-income
securities of issuers located in at least three countries, one of which may be
the United States. The Fund limits its investments in the securities of any one
foreign government to 25% of its total assets. The Fund's investments in U.S.
Government securities may include mortgage-related securities and zero coupon
securities. The Fund's investments in fixed-income securities may include
preferred stock, mortgage-related and other asset-backed securities, and zero
coupon securities.
The Fund will maintain at least 65% of its total assets in investment grade
securities and may maintain not more than 35% of its total assets in lower-
rated securities. Unrated securities will be considered for investment by the
Fund when Alliance believes that the financial condition of the issuers of
such
24
<PAGE>
obligations and the protection afforded by the terms of the obligations limit
the risk to the Fund to a degree comparable to that of rated securities that are
consistent with the Fund's investment objectives and policies. Lower-rated
securities in which the Fund may invest include Brady Bonds and fixed-income
securities of issuers located in emerging markets.
The Fund also may:
o invest in rights and warrants;
o invest in loan participations and assignments;
o invest in foreign currencies;
o purchase and write put and call options on securities and foreign
currencies;
o purchase or sell forward foreign exchange contracts;
o invest in variable, floating, and inverse floating rate instruments;
o invest in indexed commercial paper;
o invest in structured securities;
o purchase and sell securities on a forward commitment basis;
o enter into standby commitments;
o enter into contracts for the purchase or sale for future delivery of
fixed-income securities or foreign currencies, or contracts based on
financial indices, including any index of U.S. Government securities,
foreign government securities or common stock, and purchase and write
options on futures contracts;
o invest in Eurodollar instruments;
o enter into interest rate swaps, caps, and floors; and
o make short sales of securities or maintain a short position;
o enter into reverse repurchase agreements and dollar rolls;
o make loans of portfolio securities; and
o enter into repurchase agreements.
The Fund may borrow in order to purchase securities or make other investments,
although it currently limits its borrowings to 25% of its total assets.
CORPORATE BOND FUNDS
Alliance Corporate Bond Portfolio
Alliance Corporate Bond Portfolio seeks primarily to maximize income over
the long term consistent with providing reasonable safety in the value of each
shareholder's investment and secondarily to increase its capital through
appreciation of its investments in order to preserve and, if possible, increase
the purchasing power of each shareholder's investment. In pursuing these
objectives, the Fund's policy is to invest in readily marketable securities that
give promise of relatively attractive yields but do not involve substantial risk
of loss of capital. The Fund invests at least 65% of its net assets in debt
securities. Although the Fund invests at least 65% of its total assets in
corporate bonds, it also may invest in securities of non-corporate issuers. The
Fund expects that the average weighted maturity of its portfolio of fixed-income
securities will vary between one year or less and 30 years.
The Fund follows an investment strategy that in certain respects can be regarded
as more aggressive than the strategies of many other funds investing primarily
in corporate bonds. The Fund's investments normally tend to have a relatively
long average maturity and duration. The Fund places significant emphasis on both
foreign corporate and sovereign debt obligations and corporate bonds that are
expected to benefit from improvement in their issuers' credit fundamentals. In
recent years the Fund frequently has had greater net asset value volatility than
most other corporate bond funds. Prospective investors in the Fund should
therefore be prepared to accept the degree of volatility associated with its
investment strategy.
The Fund's investments in fixed-income securities have no minimum rating
requirement, except the Fund expects that it will not retain a security that is
downgraded below B, or if unrated, determined to have undergone similar credit
quality deterioration after purchase. Currently, the Fund believes its
objectives and policies may best be implemented by investing at least 65% of its
total assets in fixed-income securities considered investment grade or higher.
The Fund may invest the remainder of its assets in lower-rated fixed-income
securities. As of December 31, 1998, the Fund's investments were rated (or
equivalent quality):
o A or above 32.21%
o Baa or BBB 46.79%
o Ba or BB 18.22%
o B 2.05%
o CC .28%
o C .45%
o Unrated 0%
The Fund may invest up to 50% of its total assets in foreign debt securities,
which will consist primarily of corporate fixed-income securities and sovereign
debt obligations. The Fund invests no more than 15% of its total assets in
sovereign debt obligations in the form of foreign government loan participations
and assignments, which may be lower rated and considered to be predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. All of the Fund's investments, whether foreign or domestic, are U.S.
Dollar-denominated.
Within these limitations, the Fund has complete flexibility as to the types and
relative proportions of securities in which it will invest. The Fund plans to
vary the proportions of its holdings of long- and short-term fixed-income
securities and of equity securities in order to reflect its assessment of
prospective cyclical changes even if such action may
25
<PAGE>
adversely affect current income. Substantially all of the Fund's investments,
however, will be income producing.
The Fund also may:
o invest in structured securities;
o invest in fixed and floating rate loans that are arranged through private
negotiations between an issuer of sovereign debt obligations and one or
more financial institutions and in participations in and assignments of
these type of loans;
o for hedging purposes, purchase put and call options written by others and
write covered put and call options;
o for hedging purposes, enter into various hedging transactions, such as
interest rate swaps, caps, and floors;
o invest in variable, floating, and inverse floating rate instruments;
o invest in zero coupon and pay-in-kind securities; and
o invest in CMOs and multi-class pass-through mortgage-related securities.
Alliance High Yield Fund
Alliance High Yield Fund seeks primarily to achieve high total return by
maximizing current income and, to the extent consistent with that objective,
capital appreciation. The Fund pursues this objective by investing primarily in
a diversified mix of high yield, below investment grade debt securities, known
as "junk bonds." These securities involve greater volatility of price and risk
of principal and income than higher quality debt securities. The Fund is managed
to maximize current income by taking advantage of market developments, yield
disparities, and variations in the creditworthiness of issuers. The Fund uses
various strategies in attempting to achieve its objective.
The Fund normally invests at least 65% of its total assets in high yield debt
securities rated below investment grade by two or more NRSROs (i.e., rated lower
than Baa by Moody's or lower than BBB by S&P) or, if unrated, of equivalent
quality. The Fund may not invest more than 10% of its total assets in (i)
fixed-income securities which are rated lower than B3 or B- or their equivalents
by two or more NRSROs or, if unrated, of equivalent quality, and (ii) money
market instruments of any entity which has an outstanding issue of unsecured
debt that is rated lower than B3 or B- or their equivalents by two or more
NRSROs or, if unrated, of equivalent quality.
As of December 31, 1998, the Fund's investments were rated (or equivalent
quality):
o A and above 9.11%
o Ba or BB 4.23%
o B 72.64%
O CCC 1.62%
o Unrated 12.40%
The Fund may invest a portion of its assets in foreign securities. The Fund may
buy and sell foreign currencies principally for the purpose of preserving the
value of foreign securities or in anticipation of purchasing foreign securities.
The Fund also may invest in:
o U.S. Government securities;
o certificates of deposit, bankers' acceptances, bank notes, time deposits
and interest bearing savings deposits issued or guaranteed by certain
domestic and foreign banks;
o commercial paper (rated at least A-1 by S&P or Prime-1 by Moody's or, if
unrated, issued by domestic or foreign companies having high quality
outstanding debt securities) and participation interests in loans extended
by banks to these companies;
o corporate debt obligations with remaining maturities of less than one year
rated at least high quality as well as corporate debt obligations rated at
least high grade provided the corporation also has outstanding an issue of
commercial paper rated at least A-1 by S&P or Prime-1 by Moody's; and
o floating rate or master demand notes.
The Fund also may:
o invest in mortgage-backed and asset-backed securities;
o invest in loan participations and assignments of loans to corporate,
governmental, or other borrowers originally made by institutional lenders
or lending syndicates;
o enter into forward commitments;
o write covered put and call options on debt securities, securities indices
and foreign currencies and purchase put or call options on debt
securities, securities indices and foreign currencies;
o purchase and sell futures contracts and related options on debt securities
and on indices of debt securities;
o enter into contracts for the purchase or sale of a specific currency for
hedging purposes only;
o make secured loans of portfolio securities; and
o enter into repurchase agreements.
DESCRIPTION OF INVESTMENT PRACTICES
This section describes certain investment practices and associated risks that
are common to a number of Funds.
Derivatives. The Funds may use derivatives to achieve their investment
objectives. Derivatives are financial contracts whose value depends on, or is
derived from, the value of an underlying asset, reference rate or index. These
assets, rates, and indices may include bonds, stocks, mortgages, commodities,
interest rates, currency exchange rates, bond
26
<PAGE>
indices, and stock indices. Derivatives can be used to earn income or protect
against risk, or both. For example, one party with unwanted risk may agree to
pass that risk to another party who is willing to accept the risk, the second
party being motivated, for example, by the desire either to earn income in the
form of a fee or premium from the first party, or to reduce its own unwanted
risk by attempting to pass all or part of that risk to the first party.
Derivatives can be used by investors such as the Funds to earn income and
enhance returns, to hedge or adjust the risk profile of a portfolio, and either
to replace more traditional direct investments or to obtain exposure to
otherwise inaccessible markets. Each of the Funds is permitted to use
derivatives for one or more of these purposes, although most of the Funds
generally use derivatives primarily as direct investments in order to enhance
yields and broaden portfolio diversification. Each of these uses entails greater
risk than if derivatives were used solely for hedging purposes. Derivatives are
a valuable tool, which, when used properly, can provide significant benefits to
Fund shareholders. A Fund may take a significant position in those derivatives
that are within its investment policies if, in Alliance's judgment, this
represents the most effective response to current or anticipated market
conditions. Alliance Multi-Market Strategy, Alliance High Yield, and Alliance
Global Strategic Income, in particular, generally make extensive use of
carefully selected forwards and other derivatives to achieve the currency
hedging that is an integral part of their investment strategy. Alliance's use of
derivatives is subject to continuous risk assessment and control from the
standpoint of each Fund's investment objectives and policies.
Derivatives may be (i) standardized, exchange-traded contracts or (ii)
customized, privately-negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments--options, futures,
forwards, and swaps--from which virtually any type of derivative transaction can
be created.
o Options--An option, which may be standardized and exchange-traded, or
customized and privately negotiated, is an agreement that, for a premium
payment or fee, gives the option holder (the buyer) the right but not the
obligation to buy or sell the underlying asset (or settle for cash an
amount based on an underlying asset, rate or index) at a specified price
(the exercise price) during a period of time or on a specified date. A
call option entitles the holder to purchase, and a put option entitles the
holder to sell, the underlying asset (or settle for cash an amount based
on an underlying asset, rate or index). Likewise, when an option is
exercised the writer of the option is obligated to sell (in the case of a
call option) or to purchase (in the case of a put option) the underlying
asset (or settle for cash an amount based on an underlying asset, rate or
index).
o Futures--A futures contract is an agreement that obligates the buyer to
buy and the seller to sell a specified quantity of an underlying asset (or
settle for cash the value of a contract based on an underlying asset, rate
or index) at a specific price on the contract maturity date. Futures
contracts are standardized, exchange-traded instruments and are fungible
(i.e., considered to be perfect substitutes for each other). This
fungibility allows futures contracts to be readily offset or cancelled
through the acquisition of equal but opposite positions, which is the
primary method in which futures contracts are liquidated. A cash-settled
futures contract does not require physical delivery of the underlying
asset but instead is settled for cash equal to the difference between the
values of the contract on the date it is entered into and its maturity
date.
o Forwards--A forward contract is an obligation by one party to buy, and the
other party to sell, a specific quantity of an underlying commodity or
other tangible asset for an agreed upon price at a future date. Forward
contracts are customized, privately negotiated agreements designed to
satisfy the objectives of each party. A forward contract usually results
in the delivery of the underlying asset upon maturity of the contract in
return for the agreed upon payment.
o Swaps--A swap is a customized, privately negotiated agreement that
obligates two parties to exchange a series of cash flows at specified
intervals (payment dates) based upon or calculated by reference to changes
in specified prices or rates (interest rates in the case of interest rate
swaps, currency exchange rates in the case of currency swaps) for a
specified amount of an underlying asset (the "notional" principal amount).
The payment flows are netted against each other, with the difference being
paid by one party to the other. Except for currency swaps, the notional
principal amount is used solely to calculate the payment streams but is
not exchanged. With respect to currency swaps, actual principal amounts of
currencies may be exchanged by the counterparties at the initiation, and
again upon the termination, of the transaction.
Debt instruments that incorporate one or more of these building blocks for the
purpose of determining the principal amount of and/or rate of interest payable
on the debt instruments are often referred to as "structured securities." An
example of this type of structured security is indexed commercial paper. The
term is also used to describe certain securities issued in connection with the
restructuring of certain foreign obligations. The term "derivative" also is
sometimes used to describe securities involving rights to a portion of the cash
flows from an underlying pool of mortgages or other assets from which payments
are passed through to the owner of, or that collateralize, the securities. These
securities are described below under Mortgage-Related Securities and Other
Asset-Backed Securities.
27
<PAGE>
While the judicious use of derivatives by highly-experienced investment managers
such as Alliance can be quite beneficial, derivatives involve risks different
from, and, in certain cases, greater than, the risks presented by more
traditional investments. The following is a general discussion of important risk
factors and issues relating to the use of derivatives that investors should
understand before investing in a Fund.
o Market Risk--This is the general risk of all investments that the value of
a particular investment will change in a way detrimental to the Fund's
interest based on changes in the bond market generally.
o Management Risk--Derivative products are highly specialized instruments
that require investment techniques and risk analyses different from those
associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument but also of the
derivative itself, without the benefit of observing the performance of the
derivative under all possible market conditions. In particular, the use
and complexity of derivatives require the maintenance of adequate controls
to monitor the transactions entered into, the ability to assess the risk
that a derivative adds to a Fund's portfolio, and the ability to forecast
price, interest rate, or currency exchange rate movements correctly.
o Credit Risk--This is the risk that a loss may be sustained by a Fund as a
result of the failure of a derivative counterparty to comply with the
terms of the derivative contract. The credit risk for exchange-traded
derivatives is generally less than for privately negotiated derivatives,
since the clearing house, which is the issuer or counterparty to each
exchange-traded derivative, provides a guarantee of performance. This
guarantee is supported by a daily payment system (i.e., margin
requirements) operated by the clearing house in order to reduce overall
credit risk. For privately negotiated derivatives, there is no similar
clearing agency guarantee. Therefore, the Funds consider the
creditworthiness of each counterparty to a privately negotiated derivative
in evaluating potential credit risk.
o Liquidity Risk--Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many
privately negotiated derivatives), it may not be possible to initiate a
transaction or liquidate a position at an advantageous price.
o Leverage Risk--Since many derivatives have a leverage component, adverse
changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss generally is
related to a notional principal amount, even if the parties have not made
any initial investment. Certain derivatives have the potential for
unlimited loss, regardless of the size of the initial investment.
o Other Risks--Other risks in using derivatives include the risk of
mispricing or improper valuation of derivatives and the inability of
derivatives to correlate perfectly with underlying assets, rates and
indices. Many derivatives, in particular privately negotiated derivatives,
are complex and often valued subjectively. Improper valuations can result
in increased cash payment requirements to counterparties or a loss of
value to 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.
Derivatives Used by the Funds. The following describes specific derivatives that
one or more of the Funds may use.
Eurodollar Instruments. Eurodollar instruments are essentially U.S.
Dollar-denominated futures contracts or options that are linked to LIBOR.
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. Alliance
Limited Maturity Government and Alliance Global Strategic Income intend to use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR (to which many short-term borrowings and floating rate securities in which
each Fund invests are linked).
Forward Foreign Currency Exchange Contracts. A Fund purchases or sells forward
foreign currency exchange contracts ("forward contracts") to minimize the risk
from adverse changes in the relationship between the U.S. Dollar and other
currencies. A Fund may enter into a forward contract, for example, when it
enters into a contract for the purchase or sale of a security denominated in a
foreign currency in order to "lock in" the U.S. Dollar price of the security (a
"transaction hedge"). When a Fund believes that a foreign currency may suffer a
substantial decline against the U.S. Dollar, it may enter into a forward sale
contract to sell an amount of that foreign currency approximating the value of
some or all of the Fund's portfolio securities denominated in such foreign
currency, or when the Fund believes that the U.S. Dollar may suffer a
substantial decline against a foreign currency, it may enter into a forward
purchase contract to buy that foreign currency for a fixed dollar amount (a
"position hedge"). Instead of entering into a position hedge, a Fund may, in the
alternative, enter into a forward contract to sell a different foreign currency
for a fixed U.S. Dollar amount where the Fund believes that the U.S. Dollar
value of the currency to be sold pursuant to the forward contract will fall
whenever there is a decline in the U.S. Dollar value of the currency in which
portfolio securities of the Fund are denominated (a "cross-hedge").
28
<PAGE>
Futures Contracts and Options on Futures Contracts. A Fund may buy and sell
futures contracts on fixed-income or other securities or foreign currencies, and
contracts based on interest rates or financial indices, including any index of
U.S. Government securities, foreign government securities or corporate debt
securities.
Options on futures contracts are options that call for the delivery of futures
contracts upon exercise. Options on futures contracts written or purchased by a
Fund will be traded on U.S. or foreign exchanges and, except for Alliance
Short-Term U.S. Government and Alliance Global Strategic Income, will be used
only for hedging purposes.
Alliance Limited Maturity Government, Alliance U.S. Government, Alliance
Multi-Market Strategy, Alliance North American Government Income and Alliance
Global Strategic Income will not enter into a futures contract or write or
purchase an option on a futures contract if immediately thereafter the market
values of the outstanding futures contracts of the Fund and the currencies and
futures contracts subject to outstanding options written by the Fund would
exceed 50% of its total assets. Alliance Mortgage Securities Income will not
write or purchase options on futures contracts. Nor will Alliance Limited
Maturity Government, Alliance U.S. Government, Alliance Mortgage Securities
Income, Alliance Multi-Market Strategy, Alliance North American Government
Income or Alliance Global Strategic Income enter into a futures contract or, if
otherwise permitted, write or purchase an option on a futures contract, if
immediately thereafter the aggregate of initial margin deposits on all the
outstanding futures contracts of the Fund and premiums paid on outstanding
options on futures contracts would exceed 5% of the market value of the total
assets of the Fund. In addition, Alliance Mortgage Securities Income and
Alliance Global Strategic Income will not enter into any futures contract (i)
other than one on fixed-income securities or based on interest rates, or (ii) if
immediately thereafter the sum of the then aggregate futures market prices of
financial instruments required to be delivered under open futures contract sales
and the aggregate futures market prices of instruments required to be delivered
under open futures contract purchases would exceed 30% of the value of the
Fund's total assets.
Interest Rate Transactions (Swaps, Caps, and Floors). Each Fund that may enter
into interest rate swap, cap, or floor transactions expects to do so primarily
for hedging purposes, which may include preserving a return or spread on a
particular investment or portion of its portfolio or protecting against an
increase in the price of securities the Fund anticipates purchasing at a later
date. The Funds do not intend to use these transactions in a speculative manner.
Interest rate swaps involve the exchange by a Fund with another party of their
respective commitments to pay or receive interest (e.g., an exchange of floating
rate payments for fixed rate payments) computed based on a contractually-based
principal (or "notional") amount. Interest rate swaps are entered into on a net
basis (i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments).
Interest rate caps and floors are similar to options in that the purchase of an
interest rate cap or floor entitles the purchaser, to the extent that a
specified index exceeds (in the case of a cap) or falls below (in the case of a
floor) a predetermined interest rate, to receive payments of interest on a
notional amount from the party selling the interest rate cap or floor. A Fund
may enter into interest rate swaps, caps, and floors on either an asset-based or
liability-based basis, depending upon whether it is hedging its assets or
liabilities.
There is no limit on the amount of interest rate transactions that may be
entered into by a Fund that is permitted to enter into such transactions.
Alliance Multi-Market Strategy, Alliance North American Government Income and
Alliance Global Strategic Income may enter into interest rate swaps involving
payments in the same currency or in different currencies. Alliance Short-Term
U.S. Government, Alliance U.S. Government, Alliance Limited Maturity Government,
Alliance Mortgage Securities Income, Alliance Global Dollar Government, Alliance
Global Strategic Income and Alliance Corporate Bond will not enter into an
interest rate swap, cap, or floor transaction unless the unsecured senior debt
or the claims-paying ability of the other party is then rated in the highest
rating category of at least one NRSRO. Each of Alliance Multi-Market Strategy,
Alliance North American Government Income, and Alliance Global Strategic Income
will enter into interest rate swap, cap or floor transactions with its
respective custodian, and with other counterparties, but only if: (i) for
transactions with maturities under one year, such other counterparty has
outstanding prime commercial paper; or (ii) for transactions with maturities
greater than one year, the counterparty has high-quality debt securities
outstanding.
The swap market has grown substantially in recent years, with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become well established and relatively liquid. Caps and floors are less liquid
than swaps. These transactions do not involve the delivery of securities or
other underlying assets or principal. Accordingly, unless there is a
counterparty default, the risk of loss to a Fund from interest rate transactions
is limited to the net amount of interest payments that the Fund is contractually
obligated to make.
Options on Foreign Currencies. A Fund invests in options on foreign currencies
that are privately negotiated or traded on U.S. or foreign exchanges for the
purpose of protecting against declines in the U.S. Dollar value of foreign
currency denominated securities held by a Fund and against increases in the U.S.
Dollar cost of securities to be
29
<PAGE>
acquired. The purchase of an option on a foreign currency may constitute an
effective hedge against fluctuations in exchange rates, although if rates move
adversely, a Fund may forfeit the entire amount of the premium plus related
transaction costs.
Options on Securities. In purchasing an option on securities, a Fund would be in
a position to realize a gain if, during the option period, the price of the
underlying securities increased (in the case of a call) or decreased (in the
case of a put) by an amount in excess of the premium paid; otherwise the Fund
would experience a loss not greater than the premium paid for the option. Thus,
a Fund would realize a loss if the price of the underlying security declined or
remained the same (in the case of a call) or increased or remained the same (in
the case of a put) or otherwise did not increase (in the case of a put) or
decrease (in the case of a call) by more than the amount of the premium. If a
put or call option purchased by a Fund were permitted to expire without being
sold or exercised, its premium would represent a loss to the Fund.
A Fund may write a put or call option in return for a premium, which is retained
by the Fund whether or not the option is exercised. Except with respect to
uncovered call options written for cross-hedging purposes, none of the Funds
will write uncovered call or put options on securities. A call option written by
a Fund is "covered" if the Fund owns the underlying security, has an absolute
and immediate right to acquire that security upon conversion or exchange of
another security it holds, or holds a call option on the underlying security
with an exercise price equal to or less than that of the call option it has
written. A put option written by a Fund is covered if the Fund holds a put
option on the underlying securities with an exercise price equal to or greater
than that of the put option it has written.
The risk involved in writing an uncovered call option is that there could be an
increase in the market value of the underlying security, and a Fund could be
obligated to acquire the underlying security at its current price and sell it at
a lower price. The risk of loss from writing an uncovered put option is limited
to the exercise price of the option.
A Fund may write a call option on a security that it does not own in order to
hedge against a decline in the value of a security that it owns or has the right
to acquire, a technique referred to as "cross-hedging." A Fund would write a
call option for cross-hedging purposes, instead of writing a covered call
option, when the premium to be received from the cross-hedge transaction exceeds
that to be received from writing a covered call option, while at the same time
achieving the desired hedge. The correlation risk involved in cross-hedging may
be greater than the correlation risk involved with other hedging strategies.
Alliance Short-Term U.S. Government, Alliance U.S. Government, Alliance Mortgage
Securities Income, Alliance North American Government Income, Alliance Global
Dollar Government, Alliance Global Strategic Income, Alliance Corporate Bond,
and Alliance High Yield generally purchase or write privately negotiated options
on securities. A Fund that does so will effect such transactions only with
investment dealers and other financial institutions (such as commercial banks or
savings and loan institutions) deemed creditworthy by Alliance. Privately
negotiated options purchased or written by a Fund may be illiquid and it may not
be possible for the Fund to effect a closing transaction at an advantageous
time. Alliance Mortgage Securities Income, Alliance U.S. Government and Alliance
Corporate Bond will not purchase an option on a security if, immediately
thereafter, the aggregate cost of all outstanding options purchased by the Fund
would exceed 2% of the Fund's total assets. Nor will these Funds write an option
if, immediately thereafter, the aggregate value of the Fund's portfolio
securities subject to outstanding options would exceed 15% of the Fund's total
assets.
Options on Securities Indices. An option on a securities index is similar to an
option on a security except that, rather than taking or making delivery of a
security at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the chosen index is greater than (in the case of a call) or
less than (in the case of a put) the exercise price of the option.
Brady Bonds. Brady Bonds are created through the exchange of existing commercial
bank loans to foreign entities for new obligations in connection with debt
restructurings under a plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady (the "Brady Plan"). Brady Bonds have been issued only
recently, and, accordingly, do not have a long payment history. They may be
collateralized or uncollateralized and issued in various currencies (although
most are U.S. Dollar-denominated) and they are actively traded in the
over-the-counter secondary market.
U.S. Dollar-denominated, collateralized Brady Bonds, which may be fixed-rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal due at maturity by U.S. Treasury zero coupon obligations that have
the same maturity as the Brady Bonds. Interest payments on these Brady Bonds
generally are collateralized by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of rolling interest
payments based on the applicable interest rate at that time and is adjusted at
regular intervals thereafter. Certain Brady Bonds are entitled to "value
recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Brady Bonds
are often viewed as having up to four valuation components: (i) collateralized
repayment of principal at final maturity, (ii) collateralized interest payments,
(iii) uncollateralized interest payments, and (iv) any uncollateralized
repayment of principal at maturity (these uncollateralized amounts constitute
the "residual risk"). In the event of a default with respect to collateralized
Brady
30
<PAGE>
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 light of the residual risk of Brady
Bonds and, among other factors, the history of defaults with respect to
commercial bank loans by public and private entities of countries issuing Brady
Bonds, investments in Brady Bonds are to be viewed as speculative.
Convertible Securities. Prior to conversion, convertible securities have the
same general characteristics as non-convertible debt securities, which provide a
stable stream of income with generally higher yields than those of equity
securities of the same or similar issuers. The price of a convertible security
will normally vary with changes in the price of the underlying equity security,
although the higher yield tends to make the convertible security less volatile
than the underlying equity security. As with debt securities, the market value
of convertible securities tends to decrease as interest rates rise and increase
as interest rates decline. While convertible securities generally offer lower
interest or dividend yields than non-convertible debt securities of similar
quality, they enable investors to benefit from increases in the market price of
the underlying common stock. Convertible debt securities that are rated Baa or
lower by Moody's or BBB or lower by S&P, Duff & Phelps or Fitch and comparable
unrated securities may share some or all of the risks of debt securities with
those ratings.
Forward Commitments. Forward commitments for the purchase or sale of securities
may include purchases on a when-issued basis or purchases or sales on a delayed
delivery basis. In some cases, a forward commitment may be conditioned upon the
occurrence of a subsequent event, such as approval and consummation of a merger,
corporate reorganization or debt restructuring or approval of a proposed
financing by appropriate authorities (i.e., a "when, as and if issued" trade).
When forward commitments with respect to fixed-income securities are negotiated,
the price, which is generally expressed in yield terms, is fixed at the time the
commitment is made, but payment for and delivery of the securities take place at
a later date. Normally, the settlement date occurs within two months after the
transaction, but settlements beyond two months may be negotiated. Securities
purchased or sold under a forward commitment are subject to market fluctuation
and no interest or dividends accrues to the purchaser prior to the settlement
date.
The use of forward commitments helps a Fund to protect against anticipated
changes in interest rates and prices. For instance, in periods of rising
interest rates and falling bond prices, a Fund might sell securities in its
portfolio on a forward commitment basis to limit its exposure to falling bond
prices. In 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
Alliance Limited Maturity Government, Alliance North American Government Income,
Alliance Global Dollar Government or Alliance Global Strategic Income if, as a
result, the Fund's aggregate forward commitments under such transactions would
be more than 25% of the total assets of Alliance Global Strategic Income and 30%
of the total assets of each of the other Funds.
A Fund's right to receive or deliver a security under a forward commitment may
be sold prior to the settlement date. The Funds enter into forward commitments,
however, only with the intention of actually receiving securities or delivering
them, as the case may be. If a Fund, however, chooses to dispose of the right to
acquire a when-issued security prior to its acquisition or dispose of its right
to deliver or receive against a forward commitment, it may realize a gain or
incur a loss.
Illiquid Securities. The Funds will limit their investments in illiquid
securities to 15% of their net assets, except that the limit is 10% for Alliance
Mortgage Securities Income, Alliance Multi-Market Strategy, and Alliance North
American Government Income, and 5% for Alliance Short-Term U.S. Government. As a
matter of fundamental policy, Alliance Corporate Bond cannot purchase illiquid
securities. Illiquid securities generally include (i) direct placements or other
securities that are subject to legal or contractual restrictions on resale or
for which there is no readily available market (e.g., when trading in the
security is suspended or, in the case of unlisted securities, when market makers
do not exist or will not entertain bids or offers), including many currency
swaps and any assets used to cover currency swaps, (ii) over-the-counter options
and assets used to cover over-the-counter options, and (iii) repurchase
agreements not terminable within seven days.
A Fund that invests in illiquid securities may not be able to sell such
securities and may not be able to realize their full value upon sale. Alliance
will monitor each Fund's investments in illiquid securities. Rule 144A
securities will not be treated as "illiquid" for the purposes of the limit on
investments so long as the securities meet liquidity guidelines established by
the Board of Directors.
Indexed Commercial Paper. Indexed commercial paper may have its principal linked
to changes in foreign currency exchange rates whereby its principal amount is
adjusted upwards or downwards (but not below zero) at maturity to reflect
changes in the referenced exchange rate. Each Fund that invests in indexed
commercial paper may do so without limitation. A Fund will receive interest and
principal
31
<PAGE>
payments on such commercial paper in the currency in which such commercial paper
is denominated, but the amount of principal payable by the issuer at maturity
will change in proportion to the change (if any) in the exchange rate between
the two specified currencies between the date the instrument is issued and the
date the instrument matures. While such commercial paper entails the risk of
loss of principal, the potential for realizing gains as a result of changes in
foreign currency exchange rates enables a Fund to hedge (or cross-hedge) against
a decline in the U.S. Dollar value of investments denominated in foreign
currencies while providing an attractive money market rate of return. A Fund
will purchase such commercial paper for hedging purposes only, not for
speculation.
Investment in Other Investment Companies. Alliance Global Dollar Government may
invest in other investment companies whose investment objectives and policies
are consistent with those of the Fund. If the Fund acquires shares in investment
companies, shareholders would bear both their proportionate share of expenses in
the Fund (including management and advisory fees) and, indirectly, the expenses
of such investment companies (including management and advisory fees).
Loans of Portfolio Securities. A Fund may make secured loans of portfolio
securities to brokers, dealers and financial institutions, provided that cash,
liquid high grade debt securities or bank letters of credit equal to at least
100% of the market value of the securities loaned is deposited and maintained by
the borrower with the Fund. The risks in lending portfolio securities, as with
other secured extensions of credit, consist of possible loss of rights in the
collateral should the borrower fail financially. In determining whether to lend
securities to a particular borrower, Alliance will consider all relevant facts
and circumstances, including the creditworthiness of the borrower. While
securities are on loan, the borrower will pay the Fund any income earned from
the securities. The Fund may invest any cash collateral in portfolio securities
and earn additional income or receive an agreed-upon amount of income from a
borrower who has delivered equivalent collateral. Lending of portfolio
securities is limited to 50% of net assets for Alliance High Yield, 25% for
Alliance Short-Term U.S. Government and Alliance Global Strategic Income, and
20% for Alliance Limited Maturity Government, Alliance Mortgage Securities
Income, Alliance Multi-Market Strategy, Alliance North American Government
Income and Alliance Global Dollar Government.
Loan Participations and Assignments. A Fund's investments in loans are expected
in most instances to be in the form of participations in loans and assignments
of all or a portion of loans from third parties. A Fund's investment in loan
participations typically will result in the Fund having a contractual
relationship only with the lender and not with the borrower. A Fund will acquire
participations only if the lender 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
Alliance Global Dollar Government and Alliance Global Strategic Income, or
foreign government securities, with respect to Alliance Corporate Bond and
Alliance High Yield, is restricted by the governing documentation as to the
nature of the assignee such that the only way in which the Fund may acquire an
interest in a loan is through a participation and not an assignment. A Fund may
have difficulty disposing of assignments and participations because to do so it
will have to assign such securities to a third party. Because there may not be a
liquid market for such investments, they can probably be sold only to a limited
number of institutional investors. The lack of a liquid secondary market may
have an adverse effect on the value of such investments and a Fund's ability to
dispose of particular participations and assignments when necessary to meet its
liquidity needs in response to a specific economic event such as a deterioration
in the creditworthiness of the borrower. The lack of a liquid secondary market
for participations and assignments also may make it more difficult for the Fund
to assign a value to these investments for purposes of valuing the Fund's
portfolio and calculating its net asset value.
Alliance Global Dollar Government and Alliance Global Strategic Income may
invest up to 25%, and Alliance Corporate Bond may invest up to 15%, of their
total assets in loan participations and assignments.
Mortgage-Related Securities. The Funds' investments in mortgage-related
securities typically are securities representing interests in pools of mortgage
loans made to home owners. The mortgage loan pools may be assembled for sale to
investors (such as a Fund) by governmental or private organizations.
Mortgage-related securities bear interest at either a fixed rate or an
adjustable rate determined by reference to an index rate. Mortgage-related
securities frequently provide for monthly payments that consist of both interest
and principal, unlike more traditional debt securities, which normally do not
provide for periodic repayments of principal.
Securities representing interests in pools created by private issuers generally
offer a higher rate of interest than securities representing interests in pools
created by governmental issuers because there are no direct or indirect
governmental guarantees of the underlying mortgage payments. Private issuers
sometimes obtain committed loan facilities, lines of credit, letters of credit,
surety bonds or other forms of liquidity and credit
32
<PAGE>
enhancement to support the timely payment of interest and principal with respect
to their securities if the borrowers on the underlying mortgages fail to make
their mortgage payments. The ratings of such non-governmental securities are
generally dependent upon the ratings of the providers of such liquidity and
credit support and would be adversely affected if the rating of such an enhancer
were downgraded. A Fund may buy mortgage-related securities without credit
enhancement if the securities meet the Fund's investment standards.
One type of mortgage-related security is of the "pass-through" variety. The
holder of a pass-through security is considered to own an undivided beneficial
interest in the underlying pool of mortgage loans and receives a pro rata share
of the monthly payments made by the borrowers on their mortgage loans, net of
any fees paid to the issuer or guarantor of the securities. Prepayments of
mortgages resulting from the sale, refinancing, or foreclosure of the underlying
properties are also paid to the holders of these securities, which, as discussed
below, frequently causes these securities to experience significantly greater
price and yield volatility than experienced by traditional fixed-income
securities. Some mortgage-related securities, such as securities issued by GNMA,
are referred to as "modified pass-through" securities. The holders of these
securities are entitled to the full and timely payment of principal and
interest, net of certain fees, regardless of whether payments are actually made
on the underlying mortgages.
Another form of mortgage-related security is a "pay-through" security, which is
a debt obligation of the issuer secured by a pool of mortgage loans pledged as
collateral that is legally required to be paid by the issuer, regardless of
whether payments are actually made on the underlying mortgages. CMOs are the
predominant type of "pay-through" mortgage-related security. In a CMO, a series
of bonds or certificates is issued in multiple classes. Each class of a CMO,
often referred to as a "tranche," is issued at a specific coupon rate and has a
stated maturity or final distribution date. Principal prepayments on collateral
underlying a CMO may cause one or more tranches of the CMO to be retired
substantially earlier than the stated maturities or final distribution dates of
the collateral. The principal and interest on the underlying mortgages may be
allocated among several classes of a series of a CMO in many ways. CMOs may be
issued by a U.S. Government instrumentality or agency or by a private issuer.
Although payment of the principal of, and interest on, the underlying collateral
securing privately issued CMOs may be guaranteed by GNMA, FNMA or FHLMC, these
CMOs represent obligations solely of the private issuer and are not insured or
guaranteed by GNMA, FNMA, FHLMC, any other governmental agency or any other
person or entity.
Another type of mortgage-related security, known as ARMS, bears interest at a
rate determined by reference to a predetermined interest rate or index. There
are two main categories of rates or indices: (i) rates based on the yield on
U.S. Treasury securities; and (ii) indices derived from a calculated measure
such as a cost of funds index or a moving average of mortgage rates. Some rates
and indices closely mirror changes in market interest rate levels, while others
tend to lag changes in market rate levels and tend to be somewhat less volatile.
ARMS may be secured by fixed-rate mortgages or adjustable-rate mortgages. ARMS
secured by fixed-rate mortgages generally have lifetime caps on the coupon rates
of the securities. To the extent that general interest rates increase faster
than the interest rates on the ARMS, these ARMS will decline in value. The
adjustable-rate mortgages that secure ARMS will frequently have caps that limit
the maximum amount by which the interest rate or the monthly principal and
interest payments on the mortgages may increase. These payment caps can result
in negative amortization (i.e., an increase in the balance of the mortgage
loan). Since many adjustable-rate mortgages only reset on an annual basis, the
values of ARMS tend to fluctuate to the extent that changes in prevailing
interest rates are not immediately reflected in the interest rates payable on
the underlying adjustable-rate mortgages.
SMRS are mortgage-related securities that are usually structured with two
classes of securities collateralized by a pool of mortgages or a pool of
mortgage-backed bonds or pass-through securities, with each class receiving
different proportions of the principal and interest payments from the underlying
assets. A common type of SMRS has one class of interest-only securities or IOs
receiving all of the interest payments from the underlying assets; while the
other class of securities, principal-only securities or POs, receives all of the
principal payments from the underlying assets. IOs and POs are extremely
sensitive to interest rate changes and are more volatile than mortgage-related
securities that are not stripped. IOs tend to decrease in value as interest
rates decrease, while POs generally increase in value as interest rates
decrease. If prepayments of the underlying mortgages are greater than
anticipated, the amount of interest earned on the overall pool will decrease due
to the decreasing principal balance of the assets. Changes in the values of IOs
and POs can be substantial and occur quickly, such as occurred in the first half
of 1994 when the value of many POs dropped precipitously due to increases in
interest rates. For this reason, none of the Funds relies on IOs and POs as the
principal means of furthering its investment objective.
The value of mortgage-related securities is affected by a number of factors.
Unlike traditional debt securities, which have fixed maturity dates,
mortgage-related securities may be paid earlier than expected as a result of
prepayments of underlying mortgages. Such prepayments generally occur during
periods of falling mortgage interest rates. If property owners make unscheduled
prepayments of their mortgage loans, these prepayments will result in the early
payment of the applicable mortgage-related securities. In that event, a Fund may
be unable to invest the proceeds from the early
33
<PAGE>
payment of the mortgage-related securities in investments that provide as high a
yield as the mortgage-related securities. Early payments associated with
mortgage-related securities cause these securities to experience significantly
greater price and yield volatility than is experienced by traditional
fixed-income securities. The occurrence of mortgage prepayments is affected by
the level of general interest rates, general economic conditions, and other
social and demographic factors. During periods of falling interest rates, the
rate of mortgage prepayments tends to increase, thereby tending to decrease the
life of mortgage-related securities. Conversely, during periods of rising
interest rates, a reduction in prepayments may increase the effective life of
mortgage-related securities, subjecting them to greater risk of decline in
market value in response to rising interest rates. If the life of a
mortgage-related security is inaccurately predicted, a Fund may not be able to
realize the rate of return it expected.
Although the market for mortgage-related securities is becoming increasingly
liquid, those issued by certain private organizations may not be readily
marketable. In particular, the secondary markets for CMOs, IOs, and POs may be
more volatile and less liquid than those for other mortgage-related securities,
thereby potentially limiting a Fund's ability to buy or sell those securities at
any particular time.
As with fixed-income securities generally, the value of mortgage-related
securities also can be adversely affected by increases in general interest rates
relative to the yield provided by such securities. Such an adverse effect is
especially possible with fixed-rate mortgage securities. If the yield available
on other investments rises above the yield of the fixed-rate mortgage securities
as a result of general increases in interest rate levels, the value of the
mortgage-related securities will decline. Although the negative effect could be
lessened if the mortgage-related securities were to be paid earlier (thus
permitting a Fund to reinvest the prepayment proceeds in investments yielding
the higher current interest rate), as described above the rates of mortgage
prepayments and early payments of mortgage-related securities generally tend to
decline during a period of rising interest rates.
Although the values of ARMS may not be affected as much as the values of
fixed-rate mortgage securities by rising interest rates, ARMS may still decline
in value as a result of rising interest rates. Although, as described above, the
yields on ARMS vary with changes in the applicable interest rate or index, there
is often a lag between increases in general interest rates and increases in the
yield on ARMS as a result of relatively infrequent interest rate reset dates. In
addition, adjustable-rate mortgages and ARMS often have interest rate or payment
caps that limit the ability of the adjustable-rate mortgages or ARMS to fully
reflect increases in the general level of interest rates.
Other Asset-Backed Securities. The securitization techniques used to develop
mortgage-related securities are being applied to a broad range of financial
assets. Through the use of trusts and special purpose corporations, various
types of assets, including automobile loans and leases, credit card receivables,
home equity loans, equipment leases and trade receivables, are being securitized
in structures similar to the structures used in mortgage securitizations. These
asset-backed securities are subject to risks associated with changes in interest
rates and prepayment of underlying obligations similar to the risks of
investment in mortgage-related securities discussed above.
Each type of asset-backed security also entails unique risks depending on the
type of assets involved and the legal structure used. For example, credit card
receivables are generally unsecured obligations of the credit card holder and
the debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due. In
some transactions, the value of the asset-backed security is dependent on the
performance of a third party acting as credit enhancer or servicer. In some
transactions (such as those involving the securitization of vehicle loans or
leases) it may be administratively burdensome to perfect the interest of the
security issuer in the underlying collateral and the underlying collateral may
become damaged or stolen.
Repurchase Agreements. A repurchase agreement arises when a buyer purchases a
security and simultaneously agrees to resell it to the vendor at an agreed-upon
future date, normally a day or a few days later. The resale price is greater
than the purchase price, reflecting an agreed-upon interest rate for the period
the buyer's money is invested in the security. Such agreements permit a Fund to
keep all of its assets at work while retaining "overnight" flexibility in
pursuit of investments of a longer-term nature. A Fund requires continual
maintenance of collateral in an amount equal to, or in excess of, the resale
price. If a vendor defaults on its repurchase obligation, a Fund would suffer a
loss to the extent that the proceeds from the sale of the collateral were less
than the repurchase price. If a vendor goes bankrupt, a Fund might be delayed
in, or prevented from, selling the collateral for its benefit.
Reverse Repurchase Agreements and Dollar Rolls. Reverse repurchase agreements
involve sales by a Fund of portfolio assets concurrently with an agreement by
the Fund to repurchase the same assets at a later date at a fixed price. During
the reverse repurchase agreement period, the Fund continues to receive principal
and interest payments on these securities. Generally, the effect of such a
transaction is that a Fund can recover all or most of the cash invested in the
portfolio securities involved during the term of the reverse repurchase
agreement, while it will be able to keep the interest income associated with
those portfolio securities. Such transactions are advantageous only if the
interest cost to a Fund of the reverse repurchase transaction is less than the
cost of otherwise obtaining the cash.
34
<PAGE>
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. Alliance 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, Alliance Limited Maturity Government
and Alliance U.S. Government do not expect to engage in reverse repurchase
agreements and dollar rolls with respect to greater than 50% of their total
assets. Reverse repurchase agreements and dollar rolls together with any
borrowings by Alliance Global Dollar Government will not exceed 33% of its total
assets less liabilities (other than amounts borrowed). Alliance Global Strategic
Income may enter into reverse repurchase agreements with commercial banks and
registered broker-dealers in order to increase income, in an amount up to 25% of
its total assets. Reverse repurchase agreements and dollar rolls together with
any borrowings by Alliance Global Strategic Income will not exceed 25% of its
total assets.
Rights and Warrants. Rights and warrants are option securities permitting their
holders to subscribe for other securities. Alliance Global Dollar Government may
invest in warrants, and Alliance Global Strategic Income may invest in rights
and warrants, for debt securities or for equity securities that are acquired in
connection with debt instruments. Rights are similar to warrants except that
they have a substantially shorter duration. Rights and warrants do not carry
with them dividend or voting rights with respect to the underlying securities,
or any rights in the assets of the issuer. As a result, an investment in rights
and warrants may be considered more speculative than certain other types of
investments. In addition, the value of a right or a warrant does not necessarily
change with the value of the underlying securities, and a right or a warrant
ceases to have value if it is not exercised prior to its expiration date.
Alliance Global Strategic Income may invest up to 20% of its total assets in
rights and warrants.
Short Sales. A short sale is effected by selling a security that a Fund does not
own, or if the Fund owns the security, is not to be delivered upon consummation
of the sale. A short sale is "against the box" if a Fund owns or has the right
to obtain without payment securities identical to those sold short. Alliance
Short-Term U.S. Government and Alliance Global Dollar Government each may make
short sales only against the box and only for the purpose of deferring
realization of a 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 Alliance Global Dollar
Government, and 10% of total assets, with respect to Alliance Short-Term U.S.
Government, would be held as collateral for short sales.
Alliance Global Strategic Income may make a short sale in anticipation that the
market price of that security will decline. When the Fund makes a short sale of
a security that it does not own, it must borrow from a broker-dealer the
security sold short and deliver the security to the broker-dealer upon
conclusion of the short sale. The Fund may be required to pay a fee to borrow
particular securities and is often obligated to pay over any payments received
on such borrowed securities. The Fund's obligation to replace the borrowed
security will be secured by collateral deposited with a broker-dealer qualified
as a custodian. Depending on the arrangements the Fund makes with the
broker-dealer from which it borrowed the security regarding remittance of any
payments received by the Fund on such security, the Fund may or may not receive
any payments (e.g., dividends or interest) on its collateral deposited with the
broker-dealer.
In order to defer realization of a gain or loss for U.S. federal income tax
purposes, Alliance Global Strategic Income may also make short sales "against
the box" of securities which are eligible for such deferral. The Fund may not
make a short sale, if as a result, more than 25% of its total assets would be
held as collateral for short sales.
If the price of the security sold short increases between the time of the short
sale and the time a Fund replaces the borrowed security, the Fund will incur a
loss; conversely, if the price declines, the Fund will realize a short-term
capital gain. Any gain will be decreased, and any loss increased, by the
transaction costs described above. Although a Fund's gain is limited to the
price at which it sold the security short, its potential loss is theoretically
unlimited.
Standby Commitment Agreements. Standby commitment agreements are similar to put
options that commit a Fund, for a stated period of time, to purchase a stated
amount of a security that may be issued and sold to the Fund at the option of
the issuer. The price and coupon of the security are fixed at the time of the
commitment. At the time of entering into the agreement, the Fund is paid a
commitment fee regardless of whether the security ultimately is issued.
35
<PAGE>
The Funds will enter into such agreements only for the purpose of investing in
the security underlying the commitment at a yield and price considered
advantageous and unavailable on a firm commitment basis. No Fund will enter into
a standby commitment with a remaining term in excess of 45 days. The Funds will
limit their investments in standby commitments so that the aggregate purchase
price of the securities subject to the commitments does not exceed 20%, or 25%
with respect to Alliance Global Strategic Income, of their assets.
There is no guarantee that the security subject to a standby commitment will be
issued. In addition, the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
is at the option of the issuer, a Fund will bear the risk of capital loss in the
event the value of the security declines and may not benefit from an
appreciation in the value of the security during the commitment period if the
issuer decides not to issue and sell the security to the Fund.
Structured Securities. Structured securities in which Alliance Global Dollar
Government, Alliance Global Strategic Income and Alliance 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 Alliance Global Dollar Government and Alliance
Global Strategic Income, or foreign government securities, with respect to
Alliance 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. Alliance Global Dollar Government may invest up to 25% of its total
assets, and Alliance Global Strategic Income and Alliance Corporate Bond may
invest without limit, in these types of structured securities.
Variable, Floating and Inverse Floating Rate Instruments. Fixed-income
securities may have fixed, variable or floating 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.
Zero Coupon and Principal-Only Securities. Zero coupon securities and
principal-only (PO) securities are debt securities that have been issued without
interest coupons or stripped of their unmatured interest coupons, and include
receipts or certificates representing interests in such stripped debt
obligations and coupons. Such a security pays no interest to its holder during
its life. Its value to an investor consists of the difference between its face
value at the time of maturity and the price for which it was acquired, which is
generally an amount significantly less than its face value. Such securities
usually trade at a deep discount from their face or par value and are subject to
greater fluctuations in market value in response to changing interest rates than
debt obligations of comparable maturities and credit quality that make current
distributions of interest. On the other hand, because there are no periodic
interest payments to be reinvested prior to maturity, these securities eliminate
reinvestment risk and "lock in" a rate of return to maturity.
Zero coupon Treasury securities are U.S. Treasury bills issued without interest
coupons. Principal-only Treasury securities are U.S. Treasury notes and bonds
that have been stripped of their unmatured interest coupons, and receipts or
certificates representing interests in such stripped debt obligations. Currently
the only U.S. Treasury security issued without coupons is the Treasury bill.
Although the U.S. Treasury does not itself issue Treasury notes and bonds
without coupons, under the U.S. Treasury STRIPS program interest and principal
payments on certain long-term Treasury securities may be maintained separately
in the Federal Reserve book entry system and may be separately traded and owned.
In addition, in the last few
36
<PAGE>
years a number of banks and brokerage firms have separated ("stripped") the
principal portions from the coupon portions of U.S. Treasury bonds and notes and
sold them separately in the form of receipts or certificates representing
undivided interests in these instruments (which are generally held by a bank in
a custodial or trust account).
Alliance Global Strategic Income and Alliance Corporate Bond also may invest in
"pay-in-kind" debentures (i.e., debt obligations the interest on which may be
paid in the form of obligations of the same type rather than cash), which have
characteristics similar to zero coupon securities.
Future Developments. A Fund may, following written notice to its shareholders,
take advantage of other investment practices that are not currently contemplated
for use by the Fund, or are not available but may yet be developed, to the
extent such investment practices are consistent with the Fund's investment
objective and legally permissible for the Fund. Such investment practices, if
they arise, may involve risks that are different from or exceed those involved
in the practices described above.
Portfolio Turnover. The portfolio turnover rate for each Fund is included in the
Financial Highlights section. The Funds are actively managed and, in some cases
in response to market conditions, a Fund's portfolio turnover may exceed 100%. A
higher rate of portfolio turnover increases brokerage and other expenses, which
must be borne by the Fund and its shareholders. High portfolio turnover also may
result in the realization of substantial net short-term capital gains, which,
when distributed, are taxable to shareholders.
Temporary Defensive Position. For temporary defensive purposes, each Fund may
invest in certain types of short-term, liquid, high grade or high quality
(depending on the Fund) debt securities. These securities may include U.S.
Government securities, qualifying bank deposits, money market instruments, prime
commercial paper and other types of short-term debt securities, including notes
and bonds. For Funds that may invest in foreign countries, such securities may
also include short-term, foreign-currency denominated securities of the type
mentioned above issued by foreign governmental entities, companies and
supranational organizations. While the Funds are investing for temporary
defensive purposes, they may not meet their investment objectives.
ADDITIONAL RISK CONSIDERATIONS
Investment in certain of the Funds involves the special risk considerations
described below. Certain of these risks may be heightened when investing in
emerging markets.
Currency Considerations. Those Funds that invest some portion of their assets in
securities denominated in, and receive revenues in, foreign currencies will be
adversely affected by reductions in the value of those currencies relative to
the U.S. Dollar. These changes will affect a Fund's net assets, distributions
and income. If the value of the foreign currencies in which a Fund receives
income falls relative to the U.S. Dollar between receipt of the income and the
making of Fund distributions, a Fund may be required to liquidate securities in
order to make distributions if the Fund has insufficient cash in U.S. Dollars to
meet the distribution requirements that the Fund must satisfy to qualify as a
regulated investment company for federal income tax purposes. Similarly, if an
exchange rate declines between the time a Fund incurs expenses in U.S. Dollars
and the time cash expenses are paid, the amount of the currency required to be
converted into U.S. Dollars in order to pay expenses in U.S. Dollars could be
greater than the equivalent amount of such expenses in the currency at the time
they were incurred. In light of these risks, a Fund may engage in certain
currency hedging transactions, as described above, which involve certain special
risks.
Effects of Borrowing. A Fund's loan agreements provide for additional borrowings
and for repayments and reborrowings from time to time, and each Fund that may
borrow expects to effect borrowings and repayments at such times and in such
amounts as will maintain investment leverage in an amount approximately equal to
its borrowing target. The loan agreements provide for a selection of interest
rates that are based on the bank's short-term funding costs in the U.S. and
London markets.
Borrowings by a Fund result in leveraging of the Fund's shares. Utilization of
leverage, which is usually considered speculative, involves certain risks to a
Fund's shareholders. These include a higher volatility of the net asset value of
a Fund's shares and the relatively greater effect on the net asset value of the
shares. So long as a Fund is able to realize a net return on its investment
portfolio that is higher than the interest expense paid on borrowings, the
effect of leverage will be to cause the Fund's shareholders to realize a higher
current net investment income than if the Fund were not leveraged. On the other
hand, interest rates on U.S. Dollar-denominated and foreign currency-denominated
obligations change from time to time as does their relationship to each other,
depending upon such factors as supply and demand forces, monetary and tax
policies within each country and investor expectations. Changes in such factors
could cause the relationship between such rates to change so that rates on U.S.
Dollar-denominated obligations may substantially increase relative to the
foreign currency-denominated obligations of a Fund's investments. If the
interest expense on borrowings approaches the net return on a Fund's investment
portfolio, the benefit of leverage to the Fund's shareholders will be reduced.
If the interest expense on borrowings were to exceed the net return to
shareholders, a Fund's use of leverage would result in a lower rate of return.
Similarly, the effect of leverage in a declining market could be a greater
decrease in net asset value per share. In an extreme case, if a Fund's current
investment income were not sufficient to meet the interest expense on
borrowings, it could be necessary for the Fund to liquidate certain of its
investments and reduce the net asset value of a Fund's shares.
37
<PAGE>
In the event of an increase in rates on U.S. Government securities or other
changed market conditions, to the point where leverage by Alliance Multi-Market
Strategy, Alliance Global Strategic Income or Alliance North American Government
Income could adversely affect the Funds' shareholders, as noted above, or in
anticipation of such changes, each Fund may increase the percentage of its
investment portfolio invested in U.S. Government securities, which would tend to
offset the negative impact of leverage on Fund shareholders. Each Fund may also
reduce the degree to which it is leveraged by repaying amounts borrowed.
Fixed-Income Securities. The value of each Fund's shares will fluctuate with the
value of its investments. The value of each Fund's investments will change as
the general level of interest rates fluctuates. During periods of falling
interest rates, the values of a Fund's securities will generally rise, although
if falling interest rates are viewed as a precursor to a recession, the values
of a Fund's securities may fall along with interest rates. Conversely, during
periods of rising interest rates, the values of a Fund's securities will
generally decline. Changes in interest rates have a greater effect on
fixed-income securities with longer maturities and durations than those with
shorter maturities and durations.
In seeking to achieve a Fund's investment objective, there will be times, such
as during periods of rising interest rates, when depreciation and realization of
capital losses on securities in a Fund's portfolio will be unavoidable.
Moreover, medium- and lower-rated securities and non-rated securities of
comparable quality may be subject to wider fluctuations in yield and market
values than higher-rated securities under certain market conditions. Such
fluctuations after a security is acquired do not affect the cash income received
from that security but will be reflected in the net asset value of a Fund.
Foreign Securities. The securities markets of many foreign countries are
relatively small, with the majority of market capitalization and trading volume
concentrated in a limited number of companies representing a small number of
industries. Consequently, a Fund whose investment portfolio includes foreign
securities may experience greater price volatility and significantly lower
liquidity than a portfolio invested solely in securities of U.S. companies.
These markets may be subject to greater influence by adverse events generally
affecting the market, and by large investors trading significant blocks of
securities, than is usual in the United States.
Securities registration, custody and settlements may in some instances be
subject to delays and legal and administrative uncertainties. Furthermore,
foreign investment in the securities markets of certain foreign countries is
restricted or controlled to varying degrees. These restrictions or controls may
at times limit or preclude investment in certain securities and may increase the
cost and expenses of a Fund. In addition, the repatriation of investment income,
capital or the proceeds of sales of securities from certain of the countries is
controlled under regulations, including in some cases the need for certain
advance government notification or authority, and if a deterioration occurs in a
country's balance of payments, the country could impose temporary restrictions
on foreign capital remittances.
A Fund also could be adversely affected by delays in, or a refusal to grant, any
required governmental approval for repatriation, as well as by the application
to it of other restrictions on investment. Investing in local markets may
require a Fund to adopt special procedures or seek local governmental approvals
or other actions, any of which may involve additional costs to a Fund. These
factors may affect the liquidity of a Fund's investments in any country and
Alliance will monitor the effect of any such factor or factors on a Fund's
investments. Furthermore, transaction costs including brokerage commissions for
transactions both on and off the securities exchanges in many foreign countries
are generally higher than in the U.S.
Issuers of securities in foreign jurisdictions are generally not subject to the
same degree of regulation as are U.S. issuers with respect to such matters as
insider trading rules, restrictions on market manipulation, shareholder proxy
requirements, and timely disclosure of information. The reporting, accounting,
and auditing standards of foreign countries may differ, in some cases
significantly, from U.S. standards in important respects, and less information
may be available to investors in foreign securities than to investors in U.S.
securities. Substantially less information is publicly available about certain
non-U.S. issuers than is available about most U.S. issuers.
The economies of individual foreign countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product or gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency, and balance of payments position. Nationalization,
expropriation or confiscatory taxation, currency blockage, political changes,
government regulation, political or social instability, or diplomatic
developments could affect adversely the economy of a foreign country. In the
event of nationalization, expropriation or other confiscation, a Fund could lose
its entire investment in securities in the country involved. In addition, laws
in foreign countries governing business organizations, bankruptcy and insolvency
may provide less protection to security holders such as the Fund than that
provided by U.S. laws.
Alliance believes that, except for currency fluctuations between the U.S. Dollar
and the Canadian Dollar, the matters described above are not likely to have a
material adverse effect on Alliance North American Government Income's
investments in the securities of 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,
38
<PAGE>
including investments in securities denominated in Mexican Pesos or other
non-Canadian foreign currencies. If not hedged, however, currency fluctuations
could affect the unrealized appreciation and depreciation of Canadian Government
securities as expressed in U.S. Dollars.
Investment in the Banking Industry. Due to its investment policies with respect
to investments in the banking industry, Alliance Multi-Market Strategy will have
greater exposure to the risk factors which are characteristic of such
investments. In particular, the value of and investment return on the Fund's
shares will be affected by economic or regulatory developments in or related to
the banking industry. Sustained increases in interest rates can adversely affect
the availability and cost of funds for a bank's lending activities, and a
deterioration in general economic conditions could increase the exposure to
credit losses. The banking industry is also subject to the effects of the
concentration of loan portfolios in particular businesses such as real estate,
energy, agriculture or high technology-related companies; competition within
those industries as well as with other types of financial institutions; and
national and local governmental regulation. In addition, the Fund's investments
in commercial banks located in several foreign countries are subject to
additional risks due to the combination in such banks of commercial banking and
diversified securities activities. As discussed above, however, the Fund will
seek to minimize their exposure to such risks by investing only in debt
securities which are determined to be of high quality.
Investment in Fixed-Income Securities Rated Baa and BBB. Securities rated Baa or
BBB are considered to have speculative characteristics and share some of the
same characteristics as lower-rated securities, as described below. Sustained
periods of deteriorating economic conditions or of rising interest rates are
more likely to lead to a weakening in the issuer's capacity to pay interest and
repay principal than in the case of higher-rated securities.
Investment in Lower-Rated Fixed-Income Securities. Lower-rated securities are
subject to greater risk of loss of principal and interest than higher-rated
securities. They are also generally considered to be subject to greater market
risk than higher-rated securities, and the capacity of issuers of lower-rated
securities to pay interest and repay principal is more likely to weaken than is
that of issuers of higher-rated securities in times of deteriorating economic
conditions or rising interest rates. In addition, lower-rated securities may be
more susceptible to real or perceived adverse economic conditions than
investment grade securities. Securities rated Ba or BB are judged to have
speculative elements or to be predominantly speculative with respect to the
issuer's ability to pay interest and repay principal. Securities rated B are
judged to have highly speculative elements or to be predominantly speculative.
Such securities may have small assurance of interest and principal payments.
Securities rated Baa by Moody's are also judged to have speculative
characteristics.
The market for lower-rated securities may be thinner and less active than that
for higher-rated securities, which can adversely affect the prices at which
these securities can be sold. To the extent that there is no established
secondary market for lower-rated securities, a Fund may experience difficulty in
valuing such securities and, in turn, the Fund's assets.
Alliance will try to reduce the risk inherent in investment in lower-rated
securities through credit analysis, diversification, and attention to current
developments and trends in interest rates and economic and political conditions.
There can be no assurance, however, that losses will not occur. Since the risk
of default is higher for lower-rated securities, Alliance's research and credit
analysis are a correspondingly more important aspect of its program for managing
a Fund's securities than would be the case if a Fund did not invest in
lower-rated securities. In considering investments for the Fund, Alliance will
attempt to identify those high-yielding securities whose financial condition is
adequate to meet future obligations, has improved, or is expected to improve in
the future. Alliance's analysis focuses on relative values based on such factors
as interest or dividend coverage, asset coverage, earnings prospects, and the
experience and managerial strength of the issuer.
Unrated Securities. Unrated securities will also be considered for investment by
Alliance North American Government Income, Alliance Global Dollar Government,
Alliance Global Strategic Income, Alliance Corporate Bond and Alliance High
Yield when Alliance believes that the financial condition of the issuers of such
securities, or the protection afforded by the terms of the securities
themselves, limits the risk to the Fund to a degree comparable to that of rated
securities which are consistent with the Fund's objective and policies.
Sovereign Debt Obligations. No established secondary markets may exist for many
of the sovereign debt obligations in which Alliance Global Dollar Government and
Alliance Global Strategic Income will invest. Reduced secondary market liquidity
may have an adverse effect on the market price and a Fund's ability to dispose
of particular instruments when necessary to meet its liquidity requirements or
in response to specific economic events such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
sovereign debt obligations may also make it more difficult for a Fund to obtain
accurate market quotations for the purpose of valuing its portfolio. Market
quotations are generally available on many sovereign debt obligations only from
a limited number of dealers and may not necessarily represent firm bids of those
dealers or prices for actual sales.
By investing in sovereign debt obligations, the Funds will be exposed to the
direct or indirect consequences of political, social, and economic changes in
various countries. Political changes in a country may affect the willingness of
a foreign government to make or provide for timely payments of its
39
<PAGE>
obligations. The country's economic status, as reflected in, among other things,
its inflation rate, the amount of its external debt and its gross domestic
product, will also affect the government's ability to honor its obligations.
The sovereign debt obligations in which the Funds will invest in many cases
pertain to countries that are among the world's largest debtors to commercial
banks, foreign governments, international financial organizations, and other
financial institutions. In recent years, the governments of some of these
countries have encountered difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Certain governments have not been able to make payments of interest on or
principal of sovereign debt obligations as those payments have come due.
Obligations arising from past restructuring agreements may affect the economic
performance and political and social stability of those issuers.
The Funds are permitted to invest in sovereign debt obligations that are not
current in the payment of interest or principal or are in default so long as
Alliance believes it to be consistent with the Funds' investment objectives. The
Funds may have limited legal recourse in the event of a default with respect to
certain sovereign debt obligations it holds. For example, remedies from defaults
on certain sovereign debt obligations, unlike those on private debt, must, in
some cases, be pursued in the courts of the defaulting party itself. Legal
recourse therefore may be significantly diminished. Bankruptcy, moratorium and
other similar laws applicable to issuers of sovereign debt obligations may be
substantially different from those applicable to issuers of private debt
obligations. The political context, expressed as the willingness of an issuer of
sovereign debt obligations to meet the terms of the debt obligation, for
example, is of considerable importance. In addition, no assurance can be given
that the holders of commercial bank debt will not contest payments to the
holders of securities issued by foreign governments in the event of default
under commercial bank loan agreements.
U.S. Corporate Fixed-Income Securities. The U.S. corporate fixed-income
securities in which Alliance Global Dollar Government and Alliance High Yield
invest may include securities issued in connection with corporate restructurings
such as takeovers or leveraged buyouts, which may pose particular risks.
Securities issued to finance corporate restructurings may have special credit
risks due to the highly leveraged conditions of the issuer. In addition, such
issuers may lose experienced management as a result of the restructuring.
Furthermore, the market price of such securities may be more volatile to the
extent that expected benefits from the restructuring do not materialize. The
Funds may also invest in U.S. corporate fixed-income securities that are not
current in the payment of interest or principal or are in default, so long as
Alliance believes such investment is consistent with the Fund's investment
objectives. The Funds' rights with respect to defaults on such securities will
be subject to applicable U.S. bankruptcy, moratorium and other similar laws.
Year 2000. Many computer systems and applications in use today process
transactions using two-digit date fields for the year of the transaction, rather
than the full four digits. If these systems are not modified or replaced,
transactions occurring after 1999 could be processed as year "1900", which could
result in processing inaccuracies and computer system failures. This is commonly
known as the Year 2000 problem. Should any of the computer systems employed by
the Funds' major service providers fail to process Year 2000 related information
properly, that could have a significant negative impact on the Funds' operations
and the services that are provided to the Funds' shareholders. In addition, to
the extent that the operations of issuers of securities held by the Funds are
impaired by the Year 2000 problem, or prices of securities held by the Funds
decline as a result of real or perceived problems relating to the Year 2000, the
value of the Funds' shares may be materially affected.
With respect to the Year 2000, the Funds have been advised that Alliance, each
Fund's investment adviser, Alliance Fund Distributors, Inc. ("AFD"), each Fund's
principal underwriter, and Alliance Fund Services, Inc. ("AFS"), each Fund's
registrar, transfer agent and dividend disbursing agent, (collectively,
"Alliance"), began to address the Year 2000 issue several years ago in
connection with the replacement or upgrading of certain computer systems and
applications. During 1997, Alliance began a formal Year 2000 initiative, which
established a structured and coordinated process to deal with the Year 2000
issue. Alliance reports that it has completed its assessment of the Year 2000
issues on its domestic and international computer systems and applications.
Currently, management of Alliance expects that the required modifications for
the majority of its significant systems and applications that will be in use on
January 1, 2000, will be completed and tested in early 1999. Full integration
testing of these systems and testing of interfaces with third-party suppliers
will continue through 1999. At this time, management of Alliance believes that
the costs associated with resolving this issue will not have a material adverse
effect on its operations or on its ability to provide the level of services it
currently provides to the Funds.
The Funds and Alliance have been advised by the Funds' Custodians that they are
also in the process of reviewing their systems with the same goals. As of the
date of this prospectus, the Funds and Alliance have no reason to believe that
the Custodians will be unable to achieve these goals.
40
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUNDS
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Each Fund's Adviser is Alliance Capital Management, L.P., 1345 Avenue of the
Americas, New York, New York 10105. Alliance is a leading international
investment manager supervising client accounts with assets as of December 31,
1998, totaling more than $286 billion (of which approximately $118 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 54
registered investment companies, with more than 118 separate portfolios, managed
by Alliance currently have over 3.6 million shareholder accounts. As of December
31, 1998, Alliance was retained as an investment manager for employee benefit
plan assets of 35 of the FORTUNE 100 companies.
Alliance provides investment advisory services and order placement facilities
for the Funds. For these advisory services, the Funds paid Alliance as a
percentage of average daily net assets:
Fee as a
percentage of
average daily Fiscal
Fund net assets* Year Ending
- ---- ----------- ---------
Alliance Short-Term U.S.
Government 0 8/31/98
Alliance U.S. Government
Portfolio .55 6/30/98
Alliance Limited Maturity
Government .65 11/30/98
Alliance Mortgage Securities
Income .53 12/31/98
Alliance Multi-Market Strategy .60 10/31/98
Alliance North American
Government Income .72 11/30/98
Alliance Global Dollar
Government .75 8/31/98
Alliance Global Strategic
Income .75 10/31/98
Alliance Corporate Bond .55 6/30/98
Alliance High Yield .75 8/31/98
- ----------
* Fees are stated net of any waivers and/or reimbursements. See the "Fee
Table" at the beginning of the Prospectus for more information about fee
waivers.
PORTFOLIO MANAGER
The following table lists the person or persons who are primarily responsible
for the day-to-day management of each Fund's portfolio, the length of time that
each person has been primarily responsible for the Fund's portfolio, and each
person's principal occupation during the past five years.
Principal occupation
Employee; time period; during the past
Fund title with ACMC five years*
- --------------------------------------------------------------------------------
Short-Term U.S. Jeffrey S. Phlegar; Associated with
Government since 1997; Alliance
Senior Vice President
U.S. Government Wayne D. Lyski; Associated with
since 1983; Alliance
Executive Vice President
Jeffrey S. Phlegar; (see above)
since 1997; (see above)
Limited Maturity Jeffrey S. Phlegar; (see above)
Government since 1997; (see above)
Mortgage Securities Jeffrey S. Phlegar; (see above)
Income since 1997; (see above)
Multi-Market Strategy Douglas J. Peebles; Associated with
since inception; Alliance
Senior Vice President
North American Wayne D. Lyski; since (see above)
Government Income inception; (see above)
Global Dollar Wayne D. Lyski; since (see above)
Government inception; (see above)
Global Strategic Wayne D. Lyski; since (see above)
Income inception; (see above)
Douglas J. Peebles; since (see above)
inception; (see above)
Corporate Bond Wayne D. Lyski; since (see above)
1987; (see above)
Paul J. DeNoon; Associated with
since January 1992; Alliance
Senior Vice President
High Yield Wayne C. Tappe; Associated with
since 1991; Alliance
Senior Vice President
Nelson Jantzen; Associated with
since 1991; Alliance
Senior Vice President
- --------------------------------------------------------------------------------
* Unless indicated otherwise, persons associated with Alliance have been
employed in a portfolio management, research or investment capacity.
PERFORMANCE OF A SIMILARLY MANAGED PORTFOLIO
Alliance is the investment adviser of a portfolio (the "Historical Portfolio")
of a registered investment company, sold only to separate accounts of insurance
companies in connection with variable life insurance contracts and variable
annuities certificates and contracts (the "Contracts"), that has substantially
the same investment objective and policies and has been managed in accordance
with essentially the same investment strategies and techniques as those of
Alliance High Yield. Alliance since July 22, 1993, and prior thereto, Equitable
Capital Management Corporation, whose advisory business Alliance acquired on
that date, have served as investment adviser to the Historical Portfolio since
its inception in 1987. Wayne C.
41
<PAGE>
Tappe, who together with Nelson Jantzen is primarily responsible for the
day-to-day management of Alliance High Yield, has been the person principally
responsible for the day-to-day management of the Historical Portfolio since
1995.
The following tables set forth performance results for the Historical Portfolio
since its inception (January 2, 1987), together with those of Alliance High
Yield and the Lipper High Current Yield Mutual Funds Average as a comparative
benchmark. As of December 31, 1998, the assets in the Historical Portfolio
totalled approximately $612 million.
The performance data do not reflect account charges applicable to the Contracts
or imposed at the insurance company separate account level, which, if reflected,
would lower the performance of the Historical Portfolio. In addition, the
performance data do not reflect the Fund's higher expenses, which, if reflected,
would lower the performance of the Historical Portfolio. The performance data
have not been adjusted for corporate or individual taxes, if any, payable with
respect to the Historical Portfolio. The rates of return shown for the
Historical Portfolio are not an estimate or guarantee of future investment
performance of the Fund.
The Lipper High Current Yield Mutual Funds Average is a survey of the
performance of a large number of mutual funds the investment objective of each
of which is similar to that of the Fund. Nonetheless, the investment policies
pursued by Funds in the survey may differ from those of High Yield and the
Historical Portfolio. This survey is published by Lipper Analytical Services,
Inc. ("Lipper"), a firm recognized for its reporting of performance of actively
managed funds. According to Lipper, performance data are presented net of
investment management fees, operating expenses and, for funds with Rule 12b-1
plans, asset-based sales charges.
The performance results presented below are based on percent changes in net
asset values of the Historical Portfolio with dividends and capital gains
reinvested. Cumulative rates of return reflect performance over a stated period
of time. Annualized rates of return represent the rate of growth that would have
produced the corresponding cumulative return had performance been constant over
the entire period. Rates of return for Alliance High Yield Class A shares assume
the imposition of the maximum 4.25% sales charge. The inception date for the
Historical Portfolio and Lipper data is January 2, 1987 and for Alliance High
Yield is April 22, 1997.
Annualized Rates of Return
Periods Ended December 31, 1998
- --------------------------------------------------------------------------------
Portfolio/Benchmark 1 Year 3 Years 5 Years 10 Years Inception
- --------------------------------------------------------------------------------
Historical Portfolio -5.15% 11.36% 9.99% 11.17% 10.49%
Lipper High Current
Yield Mutual Funds
Average -0.44 8.21 7.37 9.34 8.97
Alliance High Yield -5.83 n/a n/a n/a 9.72
Cumulative Rates of Return
Periods Ending December 31, 1998
- --------------------------------------------------------------------------------
Portfolio/Benchmark 1 Year 3 Years 5 Years 10 Years Inception
- --------------------------------------------------------------------------------
Historical Portfolio -5.15% 38.11% 61.01% 188.22% 231.11%
Lipper High Current
Yield Mutual Funds
Average -0.44 26.80 43.00 145.62 182.21
Alliance High Yield -5.83 n/a n/a n/a 17.01
- --------------------------------------------------------------------------------
PURCHASE AND SALE OF SHARES
- --------------------------------------------------------------------------------
HOW THE FUNDS VALUE THEIR SHARES
The Funds' net asset value or NAV is calculated at 4:00 p.m., Eastern time, each
day the Exchange is open for business. To calculate NAV, a Fund's assets are
valued and totaled, liabilities are subtracted, and the balance, called net
assets, is divided by the number of shares outstanding. The Funds' value their
securities at their current market value determined on the basis of market
quotations or, if such quotations are not readily available, such other methods
as the Funds' Directors or Trustees believe accurately reflect fair market
value.
Your order for purchase, sale, or exchange of shares is priced at the next NAV
calculated after your order is accepted by the Fund. Your purchase of Fund
shares may be subject to an initial sales charge. Sales of Fund shares may be
subject to a contingent deferred sales charge or CDSC. See the Distribution
Arrangements section of this Prospectus for details.
HOW TO BUY SHARES
You may purchase a Fund's shares through broker-dealers, banks, or other
financial intermediaries. You also may purchase shares directly from the Funds'
principal underwriter, Alliance Fund Distributors, Inc., or AFD.
Minimum investment amounts are:
o Initial $250
o Subsequent $50
o Automatic Investment Program $25
If you are an existing Fund shareholder, you may purchase shares by electronic
funds transfer in amounts not exceeding $500,000 if you have completed the
appropriate section of the Subscription Application or the Shareholder Options
form obtained from AFS. Call 800-221-5672 to arrange a transfer from your bank
account.
A Fund is required to withhold 31% of taxable dividends, capital gains
distributions, and redemptions paid to shareholders who have not provided the
Fund with their certified taxpayer identification number. To avoid this, you
must provide your correct Tax Identification Number (Social Security Number for
most investors) on your account application.
The Funds may refuse any order to purchase shares. In this regard, the Funds
reserve the right to restrict purchases
42
<PAGE>
of Fund shares (including through exchanges) when they appear to evidence a
pattern of frequent purchases and sales made in response to short-term
considerations.
HOW TO EXCHANGE SHARES
You may exchange your Fund shares for shares of the same class of other Alliance
Mutual Funds (including AFD Exchange Reserves, a money market fund managed by
Alliance). Exchanges of shares are made at next-determined NAV, without sales or
service charges. You may request an exchange by mail or telephone. You must call
by 4:00 p.m., Eastern time, to receive that day's NAV. The Funds may change,
suspend, or terminate the exchange service on 60 days' written notice.
HOW TO SELL SHARES
You may "redeem" your shares (i.e., sell your shares to the Fund) on any day the
Exchange is open, either directly or through your financial intermediary. Your
sales price will be the next-determined NAV, less any applicable CDSC, after the
Fund receives your request in proper form. Normally, proceeds will be sent to
you within seven days. If you recently purchased your shares by check or
electronic funds transfer, your redemption payment may be delayed until the Fund
is reasonably satisfied that the check or electronic funds transfer has been
collected (which may take up to 15 days).
o Selling Shares Through Your Broker
Your broker must receive your request by 4:00 p.m., Eastern time, and submit it
to the Fund by 5:00 p.m., Eastern time, for you to receive that day's NAV, less
any applicable CDSC. Your broker is responsible for furnishing all necessary
documentation to a Fund and may charge you for this service.
o Selling Shares Directly to a Fund
By Mail
- -- Send a signed letter of instruction or stock power form to AFS, along with
certificates, to:
Alliance Fund Services, Inc.
P.O. Box 1520
Secaucus, NJ 07096-1520
800-221-5672
- -- For your protection, a bank, a member firm of a national stock exchange or
other eligible guarantor institution must guarantee signatures. Stock
power forms are available from your financial intermediary, AFS, and many
commercial banks. Additional documentation is required for the sale of
shares by corporations, intermediaries, fiduciaries, and surviving joint
owners.
By Telephone
- -- You may redeem your shares for which no stock certificates have been
issued by telephone request. Call AFS at 800-221-5672 with instructions on
how you wish to receive your sale proceeds.
- -- A telephone redemption request must be made by 4:00 p.m., Eastern time,
for you to receive that day's NAV, less any applicable CDSC and, except
for certain omnibus accounts, may be made only once per day.
- -- If you have selected electronic funds transfer in your Subscription
Application, the redemption proceeds may be sent directly to your bank.
Otherwise, the proceeds will be mailed to you.
- -- Redemption requests by electronic funds transfer may not exceed $100,000
per day and redemption requests by check cannot exceed $50,000 per day.
- -- Telephone redemption is not available for shares held in nominees or
"street name" accounts or retirement plan accounts or shares held by a
shareholder who has changed his or her address of record within the
previous 30 calendar days.
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS
- --------------------------------------------------------------------------------
AND TAXES
- --------------------------------------------------------------------------------
The Funds declare dividends on their shares each Fund business day. For
Saturdays, Sundays, and holidays dividends will be as of the previous business
day. Each Fund pays dividends on its shares after the close of business on the
twentieth day of each month or on the first day after that day if the day is not
a business day.
Each Fund's income dividend and capital gains distribution, if any, declared by
a Fund on its outstanding shares will, at the election of each shareholder, be
paid in cash or in additional shares of the same class of shares of that Fund.
If paid in additional shares, the shares will have an aggregate net asset value
as of the close of business on the day following the declaration date of the
dividend or distribution equal to the cash amount of the dividend or
distribution. You may make an election to receive dividends and distributions in
cash or in shares at the time you purchase shares. Your election can be changed
at any time prior to a record date for a dividend. There is no sales or other
charge in connection with the reinvestment of dividends or capital gains
distributions. Cash dividends may be paid in check, or at your election,
electronically via the ACH network. There is no sales or other charge on the
reinvestment of Fund dividends and distributions.
If you receive an income dividend or capital gains distribution in cash you may,
within 120 days following the date of its payment, reinvest the dividend or
distribution in additional shares of that Fund without charge by returning to
Alliance, with appropriate instructions, the check representing the dividend or
distribution. Thereafter, unless you otherwise specify, you will be deemed to
have elected to reinvest all subsequent dividends and distributions in shares of
that Fund.
43
<PAGE>
While it is the intention of each Fund to distribute to its shareholders
substantially all of each fiscal year's net income and net realized capital
gains, if any, the amount and timing of any such dividend or distribution must
necessarily depend upon the realization by such Fund of income and capital gains
from investments. There is no fixed dividend rate and there can be no assurance
that a Fund will pay any dividends or realize any capital gains.
Investment income received by a Fund from sources within foreign countries may
be subject to foreign income taxes withheld at the source. To the extent that
any Fund is liable for foreign income taxes withheld at the source, each Fund
intends, if possible, to operate so as to meet the requirements of the Code to
"pass through" to the Fund's shareholders credits or deductions for foreign
income taxes paid, but there can be no assurance that any Fund will be able to
do so. Furthermore, a shareholder's ability to claim a foreign tax credit or
deduction for foreign taxes paid by a Fund may be subject to certain limitations
imposed by the Code, as a result of which a shareholder may not be permitted to
claim a full credit or deduction for the amount of such taxes.
Under certain circumstances, if a Fund realizes losses (e.g., from fluctuations
in currency exchange rates) after paying a dividend, all or a portion of the
dividend may subsequently be characterized as a return of capital. Returns of
capital are generally nontaxable, but will reduce a shareholder's basis in
shares of a Fund. If that basis is reduced to zero (which could happen if the
shareholder does not reinvest distributions and returns of capital are
significant), any further returns of capital will be taxable as a capital gain.
The Funds expect that distributions will consist either of net income (or
short-term capital gains) or long-term capital gains. For federal income tax
purposes, the Fund's dividend distributions of net income (or short-term taxable
gains) will be taxable to you as ordinary income. Any capital gains
distributions may be taxable to you as capital gains. A Fund's distributions
also may be subject to certain state and local taxes.
If you buy shares just before a Fund deducts a distribution from its NAV, you
will pay the full price for the shares and then receive a portion of the price
back as a taxable distribution.
The sale or exchange of Fund shares is a taxable transaction for Federal income
tax purposes.
Each year shortly after December 31, the Fund will send you tax information
stating the amount and type of all its distributions for the year. Consult your
tax adviser about the federal, state, and local tax consequences in your
particular circumstances.
- --------------------------------------------------------------------------------
DISTRIBUTION ARRANGEMENTS
- --------------------------------------------------------------------------------
Share Classes. The Funds offer three classes of shares.
Class A Shares--Initial Sales Charge Alternative You can purchase Class A shares
at NAV plus an initial sales charge, as follows:
Initial Sales Charge
---------------------------------------------------
As % of Commission to
Net Amount As % of Dealer/Agent as %
Amount Purchased Invested Offering Price of Offering Price
- ---------------- -------- -------------- -----------------
Up to $100,000 ...... 4.44% 4.25% 4.00%
$100,000 up to
$250,000........... 3.36 3.25 3.00
$250,000 up to
$500,000........... 2.30 2.25 2.00
$500,000 up to
$1,000,000......... 1.78 1.75 1.50
You pay no initial sales charge on purchases of Class A shares in the amount of
$1,000,000, but may pay a 1% CDSC if you redeem your shares within 1 year.
Alliance may pay the dealer or agent a fee of up to 1% of the dollar amount
purchased. Certain purchases of Class A shares may qualify for reduced or
eliminated sales charges under a Fund's Combined Purchase Privilege, Cumulative
Quantity Discount, Statement of Intention, Privilege for Certain Retirement
Plans, Reinstatement Privilege, and Sales at Net Asset Value Programs. Consult
the Subscription Application and a Fund's SAI for additional information about
these options.
Class B Shares--Deferred Sales Charge Alternative
You can purchase Class B shares at NAV without an initial sales charge. A Fund
will thus receive the full amount of your purchase. Your investment, however,
will be subject to a CDSC if you redeem shares within three years (four years in
the case of Alliance Global Strategic Income and Alliance High Yield) after
purchase. The CDSC varies depending on the number of years you hold the shares.
The CDSC amounts are:
Alliance Global Strategic Income and Alliance High Yield:
Years Since Purchase CDSC
-------------------- ----
First 4.0%
Second 3.0%
Third 2.0%
Fourth 1.0%
Fifth None
All Other Funds:
Years Since Purchase CDSC
-------------------- ----
First 3.0%
Second 2.0%
Third 1.0%
Fourth None
If you exchange your shares for the Class B shares of another Alliance Mutual
Fund, the CDSC also will apply to those Class B shares. The CDSC period begins
with the
44
<PAGE>
date of your original purchase, not the date of exchange for the other Class B
shares.
The Fund's Class B shares purchased for cash automatically convert to
Class A shares six years after the end of the month of your purchase (except
for Alliance Global Strategic Income Trust and Alliance High Yield which
automatically convert to Class A shares eight years after the end of the month
of your purchase). If you purchase shares by exchange for the Class B shares
of another Alliance Mutual Fund, the conversion period runs from the date of
your original purchase.
Class C Shares--Asset-Based Sales Charge Alternative
You can purchase Class C shares at NAV without any initial sales charge. A Fund
will thus receive the full amount of your purchase. Your investment, however,
will be subject to a 1% CDSC if you redeem your shares within 1 year. If you
exchange your shares for the Class C shares of another Alliance Mutual Fund, the
1% CDSC also will apply to those Class C shares. The 1-year period for the CDSC
begins with the date of your original purchase, not the date of the exchange for
the other Class C shares.
Class C shares do not convert to any other class of shares of the Fund.
Asset-based Sales Charge or Rule 12b-1 Fees. Each Fund has adopted a plan under
Commission Rule 12b-1 that allows the Fund to pay asset-based sales charges or
distribution and service fees for the distribution and sale of its shares. The
amount of these fees for each class of the Fund's shares is:
Rule 12b-1 Fee (as a percent of
aggregate average daily net assets)
-----------------------------------
Class A .30%*
Class B 1.00%
Class C 1.00%
- --------------------
* The Rule 12b-1 plan for Class A shares of Alliance Short-Term U.S. Government
Fund provides for payments of up to .50% of aggregate average daily net
assets, although the Fund's Trustees currently limit such payments to .30% of
such assets.
Because these fees are paid out of the Fund's assets on an on-going basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales fees. Class B and Class C shares are subject to
higher distribution fees than Class A shares (Class B shares are subject to
these higher fees for a period of six years, after which they convert to Class A
shares except for Alliance Global Strategic Income Trust and Alliance High Yield
Fund's Class B shares, which convert to Class A shares after eight years). The
higher fees mean a higher expense ratio, so Class B and Class C shares pay
correspondingly lower dividends and may have a lower net asset value than Class
A shares.
Choosing a Class of Shares. The decision as to which class of shares is more
beneficial to you depends on the amount and intended length of your investment.
If you are making a large investment, thus qualifying for a reduced sales
charge, you might consider purchasing Class A shares. If you are making a
smaller investment, you might consider purchasing Class B shares because 100% of
your purchase is invested immediately. If you are unsure of the length of your
investment, you might consider Class C shares because there is no initial sales
charge and no CDSC as long as the shares are held for one year or more. Dealers
and agents may receive differing compensation for selling Class A, Class B, or
Class C shares. There is no size limit on purchases of Class A shares. The
maximum purchase of Class B shares is $250,000. The maximum purchase of Class C
shares is $1,000,000.
You should consult your financial agent to assist in choosing a class of Fund
shares.
Application of the CDSC. The CDSC is applied to the lesser of the original cost
of shares being redeemed or NAV at the time of redemption (or, as to Fund shares
acquired through an exchange, the cost of the Alliance Fund shares originally
purchased for cash). Shares obtained from dividend or distribution reinvestment
are not subject to the CDSC. The Fund may waive the CDSC on redemptions of
shares following the death or disability of a shareholder, to meet the
requirements of certain qualified retirement plans, or under a monthly,
bi-monthly, or quarterly systematic withdrawal plan. See the Fund's SAI for
further information about CDSC waivers.
Other. A transaction, service, administrative, or other similar fee may be
charged by your broker-dealer, agent, financial intermediary, or other financial
representative with respect to the purchase, sale, or exchange of Class A, Class
B or Class C shares made through your financial representative. The financial
intermediaries also may impose requirements on the purchase, sale, or exchange
of shares that are different from, or in addition to, those imposed by a Fund,
including requirements as to the minimum initial and subsequent investment
amounts.
In addition to the discount or commission paid to dealers or agents, AFD from
time to time pays additional cash or other incentives to dealers or agents,
including EQ Financial Consultants Inc., an affiliate of AFD, in connection with
the sale of shares of the Funds. These additional amounts may be utilized, in
whole or in part, in some cases together with other revenues of such dealers or
agents, to provide additional compensation to registered representatives who
sell shares of the Funds. On some occasions, the cash or other incentives will
be conditioned upon the sale of a specified minimum dollar amount of the shares
of a Fund and/or other Alliance Mutual Funds during a specific period of time.
The incentives may take the form of payment for attendance at seminars, meals,
sporting events or theater performances, or payment for travel, lodging and
entertainment incurred in connection with travel by persons associated with a
dealer or agent and their immediate family members to urban or resort locations
within or outside the United States. The dealer or agent may elect to receive
cash incentives of equivalent amount in lieu of such payments.
45
<PAGE>
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Under unusual circumstances, a Fund may suspend redemptions or postpone payment
for up to seven days or longer, as permitted by federal securities law. The
Funds reserve the right to close an account that through redemption has remained
below $200 for 90 days. Shareholders will receive 60 days' written notice to
increase the account value before the account is closed.
During drastic economic or market developments, you might have difficulty
reaching AFS by telephone, in which event you should issue written instructions
to AFS. AFS is not responsible for the authenticity of telephonic requests to
purchase, sell, or exchange shares. AFS will employ reasonable procedures to
verify that telephone requests are genuine, and could be liable for losses
resulting from unauthorized transactions if it fails to do so. Dealers and
agents may charge a commission for handling telephonic requests. The telephone
service may be suspended or terminated at any time without notice.
Shareholder Services. AFS offers a variety of shareholder services. For more
information about these services or your account, call AFS's toll-free number,
800-221-5672. Some services are described in the attached Subscription
Application. A shareholder manual explaining all available services will be
provided upon request. To request a shareholder manual, call 800-227-4618.
Employee Benefit Plans. Certain employee benefit plans, including
employer-sponsored tax-qualified 401(k) plans and other defined contribution
retirement plans ("Employee Benefit Plans"), may establish requirements as to
the purchase, sale or exchange of shares of the Funds, including maximum and
minimum initial investment requirements, that are different from those described
in this Prospectus. Employee Benefit Plans also may not offer all classes of
shares of the Funds. In order to enable participants investing through Employee
Benefit Plans to purchase shares of the Funds, the maximum and minimum
investment amounts may be different for shares purchased through Employee
Benefit Plans from those described in this Prospectus. In addition, the Class A,
Class B and Class C CDSC may be waived for investments made through Employee
Benefit Plans.
PENDING LEGAL PROCEEDINGS INVOLVING NORTH
AMERICAN GOVERNMENT INCOME
On July 25, 1995, a Consolidated and Supplemental Class Action Complaint
("Complaint") styled In re Alliance North American Government Income Trust, Inc.
Securities Litigation was filed in the U.S. District Court for the Southern
District of New York ("District Court") against the Fund, Alliance, ACMC, AFD,
The Equitable Companies Incorporated ("ECI"), a parent of the Adviser, and
certain current and former officers and directors of the Fund and ACMC, alleging
violations of the federal securities laws, fraud and breach of fiduciary duty in
connection with the Fund's investments in Mexican and Argentine securities. The
Complaint sought certification of a plaintiff class of all persons who purchased
or owned Class A, Class B or Class C shares of the Fund from March 27, 1992
through December 23, 1994. Plaintiffs alleged that during 1995 the Fund's losses
exceeded $750,000,000 and sought as relief unspecified damages, costs and
attorney's fees.
On September 26, 1996, the District Court granted defendants' motion to dismiss
all counts of the Complaint ("First Decision"). On October 11, 1996, plaintiffs
filed a motion for reconsideration of the First Decision. On November 25, 1996,
the District Court denied plaintiffs' motion for reconsideration of the First
Decision. On October 29, 1997, the United States Court of Appeals for the Second
Circuit ("Court of Appeals") issued an order granting defendants' motion to
strike and dismissing plaintiffs' appeal of the First Decision.
On October 29, 1996, plaintiffs filed a motion for leave to file an amended
complaint ("Amended Complaint"). In the Amended Complaint, plaintiffs asserted
claims against the Fund, Alliance, ACMC, AFD, ECI, and certain current and
former officers of the Fund and ACMC alleging violations of the federal
securities laws, fraud and breach of fiduciary duty. The principal allegations
of the Amended Complaint related to the Fund's hedging practices, the Fund's
investments in certain mortgage-backed securities, and the risk and objectives
of the Fund as described in the Fund's marketing materials. The Amended
Complaint made similar requests for class certification and damages as made in
the Complaint. On July 15, 1997, the District Court denied plaintiffs' motion
for leave to file the Amended Complaint and dismissed the case ("Second
Decision").
On November 17, 1997, plaintiffs filed a notice of appeal of the Second Decision
to the Court of Appeals. On October 15, 1998, the Court of Appeals affirmed in
part and reversed in part the Second Decision. The Court of Appeals affirmed the
District Court's denial of plaintiffs' motion for leave to file the Amended
Complaint insofar as the Amended Complaint alleged that defendants had made
misrepresentations and omissions relating to the Funds' investments in certain
mortgage-backed securities and in the Fund's marketing materials. The Court of
Appeals reversed the District Court's decision to deny plaintiffs' motions for
leave to file the Amended Complaint insofar as the Amended Complaint alleged
that defendants had made actionable misrepresentations and omissions relating to
the Fund's hedging practices. The Fund and Alliance believe that the allegations
in the Complaint and the Amended Complaint are without merit and intend to
defend vigorously against those claims.
46
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand each Fund's
financial performance for the past 5 years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
share of each Fund. The total returns in the table represent the rate that an
investor would have earned (or lost) on an investment in the Fund (assuming
reinvestment of all dividends and distributions). The information has been
audited by PricewaterhouseCoopers LLP, the independent accountants for Alliance
Short-Term U.S. Government Fund, and by Ernst & Young LLP, the independent
accountants for Alliance U.S. Government Portfolio, Alliance Limited Maturity
Government Fund, Alliance Mortgage Securities Income Fund, Alliance Multi-Market
Strategy Trust, Alliance North American Government Income Trust, Alliance Global
Dollar Government Fund, Alliance Global Strategic Income Trust, Alliance
Corporate Bond Portfolio, and Alliance High Yield Fund, whose reports, along
with each Fund's financial statements, are included in the SAI, which is
avaliable upon request.
47
<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
Year Ended 8/31/98 ....... $ 9.63 $ .49(h) $ (.11) $ .38 $ (.50) $ 0.00
Year Ended 8/31/97 ....... 9.66 .47(h) .03 .50 (.46) 0.00
Year Ended 8/31/96 ....... 9.70 .47 (.02) .45 (.49) 0.00
Year Ended 8/31/95 ....... 9.67 .42 .05 .47 (.41) 0.00
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
Class B
Year Ended 8/31/98 ....... $ 9.74 $ .42(h) $ (.08) $ .34 $ (.43) $ 0.00
Year Ended 8/31/97 ....... 9.77 .41(h) .02 .43 (.39) 0.00
Year Ended 8/31/96 ....... 9.81 .41 (.03) .38 (.42) 0.00
Year Ended 8/31/95 ....... 9.78 .36 .04 .40 (.34) 0.00
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
Class C
Year Ended 8/31/98 ....... $ 9.73 $ .42(h) $ (.08) $ .34 $ (.43) $ 0.00
Year Ended 8/31/97 ....... 9.76 .41(h) .02 .43 (.39) 0.00
Year Ended 8/31/96 ....... 9.80 .40 (.02) .38 (.42) 0.00
Year Ended 8/31/95 ....... 9.77 .34 .06 .40 (.34) 0.00
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
7/1/98 to 12/31/98+++..... $ 7.57 $ .26(h) $ .12 $ .38 $ (.28) $ 0.00
Year Ended 6/30/98 ....... 7.41 .54(h) .18 .72 (.54) 0.00
Year Ended 6/30/97 ....... 7.52 .57(h) (.10) .47 (.57) 0.00
Year Ended 6/30/96 ....... 7.96 .58 (.44) .14 (.58) 0.00
Year Ended 6/30/95 ....... 7.84 .64 .13 .77 (.65) 0.00
Year Ended 6/30/94 ....... 8.64 .65 (.80) (.15) (.65) 0.00
Class B
7/1/98 to 12/31/98+++..... $ 7.57 $ .24(h) $ .11 $ .35 $ (.25) $ 0.00
Year Ended 6/30/98 ....... 7.41 .48(h) .18 .66 (.48) 0.00
Year Ended 6/30/97 ....... 7.52 .52(h) (.10) .42 (.52) 0.00
Year Ended 6/30/96 ....... 7.96 .52 (.44) .08 (.52) 0.00
Year Ended 6/30/95 ....... 7.84 .58 .13 .71 (.59) 0.00
Year Ended 6/30/94 ....... 8.64 .59 (.80) (.21) (.59) 0.00
Class C
7/1/98 to 12/31/98+++..... $ 7.57 $ .24(h) $ .11 $ .35 $ (.25) $ 0.00
Year Ended 6/30/98 ....... 7.41 .48(h) .18 .66 (.48) 0.00
Year Ended 6/30/97 ....... 7.52 .52(h) (.10) .42 (.52) 0.00
Year Ended 6/30/96 ....... 7.96 .52 (.44) .08 (.52) 0.00
Year Ended 6/30/95 ....... 7.83 .58 .14 .72 (.59) 0.00
Year Ended 6/30/94 ....... 8.64 .59 (.81) (.22) (.59) 0.00
Limited Maturity Government
Class A
Year Ended 11/30/98 ...... $ 9.44 $ .47(h) $ .17 $ .64 $ (.47) $ 0.00
Year Ended 11/30/97 ...... 9.45 .51(h) .02 .53 (.52) 0.00
Year Ended 11/30/96 ...... 9.52 .51(h) (.04) .47 (.51) 0.00
Year Ended 11/30/95 ...... 9.51 .52(h) .02 .54 (.50) 0.00
Year Ended 11/30/94 ...... 9.94 .42 (.32) .10 (.48) (.01)
Class B
Year Ended 11/30/98 ...... $ 9.44 $ .39(h) $ .19 $ .58 $ (.39) $ 0.00
Year Ended 11/30/97 ...... 9.45 .45(h) .01 .46 (.45) 0.00
Year Ended 11/30/96 ...... 9.52 .44(h) (.04) .40 (.44) 0.00
Year Ended 11/30/95 ...... 9.52 .46(h) .01 .47 (.44) 0.00
Year Ended 11/30/94 ...... 9.94 .39 (.35) .04 (.42) (.01)
Class C
Year Ended 11/30/98 ...... $ 9.44 $ .39(h) $ .19 $ .58 $ (.39) $ 0.00
Year Ended 11/30/97 ...... 9.45 .45(h) .01 .46 (.45) 0.00
Year Ended 11/30/96 ...... 9.52 .45(h) (.05) .40 (.45) 0.00
Year Ended 11/30/95 ...... 9.52 .46(h) .01 .47 (.44) 0.00
Year Ended 11/30/94 ...... 9.94 .37 (.33) .04 (.42) (.01)
Mortgage Securities Income
Class A
Year Ended 12/31/98 ...... $ 8.63 $ .52(h) $ (.03) $ .49 $ (.52) $ 0.00
Year Ended 12/31/97 ...... 8.51 .54(h) .15 .69 (.54) 0.00
Year Ended 12/31/96 ...... 8.75 .54(h) (.19) .35 (.51) 0.00
Year Ended 12/31/95 ...... 8.13 .57(h) .64 1.21 (.57) 0.00
Year Ended 12/31/94 ...... 9.29 .57 (1.13) (.56) (.58) 0.00
Class B
Year Ended 12/31/98 ...... $ 8.63 $ .45(h) $ (.02) $ .43 $ (.45) $ 0.00
Year Ended 12/31/97 ...... 8.51 .48(h) .15 .63 (.48) 0.00
Year Ended 12/31/96 ...... 8.75 .48(h) (.19) .29 (.46) 0.00
Year Ended 12/31/95 ...... 8.13 .51(h) .64 1.15 (.51) 0.00
Year Ended 12/31/94 ...... 9.29 .51 (1.14) (.63) (.51) 0.00
Class C
Year Ended 12/31/98 ...... $ 8.63 $ .46(h) $ (.03) $ .43 $ (.46) $ 0.00
Year Ended 12/31/97 ...... 8.51 .48(h) .15 .63 (.48) 0.00
Year Ended 12/31/96 ...... 8.75 .48(h) (.19) .29 (.46) 0.00
Year Ended 12/31/95 ...... 8.13 .51(h) .64 1.15 (.51) 0.00
Year Ended 12/31/94 ...... 9.29 .51 (1.14) (.63) (.51) 0.00
</TABLE>
- --------------------------------------------------------------------------------
Please refer to the footnotes on page 52.
48
<PAGE>
<TABLE>
<CAPTION>
Distributions Total Net Assets Ratio of Net
in Excess Total Investment At End Of Ratio Investment
of Net Return Dividends Net Asset Return Period of Expenses Income (Loss) Portfolio
Investment of and Value End Based on Net (000's To Average To Average Turnover
Income Capital Distributions of Period Asset Value (b) omitted) Net Assets Net Assets Rate
------ ------- ------------- --------- --------------- -------- ---------- ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0.00 $ (.03) $ (.53) $ 9.48 4.04% $ 5,535 1.83%(d)(e)(g) 5.00% 206%
0.00 (.07) (.53) 9.63 5.29 3,901 1.41(d)(e) 4.90 65
0.00 0.00 (.49) 9.66 4.71 3,455 1.53(d)(e) 4.85 110
(.03) 0.00 (.44) 9.70 5.14 2,997 1.40(d) 4.56 15
(.03)(a) 0.00 (.15)(c) 9.67 .53 2,272 1.40*(d) 3.98* 144
(.09)(a) 0.00 (.51)(c) 9.77 .52 2,003 1.27(d) 4.41 55
$ 0.00 $ (.03) $ (.46) $ 9.62 3.52% $ 10,827 2.56%(d)(e)(g) 4.49% 206%
0.00 (.07) (.46) 9.74 4.45 6,458 2.11(d)(e) 4.13 65
0.00 0.00 (.42) 9.77 3.89 6,781 2.23(d)(e) 4.11 110
(.03) 0.00 (.37) 9.81 4.32 6,380 2.10(d) 3.82 15
(.02)(a) 0.00 (.13)(c) 9.78 .28 6,281 2.10*(d) 3.22* 144
(.09)(a) 0.00 (.44)(c) 9.88 .03 7,184 2.05(d) 3.12 55
$ 0.00 $ (.03) $ (.46) $ 9.61 3.53% $ 5,074 2.56%(d)(e)(g) 4.48% 206%
0.00 (.07) (.46) 9.73 4.45 5,012 2.11(d)(e) 4.15 65
0.00 0.00 (.42) 9.76 3.90 4,850 2.22(d)(e) 4.11 110
(.03) 0.00 (.37) 9.80 4.33 5,180 2.10(d) 3.80 15
(.02)(a) 0.00 (.13)(c) 9.77 .28 7,128 2.10*(d) 3.26* 144
(.06)(a) 0.00 (.31)(c) 9.87 (1.56) 8,763 2.10*(d) 2.60* 55
$ 0.00 $ 0.00 $ (.28) $ 7.67 4.87% $396,102 1.07%* 6.82%* 97%
0.00 (.02) (.56) 7.57 10.02 352,749 1.06 7.08 153
0.00 (.01) (.58) 7.41 6.49 354,782 1.02 7.66 330
0.00 0.00 (.58) 7.52 1.74 397,894 1.01 7.38 334
0.00 0.00 (.65) 7.96 10.37 463,660 1.01 8.27 190
0.00 0.00 (.65) 7.84 (1.93) 482,595 1.02 7.76 188
$ 0.00 $ 0.00 $ (.25) $ 7.67 4.49% $425,326 1.78%* 6.10%* 97%
0.00 (.02) (.50) 7.57 9.20 390,523 1.76 6.37 153
0.00 (.01) (.53) 7.41 5.69 471,889 1.73 6.95 330
0.00 0.00 (.52) 7.52 1.01 628,628 1.72 6.67 334
0.00 0.00 (.59) 7.96 9.52 774,097 1.72 7.57 190
0.00 0.00 (.59) 7.84 (2.63) 756,282 1.72 7.04 188
$ 0.00 $ 0.00 $ (.25) $ 7.67 4.49% $143,824 1.77%* 6.09%* 97%
0.00 (.02) (.50) 7.57 9.21 114,392 1.76 6.38 153
0.00 (.01) (.53) 7.41 5.69 115,607 1.72 6.96 330
0.00 0.00 (.52) 7.52 1.01 166,075 1.71 6.68 334
0.00 0.00 (.59) 7.96 9.67 181,948 1.71 7.59 190
0.00 0.00 (.59) 7.83 (2.75) 231,859 1.70 6.97 188
$ (.07) $ 0.00 $ (.54) $ 9.54 6.94% $ 41,493 3.27%(e) 4.74% 500%
0.00 (.02) (.54) 9.44 5.79 16,197 2.41(e) 5.52 249
0.00 (.03) (.54) 9.45 5.11 16,248 2.22(e) 5.44 159
0.00 (.03) (.53) 9.52 5.91 27,887 2.14(e) 5.53 293
0.00 (.04) (.53) 9.51 1.03 43,173 1.34(e) 4.78 375
$ (.08) $ 0.00 $ (.47) $ 9.55 6.30% $ 33,591 3.84%(e) 4.10% 500%
0.00 (.02) (.47) 9.44 5.04 33,613 3.14(e) 4.80 249
0.00 (.03) (.47) 9.45 4.36 50,386 2.94(e) 4.73 159
0.00 (.03) (.47) 9.52 5.05 84,362 2.85(e) 4.83 293
0.00 (.03) (.46) 9.52 .42 136,458 2.08(e) 4.12 375
$ (.08) $ 0.00 $ (.47) $ 9.55 6.30% $ 28,562 3.84%(e) 4.11% 500%
0.00 (.02) (.47) 9.44 5.05 28,738 3.13(e) 4.82 249
0.00 (.02) (.47) 9.45 4.38 43,457 2.92(e) 4.75 159
0.00 (.03) (.47) 9.52 5.06 68,459 2.85(e) 4.84 293
0.00 (.03) (.46) 9.52 .42 141,838 2.04(e) 4.10 375
$ (.04) $ 0.00 $ (.56) $ 8.56 5.82% $469,750 1.99%(e) 6.06% 202%
(.03) 0.00 (.57) 8.63 8.40 372,494 1.41(e) 6.30 184
0.00 (.08) (.59) 8.51 4.23 412,899 1.68(e) 6.38 208
0.00 (.02) (.59) 8.75 15.34 502,390 1.66(e) 6.77 285
0.00 (.02) (.60) 8.13 (6.14) 553,889 1.29(e) 6.77 438
$ (.05) $ 0.00 $ (.50) $ 8.56 5.04% $126,879 2.68%(e) 5.33% 202%
(.03) 0.00 (.51) 8.63 7.60 323,916 2.14(e) 5.60 184
0.00 (.07) (.53) 8.51 3.46 477,196 2.37(e) 5.66 208
0.00 (.02) (.53) 8.75 14.48 737,593 2.37(e) 6.06 285
0.00 (.02) (.53) 8.13 (6.84) 921,418 2.00(e) 6.05 438
$ (.04) $ 0.00 $ (.50) $ 8.56 5.04% $ 23,728 2.69%(e) 5.35% 202%
(.03) 0.00 (.51) 8.63 7.60 27,859 2.12(e) 5.61 184
0.00 (.07) (.53) 8.51 3.46 35,355 2.38(e) 5.67 208
0.00 (.02) (.53) 8.75 14.46 45,558 2.35(e) 6.07 285
0.00 (.02) (.53) 8.13 (6.84) 58,338 1.97(e) 6.06 438
</TABLE>
- --------------------------------------------------------------------------------
Please refer to the footnotes on page 52.
49
<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>
Multi-Market Strategy
Class A
Year Ended 10/31/98 ...... $ 7.11 $ .44(h) $ .02 $ .46 $ (.44) $ 0.00
Year Ended 10/31/97 ...... 7.23 .47(h) .08 .55 (.47) 0.00
Year Ended 10/31/96 ...... 6.83 .59(h) .48 1.07 (.67) 0.00
Year Ended 10/31/95 ...... 8.04 .77(h) (1.31) (.54) 0.00 0.00
Year Ended 10/31/94 ...... 8.94 .85 (1.08) (.23) (.09) 0.00
Class B
Year Ended 10/31/98 ...... $ 7.11 $ .36(h) $ .05 $ .41 $ (.36) $ 0.00
Year Ended 10/31/97 ...... 7.23 .42(h) .06 .48 (.42) 0.00
Year Ended 10/31/96 ...... 6.83 .53(h) .47 1.00 (.60) 0.00
Year Ended 10/31/95 ...... 8.04 .44(h) (1.05) (.61) 0.00 0.00
Year Ended 10/31/94 ...... 8.94 .88 (1.18) (.30) (.08) 0.00
Class C
Year Ended 10/31/98 ...... $ 7.11 $ .25(h) $ .16 $ .41 $ (.41) $ 0.00
Year Ended 10/31/97 ...... 7.23 .42(h) .07 .49 (.42) 0.00
Year Ended 10/31/96 ...... 6.83 .54(h) .47 1.01 (.61) 0.00
Year Ended 10/31/95 ...... 8.04 .44(h) (1.04) (.60) 0.00 0.00
Year Ended 10/31/94 ...... 8.94 .46 (.75) (.29) (.09) 0.00
North American Government Income
Class A
Year Ended 11/30/98 ...... $ 8.02 $ .87(h) $ (.33) $ .54 $ (.87) $ 0.00
Year Ended 11/30/97 ...... 8.01 1.03(h) (.05) .98 (.97) 0.00
Year Ended 11/30/96 ...... 6.75 1.09(h) 1.14 2.23 (.75) 0.00
Year Ended 11/30/95 ...... 8.13 1.18(h) (1.59) (.41) 0.00 0.00
Year Ended 11/30/94 ...... 10.35 1.02 (2.12) (1.10) (.91) 0.00
Class B
Year Ended 11/30/98 ...... $ 8.02 $ .81(h) $ (.32) $ .49 $ (.81) $ 0.00
Year Ended 11/30/97 ...... 8.01 .98(h) (.07) .91 (.90) 0.00
Year Ended 11/30/96 ...... 6.75 1.04(h) 1.12 2.16 (.69) 0.00
Year Ended 11/30/95 ...... 8.13 1.13(h) (1.61) (.48) 0.00 0.00
Year Ended 11/30/94 ...... 10.35 .96 (2.13) (1.17) (.84) 0.00
Class C
Year Ended 11/30/98 ...... $ 8.02 $ .82(h) $ (.33) $ .49 $ (.82) $ 0.00
Year Ended 11/30/97 ...... 8.01 .98(h) (.07) .91 (.90) 0.00
Year Ended 11/30/96 ...... 6.75 1.05(h) 1.11 2.16 (.69) 0.00
Year Ended 11/30/95 ...... 8.13 1.13(h) (1.61) (.48) 0.00 0.00
Year Ended 11/30/94 ...... 10.34 .96 (2.12) (1.16) (.84) 0.00
Global Dollar Government
Class A
Year Ended 8/31/98 ....... $10.64 $ .73(h) $(4.03) $(3.30) $ (.73) $(1.37)
Year Ended 8/31/97 ....... 10.01 .88(h) 1.85 2.73 (.95) (1.15)
Year Ended 8/31/96 ....... 8.02 .84 2.10 2.94 (.95) 0.00
Year Ended 8/31/95 ....... 9.14 .86 (1.10) (.24) (.88) 0.00
2/25/94+ to 8/31/94 ...... 10.00 .45 (.86) (.41) (.45) 0.00
Class B
Year Ended 8/31/98 ....... $10.64 $ .67(h) $(4.05) $(3.38) $ (.67) $(1.36)
Year Ended 8/31/97 ....... 10.01 .81(h) 1.84 2.65 (.87) (1.15)
Year Ended 8/31/96 ....... 8.02 .78 2.08 2.86 (.87) 0.00
Year Ended 8/31/95 ....... 9.14 .80 (1.11) (.31) (.81) 0.00
2/25/94+ to 8/31/94 ...... 10.00 .42 (.86) (.44) (.42) 0.00
Class C
Year Ended 8/31/98 ....... $10.64 $ .67(h) $(4.05) $(3.38) $ (.67) $(1.36)
Year Ended 8/31/97 ....... 10.01 .82(h) 1.84 2.66 (.88) (1.15)
Year Ended 8/31/96 ....... 8.02 .77 2.10 2.87 (.88) 0.00
Year Ended 8/31/95 ....... 9.14 .79 (1.10) (.31) (.81) 0.00
2/25/94+ to 8/31/94 ...... 10.00 .42 (.86) (.44) (.42)
0.00
Global Strategic Income
Class A
Year Ended 10/31/98 ...... $11.46 $ .78(h) $ (.64) $ .14 $ (.78) $ (.36)
Year Ended 10/31/97 ...... 10.83 .74(h) 1.02 1.76 (.75) (.10)
1/9/96+ to 10/31/96 ...... 10.00 .69(h) .95 1.64 (.81) 0.00
Class B
Year Ended 10/31/98 ...... $11.46 $ .69(h) $ (.63) $ .06 $ (.69) $ (.36)
Year Ended 10/31/97 ...... 10.83 .66(h) 1.03 1.69 (.67) (.10)
3/25/96++ to 10/31/96 .... 9.97 .41(h) 1.01 1.42 (.56) 0.00
Class C
Year Ended 10/31/98 ...... $11.46 $ .68(h) $ (.62) $ .06 $ (.68) $ (.36)
Year Ended 10/31/97 ...... 10.83 .66(h) 1.03 1.69 (.67) (.10)
3/25/96++ to 10/31/96 .... 9.97 .39(h) 1.03 1.42 (.56) 0.00
</TABLE>
- --------------------------------------------------------------------------------
Please refer to the footnotes on page 52.
50
<PAGE>
<TABLE>
<CAPTION>
Distributions Total Net Assets Ratio of Net
in Excess Total Investment At End Of Ratio Investment
of Net Return Dividends Net Asset Return Period of Expenses Income (Loss) Portfolio
Investment of and Value End Based on Net (000's To Average To Average Turnover
Income Capital Distributions of Period Asset Value (b) omitted) Net Assets Net Assets Rate
------ ------- ------------- --------- --------------- -------- ---------- ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ (.42) $ (.07) $ (.93) $ 6.64 6.90% $ 95,568 1.74%(g) 6.46% 24%
(.20) 0.00 (.67) 7.11 7.82 96,133 1.58(g) 6.50 173
0.00 0.00 (.67) 7.23 16.37 68,776 1.64(f) 8.40 215
0.00 (.67) (.67) 6.83 (6.47) 76,837 1.60(f) 8.56 400
0.00 (.58) (.67) 8.04 (2.64) 52,385 1.41(f) 7.17 605
$ (.43) $ (.07) $ (.86) $ 6.66 6.24% $ 7,217 2.41%(g) 5.64% 24%
(.18) 0.00 (.60) 7.11 6.90 29,949 2.29(g) 5.79 173
0.00 0.00 (.60) 7.23 15.35 88,427 2.35(f) 7.69 215
0.00 (.60) (.60) 6.83 (7.31) 116,551 2.29(f) 7.53 400
0.00 (.52) (.60) 8.04 (3.35) 233,896 2.11(f) 6.44 605
$ (.42) $ (.04) $ (.87) $ 6.65 6.10% $ 16,518 2.61%(g) 5.28% 24%
(.19) 0.00 (.61) 7.11 6.92 1,203 2.28(g) 5.80 173
0.00 0.00 (.61) 7.23 15.36 1,076 2.34(f) 7.62 215
0.00 (.61) (.61) 6.83 (7.29) 786 2.29(f) 7.55 400
0.00 (.52) (.61) 8.04 (3.34) 1,252 2.08(f) 6.10 605
$ (.07) $ (.03) $ (.97) $ 7.59 7.14% $740,066 2.04%(f) 11.17% 175%
0.00 0.00 (.97) 8.02 12.85 511,749 2.15(f) 12.78 118
0.00 (.22) (.97) 8.01 35.22 385,784 2.34(f) 14.82 166
0.00 (.97) (.97) 6.75 (3.59) 252,608 2.62(f) 18.09 180
0.00 (.21) (1.12) 8.13 (11.32) 303,538 1.70(f) 11.22 131
$ (.06) $ (.03) $ (.90) $ 7.61 6.46% $1,300,519 2.75%(f) 10.44% 175%
0.00 0.00 (.90) 8.02 11.88 1,378,407 2.86(f) 12.15 118
0.00 (.21) (.90) 8.01 33.96 1,329,719 3.05(f) 14.20 166
0.00 (.90) (.90) 6.75 (4.63) 1,123,074 3.33(f) 17.31 180
0.00 (.21) (1.05) 8.13 (11.89) 1,639,602 2.41(f) 10.53 131
$ (.05) $ (.03) $ (.90) $ 7.61 6.46% $276,073 2.74%(f) 10.45% 175%
0.00 0.00 (.90) 8.02 11.88 283,483 2.85(f) 12.14 118
0.00 (.21) (.90) 8.01 33.96 250,676 3.04(f) 14.22 166
0.00 (.90) (.90) 6.75 (4.63) 219,009 3.33(f) 17.32 180
0.00 (.21) (1.05) 8.13 (11.89) 369,714 2.39(f) 10.46 131
$ (.04) $ (.15) $(2.29) $ 5.05 (38.56)% $ 32,365 1.48% 8.51% 188%
0.00 0.00 (2.10) 10.64 30.04 37,416 1.55 8.49 314
0.00 0.00 (.95) 10.01 38.47 23,253 1.65 9.23 315
0.00 0.00 (.88) 8.02 (1.48) 12,020 1.93 11.25 301
0.00 0.00 (.45) 9.14 (3.77) 10,995 .75*(d) 9.82* 100
$ (.04) $ (.14) $(2.21) $ 5.05 (39.11)% $ 79,660 2.22% 7.78% 188%
0.00 0.00 (2.02) 10.64 29.14 93,377 2.26 7.81 314
0.00 0.00 (.87) 10.01 37.36 84,295 2.37 8.57 315
0.00 0.00 (.81) 8.02 (2.40) 62,406 2.64 10.52 301
0.00 0.00 (.42) 9.14 (4.17) 47,030 1.45*(d) 9.11* 100
$ (.04) $ (.14) $(2.21) $ 5.05 (39.09)% $ 23,711 2.19% 7.75% 188%
0.00 0.00 (2.03) 10.64 29.17 25,130 2.25 7.82 314
0.00 0.00 (.88) 10.01 37.40 14,511 2.35 8.52 315
0.00 0.00 (.81) 8.02 (2.36) 9,330 2.63 10.46 301
0.00 0.00 (.42) 9.14 (4.16) 10,404 1.45*(d) 9.05* 100
$ (.28) $ 0.00 $(1.42) $10.18 1.00% $ 24,576 1.89%(d) 7.08% 183%
(.28) 0.00 (1.13) 11.46 16.83 12,954 1.90(d) 6.56 417
0.00 0.00 (.81) 10.83 17.31 2,295 1.90*(d) 8.36* 282
$ (.30) $ 0.00 $(1.35) $10.17 .27% $ 58,058 2.58%(d) 6.41% 183%
(.29) 0.00 (1.06) 11.46 16.12 18,855 2.60(d) 5.86 417
0.00 0.00 (.56) 10.83 14.47 800 2.60*(d) 7.26* 282
$ (.31) $ 0.00 $(1.35) $10.17 .27% $ 16,067 2.58%(d) 6.43% 183%
(.29) 0.00 (1.06) 11.46 16.12 4,388 2.60(d) 5.86 417
0.00 0.00 (.56) 10.83 14.47 750 2.60*(d) 7.03* 282
</TABLE>
- --------------------------------------------------------------------------------
Please refer to the footnotes on page 52.
51
<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>
Corporate Bond
Class A
7/1/98 to 12/31/98 ....... $14.19 $ .54(h) $ (.92) $ (.38) $ (.61) $ 0.00
Year Ended 6/30/98 ....... 14.19 1.08(h) .12 1.20 (1.08) 0.00
Year Ended 6/30/97 ....... 13.29 1.15(h) .97 2.12 (1.22) 0.00
Year Ended 6/30/96 ....... 12.92 1.26 .27 1.53 (1.16) 0.00
Year Ended 6/30/95 ....... 12.51 1.19 .36 1.55 (1.14) 0.00
Year Ended 6/30/94 ....... 14.15 1.11 (1.36) (.25) (1.11) (.25)
Class B
7/1/98 to 12/31/98 ....... $14.19 $ .49(h) $ (.93) $ (.44) $ (.56) $ 0.00
Year Ended 6/30/98 ....... 14.19 .98(h) .13 1.11 (.98) 0.00
Year Ended 6/30/97 ....... 13.29 1.05(h) .98 2.03 (1.13) 0.00
Year Ended 6/30/96 ....... 12.92 1.15 .29 1.44 (1.07) 0.00
Year Ended 6/30/95 ....... 12.50 1.11 .36 1.47 (1.05) 0.00
Year Ended 6/30/94 ....... 14.15 1.02 (1.37) (.35) (1.04) (.25)
Class C
7/1/98 to 12/31/98 ....... $14.19 $ .48(h) $ (.91) $ (.43) $ (.56) $ 0.00
Year Ended 6/30/98 ....... 14.19 .99(h) .12 1.11 (.99) 0.00
Year Ended 6/30/97 ....... 13.29 1.04(h) .99 2.03 (1.13) 0.00
Year Ended 6/30/96 ....... 12.93 1.14 .29 1.43 (1.07) 0.00
Year Ended 6/30/95 ....... 12.50 1.10 .38 1.48 (1.05) 0.00
Year Ended 6/30/94 ....... 14.15 1.02 (1.37) (.35) (1.05) (.25)
High Yield
Class A
Year Ended 8/31/98 ....... $11.17 $ 1.03(h) $ (.27) $ .76 $(1.02) $ (.14)
4/22/97+ to 8/31/97 ...... 10.00 .37(h) 1.15 1.52 (.35) 0.00
Class B
Year Ended 8/31/98 ....... $11.17 $ .96(h) $ (.28) $ .68 $ (.95) $ (.14)
4/22/97+ to 8/31/97 ...... 10.00 .31(h) 1.19 1.50 (.33) 0.00
Class C
Year Ended 8/31/98 ....... $11.17 $ .96(h) $ (.28) $ .68 $ (.95) $ (.14)
4/22/97+ to 8/31/97 ...... 10.00 .32(h) 1.18 1.50 (.33) 0.00
</TABLE>
- --------------------------------------------------------------------------------
+ Prior to July 22, 1993, Equitable Capital Management Corporation
("Equitable") served as the investment adviser to The Alliance Portfolios
(the "Trust"), of which Alliance 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 to the Trust.
+ Commencement of operations.
++ Commencement of distribution.
+++ Unaudited.
* Annualized.
** Reflects newly adopted fiscal year end.
(a) Includes with respect to Alliance 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. Alliance Short-Term U.S.
Government had dividends in excess of net investment income, for the year
ended April 30, 1994, with respect to Class A shares 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 Alliance 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, 2.95% (annualized) for the period ended August
31, 1994, 3.71% for the year ended August 31, 1995, 3.04% for the year
ended August 31, 1996, 2.42% for the year ended August 31, 1997 and 2.81%
for the year ended August 31, 1998; with respect to Class B shares, 4.81%
(annualized) for 1993, 3.21% for the year ended April 30, 1994, 3.60%
(annualized) for the period ended August 31, 1994, 4.33% for the year
ended August 31, 1995, 3.74% for the year ended August 31, 1996, 3.10% for
the year ended August 31, 1997 and 3.63% for the year ended August 31,
1998; with respect to Class C shares, 3.10% (annualized) for the year
ended April 30, 1994, 3.64% (annualized) for the period ended August 31,
1994 (annualized), 4.23% for the year ended August 31, 1995, 3.72% for the
year ended August 31, 1996, 3.09% for the year ended August 31, 1997 and
3.58% for the year ended August 31, 1998. If Alliance Global Dollar
Government had borne all expenses for the period February 25, 1994 to
August 31, 1994, 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). If
Alliance Global Strategic Income had borne all expenses for the respective
periods January 9, 1996 to October 31, 1996, its fiscal year ended 1997,
and its fiscal year ended in 1998, the expense ratio would have been with
respect to Class A shares, 19.20% (annualized), 4.06%, and 2.08%
respectively; with respect to Class B shares, 19.57% (annualized), 4.76%,
and 2.76% respectively; and with respect to Class C shares, 19.49%
(annualized), 4.77%, and 2.77% respectively. If Alliance High Yield had
borne all expenses for the respective periods April 22, 1997 to August 31,
1997 and the fiscal year ended August 31, 1998, the expense ratios would
have been with respect to Class A shares, 3.11% (annualized) and 1.46%,
respectively; with respect to Class B shares, 3.85% (annualized) and
2.16%, respectively; and with respect to Class C shares, 3.84%
(annualized) and 2.16%, respectively.
52
<PAGE>
<TABLE>
<CAPTION>
Distributions Total Net Assets Ratio of Net
in Excess Total Investment At End Of Ratio Investment
of Net Return Dividends Net Asset Return Period of Expenses Income (Loss) Portfolio
Investment of and Value End Based on Net (000's To Average To Average Turnover
Income Capital Distributions of Period Asset Value (b) omitted) Net Assets Net Assets Rate
------ ------- ------------- --------- --------------- -------- ---------- ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0.00 $ 0.00 $ (.61) $13.20 (2.82)% $496,701 1.10% 8.13% 118%
(.12) 0.00 (1.20) 14.19 8.66 510,397 1.05 7.52 244
0.00 0.00 (1.22) 14.19 16.59 370,845 1.12 8.34 307
0.00 0.00 (1.16) 13.29 12.14 277,369 1.20 9.46 389
0.00 0.00 (1.14) 12.92 13.26 230,750 1.24 9.70 387
(.03) 0.00 (1.39) 12.51 (2.58) 219,182 1.30 7.76 372
$ 0.00 $ 0.00 $ (.56) $13.19 (3.24)% $678,422 1.80% 7.42% 118%
(.13) 0.00 (1.11) 14.19 7.95 672,374 1.75 6.80 244
0.00 0.00 (1.13) 14.19 15.80 480,326 1.82 7.62 307
0.00 0.00 (1.07) 13.29 11.38 338,152 1.90 8.75 389
0.00 0.00 (1.05) 12.92 12.54 241,393 1.99 9.07 387
(.01) 0.00 (1.30) 12.50 (3.27) 184,129 2.00 7.03 372
$ 0.00 $ 0.00 $ (.56) $13.20 (3.17)% $247,791 1.80% 7.40% 118%
(.12) 0.00 (1.11) 14.19 7.95 254,530 1.75 6.83 244
0.00 0.00 (1.13) 14.19 15.80 174,762 1.82 7.61 307
0.00 0.00 (1.07) 13.29 11.30 83,095 1.90 8.74 389
0.00 0.00 (1.05) 12.93 12.62 51,028 1.84 8.95 387
0.00 0.00 (1.30) 12.50 (3.27) 50,860 1.99 6.98 372
$ (.01) $ 0.00 $(1.17) $10.76 6.42% $ 43,960 1.43%(d) 8.89% 311%
0.00 0.00 (.35) 11.17 15.33 5,889 1.70*(d) 8.04* 73
$ (.01) $ 0.00 $(1.10) $10.75 5.69% $269,426 2.13%(d) 8.18% 311%
0.00 0.00 (.33) 11.17 15.07 43,297 2.40*(d) 7.19* 73
$ (.01) $ 0.00 $(1.10) $10.75 5.69% $ 48,337 2.13%(d) 8.17% 311%
0.00 0.00 (.33) 11.17 15.07 7,575 2.40*(d) 7.24* 73
</TABLE>
- --------------------------------------------------------------------------------
(e) If Alliance Short-Term U.S. Government had not borne interest expenses,
the ratio of expenses (net of expenses assumed and/or waived/reimbursed
and after giving effect to an expense offset agreement with the transfer
agent) to average net assets would have been with respect to Class A
shares, 1.40% for 1996, 1997, and 1998; with respect to Class B shares,
2.10% for 1996, 1997, and 1998; and with respect to Class C shares, 2.10%
for 1996, 1997, and 1998. If Alliance Limited Maturity Government had not
borne interest expenses, the ratio of expenses to average net assets
would have been with respect to Class A shares, 1.20% for 1994, 1.41% for
1995, 1.58% for 1996, 1.65% for 1997, and 1.68% for 1998; with respect to
Class B shares, 1.91% for 1994, 2.11% for 1995, 2.30% for 1996, 2.39% for
1997, and 2.39% for 1998; with respect to Class C shares, 1.89% for
1994, 2.10% for 1995, 2.29% for 1996, 2.37% for 1997, and 2.38% for 1998.
If Alliance Mortgage Securities Income Fund had not borne interest
expense the ratio of expenses to average net assets would have been with
respect to Class A shares .97% for 1994, 1.03% for 1995, 1.03% for 1996,
1.07% for 1997, and 1.14% for 1998; with respect to Class B shares, 1.68%
for 1994, 1.74% for 1995, 1.74% for 1996, 1.78% for 1997, and 1.85% for
1998; with respect to Class C shares 1.69% for 1994, 1.73% for 1995,
1.73% for 1996, 1.77% for 1997, and 1.84% for 1998.
(f) Includes interest expenses. If Alliance Multi-Market Strategy had not
borne interest expenses or loan fees, the ratio of expenses to average net
assets would have been with respect to Class A shares, 1.30% for 1994,
1.55% for 1995, and 1.60% for 1996; with respect to Class B shares, 2.01%
for 1994, 2.22% for 1995, and 2.31% for 1996; with respect to Class C
shares, 1.99% for 1994, 2.24% for 1995, and 2.30% for 1996. If Alliance
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, 1.37% for 1994, 1.51% for 1995,
1.41% for 1996, 1.38% for 1997, and 1.36% for 1998; with respect to Class
B shares, 2.07% for 1994, 2.22% for 1995, 2.12% for 1996, 2.09% for 1997,
and 2.07% for 1998; and with respect to Class C shares, 2.06% for 1994,
2.21% for 1995, 2.12% for 1996, 2.08% for 1997, and 2.06% for 1998.
(g) Amounts do not reflect the impact of expense offset arrangement with the
transfer agent. Taking into account such expense offset arrangements, the
ratio of expenses to average net assets, for Alliance Multi-Market
Strategy would have been with respect to Class A shares 1.57 % for 1997
and 1.73% for 1998, with respect to Class B shares 2.28% for 1997 and
2.40% for 1998 and with respect to Class C shares 2.27% for 1997 and
2.60% for 1998. For Alliance Short-Term U.S. Government the ratio of
expenses to average net assets, giving effect to the assumption and/or
waiver/reimbursement of expenses, would have been with respect to Class A
shares 1.82% for 1998, with respect to Class B shares 2.55% for 1998 and
with respect to Class C shares 2.55% for 1998.
(h) Based on average shares outstanding.
53
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A
- --------------------------------------------------------------------------------
BOND RATINGS
- --------------------------------------------------------------------------------
Moody's Investors Service, Inc.
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment some time in
the future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Absence of Rating -- When no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that are
unrated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note -- Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
STANDARD & POOR'S RATINGS SERVICES
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Debt rated BBB normally exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
BB, B, CCC, CC, C -- Debt rated BB, B, CCC, CC or C is regarded as having
significant speculative characteristics. BB indicates the lowest degree of
speculation and C the highest. While such debt will likely have some
quality and
54
<PAGE>
protective characteristics, these are outweighed by large uncertainties
or major exposures to adverse conditions.
BB -- Debt rated BB is less vulnerable to nonpayment than other speculative
debt. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to an
inadequate capacity to pay interest and repay principal.
B -- Debt rated B is more vulnerable to nonpayment than debt rated BB, but
there is capacity to pay interest and repay principal. Adverse business,
financial or economic conditions will likely impair the capacity or
willingness to pay principal or repay interest.
CCC -- Debt rated CCC is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial and economic conditions to pay interest
and repay principal. In the event of adverse business, financial or
economic conditions, there is not likely to be capacity to pay interest or
repay principal.
CC -- Debt rated CC is currently highly vulnerable to nonpayment.
C -- The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments are
being continued.
D -- The D rating, unlike other ratings, is not prospective; rather, it is
used only where a default has actually occurred.
Plus (+) or Minus (-) -- The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the
major rating categories.
NR -- Not rated.
DUFF & PHELPS CREDIT RATING CO.
AAA -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+,AA, AA- -- High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A- -- Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB- -- Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB- -- Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B- -- Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctutate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category
or into a higher or lower rating grade.
CCC -- Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company
developments.
DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP -- Preferred stock with dividend arrearages.
FITCH IBCA, INC.
AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA -- Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated F- 1+.
A -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
BB -- Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B -- Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
55
<PAGE>
CCC -- Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC -- Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C -- Bonds are in imminent default in payment of interest or principal.
DDD, DD, D -- Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor.
DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
Plus (+) Minus (-) -- Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA, DDD, DD or D categories.
NR -- Indicates that Fitch does not rate the specific issue.
56
<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.
Canadian Dollars are fully exchangeable into U.S. Dollars without foreign
exchange controls or other legal restriction. Since the major developed-country
currencies were permitted to float freely against one another, the range of
fluctuation in the U.S. Dollar/Canadian Dollar exchange rate generally has been
narrower than the range of fluctuation between the U.S. Dollar and most other
major currencies. Since 1991, Canada generally has experienced a weakening of
its currency. The Canadian Dollar reached an all-time low of 1.5770 Canadian
Dollars per U.S. Dollar on August 27, 1998. On February 22, 1999, the Canadian
Dollar-U.S. Dollar exchange rate was 1.4968:1. The range of fluctuation that has
occurred in the past is not necessarily indicative of the range of fluctuation
that will occur in the future. Future rates of exchange cannot be accurately
predicted.
GENERAL INFORMATION ABOUT THE UNITED MEXICAN STATES
The United Mexican States ("Mexico") is a nation formed by 31 states and a
Federal District (Mexico City). The Political Constitution of Mexico, which took
effect on May 1, 1917, established Mexico as a Federal Republic and provides for
the separation of executive, legislative and judicial branches. The President
and the members of the General Congress are elected by popular vote.
Prior to 1994, when Mexico experienced an economic crisis that led to the
devaluation of the Peso in December 1994, the Mexican economy experienced
improvement in a number of areas, including growth in gross domestic product and
a substantial reduction in the rate of inflation and in the public sector
financial deficit. Much of the past improvement in the Mexican economy was due
to a series of economic policy initiatives intended to modernize and reform the
Mexican economy, control inflation, reduce the financial deficit, increase
public revenues through the reform of the tax system, establish a competitive
and stable currency exchange rate, liberalize trade restrictions and increase
investment and productivity, while reducing the government's role in the
economy. In this regard, the Mexican government launched a program for
privatizing certain state owned enterprises, developing and modernizing the
securities markets, increasing investment in the private sector and permitting
increased levels of foreign investment.
In 1994, Mexico faced internal and external conditions that resulted in an
economic crisis that continues to affect the Mexican economy adversely. Growing
trade and current account deficits, which could no longer be financed by inflows
of foreign capital, were factors contributing to the crisis. A weakening economy
and unsettling political and social developments caused investors to lose
confidence in the Mexican economy. This resulted in a large decline in foreign
reserves followed by a sharp and rapid devaluation of the Mexican Peso. The
ensuing economic and financial crisis resulted in higher inflation and domestic
interest rates, a contraction in real gross domestic product and a liquidity
crisis.
In response to the adverse economic conditions that developed at the end of
1994, the Mexican government instituted a new economic program; and the
government and the business and labor sectors of the economy entered into a new
accord in an effort to stabilize the economy and the financial markets. To help
relieve Mexico's liquidity crisis and restore financial stability to Mexico's
economy, the Mexican government also obtained financial assistance from the
United States, other countries and certain international agencies conditioned
upon the implementation and continuation of the economic reform program.
In October 1995, and again in October 1996, the Mexican government announced new
accords designed to encourage economic growth and reduce inflation. While it
cannot be accurately predicted whether these accords will continue to achieve
their objectives, the Mexican economy has stabilized since the economic crisis
of 1994, and the high inflation and high interest rates that continued to be a
factor after 1994 have subsided as well. After declining for five consecutive
quarters beginning with the first quarter of 1995, Mexico's gross domestic
product began to grow in the second quarter of 1996. That growth was sustained
in
57
<PAGE>
1996 and 1997, resulting in increases of 5.2% and 7.0%, respectively. The growth
rate for 1998 was 4.8%. In addition, inflation dropped from a 52% annual rate
in 1995 to a 27.7% annual rate in 1996 and a 15.7% annual rate in 1997. In 1998,
the inflation rate was 18.6%. Mexico's economy is influenced by international
economic conditions, particularly those in the United States, and by world
prices for oil and other commodities. The recovery of the economy will require
continued economic and fiscal discipline as well as stable political and social
conditions. In addition, there is no assurance that Mexico's economic policy
initiatives will be successful or that succeeding administrations will continue
these initiatives.
Under economic policy initiatives implemented on and after December 1987, the
Mexican government introduced a series of schedules allowing for the gradual
devaluation of the Mexican Peso against the U.S. Dollar. These gradual
devaluations continued until December 1994. On December 22, 1994, the Mexican
government announced that it would permit the Peso to float freely against other
currencies, resulting in a precipitous decline against the U.S. Dollar. By
December 31, 1996, the Peso-Dollar exchange rate had decreased approximately 40%
from that on December 22, 1994. After dropping approximately 55% from 1994
through 1996, in 1997, the average annual Peso-Dollar exchange rate decreased
approximately 4% from that in 1996. In 1998, the average annual Peso-Dollar
exchange rate was approximately 16% less than that in 1997.
Mexico has in the past imposed strict foreign exchange controls. There is no
assurance that future regulatory actions in Mexico would not affect the Fund's
ability to obtain U.S. Dollars in exchange for Mexican Pesos.
GENERAL INFORMATION ABOUT THE REPUBLIC OF ARGENTINA
The Republic of Argentina ("Argentina") consists of 23 provinces and the federal
capital of Buenos Aires. Its federal constitution provides for an executive
branch headed by a President, a legislative branch and a judicial branch. Each
province has its own constitution, and elects its own governor, legislators and
judges, without the intervention of the federal government.
The military has intervened in the political process on several occasions since
1930 and has ruled the country for 22 of the past 68 years. The most recent
military government ruled the country from 1976 to 1983. Four unsuccessful
military uprisings have occurred since 1983, the most recent in December 1990.
Shortly after taking office in 1989, the country's current President adopted
market-oriented and reformist policies, including an aggressive privatization
program, a reduction in the size of the public sector and an opening of the
economy to international competition.
In the decade prior to the announcement of a new economic plan in March 1991,
the Argentine economy was characterized by low and erratic growth, declining
investment rates and rapidly worsening inflation. Despite its strengths, which
include a well-balanced natural resource base and a high literacy rate, the
Argentine economy failed to respond to a series of economic plans in the 1980's.
The 1991 economic plan represented a pronounced departure from its predecessors
in calling for raising revenues, cutting expenditures and reducing the public
deficit. The extensive privatization program commenced in 1989 was accelerated,
the domestic economy deregulated and opened up to foreign trade and the
frame-work for foreign investment reformed. As a result of the economic
stabilization reforms, gross domestic product has increased each year since
1991, with the exception of 1995. During 1998, gross domestic product increased
an estimated 4.7% from 1997. The rate of inflation is generally viewed to be
under control. Significant progress was also made between 1991 and 1994 in
rescheduling Argentina's debt with both external and domestic creditors, which
improved fiscal cash flows in the medium term and allowed a return to voluntary
credit markets. There is no assurance that Argentina's economic policy
initiatives will be successful or that succeeding administrations will continue
these initiatives.
In 1995, economic policy was directed toward the effects of the Mexican currency
crisis. The Mexican currency crisis led to a run on Argentine bank deposits,
which was brought under control by a series of measures designed to strengthen
the financial system. The measures included the "dollarization" of banking
reserves, the establishment of two trust funds and strengthening bank reserve
requirements.
In 1991, the Argentine government enacted currency reforms, which required the
domestic currency to be fully backed by international reserves, in an effort to
make the Argentine Peso fully convertible into the U.S. Dollar at a rate of one
to one.
The Argentine Peso has been the Argentine currency since January 1, 1992. Since
that date, the rate of exchange from the Argentine Peso to the U.S. Dollar has
remained approximately one to one. The fixed exchange rate has been instrumental
in stabilizing the economy, but has not reduced pressures from high rates of
unemployment. It is not clear that the government will be able to resist
pressure to devalue the currency. However, the historic range is not necessarily
indicative of fluctuations that may occur in the exchange rate over time and
future rates of exchange cannot be accurately predicted. The Argentine foreign
exchange market was highly controlled until December 1989, when a free exchange
rate was established for all foreign currency transactions. Argentina has
eliminated restrictions on foreign direct investment and capital repatriation.
In 1993, legislation was adopted abolishing previous requirements of a
three-year waiting period for capital repatriation. Under the legislation,
foreign investors are permitted to remit profits at any time.
58
<PAGE>
For more information about the Funds, the following documents are available upon
request:
Annual/Semi-Annual Reports to Shareholders
The Funds' annual and semi-annual reports to shareholders contain additional
information on the Funds' investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected a Fund's performance during its last fiscal year.
Statement of Additional Information (SAI)
Each Fund has an SAI, which contains more detailed information about the Fund,
including its operations and investment policies. The Funds' SAIs are
incorporated by reference into (and is legally part of) this Prospectus.
You may request a free copy of the current annual/semi-annual report or the SAI,
by contacting your broker or other financial intermediary, or by contacting
Alliance:
By mail: c/o Alliance Fund Services, Inc.
P.O. Box 1520
Secaucus, NJ 07096-1520
By phone: For Information: (800) 221-5672
For Literature: (800) 227-4618
Or you may view or obtain these documents from the Commission:
In person: at the Commission's Public Reference
Room in Washington, D.C.
By phone: 1-800-SEC-0330
By mail: Public Reference Section
Securities and Exchange Commission
Washington, DC 20549-6009
(duplicating fee required)
On the Internet: www.sec.gov
You also may find more information about Alliance and the Funds on the Internet
at: www.Alliancecapital.com.
59
ALLIANCE BOND FUNDS SUBSCRIPTION APPLICATION
_______________________________________________________________________________
SHORT-TERM U.S. GOVERNMENT FUND
U.S. GOVERNMENT PORTFOLIO
LIMITED MATURITY GOVERNMENT FUND
MORTGAGE SECURITIES INCOME FUND
MULTI-MARKET STRATEGY TRUST
NORTH AMERICAN GOVERNMENT INCOME TRUST
GLOBAL DOLLAR GOVERNMENT FUND
GLOBAL STRATEGIC INCOME TRUST
CORPORATE BOND PORTFOLIO
HIGH YIELD FUND
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
For certified or overnight deliveries, send to:
ALLIANCE FUND SERVICES, INC.
500 PLAZA DRIVE
SECAUCUS, NEW JERSEY 07094
SECTION 1 YOUR ACCOUNT REGISTRATION (REQUIRED)
Complete one of the available choices. To ensure proper tax reporting to the
IRS:
* Individuals, Joint Tenants, Transfer on Death and Gift/Transfer to a Minor:
. Indicate your name(s) exactly as it appears on your social security
card.
* Transfer on Death:
. Ensure that your state participates
* 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.
SECTION 2 YOUR ADDRESS (REQUIRED) Complete in full.
* Non-Resident Alien:
. Indicate your permanent country of residence.
SECTION 3 YOUR INITIAL INVESTMENT (REQUIRED)
For each Fund in which you are investing: 1 Write the three digit Fund number
in the column titled 'INDICATE THREE DIGIT FUND NUMBER LOCATED BELOW'.
2 Write the dollar amount of your initial purchase in the column titled
'INDICATE DOLLAR AMOUNT'. (If you are eligible for a reduced sales charge,
you must also complete Section 4F). 3 Check off a distribution option for
your dividends. 4 Check off a distribution option for your capital gains.
All distributions (dividends and capital gains) will be reinvested into
your fund account unless you direct otherwise. If you want distributions
sent directly to your bank account, then you must complete Section 4D and
attach a preprinted, voided check for that account. If you want your
distributions sent to a third party you must complete Section 4E.
SECTION 4 YOUR SHAREHOLDER OPTIONS (COMPLETE ONLY THOSE OPTIONS YOU WANT)
A. AUTOMATIC INVESTMENT PLANS (AIP) - You can make periodic investments into
any of your Alliance Funds in one of three ways. First, by a periodic
withdrawal ($25 minimum) directly from your bank account and invested into an
Alliance Fund. Second, you can direct your distributions (dividends and
capital gains) from one Alliance Fund into another Fund. Or third, you can
automatically exchange monthly ($25 minimum) shares of one Alliance Fund for
shares of another Fund. To elect one of these options, complete the
appropriate portion of Section 4A & 4D. If more than one dividend direction
or monthly exchange is desired, please call our Literature Center to obtain a
Shareholder Account Services Options Form for completion.
B. TELEPHONE TRANSACTIONS VIA EFT - Complete this option if you would like to
be able to transact via telephone between your fund account and your bank
account.
C. SYSTEMATIC WITHDRAWAL PLANS (SWP) - Complete this option if you wish to
periodically redeem dollars from one of your fund accounts. Payments can be
made via Electronic Funds Transfer (EFT) to your bank account or by check.
D. BANK INFORMATION - If you have elected any options that involve
transactions between your bank account and your fund account or have elected
cash distribution options and would like the payments sent to your bank
account, please tape a preprinted, voided check of the account you wish to use
to this section of the application.
E. THIRD PARTY PAYMENT DETAILS - If you have chosen cash distributions and/or
a Systematic Withdrawal Plan and would like the payments sent to a person
and/or address other than those provided in section 1 or 2, complete this
option. Medallion Signature Guarantee is required if your account is not
maintained by a broker dealer.
F. REDUCED CHARGES (CLASS A ONLY) - Complete if you would like to link fund
accounts that have combined balances that might exceed $100,000 so that future
purchases will receive discounts. Complete if you intend to purchase over
$100,000 within 13 months.
SECTION 5 SHAREHOLDER AUTHORIZATION (REQUIRED) All owners must sign. If it
is a custodial, corporate, or trust account, the custodian, an authorized
officer, or the trustee respectively must sign.
IF WE CAN ASSIST YOU IN ANY WAY, PLEASE DO NOT HESITATE TO CALL US AT: (800)
221-5672.
FOR LITERATURE CALL: (800) 227-4618
THE ALLIANCE BOND FUNDS SUBSCRIPTION APPLICATION
_______________________________________________________________________________
1. YOUR ACCOUNT REGISTRATION (Please Print in Capital Letters and Mark Check
Boxes Where Applicable)
__ Individual Account { __ Male __ Female } - or - __ Joint Account - or -
__ Transfer On Death { __ Male __ Female } - or - __ Gift/Transfer to a Minor
___________________________________________ ____ ____________________________
Owner or Custodian (First Name) (MI) (Last Name)
________________________________________________________________________
(First Name) Joint Owner*, Transfer On Death Beneficiary or Minor
____ ______________________________
(MI) (Last Name)
______________-____-_________________
Social Security Number of Owner or Minor (required to open account)
If Uniform Gift/Transfer to Minor Account: ________ Minor's State of Residence
If Joint Tenants Account: * The Account will be registered "Joint Tenants with
right of Survivorship" unless you indicate otherwise below:
__ In Common __ By Entirety __ Community Property
__ Trust - or - __ Corporation - or - Other________________________________
___________________________________________ ____ ____________________________
Name of Trustee if applicable (First Name) (MI) (Last Name)
_______________________________________________________________________________
Name of Trust or Corporation or Other Entity
_______________________________________________________________________________
Name of Trust or Corporation or Other Entity continued
_________________________
Trust Dated (MM,DD,YYYY)
________________________________________
Tax ID Number (required to open account)
__ Employer ID Number - OR - __ Social Security Number
2. YOUR ADDRESS
__________________________ ___________________________________________________
Street Number Street Name
_______________________________________________ ______ ______________________
City State Zip code
____________________________ ________-________-____________
If Non-U.S., Specify Country Daytime Phone Number
__ U.S. Citizen __ Resident Alien __ Non-Resident Alien
90231GEN-TABFAPP-P1
1
3. YOUR INITIAL INVESTMENT
The minimum investment is $250 per fund.
The maximum investment in Class B is $250,000; Class C is $1,000,000.
I hereby subscribe for shares of the following Alliance Bond Fund(s) and elect
distribution options as indicated.
BROKER/DEALER USE ONLY: WIRE CONFIRM # _________________________
DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS:
R REINVEST DISTRIBUTIONS into my fund account.
C SEND MY DISTRIBUTIONS IN CASH to the address I have provided in Section 2.
(Complete Section 4D for direct deposit to your bank account. Complete Section
4E for payment to a third party)
D DIRECT MY DISTRIBUTIONS TO ANOTHER ALLIANCE FUND. Complete the appropriate
portion of Section 4A to direct your distributions (dividends and capital
gains) to another Alliance Fund (the $250 minimum investment requirement
applies to Funds into which distributions are directed).
Indicate three digit Fund Indicate Dollar Distributions Options *Check One*
number located below Amount Dividends Capital Gains
- ------------------------- --------------- ---------------- ---------------
_______________ $______________ R C D R C D
_______________ $______________ R C D R C D
_______________ $______________ R C D R C D
TOTAL INVESTMENT $______________
MAKE ALL CHECKS PAYABLE TO: ALLIANCE FUNDS
ALLIANCE BOND FUND NAMES AND NUMBERS
_______________________________________________________________________________
For checkwriting privileges, please send the enclosed signature card with
your application. Checkwriting is offered on Class A and Class C shares
only, and is not offered on Corporate Bond Portfolio and High Yield Fund.
A Medallion Signature Guarantee is required if your account is not maintained
by a broker/dealer. For Class C shares, checkwriting may result in the
imposition of a contingent deferred sales charge against your account. The
minimum amount for checkwriting is $500.
<TABLE>
<CAPTION>
Initial Sales Contingent Deferred Asset-Based
Charge Sales Charge Sales Charge
A B C
------------- ------------------- --------------
<S> <C> <C> <C>
U.S. GOVERNMENT FUNDS
SHORT-TERM U.S. GOVERNMENT FUND 37 51 337
U.S. GOVERNMENT PORTFOLIO 46 76 346
LIMITED MATURITY GOVERNMENT FUND 88 89 388
MORTGAGE FUND
MORTGAGE SECURITIES INCOME FUND 52 63 352
MULTI-MARKET FUND
MULTI-MARKET STRATEGY TRUST 22 23 322
GLOBAL BOND FUNDS
NORTH AMERICAN GOVERNMENT INCOME TRUST 55 56 355
GLOBAL DOLLAR GOVERNMENT FUND 166 266 366
GLOBAL STRATEGIC INCOME TRUST 124 224 324
CORPORATE BOND FUNDS
CORPORATE BOND PORTFOLIO 95 295 395
HIGH YIELD FUND 103 203 303
</TABLE>
90231GEN-TABFAPP-P2
2
4. YOUR SHAREHOLDER OPTIONS
A. AUTOMATIC INVESTMENT PLANS (AIP)
__ WITHDRAW FROM MY BANK ACCOUNT VIA EFT*
I authorize Alliance to draw on my bank account for investment in my fund
account(s) as indicated below (Complete Section 4D also for the bank account
you wish to use).
1- ___________ ______________________ ______ , _________.00 __
Fund Number Beginning Date (MM,DD) Amount ($25 minimum) Frequency
2- ___________ ______________________ ______ , _________.00 __
Fund Number Beginning Date (MM,DD) Amount ($25 minimum) Frequency
3- ___________ ______________________ ______ , _________.00 __
Fund Number Beginning Date (MM,DD) Amount ($25 minimum) Frequency
Frequency:
M = monthly
Q = quarterly
A = Annually
* ELECTRONIC FUNDS TRANSFER. YOUR BANK MUST BE A MEMBER OF THE NATIONAL
AUTOMATED CLEARING HOUSE ASSOCIATION (NACHA)
__ DIRECT MY DISTRIBUTIONS
As indicated in Section 3, I would like my dividends and/or capital gains
directed to the same class of shares of another Alliance Fund.
FROM: ___________ ______________________________ - __
Fund Number Account Number (If existing)
TO: ___________ ______________________________ - __
Fund Number Account Number (If existing)
__ EXCHANGE MY SHARES MONTHLY
I authorize Alliance to transact monthly exchanges, within the same class of
shares, between my fund accounts as listed below.
FROM: ___________ ______________________________ - __
Fund Number Account Number (If existing)
______ ,___________.00 ________
Amount ($25 minimum) Day of Exchange**
TO: ___________ ______________________________ - __
Fund Number Account Number (If existing)
** SHARES EXCHANGED WILL BE REDEEMED AT THE NET ASSET VALUE ON THE "DAY OF
EXCHANGE" (IF THE "DAY OF EXCHANGE" IS NOT A FUND BUSINESS DAY, THE EXCHANGE
TRANSACTION WILL BE PROCESSED ON THE NEXT FUND BUSINESS DAY). THE EXCHANGE
PRIVILEGE IS NOT AVAILABLE IF SHOCK CERTIFICATES HAVE BEEN ISSUED.
B. PURCHASES AND REDEMPTIONS VIA EFT
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.
* 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 Section 4D of 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
maximum redemption amount is $100,000 per day.
For shares recently purchased by check or electronic funds transfer,
redemption proceeds will not be made available until the Fund is reasonably
assured the check or electronic funds transfer has been collected, normally
for 15 calendar days after the purchase date.
90231GEN-TABFAPP-P3
3
4. YOUR SHAREHOLDER OPTIONS (CONTINUED)
C. SYSTEMATIC WITHDRAWAL PLANS (SWP)
In order to establish a SWP, you must reinvest all dividends and capital gains.
__ I authorize Alliance to transact periodic redemptions from my fund account
and send the proceeds to me as indicated below.
1- ___________ ______________________ ______ , _________.00 __
Fund Number Beginning Date (MM,DD) Amount ($25 minimum) Frequency
2- ___________ ______________________ ______ , _________.00 __
Fund Number Beginning Date (MM,DD) Amount ($25 minimum) Frequency
3- ___________ ______________________ ______ , _________.00 __
Fund Number Beginning Date (MM,DD) Amount ($25 minimum) Frequency
Frequency:
M = monthly
Q = quarterly
A = Annually
PLEASE SEND MY SWP PROCEEDS TO:
__ My Address of Record (via check)
__ My checking account-via EFT (complete section 4D)
Your bank must be a member of the National Automated Clearing House Association
(NACHA) in order for you to receive SWP proceeds directly into your bank
account. Otherwise payment will be made by check
__ The Payee and address specified in section 4E (via check)
(Medallion Signature Guarantee required)
D. BANK INFORMATION This bank account information will be used for:
__ Distributions (Section 3)
__ Telephone Transactions (Section 4B)
__ Automatic Investments (Section 4A)
__ Withdrawals (Section 4C)
PLEASE TAPE A PRE-PRINTED VOIDED CHECK HERE*
* THE ABOVE SERVICES CANNOT BE ESTABLISHED WITHOUT A PRE-PRINTED VOIDED CHECK.
FOR EFT TRANSACTIONS, THE FUND REQUIRES SIGNATURES OF BANK ACCOUNT OWNERS
EXACTLY AS THEY APPEAR ON BANK RECORDS. IF THE REGISTRATION AT THE BANK
DIFFERS FROM THAT ON THE ALLIANCE MUTUAL FUND, ALL PARTIES MUST SIGN IN SECTION
5.
VOID
ABA Routing Number
Check Number
Bank Account Number
______________________________
Your Bank's ABA Routing Number
______________________________________________
Your Bank Account Number
__ Checking Account __ Savings Account
90231GEN-TABFAPP-P4
4
4. YOUR SHAREHOLDER OPTIONS (CONTINUED)
E. THIRD PARTY PAYMENT DETAILS Your signature(s) in Section 5 must be
Medallion Signature Guaranteed if your account is not maintained by a
broker/dealer. This third party payee information will be used for:
__ Distributions (section 3) __ Systematic Withdrawals (section 4C)
_________________________________ _____ _____________________________________
Name (First Name) (MI) (Last Name)
___________________________ __________________________________________________
Street Number Street Name
______________________________________________ _____ ________________________
City State Zip code
F. 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 complete the Right of Accumulation section or the Statement
of Intent section.
__ A. RIGHT OF ACCUMULATION
Please link the tax identification numbers or account numbers listed below for
Right of Accumulation privileges, so that this and future purchases will
receive any discount for which they are eligible.
_________________________ _________________________ _________________________
Tax ID or Account Number Tax ID or Account Number Tax ID or Account Number
__ 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
that an additional sales charge must be paid from my account.
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 5, as well as the legal capacity of the
shareholder.
_________________________________________ ____________________________________
Dealer/Agent Firm Authorized Signature
____________________________________ ____ ___________________________________
Representative First Name MI Last Name
_________________________________________ ____________________________________
Dealer/Agent Firm Number Representative Number
_________________________________________ ____________________________________
Branch Number Branch Telephone Number
_______________________________________________________________________________
Branch Office Address
_______________________________________________ _____ _______________________
City State Zip Code
90231GEN-TABFAPP-P5
5
5. SHAREHOLDER AUTHORIZATION -- THIS SECTION MUST BE COMPLETED
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 not have
changed within the last 30 days. The maximum telephone redemption amount is
$50,000. 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
By selecting any of the above telephone privileges, I agree that neither the
Fund nor Alliance, Alliance Fund Distributors, Inc., Alliance Fund Services,
Inc. 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.
I CERTIFY UNDER PENALTY OF PERJURY THAT THE NUMBER SHOWN IN SECTION 1 OF THIS
FORM IS MY CORRECT TAX IDENTIFICATION NUMBER OR I AM WAITING FOR A NUMBER TO BE
ISSUED TO ME AND THAT I HAVE NOT BEEN NOTIFIED THAT THIS ACCOUNT IS SUBJECT TO
BACKUP WITHHOLDING.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION
OF THIS DOCUMENT OTHER THAN THE CERTIFICATION REQUIRED TO AVOID BACKUP
WITHHOLDING.
______________________________________________________ _______________________
Signature Date
______________________________________________________ _______________________
Signature Date
Medallion Signature Guarantee required if completing Section 4E and your mutual
fund is not maintained by a broker dealer
90231GEN-TABFAPP-P6
6
SIGNATURE CARD
Dealer/Bank Name: _______________________________________
FUND ACCT. NO.:* ________________________________________
FUND NAME:* _____________________________________________
*Information Necessary to Complete Request
ACCOUNT NAME(S) AS REGISTERED:
_________________________________________________________
_________________________________________________________
SHAREHOLDER ADDRESS:
_________________________________________________________
_________________________________________________________
SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER:*
_________________________________________________________
AUTHORIZED SIGNATURES:
1. _________________________________________________________
2. _________________________________________________________
3. _________________________________________________________
Joint Accounts check one:
__ Either owner is authorized to sign Redemption Checks
__ All owners are required to sign Redemption Checks
(If no box is checked, only one signature will be required.)
Checkbooks are not transferable to other accounts. If you change account
numbers, change funds or change of ownership you must reapply for check-writing.
STATE STREET BANK AND TRUST COMPANY Subject to conditions on reverse side.
SIGNATURE CARD
The payment of funds is authorized by the signature(s) appearing on the reverse
side. Each signatory guarantees the genuineness of the other signatures.
STATE STREET BANK AND TRUST COMPANY (the "Bank") is hereby appointed agent by
the person(s) signing this card (the "Depositor(s)") and, as agent, is
authorized and directed, upon presentment of checks to the Bank.
(1) IF PERTAINING TO AN ALLIANCE DEPOSIT ACCOUNT (THE "ACCOUNT") - to direct
Alliance, which as the Depositor's agent and nominee maintains such Account on
the Depositors behalf at one or more depository institutions, to withdraw funds
from the Account in the amounts of such checks for deposit in this checking
account. Alliance hereby appointed the Depositor's agent and, where
appropriate, messenger for the purpose of effecting such withdrawals.
(2) IF PERTAINING TO AN ALLIANCE MUTUAL FUND (THE "FUND") - to transmit such
checks to the Fund or its transfer agent as requests to redeem shares
registered in the name of the Depositor(s) in the amounts of such checks for
deposit in this checking account.
This checking arrangement is subject to the applicable terms and restrictions,
including charges, set forth in the current Prospectus or Statement of
Additional Information for each Alliance mutual fund or deposit account as to
which the Depositor has arranged to redeem shares or withdraw funds by
check-writing. The Bank is further authorized to effect withdrawals or
redemptions to defray the Bank's charges relating to this checking arrangement.
The Depositor(s) agrees that he shall be subject to the rules and regulations
of the Bank pertaining to this checking arrangement as amended from time to
time, that the Bank has the right not to honor checks which do not meet the
Banks normal standards for checks presented to it, that the Bank and Alliance
have the right to change, modify or terminate this check-writing service at
any time; and that the Bank shall be liable only for its own negligence.
MEDALLION SIGNATURE GUARANTEE - Signatures must be guaranteed by an institution
that is an "eligible guarantor" as defined in Rule 17 Ad-15 of the Securities
Exchange Act of 1934. This would include such institutions such as banks and
brokerage firms.
Send this card with any necessary authorizing documentation to:
ALLIANCE FUND SERVICES
ATTN: CHECKWRITING DEPARTMENT
P.O. BOX 1520
SECAUCUS, NJ 07096-1520
MEDALLION SIGNATURE GUARANTEE (see reverse)
<PAGE>
This is filed pursuant to Rule 497(c).
File Nos. 033-45328 and 811-06554.
<PAGE>
[LOGO] ALLIANCE NORTH AMERICAN
GOVERNMENT INCOME TRUST, INC.
_________________________________________________________________
c/o Alliance Fund Services, Inc.
Box 1520, Secaucus, New Jersey 07096-1520
Toll Free (800) 221-5672
For Literature: Toll Free (800) 227-4618
_________________________________________________________________
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1999
_________________________________________________________________
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus
dated March 1, 1999 for Alliance North American Government Income
Trust, Inc. (the "Fund") that offers Class A, Class B and Class C
shares of the Fund, and if the Fund begins to offer Advisor Class
shares, the Prospectus that offers the Advisor Class shares of
the Fund (the "Advisor Class Prospectus" and, together with any
Prospectus that offers the Class A, Class B and Class C shares,
the "Prospectus(es)"). The Fund currently does not offer Advisor
Class Shares. Copies of the Prospectus(es) of the Fund may be
obtained by contacting Alliance Fund Services, Inc. at the
address or the "For Literature" telephone number shown above.
TABLE OF CONTENTS
PAGE
Description of the Fund...............................
Additional Information About Canada, the United
Mexican States and the Republic of Argentina........
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...................................
Report of Independent Auditors and Financial
Statements..........................................
Appendix A (Bond Ratings)............................. A-1
Appendix B (Obligations of U.S. Government
Agencies or Instrumentalities)...................... B-1
Appendix C (Futures Contracts and Options on
Futures Contracts and Foreign Currencies)........... C-1
Appendix D (Certain Employee Benefit Plans)........... D-1
<PAGE>
__________
(R): This registered service mark used under license from the
owner, Alliance Capital Management L.P.
<PAGE>
_________________________________________________________________
DESCRIPTION OF THE FUND
_________________________________________________________________
Alliance North American Government Income Trust, Inc.
(the "Fund") is a non-diversified, open-end investment company.
Except as otherwise indicated, the investment policies of the
Fund are not designated "fundamental policies" and may,
therefore, be changed by the Fund's 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 Fund seeks the highest level of current income,
consistent with what Alliance Capital Management L.P., the Fund's
investment adviser (the "Adviser"), considers to be prudent
investment risk, that is available from a portfolio of debt
securities issued or guaranteed by the governments of 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 seeks high current yields by investing in
Government Securities denominated in the U.S. Dollar, the
Canadian Dollar and the Mexican Peso (including the Mexican New
Peso). Normally, the Fund expects to maintain at least 25% of
its assets in securities denominated in the U.S. Dollar. The
Fund is permitted to utilize certain other investment techniques,
including options and futures.
The Adviser 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 notwithstanding
the recent economic crisis and Peso devaluation in Mexico. See
"Additional Information About Canada, the United Mexican States
and the Republic of Argentina--Additional Information about
Mexico."
2
<PAGE>
HOW THE FUND PURSUES ITS OBJECTIVE
The Fund may invest its assets in Government Securities
considered investment grade or higher (i.e., securities rated at
least BBB by Standard & Poor's Ratings Services ("S&P"), Duff &
Phelps Credit Rating Co. ("Duff & Phelps") or Fitch IBCA, Inc.
("Fitch") or at least Baa by Moody's Investors Service, Inc.
("Moody's") or, if not so rated, of equivalent investment quality
as determined by the Adviser.
See "Additional Investment Considerations--Securities
Ratings," below. For a description of bond ratings, see
Appendix A.
The Adviser will actively manage the Fund's assets in
relation to market conditions and general economic conditions in
the United States, Canada and Mexico and elsewhere, and will
adjust the Fund's investments in Government Securities based on
its perception of which Government Securities will best enable
the Fund to achieve its investment objective of seeking the
highest level of current income, consistent with what the Adviser
considers to be a prudent investment risk. In this regard,
subject to the limitations described above, the percentage of
assets invested in a particular country or denominated in a
particular currency will vary in accordance with the Adviser'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 will invest 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 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 and are rated investment grade or, if not
so rated, are of equivalent investment quality as determined by
the Adviser. 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 debt securities issued by governmental
entities of Argentina ("Argentine Government Securities"). Under
normal market conditions, the Fund will invest at least 65% of
its total assets in income-producing securities (including zero
coupon securities and other discount obligations).
The following investment policies and restrictions
supplement, and should be read in conjunction with, the
information set forth in the Fund's Prospectus under the heading
3
<PAGE>
"Description of the Fund." The Fund's investment policies are
not designated "fundamental policies" within the meaning of the
Investment Company Act of 1940 (the "1940 Act") and may be
changed by the Fund's Board of Directors without shareholder
approval. However, the Fund will not change its investment
policies without contemporaneous written notice to shareholders.
U.S. GOVERNMENT SECURITIES. Securities issued or
guaranteed by the United States Government, its agencies or
instrumentalities include: (i) U.S. Treasury obligations, which
differ only in their interest rates, maturities and times of
issuance: U.S. Treasury bills (maturity of one year or less),
U.S. Treasury notes (maturities of one to 10 years), and U.S.
Treasury bonds (generally maturities of greater than 10 years),
all of which are backed by the full faith and credit of the
United States, and (ii) obligations issued or guaranteed by U.S.
Government agencies or instrumentalities, including government
guaranteed mortgage-related securities. Some such obligations
are backed by the full faith and credit of the U.S. Treasury,
e.g., direct pass-through certificates of the Government National
Mortgage Association ("GNMA"); some are supported by the right of
the issuer to borrow from the U.S. Government, e.g., obligations
of Federal Home Loan Banks; and some are backed only by the
credit of the issuer itself, e.g., obligations of the Student
Loan Marketing Association.
U.S. Government Securities do not generally involve the
credit risks associated with other types of interest bearing
securities, although, as a result, the yields available from U.S.
Government Securities are generally lower than the yields
available from other interest bearing securities. Like other
fixed-income securities, however, the values of U.S. Government
Securities change as interest rates fluctuate.
Guarantees of securities by the U.S. Government or its
agencies or instrumentalities guarantee only the payment of
principal and interest on the securities, and do not guarantee
the securities' yield or value or the yield or value of the
shares of the Fund that holds the securities.
U.S. Government securities are considered among the
safest of fixed-income investments. As a result, however, their
yields are generally lower than the yields available from other
fixed-income securities.
See Appendix B for a general description of obligations
issued or guaranteed by U.S. Government agencies or
instrumentalities.
U.S. GOVERNMENT GUARANTEED MORTGAGE-RELATED SECURITIES--
GENERAL. Mortgages backing the U.S. Government guaranteed
4
<PAGE>
mortgage-related securities purchased by the Fund include, among
others, conventional thirty-year fixed-rate mortgages, graduated
payment mortgages, fifteen year mortgages and adjustable rate
mortgages. All of these mortgages can be used to create pass-
through securities. A pass-through security is formed when
mortgages are pooled together and undivided interests in the pool
or pools are sold. The cash flow from the mortgages is passed
through to the holders of the securities in the form of periodic
payments of interest, principal and prepayments (net of a service
fee). Prepayments occur when the holder of an individual
mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage-
backed securities are often subject to more rapid prepayment of
principal than their stated maturity would indicate. Because the
prepayment characteristics of the underlying mortgages vary, it
is not possible to predict accurately the realized yield or
average life of a particular issue of pass-through certificates.
Prepayment rates are important because of their effect on the
yield and price of the securities. Accelerated prepayments
adversely impact yields for pass-throughs purchased at a premium
(i.e., a price in excess of principal amount) and may involve
additional risk of loss of principal because the premium may not
have been fully amortized at the time the obligation is repaid.
The opposite is true for pass-throughs purchased at a discount.
The Fund may purchase mortgage-related securities at a premium or
at a discount. Principal and interest payments on the mortgage-
related securities are government guaranteed to the extent
described below. Such guarantees do not extend to the value or
yield of the mortgage-related securities themselves or of the
Fund's shares of common stock.
GNMA CERTIFICATES. Certificates of the Government
National Mortgage Association ("GNMA Certificates") are mortgage-
backed securities, which evidence an undivided interest in a pool
or pools of mortgages. GNMA certificates that the Fund purchases
are the "modified pass-through" type, which entitle the holder to
receive timely payment of all interest and principal payments due
on the mortgage pool, net of fees paid to the "issuer" and GNMA,
regardless of whether or not the mortgagor actually makes the
payment.
The National Housing Act authorizes GNMA to guarantee
the timely payment of principal and interest on securities backed
by a pool of mortgages insured by the Federal Housing
Administration ("FHA") or guaranteed by the Veterans
Administration ("VA"). The GNMA guarantee is backed by the full
faith and credit of the United States. The GNMA is also
empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
5
<PAGE>
The average life of a GNMA Certificate is likely to be
substantially shorter than the original maturity of the mortgages
underlying the securities. Prepayments of principal by
mortgagors and mortgage foreclosures will usually result in the
return of the greater part of principal investment long before
the maturity of the mortgages in the pool. Foreclosures impose
no risk to principal investment because of the GNMA guarantee,
except to the extent that the Fund has purchased the certificates
above par in the secondary market.
FHLMC SECURITIES. The Federal Home Loan Mortgage
Corporation ("FHLMC") was created in 1970 through enactment of
Title III of the Emergency Home Finance Act of 1970. Its purpose
is to promote development of a nationwide secondary market in
conventional residential mortgages.
FHLMC issues two types of mortgage pass-through
securities ("FHLMC Certificates"), mortgage participation
certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). PCs resemble GNMA Certificates in that each PC
represents a pro-rata share of all interest and principal
payments made and owed on the underlying pool. FHLMC guarantees
timely monthly payment of interest on PCs and the ultimate
payment of principal.
GMCs also represent a pro-rata interest in a pool of
mortgages. However, these instruments pay interest semi-annually
and return principal once a year in guaranteed minimum payments.
The expected average life of these securities is approximately
ten years. The FHLMC guarantee is not backed by the full faith
and credit of the United States.
FNMA SECURITIES. The Federal National Mortgage
Association ("FNMA") was established in 1938 to create a
secondary market in mortgages insured by the FHA.
FNMA issues guaranteed mortgage pass-through
certificates ("FNMA Certificates"). FNMA Certificates resemble
GNMA Certificates in that each FNMA Certificate represents a
pro-rata share of all interest and principal payments made and
owed on the underlying pool. FNMA guarantees timely payment of
interest and principal on FNMA Certificates. The FNMA guarantee
is not backed by the full faith and credit of the United States.
ZERO COUPON TREASURY SECURITIES. U.S. Government
Securities in which the Fund may invest also include "zero
coupon" Treasury securities, which are U.S. Treasury bills which
are issued without interest coupons, U.S. Treasury notes and
bonds which have been stripped of their unmatured interest
coupons, and receipts or certificates representing interests in
such stripped debt obligations and coupons. A zero coupon
6
<PAGE>
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. Accordingly, such securities usually trade at a
deep discount from their face or par value and will be subject to
greater fluctuations of market value in response to changing
interest rates than debt obligations of comparable maturities
which make current distributions of interest. On the other hand,
because there are no periodic interest payments to be reinvested
prior to maturity, zero coupon securities eliminate reinvestment
risk and lock in a rate of return to maturity.
Current federal tax law requires that a holder (such as
the 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 Fund receives no interest payment in cash on the
security during the year. For a discussion of the tax treatment
of "zero coupon" Treasury securities see "Taxation--Zero Coupon
Securities." 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 ("corpus") from the coupon
portions of the U.S. Treasury bonds and notes and sold them
separately in the form of receipts or certificates representing
undivided interests in these instruments (which instruments are
generally held by a bank in a custodial or trust account).
Established trading markets have not yet developed for these
securities and, accordingly, these securities may be illiquid.
The staff of the Securities and Exchange Commission (the
"Commission") has indicated that, in its view, these receipts or
certificates should be considered as securities issued by the
bank or brokerage firm involved and, therefore, should not be
included in the Fund's categorization of U.S. Government
Securities. The Fund disagrees with the staff's interpretation
but has undertaken that it will not invest in such securities
until final resolution of the issue. If such securities are
deemed to be U.S. Government Securities the Fund will not be
subject to any limitations on their purchase.
CANADIAN GOVERNMENT SECURITIES. Canadian Government
Securities include the sovereign debt of Canada or any of its
Provinces (Alberta, British Columbia, Manitoba, New Brunswick,
Newfoundland, Nova Scotia, Ontario, Prince Edward Island, Quebec
and Saskatchewan). Canadian Government Securities in which the
Fund may invest include government of Canada bonds and government
7
<PAGE>
of Canada Treasury bills. The Bank of Canada, acting on behalf
of the federal government, is responsible for the distribution of
these bonds and Treasury bills. The Bank of Canada offers new
issues, as approved by the Government, to specific investment
dealers and banks. Government of 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 various maturity dates representing
different segments of the yield curve with maturities ranging
from one to 25 years. The Bank of Canada usually purchases a
pre-determined amount of each issue.
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. Spreads in the marketplace
are determined by various factors, including the relative supply
and the rating assigned by the rating agencies.
Many Canadian municipalities, municipal financial
authorities and 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 (the "NHA MBS Program") established under the
National Housing Act of Canada ("NHA"). Certificates issued
pursuant to the NHA MBS Program ("NHA Mortgage-Related
Securities") benefit from the guarantee of the Canada Mortgage
and Housing Corporation ("CMHC"), a federal Crown corporation
that is (except for certain limited purposes) an agency of the
Government of Canada whose guarantee (similar to that of GNMA in
the United States) is an unconditional obligation of the
Government of Canada except as described below. The NHA
currently provides that the aggregate principal amount of all
issues of NHA Mortgage Related Securities in respect of which
CMHC may give a guarantee must not exceed C$60 billion.
NHA Mortgage-Related Securities are backed by a pool of
insured mortgages that satisfy the requirements established by
the NHA. Issuers that wish to issue NHA Mortgage-Related
Securities must meet the status and other requirements of CMHC
and submit the necessary documentation to become an "approved
issuer". When an approved issuer wishes to issue NHA Mortgage
Related Securities in respect of a particular pool of mortgages,
8
<PAGE>
it must seek the approval of CMHC. Such mortgages must, among
other things, be first mortgages that are insured under the NHA,
not be in default and provide for equal monthly payments
throughout their respective terms.
The mortgages in each NHA Mortgage-Related Securities
pool are assigned to CMHC which, in turn, issues a guarantee of
timely payment of principal and interest that is shown on the
face of the certificates representing the NHA Mortgage-Related
Securities (the "NHA MBS Certificates"). NHA Mortgage-Related
Securities do not constitute any liability of, nor evidence any
recourse against, the issuer of the NHA Mortgage-Related
Securities, but in the event of any failure, delay or default
under the terms of NHA MBS Certificates, the holder has recourse
to CMHC in respect of its guarantee set out on the NHA MBS
Certificates.
In any legal action or proceeding or otherwise, CMHC has
agreed not to contest or defend against a demand for the timely
payment of the amount set forth and provided for in, and unpaid
on, any duly and validly issued NHA MBS Certificate, provided
that such payment is sought and claimed by or on behalf of a bona
fide purchaser of and investor in such security, without actual
notice at the time of the purchase of the basis or grounds for
contesting or defending against that demand for timely payment.
While most Canadian Mortgage-Related Securities are
subject to voluntary prepayments, some pools are not and function
more like a traditional bond. The typical maturity of Canadian
Mortgage-Related Securities is five years as most Canadian
residential mortgages provide for a five-year maturity with equal
monthly blended payments of interest and principal based on a
twenty-five year amortization schedule. Pursuant to recent
changes adopted by CMHC, maturities of NHA Mortgaged-Related
Securities may be as short as six months or as long as eighteen
years.
MEXICAN GOVERNMENT SECURITIES. The Fund may invest in
Mexican Government Securities of investment grade quality. As of
the date of this Statement of Additional Information, there are
five Mexican Government Securities denominated in the Mexican
Peso that have been rated investment grade by either S&P or
Moody's. These five Mexican Government Securities are Cetes and
Tesobonos, each rated A-2 by S&P, and Ajustabonos, Bondes and
Udibonos, each rated BBB+/stable by S&P. The Adviser, however,
believes that there are other Peso-denominated Mexican Government
Securities that are of investment grade quality. Currently,
Floating Rate Notes, rated BB/stable by S&P, is the only Mexican
Government Security denominated in U.S. Dollars that is rated
investment grade by S&P. If qualified investments of this nature
appear in the future, the Fund will consider them for investment.
9
<PAGE>
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 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 as of the end of the preceding month.
ARGENTINE GOVERNMENT SECURITIES. 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, which are investment and growth bonds issued
directly by the Argentine government with maturities of ten
years; (ii) Bono de Consolidacion Economica, which are economic
consolidation bonds issued directly by the Argentine government
with maturities of ten years and (iii) Bono de Credito a la
Exportacion, which are export credit bonds issued directly by the
Argentine government with maturities of four years. Although not
all Argentine Government securities are rated investment grade
quality by S&P, Moodys, Duff & Phelps or Fitch, the Adviser
believes that there are unrated Argentine Government securities
that are of investment grade quality.
GOVERNMENTAL OBLIGATIONS. 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 U.S. dollars,
its ability to make debt payments denominated in U.S. 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.
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
10
<PAGE>
governments. The Parliament of Canada has jurisdiction over all
areas not assigned exclusively to the Provincial legislatures,
and has jurisdiction over such matters as the federal public debt
and property, the regulation of trade and commerce, currency and
coinage, banks and banking, national defense, the postal
services, navigation and shipping and unemployment insurance.
The Canadian economy is based on the free enterprise
system, with business organizations ranging from small owner-
operated businesses to large multinational corporations.
Manufacturing and resource industries are large contributors to
the country's economic output, but as in many other highly
developed countries, there has been a gradual shift from a
largely goods-producing economy to a predominantly service-based
one. Agriculture and other primary production play a small but
key role in the economy. Canada is also an exporter of energy to
the United States in the form of natural gas (of which Canada has
substantial reserves) and hydroelectric power, and has
significant mineral resources.
Canadian Dollars are fully exchangeable into U.S.
Dollars without foreign exchange controls or other legal
restriction. Since the major developed-country currencies were
permitted to float freely against one another, the range of
fluctuation in the U.S. Dollar/Canadian Dollar exchange rate
generally has been narrower than the range of fluctuation between
the U.S. Dollar and most other major currencies. Since 1991,
Canada generally has experienced a weakening of its currency.
The Canadian Dollar reached an all-time low of 1.5770 Canadian
Dollars per U.S. Dollar on August 27, 1998. On February 22,
1999, the Canadian Dollar-U.S. Dollar exchange rate was 1.4968:1.
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
accurately 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.
Prior to 1994, when Mexico experienced an economic
crisis that led to the devaluation of the Peso in December 1994,
the Mexican economy experienced improvement in a number of areas,
including growth in gross domestic product and a substantial
reduction in the rate of inflation and in the public sector
financial deficit. Much of the past improvement in the Mexican
11
<PAGE>
economy was due to a series of economic policy intiatives
intended to modernize and reform the Mexican economy, control
inflation, reduce the financial deficit, increase public revenues
through the reform of the tax system, establish a competitive and
stable currency exchange rate, liberalize trade restrictions and
increase investment and productivity, while reducing the
government's role in the economy. In this regard, the Mexican
government launched a program for privatizing certain state owned
enterprises, developing and modernizing the securities markets,
increasing investment in the private sector and permitting
increased levels of foreign investment.
In 1994, Mexico faced internal and external conditions
that resulted in an economic crisis that continues to affect the
Mexican economy adversely. Growing trade and current account
deficits, which could no longer be financed by inflows of foreign
capital, were factors contributing to the crisis. A weakening
economy and unsettling political and social developments caused
investors to lose confidence in the Mexican economy. This
resulted in a large decline in foreign reserves followed by a
sharp and rapid devaluation of the Mexican Peso. The ensuing
economic and financial crisis resulted in higher inflation and
domestic interest rates, a contraction in real gross domestic
product and a liquidity crisis.
In response to the adverse economic conditions that
developed at the end of 1994, the Mexican government instituted a
new economic program; and the government and the business and
labor sectors of the economy entered into a new accord in an
effort to stabilize the economy and the financial markets. To
help relieve Mexico's liquidity crisis and restore financial
stability to Mexico's economy, the Mexican government also
obtained financial assistance from the United States, other
countries and certain international agencies conditioned upon the
implementation and continuation of the economic reform program.
In October 1995, and again in October 1996, the Mexican
government announced new accords designed to encourage economic
growth and reduce inflation. While it cannot be accurately
predicted whether these accords will continue to achieve their
objectives, the Mexican economy has stabilized since the economic
crisis of 1994, and the high inflation and high interest rates
that continued to be a factor after 1994 have subsided as well.
After declining for five consecutive quarters beginning with the
first quarter of 1995, Mexico's gross domestic product began to
grow in the second quarter of 1996. That growth was sustained in
1996 and 1997, resulting in increases of 5.2% and 7.0%,
respectively. The growth rate for 1998 was 4.8%. In addition,
inflation dropped from a 5.2% annual rate in 1995 to a 27.7%
annual rate in 1996 and a 15.7% annual rate in 1997. In 1998,
12
<PAGE>
the inflation rate was 18.6%. Mexico's economy is influenced by
international economic conditions, particularly those in the
United States, and by world prices for oil and other commodities.
The recovery of the economy will require continued economic and
fiscal discipline as well as stable political and social
conditions. In addition, there is no assurance that Mexico's
economic policy initiatives will be successful or that succeeding
administrations will continue these initiatives.
Under economic policy initiatives implemented on and
after December 1987, the Mexican government introduced a series
of schedules allowing for the gradual devaluation of the Mexcian
Peso against the U.S. Dollar. These gradual devaluations
continued until December 1994. On December 22, 1994, the Mexican
government announced that it would permit the Peso to float
freely against other currencies, resulting in a precipitous
decline against the U.S. Dollar. By December 31, 1996, the Peso-
Dollar exchange rate had decreased approximately 40% from that on
December 22, 1994. After dropping approximately 55% from 1994
through 1996, in 1997, the average annual Peso-Dollar exchange
rate decreased aproximately 4% from that in 1996. In 1998, the
average annual Peso-Dollar exchange rate was approximately 16%
less than that in 1997.
Mexico has in the past imposed strict foreign exchange
controls. There is no assurance that future regulatory actions
in Mexico would not affect the Fund's ability to obtain U.S.
Dollars in exchange for Mexican Pesos.
GENERAL INFORMATION ABOUT THE REPUBLIC OF ARGENTINA.
The Republic of Argentina ("Argentina") consists of 23 provinces
and the federal capital of Buenos Aires. Its federal
constitution provides for an executive branch headed by a
President, a legislative branch and a judicial branch. Each
province has its own constitution, and elects its own governor,
legislators and judges, without the intervention of the federal
government.
The military has intervened in the political process on
several occasions since 1930 and has ruled the country for 22 of
the past 68 years. The most recent military government ruled the
country from 1976 to 1983. Four unsuccessful military uprisings
have occurred since 1983, the most recent in December 1990.
Shortly after taking office in 1989, the country's
current President adopted market-oriented and reformist policies,
including an aggressive privatization program, a reduction in the
size of the public sector and an opening of the economy to
international competition.
13
<PAGE>
In the decade prior to the announcement of a new
economic plan in March 1991, the Argentine economy was
characterized by low and erratic growth, declining investment
rates and rapidly worsening inflation. Despite its strengths,
which include a well-balanced natural resource base and a high
literacy rate, the Argentine economy failed to respond to a
series of economic plans in the 1980's. The 1991 economic plan
represented a pronounced departure from its predecessors in
calling for raised revenues, cutting expenditures and reducing
the public deficit. The extensive privatization program
commenced in 1989 was accelerated, the domestic economy
deregulated and opened up to foreign trade and the framework for
foreign investment reformed. As a result of the economic
stabilization reforms, gross domestic product has increased each
year since 1991, with the exception of 1995. During 1998, gross
domestic product increased an estimated 4.7% from 1997. The rate
of inflation is generally viewed to be under control.
Significant progress was also made between 1991 and 1994 in
rescheduling Argentina's debt with both external and domestic
creditors, which improved fiscal cash flows in the medium term
and allowed a return to voluntary credit markets. There is no
assurance that Argentina's economic policy initiatives will be
successful or that succeeding administrations will continue these
initiatives.
In 1995, economic policy was directed toward the effects
of the Mexican currency crisis. The Mexican currency crisis led
to a run on Argentine bank deposits, which was brought under
control by a series of measures designed to strengthen the
financial system. The measures included the "dollarization" of
banking reserves, the establishment of two trust funds and
strengthening bank reserve requirements.
In 1991, the Argentine government enacted currency
reforms, which required the domestic currency to be fully backed
by international reserves, in an effort to make the Argentine
Peso fully convertible into the U.S. Dollar at a rate of one to
one.
The Argentine Peso has been the Argentine currency since
January 1, 1992. Since that date, the rate of exchange from the
Argentine Peso to the U.S. Dollar has remained approximately one
to one. The fixed exchange rate has been instrumental in
stabilizing the economy, but has not reduced pressures from high
rates of unemployment. It is not clear that the government will
be able to resist pressure to devalue the currency. However, the
historic range is not necessarily indicative of fluctuations that
may occur in the exchange rate over time and future rates of
exchange cannot be accurately predicted. The Argentine foreign
exchange market was highly controlled until December 1989, when a
free exchange rate was established for all foreign currency
14
<PAGE>
transactions. Argentina has eliminated restrictions on foreign
direct investment and capital repatriation. In 1993, legislation
was adopted abolishing previous requirements of a three-year
waiting period for capital repatriation. Under the legislation,
foreign investors are permitted to remit profits at any time.
ADDITIONAL INVESTMENT POLICIES AND PRACTICES
The following additional investment policies supplement
those set forth in the Prospectus.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The
Fund may enter into contracts for the purchase or sale for future
delivery of fixed-income securities or foreign currencies, or
contracts based on financial indices including any index of U.S.
Government Securities or foreign government securities ("futures
contracts") and may purchase and write put and call options to
buy or sell futures contracts ("options on futures contracts"). A
"sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities or foreign
currencies called for by the contract at a specified price on a
specified date. A "purchase" of a futures contract means the
incurring of a contractual obligation to acquire the securities
or foreign currencies called for by the contract at a specified
price on a specified date. The purchaser of a futures contract
on an index agrees to take or make delivery of an amount of cash
equal to the difference between a specified dollar multiple of
the value of the index on the expiration date of the contract and
the price at which the contract was originally struck. Options
on futures contracts to be written or purchased by the Fund will
be traded on U.S. or foreign exchanges or over-the-counter.
The Board of Directors has adopted the requirement that
futures contracts and options on futures contracts only be used
as a hedge and not for speculation. In addition to this
requirement, the Board of Directors has also adopted two
percentage restrictions on the use of futures contracts.
The Fund will not (i) enter into any futures contracts
or options on futures contracts if immediately thereafter the
aggregate of 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, or (ii) enter into any futures
contracts or options on futures contracts if the aggregate of the
market value of the outstanding futures contracts of the Fund and
the market value of the currencies and futures contracts subject
to outstanding options written by the Fund would exceed 50% of
the market value of the total assets of the Fund. Neither of
these restrictions will be changed by the Fund's Board of
15
<PAGE>
Directors without considering the policies and concerns of the
various applicable federal and state regulatory agencies.
See Appendix C for further discussion of the use, risks
and costs of futures contracts and options on futures contracts.
OPTIONS ON FOREIGN CURRENCIES. The Fund may purchase
and write put and call options on foreign currencies for the
purpose of protecting against declines in the U.S. Dollar value
of foreign currency-denominated portfolio securities and against
increases in the U.S. Dollar cost of such securities to be
acquired. As in the case of other kinds of options, however, the
writing of an option on a foreign currency will constitute only a
partial hedge, up to the amount of the premium received, and the
Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on a foreign currency may constitute an
effective hedge against fluctuations in exchange rates although,
in the event of rate movements adverse to the Fund's position, it
may forfeit the entire amount of the premium plus related
transaction costs. Options on foreign currencies to be written
or purchased by the Fund will be traded on U.S. and foreign
exchanges or over-the-counter. There is no specific percentage
limitation on the Fund's investments in options on foreign
currencies.
See Appendix C for further discussion of the use, risks
and costs of options on foreign currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund
may purchase or sell forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk to the Fund
of adverse changes in the relationship between the U.S. Dollar
and other currencies. A forward contract is an obligation to
purchase or sell a specific currency for an agreed price at a
future date which is individually negotiated and privately traded
by currency traders and their customers.
The 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").
Additionally, for example, when the 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 U.S. Dollar amount ("position hedge"). In
16
<PAGE>
this situation the 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"). To the extent required by
applicable law, the Fund's Custodian will place liquid assets in
a segregated account of the Fund having a value equal to the
aggregate amount of the Fund's commitments under forward
contracts entered into with respect to position hedges and cross-
hedges. If the value of the assets placed in the segregated
account declines, additional liquid assets or securities will be
placed in the account on a daily basis so that the value of the
account will equal the amount of the Fund's commitments with
respect to such contracts. As an alternative to maintaining all
or part of the segregated account, the Fund may purchase a call
option permitting the Fund to purchase the amount of foreign
currency being hedged by a forward sale contract at a price no
higher than the forward contract price or the Fund may purchase a
put option permitting the Fund to sell the amount of foreign
currency subject to a forward purchase contract at a price as
high or higher than the forward contract price. In addition, the
Fund may use such other methods of "cover" as are permitted by
applicable law.
While these contracts are not presently regulated by the
Commodity Futures Trading Commission ("CFTC"), the CFTC may in
the future assert authority to regulate forward contracts. In
such event the Fund's ability to utilize forward contracts in the
manner set forth in the Prospectus may be restricted. Forward
contracts will reduce the potential gain from a positive change
in the relationship between the U.S. Dollar and foreign
currencies. Unanticipated changes in currency prices may result
in poorer overall performance for the Fund than if it had not
entered into such contracts. The use of foreign currency forward
contracts will not eliminate fluctuations in the underlying U.S.
Dollar equivalent value of the proceeds of or rates of return on
the Fund's foreign currency denominated portfolio securities and
the use of such techniques will subject the Fund to certain
risks.
The matching of the increase in value of a forward
contract and the decline in the U.S. Dollar equivalent value of
the foreign currency denominated asset that is the subject of the
hedge generally will not be precise. In addition, the Fund may
not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit the Fund's
ability to use such contracts to hedge its assets.
17
<PAGE>
OPTIONS ON U.S. AND FOREIGN GOVERNMENT SECURITIES. In
an effort to increase current income and to reduce fluctuations
in net asset value, the Fund intends to write covered put and
call options and purchase put and call options on U.S. Government
Securities and foreign government securities that are traded on
United States and foreign securities exchanges. The Fund also
intends to write call options for cross-hedging purposes. There
are no specific limitations on the Fund's writing and purchasing
of options.
The purchaser of an option, upon payment of a premium,
obtains, in the case of a put option, the right to deliver to the
writer of the option, and, in the case of a call option, the
right to call upon the writer to deliver a specified amount of a
security on or before a fixed date at a predetermined price. A
call option written by the Fund is "covered" if the Fund (i) owns
the underlying security covered by the call, (ii) has an absolute
and immediate right to acquire that security without additional
cash consideration (or for additional cash consideration held in
a segregated account by its Custodian) upon conversion or
exchange of other portfolio securities, or (iii) 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 liquid assets 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 Government Securities with a
value equal to the exercise price in a segregated account with
its Custodian, or else holds a put on the same security 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.
A call option is written for cross-hedging purposes if
the Fund does not own the underlying security but seeks to
provide a hedge against a decline in value in another security
which the Fund owns or has the right to acquire. In such
circumstances, the Fund collateralizes its obligation under the
option (which is not covered) by maintaining in a segregated
account with its Custodian cash or liquid high-grade Government
Securities in an amount not less than the market value of the
underlying security, marked to market daily.
In purchasing a call option, the Fund would be in a
position to realize a gain if, during the option period, the
price of the underlying security increased by an amount in excess
of the premium paid. It would realize a loss if the price of the
underlying security declined or remained the same or did not
increase during the period by more than the amount of the
18
<PAGE>
premium. In purchasing a put option, the Fund would be in a
position to realize a gain if, during the option period, the
price of the underlying security declined by an amount in excess
of the premium paid. It would realize a loss if the price of the
underlying security increased or remained the same or did not
decrease during that period by more than the amount of the
premium. If a put or call option purchased by the Fund were
permitted to expire without being sold or exercised, its premium
would be lost by the Fund.
The risk involved in writing a put option is that there
could be a decrease in the market value of the underlying
security. If this occurred, the option could be exercised and
the underlying security would then be sold by the option holder
to the Fund at a higher price than its current market value. The
risk involved in writing a call option is that there could be an
increase in the market value of the underlying security. 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 discussed in Appendix C. The Fund
retains the premium received from writing a put or call option
whether or not the option is exercised.
The Fund may purchase or write options on securities of
the types in which it is permitted to invest in privately
negotiated transactions. The Fund will effect such transactions
only with investment dealers and other financial institutions
(such as commercial banks or savings and loan institutions)
deemed creditworthy by the Adviser, and the Adviser has adopted
procedures for monitoring the creditworthiness of such entities.
Options purchased or written by the Fund in negotiated
transactions are illiquid and it may not be possible for the Fund
to effect a closing transaction at a time when the Adviser
believes it would be advantageous to do so. See "Illiquid
Securities," below.
See Appendix C for a further discussion of the use,
risks and costs of options in U.S. Government and foreign
government securities.
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
19
<PAGE>
respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments. The
exchange commitments can involve payments to be made in the same
currency or in different currencies. 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 such interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to
receive payments on a contractually-based principal amount from
the party selling such 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. Inasmuch as these hedging transactions are
entered into for good faith hedging purposes, the Adviser and the
Fund believe such obligations do not constitute senior securities
and, accordingly, will not treat them as being subject to its
borrowing restrictions. The net amount of the excess, if any, of
the Fund's obligations over its entitlements with respect to each
interest rate swap will be accrued daily and an amount of cash or
liquid 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 in a segregated account with its Custodian the full
amount, accrued daily, of the Fund's obligations with respect to
the swap. The Fund will enter into interest rate swap, cap or
floor transactions with its Custodian, and with other
counterparties, but only if: (i) for transactions with maturities
under one year, such other counterparty has outstanding short-
term paper rated at least A-1 by S&P or Prime-1 by Moody's or
(ii) for transactions with maturities greater than one year, the
counterparty has outstanding debt securities rated at least AA by
S&P or Aa by Moody's. If there is a default by the other party
to such a transaction, the Fund will 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.
As a result, the swap market has become well established and
provides a degree of liquidity. Caps and floors are more recent
innovations for which documentation is not as standardized and,
accordingly, they are less liquid than swaps. To the extent the
Fund sells (i.e., writes) caps and floors it will maintain in a
segregated account with its Custodian liquid assets having an
aggregate net asset value at least equal to the full amount,
20
<PAGE>
accrued daily, of the Fund's obligations with respect to any caps
and floors.
FORWARD COMMITMENTS. The Fund may enter into forward
commitments for the purchase or sale of securities. Such
transactions may include purchases on a "when-issued" basis or
purchases or sales on a "delayed delivery" basis. 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, i.e., a "when, as
and if issued" trade.
When forward commitment transactions are negotiated, the
price, which is generally expressed in yield terms, is fixed at
the time the commitment is made, but delivery and payment for the
securities take place at a later date, normally within two months
after the transaction, although delayed settlements beyond two
months may be negotiated. Securities purchased or sold under a
forward commitment are subject to market fluctuation, and no
interest accrues to the purchaser prior to the settlement date.
At the time the Fund enters into a forward commitment, it will
record the transaction and thereafter reflect the value of the
security purchased or, if a sale, the proceeds to be received, in
determining its net asset value. Any unrealized appreciation or
depreciation reflected in such valuation of a "when, as and if
issued" security would be canceled in the event that the required
condition did not occur and the trade was canceled.
The use of forward commitments enables the Fund to
protect against anticipated changes in interest rates and prices.
For instance, in periods of rising interest rates and falling
bond prices, the Fund might sell securities in its portfolio on a
forward commitment basis to limit its exposure to falling 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
inferior to then current market values. No forward commitments
will be made by the Fund if, as a result, the Fund's aggregate
commitments under such transactions would be more than 30% of the
then current value of the Fund's total assets.
The Fund's right to receive or deliver a security under
a forward commitment may be sold prior to the settlement date,
but the Fund will enter into forward commitments only with the
intention of actually receiving or delivering the securities, as
the case may be. To facilitate such transactions, the Fund's
Custodian will maintain, in the separate account of the Fund,
21
<PAGE>
cash or liquid high-grade Government Securities having value
equal to, or greater than, any commitments to purchase securities
on a 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 receive or deliver a security subject
to a forward commitment prior to the settlement date of the
transaction, it can incur a gain or loss. In the event the other
party to a forward commitment transaction were to default, the
Fund might lose the opportunity to invest money at favorable
rates or to dispose of securities at favorable prices.
GENERAL. The successful use of the foregoing investment
practices draws upon the Adviser's special skills and experience
with respect to such instruments and usually depends on the
Adviser's ability to forecast interest rate and currency exchange
rate movements correctly. Should interest or exchange rates move
in an unexpected manner, the Fund may not achieve the anticipated
benefits of futures contracts, options, interest rate
transactions or forward contracts or may realize losses and thus
be in a worse position than if such strategies had not been used.
Unlike many exchange-traded futures contracts and options on
futures contracts, there are no daily price fluctuation limits
with respect to options on currencies and forward contracts, and
adverse market movements could therefore continue to an unlimited
extent over a period of time. In addition, the correlation
between movements in the prices of such instruments and movements
in the price of the securities and currencies hedged or used for
cover will not be perfect and could produce unanticipated losses.
The Fund's ability to dispose of its positions in
futures contracts, options, interest rate transactions and
forward contracts will depend on the availability of liquid
markets in such instruments. Markets in options and futures with
respect to a number of fixed-income securities and currencies are
relatively new and still developing. It is impossible to predict
the amount of trading interest that may exist in various types of
futures contracts, options and forward contracts. If a secondary
market does not exist with respect to an option purchased or
written by the Fund over-the-counter, it might not be possible to
effect a closing transaction in the option (i.e., dispose of the
option) with the result that (i) an option purchased by the Fund
would have to be exercised in order for the Fund to realize any
profit and (ii) the Fund may not be able to sell currencies or
portfolio securities covering an option written by the Fund until
the option expires or it delivers the underlying futures contract
or currency upon exercise. Therefore, no assurance can be given
that the Fund will be able to utilize these instruments
effectively for the purposes set forth above.
22
<PAGE>
LOANS OF PORTFOLIO SECURITIES. The Fund may make
secured loans of its portfolio securities to brokers, dealers and
financial institutions provided that cash, U.S. Government
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, the Adviser (subject to review by the Board
of Directors) 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. The Fund will have the right to regain
record ownership of loaned securities or equivalent securities in
order to exercise ownership rights such as voting rights,
subscription rights and rights to dividends, interest or
distributions. 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. The Board of Directors will
monitor the Fund's lending of portfolio securities.
REPURCHASE AGREEMENTS. The Fund may enter into
"repurchase agreements" pertaining to the types of securities in
which it may invest with member banks of the Federal Reserve
System or "primary dealers" (as designated by the Federal Reserve
Bank of New York) in such securities. There is no percentage
restriction on the Fund's ability to enter into repurchase
agreements. Currently the Fund enters into repurchase agreements
only with its Custodian and such primary dealers. A repurchase
agreement arises when a buyer such as the Fund 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 interest 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 requires continual maintenance
for its account in the Federal Reserve/Treasury Book Entry System
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 a vendor defaulted on its repurchase obligation, the
Fund might suffer a loss to the extent that the proceeds from the
23
<PAGE>
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.
The Fund's Board of Directors has established procedures, which
are periodically reviewed by the Board, pursuant to which the
Adviser monitors the creditworthiness of the dealers with which
the Fund enters into repurchase agreement transactions.
ILLIQUID SECURITIES. The Fund has adopted the following
investment policy which may be changed by the vote of the Board
of Directors.
The Fund will not invest in illiquid securities if
immediately after such investment more than 10% of the Fund's net
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.
Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of
1933, as amended ("Securities Act"), securities which are
otherwise not readily marketable and repurchase agreements having
a maturity of longer than seven days. Securities which have not
been registered under the Securities Act are referred to as
private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations
on resale may have an adverse effect on the marketability of
portfolio securities and a mutual fund might be unable to dispose
of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days. A mutual fund might
also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay.
Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market
has developed for certain securities that are not registered
24
<PAGE>
under the Securities Act including repurchase agreements,
commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand
for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such
investments.
Rule 144A under the Securities Act allows a broader
institutional trading market for securities otherwise subject to
restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of
the Securities Act for resales of certain securities to qualified
institutional buyers. An insufficient number of qualified
institutional buyers interested in purchasing certain restricted
securities held by the Fund, however, could affect adversely the
marketability of such portfolio securities and the Fund might be
unable to dispose of such securities promptly or at reasonable
prices. Rule 144A has already produced enhanced liquidity for
many restricted securities, and market liquidity for such
securities may continue to expand as a result of this regulation
and the consequent inception of the PORTAL System, an automated
system for the clearance and settlement of transactions in
unregistered securities of domestic and foreign issuers,
sponsored by the National Association of Securities Dealers, Inc.
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, among others, the following factors:
(1) the frequency of trades and quotes for the security; (2) the
number of dealers making 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 and the nature of
the marketplace for the security (e.g., the time needed to
dispose of the security, the method of soliciting offers and the
mechanics of the transfer); and (6) any applicable Commission
interpretation or position with respect to such type of
securities.
PORTFOLIO TURNOVER. The Fund may engage in active
short-term trading to benefit from yield disparities among
different issues of securities, to seek short-term profits during
periods of fluctuating interest rates or for other reasons. Such
trading will increase the Fund's rate of turnover and the
incidence of short-term capital gain taxable as ordinary income.
The Adviser anticipates that the annual turnover in the Fund will
not be in excess of 400%. An annual turnover rate of 400%
25
<PAGE>
occurs, for example, when all of the securities in the Fund's
portfolio are replaced four 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. See "Dividends, Distributions and
Taxes" and "General Information--Portfolio Transactions."
SPECIAL BORROWING CONSIDERATIONS
EFFECTS OF BORROWING. The Fund maintains borrowings
from banks unaffiliated with the Fund or the Adviser in an amount
of money representing approximately one-third of the Fund's total
assets less liabilities (other than the amount borrowed). The
Fund's loan agreements provide for additional borrowings and for
repayments and reborrowings from time to time, and the Fund
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 the Fund result in leveraging of the
Fund's shares of common stock. The proceeds of such borrowings
will be invested in Government Securities in accordance with the
Fund's investment objective and policies. The Adviser
anticipates that the difference between the interest expense paid
by the Fund on borrowings and the rates received by the Fund from
its investments in Government Securities of non-U.S. issuers will
provide the Fund's shareholders with a potentially higher yield.
Utilization of leverage, which is usually considered
speculative, however, involves certain risks to the Fund's
shareholders. These include a higher volatility of the net asset
value of the Fund's shares of common stock and the relatively
greater effect on the net asset value of the shares caused by
favorable or adverse changes in currency exchange rates. So long
as the Fund is able to realize a net return on the leveraged
portion of 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 higher current net
investment income than if the Fund were not leveraged. However,
to the extent that the interest expense on borrowings approaches
the net return on the leveraged portion of the 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, the Fund's use of
leverage would result in a lower rate of return than if the 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 the Fund's current investment income were not sufficient
26
<PAGE>
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 the Fund's shares.
PORTFOLIO MANAGEMENT AND OTHER CONSIDERATIONS. In the
event of an increase in rates on U.S. Government Securities
obligations or other changed market conditions, to the point
where the Fund's leverage could adversely affect the Fund's
shareholders, as noted above, or in anticipation of such changes,
the Fund may increase the percentage of its investment portfolio
invested in U.S. Government Securities, which would tend to
offset the negative impact of leverage on Fund shareholders. The
Fund may also reduce the degree to which it is leveraged by
repaying amounts borrowed.
OTHER BORROWINGS. The Fund may also borrow to
repurchase its shares or to meet redemption requests. In
addition, the 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 total assets of the Fund.
Borrowings for temporary purposes are not subject to the 300%
asset coverage limit described above. See "Certain Fundamental
Investment Policies." The Fund may also borrow through the use
of reverse repurchase agreements.
ADDITIONAL INVESTMENT CONSIDERATIONS
RISKS OF INVESTMENTS IN FOREIGN SECURITIES. Investing
in securities issued by foreign governments involves
considerations and possible risks not typically associated with
investing in U.S. Government Securities. The values of foreign
investments are affected by changes in currency rates or exchange
control regulations, application of foreign tax laws, including
withholding taxes, changes in governmental administration or
economic or monetary policy (in this country or abroad), or
changed circumstances in dealings between nations. Costs are
incurred in connection with conversions between various
currencies. In addition, foreign brokerage commissions are
generally higher than in the United States, and foreign
securities markets may be less liquid, more volatile and less
subject to governmental supervision than in the United States.
Investments in foreign countries could be affected by other
factors not present in the United States, including
expropriation, confiscatory taxation, lack of uniform accounting
and auditing standards and potential difficulties in enforcing
contractual obligations and could be subject to extended
settlement periods. The Fund 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 the Fund's investments in the securities of Canadian
issuers or investments denominated in Canadian Dollars. The
27
<PAGE>
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 RISKS. Because Fund assets will be invested in
fixed income securities denominated in the Canadian Dollar, the
Mexican Peso and other foreign currencies and because a
substantial portion of the Fund's revenues will be received in
currencies other than the U.S. Dollar, the U.S. Dollar equivalent
of the Fund's net assets and distributions will be adversely
affected by reductions in the value of certain foreign currencies
relative to the U.S. Dollar. These changes will also affect the
Fund's income. If the value of the foreign currencies in which
the Fund receives income falls relative to the U.S. Dollar
between receipt of the income and the making of Fund
distributions, the 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 the value of a
particular foreign currency declines between the time the 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, the Fund may engage in certain currency hedging
transactions, which themselves, involve certain special risks.
See "Additional Investment Policies and Practices," above.
SECURITIES RATINGS. The ratings of fixed-income
securities by S&P and Moody's are a generally accepted barometer
of credit risk. They are, however, subject to certain
limitations from an investor's standpoint. The rating of an
issuer is heavily weighted by past developments and does not
necessarily reflect probable future conditions. There is
frequently a lag between the time a rating is assigned and the
time it is updated. In addition, there may be varying degrees of
difference in credit risk of securities within each rating
category. Securities rated BBB by S&P or Baa by Moody's are
considered to be investment grade, but to have speculative
characteristics. Sustained periods of deteriorating economic
conditions or rising interest rates are more likely to lead to a
weakening in the issuer's capacity to pay interest and repay
principal than in the case of higher-rated securities. The Fund
expects that it will not retain a debt security which is
28
<PAGE>
downgraded below BBB or Baa, or, if unrated, determined by the
Adviser to have undergone similar credit quality deterioration,
subsequent to purchase by the Fund. See Appendix A for a
description of such ratings.
Non-rated securities will also be considered for
investment by the Fund when the Adviser believes that the
financial condition of the issuers of such securities, or the
protection afforded by the terms of the securities themselves,
limits the risk to the Fund to a degree comparable to that of
rated securities which are consistent with the Fund's objective
and policies.
DEBT SECURITIES. The net asset value of the Fund's
shares will change as the general levels of interest rates
fluctuate. When interest rates decline, the value of a portfolio
primarily invested in debt securities can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio
primarily invested in debt securities can be expected to decline.
NON-DIVERSIFIED STATUS. The Fund 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. Because the Fund may invest
in a smaller number of individual issuers than a diversified
investment company, an investment in the Fund may, under certain
circumstances, present greater risk to an investor than an
investment in a diversified company. However, the Fund intends
to conduct its operations so as to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code
(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--U.S.
Federal Income Taxes." To so qualify, among other requirements,
the Fund will limit its investments so that, at the close of each
quarter of the taxable year, (i) not more than 25% of the market
value of the Fund's total assets will be invested in the
securities of a single issuer and (ii) with respect to 50% of the
market value of its total assets, not more than 5% of the market
value 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. The Fund's
investments in U.S. Government Securities are not subject to
these limitations. 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
29
<PAGE>
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, the Fund will be
required to diversify its portfolio of Canadian Government
Securities, Mexican Government Securities and other foreign
government securities in a manner which would not be necessary if
the Fund had made similar investments in U.S. Government
Securities.
1940 ACT RESTRICTIONS
Under the 1940 Act, the 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%, the
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 outstanding borrowings representing not
more than one-third of the 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%. The 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 the Fund to sell portfolio securities at times
considered disadvantageous by the Adviser and such sales could
cause the Fund to incur related transaction costs and to realize
taxable gains.
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.
CERTAIN FUNDAMENTAL INVESTMENT POLICIES
The following restrictions, which supplement those set
forth in the Fund's Prospectus, may not be changed without
shareholder approval, which means the affirmative vote of the
holders of (i) 67% or more of the shares represented at a meeting
at which more than 50% of the outstanding shares are represented,
or (ii) more than 50% of the outstanding shares, whichever is
less.
30
<PAGE>
The Fund may not:
1. Make loans except through (i) the purchase of debt
obligations in accordance with its investment objectives and
policies; (ii) the lending of portfolio securities; or (iii) the
use of repurchase agreements;
2. Participate on a joint or joint and several basis
in any securities trading account;
3. Invest in companies for the purpose of exercising
control;
4. Make short sales of securities or maintain a short
position, unless at all times when a short position is open it
owns an equal amount of such securities or securities convertible
into or exchangeable for, without payment of any further
consideration, securities of the same issue as, and equal in
amount to, the securities sold short ("short sales against the
box"), and unless not more than 10% of the Fund's net assets
(taken at market value) is held as collateral for such sales at
any one time (it is the Fund's present intention to make such
sales only for the purpose of deferring realization of gain or
loss for federal income tax purposes);
5. 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 any securities of an open-
end investment company or more than 3% of the total outstanding
voting stock of any closed-end investment company or more than 5%
of the value of the Fund's total assets would be invested in
securities of any one or more closed-end investment companies; or
6. (i) Purchase or sell real estate, except that it
may purchase and sell securities of companies which deal in real
estate or purchase and sell securities of companies which deal in
real estate or interests therein; (ii) purchase or sell
commodities or commodity contracts (except currencies, futures
contracts on currencies and related options, forward contracts or
contracts for the future acquisition or delivery of fixed-income
securities and related options, futures contracts and options on
futures contracts and other similar contracts); (iii) invest in
interests in oil, gas, or other mineral exploration or
development programs; (iv) purchase securities on margin, except
for such short-term credits as may be necessary for the clearance
of transactions; and (v) act as an underwriter of securities,
except that the Fund may acquire restricted securities under
circumstances in which, if such securities were sold, the Fund
might be deemed to be an underwriter for purposes of the
Securities Act.
31
<PAGE>
To maintain portfolio diversification and reduce
investment risk, as a matter of fundamental policy, the Fund may
not: (a) 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;
(b) borrow money, except that the Fund may, in accordance with
provisions of the 1940 Act, (i) borrow from a bank, if after such
borrowing, there is asset coverage of at least 300% as defined in
the 1940 Act and (ii) borrow for temporary or emergency purposes
in an amount not exceeding 5% of the value of the total assets of
the Fund; or (c) pledge, hypothecate, mortgage or otherwise
encumber its assets, except to secure permitted borrowings.
In addition to the restrictions set forth above, in
connection with the qualification of its shares for sale in
certain states, the Fund may not invest in warrants if such
warrants, valued at the lower of cost or market, would exceed 5%
of the value of the Fund's net assets. Included within such
amount, but not to exceed 2% of the Fund's net assets, may be
warrants which are not listed on the New York Stock Exchange (the
"Exchange") or the American Stock Exchange. Warrants acquired by
the Fund in units or attached to securities may be deemed to be
without value. The Fund will also not purchase puts, calls,
straddles, spreads and any combination thereof if by reason
thereof the value of its aggregate investment in such classes of
securities will exceed 5% of its total 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 late increase or
decrease in percentage beyond the specified limitations resulting
from a change in value or net assets will not be considered a
violation of any such maximum.
_______________________________________________________________
ADDITIONAL INFORMATION ABOUT CANADA,
THE UNITED MEXICAN STATES AND THE REPUBLIC OF ARGENTINA
_______________________________________________________________
The information in this section is based on material
obtained by the Fund from various Canadian, Mexican and Argentine
governmental and other economic sources believed to be accurate
but has not been independently verified by the Fund or the
Adviser. It is not intended to be a complete description of
Canada, Mexico or Argentina, their economies, or the consequences
of investing in Mexican Government Securities, Canadian
Government Securities or Argentine Government Securities.
32
<PAGE>
_______________________________________________________________
ADDITIONAL INFORMATION ABOUT CANADA
_______________________________________________________________
Territory and Population
Canada is the second largest country in the world in
terms of land mass with an area of 9.22 million square kilometers
(3.85 million square miles). It is located north of the
continental United States of America and east of Alaska. Canada
comprises ten provinces (Alberta, British Columbia, Manitoba, New
Brunswick, Newfoundland, Nova Scotia, Ontario, Prince Edward
Island, Quebec and Saskatchewan) and two territories (the
Northwest Territories (scheduled in 1999 to be divided into the
Nunavut Territory and the Northwest Territories) and the Yukon
Territory). Its population is approximately 30 million.
Government
Canada is a constitutional monarchy with Queen Elizabeth
II of the United Kingdom its nominal head of state. The Queen is
represented by the Canadian governor-general, appointed on the
recommendation of the Canadian prime minister. Canada's
government has a federal structure, with a federal government and
ten provincial governments. The legislative branch consists of a
House of Commons (parliament) and the Senate. Members of the
House of Commons are elected by Canadian citizens over 18 years
of age. Senators are appointed on a regional basis by the Prime
Minister. The federal government is headed by the Prime Minister
who is chosen from the party that has won the majority of seats
in the House of Commons. The provincial governments each have a
Legislative Assembly and a Premier. The prime minister has the
privilege of appointing all judges except those of the provincial
courts.
Provinces have extensive power within specific areas of
jurisdiction. The federal government has defined areas of
jurisdiction and the power to act in areas declared by the House
of Commons to be for the general advantage of Canada. This
general power has been used to justify federal action in certain
areas of provincial jurisdiction. Concurrent federal and
provincial jurisdiction exists in certain matters, including
agriculture, immigration and pensions. The power-sharing issue
between the federal government and provincial governments has
been contentious and has proven to be a central issue in the
process of constitutional reform.
33
<PAGE>
Politics
Since World War II, the federal government has been
formed by either the Liberal Party or the Progressive
Conservative Party. In October 1993, the Liberal Party, under
the leadership of Mr. Jean Chretien, won 178 of the 295 seats in
the Canadian House of Commons, ending nine years of rule by the
Progressive Conservative Party. The Liberal Party was re-elected
for a second term in the June 2, 1997 general election, but lost
20 seats in the House of Commons. The next general election is
required by law to occur no later than June 2002. Mr. Chretien
may face pressure to step down before then, however, if his
popularity, which has been dropping, erodes significantly.
Canada has had three major developments regarding unity
and constitutional reform in recent years. The first two major
developments were the rejection of the Meech Lake Agreement in
1990 and the Charlottetown Accord in 1992. Those reforms would
have given Quebec constitutional recognition as a distinct
society, transferred powers from the federal to the provincial
governments and reformed the Senate by providing for more equal
representation among the provinces.
The third major development is the continuing
possibility of Quebec's independence. Upon gaining power in
1994, the Quebec separatist party, Parti quebecois ("PQ"), called
for a referendum supporting independence. On October 30, 1995,
the referendum was defeated in a close ballot, in which 50.6%
voted against secession and 49.4% voted for secession. If the
referendum had been approved, Quebec would have become a separate
country, but would have retained formal political and economic
links with Canada similar to those that join members of the
European Union. The PQ, under the leadership of Lucien Bouchard,
was re-elected in the provincial election held on November 30,
1998, winning 75 of the 125 seats. However, the party's share of
the popular vote dropped 2% from the 1994 election to 43%. The
Parti liberal won 48 seats. It is unclear whether or not
Mr. Bouchard will hold a second referendum. The PQ previously
indicated it would do so if it were re-elected, but only if the
referendum would stand a strong chance of success. Given current
opinion polls, it is believed unlikely that a referendum would
have a strong chance of success. In August 1998, Canada's
Supreme Court rendered a unanimous opinion in a legal action
initiated by the federal government to determine the legality of
Quebec's secession. While the Court ruled that Quebec has no
right to unilaterally leave the Canadian federation, the court
also indicated that the federal government would have to
negotiate a separation if a clear majority of Quebec voters vote
for it. It is expected that Quebec's position within Canada will
continue to be a matter of political debate.
34
<PAGE>
Monetary and Banking System
The central bank of Canada is the Bank of Canada. Its
main functions are conducting monetary policy, supervising
commercial banks, acting as a fiscal agent to the federal
government and managing the foreign exchange fund. The currency
unit of Canada is the Canadian Dollar. Canada does not impose
foreign exchange controls on capital receipts or payments by
residents or non-residents.
Trade
Canada and the United States are each other's largest
trading partners and as a result there is a significant linkage
between the two economies. Bilateral trade between Canada and
the United States in 1997 was larger than between any other two
countries in the world. The North American Free Trade Agreement
("NAFTA") took effect on December 30, 1993. In July 1997 a free-
trade accord between Canada and Chile also took effect. Talks
with Brazil and Argentina are also under way for similar
bilateral trade agreements that are expected eventually to fall
under the umbrella of a new form of NAFTA. When fully
implemented, NAFTA is designed to create a free trade area in
North America, expand the flow of goods, services and investment,
and eventually eliminate tariff barriers, import quotas and
technical barriers among Canada, the United States, Mexico and
future parties to NAFTA. At the April 1998 Summit of the
Americas, an agreement was signed by the leaders of 34
governments across the Americas (including Canada) to begin trade
negotiations toward the creation of a free trade area across the
Western Hemisphere.
The trade sector is an important factor in the growth of
the Canadian economy. In 1995, the trade surplus was more than
three times higher than the average surplus between 1990 and
1994. In 1996, the trade surplus was almost 25% higher than it
was in 1995. In 1997, however, the trade surplus was reduced as
the rate of import growth almost doubled the rate of export
growth. The trade surplus continued to shrink in 1998 with
exports growing by 5.6% during the first three quarters as
compared to a 9.3% increase in the growth of imports.
Economic Information Regarding Canada
Canada experienced rapid economic expansion during most
of the 1980s. In the early 1990s, however, the economy
experienced a deep recession. This resulted from, among other
things, high government debt and high interest rates. The
recession partly created and partly highlighted some difficulties
which the present government is attempting to resolve. The
relatively low level of economic activity during this period
35
<PAGE>
reduced the growth of tax receipts with the result that the
already high levels of government debt increased.
RECENT DEVELOPMENTS. The deterioration in the
government's fiscal position, which started during the recession
in the early 1990s, was aggravated by a reluctance to decrease
expenditures or increase taxes. In its 1995 budget, however, the
Liberal Party introduced new spending cuts, the largest in over
thirty years, to reduce Canada's budget deficit. For the fiscal
years 1994-95, 1995-96 and 1996-97, the budget deficit was
approximately 5%, 4.2% and 1.1%, respectively of gross domestic
product ("GDP"). On October 24, 1998 the government announced
that there was a budget surplus of C$3.5 billion for the 1997-98
fiscal year, the first time in 28 years the government had
recorded a budget surplus. While the government's budget deficit
objectives can be achieved, it will require continued economic
growth, lower interest rates and additional reductions in
government spending.
In addition to the growth of the federal government
deficit, provincial government debt rose rapidly in the early
1990s. Several developments, including increased spending on
social services at the provincial level, were responsible for a
significant amount of the growth of public debt from 1990 through
1992. In response to the increase in provincial debt, a number
of rating agencies downgraded certain provincial debt ratings.
All provinces undertook plans to balance their respective
budgets, and, with the exception of Quebec which predicts small
deficits until the fiscal year 2000-01, the provinces have
achieved their goals. While Ontario and Quebec have not yet
balanced their budgets, both have made significant progress and
it is anticipated that both provinces will achieve their plans to
eliminate their budget deficits by fiscal year 2000-01.
Canada's real GDP growth rate slipped to 2.2% in 1995
and 1.2% in 1996 from 3.9% in 1994. In 1997, real GDP grew 3.7%.
That growth was sustained in the first quarter of 1998, when
Canada's real GDP grew at an annual rate of 3.4%, but it
moderated to a rate of 1.8% in the second quarter of 1998 and
1.7% in the third quarter of 1998. The Canadian government had
forecast annual real GDP growth of 3.5% through mid-1999, but
that forecast is currently under review. The recent growth of
the economy has been broadly based, unlike earlier periods of
recovery, when it was attributable almost entirely to a growth in
exports.
During 1994, despite growing output and low inflation,
concern over the country's deficit and the uncertainty associated
with Quebec's status within Canada led to a weakening of its
currency and higher interest rates. On January 20, 1995, the
exchange rate for the Canadian Dollar fell to .702 against the
U.S. Dollar, which at that time represented a nine-year low and
36
<PAGE>
was close to its then record low of .692. The Bank of Canada
responded by increasing rates on Treasury bills and selling U.S.
Dollars. Between January 20, 1995 and September 30, 1997, the
Canadian Dollar increased in value from .702 to .724 against the
U.S. Dollar. The renewed strength of the Canadian Dollar during
this period facilitated the easing of monetary policy.
Subsequently, however, the Canadian Dollar depreciated, reaching
a record low of .633 against the U.S. Dollar on August 27, 1998.
On February 22, 1999, the Canadian Dollar was 0.668 against the
U.S. Dollar. In June 1997, with a real GDP growth rate of 4%
annualized during the first two quarters of 1997 and signs of
weakness in the Canadian Dollar, the Bank of Canada decided to
raise its Bank Rate for the first time since 1995, by 25 basis
points to 3.5%. The Bank Rate was raised several more times,
most recently on August 27, 1998, when it was raised one full
percentage point from 5% to 6%. The Bank Rate was subsequently
lowered to 5.75% on September 29, 1998, to 5.5% on October 16,
1998, and to 5.25% on November 18, 1998, following rate cuts by
the U.S. Federal Reserve on those dates.
The following provides certain statistical and related
information regarding historical rates of exchange between the
U.S. Dollar and the Canadian Dollar, information concerning
inflation rates, historical information regarding the Canadian
GDP and information concerning yields on certain Canadian
Government Securities. Historical statistical information is not
necessarily indicative of future developments.
CURRENCY EXCHANGE RATES. The exchange rate between the
U.S. Dollar and the Canadian Dollar is at any moment related to
the supply of and demand for the two currencies, and changes in
the rate result over time from the interaction of many factors
directly or indirectly affecting economic conditions in the
United States and Canada, including economic and political
developments in other countries and government policy and
intervention in the money markets.
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. However, the range that has occurred in the past is
not necessarily indicative of future fluctuations in that rate.
Future rates of exchange cannot be predicted, particularly over
extended periods of time.
The following table sets forth, for each year indicated,
the annual average of the daily noon buying rates in New York for
cable transfers in U.S. Dollars for one Canadian Dollar as
certified by the Federal Reserve Bank of New York:
37
<PAGE>
Buying Rate in
U.S. Dollars
1981 0.83
1982 0.81
1983 0.81
1984 0.77
1985 0.73
1986 0.72
1987 0.75
1988 0.81
1989 0.84
1990 0.86
1991 0.87
1992 0.83
1993 0.78
1994 0.73
1995 0.73
1996 0.73
1997 0.72
1998 0.67
1999
January 0.66
Source: Federal Reserve Statistical Releases.
INFLATION RATE OF THE CANADIAN CONSUMER PRICE INDEX.
Since 1991, when the Canadian government adopted inflation
control targets, inflation in Canada has been maintained within
the targeted range of 1% to 3%. The government announced on
February 24, 1998 that the 1991 targets would be extended to the
end of 2001. The following table sets forth for each year
indicated the average change in the core Canadian consumer price
index for the twelve months ended December 31 for the years 1981
through 1998, and for the month of January 1999 (annualized).
38
<PAGE>
National Consumer
Price Index
_________________
1981 . . . . . . . . . . . . . . . 12.4%
1982 . . . . . . . . . . . . . . . 10.9
1983 . . . . . . . . . . . . . . . 5.7
1984 . . . . . . . . . . . . . . . 4.4
1985 . . . . . . . . . . . . . . . 3.9
1986 . . . . . . . . . . . . . . . 4.2
1987 . . . . . . . . . . . . . . . 4.4
1988 . . . . . . . . . . . . . . . 4.0
1989 . . . . . . . . . . . . . . . 5.0
1990 . . . . . . . . . . . . . . . 4.8
1991 . . . . . . . . . . . . . . . 5.6
1992 . . . . . . . . . . . . . . . 1.5
1993 . . . . . . . . . . . . . . . 1.8
1994 . . . . . . . . . . . . . . . 0.2
1995 . . . . . . . . . . . . . . . 2.1
1996 . . . . . . . . . . . . . . . 1.6
1997 . . . . . . . . . . . . . . . 1.6
1998 . . . . . . . . . . . . . . . 1.2
1999
January . . . . . . . . . . . . 1.0
Source: BANK OF CANADA REVIEW Winter 1996-1997; BANK OF CANADA
WEEKLY FINANCIAL STATISTICS.
CANADIAN GROSS DOMESTIC PRODUCT. The following table
sets forth Canada's GDP for the years 1981 through 1997 and
annualized GDP for the first, second and third quarters of 1998,
at current and constant prices.
39
<PAGE>
Gross Domestic Change from
Gross Domestic Product at Prior Year at
Product Constant 1986 Constant Prices
_____________ Prices________ _______________
(millions of Canadian Dollars) (%)
1981 355,994 440,127 3.7%
1982 374,442 425,970 (3.2)
1983 405,717 439,448 3.2
1984 444,735 467,167 6.3
1985 477,988 489,437 4.8
1986 505,666 505,666 3.3
1987 551,597 526,730 4.2
1988 605,906 552,958 5.0
1989 650,748 566,486 2.4
1990 669,467 565,155 (0.2)
1991 676,477 555,052 (1.8)
1992 690,122 559,305 0.8
1993 712,855 571,722 2.2
1994 747,260 594,990 4.1
1995 776,299 608,835 2.3
1996 797,789 617,795 1.5
1997 856,134 640,653 3.7
1998
1st Quarter N/A N/A 3.4
2nd Quarter N/A N/A 1.8
3rd Quarter N/A N/A 1.7
Source: BANK OF CANADA REVIEW Summer 1998, STATISTICS CANADA.
YIELDS ON CANADIAN GOVERNMENT TREASURY BILLS AND BONDS. The
following table sets forth the yields on 3-month and 6-month
Government of Canada Treasury bills and 5-year and 10-year Canada
Benchmark Bonds from January 1995 through January 1999.
40
<PAGE>
Treasury Bills Benchmark Bonds
1995 3 Months 6 Months 5 Years 10 Years
____ ___________________ __________________
January 8.10 8.47 9.18 9.34
February 8.11 8.15 8.46 8.76
March 8.29 8.35 8.23 8.57
April 7.87 7.87 7.93 8.31
May 7.40 7.36 7.41 7.88
June 6.73 6.65 7.33 7.81
July 6.65 6.87 7.79 8.27
August 6.34 6.62 7.58 8.00
September 6.58 6.80 7.54 7.89
October 7.16 7.21 7.54 7.86
November 5.83 5.87 6.74 7.19
December 5.54 5.64 6.64 7.11
Treasury Bills Benchmark Bonds
1996 3 Months 6 Months 5 Years 10 Years
____ ___________________ __________________
January 5.12 5.20 6.33 7.01
February 5.21 5.38 6.87 7.53
March 5.02 5.25 7.02 7.64
April 4.78 4.97 7.09 7.76
May 4.68 4.88 7.01 7.72
June 4.70 4.94 7.05 7.77
July 4.39 4.75 6.96 7.62
August 4.02 4.32 6.60 7.34
September 3.86 4.13 6.28 7.16
October 3.17 3.33 5.59 6.47
November 2.73 2.89 5.10 6.05
December 2.85 3.24 5.44 6.37
Treasury Bills Benchmark Bonds
1997 3 Months 6 Months 5 Years 10 Years
____ ___________________ __________________
January 2.87 3.21 5.67 6.65
February 2.91 3.17 5.44 6.38
March 3.14 3.45 5.75 6.59
April 3.14 3.55 5.92 6.68
May 2.99 3.39 5.86 6.65
June 2.86 3.19 5.32 6.14
July 3.29 3.62 5.18 5.80
August 3.11 3.68 5.36 6.06
September 2.86 3.49 5.17 5.70
October 3.59 3.82 4.99 5.49
November 3.67 4.11 5.17 5.56
December 3.99 4.56 5.34 5.61
41
<PAGE>
Treasury Bills Benchmark Bonds
1998 3 Months 6 Months 5 Years 10 Years
____ ___________________ __________________
January 4.10 4.42 5.09 5.41
February 4.57 4.84 5.26 5.47
March 4.59 4.70 5.11 5.34
April 4.85 4.97 5.32 5.49
May 4.75 4.97 5.21 5.34
June 4.87 5.04 5.28 5.35
July 4.94 5.13 5.42 5.47
August 4.91 5.25 5.62 5.67
September 4.91 5.03 4.78 4.95
October 4.74 4.79 4.69 5.00
November 4.82 4.93 5.03 5.18
December 4.70 4.76 4.76 4.89
Treasury Bills Benchmark Bonds
1999 3 Months 6 Months 5 Years 10 Years
____ ___________________ __________________
January 4.66 4.77 4.76 4.89
Source: BANK OF CANADA.
_________________________________________________________________
ADDITIONAL INFORMATION ABOUT THE UNITED MEXICAN STATES
_________________________________________________________________
Territory and Population
The United Mexican States ("Mexico") occupies a
territory of approximately 1.97 million square kilometers (759
thousand square miles). To the north, Mexico shares a border
with the United States of America, and to the south it has
borders with Guatemala and Belize. Its coastline is along both
the Gulf of Mexico and the Pacific Ocean. Mexico comprises 31
states and a Federal District (Mexico City). It is the second
most populous nation in Latin America, with an estimated
population of 91.1 million, as reported by the National Institute
of Statistics, Geography and Informatics in 1995.
Mexico's three largest cities are Mexico City,
Guadalajara and Monterrey, with estimated populations in 1995 of
16.4 million, 3.3 million and 2.9 million, respectively. In the
1980s, Government efforts concerning family planning and birth
control, together with declining birth rates among women under 35
and those living in urban areas, have resulted in a reduction of
the population growth rate to a projected 1.6% in 1997.
42
<PAGE>
Government
The present form of government was established by the
Constitution, which took effect on May 1, 1917. The Constitution
establishes Mexico as a Federal Republic and provides for the
separation of the executive, legislative and judicial branches.
The President and the members of Congress are elected by popular
vote of Mexican citizens over 18 years of age.
Executive authority is vested in the President, who is
elected for a single six-year term. The executive branch
consists of 17 ministries, the office of the Federal Attorney
General, the Federal District Department and the office of the
Attorney General of the Federal District.
Federal Legislative authority is vested in the Congress,
which is composed of the Senate and the Chamber of Deputies.
Senators serve a six-year term. Deputies serve a three-year
term, and neither Senators nor Deputies may serve consecutive
terms in the same Chamber. The Senate has 128 members, four from
each state and four from the Federal District. The Chamber of
Deputies has 500 members, of whom 300 are elected by direct vote
from the electoral districts and 200 are elected by a system of
proportional representation. The Constitution provides that the
President may veto bills and that Congress may override such
vetoes with a two-thirds majority of each Chamber.
Federal Judicial authority is vested in the Supreme
Court of Justice, the Circuit and District courts, and the
Federal Judicial Board. The Supreme Court has 11 members who are
selected by the Senate from a pool of candidates nominated by the
President. Its members serve for 15 year terms, except for the
current members of the Court, whose appointments range from eight
to 20 years.
Mexico has diplomatic relations with approximately 176
countries. It is a charter member of the United Nations and a
founding member of the Organization of American States, the
International Monetary Fund (the "IMF"), the World Bank, the
International Finance Corporation, the Inter-American Development
Bank and the European Bank for Reconstruction and Development.
Mexico became a member of the Organization for Economic
Corporation and Development (the "OECD") on April 14, 1994 and
the World Trade Organization ("WTO") on January 1, 1995 (the date
on which the WTO superseded the General Agreement on Trade and
Tariffs ("GATT")).
43
<PAGE>
Politics
The Partido Revolucionario Institucional ("PRI") has
long been the dominant political party in Mexico, although its
dominance has been weakened in recent years. Since 1929 the PRI
has won all presidential elections and, until the 1997
Congressional elections, held a majority in Congress. Until 1989
it had also won all of the state governorships. The oldest
opposition party in Mexico is the Partido Accion Nacional
("PAN"). The third major party in Mexico is the Partido de la
Revolucion Democratica ("PRD").
On August 21, 1994, elections were held to select a new
President of Mexico for a six-year term beginning on December 1,
1994. In addition, elections were held for three-quarters of the
Senate and the entire Chamber of Deputies. The candidate of the
PRI, Ernesto Zedillo Ponce de Leon, won the Presidential election
with 48.77% of the votes, the candidate of the PAN was second
with 25.94% of the votes and the PRD candidate was third with
16.6% of the votes. With respect to the Congressional elections,
the PRI maintained its majority in both chambers, with 93 seats
in the Senate and 298 seats in the Chamber of Deputies. The PAN
had the second largest representation with 25 seats in the Senate
and 118 seats in the Chamber of Deputies and the PRD had the
third largest representation with 10 seats in the Senate and 70
seats in the Chamber of Deputies. The PRI won two additional
seats pursuant to proportional representation and the PAN and the
PRD each won one seat in extraordinary elections held on
April 30, 1995. In the mid-term Congressional elections on
July 6, 1997, the PRI lost its majority in the Chamber of
Deputies and now holds 239 of its 500 seats. In the Senate, the
PRI retained its overall majority but lost the two-thirds
majority important in constitutional amendments. The PRI also
failed to win the election for mayor of Mexico City. The PRI was
successful, however, in 7 of the 10 state governorship elections
held in 1998. The next general elections are required by law to
occur in 2000 (congressional and presidential).
At the beginning of 1994 armed insurgents attacked (and
in some cases temporarily seized control of) several villages in
the southern state of Chiapas. While the Government responded by
providing support to the local authorities and publicly offering
to negotiate a peaceful resolution that would address the
underlying concerns of the local population, the conflict
remained a source of debate and uncertainty for the remainder of
the year. Negotiations with the insurgents continued through the
spring of 1994, but subsequently were broken off. In December of
1994, the Congress approved the creation of a Congressional peace
commission, to be formed by members of both chambers of Congress,
which would be responsible for mediating the negotiations between
the Government and the insurgents. By the end of 1994, however,
44
<PAGE>
the insurgents had not agreed to resume negotiations and there
were additional incidents of civil unrest.
In the Spring of 1995, the Government renewed its
efforts to resolve its differences with the insurgents in the
Chiapas region by facilitating their participation in the
political process. On March 9, 1995, Congress approved a law
granting temporary amnesty to insurgents who participate in peace
talks with the Government, and on March 13, 1995, the law
establishing the framework for these peace talks took effect. On
September 11, 1995, the Government and the insurgents reached an
agreement pursuant to which both sides accepted a common
political agenda and procedural rules, and agreed to the creation
of a working committee regarding the rights of indigenous
peoples. This agreement was expected to represent a first step
toward a comprehensive peace agreement between the parties. The
working committee began negotiations on October 17, 1995 and
concluded a second round of meetings on November 19, 1995 having
made significant progress in laying out the framework for a
plenary session that took place from January 10 through
January 19, 1996. The attendees at the plenary session drafted
an agreement on a series of measures aimed at enhancing and
guaranteeing the rights of the indigenous population. The
agreement was signed on February 16, 1996, but further
negotiations between the government and the insurgents were
unsuccessful.
On August 28, 1996, a newly formed group calling itself
the Popular Revolutionary Army attacked military and police
targets in small cities of some southern states of Mexico. It is
generally believed that this group does not enjoy popular
support, and its terrorists attacks have been condemned by both
Government and nongovernment representatives. The Government has
announced the apprehension of several alleged members of the
group.
On December 22, 1997, a violent incident occurred in the
municipality of Chenalho, Chiapas that resulted in the death of
45 civilians, mostly women and children. This incident
strengthened the resolve of the Government to negotiate peace in
Chiapas and toward that end the Government adopted a new peace
plan. The goals of the new peace plan include (a) reinitiating
an intense dialogue among the federal and state governments,
political parties and insurgent groups, (b) formulating a legal
framework that respects Mexico's multicultural heritage and
includes the indigenous population in the social and economic
development of Mexico, (c) achieving the disarmament of all non-
governmental groups, (d) continuing the investigation of the
Chenalho incident, and (e) restructuring the Chiapas state
police. It is unclear whether the government's new peace plan
will achieve its desired effect. On October 4, 1998 there were
45
<PAGE>
elections in the State of Chiapas that, unlike recent elections,
were without violence and were relatively free of controversy.
In addition to the civil unrest in Chiapas, certain
national developments have led to disillusionment among the
electorate with the institutions of government. These events
include the assassination of Luis Donaldo Colosio, the likely
successor to former President Salinas and the murder of Mr. Jose
Francisco Ruiz Massieu, a high-ranking PRI official. Links
between Mexico's drug cartels and high Government and military
officials have also been discovered. These links could
jeopardize Mexico's status as an ally of the U.S. in the war
against narcotics smuggling. While Mexico is currently certified
by the President of the United States as an ally, there is no
assurance that the certification will be maintained. A loss of
certification could result in the termination of U.S. economic
assistance to Mexico.
On July 25, 1996, the Mexican Government announced
certain proposed constitutional amendments aimed at reforming the
electoral law that were ratified on August 22, 1996. The
amendments, which had been agreed to by the President and the
leaders of the four major political parties represented in
Congress, among other things, exclude the President from the
Federal Electoral Institute, an autonomous agency charged with
organizing elections; eliminate the Electoral Committee of the
Chamber of Deputies, which had been responsible for determining
the validity of presidential elections; impose limits on
expenditures on political campaigns and controls on the source of
and uses of funds contributed to a political party; grant voting
rights to Mexican citizens residing abroad; reduce from 315 to
300 the maximum number of congressional representatives who may
belong to a single party, and establish an electoral procedure
intended to result in a more proportional representation in the
Senate. The Mexican Supreme Court is empowered to determine the
constitutionality of electoral laws and the Mexican Federal
Electoral Court, which had been part of the executive branch, is
now part of the judicial branch.
Money and Banking
Banco de Mexico, chartered in 1925, is the central bank
of Mexico. It is the Federal Government's primary authority for
the execution of monetary policy and the regulation of currency
and credit. It is authorized by law to regulate interest rates
payable on time deposits, to establish minimum reserve
requirements for credit institutions and to provide discount
facilities for certain types of bank loans. The currency unit of
Mexico is the Peso. Mexico repealed its exchange control rules
in 1991 and now maintains only a market exchange rate.
46
<PAGE>
A constitutional amendment relating to Banco de Mexico's
activities and role within the Mexican economy became effective
on August 23, 1993. The amendment's purpose was to reinforce the
independence of Banco de Mexico, which may in the future act as a
counterbalance to the executive and legislative branches in
monetary policy matters. The amendment significantly strengthens
Banco de Mexico's authority with respect to monetary policy,
foreign exchange and related activities and the regulation of the
financial services industry. On April 1, 1994, a new law
governing the activities of Banco de Mexico became effective.
The new law was intended to put into effect the greater degree of
autonomy granted to Banco de Mexico under the constitutional
amendment described above and also established a Foreign Exchange
Commission charged with determining the nation's exchange rate
policies.
Trade Reform
Mexico became a member of the GATT in 1986 and has been
a member of the WTO since January 1, 1995, the date on which the
WTO superseded the GATT. Mexico has also entered into NAFTA with
the United States and Canada. In addition, Mexico signed an
agreement providing for a framework for a free trade agreement in
1992 with Costa Rica, El Salvador, Guatemala, Honduras and
Nicaragua as a step toward establishing a free-trade area.
Mexico entered into definitive free trade agreements with Costa
Rica in April 1994 and Nicaragua in December 1997. A free trade
agreement between Mexico and Chile went into effect on January 1,
1992. A free trade agreement with Colombia and Venezuela was
signed in June 1994 and a similar agreement with Bolivia was
signed in September 1994; both agreements entered into force in
January 1995. In addition, Mexico began trade negotiations in
July 1998 with the European Union for a trade agreement; a second
round of talks occurred in January 1999. In connection with the
implementation of NAFTA, amendments to several laws relating to
financial services (including the Banking Law and the Securities
Market Law) became effective on January 1, 1994. These measures
permit non-Mexican financial groups and financial intermediaries,
through Mexican subsidiaries, to engage in various activities in
the Mexican financial system, including banking and securities
activities. In December 1998, Mexico lifted all remaining
restrictions on foreign ownership of its largest banks, which had
been excluded from the liberalization measures that became
effective in 1994.
Economic Information Regarding Mexico
During the period from World War II through the mid-
1970's, Mexico experienced sustained economic growth. During the
mid 1970's, Mexico experienced high inflation and, as a result,
the government embarked on a high-growth strategy based on oil
47
<PAGE>
exports and external borrowing. The steep decline in oil prices
in 1981 and 1982, together with high international interest rates
and the credit markets' unwillingness to refinance maturing
external Mexican credits, led in 1982 to record inflation,
successive devaluations of the peso by almost 500% in total, a
pubic sector deficit of 16.9% of GDP and, in August 1982, a
liquidity crisis that precipitated subsequent restructurings of a
large portion of the country's external debt. Through much of
the 1980's, the Mexican economy continued to experience high
inflation and large foreign indebtedness. In February 1990,
Mexico became the first Latin American country to reach an
agreement with external creditor banks and multi-national
agencies under the U.S. Treasury's approach to debt reduction
known as the "Brady Plan."
The value of the peso has been central to the
performance of the Mexican economy. From late 1982 until
November 11, 1991, Mexico maintained a dual foreign exchange rate
system, with a "controlled" rate and a "free market" rate. The
controlled exchange rate applied to certain imports and exports
of goods, advances and payments of registered foreign debt and
funds used in connection with the in-bond industry (the industry
is comprised of companies which import raw materials without
paying a duty), and payments of royalties and technical
assistance under registered agreements requiring such payments.
The free market rate was used for all other types of
transactions. The dual system assisted in controlling the value
of the Mexican Peso, particularly from 1983 to 1985. In later
years the difference between the two rates was not significant.
Mexico has since repealed the controlled rate.
A fixed exchange rate was maintained from February to
December 1988. Thereafter, under a Government implemented
devaluation schedule, the intended annual rate of devaluation was
gradually lowered from 16.7% in 1989 to 11.4% in 1990, 4.5% in
1991 and 2.4% in 1992. From October 1992 through December 20,
1994, the peso/dollar exchange rate was allowed to fluctuate
within a band that widened daily. The ceiling of the band, which
was the maximum selling rate, depreciated at a daily rate of
0.0004 pesos (equal to approximately 4.5% per year), while the
floor of the band, i.e., the minimum buying rate, remained fixed.
Banco de Mexico agreed to intervene in the foreign exchange
market to the extent that the peso/dollar exchange rate reached
either the floor or the ceiling of the band.
Beginning on January 1, 1994, volatility in the
peso/dollar exchange rate began to increase, with the value of
the peso relative to the dollar declining at one point to an
exchange rate of 3.375 pesos to the U.S. Dollar, a decline of
approximately 8.69% from the high of 3.1050 pesos reached in
early February. This increased volatility was attributed to a
48
<PAGE>
number of political and economic factors, including a growing
current account deficit, the relative overvaluation of the peso,
investor reactions to the increase in U.S. interest rates, lower
than expected economic growth in Mexico in 1993, uncertainty
concerning the Mexican Presidential elections in August 1994 and
certain related developments.
On December 20, 1994, increased pressure on the
peso/dollar exchange rate led Mexico to increase the ceiling of
the Banco de Mexico intervention band. That action proved
insufficient to address the concerns of foreign investors, and
the demand for foreign currency continued. On December 22, the
Government adopted a free exchange rate policy, eliminating the
intervention band and allowing the peso to float freely against
the dollar. The value of the peso continued to weaken relative
to the dollar in the following days. There was substantial
volatility in the peso/dollar exchange during the first quarter
of 1995, with the peso/dollar exchange rate falling to a low
point of 7.588 pesos to the U.S. Dollar on March 13, 1995. By
the end of April and through September 1995, the exchange rate
began to stabilize; however, the exchange rate began to show
signs of renewed volatility in October and November 1995. The
peso/dollar exchange rate fell to a low for the year of 8.14
pesos to the U.S. Dollar on November 13, 1995.
In order to address the adverse economic situation that
developed at the end of 1994, the Government announced in January
1995 a new economic program and a new accord among the Government
and the business and labor sectors of the economy, which,
together with a subsequent program announced in March 1995 and
the international support package described below, formed the
basis of Mexico's 1995 economic plan (the "1995 Economic Plan").
The objectives of the 1995 Economic Plan were to stabilize the
financial markets, lay the foundation for a return to lower
inflation rates over the medium-term, preserve Mexico's
international competitiveness, maintain the solvency of the
banking system and attempt to reassure long-term investors of the
strong underlying fundamentals of the Mexican economy.
The central elements of the 1995 Economic Plan were
fiscal reform, aimed at increasing public revenues through price
and tax adjustments and reducing public sector expenditures;
restrictive monetary policy, characterized by limited credit
expansion; stabilization of the exchange rate while maintaining
the current floating exchange rate policy; reduction of the
current account deficit; introduction of certain financial
mechanisms to enhance the stability of the banking sector; and
maintenance and enhancement of certain social programs, to ease
the transition for the poorest segments of society.
49
<PAGE>
In addition to the actions described above, in the
beginning of 1995, the Government engaged in a series of
discussions with the IMF, the World Bank, the Inter-American
Development Bank and the U.S. and Canadian Governments in order
to obtain the international financial support necessary to
relieve Mexico's liquidity crisis and aid in restoring financial
stability to Mexico's economy. The proceeds of the loans and
other financial support were used to refinance public sector
short-term debt, primarily Tesobonos, to restore the country's
international reserves and to support the banking sector. The
largest component of the international support package was up to
$20 billion in support from the United States pursuant to four
related agreements entered into on February 21, 1995. During
1995, the U.S. Government and the Canadian Government disbursed
$13.7 billion of proceeds to Mexico under these agreements and
the North American Framework Agreement ("NAFA"), the proceeds of
which were used by Mexico to refinance maturing short-term debt,
including Tesobonos and $1 billion of short-term swaps under the
NAFA. In a series of repayments and prepayments beginning in
October 1995 and ending in January 1997, Mexico repaid all of its
borrowings under the agreements.
Using resources made available through the international
support package as well as operations by Banco de Mexico, in 1995
Mexico altered its debt profile significantly. The outstanding
balance of Tesobonos (which are dollar denominated) was reduced
from $29.2 billion at December 31, 1994 to $16.2 billion at the
end of the first quarter of 1995, $10.0 billion at the end of the
second quarter, $2.5 billion at the end of the third quarter and
$246 million at the end of the fourth quarter. By February 16,
1996, Mexico had no Tesobonos outstanding, and has not issued
Tesobonos since that date. As of December 31, 1996, 100% of
Mexico's net internal debt was denominated and payable in pesos,
as compared with only 44.3% of such debt at the end of 1994.
On May 31, 1995, the Government announced the Plan
Nacional de Desarrollo 1995-2000 (1995-2000 National Development
Plan, or the "Development Plan"). The Development Plan covers
five topics: sovereignty; the rule of law; democratic
development; social development; and economic growth. The
fundamental strategic objective of the Development Plan is to
promote vigorous and sustainable economic growth. Among other
things, the Development Plan calls for steps to increase domestic
savings, preferences for channeling foreign investment into
direct productive investment, the elimination of unnecessary
regulatory obstacles to foreign participation in productive
activities and further deregulation of the economy.
On October 26, 1996, the Government announced the
establishment of another accord among the Government and the
business, labor and agricultural sectors of the economy known as
50
<PAGE>
the Alianza para el Crecimiento Economico (Alliance for Economic
Growth or "ACE"). The chief objectives of the ACE are to foster
sustainable economic growth by emphasizing (i) the export sector,
particularly through domestic and foreign investment, (ii) public
investment, particularly in the hydrocarbon, electricity,
transportation and water sectors and (iii) fiscal and monetary
discipline in order to encourage an environment of greater price
stability and lower interest rates.
On December 31, 1997, the ACE expired. On February 24,
1998, the Government and representatives of the labor,
agriculture and business sectors signed the Acuerdo de
Cooperacion y Consulta (Cooperation and Consultation Accord or
"ACC"). In the ACC, the Government and the three economic
sectors agreed to increase productivity and competitiveness to
prepare Mexico for the globalization of the world economy. The
accord is based on the following commitments: (i) a pledge by
the Government and the three economic sectors to periodically
examine the development of the Mexican economy and to create
subcommissions or working groups to analyze specific economic
problems; (ii) to allow the unimpeded negotiation of collective
bargaining agreements and to foster a cooperative environment to
achieve productivity and competitiveness goals, as well as the
equitable distribution of any resulting benefits; (iii) to set as
a priority workforce education and job training to increase
productivity and to facilitate worker transition to changing
production technology; and (iv) to catalyze capital investment,
infrastructure development and labor retraining in rural areas,
in order to increase productivity, competitiveness and the
standards of living in such areas.
On June 3, 1997, the Government announced the Programa
Nacional de Financiamiento del Desarrollo 1997-2000 (National
Development Financing Program 1997-2000, or "PRONAFIDE"). The
PRONAFIDE's goals are to: (i) achieve, on average, real GDP
growth of 5% per year, (ii) generate more than one million jobs
per year, (iii) increase real wages and salaries, (iv) strengthen
the capacity of the Government to respond to social needs and
(v) avoid economic crises of the types suffered by Mexico during
the past 20 years.
The effects of the devaluation of the peso, as well as
the Government's response to that and related events, were
apparent in the performance of the Mexican economy during 1995
and 1996. Mexico's trade deficit decreased during 1995, the
value of imports decreasing by 8.7% between 1994 and 1995, to
$72.5 billion in 1995. Although the value of imports in 1996
increased approximately 23.4% from 1995, to $89.5 billion,
exports increased by almost the same amount. During 1995, Mexico
registered a $7.089 billion trade surplus, its first annual trade
surplus since 1989. Mexico continued to register a trade surplus
51
<PAGE>
in 1996 and 1997 but the surplus decreased by approximately 7.9%
to $6.531 billion in 1996 and 90% to $624 million in 1997. In
1998, Mexico registered a $7.7 billion deficit in its trade
balance. During 1996 and 1997, Mexico's current account balance
registered a deficit of $1.923 billion and $7.450 billion,
respectively, as compared with a deficit of $1.576 billion in
1995. In the first three quarters of 1998, Mexico's current
account balance registered a deficit of $4.70 billion.
Banco de Mexico is currently disclosing reserve figures
on a weekly basis. On December 31, 1997, Mexico's international
reserves amounted to $28 billion, as compared to $17.5 billion at
December 31, 1996, $15.7 billion at December 31, 1995, $6.1
billion at December 31, 1994 and $24.5 billion at December 31,
1993. On December 31, 1998, Mexico's international reserves
amounted to $30.1 billion.
During 1995 real GDP decreased by 6.9%, as compared with
an increase on July 31, 1998, Mexico's international reserves
amounted to $30.7 billion of 3.5% during 1994. This downward
trend continued into the first quarter of 1996, but turned around
in the second quarter of 1996. The real GDP has continued to
grow since that time, resulting in an overall GDP growth rate of
5.2% for 1996 and 7.0% for 1997. During 1998, real GDP grew
4.8%, according to preliminary data. The Government has
predicted a growth rate of 3% in 1999. Although the Mexican
economy has stabilized, there can be no assurance that the
government's plan will lead to a full recovery.
Statistical and Related Information
Concerning Mexico
The following provides certain statistical and related
information regarding historical rates of exchange between the
U.S. Dollar and the Mexican Peso, information concerning
inflation rates, historical information regarding the Mexican GDP
and information concerning interest rates on certain Mexican
Government Securities. Historical information is not necessarily
indicative of future fluctuations or exchange rates. In 1982,
Mexico imposed strict foreign exchange controls which shortly
thereafter were relaxed and were eliminated in 1991.
CURRENCY EXCHANGE RATES. There is no assurance that
future regulatory actions in Mexico will not affect the Fund's
ability to obtain U.S. Dollars in exchange for Mexican Pesos.
The following table sets forth the exchange rates of the
Mexican Peso to the U.S. Dollar with respect to each year from
1981 to 1998.
52
<PAGE>
Free Market Rate Controlled Rate
________________ _______________
End of End of
Period Average Period Average
______ ________ _______ _______
1981. . . . . . . 26 24 -- --
1982. . . . . . . 148 57 96 57
1983. . . . . . . 161 150 143 120
1984. . . . . . . 210 185 192 167
1985. . . . . . . 447 310 371 256
1986. . . . . . . 915 637 923 611
1987. . . . . . . 2.209 1.378 2.198 1.366
1988. . . . . . . 2.281 2.273 2.257 2.250
1989. . . . . . . 2.681 2.483 2.637 2.453
1990. . . . . . . 2.943 2.838 2.939 2.807
1991. . . . . . . 3.075 3.016 3.065* 3.007*
1992. . . . . . . 3.119 3.094 -- --
1993. . . . . . . 3.192 3.155 -- --
1994. . . . . . . 5.325 3.222 -- --
1995. . . . . . . 7.643 6.419 -- --
1996. . . . . . . 7.851 7.598 -- --
1997. . . . . . . 8.083 7.918 -- --
1998. . . . . . . 9.901 9.152 -- --
* Through November 10, 1991.
Source: Banco de Mexico; Federal Reserve Statistical Releases.
INFLATION AND CONSUMER PRICES. Through much of the
1980's, the Mexican economy continued to be affected by high
inflation, low growth and high levels of domestic and foreign
indebtedness. The annual inflation rate, as measured by the
consumer price index, rose from 28.7% in December 1981 to 159.2%
in December 1987. In December 1987, the Mexican Government
agreed with labor and business to curb the economy's inflationary
pressures by freezing wages and prices (the "1987 accord"). The
1987 accord included the implementation of restrictive fiscal and
monetary policies, the elimination of trade barriers and the
reduction of import tariffs. After substantive increases in
public sector prices and utility rates, price controls were
introduced.
The 1987 accord was succeeded by a series of additional
accords, each of which continued to stress the moderation of
inflation, fiscal discipline and, in the case of accords entered
into prior to 1995, a gradual devaluation of the peso. There
was a gradual reduction in the number of goods and services whose
prices were covered by such accords. The two most recent of
these accords also incorporated a reduction in the income tax
53
<PAGE>
rate applicable to corporations and certain self-employed
individuals from 35% to 34% and a reduction in the withholding
tax applicable to interest payments on publicly issued external
debt and external debt payable to certain financial institutions
from 15% to 4.9%. These policies lowered the consumer inflation
rate from 159.2% in 1987 to 7.1% in 1994.
Over the medium-term, the Government is committed to
reversing the decline in real wages experienced in the last
decade through control of inflation, a controlled gradual upward
adjustment of wages and a reduction in income taxes for the lower
income brackets. Nonetheless, the effect of the devaluation of
the peso and the Government's response to that event and related
developments caused a significant increase in inflation, as well
a decline in real wages for much of the population, during 1995,
when the inflation rate increased to 52.0%. Subsequent fiscal
and monetary policies succeeded in lowering inflation during 1996
and 1997 (as measured by the increase in the National Consumer
Price Index), to 27.7% and 15.7%, respectively. In 1998,
however, inflation rose to 18.6%, well over the Government's
target of 12%.
CONSUMER PRICE INDEX. The following table sets forth
the changes in the Mexican consumer price index for the year
ended December 31 for the years 1981 through 1998.
Annual
Increases in
National Consumer
Price Index
_________________
1981............................. 28.7%
1982............................. 98.9
1983............................. 80.8
1984............................. 59.2
1985............................. 63.7
1986............................. 105.7
1987............................. 159.2
1988............................. 51.7
1989............................. 19.7
1990............................. 29.9
1991............................. 18.8
1992............................. 11.9
1993............................. 8.0
1994............................. 7.1
1995............................. 52.0
1996............................. 27.7
1997............................. 15.7
1998............................. 18.6
54
<PAGE>
Source: Banco de Mexico.
MEXICAN GROSS DOMESTIC PRODUCT. The following table
sets forth certain information concerning Mexico's GDP for the
years 1990 through 1998 at current and constant prices.
Gross Gross Change
Domestic Domestic from Prior
Product Product at Year at
at Current Constant Constant
Prices 1993 Prices(1) Prices
__________ ___________ __________
(millions of Argentine Pesos) (percent)
1991. . . . 949,148 1,189,017 4.2
1992. . . . 1,125,334 1,232,162 3.6
1993. . . . 1,256,196 1,256,196 2.0
1994. . . . 1,423,364 1,312,200 4.5
1995. . . . 1,840,431 1,230,608 (6.2)
1996. . . . 2,508,147 1,294,152 5.2
1997(2) . . 3,187,441 1,384,825 7.0
1998(2) . . 3,798,000 N/A 4.8
(1) Constant peso with purchasing power at December 31, 1993,
expressed in pesos.
(2) Preliminary.
Source: Banco de Mexico; Mexico's National Statistics, Geography
and Informatics Institute (INEGI).
INTEREST RATES. The following table sets forth the
average interest rates per annum on 28-day and 91-day CETES,
which are peso-denominated Treasury bills, the average weighted
cost of term deposits for commercial banks ("CPP"), the average
interest rate ("TIIP") and the equilibrium interest rate ("TIIE")
for the periods listed below. The government announced plans in
late 1997 to issue medium-term CETES for the first time in 1998.
Average CETES and Interest Rates
_________________________________
28-Day 91-Day
CETES CETES CPP TIIP TIIE
_____ _____ _____ _____ _____
1990:
Jan.-June 41.2 40.7 43.2% _____ _____
July-Dec. 28.3 29.4 31.0 _____ _____
1991:
Jan.-June 21.2 21.7 24.3 _____ _____
July-Dec. 17.3 18.0 20.8 _____ _____
55
<PAGE>
1992:
Jan.-June 13.8 13.8 16.9 _____ _____
July-Dec. 17.4 18.0 20.7 _____ _____
1993:
Jan.-June 16.4 17.3 20.9 20.4(1) _____
July-Dec. 13.5 13.6 16.2 16.1 _____
1994:
Jan.-June 13.0 13.5 14.2 15.3 _____
July-Dec. 15.2 15.7 16.8 20.4 _____
1995:
Jan.-June 55.0 54.3 49.6 63.6 71.2(2)
July-Dec. 41.9 42.2 40.7 44.5 44.5
1996:
Jan.-June 35.4 37.2 34.5 37.3 37.2
July-Dec. 27.4 28.6 26.9 30.2 30.1
1997:
Jan.-June 20.8 22.2 20.8 23.2 23.2
July-Dec. 18.8 20.3 17.4 20.5 20.6
1998:
Jan.-June 18.8 19.8 17.2 20.6 20.6
July-Dec. 30.7 32.5 25.0 32.9 33.1
(1) February-June average.
(2) Average for the last two weeks of March.
Source: Banco de Mexico.
________________________________________________________________
ADDITIONAL INFORMATION ABOUT THE REPUBLIC OF ARGENTINA
________________________________________________________________
Territory and Population
The Republic of Argentina ("Argentina") is the second
largest country in Latin America, occupying a territory of 2.8
million square kilometers (1.1 million square miles) (3.8 million
square kilometers (1.5 million square miles) if territorial
claims in the Antarctic and certain South Atlantic islands are
included). It is located at the extreme south of the South
American continent, bordered by Chile, Bolivia, Paraguay, Brazil,
Uruguay and the South Atlantic Ocean. Argentina consists of 23
provinces and the federal capital of Buenos Aires. In 1991, the
year of the last Census, it had a population of approximately
34.6 million.
The most densely inhabited areas and the traditional
agricultural wealth are on the wide temperate belt that stretches
across central Argentina. About one-third of the population
lives in the greater Buenos Aires area. Six other urban centers,
Cordoba, Rosario, Mendoza, San Miguel de Tucuman, Mar del Plata
56
<PAGE>
and La Plata, have a population of over 500,000 each.
Approximately 79% of the country's population is urban. During
the period 1980-1990, Argentina's population grew at a 1.4%
average annual rate. In the 1990-1995 period, Argentina's
population grew at a 1.2% average annual rate.
Government
The current Argentine federal constitution (the
"Constitution"), was promulgated on August 24, 1994 and became
effective immediately. The Constitution retains the basic
principles of the Constitution first established in 1853. The
Constitution provides for a tripartite system of government: an
executive branch headed by a president; a legislative branch made
up of a bicameral congress; and a judicial branch, of which the
Supreme Court of Justice (the "Supreme Court") is the highest
body of authority. The President is directly elected by the
voters and may serve for a maximum of two consecutive four-year
terms. The next election for the Presidency is required by law
to occur no later than October 1999. The President directs the
general administration of the country and has the power to veto
laws in whole or in part, although Congress may override a veto
by a two-thirds vote.
The Congress is made up of the Senate and the Chamber of
Deputies. The 72-member Senate consists of three Senators for
each province and the federal capital of Buenos Aires. Senators
are elected for six-year terms, and serve in staggered terms so
that one-third of the Senate's seats are subject to elections
every two years. The Chamber of Deputies consists of 257 seats
which are allocated according to each province's population.
Representatives are elected for four-year staggered terms so that
one-half of the Chamber is subject to elections every two years.
The judicial system comprises federal and provincial
trial courts, courts of appeal and supreme courts. The supreme
judicial power of the Republic is vested in the Supreme Court,
which has nine members who are appointed for life by the
President (subject to ratification by the Senate). In addition,
in 1994 Argentina's two largest political parties entered into an
agreement whereby future Supreme Court justices will be selected
from a list of nominees mutually agreed upon by both parties.
Each province has its own constitution, and elects its
own governor, legislators and judges, without the intervention of
the federal government.
57
<PAGE>
Politics
The two largest political parties in Argentina are the
Partido Justicialista or Peronist Party ("PJ"), which evolved out
of Juan Peron's efforts to expand the role of labor in the
political process in the 1940s, and the Union Civica Radical or
Radical Civic Union ("UCR"), founded in 1890. Traditionally, the
UCR has had more urban middle-class support and the PJ more labor
support. At present, support for both parties is broadly based,
with the PJ having substantial support from the business
community. Smaller parties occupy varied political positions on
both sides of the political spectrum and some are active only in
certain provinces. Following the October 26, 1997 Congressional
elections, the PJ held 119 seats and the UCR and others held 138
seats in the Chamber of Deputies.
Since the 1930's, Argentina's political parties have had
difficulty in resolving the inter-group conflicts that arose out
of the Great Depression, the deepening social divisions that
occurred under the Peron Government and the economic stagnation
of the past several decades. As a result, the military
intervened in the political process on several occasions and
ruled the country for 22 of the past 68 years. Poor economic
management by the military and the loss of a brief war with the
United Kingdom over the Malvinas (Falkland) Islands led in 1983
to the end of the most recent military government, which had
ruled the country since 1976.
Four military uprisings have occurred since 1983, the
most recent in December 1990. The uprisings, which were led by a
small group of officers, failed due to a lack of support from the
public and the military as a whole.
Since 1983, Argentina has had two successive elected
civilian Presidents. Raul Alfonsin, elected in 1983, was the
first civilian president in six decades to stay in office until
the scheduled election of a successor. His UCR Government re-
established civilian rule, including a functioning Congress. The
current president, Carlos Menem, won the presidential election in
May 1989 and took office in July 1989, several months ahead of
the scheduled inauguration, in the midst of an economic crisis.
President Menem, the leader of the PJ, was first elected
with the backing of organized labor and business interests that
traditionally supported a closed economy and a large public
sector. Shortly after taking office, however, President Menem
adopted market-oriented and reformist policies, including an
aggressive privatization program, a reduction in the size of the
public sector and an opening of the economy to international
competition. President Menem won reelection in May 1995, but his
popularity has declined since then as the government has faced
58
<PAGE>
allegations of corruption and criticism from both the ruling and
opposition parties concerning its economic policies. In the
October 26, 1997 Congressional elections, the PJ lost 12 seats in
the lower house, leaving it with 119 of the 257 seats, far short
of its pre-election majority. Although President Menem had
planned to seek a third term (which would have required a
constitutional amendment), in July 1998 he announced that he
would not do so, thus sparing Argentina from political turmoil as
it approaches the 1999 elections.
As President Menem's second term in office approaches
its end, Argentina looks ahead to the presidential election in
October 1999. President Menem's party, the PJ, will not nominate
a presidential candidate until April 1999. The PJ's opposition,
the UCR and its partner, Alianza por el Trabajo, la Justicia y la
Produccin, has formally commenced campaigning for its
presidential candidate, Fernando de la Rua.
Argentina has diplomatic relations with more than 135
countries. It is a charter member of the United Nations and a
founding member of the Organization of American States. It is
also a member of the IMF and the World Bank. Argentina became a
member of the WTO on January 1, 1995 (the date on which the WTO
superseded GATT).
Monetary and Banking System
The central bank of Argentina is the Banco Central de la
Republica Argentina ("Central Bank of Argentina"). Its primary
functions include the administration of the financial sector,
note issue, credit control and regulation of foreign exchange
markets. The currency unit of Argentina is the Peso. Under the
Government's medium-term program with the IMF, the Government has
agreed to maintain the present fixed exchange rate of one peso
per dollar. Due to the ease of convertibility between the peso
and the dollar as a result of the Government's exchange rate
policies, changes in U.S. interest rates constitute a significant
factor in determining peso-dollar capital flows.
Economic Information Regarding Argentina
The Argentina economy has many strengths including a
well balanced natural resource base and a high literacy rate.
Since World War II, however, it has had a record of erratic
growth, declining investment rates and rapid inflation. Since
the implementation of the current reform program in March 1991,
significant progress has been made in reducing inflation and
increasing real GDP growth. Although the GDP declined by 4.4% in
1995, it has increased every year since then: 4.8% in 1996, 8.6%
in 1997, and at annual rates of 7.2%, 7.4% and 2.9% in the first,
second and third quarters of 1998, respectively, compared to the
59
<PAGE>
same periods in 1997. The decline in the rate of GPD growth in
the third quarter of 1998 was largely a consequence of the
Russian default on its financial commitments and the financial
instability in Asia and Brazil.
DEREGULATION OF THE ECONOMY AND PRIVATIZATIONS.
Deregulation of the domestic economy, liberalization of trade and
reforms of investment regulations are prominent features of
Argentina's structural adjustment program. In order to achieve
the free functioning of markets, the Government has undertaken an
extensive program for the removal of economic restrictions and
regulations and the promotion of competition.
In 1989 and 1990, steps were taken to remove various
regulations that restricted both international trade and domestic
commerce. Restrictions were removed in order to allow the
private sector to provide certain public services, such as
telephone, electricity and natural gas, subject to governmental
regulation.
On October 31, 1991, the Argentine government
promulgated its principal deregulation legislation which
deregulated the domestic market for goods, services and
transportation, abolished restrictions on imports and exports,
abolished or simplified a number of regulatory agencies and
allowed free wage bargaining in the private sector. In the
financial sector, this legislation abolished all stamp taxes
relating to publicly offered securities, all capital gains taxes
on stocks and bonds held by non-resident investors and fixed
commissions on the stock exchanges.
In addition, Argentina has eliminated restrictions on
foreign direct investment and capital repatriation. In late
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 and to organize their companies and make use
of domestic credit under the same rights and under the same
conditions as local firms. The process of deregulation and
liberalization is continuing through the privatization process,
the proposed reform of the social security system, regional
integration and further labor law reforms.
In 1989, the State Reform Law declared certain
enterprises eligible for privatization. In addition to increasing
the efficiency of services provided by public sector enterprises,
the privatizations have also served to reduce outstanding debt
(by applying cash proceeds and through the selective use of debt-
to-equity conversions), increase reserves and increase tax
revenues from the new owners of the enterprises. The
privatization program has also served as an important conduit for
60
<PAGE>
direct foreign investment into Argentina attracting interested
investors from Asia, Europe, North America and Latin America.
The Government completed 32 major privatizations in 1993, 11 in
1994 and 3 in 1995. On March 13, 1995 the Government announced a
new fiscal package, which included, among other measures, an
acceleration in the sale of assets and the privatization of
several additional companies. In July 1997, the postal service
was privatized and on February 11, 1998, the Government
officially unveiled a decree awarding the management of 33 of
Argentina's airports to a private consortium, bringing to more
than $30 billion the amount of assets sold since the
privatization program began.
The Government has decided to sell a 14.99% ownership
interest in the Yacimientos Petroliferos Fiscales in early 1999
in an auction in which major international oil firms will be
invited to participate. The sale is expected to raise an
estimated $2 billion. The Government has not decided whether the
sale of an additional 5.4% will be similarly made en bloc or
whether it will be sold to retail investors on the stock market.
The Government will retain one "golden share" granting it veto
power over any strategic decisions.
The Government has plans for the sale of the first
tranche of 25% in Banco Hipotecario National, which is expected
to raise an estimated $300 million. The proceeds are to be used
to pay back the $220 million bridge loan obtained in 1998 from
the banks in charge of organizing the sale. The sale of the
shares was postponed on several occasions during 1998 because of
the adverse conditions in the international financial markets.
The following provides certain statistical and related
information regarding historical rates of exchange between the
U.S. Dollar and the Argentine Peso, information concerning
inflation rates, historical information concerning the Argentine
GDP and information concerning interest rates on certain
Argentine Government Securities. Historical statistical
information is not necessarily indicative of future developments.
CURRENCY EXCHANGE RATES. The Argentine foreign exchange
market was highly controlled until December 1989, when a free
exchange rate was established for all foreign transactions.
Since the institution of the Convertibility Law on April 1, 1991,
the Argentine currency has been tied to the U.S. Dollar. Under
the Convertibility Law, the Central Bank of Argentina must
maintain a reserve in foreign currencies, gold and certain public
bonds denominated in foreign currencies equal to the amount of
outstanding Argentine currency and is obliged to sell dollars to
any person who so requires at a rate of one peso to one dollar.
From April 1, 1991 through the end of 1991, the exchange rate was
approximately 10,000 Australes (the predecessor to the Argentine
61
<PAGE>
Peso) per U.S. Dollar. On January 1, 1992 the Argentine Peso
equal to 10,000 Australes was introduced. Since January 1, 1992,
the rate of exchange from Argentine Peso to U.S. Dollar has been
approximately one to one. However, the historic range of
exchange rates is not necessarily indicative of future rates.
Future rates of exchange cannot be predicted.
The following table sets forth, for each year indicated,
the nominal exchange rates of Argentine Peso to U.S. Dollar as of
the last day of the period indicated.
Free Rate
1990 . . . . . . . . . . . . .5590
1991 . . . . . . . . . . . . .9990
1992 . . . . . . . . . . . . .9990
1993 . . . . . . . . . . . . .9990
1994 . . . . . . . . . . . . 1.0
1995 . . . . . . . . . . . . 1.0
1996 . . . . . . . . . . . . 1.0
1997 . . . . . . . . . . . . 1.0
1998 . . . . . . . . . . . . 1.0
Source: Banco Central de la Republica Argentina.
WAGES AND PRICES. Prior to the adoption of the economic
plan announced by former Economy Minister Domingo F. Cavallo in
March 1991, the Argentine economy was characterized by low and
erratic growth, declining investment rates and rapid inflation.
Argentina's high inflation rates and balance of payments
imbalances during the period from 1975 to 1990 resulted mainly
from a lack of control over fiscal policy and the money supply.
Large subsidies to state-owned enterprises and an inefficient tax
collection system led to large persistent public-sector deficits
which were financed in large part through increases in the money
supply and external financings. High inflation combined with the
lag between the accrual and receipt of taxes reduced real tax
revenues and increased the size of the deficit, further fueling
the inflationary cycle. Inflation accelerated on several
occasions and turned into hyperinflation in 1989 and the end of
1990, with prices rising at an annual rate of 1,000% or more.
During the 1980's and in 1990, the Argentine government
instituted several economic plans to stabilize the economy and
foster real growth, all of which failed after achieving initial
success mainly because the government was unable to sustain
reductions in the public deficit. The government's initial
stabilization efforts included a devaluation of the Austral, a
fixed exchange rate, wage and price controls and a sharp rise in
public utility rates.
62
<PAGE>
The government's efforts proved inadequate, however, and
foreign exchange markets declined sharply in anticipation of a
new bout of hyperinflation. The government adopted a new set of
stabilization measures in December 1989 which abandoned attempts
to control wages, prices and the exchange rate and sought to
restrain the public deficit which was believed to be the
principal cause of Argentina's chronic inflation. The new
stabilization plan (called the Bonex Plan) featured, among other
things, tax reforms, a tighter rein on public enterprises and
restrictions on lending activities of the public sector banks
(which had been financing provincial government deficits through
loans which were in turn financed with discounts from the Central
Bank), government personnel cuts and a reliance on cash income
generated by privatizations to reduce the public sector deficit.
The plan also eliminated all restrictions on foreign exchange
transactions. In addition, the plan froze fixed-rate short-term
bank deposits pursuant to which holders of 7- to 30-day deposits
were permitted to withdraw no more than the equivalent of
approximately U.S. $1,000 from their accounts, and the balance
was made payable only in 10-year U.S. Dollar denominated
government bonds (Bonex 89). The plan also provided for the
compulsory exchange of certain domestic currency denominated
bonds for Bonex 89.
The stabilization effort succeeded in ending temporarily
the period of hyperinflation, but not in ending the Argentine
economy's susceptibility to inflation. In late 1990, a
deterioration in the finances of the social security system and
provincial governments led to an expansion of Central Bank
credit. The Central Bank loaned funds to the social security
system to allow it to meet year-end payments and also funded
provincial banks suffering deposit runs. The provincial banks
continued to lend to finance provincial government deficits. The
credit expansion led to downward market pressure on the Austral,
and a resurgence of price inflation. Between December 1989 and
December 1990, the CPI rose 1,343.9%, which was significantly
less than the 4,923.6% increase in 1989, but was still an
unacceptably high inflation rate. The government responded by
installing a new economic team headed by Economy Minister
Cavallo, which acted to reduce the public sector deficit by
increasing public utility rates and taxes and by developing a new
stabilization program.
The Argentine government's current stabilization program
is built around the plan announced by Economy Minister Cavallo on
March 20, 1991 (the "Convertibility Plan", as amended and
supplemented), and approved by Congress through passage of the
Convertibility Law. The Convertibility Plan has sought to reduce
inflation and restore economic stability through reforms relating
to the tax system, privatizations and the opening of the economy
63
<PAGE>
that are intended to address underlying structural problems that
had distorted fiscal and monetary policy.
The Convertibility Plan is centered on the two following
fundamental principles:
(1) Full international reserve backing for the monetary
base. The monetary base (consisting of currency in circulation
and peso deposits of financial entities with the Central Bank) is
not to exceed the Central Bank's gross international assets as a
fixed rate of one Argentine Peso per U.S. Dollar. This
effectively means that the money supply can be increased only
when backed by increases in the level of international reserves,
and not whenever the public sector deficit or the financial
sector needs to be financed. Gross international assets include
the Central Bank's holdings of gold, foreign exchange (including
short-term investments), U.S. Dollar denominated Argentine
government bonds (in an amount not to exceed 30% of total assets)
and its net Asociacion Latinoamericana de Integraction ("ALADI")
claims (except overdue claims) all freely available and valued at
market prices. Under this arrangement, in which the Argentine
Peso is fully convertible into the U.S. Dollar, no increase in
the domestic monetary base can occur without an equivalent
increase in gross international assets at the one Argentine Peso
per U.S. Dollar rate; and
(2) the elimination of the fiscal deficit and the
achievement of a surplus in the primary balance to provide funds
for the government to service its debt and thereby eliminate the
need for further borrowings.
The IMF has supported the implementation of the
Convertibility Plan and designed a financial program for the
Argentine public sector. In the event of any noncompliance with
the program, Argentina is required to consult in the first
instance with the IMF in order to obtain a waiver and, if
required, revise the program to remedy the situation. In the
second half of 1994, the Government decided to seek private
financing rather than utilize its EFF allotment for that period.
After the onset of the Mexican currency crisis, however, the
Government determined that it was necessary to seek further
funding through the EFF program, including drawing down on its
unused quota for the later part of 1994. Negotiations with the
IMF led to approval in April 1995 of economic performance waivers
for the last two quarters of 1994, an extension of the EFF credit
for a fourth year through March 30, 1996, and an increase in the
amount of the EFF credit by the equivalent of approximately
US$2.4 billion to a total of approximately US $6.3 billion. On
February 4, 1998, the IMF, citing Argentina's strong
macroeconomic performance in 1997, announced its approval of a
new three-year EFF credit for Argentina in the amount of
64
<PAGE>
approximately US $2.8 billion to support the government's medium-
term economic reform program for 1998-2000.
Argentina, like other Latin American countries, has been
affected by the recent financial instability in Asia. In October
1998, Argentina negotiated a $4 billion aid package with the
World Bank and the Inter-American Development Bank. Argentina
also announced the issuance of $11 billion in 29-year Treasury
bonds in the domestic market, which would be placed in six
monthly installments between October 1998 and March 1999. The
Government also obtained a bridge loan for $700 million with
private domestic and international banks. As a result, at the
start of the fourth quarter of 1998, the government has raised
enough funds to cover its borrowing needs until March 1999. The
official estimate of total public-sector borrowing needs for 1999
amounts to $14.2 billion or $17.2 billion if the roll-over of
T-bills is included.
The Convertibility Plan has simplified fiscal and market
regulations and reallocated state activities to the private
sector, thereby reducing state expenditures, increasing the
amount of federal revenues and at the same time encouraging
domestic private sector initiative and foreign investment. Since
the Convertibility Plan was introduced in March 1991, inflation
as measured by the consumer price index declined from a 27.0%
monthly rate in February 1991 to a 0.3% monthly rate in December
1992 and resulted in a 24.8% annual rate for 1992. Inflation has
continued to decrease. In 1997, the annual rate of inflation was
0.5%.
The slowdown in economic activity has contributed to the
continuing low inflation rate that has prevailed since 1996. The
12-month inflation rate through October 1998 reached 0.9%. This
was due to the deflationary trend prevailing in international
commodity markets for both agricultural and industrial products.
The dismissal of Economy Minister Cavallo by President
Menem in July 1996 has had no effect on the economic priorities
of the government. There is no assurance, however, that in the
future, the Convertibility Plan will not be modified or
abandoned.
The international financial crises and their impact on
the domestic banking sector have prompted the authorities to
adopt new measures to prevent a run on bank deposits. In
September, the Central Bank increased the amount covered by
deposit insurance and extended coverage to large deposits, which
had previously been uninsured.
65
<PAGE>
CONSUMER PRICE INDEX. The following table sets forth
for each year indicated the change in Argentine Consumer Prices
for the twelve months ended December 31, 1989-97.
INFLATION
Consumer Prices,
Increase Over
Previous Period
----------------
1989................................... 4,923.6
1990................................... 1,343.9
1991................................... 84.1
1992................................... 24.8
1993................................... 10.6
1994................................... 4.2
1995(1)................................ 3.4
1996(1)................................ 0.2
1997................................... 0.5
1998 (Estimate)........................ 1.5
1999 (Forecast)........................ 1.8
(1) In 1996, a new index was introduced called the
Indice Precios Internos al por Mayor (IPIM). The IPIM is broadly
similar to the index formerly used to determine wholesale price
inflation, but varies slightly as to the weighted average of the
goods measured in the index. The 1995 figures were also
recalculated using the new IPIM index.
___________________
Source: Banco Central de la Republica Argentina; Economist
Intelligence Unit.
ARGENTINE GROSS DOMESTIC PRODUCT. The following table
sets forth Argentina's GDP for the years 1989 through 1997, and
annualized change in GDP for the first quarter of 1998, at
current and constant prices.
66
<PAGE>
Gross Change
Domestic from Prior
Gross Product at Year at
Domestic Constant Constant
Product 1986 Prices Prices
________ ___________ ___________
(millions of Argentine Pesos) (percent)
1991 180,898 10,270 8.9
1992 226,847 11,159 8.7
1993 257,570 11,832 6.0
1994 281,600 12,710 7.4
1995 279,500 12,150 (4.6)
1996 294,100 12,672 4.3
1997 327,900 N/A 8.6
1998
1st Qtr N/A N/A 7.2
2nd Qtr N/A N/A 6.9
_______________
Source: Banco Central de la Republica Argentina; Ministerio de
Economia, Obras y Servicios Publicos.
1998 data are preliminary.
________________________________________________________________
MANAGEMENT OF THE FUND
________________________________________________________________
Adviser
Alliance Capital Management L.P., a Delaware limited
partnership with principal offices at 1345 Avenue of the
Americas, New York, New York 10105, has been retained under an
investment advisory agreement (the "Advisory Agreement") to
provide investment advice and, in general, to conduct the
management and investment program of the Fund under the
supervision of the Fund's Board of Directors (see "Management of
the Fund" in the Prospectus).
The Adviser is a leading international investment
manager supervising client accounts with assets as of
December 31, 1998, totaling more than $286 billion (of which more
than $118 billion represented the assets of investment
companies). The Adviser's clients are primarily major corporate
employee benefit funds, public employee retirement systems,
investment companies, foundations and endowment funds. The 54
registered investment companies managed by the Adviser,
comprising 118 separate investment portfolios, currently have
more than 3.6 million shareholder accounts. As of December 31,
1998, the Adviser and its subsidiaries employed more than 2,000
67
<PAGE>
employees who operate out of domestic offices and the offices of
subsidiaries in Bahrain, Bangalore, Cairo, Chennai, Hong Kong,
Istanbul, Johannesburg, London, Luxembourg, Madrid, Moscow,
Mumbai, New Delhi, Paris, Pune, Sao Paolo, Seoul, Singapore,
Sydney, Tokyo, Toronto, Vienna and Warsaw. As of December 31,
1998, the Adviser was retained as an investment manager for
employee benefit plan assets of 35 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 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"). ECI is a holding
company controlled by AXA a French insurance holding company
which at March 1, 1998, beneficially owned approximately 59% of
the outstanding voting shares of ECI. As of June 30, 1998, ACMC,
Inc. and Equitable Capital Management Corporation, each a wholly-
owned direct or indirect subsidiary of Equitable, together with
Equitable, owned in the aggregate approximately 57% of the issued
and outstanding units representing assignments of beneficial
ownership of limited partnership interests in the Adviser.
AXA is a holding company for an international group of
insurance and related financial services companies. AXA's
insurance operations include activities in life insurance,
property and casualty insurance and reinsurance. The insurance
operations are diverse geographically, with activities
principally in Western Europe, North America and the Asia/Pacific
area. AXA is also engaged in asset management, investment
banking, securities trading, brokerage, real estate and other
financial services activities principally in the United States,
as well as in Western Europe and the Asia/Pacific area.
Based on information provided by AXA, as of March 31,
1998, more than 30% of the voting power of AXA was controlled
directly and indirectly by FINAXA, a French holding company. As
of March 31, 1998 approximately 74% of the voting power of FINAXA
was controlled directly and indirectly by four French mutual
insurance companies (the "Mutuelles AXA"), one of which, AXA
Assurances I.A.R.D. Mutuelle, itself controlled directly and
indirectly more than 42% of the voting power of FINAXA. Acting
as a group, the Mutuelles AXA control AXA and FINAXA.
Under the Advisory Agreement, the Adviser provides
investment advisory services and order placement facilities for
the Fund and pays all compensation of Directors and officers of
the Fund who are affiliated persons of the Adviser. The Adviser
or its affiliates also furnishes the Fund, without charge,
management supervision and assistance and office facilities and
68
<PAGE>
provide persons satisfactory to the Fund's Board of Directors to
serve as the Fund's officers.
The Adviser is, under the Advisory Agreement,
responsible for certain expenses incurred by the Fund, including,
for example, office facilities and certain administrative
services, and any expenses incurred in promoting the sale of Fund
shares (other than the portion of the promotional expenses borne
by the Fund in accordance with an effective plan pursuant to Rule
12b-1 under the 1940 Act, and the costs of printing Fund
prospectuses and other reports to shareholders and fees related
to registration with the Commission and with state regulatory
authorities).
The Fund has, under the Advisory Agreement, assumed the
obligation for payment of all of its other expenses. As to the
obtaining of services other than those specifically provided to
the Fund by the Adviser, the Fund may utilize personnel employed
by the Adviser or by other subsidiaries of Equitable. The Fund
may employ its own personnel or contract for services to be
performed by third parties. In such event, the services will be
provided to the Fund at cost and the payments specifically
approved by the Fund's Board of Directors. The Fund paid to the
Adviser a total of $129,953 in respect of such services during
the fiscal year of the Fund ended in 1998.
The Advisory Agreement is terminable without penalty by
a vote of a majority of the Fund's outstanding voting securities
or by a vote of a majority of the Fund's Directors on 60 days'
written notice, or by the Adviser on 60 days' written notice, and
will automatically terminate in the event of its assignment. The
Advisory Agreement provides that in the absence of willful
misfeasance, bad faith or gross negligence on the part of the
Adviser, or of reckless disregard of its obligations thereunder,
the Adviser shall not be liable for any action or failure to act
in accordance with its duties thereunder.
The Advisory Agreement became effective on July 22,
1992. The Advisory Agreement was approved by the unanimous vote,
cast in person, by the Fund's Directors (including the Directors
who are not parties to the Advisory Agreement or "interested
persons", as defined in the 1940 Act, of any such party) at a
meeting called for that purpose held on February 21, 1992, and by
the Fund's sole shareholder on February 21, 1992. The Advisory
Agreement continues in force for successive twelve-month periods
(computed from each November 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.
69
<PAGE>
Most recently, the continuance of the Advisory Agreement until
October 31, 1999 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
October 15, 1998.
For the services rendered by the Adviser under the
Advisory Agreement, the Fund pays the Adviser a monthly fee at an
annual rate of .65 of 1% of the average daily value of the Fund's
adjusted total assets (i.e., the average daily value of the total
assets of the Fund, minus the sum of accrued liabilities of the
Fund, other than the principal amount of money borrowed). For
the fiscal years of the Fund ended in 1996, 1997 and 1998 the
Adviser received from the Fund advisory fees of $13,118,739,
$15,056,849 and $16,629,250, respectively.
Certain other clients of the Adviser may have investment
objectives and policies similar to those of the Fund. The Adviser
may, from time to time, make recommendations which result in the
purchase or sale of a particular security by its other clients
simultaneously with the Fund. If transactions on behalf of more
than one client during the same period increase the demand for
securities being purchased or the supply of securities being
sold, there may be an adverse effect on price or quantity. It is
the policy of the Adviser to allocate advisory recommendations
and the placing of orders in a manner which is deemed equitable
by the Adviser to the accounts involved, including the Fund.
When two or more of the clients of the Adviser (including the
Fund) are purchasing or selling the same security on a given day
from the same broker-dealer, such transactions may be averaged as
to price.
The Adviser may act as an investment adviser to other
persons, firms or corporations, including investment companies,
and is investment adviser to AFD Exchange Reserves, Alliance All-
Asia Investment Fund, Inc., Alliance Balanced Shares, Inc.,
Alliance Bond Fund, Inc., Alliance Capital Reserves, Alliance
Global Dollar Government Fund, Inc., Alliance Global Environment
Fund, Inc., Alliance Global Small Cap Fund, Inc., Alliance Global
Strategic Income Trust, Inc., Alliance Government Reserves,
Alliance Greater China '97 Fund, Inc., Alliance Growth and Income
Fund, Inc., Alliance High Yield Fund, Inc., Alliance
Institutional Funds, Inc., Alliance Institutional Reserves, Inc.,
Alliance International Fund, Alliance International Premier
Growth Fund, Inc., Alliance Limited Maturity Government Fund,
Inc., Alliance Money Market Fund, Alliance Mortgage Securities
Income Fund, Inc., Alliance Multi-Market Strategy Trust, Inc.,
Alliance Municipal Income Fund, Inc., Alliance Municipal Income
Fund II, Alliance Municipal Trust, Alliance New Europe Fund,
Inc., Alliance Premier Growth Fund, Inc., Alliance Quasar Fund,
70
<PAGE>
Inc., Alliance Real Estate Investment Fund, Inc., Alliance/Regent
Sector Opportunity Fund, Inc., Alliance Select Investor Series,
Inc., Alliance Technology Fund, Inc., Alliance Utility Income
Fund, Inc., Alliance Variable Products Series Fund, Inc.,
Alliance Worldwide Privatization Fund, Inc., The Alliance Fund,
Inc., The Alliance Portfolios and The Hudson River Trust, all
registered open-end investment companies; and to ACM Government
Income Fund, Inc., ACM Government Securities Fund, Inc., ACM
Government Spectrum Fund, Inc., ACM Government Opportunity Fund,
Inc., ACM Managed Dollar Income Fund, Inc., ACM Managed Income
Fund, Inc., ACM Municipal Securities Income Fund, Inc., Alliance
All-Market Advantage Fund, Inc., Alliance World Dollar Government
Fund, Inc., Alliance World Dollar Government Fund II, Inc., The
Austria Fund, Inc., The Korean Investment Fund, Inc., The
Southern Africa Fund, Inc. and The Spain Fund, Inc., all
registered closed-end investment companies.
DIRECTORS AND OFFICERS
The Directors and officers of the Fund, their ages and
their principal occupations during the past five years are set
forth below. Each such Director and officer is also a trustee,
director or officer of other registered investment companies
sponsored by the Adviser. Unless otherwise specified, the
address of each such person is 1345 Avenue of the Americas, New
York, New York 10105.
JOHN D. CARIFA,* 53, Chairman of the Board, is the
President, Chief Operating Officer and a Director of ACMC, with
which he has been associated since prior to 1994.
RUTH BLOCK, 68, was formerly an Executive Vice President
and the Chief Insurance Officer of Equitable. She is a Director
of Ecolab Incorporated (specialty chemicals) and BP Amoco
Corporation (oil and gas). Her address is P.O. Box 4623,
Stamford, Connecticut 06903.
DAVID H. DIEVLER, 69, is an independent consultant. He
was formerly a Senior Vice President of ACMC until December 1994.
His address is P.O. Box 167, Spring Lake, New Jersey 07762.
JOHN H. DOBKIN, 57, has been the President of Historic
Hudson Valley (historic preservation) since prior to 1994.
Previously, he was Director of the National Academy of Design.
His address is 150 White Plains Road, Tarrytown, New York 10591.
____________________
* An "interested person" of the Fund as defined in the 1940
Act.
71
<PAGE>
WILLIAM H. FOULK, JR., 66, is an Investment Adviser and
an independent consultant. He was formerly Senior Manager of
Barrett Associates, Inc., a registered investment adviser, with
which he had been associated since prior to 1994. His address is
Room 100, 2 Greenwich Plaza, Greenwich, Connecticut 06830.
DR. JAMES M. HESTER, 74, is President of the Harry Frank
Guggenheim Foundation, with which he has been associated since
prior to 1994. He was formerly President of New York University,
the New York Botanical Garden and Rector of the United Nations
University. His address is 25 Cleveland Lane, Princeton, New
Jersey 08540.
CLIFFORD L. MICHEL, 59, is a member of the law firm of
Cahill Gordon & Reindel, with which he has been associated since
prior to 1994. He is President and Chief Executive Officer of
Wenonah Development Company (investments) and a Director of
Placer Dome, Inc. (mining). His address is St. Bernard's Road,
Gladstone, New Jersey 07934.
DONALD J. ROBINSON, 64, is Senior Counsel to the law
firm of Orrick, Herrington & Sutcliffe and was formerly a senior
partner and a member of the Executive Committee of that firm. He
was also a Trustee of the Museum of the City of New York from
1977 to 1995. His address is 98 Hell's Peak Road, Weston,
Vermont 05161.
OFFICERS
JOHN D. CARIFA, Chairman and President, see biography,
"Directors" section above.
KATHLEEN A. CORBET, 39, Senior Vice President, is an
Executive Vice President of ACMC, with which she has been
associated since prior to 1994.
WAYNE D. LYSKI, 57, Senior Vice President, is an
Executive Vice President of ACMC, with which he has been
associated since prior to 1994.
EDMUND P. BERGAN, JR., 48, Secretary, is a Senior Vice
President and the General Counsel of Alliance Fund Distributors,
Inc. ("AFD") and Alliance Fund Services, Inc. ("AFS"), with which
he has been associated since prior to 1994.
ANDREW L. GANGOLF, 44, Assistant Secretary, is a Vice
President and Assistant General Counsel of AFD, with which he has
been associated since December 1994. Prior thereto he was a Vice
President and Assistant Secretary of Delaware Management Company,
Inc. since prior to 1994.
72
<PAGE>
DOMENICK PUGLIESE, 37, Assistant Secretary, is a Vice
President and Assistant General Counsel of AFD, with which he has
been associated since May 1995. Previously, he was a Vice
President and Counsel of Concord Holding Corporation since prior
to 1994.
EMILIE D. WRAPP, 43, Assistant Secretary, is a Vice
President and Assistant General Counsel of AFD, with which she
has been associated since prior to 1994.
MARK D. GERSTEN, 48, Treasurer and Chief Financial
Officer, is a Senior Vice President of AFS, with which he has
been associated since prior to 1994.
JUAN J. RODRIGUEZ, 41, Controller, is a Vice President
of AFS, with which he has been associated since prior to 1994.
The aggregate compensation paid by the Fund to each of
the Directors during its fiscal year ended November 30, 1998, the
aggregate compensation paid to each of the Directors during
calendar year 1998 by all of the registered investment companies
to which the Adviser provides investment advisory services
(collectively, the "Alliance Fund Complex"), and the total number
of registered investment companies (and separate investment
portfolios within those companies) in the Alliance Fund Complex
with respect to which each of the Directors serves as a director
or trustee, are set forth below. Neither the Fund nor any
registered investment company in the Alliance Fund Complex
provides compensation in the form of pension or retirement
benefits to any of its directors or trustees. Each of the
Directors is a director or trustee of one or more other
registered investment companies in the Alliance Fund Complex.
73
<PAGE>
Total Number
of Investment
Total Number Portfolios
of Investment within the
Companies in the Alliance
Alliance Fund Fund Complex,
Complex, Including
Total Including the the Fund,
Compensation Fund, as to which as to which
Aggregate from the the Director the Director
Compensation Alliance is a Director is a Director
Name of Director From the Fund Fund Complex or Trustee or Trustee
John D. Carifa $-0- $-0- 50 114
Ruth Block $5,065 $180,763 37 77
David H. Dievler $5,065 $216,288 43 80
John H. Dobkin $5,068 $185,363 41 91
William H. Foulk, Jr. $5,062 $241,003 45 109
Dr. James M. Hester $5,068 $172,913 37 74
Clifford L. Michel $4,568 $187,763 38 90
Donald J. Robinson $5,065 $193,709 41 103
As of February 1, 1999, 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 AFD, the Fund's principal
underwriter (the "Principal Underwriter"), to permit the Principal
Underwriter to distribute the Fund's shares and to permit the Fund
to pay distribution services fees to defray expenses associated
with the distribution of its Class A, Class B and Class C shares
in accordance with a plan of distribution which is included in the
Agreement and has been duly adopted and approved in accordance
with Rule 12b-1 adopted by the Commission under the 1940 Act (the
"Rule 12b-1 Plan").
During the Fund's fiscal year ended November 30, 1998,
the Fund paid distribution services fees for expenditures under
the Agreement, with respect to Class A shares, in amounts
aggregating $1,976,686 which constituted approximately .30% of the
aggregate average daily net assets attributable to the Class A
shares during the period, and the Adviser made payments from its
own resources, as described above, aggregating $2,316,360. Of the
$4,293,046 paid by the Fund and the Adviser under the Rule 12b-1
74
<PAGE>
Plan with respect to the Class A shares, $183,394 was spent on
advertising, $85,098 on the printing and mailing of prospectuses
for persons other than current shareholders, $2,156,236 for
compensation to broker-dealers and other financial intermediaries
(including $401,304 to the Fund's Principal Underwriter), $779,102
for compensation to sales personnel and $1,089,216 was spent on
the printing of sales literature, travel, entertainment, due
diligence and other promotional expenses.
During the Fund's fiscal year ended November 30, 1998,
the Fund paid distribution services fees for expenditures under
the Agreement, with respect to Class B shares, in amounts
aggregating $13,643,777 which constituted 1.00% of the aggregate
average daily net assets attributable to the Class B shares during
the period, and the Adviser made payments from its own resources,
as described above, aggregating $91,833. Of the $13,735,610 paid
by the Fund and the Adviser under the Plan, $205,263 was spent on
advertising, $92,154 on the printing and mailing of prospectuses
for persons other than current shareholders, $10,577,585 for
compensation to broker-dealers and other financial intermediaries
(including $459,349 to the Fund's Principal Underwriter), $649,222
for compensation to sales personnel and $631,425 was spent on the
printing of sales literature, travel, entertainment, due diligence
and other promotional expenses, and $1,579,961 in interest on
Class B shares financing.
During the Fund's fiscal year ended November 30, 1998,
the Fund paid distribution services fees for expenditures under
the Agreement, with respect to Class C shares, in amounts
aggregating $2,850,733 which constituted approximately 1.00% of
the aggregate average daily net assets attributable to the Class C
shares during the period, and the Adviser made payments from its
own resources, as described above, aggregating $518,342. Of the
$3,369,075 paid by the Fund and the Adviser under the Rule 12b-1
Plan, with respect to Class C shares $54,555 was spent on
advertising, $23,788 on the printing and mailing of prospectuses
for persons other than current shareholders, $2,627,233 for
compensation to broker-dealers and other financial intermediaries
(including $121,017 to the Fund's Principal Underwriter), $167,766
for compensation to sales personnel, $166,049 was spent on the
printing of sales literature, travel, entertainment, due diligence
and other promotional expenses and $329,684 in interest on Class C
shares financing.
Distribution services fees are accrued daily and paid
monthly and are charged as expenses of the Fund as accrued. The
distribution services fees attributable to the Class B shares and
Class C shares are designed to permit an investor to purchase such
shares through broker-dealers without the assessment of an initial
sales charge, and at the same time to permit the Principal
Underwriter to compensate broker-dealers in connection with the
75
<PAGE>
sale of such shares. In this regard, the purpose and function of
the combined contingent deferred sales charges and distribution
services fees on the Class B shares and Class C shares are the
same as those of the initial sales charge and distribution
services fee with respect to the Class A shares in that in each
case the sales charge and distribution services fee provide for
the financing of the distribution of the relevant class of the
Fund's shares.
With respect to Class A shares of the Fund, distribution
expenses accrued by AFD in one fiscal year may not be paid from
distribution services fees received from the Fund in subsequent
fiscal years. AFD's compensation with respect to Class B and
Class C shares under the Rule 12b-1 Plan of the Fund 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 Rule 12b-1 Plan with respect to the class
involved and, in the case of Class B and Class C shares, payments
received from contingent deferred sales charges ("CDSCs"). The
excess will be carried forward by AFD and reimbursed from
distribution services fees payable under the Rule 12b-1 Plan with
respect to the class involved and, in the case of Class B and
Class C shares, payments subsequently received through CDSCs, so
long as the Rule 12b-1 Plan is in effect.
Unreimbursed distribution expenses incurred as of the end
of the Fund's most recently completed fiscal year, and carried
over for reimbursement in future years in respect of the Class B
and Class C shares of the Fund were, respectively $36,411,699
(2.80% of the net assets of Class B ) and $4,590,722 (1.66% of the
net assets of Class C).
The Rule 12b-1 Plan is in compliance with rules of the
National Association of Securities Dealers, Inc. which effectively
limit the annual asset-based sales charges and service fees that a
mutual fund may pay on a class of shares to .75% and .25%,
respectively, of the average annual net assets attributable to
that class. The rules also limit the aggregate of all front-end,
deferred and asset-based sales charges imposed with respect to a
class of shares by a mutual fund that also charges a service fee
to 6.25% of cumulative gross sales of shares of that class, plus
interest at the prime rate plus 1% per annum.
In approving the Rule 12b-1 Plan, the Directors of the
Fund determined that there was a reasonable likelihood that the
Rule 12b-1 Plan would benefit the Fund and its shareholders. The
distribution services fee of a particular class will not be used
to subsidize the provision of distribution services with respect
to any other class.
76
<PAGE>
The Adviser may from time to time and from its own funds
or such other resources as may be permitted by rules of the
Commission make payments for distribution services to the
Principal Underwriter; the latter may in turn pay part or all of
such compensation to brokers or other persons for their
distribution assistance.
The Agreement will continue in effect for successive
twelve-month periods (computed from each November 1), provided,
however, that such continuance is specifically approved at least
annually by the Directors of the Fund or by vote of the holders of
a majority of the outstanding voting securities (as defined in the
1940 Act) of that class, and, in either case, by a majority of the
Directors of the Fund who are not parties to the Agreement or
interested persons, as defined in the 1940 Act, of any such party
(other than as Directors of the Fund) and who have no direct or
indirect financial interest in the operation of the Rule 12b-1
Plan or any agreement related thereto. Most recently the
continuance of the Agreement until October 31, 1999 was approved
by a vote, cast in person, of the Directors, including a majority
of the Directors who are not "interested persons," as defined in
the 1940 Act, at their meeting held on October 15, 1998.
In the event that the Rule 12b-1 Plan is terminated or
not continued with respect to the Class A shares, Class B shares
or Class C shares, (i) no distribution services fees (other than
current amounts accrued but not yet paid) would be owed by the
Fund to the Principal Underwriter with respect to that class, and
(ii) the Fund would not be obligated to pay the Principal
Underwriter for any amounts expended under the Agreement not
previously recovered by the Principal Underwriter from
distribution services fees in respect of shares of such class or
through deferred sales charges.
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
Agreement. In the event that a change in these laws prevented a
bank from providing such services, it is expected that other
service arrangements would be made and that shareholders would not
be adversely affected.
TRANSFER AGENCY AGREEMENT
Alliance Fund Services, Inc., an indirect wholly-owned
subsidiary of the Adviser, located at 500 Plaza Drive, Secaucus,
New Jersey 07094, acts as the Fund's registrar, transfer agent and
77
<PAGE>
dividend-disbursing agent for a fee based upon the number of
account holders of the Class A shares, Class B shares, Class C
shares and Advisor Class shares of the Fund, plus reimbursement
for out-of-pocket expenses. The transfer agency fee with respect
to the Class B shares and Class C shares is higher than the
transfer agency fee with respect to the Class A shares and Advisor
Class shares, reflecting the additional costs associated with the
Class B and Class C contingent deferred sales charges. For the
fiscal year ended November 30, 1998, the Fund paid AFS $2,156,101
pursuant to the Transfer Agency Agreement.
________________________________________________________________
PURCHASE OF SHARES
________________________________________________________________
The following information supplements that set forth in
the Prospectus(es) under the heading "Purchase and Sale of
Shares--How to Buy Shares."
GENERAL
Shares of the Fund are offered on a continuous basis at a
price equal to their net asset value plus an initial sales charge
at the time of purchase ("Class A shares"), with a contingent
deferred sales charge ("Class B shares"), without any initial
sales charge and, as long as the shares are held for one year or
more, without any contingent deferred sales charge ("Class C
shares"), or, to investors eligible to purchase Advisor Class
shares, without any initial, contingent deferred or asset-based
sales charge, in each case as described below. Shares of the Fund
that are offered subject to a sales charge are offered through
(i) investment dealers that are members of the National
Association of Securities Dealers, Inc. and have entered into
selected dealer agreements with the Principal Underwriter
("selected dealers"), (ii) depository institutions and other
financial intermediaries or their affiliates, that have entered
into selected agent agreements with the Principal Underwriter
("selected agents") and (iii) the Principal Underwriter.
Advisor Class shares of the Fund may be purchased and
held solely (i) through accounts established under fee-based
programs, sponsored and maintained by registered broker-dealers or
other financial intermediaries and approved by the Principal
Underwriter, (ii) through self-directed defined contribution
employee benefit plans (e.g., 401(k) plans) that have at least
1,000 participants or $25 million in assets, (iii) by the
categories of investors described in clauses (i) through
(iv) under "--Sales at Net Asset Value" (other than officers,
directors and present and full-time employees of selected dealers
or agents, or relatives of such person, or any trust, individual
78
<PAGE>
retirement account or retirement plan account for the benefit of
such relative, none of whom is eligible on the basis solely of
such status to purchase and hold Advisor Class shares), or (iv) by
directors and present or retired full-time employees of CB Richard
Ellis, Inc. Generally, a fee-based program must charge an asset-
based or other similar fee and must invest at least $250,000 in
Advisor Class shares of the Fund in order to be approved by AFD
for investment in Advisor Class shares.
Investors may purchase shares of the Fund either through
selected broker-dealers, agents, financial intermediaries or other
financial representatives or directly through the Principal
Underwriter. A transaction, service, administrative or other
similar fee may be charged by your broker-dealer, agent, financial
intermediary or other financial representative with respect to the
purchase, sale or exchange of Class A, Class B, Class C or Advisor
Class shares made through such financial representative. Such
financial representative may also impose requirements with respect
to the purchase, sale or exchange of shares that are different
from, or in addition to, those imposed by the Fund, including
requirements as to the minimum initial and subsequent investment
amounts. Sales personnel of selected dealers and agents
distributing the Funds shares may receive differing compensation
for selling Class A, Class B, Class C or Advisor Class shares.
The Fund may refuse any order for the purchase of shares.
The Fund reserves the right to suspend the sale of its shares to
the public in response to conditions in the securities markets or
for other reasons.
The public offering price of shares of the Fund is their
net asset value, plus, in the case of Class A shares, a sales
charge which will vary depending on the purchase alternative
chosen by the investor, as shown in the table below under "Class A
Shares". On each Fund business day on which a purchase or
redemption order is received by the Fund and trading in the types
of securities in which the Fund invests might materially affect
the value of Fund shares, the per share net asset value is
computed in accordance with the Fund's Articles of Incorporation
and By-Laws as of the next close of regular trading on the
Exchange (currently 4:00 p.m. Eastern time) by dividing the value
of the Fund's total assets, less its liabilities, by the total
number of its shares then outstanding. A Fund business day is any
day on which the Exchange is open for trading.
The respective per share net asset values of the Class A,
Class B, Class C and Advisor Class shares are expected to be
substantially the same. Under certain circumstances, however, the
per share net asset values of the Class B and Class C shares may
be lower than the per share net asset values of the Class A and
Advisor Class shares as a result of the differential daily expense
79
<PAGE>
accruals of the distribution and transfer agency fees applicable
with respect to those classes of shares. Even under those
circumstances, the per share net asset values of the four classes
eventually will tend to converge immediately after the payment of
dividends, which will differ by approximately the amount of the
expense accrual differential among the classes.
The Fund will accept unconditional orders for its shares
to be executed at the public offering price equal to their net
asset value next determined (plus applicable Class A sales
charges), as described below. Orders received by the Principal
Underwriter prior to the close of regular trading on the Exchange
on each day the Exchange is open for trading are priced at the net
asset value computed as of the close of regular trading on the
Exchange on that day (plus applicable Class A sales charges). In
the case of orders for purchase of shares placed through selected
dealers, agents or financial representatives, as applicable, the
applicable public offering price will be the net asset value as so
determined, but only if the selected dealer, agent or financial
representative receives the order prior to the close of regular
trading on the Exchange and transmits it to the Principal
Underwriter prior to 5:00 p.m. Eastern time (certain selected
dealers, agents or financial representatives may enter into
operating agreements permitting them to transmit purchase
information to the Principal Underwriter after 5:00 p.m. Eastern
time and receive that day's asset value). The selected dealer,
agent or financial representative, as applicable, is responsible
for transmitting such orders by 5:00 p.m. If the selected dealer,
agent or financial representative fails to do so, the investor's
right to that day's closing price must be settled between the
investor and the selected dealer, agent or financial
representative, as applicable. If the selected dealer, agent or
financial representative, as applicable, receives the order after
the close of regular trading on the Exchange, the price will be
based on the net asset value determined as of the close of regular
trading on the Exchange on the next day it is open for trading.
Following the initial purchase of Fund shares, a
shareholder may place orders to purchase additional shares by
telephone if the shareholder has completed the appropriate portion
of the Subscription Application or an "Autobuy" application
obtained by calling the "For Literature" telephone number shown on
the cover of this Statement of Additional Information. Except
with respect to certain omnibus accounts, telephone purchase
orders may not exceed $500,000. Payment for shares purchased by
telephone can be made only by Electronic Funds Transfer from a
bank account maintained by the shareholder at a bank that is a
member of the National Automated Clearing House Association
("NACHA"). If a shareholder's telephone purchase request is
received before 3:00 p.m. Eastern time on a Fund business day, the
order to purchase shares is automatically placed the following
80
<PAGE>
Fund business day, and the applicable public offering price will
be the public offering price determined as of the close of
business on such following business day.
Full and fractional shares are credited to a subscriber's
account in the amount of his or her subscription. As a
convenience to the subscriber, and to avoid unnecessary expense to
the Fund, stock certificates representing shares of the Fund are
not issued except upon written request to the Fund by the
shareholder or his or her authorized selected dealer or agent.
This facilitates later redemption and relieves the shareholder of
the responsibility for and inconvenience of lost or stolen
certificates. No certificates are issued for fractional shares,
although such shares remain in the shareholder's account on the
books of the Fund.
In addition to the discount or commission amount paid to
dealers or agents, the Principal Underwriter from time to time
pays additional cash or other incentives to dealers or agents, in
connection with the sale of shares of the Fund. Such additional
amounts may be utilized, in whole or in part, to provide
additional compensation to registered representatives who sell
shares of the Fund. On some occasions, 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 will take the form
of payment for attendance at seminars, meals, sporting events or
theater performances, or payment for travel, lodging and
entertainment incurred in connection with travel taken by persons
associated with a dealer or agent to urban or resort locations
within or outside the United States. Such dealer or agent may
elect to receive cash incentives of equivalent amount in lieu of
such payments.
Class A, Class B, Class C and Advisor Class shares each
represent an interest in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects,
except that (i) Class A shares bear the expense of the initial
sales charge (or contingent deferred sales charge, when
applicable) and Class B and Class C shares bear the expense of the
deferred sales charge, (ii) Class B shares and Class C shares each
bear the expense of a higher distribution services fee than that
borne by Class A shares, and Advisor Class shares do not bear such
a fee, (iii) Class B shares and Class C shares bear higher
transfer agency costs than those borne by Class A and Advisor
Class shares; (iv) each of Class A, Class B and Class C shares has
exclusive voting rights with respect to provisions of the Rule
12b-1 Plan pursuant to which its distribution services fee is paid
and other matters for which separate class voting is appropriate
under applicable law, provided that, if the Fund submits to a vote
81
<PAGE>
of the Class A shareholders, an amendment to the Rule 12b-1 Plan
that would materially increase the amount to be paid thereunder
with respect to the Class A shares, then such amendment will also
be submitted to the Class B shareholders and Advisor Class
shareholders and the Class A, Class B and Advisor Class
shareholders will vote separately by class, and (v) Class B shares
and Advisor Class shares are subject to a conversion feature.
Each class has different exchange privileges and certain different
shareholder service options available.
The Directors of the Fund have determined that currently
no conflict of interest exists between or among the Class A,
Class B, Class C and Advisor Class shares. On an ongoing basis,
the Directors of the Fund, pursuant to their fiduciary duties
under the 1940 Act and state law, will seek to ensure that no such
conflict arises.
Alternative Retail Purchase Arrangements -- Class A, Class B and
Class C Shares.**
The alternative purchase arrangements available with
respect to Class A shares, Class B shares and Class C shares
permit an investor to choose the method of purchasing shares that
is most beneficial given the amount of the purchase, the length of
time the investor expects to hold the shares, and other
circumstances. Investors should consider whether, during the
anticipated life of their investment in the Fund, the accumulated
distribution services fee and contingent deferred sales charge on
Class B shares prior to conversion, or the accumulated
distribution services fee and contingent deferred sales charge on
Class C shares, would be less than the initial sales charge and
accumulated distribution services fee on Class A shares purchased
at the same time, and to what extent such differential would be
offset by the higher return of Class A shares. Class A shares
will normally be more beneficial than Class B shares to the
investor who qualifies for reduced initial sales charges on
Class A shares, as described below. In this regard, the Principal
Underwriter will reject any order (except orders from certain
retirement plans and certain employee benefit plans.) for more
than $250,000 for Class B shares. (See Appendix D for information
concerning the eligibility of certain employee benefit plans to
purchase Class B shares at net asset value without being subject
to a contingent deferred sales charge and the ineligibility of
certain such plans to purchase Class A shares.) Class C shares
will normally not be suitable for the investor who qualifies to
purchase Class A shares at net asset value. For this reason, the
____________________
** Advisor Class shares are sold only to investors described
above in this section under "--General."
82
<PAGE>
Principal Underwriter will reject any order for more than
$1,000,000 for Class C shares.
Class A shares are subject to a lower distribution
services fee and, accordingly, pay correspondingly higher
dividends per share than Class B shares or Class C shares.
However, because initial sales charges are deducted at the time of
purchase, investors purchasing Class A shares would not have all
their funds invested initially and, therefore, would initially own
fewer shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended
period of time might consider purchasing Class A shares because
the accumulated continuing distribution charges on Class B shares
or Class C shares may exceed the initial sales charge on Class A
shares during the life of the investment. Again, however, such
investors must weigh this consideration against the fact that,
because of such initial sales charges, not all their funds will be
invested initially.
Other investors might determine, however, that it would
be more advantageous to purchase Class B shares or Class C shares
in order to have all their funds invested initially, although
remaining subject to higher continuing distribution charges and
being subject to a contingent deferred sales charge for a three-
year period and one-year period, respectively. For example, based
on current fees and expenses, an investor subject to the 4.25%
initial sales charge on Class A shares 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.
During the fiscal years ended in 1996, 1997 and 1998, the
aggregate amount of underwriting commission payable with respect
to shares of the Fund was $6,878,583, $9,018,289 and $6,679,048,
respectively. Of those amounts, the Principal Underwriter
received the amounts of $237,477, $291,260 and $234,927,
respectively, representing that portion of the sales charges paid
on shares of the Fund sold during the year which was not reallowed
to selected dealers (and was, accordingly, retained by the
83
<PAGE>
Principal Underwriter). During the Fund's fiscal years ended in
1996, 1997 and 1998, the Principal Underwriter received contingent
deferred sales charges of $237,571, $361 and $28,978,
respectively, on Class A shares, $1,914,263, $1,417,334 and
$1,574,130, respectively, on Class B shares and $32,226, $93,896
and $164,308, respectively, on Class C shares.
CLASS A SHARES
The public offering price of Class A shares is the net asset value
plus a sales charge, as set forth below.
SALES CHARGE
Discount or
Commission
As % of to Dealers
As % of the or Agents
Net Public As % of
Amount of Amount Offering Offering
Purchase Invested Price Price
Less than
$100,000 4.44% 4.25% 4.00%
$100,000 but
less than
$250,000 3.36 3.25 3.00
$250,000 but
less than
$500,000 2.30 2.25 2.00
$500,000 but
less than
$1,000,000* 1.78 1.75 1.50
____________________
* There is no initial sales charge on transactions of $1,000,000
or more.
With respect to purchases of $1,000,000 or more, Class A
shares redeemed within one year of purchase will be subject to a
contingent deferred sales charge equal to 1% of the lesser of the
cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no sales charge will be imposed
on increases in net asset value above the initial purchase price.
In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions. The
contingent deferred sales charge on Class A shares will be waived
on certain redemptions, as described below under "--Class B
Shares." In determining the contingent deferred sales charge
applicable to a redemption of Class A shares, it will be assumed
84
<PAGE>
that the redemption is, first, of any shares that are not subject
to a contingent deferred sales charge (for example, because an
initial sales charge was paid with respect to the shares, or they
have been held beyond the period during which the charge applies
or were acquired upon the reinvestment of dividends or
distributions) and, second, of shares held longest during the
time they are subject to the sales charge. Proceeds from the
contingent deferred sales charge on Class A shares are paid to
the Principal Underwriter and are used by the Principal
Underwriter to defray the expenses of the Principal Underwriter
related to providing distribution-related services to the Fund in
connection with the sales of Class A shares, such as the payment
of compensation to selected dealers and agents for selling
Class A shares. With respect to purchases of $1,000,000 or more
made through selected dealers or agents, the Adviser may,
pursuant to the Distribution Services Agreement described above,
pay such dealers or agents from its own resources a fee of up to
1% of the amount invested to compensate such dealers or agents
for their distribution assistance in connection with such
purchases.
No initial sales charge is imposed on Class A shares
issued (i) pursuant to the automatic reinvestment of income
dividends or capital gains distributions, (ii) in exchange for
Class A shares of other "Alliance Mutual Funds" (as that term is
defined under "Combined Purchase Privilege" below), except that
an initial sales charge will be imposed on Class A shares issued
in exchange for Class A shares of AFD Exchange Reserves ("AFDER")
that were purchased for cash without the payment of an initial
sales charge and without being subject to a contingent deferred
sales charge or (iii) upon the automatic conversion of Class B
shares or Advisor Class shares as described below under
"--Class B Shares Conversion Feature" and "--Conversion of
Advisor Class Shares to Class A Shares." The Fund receives the
entire net asset value of its Class A shares sold to investors.
The Principal Underwriter's commission is the sales charge shown
above less any applicable discount or commission "reallowed" to
selected dealers and agents. The Principal Underwriter will
reallow discounts to selected dealers and agents in the amounts
indicated in the table above. In this regard, the Principal
Underwriter may elect to reallow the entire sales charge to
selected dealers and agents for all sales with respect to which
orders are placed with the Principal Underwriter. A selected
dealer who receives reallowance in excess of 90% of such a sales
charge may be deemed to be an "underwriter" under the Securities
Act.
Investors choosing the initial sales charge alternative
may under certain circumstances be entitled to pay (i) no initial
sales charge (but may be subject in most such cases to a
contingent deferred sales charge) or (ii) a reduced initial sales
85
<PAGE>
charge. The circumstances under which such investors may pay a
reduced initial sales charge are described below.
COMBINED PURCHASE PRIVILEGE. Certain persons may
qualify for the sales charge reductions indicated in the schedule
of such charges above by combining purchases of shares of the
Fund into a single "purchase," if the resulting "purchase" totals
at least $100,000. The term "purchase" refers to: (i) a single
purchase by an individual, or to concurrent purchases, which in
the aggregate are at least equal to the prescribed amounts, by an
individual, his or her spouse and their children under the age of
21 years purchasing shares of the Fund for his, her or their own
account(s); (ii) a single purchase by a trustee or other
fiduciary purchasing shares for a single trust, estate or single
fiduciary account although more than one beneficiary is involved;
or (iii) a single purchase for the employee benefit plans of a
single employer. The term "purchase" also includes purchases by
any "company," as the term is defined in the 1940 Act, but does
not include purchases by any such company which has not been in
existence for at least six months or which has no purpose other
than the purchase of shares of the Fund or shares of other
registered investment companies at a discount. The term
"purchase" does not include purchases by any group of individuals
whose sole organizational nexus is that the participants therein
are credit card holders of a company, policy holders of an
insurance company, customers of either a bank or broker-dealer or
clients of an investment adviser. A "purchase" may also include
shares, purchased at the same time through a single selected
dealer or agent, of any other "Alliance Mutual Fund." Currently,
the Alliance Mutual Funds include:
AFD Exchange Reserves
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
Alliance Bond Fund, Inc.
-Corporate Bond Portfolio
-U.S. Government Portfolio
Alliance Global Dollar Government Fund, Inc.
Alliance Global Environment Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Global Strategic Income Trust, Inc.
Alliance Greater China '97 Fund, Inc.
Alliance Growth and Income Fund, Inc.
Alliance High Yield Fund, Inc.
Alliance International Fund
Alliance International Premier Growth Fund, Inc.
Alliance Limited Maturity Government Fund, Inc.
Alliance Mortgage Securities Income Fund, Inc.
Alliance Multi-Market Strategy Trust, Inc.
86
<PAGE>
Alliance Municipal Income Fund, Inc.
-California Portfolio
-Insured California Portfolio
-Insured National Portfolio
-National Portfolio
-New York Portfolio
Alliance Municipal Income Fund II
-Arizona Portfolio
-Florida Portfolio
-Massachusetts Portfolio
-Michigan Portfolio
-Minnesota Portfolio
-New Jersey Portfolio
-Ohio Portfolio
-Pennsylvania Portfolio
-Virginia Portfolio
Alliance New Europe Fund, Inc.
Alliance North American Government Income Trust, Inc.
Alliance Premier Growth Fund, Inc.
Alliance Quasar Fund, Inc.
Alliance Real Estate Investment Fund, Inc.
Alliance Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
Alliance Worldwide Privatization Fund, Inc.
The Alliance Fund, Inc.
The Alliance Portfolios
-Alliance Growth Fund
-Alliance Conservative Investors Fund
-Alliance Growth Investors Fund
-Alliance Short-Term U.S. Government Fund
Prospectuses for the Alliance Mutual Funds may be
obtained without charge by contacting Alliance Fund Services,
Inc. at the address or the "For Literature" telephone number
shown on the front cover of this Statement of Additional
Information.
CUMULATIVE QUANTITY DISCOUNT (RIGHT OF ACCUMULATION). An
investor's purchase of additional Class A shares of the Fund may
qualify for a Cumulative Quantity Discount. The applicable sales
charge will be based on the total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business
on the previous day) of (a) all shares of the Fund held
by the investor and (b) all shares of any other Alliance
Mutual Fund held by the investor; and
(iii) the net asset value of all shares
described in paragraph (ii) owned by another shareholder
87
<PAGE>
eligible to combine his or her purchase with that of the
investor into a single "purchase" (see above).
For example, if an investor owned shares of an Alliance
Mutual Fund worth $200,000 at their then current net asset value
and, subsequently, purchased Class A shares of the Fund worth an
additional $100,000, the sales charge for the $100,000 purchase
would be at the 2.25% rate applicable to a single $300,000
purchase of shares of the Fund, rather than the 3.25% rate.
To qualify for the Combined Purchase Privilege or to
obtain the Cumulative Quantity Discount on a purchase through a
selected dealer or agent, the investor or selected dealer or
agent must provide the Principal Underwriter with sufficient
information to verify that each purchase qualifies for the
privilege or discount.
STATEMENT OF INTENTION. Class A investors may also
obtain the reduced sales charges shown in the table above by
means of a written Statement of Intention, which expresses the
investor's intention to invest not less than $100,000 within a
period of 13 months in Class A shares (or Class A, Class B,
Class C and/or Advisor Class shares) of the Fund or any other
Alliance Mutual Fund. Each purchase of shares under a Statement
of Intention will be made at the public offering price or prices
applicable at the time of such purchase to a single transaction
of the dollar amount indicated in the Statement of Intention. At
the investor's option, a Statement of Intention may include
purchases of shares of the Fund or any other Alliance Mutual Fund
made not more than 90 days prior to the date that the investor
signs the Statement of Intention; however, the 13-month period
during which the Statement of Intention is in effect will begin
on the date of the earliest purchase to be included.
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 only be necessary to
invest a total of $60,000 during the following 13 months in
shares of the Fund or any other Alliance Mutual Fund, to qualify
for the 3.25% sales charge on the total amount being invested
(the sales charge applicable to an investment of $100,000).
The Statement of Intention is not a binding obligation
upon the investor to purchase the full amount indicated. The
minimum initial investment under a Statement of Intention is 5%
of such amount. Shares purchased with the first 5% of such
amount will be held in escrow (while remaining registered in the
88
<PAGE>
name of the investor) to secure payment of the higher sales
charge applicable to the shares actually purchased if the full
amount indicated is not purchased, and such escrowed shares will
be involuntarily redeemed to pay the additional sales charge, if
necessary. Dividends on escrowed shares, whether paid in cash or
reinvested in additional Fund shares, are not subject to escrow.
When the full amount indicated has been purchased, the escrow
will be released. To the extent that an investor purchases more
than the dollar amount indicated on the Statement of Intention
and qualifies for a further reduced sales charge, the sales
charge will be adjusted for the entire amount purchased at the
end of the 13-month period. The difference in the sales charge
will be used to purchase additional shares of the Fund subject to
the rate of the sales charge applicable to the actual amount of
the aggregate purchases.
Investors wishing to enter into a Statement of Intention
in conjunction with their initial investment in Class A shares of
the Fund should complete the appropriate portion of the
Subscription Application found in the Prospectus while current
Class A shareholders desiring to do so can obtain a form of
Statement of Intention by contacting Alliance Fund Services, Inc.
at the address or telephone numbers shown on the cover of this
Statement of Additional Information.
CERTAIN RETIREMENT PLANS. Multiple participant payroll
deduction retirement plans may also purchase shares of the Fund
or any other Alliance Mutual Fund at a reduced sales charge on a
monthly basis during the 13-month period following such a plan's
initial purchase. The sales charge applicable to such initial
purchase of shares of the Fund will be that normally applicable,
under the schedule of sales charges set forth in this Statement
of Additional Information, to an investment 13 times larger than
such initial purchase. The sales charge applicable to each
succeeding monthly purchase will be that normally applicable,
under such schedule, to an investment equal to the sum of (i) the
total purchase previously made during the 13-month period and
(ii) the current month's purchase multiplied by the number of
months (including the current month) remaining in the 13-month
period. Sales charges previously paid during such period will
not be retroactively adjusted on the basis of later purchases.
REINSTATEMENT PRIVILEGE. A shareholder who has caused
any or all of his or her Class A or Class B shares of the Fund to
be redeemed or repurchased may reinvest all or any portion of the
redemption or repurchase proceeds in Class A shares of the Fund
at net asset value without any sales charge, provided that
(i) such reinvestment is made within 120 calendar days after the
redemption or repurchase date, and (ii) for Class B shares, a
contingent deferred sales charge has been paid and the Principal
Underwriter has approved, at its discretion, the reinvestment of
89
<PAGE>
such shares. Shares are sold to a reinvesting shareholder at the
net asset value next determined as described above. A
reinstatement pursuant to this privilege will not cancel the
redemption or repurchase transaction; therefore, any gain or loss
so realized will be recognized for federal income tax purposes
except that no loss will be recognized to the extent that the
proceeds are reinvested in shares of the Fund within 30 calendar
days after the redemption or repurchase transaction. Investors
may exercise the reinstatement privilege by written request sent
to the Fund at the address shown on the cover of this Statement
of Additional Information.
SALES AT NET ASSET VALUE. The Fund may sell its Class A
shares at net asset value (i.e., without an initial sales charge)
and without a contingent deferred sales charge to certain
categories of investors including: (i) investment management
clients of the Adviser or its affiliates; (ii) officers and
present or former Directors of the Fund; present or former
directors and trustees of other investment companies managed by
the Adviser; present or retired full-time employees of the
Adviser, the Principal Underwriter, Alliance Fund Services, Inc.
and their affiliates; officers and directors of ACMC, the
Principal Underwriter, Alliance Fund Services, Inc. and their
affiliates; officers, directors and present full-time employees
of selected dealers or agents; or the spouse, 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) the Adviser, the Principal
Underwriter, Alliance Fund Services, Inc. and their affiliates;
certain employee benefit plans for employees of the Adviser, the
Principal Underwriter, Alliance Fund Services, Inc. and their
affiliates; (iv) registered investment advisers or other
financial intermediaries who charge a management, consulting or
other fee for their services and who purchase shares through a
broker or agent approved by the Principal Underwriter and clients
of such registered investment advisers or financial
intermediaries whose accounts are linked to the master account of
such investment adviser or financial intermediary on the books of
such approved broker or agent; (v) persons participating in a
fee-based program, sponsored and maintained by a registered
broker-dealer or other financial intermediary and approved by the
Principal Underwriter, pursuant to which such persons pay an
asset-based fee to such broker-dealer or financial intermediary,
or its affiliate or agent, for services in the nature of
investment advisory or administrative services; (vi) persons who
establish to the Principal Underwriter's satisfaction that they
are investing, within such time period as may be designated by
the Principal Underwriter, proceeds of redemption of shares of
90
<PAGE>
such other registered investment companies as may be designated
from time to time by the Principal Underwriter; and
(vii) employer-sponsored qualified pension or profit-sharing
plans (including Section 401(k) plans), custodial accounts
maintained pursuant to Section 403(b)(7) retirement plans and
individual retirement accounts (including individual retirement
accounts to which simplified employee pension ("SEP")
contributions are made), if such plans or accounts are
established or administered under programs sponsored by
administrators or other persons that have been approved by the
Principal Underwriter.
CLASS B SHARES
Investors may purchase Class B shares at the public
offering price equal to the net asset value per share of the
Class B shares on the date of purchase without the imposition of
a sales charge at the time of purchase. The Class B shares are
sold without an initial sales charge so that the Fund will
receive the full amount of the investor's purchase payment.
Proceeds from the contingent deferred sales charge on
the Class B shares are paid to the Principal Underwriter and are
used by the Principal Underwriter to defray the expenses of the
Principal Underwriter related to providing distribution-related
services to the Fund in connection with the sale of the Class B
shares, such as the payment of compensation to selected dealers
and agents for selling Class B shares. The combination of the
contingent deferred sales charge and the distribution services
fee enables the Fund to sell the Class B shares without a sales
charge being deducted at the time of purchase. The higher
distribution services fee incurred by Class B shares will cause
such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares.
CONTINGENT DEFERRED SALES CHARGE. Class B shares that
are redeemed within three years of purchase will be subject to a
contingent deferred sales charge at the rates set forth below
charged as a percentage of the dollar amount subject thereto. The
charge will be assessed on an amount equal to the lesser of the
cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no sales charge will be imposed
on increases in net asset value above the initial purchase price.
In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
To illustrate, assume that an investor purchased 100
Class B shares at $10 per share (at a cost of $1,000) and in the
second year after purchase, the net asset value per share is $12
and, during such time, the investor has acquired 10 additional
Class B shares upon dividend reinvestment. If at such time the
91
<PAGE>
investor makes his or her first redemption of 50 Class B shares
(proceeds of $600), 10 Class B shares will not be subject to the
charge because of dividend reinvestment. With respect to the
remaining 40 Class B shares, the charge is applied only to the
original cost of $10 per share and not to the increase in net
asset value of $2 per share. Therefore, $400 of the $600
redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the second year after purchase, as set forth
below).
The amount of the contingent deferred sales charge, if
any, will vary depending on the number of years from the time of
payment for the purchase of Class B shares until the time of
redemption of such shares.
Contingent Deferred Sales Charge as a %
Year Since Purchase of Dollar Amount Subject to Charge
First 3%
Second 2%
Third 1%
Fourth and thereafter None
In determining the contingent deferred sales charge
applicable to a redemption of Class B shares, it will be assumed
that the redemption is, first, of any shares that were acquired
upon the reinvestment of dividends or distributions and, second,
of shares held longest during the time they are subject to the
sales charge. When shares acquired in an exchange are redeemed,
the applicable contingent deferred sales charge and conversion
schedules will be the schedules that applied at the time of the
purchase of shares of the corresponding class of the Alliance
Mutual Fund originally purchased by the shareholder.
The contingent deferred sales charge is waived on
redemptions of shares (i) following the death or disability, as
defined in the Internal Revenue Code of 1986, as amended (the
"Code"), of a shareholder, (ii) to the extent that the redemption
represents a minimum required distribution from an individual
retirement account or other retirement plan to a shareholder who
has attained the age of 70-1/2, (iii) that had been purchased by
present or former Directors of the Fund, by the relative of any
such person, by any trust, individual retirement account or
retirement plan account for the benefit of any such person or
relative, or by the estate of any such person or relative, or
(iv) pursuant to a systematic withdrawal plan (see "Shareholder
Services--Systematic Withdrawal Plan" below).
CONVERSION FEATURE. Six years after the end of the
calendar month in which the shareholder's purchase order was
accepted, Class B shares will automatically convert to Class A
92
<PAGE>
shares and will no longer be subject to a higher distribution
services fee. Such conversion will occur on the basis of the
relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. The purpose
of the conversion feature is to reduce the distribution services
fee paid by holders of Class B shares that have been outstanding
long enough for the Principal Underwriter to have been
compensated for distribution expenses incurred in the sale of
such shares.
For purposes of conversion to Class A, Class B shares
purchased through the reinvestment of dividends and distributions
paid in respect of Class B shares in a shareholder's account will
be considered to be held in a separate sub-account. Each time
any Class B shares in the shareholder's account (other than those
in the sub-account) convert to Class A, an equal pro-rata portion
of the Class B shares in the sub-account will also convert to
Class A.
The conversion of Class B shares to Class A shares is
subject to the continuing availability of an opinion of counsel
to the effect that the conversion of Class B shares to Class A
shares does not constitute a taxable event under federal income
tax law. The conversion of Class B shares to Class A shares may
be suspended if such an opinion is no longer available at the
time such conversion is to occur. In that event, no further
conversions of Class B shares would occur, and shares might
continue to be subject to the higher distribution services fee
for an indefinite period which may extend beyond the period
ending six years after the end of the calendar month in which the
shareholder's purchase order was accepted.
CLASS C SHARES
Investors may purchase Class C shares at the public
offering price equal to the net asset value per share of the
Class C shares on the date of purchase without the imposition of
a sales charge either at the time of purchase or, as long as the
shares are held for one year or more, upon redemption. Class C
shares are sold without an initial sales charge so that the Fund
will receive the full amount of the investor's purchase payment
and, as long as the shares are held for one year or more, without
a contingent deferred sales charge so that the investor will
receive as proceeds upon redemption the entire net asset value of
his or her Class C shares. The Class C distribution services fee
enables the Fund to sell Class C shares without either an initial
or contingent deferred sales charge, as long as the shares are
held for one year or more. Class C shares do not convert to any
other class of shares of the Fund and incur higher distribution
services fees and transfer agency costs than Class A shares and
Advisor Class shares, and will thus have a higher expense ratio
93
<PAGE>
and pay correspondingly lower dividends than Class A shares and
Advisor Class shares.
Class C shares that are redeemed within one year of
purchase will be subject to a contingent deferred sales charge of
1%, charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of
the cost of the shares being redeemed or their net asset value at
the time of redemption. Accordingly, no sales charge will be
imposed on increases in net asset value above the initial
purchase price. In addition, no charge will be assessed on shares
derived from reinvestment of dividends or capital gains
distributions. The contingent deferred sales charge on Class C
shares will be waived on certain redemptions, as described above
under "--Class B Shares."
In determining the contingent deferred sales charge
applicable to a redemption of Class C shares, it will be assumed
that the redemption is, first, of any shares that are not subject
to a contingent deferred sales charge (for example, because the
shares have been held beyond the period during which the charge
applies or were acquired upon the reinvestment of dividends or
distributions) and, second, of shares held longest during the
time they are subject to the sales charge.
Proceeds from the contingent deferred sales charge are
paid to the Principal Underwriter and are used by the Principal
Underwriter to defray the expenses of the Principal Underwriter
related to providing distribution-related services to the Fund in
connection with the sale of the Class C shares, such as the
payment of compensation to selected dealers and agents for
selling Class C shares. The combination of the contingent
deferred sales charge and the distribution services fee enables
the Fund to sell the Class C shares without a sales charge being
deducted at the time of purchase. The higher distribution
services fee incurred by Class C shares will cause such shares to
have a higher expense ratio and to pay lower dividends than those
related to Class A shares and Advisor Class shares.
Conversion of Advisor Class Shares to Class A Shares
Advisor Class shares may be held solely through the fee-
based program accounts, employee benefit plans and registered
investment advisory or other financial intermediary relationships
described above under "Purchase of Shares-- General," and by
investment advisory clients of, and by certain other persons
associated with, the Adviser and its affiliates or the Fund. If
(i) a holder of Advisor Class shares ceases to participate in the
fee-based program or plan, or to be associated with the
investment adviser or financial intermediary, in each case, that
satisfies the requirements to purchase shares set forth under
94
<PAGE>
"Purchase of Shares--General" or (ii) the holder is otherwise no
longer eligible to purchase Advisor Class shares as described in
the Advisor Class Prospectus and this Statement of Additional
Information (each, a "Conversion Event"), then all Advisor Class
shares held by the shareholder will convert automatically and
without notice to the shareholder, other than the notice
contained in the Advisor Class Prospectus and this Statement of
Additional Information, to Class A shares of the Fund during the
calendar month following the month in which the Fund is informed
of the occurrence of the Conversion Event. The failure of a
shareholder or a fee-based program to satisfy the minimum
investment requirements to purchase Advisor Class shares will not
constitute a Conversion Event. The conversion would occur on the
basis of the relative net asset values of the two classes and
without the imposition of any sales load, fee or other charge.
Class A shares currently bear a .30% distribution services fee
and have a higher expense ratio than Advisor Class shares. As a
result, Class A shares may pay correspondingly lower dividends
and have a lower net asset value than Advisor Class shares.
The conversion of Advisor Class shares to Class A shares
is subject to the continuing availability of an opinion of
counsel to the effect that the conversion of Advisor Class shares
to Class A shares does not constitute a taxable event under
federal income tax law. The conversion of Advisor Class shares
to Class A shares may be suspended if such an opinion is no
longer available at the time such conversion is to occur. In
that event, the Advisor Class shareholder would be required to
redeem his Advisor Class shares, which would constitute a taxable
event under federal income tax law.
_________________________________________________________________
REDEMPTION AND REPURCHASE OF SHARES
_________________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus(es) under the heading "Purchase and Sale of
Shares--How to Sell Shares." If you are an Advisor Class
shareholder through an account established under a fee-based
program your fee-based program may impose requirements with
respect to the purchase, sale or exchange of Advisor Class shares
of the Fund that are different from those described herein. A
transaction fee may be charged by your financial representative
with respect to the purchase, sale or exchange of Advisor Class
shares made through such financial representative.
95
<PAGE>
REDEMPTION
Subject only to the limitations described below, the
Fund's Articles of Incorporation require that the Fund redeem the
shares tendered to it, as described below, at a redemption price
equal to their net asset value as next computed following the
receipt of shares tendered for redemption in proper form. Except
for any contingent deferred sales charge which may be applicable
to Class A, Class B or Class C shares, there is no redemption
charge. Payment of the redemption price will be made within
seven days after the Fund's receipt of such tender for
redemption. If a shareholder is in doubt about what documents
are required by his or her fee-based program or employee benefit
plan, the shareholder should contact his or her financial
representative.
The right of redemption may not be suspended or the date
of payment upon redemption postponed for more than seven days
after shares are tendered for redemption, except for any period
during which the Exchange is closed (other than customary weekend
and holiday closings) or during which the Commission determines
that trading thereon is restricted, or for any period during
which an emergency (as determined by the Commission) exists as a
result of which disposal by the Fund of securities owned by it is
not reasonably practicable or as a result of which it is not
reasonably practicable for the Fund fairly to determine the value
of its net assets, or for such other periods as the Commission
may by order permit for the protection of security holders of the
Fund.
Payment of the redemption price will be made in cash.
The value of a shareholder's shares on redemption or repurchase
may be more or less than the cost of such shares to the
shareholder, depending upon the market value of the Fund's
portfolio securities at the time of such redemption or
repurchase. Redemption proceeds on Class A, Class B and Class C
shares will reflect the deduction of the contingent deferred
sales charge, if any. Payment received by a shareholder upon
redemption or repurchase of his shares, assuming the shares
constitute capital assets in his hands, will result in long-term
or short-term capital gains (or loss) depending upon the
shareholder's holding period and basis in respect of the shares
redeemed.
To redeem shares of the Fund for which no stock
certificates have been issued, the registered owner or owners
should forward a letter to the Fund containing a request for
redemption. The signature or signatures on the letter must be
guaranteed by an "eligible guarantor institution" as defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended.
96
<PAGE>
To redeem shares of the Fund represented by stock
certificates, the investor should forward the appropriate stock
certificate or certificates, endorsed in blank or with blank
stock powers attached, to the Fund with the request that the
shares represented thereby, or a specified portion thereof, be
redeemed. The stock assignment form on the reverse side of each
stock certificate surrendered to the Fund for redemption must be
signed by the registered owner or owners exactly as the
registered name appears on the face of the certificate or,
alternatively, a stock power signed in the same manner may be
attached to the stock certificate or certificates or, where
tender is made by mail, separately mailed to the Fund. The
signature or signatures on the assignment form must be guaranteed
in the manner described above.
TELEPHONE REDEMPTION BY ELECTRONIC FUNDS TRANSFER. Each
Fund shareholder is entitled to request redemption by electronic
funds transfer of shares for which no stock certificates have
been issued by telephone at (800) 221-5672 by a shareholder who
has completed the appropriate portion of the Subscription
Application or, in the case of an existing shareholder, an
"Autosell" application obtained from Alliance Fund Services, Inc.
A telephone redemption request by electronic funds transfer may
not exceed $100,000 (except for certain omnibus accounts), and
must be made by 4:00 p.m. Eastern time on a Fund business day as
defined above. Proceeds of telephone redemptions will be sent by
electronic funds transfer to a shareholder's designated bank
account at a bank selected by the shareholder that is a member of
the NACHA.
TELEPHONE REDEMPTION BY CHECK. Each Fund shareholder is
eligible to request redemption by check of Fund shares for which
no stock certificates have been issued by telephone at
(800) 221-5672 before 4:00 p.m. Eastern time on a Fund business
day in an amount not exceeding $50,000. Proceeds of such
redemptions are remitted by check to the shareholder's address of
record. A shareholder otherwise eligible for telephone
redemption by check may cancel the privilege by written
instruction to Alliance Fund Services, Inc., or by checking the
appropriate box on the Subscription Application found in the
Prospectus.
TELEPHONE REDEMPTION -- 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
97
<PAGE>
Fund reserves the right to suspend or terminate its telephone
redemption service at any time without notice. Telephone
redemption is not available with respect to shares (i) for which
certificates have been issued, (ii) held in nominee or "street
name" accounts, (iii) held by a shareholder who has changed his
or her address of record within the preceding 30 calendar days or
(iv) held in any retirement plan account. Neither the Fund nor
the Adviser, the Principal Underwriter or Alliance Fund Services,
Inc. will be responsible for the authenticity of telephone
requests for redemptions that the Fund reasonably believes to be
genuine. The Fund will employ reasonable procedures in order to
verify that telephone requests for redemptions are genuine,
including, among others, recording such telephone instructions
and causing written confirmations of the resulting transactions
to be sent to shareholders. If the Fund did not employ such
procedures, it could be liable for losses arising from
unauthorized or fraudulent telephone instructions. Selected
dealers or agents may charge a commission for handling telephone
requests for redemptions.
REPURCHASE
The Fund may repurchase shares through the Principal
Underwriter, selected financial intermediaries or selected
dealers or agents. The repurchase price will be the net asset
value next determined after the Principal Underwriter receives
the request (less the contingent deferred sales charge, if any,
with respect to the Class A, Class B and Class C shares), except
that requests placed through selected dealers or agents before
the close of regular trading on the Exchange on any day will be
executed at the net asset value determined as of such close of
regular trading on that day if received by the Principal
Underwriter prior to its close of business on that day (normally
5:00 p.m. Eastern time). The financial intermediary or selected
dealer or agent is responsible for transmitting the request to
the Principal Underwriter by 5:00 p.m. Eastern time (certain
selected dealers, agents or financial representatives may enter
into operating agreements permitting them to transmit purchase
information to the Principal Underwriter after 5:00 p.m. Eastern
time and receive that day's asset value). If the financial
intermediary or selected dealer or agent fails to do so, the
shareholder's right to receive that day's closing price must be
settled between the shareholder and the dealer or agent. A
shareholder may offer shares of the Fund to the Principal
Underwriter either directly or through a selected dealer or
agent. Neither the Fund nor the Principal Underwriter charges a
fee or commission in connection with the repurchase of shares
(except for the contingent deferred sales charge, if any, with
respect to Class A, Class B and Class C shares). Normally, if
shares of the Fund are offered through a financial intermediary
or selected dealer or agent, the repurchase is settled by the
98
<PAGE>
shareholder as an ordinary transaction with or through the
selected dealer or agent, who may charge the shareholder for this
service. The repurchase of shares of the Fund as described above
is a voluntary service of the Fund and the Fund may suspend or
terminate this practice at any time.
GENERAL
The Fund reserves the right to close out an account that
through redemption has remained below $200 for 90 days.
Shareholders will receive 60 days' written notice to increase the
account value before the account is closed. No contingent
deferred sales charge will be deducted from the proceeds of this
redemption. In the case of a redemption or repurchase of shares
of the Fund recently purchased by check, redemption proceeds will
not be made available until the Fund is reasonably assured that
the check has cleared, normally up to 15 calendar days following
the purchase date.
________________________________________________________________
SHAREHOLDER SERVICES
________________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus(es) under the heading "Purchase and Sale of
Shares--Shareholder Services." The shareholder services set
forth below are applicable to Class A, Class B, Class C and
Advisor Class shares unless otherwise indicated. If you are an
Advisor Class shareholder through an account established under a
fee-based program your fee-based program may impose requirements
with respect to the purchase, sale or exchange of Advisor Class
shares of the Fund that are different from those described
herein. A transaction fee may be charged by your financial
representative with respect to the purchase, sale or exchange of
Advisor Class shares made through such financial representative.
AUTOMATIC INVESTMENT PROGRAM
Investors may purchase shares of the Fund through an
automatic investment program utilizing electronic funds transfer
drawn on the investor's own bank account. Under such a program,
pre-authorized monthly drafts for a fixed amount (at least $25)
are used to purchase shares through the selected dealer or
selected agent designated by the investor at the public offering
price next determined after the Principal Underwriter receives
the proceeds from the investor's bank. In electronic form,
drafts can be made on or about a date each month selected by the
shareholder. Investors wishing to establish an automatic
investment program in connection with their initial investment
should complete the appropriate portion of the Subscription
99
<PAGE>
Application found in the Prospectus. Current shareholders should
contact Alliance Fund Services, Inc. at the address or telephone
numbers shown on the cover of this Statement of Additional
Information to establish an automatic investment program.
EXCHANGE PRIVILEGE
You may exchange your investment in the Fund for shares
of the same class of other Alliance Mutual Funds (including AFD
Exchange Reserves, a money market fund managed by the Adviser).
In addition, (i) present officers and full-time employees of the
Adviser, (ii) present Directors or Trustees of any Alliance
Mutual Fund and (iii) certain employee benefit plans for
employees of the Adviser, the Principal Underwriter, Alliance
Fund Services, Inc. and their affiliates may, on a tax-free
basis, exchange Class A shares of the Fund for Advisor Class
shares of the Fund. Exchanges of shares are made at the net
asset value next determined and without sales or service charges.
Exchanges may be made by telephone or written request. Telephone
exchange requests must be received by Alliance Fund Services,
Inc. by 4:00 p.m. Eastern time on a Fund business day in order to
receive that day's net asset value.
Shares will continue to age without regard to exchanges
for purpose of determining the CDSC, if any, upon redemption and,
in the case of Class B shares, for the purpose of conversion to
Class A shares. After an exchange, your Class B shares will
automatically convert to Class A shares in accordance with the
conversion schedule applicable to the Class B shares of the
Alliance Mutual Fund you originally purchased for cash ("original
shares"). When redemption occurs, the CDSC applicable to the
original shares is applied.
Please read carefully the prospectus of the mutual fund
into which you are exchanging before submitting the request.
Call Alliance Fund Services, Inc. at (800) 221-5672 to exchange
uncertificated shares. Except with respect to exchanges of
Class A shares of the Fund for Advisor Class shares of the Fund,
exchanges of shares as described above in this section are
taxable transactions for federal income tax purposes. The
exchange service may be changed, suspended, or terminated on 60
days written notice.
All exchanges are subject to the minimum investment
requirements and any other applicable terms set forth in the
Prospectus for the Alliance Mutual Fund whose shares are being
acquired. An exchange is effected through the redemption of the
shares tendered for exchange and the purchase of shares being
acquired at their respective net asset values as next determined
following receipt by the Alliance Mutual Fund whose shares are
being exchanged of (i) proper instructions and all necessary
100
<PAGE>
supporting documents as described in such fund's Prospectus, or
(ii) a telephone request for such exchange in accordance with the
procedures set forth in the following paragraph. Exchanges
involving the redemption of shares recently purchased by check
will be permitted only after the Alliance Mutual Fund whose
shares have been tendered for exchange is reasonably assured that
the check has cleared, normally up to 15 calendar days following
the purchase date. Exchanges of shares of Alliance Mutual Funds
will generally result in the realization of a capital gain or
loss for federal income tax purposes.
Each Fund shareholder, and the shareholder's selected
dealer, agent or financial representative, as applicable, are
authorized to make telephone requests for exchanges unless
Alliance Fund Services, Inc., receives written instruction to the
contrary from the shareholder, or the shareholder declines the
privilege by checking the appropriate box on the Subscription
Application found in the Prospectus. Such telephone requests
cannot be accepted with respect to shares then represented by
stock certificates. Shares acquired pursuant to a telephone
request for exchange will be held under the same account
registration as the shares redeemed through such exchange.
Eligible shareholders desiring to make an exchange
should telephone Alliance Fund Services, Inc. with their account
number and other details of the exchange, at (800) 221-5672
before 4:00 p.m., Eastern time, on a Fund business day as defined
above. Telephone requests for exchange received before 4:00 p.m.
Eastern time on a Fund business day will be processed as of the
close of business on that day. During periods of drastic
economic or market developments, such as the market break of
October 1987, it is possible that shareholders would have
difficulty in reaching Alliance Fund Services, Inc. by telephone
(although no such difficulty was apparent at any time in
connection with the 1987 market break). If a shareholder were to
experience such difficulty, the shareholder should issue written
instructions to Alliance Fund Services, Inc. at the address shown
on the cover of this Statement of Additional Information.
A shareholder may elect to initiate a monthly "Auto
Exchange" whereby a specified dollar amount's worth of his or her
Fund shares (minimum $25) is automatically exchanged for shares
of another Alliance Mutual Fund. Auto Exchange transactions
normally occur on the 12th day of each month, or the Fund
business day prior thereto.
None of the Alliance Mutual Funds, the Adviser, the
Principal Underwriter or Alliance Fund Services, Inc. will be
responsible for the authenticity of telephone requests for
exchanges that the Fund reasonably believes to be genuine. The
Fund will employ reasonable procedures in order to verify that
101
<PAGE>
telephone requests for exchanges are genuine, including, among
others, recording such telephone instructions and causing written
confirmations of the resulting transactions to be sent to
shareholders. If the Fund did not employ such procedures, it
could be liable for losses arising from unauthorized or
fraudulent telephone instructions. Selected dealers, agents or
financial representatives, as applicable, may charge a commission
for handling telephone requests for exchanges.
The exchange privilege is available only in states where
shares of the Alliance Mutual Fund being acquired may be legally
sold. Each Alliance Mutual Fund reserves the right, at any time
on 60 days' notice to its shareholders, to reject any order to
acquire its shares through exchange or otherwise to modify,
restrict or terminate the exchange privilege.
RETIREMENT PLANS
The Fund may be a suitable investment vehicle for part
or all of the assets held in various types of retirement plans,
such as those listed below. The Fund has available forms of such
plans pursuant to which investments can be made in the Fund and
other Alliance Mutual Funds. Persons desiring information
concerning these plans should contact Alliance Fund Services,
Inc. at the "For Literature" telephone number on the cover of
this Statement of Additional Information, or write to:
Alliance Fund Services, Inc.
Retirement Plans
P.O. Box 1520
Secaucus, New Jersey 07096-1520
INDIVIDUAL RETIREMENT ACCOUNT ("IRA"). Individuals who
receive compensation, including earnings from self-employment,
are entitled to establish and make contributions to an IRA.
Taxation of the income and gains paid to an IRA by the Fund is
deferred until distribution from the IRA. An individual's
eligible contribution to an IRA will be deductible if neither the
individual nor his or her spouse is an active participant in an
employer-sponsored retirement plan. If the individual or his or
her spouse is an active participant in an employer-sponsored
retirement plan, the individual's contributions to an IRA may be
deductible, in whole or in part, depending on the amount of the
adjusted gross income of the individual and his or her spouse.
EMPLOYER-SPONSORED QUALIFIED RETIREMENT PLANS. Sole
proprietors, partnerships and corporations may sponsor qualified
money purchase pension and profit-sharing plans, including
Section 401(k) plans ("qualified plans"), under which annual tax-
deductible contributions are made within prescribed limits based
on compensation paid to participating individuals. The minimum
102
<PAGE>
initial investment requirement may be waived with respect to
certain of these qualified plans.
If the aggregate net asset value of shares of the
Alliance Mutual Funds held by a qualified plan reaches $1 million
on or before December 15 in any year, all Class B or Class C
shares of the Fund held by the plan can be exchanged at the
plan's request without any sales charge, for Class A shares of
the Fund.
SIMPLIFIED EMPLOYEE PENSION PLAN ("SEP"). Sole
proprietors, partnerships and corporations may sponsor a SEP
under which they make annual tax-deductible contributions to an
IRA established by each eligible employee within prescribed
limits based on employee compensation.
403(B)(7) RETIREMENT PLAN. Certain tax-exempt
organizations and public educational institutions may sponsor
retirement plans under which an employee may agree that monies
deducted from his or her compensation (minimum $25 per pay
period) may be contributed by the employer to a custodial account
established for the employee under the plan.
The Alliance Plans Division of Frontier Trust Company, a
subsidiary of Equitable, which serves as custodian or trustee
under the retirement plan prototype forms available from the
Fund, charges certain nominal fees for establishing an account
and for annual maintenance. A portion of these fees is remitted
to Alliance Fund Services, Inc. as compensation for its services
to the retirement plan accounts maintained with the Fund.
Distributions from retirement plans are subject to
certain Code requirements in addition to normal redemption
procedures. For additional information please contact Alliance
Fund Services, Inc.
DIVIDEND DIRECTION PLAN
A shareholder who already maintains, in addition to his
or her Class A, Class B, Class C or Advisor Class Fund account, a
Class A, Class B, Class C or Advisor Class account with one or
more other Alliance Mutual Funds may direct that income dividends
and/or capital gains paid on the shareholder's Class A, Class B,
Class C or Advisor Class Fund shares be automatically reinvested,
in any amount, without the payment of any sales or service
charges, in shares of the same class of such other Alliance
Mutual Fund(s). Further information can be obtained by
contacting Alliance Fund Services, Inc. at the address or the
"For Literature" telephone number shown on the cover of this
Statement of Additional Information. Investors wishing to
establish a dividend direction plan in connection with their
103
<PAGE>
initial investment should complete the appropriate section of the
Subscription Application found in the Prospectus. Current
shareholders should contact Alliance Fund Services, Inc. to
establish a dividend direction plan.
SYSTEMATIC WITHDRAWAL PLAN
General. Any shareholder who owns or purchases shares of
the Fund having a current net asset value of at least $4,000 (for
quarterly or less frequent payments), $5,000 (for bi-monthly
payments) or $10,000 (for monthly payments) may establish a
systematic withdrawal plan under which the shareholder will
periodically receive a payment in a stated amount of not less
than $50 on a selected date. Systematic withdrawal plan
participants must elect to have their dividends and distributions
from the Fund automatically reinvested in additional shares of
the Fund.
Shares of the Fund owned by a participant in the Fund's
systematic withdrawal plan will be redeemed as necessary to meet
withdrawal payments and such payments will be subject to any
taxes applicable to redemptions and, except as discussed below,
any applicable contingent deferred sales charge. Shares acquired
with reinvested dividends and distributions will be liquidated
first to provide such withdrawal payments and thereafter other
shares will be liquidated to the extent necessary, and depending
upon the amount withdrawn, the investor's principal may be
depleted. A systematic withdrawal plan may be terminated at any
time by the shareholder or the Fund.
Withdrawal payments will not automatically end when a
shareholder's account reaches a certain minimum level. Therefore,
redemptions of shares under the plan may reduce or even liquidate
a shareholder's account and may subject the shareholder to the
Fund's involuntary redemption provisions. See "Redemption and
Repurchase of Shares--General." Purchases of additional shares
concurrently with withdrawals are undesirable because of sales
charges when purchases are made. While an occasional lump-sum
investment may be made by a holder of Class A shares who is
maintaining a systematic withdrawal plan, such investment should
normally be an amount equivalent to three times the annual
withdrawal or $5,000, whichever is less.
Payments under a systematic withdrawal plan may be made
by check or electronically via the Automated Clearing House
("ACH") network. Investors wishing to establish a systematic
withdrawal plan in conjunction with their initial investment in
shares of the Fund should complete the appropriate portion of the
Subscription Application found in the Prospectus, while current
Fund shareholders desiring to do so can obtain an application
form by contacting Alliance Fund Services, Inc. at the address or
104
<PAGE>
the "For Literature" telephone number shown on the cover of this
Statement of Additional Information.
CDSC Waiver for Class B Shares and Class C Shares. Under
a systematic withdrawal plan, up to 1% monthly, 2% bi- monthly or
3% quarterly of the value at the time of redemption of the
Class B or Class C shares in a shareholder's account may be
redeemed free of any contingent deferred sales charge.
With respect to Class B shares, the waiver applies only
with respect to shares acquired after July 1, 1995. Class B
shares that are not subject to a contingent deferred sales charge
(such as shares acquired with reinvested dividends or
distributions) will be redeemed first and will count toward the
foregoing limitations. Remaining Class B shares that are held the
longest will be redeemed next. Redemptions of Class B shares in
excess of the foregoing limitations will be subject to any
otherwise applicable contingent deferred sales charge.
With respect to Class C shares, shares held the longest
will be redeemed first and will count toward the foregoing
limitations. Redemptions in excess of those limitations will be
subject to any otherwise applicable contingent deferred sales
charge.
STATEMENTS AND REPORTS
Each shareholder of the Fund receives semi-annual and
annual reports which include a portfolio of investments,
financial statements and, in the case of the annual report, the
report of the Fund's independent auditors, Ernst & Young LLP, as
well as a confirmation of each purchase and redemption. By
contacting his or her broker or Alliance Fund Services, Inc., a
shareholder can arrange for copies of his or her account
statements to be sent to another person.
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
105
<PAGE>
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 change, 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.
_________________________________________________________________
NET ASSET VALUE
_________________________________________________________________
The per share net asset value is computed in accordance
with the Fund's Articles of Incorporation and By-Laws at the next
close of regular trading on the Exchange (ordinarily 4:00 p.m.
Eastern time) following receipt of a purchase or redemption order
by the Fund on each Fund business day on which such an order is
received and on such other days as the Board of Directors of the
Fund deems appropriate or necessary in order to comply with Rule
22c-1 under the 1940 Act. The Fund's per share net asset value
is calculated by dividing the value of the Fund's total assets,
less its liabilities, by the total number of its shares then
outstanding. A Fund business day is any weekday on which the
Exchange is open for trading.
In accordance with applicable rules under the 1940 Act,
portfolio securities are valued at current market value or at
fair value as determined in good faith by the Board of Directors.
The Board of Directors has delegated to the Adviser certain of
the Boards duties with respect to the following procedures.
106
<PAGE>
Readily marketable securities listed on the Exchange or on a
foreign securities exchange (other than foreign securities
exchanges whose operations are similar to those of the United
States over-the-counter market) are valued, except as indicated
below, at the last sale price reflected on the consolidated tape
at the close of the Exchange or, in the case of a foreign
securities exchange, at the last quoted sale price, in each case
on the business day as of which such value is being determined.
If there has been no sale on such day, the securities are valued
at the quoted bid prices on such day. If no bid prices are
quoted on such day, then the security is valued at the mean of
the bid and asked prices at the close of the Exchange on such day
as obtained from one or more dealers regularly making a market in
such security. Where a bid and asked price can be obtained from
only one such dealer, such security is valued at the mean of the
bid and asked price obtained from such dealer unless it is
determined that such price does not represent current market
value, in which case the security shall be valued in good faith
at fair value by, or pursuant to procedures established by, the
Board of Directors. Securities for which no bid and asked price
quotations are readily available are valued in good faith at fair
value by, or in accordance with procedures established by, the
Board of Directors. Readily marketable securities not listed on
the Exchange or on a foreign securities exchange are valued in
like manner. Portfolio securities traded on the Exchange and on
one or more other foreign or other national securities exchanges,
and portfolio securities not traded on the Exchange but traded on
one or more foreign or other national securities exchanges are
valued in accordance with these procedures by reference to the
principal exchange on which the securities are traded.
Readily marketable securities traded only in the over-
the-counter market, securities listed on a foreign securities
exchange whose operations are similar to those of the United
States over-the-counter market, and debt securities listed on a
U.S. national securities exchange whose primary market is
believed to be over-the-counter, are valued at the mean of the
bid and asked prices at the close of the Exchange on such day as
obtained from two or more dealers regularly making a market in
such security. Where a bid and asked price can be obtained from
only one such dealer, such security is valued at the mean of the
bid and asked price obtained from such dealer unless it is
determined that such price does not represent current market
value, in which case the security shall be valued in good faith
at fair value by, or in accordance with procedures established
by, the Board of Directors.
Listed put and call options purchased by the Fund are
valued at the last sale price. If there has been no sale on that
day, such securities will be valued at the closing bid prices on
that day.
107
<PAGE>
Open futures contracts and options thereon will be
valued using the closing settlement price or, in the absence of
such a price, the most recent quoted bid price. If there are no
quotations available for the day of valuations, the last
available closing settlement price will be used.
U.S. Government Securities and other debt instruments
having 60 days or less remaining until maturity are valued at
amortized cost if their original maturity was 60 days or less, or
by amortizing their fair value as of the 61st day prior to
maturity if their original term to maturity exceeded 60 days
(unless in either case the Board of Directors determines that
this method does not represent fair value).
Fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities.
The prices provided by a pricing service take into account many
factors, including institutional size trading in similar groups
of securities and any developments related to specific
securities. Mortgage backed and asset backed securities may be
valued at prices obtained from a bond pricing service or at a
price obtained from one or more of the major broker/dealers in
such securities. In cases where broker/dealer quotes are
obtained, the Adviser may establish procedures whereby changes in
market yields or spreads are used to adjust, on a daily basis, a
recently obtained quoted bid price on a security.
All other assets of the Fund are valued in good faith at
fair value by, or in accordance with procedures established by,
the Board of Directors.
Trading in securities on Far Eastern and European
securities exchanges and over-the-counter markets is normally
completed well before the close of business of each Fund business
day. In addition, trading in foreign markets may not take place
on all Fund business days. Furthermore, trading may take place
in various foreign markets on days that are not Fund business
days. The Funds calculation of the net asset value per share,
therefore, does not always take place contemporaneously with the
most recent determination of the prices of portfolio securities
in these markets. Events affecting the values of these portfolio
securities that occur between the time their prices are
determined in accordance with the above procedures and the close
of the Exchange will not be reflected in the Fund's calculation
of net asset value unless these prices do not reflect current
market value, in which case the securities will be valued in good
faith at fair value by, or in accordance with procedures
established by, the Board of Directors.
108
<PAGE>
The Board of Directors may suspend the determination of
the Funds net asset value (and the offering and sales of shares),
subject to the rules of the Commission and other governmental
rules and regulations, at a time when: (1) the Exchange is
closed, other than customary weekend and holiday closings, (2) an
emergency exists as a result of which it is not reasonably
practicable for the Fund to dispose of securities owned by it or
to determine fairly the value of its net assets, or (3) for the
protection of shareholders, the Commission by order permits a
suspension of the right of redemption or a postponement of the
date of payment on redemption.
For purposes of determining the Funds net asset value
per share, all assets and liabilities initially expressed in a
foreign currency will be converted into U.S. Dollars at the mean
of the current bid and asked prices of such currency against the
U.S. Dollar last quoted by a major bank that is a regular
participant in the relevant foreign exchange market or on the
basis of a pricing service that takes into account the quotes
provided by a number of such major banks. If such quotations are
not available as of the close of the Exchange, the rate of
exchange will be determined in good faith by, or under the
direction of, the Board of Directors.
The assets attributable to the Class A shares, Class B
shares, Class C shares and Advisor Class shares will be invested
together in a single portfolio. The net asset value of each
class will be determined separately by subtracting the
liabilities allocated to that class from the assets belonging to
that class in conformance with the provisions of a plan adopted
by the Fund in accordance with Rule 18f-3 under the 1940 Act.
________________________________________________________________
DIVIDENDS, DISTRIBUTIONS AND TAXES
________________________________________________________________
UNITED STATES FEDERAL INCOME TAXATION
OF DIVIDENDS AND DISTRIBUTIONS
General
The Fund intends for each taxable year to qualify to be
taxed as a "regulated investment company" under the Code. So
long as the Fund distributes 90% of its income, qualification
relieves the Fund of federal income tax liability on the part of
its net ordinary income and net realized capital gains which it
timely distributes to its shareholders. 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
109
<PAGE>
Fund must meet to qualify to be taxed as a "regulated investment
company."
In order to qualify as a regulated investment company
for any taxable year, the Fund must, among other things, derive
at least 90% of its gross income from dividends, interest,
certain payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign
currency, or certain other income (including, but not limited to,
gains from options, futures and forward contracts) derived with
respect to its business of investing in such stock, securities or
currency. In addition, the Fund will qualify as a regulated
investment company for any taxable year only if it satisfies the
diversification requirements set forth under the heading
"Description of the Fund--Non-Diversified Status."
The information set forth in the Prospectus and the
following discussion relate solely to the significant United
States federal income taxes on dividends and distributions by the
Fund and assumes that the Fund qualifies to be taxed as a
regulated investment company. Investors should consult their own
tax counsel with respect to the specific tax consequences of
their being shareholders of the Fund, including the effect and
applicability of federal, state, local and foreign tax laws to
their own particular situation and the possible effects of
changes therein.
The Fund intends to declare and distribute dividends in
the amounts and at the times necessary to avoid the application
of the 4% federal excise tax imposed on certain undistributed
income of regulated investment companies. The Fund will be
required to pay the 4% excise tax to the extent it does not
distribute to its shareholders during any calendar year an amount
equal to the sum of (i) 98% of its ordinary taxable income for
the calendar year, (ii) 98% of its capital gain net income and
foreign currency gains for the twelve months ended October 31 of
such year (or November 30 if elected by the Fund), and (iii) any
ordinary income or capital gain net income from the preceding
calendar year that was not distributed during such year. For
this purpose, income or gain retained by the Fund that is subject
to corporate income tax will be considered to have been
distributed by the Fund by year-end. For federal income and
excise tax purposes, dividends declared and payable to
shareholders of record as of a date in October, November or
December but actually paid during the following January will be
taxable to these shareholders for the year declared, and not for
the subsequent calendar year in which the shareholders actually
receive the dividend.
Dividends of the Fund's net ordinary income and
distributions of any net realized short-term capital gain are
110
<PAGE>
taxable to shareholders as ordinary income. 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.
Distributions of net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss) are
taxable as long-term capital gain, regardless of how long a
shareholder has held shares in the Fund. Any dividend or
distribution received by a shareholder on shares of the Fund will
have the effect of reducing the net asset value of such shares by
the amount of such dividend or distribution. Furthermore, a
dividend or distribution made shortly after the purchase of such
shares by a shareholder, although in effect a return of capital
to that particular shareholder, would be taxable to him or her as
described above. If a shareholder has held shares in the Fund
for six months or less and during that period has received a
distribution of net capital gain, any loss recognized by the
shareholder on the sale of those shares during the six-month
period will be treated as a long-term capital loss to the extent
of the distribution.
Dividends are taxable in the manner discussed regardless
of whether they are paid to the shareholder in cash or are
reinvested in additional shares of the Fund's Common Stock.
A dividend or capital gains distribution with respect to
shares of the Fund held by a tax-deferred or qualified plan, such
as an individual retirement account, 403(b)(7) retirement plan or
corporate pension or profit-sharing plan, generally will not be
taxable to the plan. Distributions from such plans will be
taxable to individual participants under applicable tax rules
without regard to the character of the income earned by the
qualified plan.
The Fund may be required to withhold federal income tax
at the rate of 31% of all taxable distributions payable to
shareholders who fail to provide the Fund with their correct
taxpayer identification numbers or to make required
certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate
shareholders and certain other shareholders specified in the Code
are exempt from such backup withholding. Backup withholding is
not an additional tax; any amounts so withheld may be credited
against a shareholder's federal income tax liability or refunded.
111
<PAGE>
FOREIGN TAX CREDIT
Investment income received by the Fund from sources
within foreign countries may be subject to foreign income taxes,
including taxes withheld at the source. The United States has
entered into tax treaties with many foreign countries which
entitle the Fund to a reduced rate of such taxes or exemption
from taxes on such income. It is impossible to determine the
effective rate of foreign tax in advance since the amount of the
Fund's assets to be invested within various countries is not
known. If more than 50% of the value of the Fund's total assets
at the close of its taxable year consists of stocks or securities
of foreign corporations (which for this purpose should include
obligations issued by foreign governments), the Fund will be
eligible to file an election with the Internal Revenue Service to
pass through to its shareholders the amount of foreign taxes paid
by the Fund. If eligible, the Fund intends to file such an
election. However, there can be no assurance that the Fund will
be able to do so. Pursuant to this election, a shareholder will
be required to (i) include in gross income(in addition to taxable
dividends actually received) his pro rata share of any foreign
income taxes paid by the Fund, (ii) treat his pro rata share of
such foreign taxes as having been paid by him; and (iii) either
deduct such pro rata share of foreign taxes in computing his
taxable income or treat such foreign taxes as a credit against
federal income taxes. Shareholders who normally are not liable
for federal income taxes, such as retirement plans qualified
under section 401 of the Code, will not be affected by any such
pass-through of taxes by the Fund. No deduction for foreign
income taxes may be claimed by an individual shareholder who does
not itemize deductions. In addition, certain shareholders may be
subject to rules which limit or reduce their ability to fully
deduct, or claim a credit for, their pro rata share of the
foreign income taxes paid by the Fund. A shareholder's foreign
tax credit with respect to a dividend received from the Fund will
be disallowed unless the shareholder holds shares in the Fund on
the ex-dividend date and for at least 15 other days during the
30-day period beginning 15 days prior to the ex-dividend date.
Each shareholder will be notified within 60 days after the close
of the Fund's taxable year whether the foreign income taxes paid
by the Fund will pass through for that year and, if so, such
notification will designate (i) such shareholder's portion of the
foreign income taxes paid to each such country, and (ii) the
portion of dividends that represents income derived from sources
within each such country.
The federal income tax status of each year's
distributions by the Fund will be reported to shareholders and to
the Internal Revenue Service. The foregoing is only a general
description of the treatment of foreign taxes under the United
States federal income tax laws. Because the availability of a
112
<PAGE>
foreign tax credit or deduction will depend on the particular
circumstances of each shareholder, potential investors are
advised to consult their own tax advisers.
UNITED STATES FEDERAL INCOME TAXATION OF THE FUND
The following discussion relates to certain significant
United States federal income tax consequences to the Fund with
respect to the determination of its "investment company taxable
income" each year. This discussion assumes that the Fund will be
taxed as a regulated investment company for each of its taxable
years.
CURRENCY FLUCTUATIONS--"SECTION 988" GAINS OR LOSSES.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities
are treated as ordinary income or ordinary loss. Similarly,
gains or losses from the disposition of foreign currencies, from
the disposition of debt securities denominated in a foreign
currency, or from the disposition of a forward contract
denominated in a foreign currency which are attributable to
fluctuations in the value of the foreign currency between the
date of acquisition of the asset and the date of disposition also
are treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "section 988" gains or losses,
increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to its shareholders as
ordinary income, rather than increasing or decreasing the amount
of the Fund's net capital gain. Because section 988 losses
reduce the amount of ordinary dividends the Fund will be allowed
to distribute for a taxable year, such section 988 losses may
result in all or a portion of prior dividend distributions for
such year being recharacterized as a non-taxable return of
capital to shareholders, rather than as an ordinary dividend,
reducing each shareholder's basis in his or her Fund shares. To
the extent that such distributions exceed such shareholder's
basis, each will be treated as a gain from the sale of shares.
OPTIONS, FUTURES CONTRACTS, AND FORWARD FOREIGN CURRENCY
CONTRACTS. Certain listed options, regulated futures contracts
and forward foreign currency contracts are considered "section
1256 contracts" for federal income tax purposes. Section 1256
contracts held by the Fund at the end of each taxable year will
be "marked to market" and treated for federal income tax purposes
as though sold for fair market value on the last business day of
such taxable year. Gain or loss realized by the Fund on section
1256 contracts other than forward foreign currency contracts will
be considered 60% long-term and 40% short-term capital gain or
113
<PAGE>
loss, although the Fund may elect to have the gain or loss it
realizes on certain contracts taxed as "section 988" gain or
loss. Gain or loss realized by the Fund on forward foreign
currency contracts generally will be treated as section 988 gain
or loss and will therefore be characterized as ordinary income or
loss and will increase or decrease the amount of the Fund's net
investment income available to be distributed to shareholders as
ordinary income, as described above. The Fund can elect to
exempt its section 1256 contracts which are part of a "mixed
straddle" (as described below) from the application of section
1256.
The Treasury Department has the authority to issue
regulations that would permit or require the Fund either to
integrate a foreign currency hedging transaction with the
investment that is hedged and treat the two as a single
transaction, or otherwise to treat the hedging transaction in a
manner that is consistent with the hedged investment. The
regulations issued under this authority generally should not
apply to the type of hedging transactions in which the Fund
intends to engage.
With respect to over-the-counter put and call options,
gain or loss realized by the Fund upon the lapse or sale of such
options held by the Fund will be either long-term or short-term
capital gain or loss depending upon the Fund's holding period
with respect to such option. However, gain or loss realized upon
the lapse or closing out of such options that are written by the
Fund will be treated as short-term capital gain or loss. In
general, if the Fund exercises an option, or if an option that
the Fund has written is exercised, gain or loss on the option
will not be separately recognized but the premium received or
paid will be included in the calculation of gain or loss upon
disposition of the property underlying the option.
Gain or loss realized by the Fund on the lapse or sale
of put and call options on foreign currencies which are traded
over-the-counter or on certain foreign exchanges will be treated
as section 988 gain or loss and will therefore be characterized
as ordinary income or loss and will increase or decrease the
amount of the Fund's net investment income available to be
distributed to shareholders as ordinary income, as described
above. The amount of such gain or loss shall be determined by
subtracting the amount paid, if any, for or with respect to the
option (including any amount paid by the Fund upon termination of
an option written by the Fund) from the amount received, if any,
for or with respect to the option (including any amount received
by the Fund upon termination of an option held by the Fund). In
general, if the Fund exercises such an option on a foreign
currency, or if such an option that the Fund has written is
exercised, gain or loss on the option will be recognized in the
114
<PAGE>
same manner as if the Fund had sold the option (or paid another
person to assume the Fund's obligation to make delivery under the
option) on the date on which the option is exercised, for the
fair market value of the option. The foregoing rules will also
apply to other put and call options which have as their
underlying property foreign currency and which are traded over-
the-counter or on certain foreign exchanges to the extent gain or
loss with respect to such options is attributable to fluctuations
in foreign currency exchange rates.
TAX STRADDLES. Any option, futures contract, or forward
foreign currency contract, interest rate swap, cap or floor or
other position entered into or held by the Fund in conjunction
with any other position held by the Fund may constitute a
"straddle" for federal income tax purposes. A straddle of which
at least one, but not all, the positions are section 1256
contracts may constitute a "mixed straddle". In general,
straddles are subject to certain rules that may affect the
character and timing of the Fund's gains and losses with respect
to straddle positions by requiring, among other things, that
(i) loss realized on disposition of one position of a straddle
not be recognized to the extent that the Fund has unrealized
gains with respect to the other position in such straddle;
(ii) the Fund's holding period in straddle positions be suspended
while the straddle exists (possibly resulting in gain being
treated as short-term capital gain rather than long-term capital
gain); (iii) losses recognized with respect to certain straddle
positions which are part of a mixed straddle and which are non-
section 1256 positions be treated as 60% long-term and 40% short-
term capital loss; (iv) losses recognized with respect to certain
straddle positions which would otherwise constitute short-term
capital losses be treated as long-term capital losses; and
(v) the deduction of interest and carrying charges attributable
to certain straddle positions may be deferred. The Treasury
Department is authorized to issue regulations providing for the
proper treatment of a mixed straddle where at least one position
consists of an ordinary asset and at least one position consists
of a capital asset. No such regulations have yet been issued.
Various elections are available to the Fund which may mitigate
the effects of the straddle rules, particularly with respect to
mixed straddles. In general, the straddle rules described above
do not apply to any straddles held by the Fund all of the
offsetting positions of which consist of section 1256 contracts.
ZERO COUPON SECURITIES. Current federal tax law
requires that a holder (such as the 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 Fund receives
no interest payment in cash on the security during the year.
Accordingly, the Fund may be required to pay out as an income
distribution each year an amount which is greater than the total
115
<PAGE>
amount of cash interest the Fund actually received. Such
distributions will be made from the cash assets of the Fund or by
liquidation of portfolio securities, if necessary. If a
distribution of cash necessitates the liquidation of portfolio
securities, the Adviser will select which securities to sell.
The Fund may realize a gain or loss from such sales. In the
event the Fund realizes net capital gains from such transactions,
its shareholders may receive a larger capital gain distribution,
if any, than they would have in the absence of such transactions.
TAXATION OF FOREIGN STOCKHOLDERS
The foregoing discussion relates only to United States
federal income tax law as it affects shareholders who are United
States citizens or residents or United States corporations. The
effects of federal income tax law on shareholders who are non-
resident alien individuals or foreign corporations may be
substantially different. Foreign investors should therefore
consult their counsel for further information as to the United
States tax consequences of receipt of income from the Fund.
_________________________________________________________________
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 underwriters; 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 futures contracts.
The Fund has no obligation to enter into transactions in
portfolio securities with any 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
dealer, the Adviser may, in its discretion, purchase and sell
securities through 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
116
<PAGE>
from a dealer is in addition to the services required to be
performed by the Adviser under the Advisory Agreement, and the
expenses of the Adviser will not necessarily be reduced as a
result of the receipt of such information. Consistent with the
Conduct Rules of the National Association of Securities Dealers,
Inc., and subject to seeking best price and execution, the Fund
may consider sales of its shares as a factor in the selection of
dealers to enter into portfolio transactions with the Fund.
Portfolio securities will not be purchased from or sold to
Donaldson, Lufkin & Jenrette Securities Corporation, an affiliate
of the Adviser, or any other subsidiary or affiliate of
Equitable.
_________________________________________________________________
GENERAL INFORMATION
_________________________________________________________________
CAPITALIZATION
The Fund is a Maryland corporation organized in 1992.
The Fund's shares have non-cumulative voting rights, which means
that the holders of more than 50% of the shares voting for the
election of Directors can elect 100% of the Directors if they
choose to do so, and in such event the holders of the remaining
less than 50% of the shares voting for such election of Directors
will not be able to elect any person or persons to the Board of
Directors. The authorized capital stock of the Fund currently
consists of 3,000,000,000 shares of Class A Common Stock, $.001
par value, 3,000,000,000 shares of Class B Common Stock, $.001
par value, 3,000,000,000 shares of Class C Common Stock, $.001
par value, and 3,000,000,000 shares of Advisor Class Common
Stock, $.001 par value. All shares of the Fund, when issued, are
fully paid and non-assessable. The Board of Directors is
authorized to reclassify and issue any unissued shares to any
number of additional series and classes without shareholder
approval. Accordingly, the Board in the future, for reasons such
as the desire to establish one or more additional portfolios with
different investment objectives, policies or restrictions, may
create additional classes or series of shares. Any issuance of
shares of another class or series would be governed by the 1940
Act and the law of the State of Maryland. If shares of another
series were issued in connection with the creation of a second
portfolio, each share of either portfolio would normally be
entitled to one vote for all purposes. Generally, shares of both
portfolios would vote as a single series on matters, such as the
election of Directors, that affected both portfolios in
substantially the same manner. As to matters affecting each
portfolio differently, such as approval of the Advisory Agreement
and changes in investment policy, shares of each portfolio would
vote as separate series.
117
<PAGE>
It is anticipated that annual shareholder meetings will
not be held; shareholder meetings will be held only when required
by federal or state law. Shareholders have available certain
procedures for the removal of Directors.
A shareholder in the Fund will be entitled to share pro
rata with other holders of the same class of shares all dividends
and distributions arising from the Fund's assets and, upon
redeeming shares, will receive the then current net asset value
of the Fund represented by the redeemed shares less any
applicable CDSC. Class A, Class B and Class C shares of the Fund
have identical voting, dividend, liquidation and other rights,
except that each class bears its own distribution and transfer
agency expenses. Each class of shares of the Fund votes
separately with respect to the Fund's Rule 12b-1 distribution
plan and other matters for which separate class voting is
appropriate under applicable law. Shares are freely
transferable, are entitled to dividends as determined by the
Directors and, in liquidation of the Fund, are entitled to
receive the net assets of the Fund. Certain additional matters
relating to the Fund's organization are discussed in this
Statement of Additional Information.
The outstanding voting shares of the Fund as of February
1, 1999 consisted of 279,897,438 shares of common stock
outstanding, of which 76,402,292 were Class A shares,
168,262,368were Class B shares and 35,232,778 were Class C
shares. To the knowledge of the Fund, the following persons
owned of record, and no person owned beneficially, 5% or more of
the outstanding shares of the Fund as of February 1, 1999:
Name and Address
Class A Shares
MLPF&S
For the Sole Benefit of
Its Customers
Attn: Fund Admin (979L9)
4800 Deer Lake Dr. East 2nd Fl.
Jacksonville, FL 32246-6484 10,433,694 13.66%
Class B Shares
MLPF&S For the Sole Benefit
of Its Customers
Attn: Fund Admin (979L9)
4800 Deer Lake Dr. East 2nd Fl.
Jacksonville, FL 32246-6484 34,418,557 20.46%
118
<PAGE>
Class C Shares
MLPF&S For the Sole Benefit of
Its Customers
Attn: Fund Admin (97BF3)
4800 Deer Lake Dr. East 2nd Fl.
Jacksonville, FL 32246-6484 11,527,023 32.72%
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts 02109, will act as custodian for the assets of the
Fund but plays no part in deciding the purchase or sale of
portfolio securities. Subject to the supervision of the Fund's
Directors, Brown Brothers Harriman & Co. may enter into sub-
custodial agreements for the holding of the Fund's foreign
securities.
PRINCIPAL UNDERWRITER
Alliance Fund Distributors, Inc., an indirect wholly-
owned subsidiary of the Adviser, located at 1345 Avenue of the
Americas, New York, New York 10105, is the principal underwriter
of the shares of the Fund and as such may solicit orders from the
public to purchase shares of the Fund. Under the Distribution
Services Agreement, the Fund has agreed to indemnify the
Principal Underwriter, in the absence of its willful misfeasance,
bad faith, gross negligence or reckless disregard of its
obligations thereunder, against certain civil liabilities,
including liabilities under the Securities Act.
COUNSEL
Legal matters in connection with the issuance of the
shares offered hereby are passed upon by Seward & Kissel LLP, New
York, New York. Seward & Kissel LLP has relied upon the opinion
of Venable, Baetjer and Howard LLP, Baltimore, Maryland, for
matters relating to Maryland law.
INDEPENDENT AUDITORS
Ernst & Young LLP, New York, New York, has been
appointed as independent auditors for the Fund.
YIELD AND TOTAL RETURN QUOTATIONS
From time to time, the Fund advertises its "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
119
<PAGE>
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 may also state in
its sales literature an "actual distribution rate" for each class
which is computed in the same manner as yield except that actual
income dividends declared per share during the period in question
are substituted for net investment income per share. The actual
distribution rate is computed separately for Class A, Class B and
Class C shares. Advertisements of the Fund's total return
disclose its average annual compounded total return for the
periods prescribed by the Commission. The Fund's total return
for each such period is computed by finding, through the use of a
formula prescribed by the Commission, the average annual
compounded rate of return over the period that would equate an
assumed initial amount invested to the value of the investment at
the end of the period. For purposes of computing total return,
income dividends and capital gains distributions paid on shares
of the Fund are assumed to have been reinvested when paid and the
maximum sales charges applicable to purchases and redemptions of
the Fund's shares are assumed to have been paid. The Fund's
advertisements may quote performance rankings or ratings of the
Fund by financial publications or independent organizations such
as Lipper Analytical Services, Inc. and Morningstar, Inc. or
compare the Fund's performance to various indicies.
The Fund calculates average annual total return
information in the Performance Table in the Risk/Return Summary
according to the Commission formula as described above. In
accordance with Commission guidelines, total return information
is presented for each class for the same time periods, i.e., the
1, 5 and 10 years (or over the life of the Fund, if the Fund is
less than 10 years old) ending on the last day of the most recent
calendar year. Since different classes may have first been sold
on different dates ("Actual Inception Dates"), in some cases this
can result in return information being presented for a class for
periods prior to its Actual Inception Date. Where return
information is presented for periods prior to the Actual
Inception Date of a Class (a "Younger Class"), such information
is calculated by using the historical performance of the class
with the earliest Actual Inception Date (the "Oldest Class").
For this purpose, the Fund calculates the difference in total
annual fund operating expenses (as a percentage of average net
assets) between the Younger Class and the Oldest Class for the
most recent fiscal year ended prior to March 1, 1999, divides the
difference by 12, and subtracts the result from the monthly
performance at net asset value (including reinvestment of all
dividends and distributions) of the Oldest Class for each month
prior to the Younger Class's Actual Inception Date for which
performance information is to be shown. The resulting "pro
forma" monthly performance information is used to calculate the
120
<PAGE>
Younger Class's average annual returns for these periods. Any
conversion feature applicable to the Younger Class is assumed to
occur in accordance with the Actual Inception Date for that
class, not its hypothetical inception date.
The Fund's yield for the month ended November 30, 1998
for Class A shares was 12.01%, for Class B shares was 11.80% and
for Class C shares was 11.81%. The Fund's actual distribution
rate for such period for Class A shares was 12.23%, for Class B
shares was 11.83% and for Class C shares was 11.83%.
The average annual total return based on net asset value
for each class of shares for the one-, five-, and ten-year
periods ended November 30, 1998 (or since inception through that
date, as noted) was as follows:
12 Months
Ended 5 Years Ended 10 Years Ended
11/30/98 11/30/98 11/30/98
Class A 7.14% 6.92% 8.52%*
Class B 6.46% 6.01% 7.72%*
Class C 6.46% 6.03% 7.02%*
*Inception Date: Class A - March 27, 1992
Class B - March 27, 1992
Class C - May 3, 1993
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.
Quotations of yield and total return do not include any provision
for the effect of individual income taxes. An investor's
principal invested in the Fund is not fixed and will fluctuate in
response to prevailing market conditions. The Fund may advertise
the fluctuation of its net asset value over certain time periods
and compare its performance to that available from other
investments, including money market funds and certificates of
deposit, the later of which, unlike the Fund, are insured and
have fixed rates of return.
Advertisements quoting performance rankings of the Fund
as measured by financial publications or by independent
organizations such as Lipper Analytical Services, Inc.,
Morningstar, Inc., and advertisements presenting the historical
record of payments of income dividends by the Fund may also from
time to time be sent to investors or placed in newspapers,
magazines such as The Wall Street Journal, The New York Times,
Barrons, Investor's Daily, Money Magazine, Changing Times,
Business Week and Forbes or other media on behalf of the Fund.
121
<PAGE>
It is expected that the Fund will be ranked by Lipper in the
category known as "World Income Funds."
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. 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.
122
<PAGE>
_________________________________________________________________
REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
_________________________________________________________________
123
<PAGE>
ALLIANCE
----------------------------
NORTH AMERICAN
----------------------------
GOVERNMENT
----------------------------
INCOME TRUST
----------------------------
Annual Report
November 30, 1998
Alliance Capital[LOGO](R)
<PAGE>
PORTFOLIO OF INVESTMENTS Alliance North American
November 30, 1998 Government Income Trust
================================================================================
Principal
Amount
(000) U.S. $ Value
- --------------------------------------------------------------------------------
ARGENTINA-26.8%
GOVERNMENT OBLIGATIONS-26.8%
Republic of Argentina
Pensioner-Bocon
Pre III FRN
2.91%, 9/01/02 (a)................. ARS 242,124 $ 200,027,118
Supplier-Bocon
Pro 1 FRN
2.91%, 4/01/07..................... 634,411 419,626,837
--------------
Total Argentinian Securities
(cost $632,552,777)................ 619,653,955
--------------
CANADA-18.7%
GOVERNMENT/AGENCY OBLIGATIONS-18.7%
Government of Canada
8.00%, 6/01/27..................... CA$ 195,000 176,997,047
Province of British Columbia
7.88%, 11/30/23 (b)................ 36,000 29,468,504
8.00%, 9/08/23 (b)................. 24,600 20,871,260
9.00%, 8/23/24 (b)................. 25,000 23,482,612
Province of Manitoba
7.75%, 12/22/25 (b)................ 60,200 50,601,181
Province of Ontario
7.75%, 12/08/03 (b)................ 20,000 14,619,423
Province of Quebec
9.375%, 1/16/23 (b)................ 53,600 50,118,110
Province of Saskatchewan
9.60%, 2/04/22 (b)................. 24,600 24,148,032
Quebec Hydro Zero coupon, 8/15/20 (c).. 250,000 43,928,806
--------------
Total Canadian Securities
(cost $394,752,068)................ 434,234,975
--------------
MEXICO-27.9%
GOVERNMENT/AGENCY OBLIGATIONS-27.9%
Bankers Acceptances
Nacional Financiera
S.N.C. (d)
16.50%, 12/26/03................... MXP 414,125 10,969,711
16.95%, 12/24/03................... 81,401 2,157,936
17.50%, 12/11/03................... 55,253 1,472,364
Mexican Treasury Bills (d)
19.75%, 12/17/98................... 187,490 18,472,248
20.10%, 4/08/99.................... 150,000 13,360,020
20.68%, 3/11/99.................... 1,283,235 116,669,402
20.77%, 1/14/99.................... 314,635 30,227,619
20.80%, 2/11/99.................... 1,178,760 109,942,916
27.08%, 6/03/99.................... 1,323,836 112,544,249
29.47%, 5/06/99.................... 1,064,297 92,556,808
31.12%, 7/08/99.................... 820,116 67,792,426
34.51%, 8/05/99.................... 850,131 68,912,289
--------------
Total Mexican Securities
(cost $826,468,831)................ 645,077,988
--------------
UNITED STATES-42.5%
GOVERNMENT OBLIGATIONS-42.1%
U.S. Treasury Bonds
5.25%, 11/15/28.................... US$ 105,000 107,920,365
5.50%, 8/15/28..................... 25,000 26,429,700
6.75%, 8/15/26..................... 55,000 66,378,125
11.75%, 11/15/14................... 64,000 99,660,032
12.375%, 5/15/04................... 41,200 56,057,750
12.50%, 8/15/14.................... 69,000 111,046,875
13.75%, 8/15/04.................... 60,000 86,531,280
14.00%, 11/15/11................... 11,900 18,902,412
U.S. Treasury Notes
5.625%, 5/15/08.................... 21,000 22,351,875
6.125%, 11/15/27................... 80,000 90,325,040
6.25%, 2/15/07..................... 46,800 51,363,000
6.50%, 10/15/06.................... 15,000 16,631,250
7.00%, 7/15/06..................... 67,900 77,257,503
U.S. Treasury Strips
Zero coupon, 2/15/12............... 100,000 50,051,300
Zero coupon, 8/15/12............... 52,000 25,218,752
Zero coupon, 5/15/13............... 137,000 63,594,304
Zero coupon, 5/15/14............... 13,400 5,854,406
--------------
975,573,969
--------------
6
<PAGE>
Alliance North American
Government Income Trust
================================================================================
Principal
Amount
(000) U.S. $ Value
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT-0.4%
Brown Brothers Harriman & Co.
5.15%, dated 11/30/98,
$9,901,416 due 12/01/98,
(collateralized by $9,846,000
U.S. Treasury Note
5.375%, 1/31/00)................... US$ 9,900 $ 9,900,000
--------------
Total United States Securities
(cost $942,183,016)................ 985,473,969
--------------
TOTAL INVESTMENTS-115.9%
(cost $2,795,956,692).............. $2,684,440,887
Other assets less
liabilities-(15.9%)................ (367,781,915)
--------------
NET ASSETS-100%........................ $2,316,658,972
==============
- --------------------------------------------------------------------------------
(a) Interest is compounded monthly and capitalized until October 1, 1998,
after which the security holder will receive monthly paydowns of principal
and interest until maturity.
(b) Securities, or portion thereof, with an aggregate market value of
$213,309,122 have been segregated to collateralize forward exchange
currency contracts.
(c) Private Placement, valued at fair value (see Note A.)
(d) Interest rate represents annualized yield to maturity at purchase date.
Glossary:
FRN - Floating Rate Note.
See notes to financial statements.
7
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES Alliance North American
November 30, 1998 Government Income Trust
================================================================================
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $2,795,956,692) .......................... $2,684,440,887
Cash ............................................................................... 88,926
Interest receivable ................................................................ 23,791,511
Receivable for investment securities sold .......................................... 11,778,487
Receivable for capital stock sold .................................................. 9,508,409
Other assets ....................................................................... 342,603
--------------
Total assets ....................................................................... 2,729,950,823
--------------
LIABILITIES
Loan payable ....................................................................... 250,000,000
Payable for investment securities purchased ........................................ 136,672,922
Payable for capital stock redeemed ................................................. 8,225,073
Dividend payable ................................................................... 7,800,881
Loan interest payable .............................................................. 3,596,072
Unrealized depreciation of forward exchange currency contracts...................... 2,928,987
Advisory fee payable ............................................................... 1,351,056
Distribution fee payable ........................................................... 394,244
Accrued expenses and other liabilities ............................................. 2,322,616
--------------
Total liabilities .................................................................. 413,291,851
--------------
NET ASSETS............................................................................. $2,316,658,972
==============
COMPOSITION OF NET ASSETS
Capital stock, at par .............................................................. $ 304,719
Additional paid-in capital ......................................................... 2,594,655,880
Distributions in excess of net investment income ................................... (32,865,565)
Accumulated net realized loss on investments and foreign currency transactions ..... (131,476,846)
Net unrealized depreciation of investments and foreign currency denominated
assets and liabilities ........................................................... (113,959,216)
--------------
$2,316,658,972
==============
CALCULATION OF MAXIMUM OFFERING PRICE
Class A Shares
Net asset value and redemption price per share
($740,066,296 / 97,500,301 shares of capital stock issued and outstanding) ....... $7.59
Sales charge--4.25% of public offering price ....................................... 0.34
-----
Maximum offering price ............................................................. $7.93
=====
Class B Shares
Net asset value and offering price per share
($1,300,519,285 / 170,935,732 shares of capital stock issued and outstanding) .... $7.61
=====
Class C Shares
Net asset value and offering price per share
($276,073,391 / 36,282,649 shares of capital stock issued and outstanding) ....... $7.61
=====
</TABLE>
- --------------------------------------------------------------------------------
See notes to financial statements.
8
<PAGE>
STATEMENT OF OPERATIONS Alliance North American
Year Ended November 30, 1998 Government Income Trust
================================================================================
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (net of foreign taxes withheld of $232,087) ..... $ 304,387,869
EXPENSES
Advisory fee ............................................. $16,629,250
Distribution fee - Class A ............................... 1,976,686
Distribution fee - Class B ............................... 13,643,777
Distribution fee - Class C ............................... 2,850,733
Custodian ................................................ 3,376,048
Transfer agency .......................................... 3,037,804
Printing ................................................. 374,548
Audit and legal .......................................... 134,415
Administrative ........................................... 129,953
Registration ............................................. 96,875
Directors' fees .......................................... 34,060
Miscellaneous ............................................ 584,019
-----------
Total expenses before interest ........................... 42,868,168
Interest expense ......................................... 15,656,952
-----------
Total expenses ........................................... 58,525,120
-------------
Net investment income .................................... 245,862,749
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain on investment transactions ............. 103,109,587
Net realized loss on foreign currency transactions ....... (82,930,864)
Net change in unrealized appreciation of:
Investments ............................................ (127,857,382)
Foreign currency denominated assets and liabilities .... (2,506,950)
-------------
Net loss on investments .................................. (110,185,609)
-------------
NET INCREASE IN NET ASSETS FROM OPERATIONS .................. $ 135,677,140
=============
</TABLE>
- --------------------------------------------------------------------------------
See notes to financial statements.
9
<PAGE>
Alliance North American
STATEMENT OF CHANGES IN NET ASSETS Government Income Trust
================================================================================
<TABLE>
<CAPTION>
Year Ended Year Ended
November 30, November 30,
1998 1997
-------------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income ............................................... $ 245,862,749 $ 253,796,693
Net realized gain on investments and foreign currency transactions .. 20,178,723 46,788,566
Net change in unrealized appreciation (depreciation) of investments .
and foreign currency denominated assets and liabilities ........... (130,364,332) (64,771,290)
-------------- --------------
Net increase in net assets from operations .......................... 135,677,140 235,813,969
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ........................................................... (74,201,378) (53,153,774)
Class B ........................................................... (141,961,151) (151,811,556)
Class C ........................................................... (29,700,220) (29,704,053)
Distributions in excess of net investment income
Class A ........................................................... (5,401,762) -0-
Class B ........................................................... (10,316,188) -0-
Class C ........................................................... (2,143,419) -0-
Tax return of capital
Class A ........................................................... (2,554,780) -0-
Class B ........................................................... (4,887,773) -0-
Class C ........................................................... (1,022,589) -0-
CAPITAL STOCK TRANSACTIONS
Net increase ........................................................ 279,531,511 206,316,343
-------------- --------------
Total increase ...................................................... 143,019,391 207,460,929
NET ASSETS
Beginning of year ................................................... 2,173,639,581 1,966,178,652
-------------- --------------
End of year ......................................................... $2,316,658,972 $2,173,639,581
============== ==============
</TABLE>
- --------------------------------------------------------------------------------
See notes to financial statements.
10
<PAGE>
STATEMENT OF CASH FLOWS Alliance North American
Year Ended November 30, 1998 Government Income Trust
================================================================================
<TABLE>
<S> <C> <C>
INCREASE (DECREASE) IN CASH FROM:
OPERATING ACTIVITIES:
Interest received ............................................. $ 110,920,723
Interest paid ................................................. (15,076,009)
Operating expenses paid ....................................... (42,613,610)
--------------
Net increase in cash from operating activities ................ $ 53,231,104
INVESTING ACTIVITIES:
Purchases of short-term portfolio investments, net ............ (107,523,154)
Purchases of long-term portfolio investments .................. (3,830,009,769)
Proceeds from disposition of long-term portfolio investments .. 3,875,921,511
--------------
Net decrease in cash from investing activities ................ (61,611,412)
FINANCING ACTIVITIES*:
Subscriptions of capital stock, net ........................... 281,589,081
Cash dividends paid ........................................... (273,106,331)
--------------
Net increase in cash from financing activities ................ 8,482,750
Effect of exchange rate on cash ............................... (57,328)
------------
Net increase in cash .......................................... 45,114
Cash at beginning of year ..................................... 43,812
------------
Cash at end of year ........................................... $ 88,926
============
- ---------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCREASE IN NET ASSETS
FROM OPERATIONS TO NET INCREASE IN CASH FROM
OPERATING ACTIVITIES:
Net increase in net assets from operations .................... $135,677,140
ADJUSTMENTS:
Decrease in interest receivable ............................... $ 645,236
Net realized gain on investment transactions .................. (103,109,587)
Net change in unrealized depreciation ......................... 130,364,332
Accretion of bond discount .................................... (194,112,382)
Increase in accrued expenses and other liabilities ............ 835,501
Net realized loss on foreign currency transactions ............ 82,930,864
--------------
(82,446,036)
------------
Net increase in cash from operating activities ................ $ 53,231,104
============
</TABLE>
- --------------------------------------------------------------------------------
* Non-cash financing activities not included herein consist of reinvestment
of dividends.
See notes to financial statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS Alliance North American
November 30, 1998 Government Income Trust
================================================================================
NOTE A: Significant Accounting Policies
Alliance North American Government Income Trust, Inc. (the "Fund") was
incorporated in the State of Maryland on February 3, 1992 as a non-diversified,
open-end management 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% for purchases not exceeding $1,000,000. With respect to purchases of
$1,000,000 or more, Class A shares redeemed within one year of purchase may be
subject to a contingent deferred sales charge of 1%. Class B shares are sold
with a contingent deferred sales charge which declines from 3% 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 subject to a contingent deferred sales charge of 1%
on redemptions made within the first year after purchase. All three classes of
shares have identical voting, dividend, liquidation and other rights with
respect to its distribution plan. The financial statements have been prepared in
conformity with generally accepted accounting principles which require
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities in the financial statements and amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates. The following is a summary of significant accounting
policies followed by the Fund.
1. Security Valuation
Portfolio securities traded on a national securities exchange or on a foreign
securities exchange (other than foreign securities exchanges whose operations
are similar to those of the United States over-the-counter market) are generally
valued at the last reported sale price or, if there was no sale on such day, the
last bid price quoted on such day. If no bid prices are quoted, then the
security is valued at the mean of the bid and asked prices as obtained on that
day from one or more dealers regularly making a market in that security.
Securities traded on the over-the-counter market, securities listed on a foreign
securities exchange whose operations are similar to the United States
over-the-counter market, and securities listed on a national securities exchange
whose primary market is believed to be over-the-counter are valued at the mean
of the closing bid and asked price provided by two or more dealers regularly
making a market in such securities. U.S. government securities and other debt
securities which mature in 60 days or less are valued at amortized cost unless
this method does not represent fair value. Securities for which market
quotations are not readily available are valued at fair value as determined in
good faith by, or in accordance with procedures approved by, the Board of
Directors. Fixed income securities may be valued on the basis of prices provided
by a pricing service when such prices are believed to reflect the fair market
value of such securities.
2. Currency Translation
Assets and liabilities denominated in foreign currencies and commitments under
forward exchange currency contracts are translated into U.S. dollars at the mean
of the quoted bid and asked price of such currencies against the U.S. dollar.
Purchases and sales of portfolio securities are translated at the rates of
exchange prevailing when such securities were acquired or sold. Income and
expenses are translated at rates of exchange prevailing when accrued.
Net realized gains or losses on foreign currency transactions represent foreign
exchange gains and losses from sales and maturities of foreign securities and
forward exchange currency contracts, holding of foreign currencies, exchange
gains or losses realized between the trade and settlement dates on investment
transactions, and the difference between the amounts of interest recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid. Net change in unrealized appreciation (depreciation) of foreign currency
denominated assets and liabilities represents net currency gains and losses from
valuing foreign currency denominated assets and liabilities at period end
exchange rates.
3. Taxes
It is the Fund's policy to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
investment company taxable income and net realized gains, if any, to
shareholders. Therefore, no provisions for federal income or excise taxes are
required.
12
<PAGE>
Alliance North American
Government Income Trust
================================================================================
4. Investment Income and Investment Transactions
Interest income is accrued daily. Investment transactions are accounted for on
the date securities are purchased or sold. Investment gains and losses are
determined on the identified cost basis. The Fund accretes discount as an
adjustment to interest income.
5. Income and Expenses
All income earned and expenses incurred by the Fund are borne on a pro-rata
basis by each settled class of shares, based on the proportionate interest in
the Fund represented by the shares of such class, except that the Fund's Class B
and Class C shares bear higher distribution and transfer agent fees than Class A
shares.
6. Dividends and Distributions
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Income and capital gains distributions are determined in accordance with
federal tax regulations and may differ from those determined in accordance with
generally accepted accounting principles. To the extent these differences are
permanent, such amounts are reclassified within capital accounts based on their
federal tax basis treatment; temporary differences do not require such
reclassification. During the current fiscal year, permanent differences,
primarily due to foreign currency losses and a tax return of capital, resulted
in a net decrease in distributions in excess of net investment income, a
decrease in accumulated net realized loss on investments and foreign currency
transactions, and a decrease in additional paid-in capital. This
reclassification had no effect on net assets.
- --------------------------------------------------------------------------------
NOTE B: Advisory Fee and Other Transactions with Affiliates
Under the terms of an investment advisory agreement, the Fund pays Alliance
Capital Management L.P. (the "Adviser") an advisory fee at an annual rate of .65
of 1% of the average adjusted daily net assets of the Fund. Such fee is accrued
daily and paid monthly.
Pursuant to the advisory agreement, the Fund paid the Adviser $129,953
representing the cost of certain legal and accounting services provided to the
Fund by the Adviser for the year ended November 30, 1998.
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 $2,156,101 for the year ended November 30, 1998.
Alliance Fund Distributors, Inc. (a wholly-owned subsidiary of the Adviser)
serves as the Distributor of the Fund's shares. The Distributor received
front-end sales charges of $234,927 from the sale of Class A shares and $28,978,
$1,574,130 and $164,308 in contingent deferred sales charges imposed upon
redemptions by shareholders of Class A, Class B and Class C shares,
respectively, for the year ended November 30, 1998.
- --------------------------------------------------------------------------------
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 the Fund's average daily net assets attributable to Class A
shares and 1% of the average daily net assets attributable to both Class B and
Class C shares. 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 $36,411,699 and $4,590,722 for Class B and Class 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 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.
13
<PAGE>
Alliance North American
NOTES TO FINANCIAL STATEMENTS (continued) Government Income Trust
================================================================================
NOTE D: Investment Transactions
Purchases and sales of investment securities (excluding short-term investments
and U.S. government securities) aggregated $315,555,135 and $188,823,314,
respectively, for the year ended November 30, 1998. There were purchases of
$3,403,171,041 and sales of $3,693,242,876 of U.S. government and government
agency obligations for the year ended November 30, 1998.
At November 30, 1998, the cost of investments for federal income tax purposes
was $2,816,932,886. Accordingly, gross unrealized appreciation of investments
was $86,769,935 and gross unrealized depreciation of investments was
$219,261,934 resulting in net unrealized depreciation of $132,491,999 excluding
foreign currency transactions. At November 30, 1998, the Fund had a capital loss
carryforward totaling $110,500,652, of which $71,003,543 expires in the year
2003, and $39,497,109 expires in the year 2004.
Forward Exchange Currency Contracts
The Fund enters into forward exchange currency contracts to hedge its exposure
to changes in foreign currency exchange rates on its foreign portfolio holdings,
to hedge certain firm purchase and sales commitments denominated in foreign
currencies and for investment purposes. A forward exchange currency contract is
a commitment to purchase or sell a foreign currency at a future date at a
negotiated forward rate. The gain or loss arising from the difference between
the original contracts and the closing of such contracts is included in realized
gains or losses from foreign currency transactions.
Fluctuations in the value of forward exchange currency contracts are recorded
for financial reporting purposes as unrealized gains or losses by the Fund.
The Fund's custodian will place and maintain cash not available for investment
or other liquid assets in a separate account of the Fund having a value equal to
the aggregate amount of the Fund's commitments under forward exchange currency
contracts entered into with respect to position hedges.
Risks may arise from the potential inability of the counterparty to meet the
terms of a contract and from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar. The face or contract amount, in U.S.
dollars, reflects the total exposure of the Fund in that particular currency
contract.
At November 30, 1998, the Fund had outstanding forward exchange currency
contracts, as follows:
<TABLE>
<CAPTION>
U.S. $
Contract Value on U.S. $ Unrealized
Amount Origination Current Appreciation
(000) Date Value (Depreciation)
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Forward Exchange Currency
Buy Contracts
Canadian Dollars,
settling 12/07/98.............. 48,583 $ 31,425,182 $ 31,879,454 $ 454,272
Forward Exchange Currency
Sale Contracts
Canadian Dollars,
settling 12/07/98.............. 314,674 203,099,997 206,483,256 (3,383,259)
------------
$ (2,928,987)
============
</TABLE>
- --------------------------------------------------------------------------------
NOTE E: Bank Borrowing
The Fund entered into a Revolving Credit Agreement with Deutsche Bank AG, New
York Branch on June 4, 1998. The maximum credit available under the credit
facility is $250,000,000 and requires no collateralization. The loan
outstanding, under the Credit Agreement for the year ended November 30, 1998 was
$250,000,000 with a related weighted average interest rate at year end of 6.15%
and a weighted average annualized interest rate of 6.26%. The $250,000,000
balance will mature on
14
<PAGE>
Alliance North American
Government Income Trust
================================================================================
December 9, 1998, (the loan was subsequently renewed). Interest payments on
current borrowings are based on the Eurodollar margin plus the applicable
Eurodollar rate. The Fund is also obligated to pay Deutsche Bank AG, New York
Branch a facility fee computed at the rate of .10% per annum on the daily amount
of the total commitment as in effect.
- --------------------------------------------------------------------------------
NOTE F: Capital Stock
There are 9,000,000,000 shares of $0.001 par value capital stock authorized,
divided into three classes, designated Class A, Class B, and Class C shares.
Each class consists of 3,000,000,000 authorized shares. Transactions in capital
stock were as follows:
<TABLE>
<CAPTION>
----------------------------------- -----------------------------------
SHARES AMOUNT
----------------------------------- -----------------------------------
Year Ended Year Ended Year Ended Year Ended
November 30, November 30, November 30, November 30,
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Class A
Shares sold....................... 40,930,531 17,871,465 $ 325,348,092 $ 144,058,872
Shares issued in reinvestment of
dividends...................... 3,181,255 2,269,271 24,821,621 18,311,581
Shares converted from Class B..... 7,799,684 8,014,844 59,480,464 64,154,628
Shares redeemed................... (18,195,141) (12,556,597) (139,838,724) (100,703,640)
-------------- -------------- -------------- --------------
Net increase...................... 33,716,329 15,598,983 $ 269,811,453 $ 125,821,441
============== ============== ============== ==============
Class B
Shares sold....................... 40,837,786 43,619,890 $ 320,851,480 $ 351,851,243
Shares issued in reinvestment of
dividends...................... 5,700,319 5,419,148 44,452,518 43,709,426
Shares converted to Class A....... (7,799,684) (8,014,844) (59,480,464) (64,154,628)
Shares redeemed................... (39,600,299) (35,310,274) (305,507,405) (283,575,964)
-------------- -------------- -------------- --------------
Net increase (decrease)........... (861,878) 5,713,920 $ 316,129 $ 47,830,077
============== ============== ============== ==============
Class C
Shares sold....................... 11,845,488 11,671,925 $ 93,169,906 $ 94,074,275
Shares issued in reinvestment of
dividends...................... 1,368,044 1,158,939 10,660,900 9,352,065
Shares redeemed................... (12,263,001) (8,808,490) (94,426,877) (70,761,515)
-------------- -------------- -------------- --------------
Net increase...................... 950,531 4,022,374 $ 9,403,929 $ 32,664,825
============== ============== ============== ==============
</TABLE>
- --------------------------------------------------------------------------------
NOTE G: Litigation
On July 25, 1995, a Consolidated and Supplemental Class Action Complaint
("Complaint"), styled In re North American Government Income Trust, Inc.
Securities Litigation, was filed in the U.S. District Court for the Southern
District of New York ("District Court") against the Fund, the Adviser, Alliance
Capital Management Corporation ("ACMC"), Alliance Fund Distributors, Inc.
("AFD"), The Equitable Companies Incorporated ("ECI"), a parent of the Adviser,
and certain current and former officers and directors of the Fund and ACMC,
alleging violations of the federal securities laws, fraud and breach of
fiduciary duty in connection with the Fund's investments in Mexican and
Argentine securities. The Complaint sought certification of a plaintiff class of
all persons who purchased or owned Class A, B or C shares of the Fund from March
27, 1992 through December 23, 1994. Plaintiffs alleged that during 1995 the
Fund's losses exceeded $750,000,000 and sought as relief unspecified damages,
costs and attorney's fees.
15
<PAGE>
Alliance North American
NOTES TO FINANCIAL STATEMENTS (continued) Government Income Trust
================================================================================
On September 26, 1996, the District Court granted defendants' motion to dismiss
all courts of the Complaint ("First Decision"). On October 11, 1996, plaintiffs
filed a motion for reconsideration of the First Decision. On November 25, 1996,
the District Court denied plaintiffs' motion for reconsideration of the First
Decision. On October 29, 1997, the United States Court of Appeals for the Second
Circuit ("Court of Appeals") issued an order granting defendants' motion to
strike and dismiss plaintiffs' appeal of the First Decision.
On October 29, 1996, plaintiffs filed a motion for leave to file an amended
complaint ("Amended Complaint"). In the Amended Complaint, plaintiffs asserted
claims against the Fund, the Adviser, ACMC, AFD, ECI, and certain current and
former officers of the Fund and ACMC alleging violations of the federal
securities laws, fraud and breach of fiduciary duty. The principal allegations
of the Amended Complaint related to the Fund's hedging practices, the Fund's
investments in certain mortgage-backed securities, and the risk and objectives
of the Fund as described in the Fund's marketing materials. The Amended
Complaint made similar requests for class certification and damages as made in
the Complaint. On July 15, 1997, the District Court denied plaintiffs' motion
for leave to file the Amended Complaint and dismissed the case ("Second
Decision").
On November 17, 1997, plaintiffs filed a notice of appeal of the Second Decision
to the Court of Appeals. On October 15, 1998, the Court of Appeals affirmed in
part and reversed in part the Second Decision. The Court of Appeals affirmed the
District Court's denial of plaintiffs' motion for leave to file the Amended
Complaint insofar as the Amended Complaint alleged that defendants had made
misrepresentations and omissions relating to the Fund's investments in certain
mortgage-backed securities and in the Fund's marketing materials. The Court of
Appeals reversed the District Court's decision to deny plaintiffs' motions for
leave to file the Amended Complaint insofar as the Amended Complaint alleged
that defendants had made actionable misrepresentation and omissions relating to
the Fund's hedging practices.
The Fund and Alliance believe that the allegations in the Complaint and the
Amended Complaint are without merit and intend to defend vigorously against
those claims.
- --------------------------------------------------------------------------------
NOTE H: Concentration of Risk
Investing in securities of foreign governments involves special risks which
include changes in foreign exchange rates and the possibility of future adverse
political and economic developments which could adversely affect the value of
such securities. Moreover, securities of many foreign governments and their
markets may be less liquid and their prices more volatile than those of the
United States government. The Fund may invest in the sovereign debt obligations
of countries that are considered emerging market countries at the time of
purchase. Therefore, the Fund is susceptible to governmental factors and
economic and debt restructuring developments adversely affecting the economies
of these emerging market countries. In addition, these debt obligations may be
less liquid and subject to greater volatility than debt obligations of more
developed countries.
16
<PAGE>
Alliance North American
FINANCIAL HIGHLIGHTS Government Income Trust
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Year
<TABLE>
<CAPTION>
------------------------------------------------------------------
CLASS A
------------------------------------------------------------------
Year Ended November 30,
------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................ $ 8.02 $ 8.01 $ 6.75 $ 8.13 $ 10.35
-------- -------- -------- -------- --------
Income From Investment Operations
Net investment income ............................. .87(a) 1.03(a) 1.09(a) 1.18(a) 1.02
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions ................................... (.33) (.05) 1.14 (1.59) (2.12)
-------- -------- -------- -------- --------
Net increase (decrease) in net asset
value from operations .......................... .54 .98 2.23 (.41) (1.10)
-------- -------- -------- -------- --------
Less: Dividends and Distributions
Dividends from net investment income .............. (.87) (.97) (.75) -0- (.91)
Distributions in excess of net investment income .. (.07) -0- -0- -0- -0-
Tax return of capital ............................. (.03) -0- (.22) (.97) (.21)
-------- -------- -------- -------- --------
Total dividends and distributions ................. (.97) (.97) (.97) (.97) (1.12)
-------- -------- -------- -------- --------
Net asset value, end of year ...................... $ 7.59 $ 8.02 $ 8.01 $ 6.75 $ 8.13
======== ======== ======== ======== ========
Total Return
Total investment return based on net
asset value (b) ................................ 7.14% 12.85% 35.22% (3.59)% (11.32)%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) ........... $740,066 $511,749 $385,784 $252,608 $303,538
Ratio of expenses to average net assets ........... 2.04% 2.15% 2.34% 2.62% 1.70%
Ratio of expenses to average net assets
excluding interest expense (c) ................. 1.36% 1.38% 1.41% 1.51% 1.37%
Ratio of net investment income to
average net assets ............................. 11.17% 12.78% 14.82% 18.09% 11.22%
Portfolio turnover rate ........................... 175% 118% 166% 180% 131%
</TABLE>
- --------------------------------------------------------------------------------
See footnote summary on page 19.
17
<PAGE>
Alliance North American
FINANCIAL HIGHLIGHTS (continued) Government Income Trust
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Year
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
CLASS B
----------------------------------------------------------------------------
Year Ended November 30,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .................. $ 8.02 $ 8.01 $ 6.75 $ 8.13 $ 10.35
---------- ---------- ---------- ---------- ----------
Income From Investment Operations
Net investment income ............................... .81(a) .98(a) 1.04(a) 1.13(a) .96
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions ..................................... (.32) (.07) 1.12 (1.61) (2.13)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net asset
value from operations ............................ .49 .91 2.16 (.48) (1.17)
---------- ---------- ---------- ---------- ----------
Less: Dividends and Distributions
Dividends from net investment income ................ (.81) (.90) (.69) -0- (.84)
Distributions in excess of net investment income .... (.06) -0- -0- -0- -0-
Tax return of capital ............................... (.03) -0- (.21) (.90) (.21)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions ................... (.90) (.90) (.90) (.90) (1.05)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ........................ $ 7.61 $ 8.02 $ 8.01 $ 6.75 $ 8.13
========== ========== ========== ========== ==========
Total Return
Total investment return based on net
asset value (b) .................................. 6.46% 11.88% 33.96% (4.63)% (11.89)%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) ............. $1,300,519 $1,378,407 $1,329,719 $1,123,074 $1,639,602
Ratio of expenses to average net assets ............. 2.75% 2.86% 3.05% 3.33% 2.41%
Ratio of expenses to average net assets
excluding interest expense (c) ................... 2.07% 2.09% 2.12% 2.22% 2.07%
Ratio of net investment income to
average net assets ............................... 10.44% 12.15% 14.20% 17.31% 10.53%
Portfolio turnover rate ............................. 175% 118% 166% 180% 131%
</TABLE>
- --------------------------------------------------------------------------------
See footnote summary on page 19.
18
<PAGE>
Alliance North American
Government Income Trust
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Year
<TABLE>
<CAPTION>
------------------------------------------------------------------
CLASS C
------------------------------------------------------------------
Year Ended November 30,
------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................ $ 8.02 $ 8.01 $ 6.75 $ 8.13 $ 10.34
-------- -------- -------- -------- --------
Income From Investment Operations
Net investment income ............................. .82(a) .98(a) 1.05(a) 1.13(a) .96
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions ................................... (.33) (.07) 1.11 (1.61) (2.12)
-------- -------- -------- -------- --------
Net increase (decrease) in net asset
value from operations .......................... .49 .91 2.16 (.48) (1.16)
-------- -------- -------- -------- --------
Less: Dividends and Distributions
Dividends from net investment income .............. (.82) (.90) (.69) -0- (.84)
Distributions in excess of net investment income .. (.05) -0- -0- -0- -0-
Tax return of capital ............................. (.03) -0- (.21) (.90) (.21)
-------- -------- -------- -------- --------
Total dividends and distributions ................. (.90) (.90) (.90) (.90) (1.05)
-------- -------- -------- -------- --------
Net asset value, end of year ...................... $ 7.61 $ 8.02 $ 8.01 $ 6.75 $ 8.13
======== ======== ======== ======== ========
Total Return
Total investment return based on net
asset value (b) ................................ 6.46% 11.88% 33.96% (4.63)% (11.89)%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) ........... $276,073 $283,483 $250,676 $219,009 $369,714
Ratio of expenses to average net assets ........... 2.74% 2.85% 3.04% 3.33% 2.39%
Ratio of expenses to average net assets
excluding interest expense (c) ................. 2.06% 2.08% 2.12% 2.21% 2.06%
Ratio of net investment income to
average net assets ............................. 10.45% 12.14% 14.22% 17.32% 10.46%
Portfolio turnover rate ........................... 175% 118% 166% 180% 131%
</TABLE>
- --------------------------------------------------------------------------------
(a) Based on average shares outstanding.
(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 net asset value during the period, and
redemption on the last day of the period. Initial sales charges or
contingent deferred sales charges are not reflected in the calculation of
total investment return.
(c) Net of interest expense of .68%, .77%, .93%, 1.11%, and .33% respectively,
on loan agreement (see Note E).
19
<PAGE>
REPORT OF ERNST & YOUNG LLP Alliance North American
INDEPENDENT AUDITORS Government Income Trust
================================================================================
To the Shareholders and Board of Directors
Alliance North American Government Income Trust, Inc.
We have audited the accompanying statement of assets and liabilities of Alliance
North American Government Income Trust, Inc. (the "Fund"), including the
portfolio of investments, as of November 30, 1998, and the related statements of
operations and cash flows 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
November 30, 1998, 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 North American Government Income Trust, Inc. at November 30, 1998, the
results of its operations and its cash flows 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.
/s/ Ernst & Young LLP
New York, New York
January 8, 1999
20
<PAGE>
<PAGE>
APPENDIX A
BOND RATINGS
STANDARD & POOR's BOND RATINGS
A Standard & Poor's Ratings Services ("S&P") corporate
debt rating is a current assessment of the creditworthiness of an
obligor with respect to a specific obligation. Debt rated "AAA"
has the highest rating assigned by S&P. Capacity to pay interest
and repay principal is extremely strong. Debt rated "AA" has a
very strong capacity to pay interest and to repay principal and
differs from the highest rated issues only in a small degree.
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 a debt of a higher rated category. 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 to repay principal for debt in this category
than for higher rated categories.
Debt rated "BB", "B", "CCC" or "CC" is regarded, on
balance, as predominately speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of
the obligation. "BB" indicates the lowest degree of speculation
and "CC" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to
adverse conditions. The rating "C" is reserved for income bonds
on which no interest is being paid. Debt rated "D" is in default
and payments of interest and/or repayment of principal is in
arrears.
The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within
the major rating categories.
MOODY's BOND RATINGS
Excerpts from Moody's description of its corporate bond
ratings: Aaa - judged to be the best quality, carry the smallest
degree of investment risk; Aa - judged to be of high quality by
all standards; A - possess many favorable investment attributes
and are to be considered as higher medium grade obligations;
Baa - considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured and have speculative
characteristics as well; Ba, B, Caa, Ca, C - protection of
interest and principal payments is questionable; Ba indicates
some speculative elements while Ca represents a high degree of
A-1
<PAGE>
speculation and C represents the lowest rated class of bonds;
Caa, Ca and C bonds may be in default. Moody's applies numerical
modifiers 1, 2 and 3 in each generic rating classification from
Aa to B in it 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 at the
lower end of its generic rating category.
A-2
<PAGE>
APPENDIX B
DESCRIPTION OF OBLIGATIONS ISSUED
OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES OR INSTRUMENTALITIES
FEDERAL FARM CREDIT SYSTEM NOTES AND BONDS--are bonds
issued by a cooperatively owned nationwide system of banks and
associations supervised by the Farm Credit Administration, an
independent agency of the U.S. Government. These bonds are not
guaranteed by the U.S. Government.
FHA DEBENTURES--are debentures issued by the Federal
Housing Administration of the U.S. Government and are guaranteed
by the U.S. Government.
GNMA CERTIFICATES--are mortgage-backed securities which
represent a partial ownership interest in a pool of mortgage
loans issued by lenders such as mortgage bankers, commercial
banks and savings and loan associations. Each mortgage loan
included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration.
FHLMC BONDS--are bonds issued and guaranteed by the
Federal Home Loan Mortgage Corporation.
FNMA BONDS--are bonds issued and guaranteed by the
Federal National Mortgage Association.
FEDERAL HOME LOAN BANK NOTES AND BONDS--are notes and
bonds issued by the Federal Home Loan Bank System and are not
guaranteed by the U.S. Government.
STUDENT LOAN MARKETING ASSOCIATION ("SALLIE MAE") NOTES
AND BONDS--are notes and bonds issued by the Student Loan
Marketing Association.
Although this list includes a description of the primary
types of U.S. Government agency or instrumentality obligations in
which the Fund intends to invest, the Fund may invest in
obligations of U.S. Government agencies or instrumentalities
other than those listed above.
B-1
<PAGE>
APPENDIX C
FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS AND FOREIGN CURRENCIES
OPTIONS ON U.S. AND FOREIGN GOVERNMENT SECURITIES
The Fund intends to write covered put and call options
and purchase put and call options on U.S. Government Securities
and foreign government securities that are traded on United
States and foreign securities exchanges and over-the-counter.
The Fund also intends to write call options that are not covered
for cross-hedging purposes.
The Fund would write a call option for cross-hedging
purposes, instead of writing a covered call option, when the
premium to be received from the cross-hedge transaction would
exceed that which would be received from writing a covered call
option, while at the same time achieving the desired hedge.
The writer of an option may have no control when the
underlying securities must be sold, in the case of a call option,
or purchased, in the case of a put option, since with regard to
certain options, the writer may be assigned an exercise notice at
any time prior to the termination of the obligation. Whether or
not an option expires unexercised, the writer retains the amount
of the premium. This amount, of course, may, in the case of a
covered call option, be offset by a decline in the market value
of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from
the sale of the underlying security. If a put option is
exercised, the writer must fulfill the obligation to purchase the
underlying security at the exercise price, which will usually
exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its
obligation may effect a "closing purchase transaction". This is
accomplished by buying an option of the same series as the option
previously written. The effect of the purchase is that the
writer's position will be cancelled by the clearing corporation.
However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an
investor who is the holder of an option may liquidate its
position by effecting a "closing sale transaction". This is
accomplished by selling an option of the same series as the
option previously purchased. There is no guarantee that either a
closing purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written
call option will permit the Fund to write another call option on
the underlying security with either a different exercise price or
C-1
<PAGE>
expiration date or both, or in the case of a written put option
will permit the Fund to write another put option to the extent
that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction
will permit the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other Fund
investments. If the Fund desires to sell a particular security
from its portfolio on which it has written a call option, it will
effect a closing transaction prior to or concurrent with the sale
of the security.
The Fund will realize a profit from a closing
transaction if the price of the purchase transaction is less than
the premium received from writing the option or the price
received from a sale transaction is more than the premium paid to
purchase the option; the Fund will realize a loss from a closing
transaction if the price of the purchase transaction is more than
the premium received from writing the option or the price
received from a sale transaction is less than the premium paid to
purchase the option. Because increases in the market of a call
option will generally reflect increases in the market price of
the underlying security, any loss resulting from the repurchase
of a call option is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there
exists a secondary market for an option of the same series. If a
secondary market does not exist, it might not be possible to
effect closing transactions in particular options with the result
that the Fund would have to exercise the options in order to
realize any profit. If the Fund is unable to effect a closing
purchase transaction in a secondary market, it will not be able
to sell the underlying security until the option expires or it
delivers the underlying security upon exercise. Reasons for the
absence of a liquid secondary market include the following:
(i) there may be insufficient trading interest in certain
options, (ii) restrictions may be imposed by a national
securities exchange ("Exchange") on opening transactions or
closing transactions or both, (iii) trading halts, suspensions or
other restrictions may be imposed with respect to particular
classes or series of options or underlying securities,
(iv) unusual or unforeseen circumstances may interrupt normal
operations on an Exchange, (v) the facilities of an Exchange or
the Options Clearing Corporation may not at all times be adequate
to handle current trading volume, or (vi) one or more Exchanges
could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a
particular class or series of options), in which event the
secondary market on that Exchange (or in that class or series of
options) would cease to exist, although outstanding options on
that Exchange that had been issued by the Options Clearing
C-2
<PAGE>
Corporation as a result of trades on that Exchange would continue
to be exercisable in accordance with their terms.
The Fund may write options in connection with buy-and-
write transactions; that is, the Fund may purchase a security and
then write a call option against that security. The exercise
price of the call the Fund determines to write will depend upon
the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"),
equal to ("at-the- money") or above ("out-of-the-money") the
current value of the underlying security at the time the option
is written. Buy-and-write transactions using in-the-money call
options may be used when it is expected that the price of the
underlying security will remain flat or decline moderately during
the option period. Buy-and-write transactions using at-the-money
call options may be used when it is expected that the price of
the underlying security will remain fixed or advance moderately
during the option period. Buy-and-write transactions using out-
of-the-money call options may be used when it is expected that
the premiums received from writing the call option plus the
appreciation in the market price of the underlying security up to
the exercise price will be greater than the appreciation in the
price of the underlying security alone. If the call options are
exercised in such transactions, the Fund's maximum gain will be
the premium received by it for writing the option, adjusted
upwards or downwards by the difference between the Fund's
purchase price of the security and the exercise price. If the
options are not exercised and the price of the underlying
security declines, the amount of such decline will be offset in
part, or entirely, by the premium received.
The writing of covered put options is similar in terms
of risk/return characteristics to buy-and-write transactions. If
the market price of the underlying security rises or otherwise is
above the exercise price, the put option will expire worthless
and the Fund's gain will be limited to the premium received. If
the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the
position or take delivery of the security at the exercise price
and the Fund's return will be the premium received from the put
options minus the amount by which the market price of the
security is below the exercise price. Out-of-the-money, at-the-
money, and in-the-money put options may be used by the Fund in
the same market environments that call options are used in
equivalent buy-and-write transactions.
The Fund may purchase put options to hedge against a
decline in the value of its portfolio. By using put options in
this way, the Fund will reduce any profit it might otherwise have
realized in the underlying security by the amount of the premium
paid for the put option and by transaction costs.
C-3
<PAGE>
The Fund may purchase call options to hedge against an
increase in the price of securities that the Fund anticipates
purchasing in the future. The premium paid for the call option
plus any transaction costs will reduce the benefit, if any,
realized by the Fund upon exercise of the option, and, unless the
price of the underlying security rises sufficiently, the option
may expire worthless to the Fund.
FUTURES CONTRACTS
The Fund may enter into contracts for the purchase or
sale for future delivery of fixed-income securities or foreign
currencies, or contracts based on financial indices including any
index of U.S. Government Securities or foreign government
securities. U.S. futures contracts have been designed by
exchanges which have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC"), and must be
executed through a futures commission merchant, or brokerage
firm, which is a member of the relevant contract market. Futures
contracts trade on a number of exchange markets, and, through
their clearing corporations, the exchanges guarantee performance
of the contracts as between the clearing members of the exchange.
The Fund will enter into futures contracts which are based on
debt securities that are backed by the full faith and credit of
the U.S. Government, such as long-term U.S. Treasury Bonds,
Treasury Notes, Government National Mortgage Association modified
pass-through mortgage-backed securities and three-month U.S.
Treasury Bills. The Fund may also enter into futures contracts
which are based on bonds issued by entities other than the U.S.
government.
At the same time a futures contract is purchased or
sold, the Fund must allocate cash or securities as a deposit
payment ("initial deposit"). It is expected that the initial
deposit would be approximately 1 1/2%-5% of a contract's face
value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the
Fund would provide or receive cash that reflects any decline or
increase in the contract's value.
At the time of delivery of securities pursuant to such a
contract, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest
rate from that specified in the contract. In some (but not many)
cases, securities called for by a futures contract may not have
been issued when the contract was written.
Although futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the
contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the
C-4
<PAGE>
securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical futures contract calling for
delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation
to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled
through a clearinghouse associated with the exchange on which the
contracts are traded, the Fund will incur brokerage fees when it
purchases or sells futures contracts.
The purpose of the acquisition or sale of a futures
contract, in the case of a portfolio, such as the portfolio of
the Fund, which holds or intends to acquire fixed-income
securities, is to attempt to protect the Fund from fluctuations
in interest or foreign exchange rates without actually buying or
selling fixed-income securities or foreign currency. For
example, if interest rates were expected to increase, the Fund
might enter into futures contracts for the sale of debt
securities. Such a sale would have much the same effect as
selling an equivalent value of the debt securities owned by the
Fund. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the
futures contracts to the Fund would increase at approximately the
same rate, thereby keeping the net asset value of the Fund from
declining as much as it otherwise would have. The Fund could
accomplish similar results by selling debt securities and
investing in bonds with short maturities when interest rates are
expected to increase. However, since the futures market is more
liquid than the cash market, the use of futures contracts as an
investment technique allows the Fund to maintain a defensive
position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may
decline, futures contracts may be purchased to attempt to hedge
against anticipated purchases of debt securities at higher
prices. Since the fluctuations in the value of futures contracts
should be similar to those of debt securities, the Fund could
take advantage of the anticipated rise in the value of debt
securities without actually buying them until the market had
stabilized. At that time, the futures contracts could be
liquidated and the Fund could then buy debt securities on the
cash market. To the extent the Fund enters into futures
contracts for this purpose, the assets in the segregated asset
account maintained to cover the Fund's obligations with respect
to such futures contracts will consist of cash, cash equivalents
or high quality liquid debt securities from its portfolio in an
amount equal to the difference between the fluctuating market
value of such futures contracts and the aggregate value of the
initial and variation margin payments made by the Fund with
respect to such futures contracts.
C-5
<PAGE>
The ordinary spreads between prices in the cash and
futures markets, due to differences in the nature of those
markets, are subject to distortions. First, all participants in
the futures market are subject to initial deposit and variation
margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts
through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the
liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of
speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the
securities market. Therefore, increased participation by
speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct
forecast of general interest rate trends by the Adviser may still
not result in a successful transaction.
In addition, futures contracts entail risks. Although
the Fund believes that use of such contracts will benefit the
Fund, if the Adviser's investment judgment about the general
direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any
such contract. For example, if the Fund has hedged against the
possibility of an increase in interest rates which would
adversely affect the price of debt securities held in its
portfolio and interest rates decrease instead, the Fund will lose
part or all of the benefit of the increased value of its debt
securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to
sell debt securities from its portfolio to meet daily variation
margin requirements. Such sales of bonds may be, but will not
necessarily be, at increased prices which reflect the rising
market. The Fund may have to sell securities at a time when it
may be disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS
The Fund intends to purchase and write options on
futures contracts for hedging purposes. The purchase of a call
option on a futures contract is similar in some respects to the
purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the
underlying debt securities, it may or may not be less risky than
ownership of the futures contract or underlying debt securities.
As with the purchase of futures contracts, when the Fund is not
C-6
<PAGE>
fully invested it may purchase a call option on a futures
contract to hedge against a market advance due to declining
interest rates.
The writing of a call option on a futures contract
constitutes a partial hedge against declining prices of the
security or foreign currency which is deliverable upon exercise
of the futures contract. If the futures price at expiration of
the option is below the exercise price, the Fund will retain the
full amount of the option premium which provides a partial hedge
against any decline that may have occurred in the Fund's
portfolio holdings. The writing of a put option on a futures
contract constitutes a partial hedge against increasing prices of
the security or foreign currency which is deliverable upon
exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium which
provides as partial hedge against any increase in the price of
securities which the Fund intends to purchase. If a put or call
option the Fund has written is exercised, the Fund will incur a
loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes
in the value of its portfolio securities and changes in the value
of its futures positions, the Fund's losses from existing options
on futures may to some extent be reduced or increased by changes
in the value of portfolio securities.
The purchase of a put option on a futures contract is
similar in some respects to the purchase of protective put
options on portfolio securities. For example, the Fund may
purchase a put option on a futures contract to hedge the Fund's
portfolio against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an
option on a futures contract is the premium paid for the option
plus related transaction costs. In addition to the correlation
risks discussed above, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract
will not be fully reflected in the value of the option purchased.
OPTIONS ON FOREIGN CURRENCIES
The Fund may purchase and write options on foreign
currencies for hedging purposes in a manner similar to that in
which futures contracts on foreign currencies, or forward
contracts, will be utilized. For example, a decline in the U.S.
Dollar value of a foreign currency in which portfolio securities
are denominated will reduce the U.S. Dollar value of such
securities, even if their value in the foreign currency remains
constant. In order to protect against such diminutions in the
value of portfolio securities, the Fund may purchase put options
C-7
<PAGE>
on the foreign currency. If the value of the currency does
decline, the Fund will have the right to sell such currency for a
fixed amount in U.S. Dollars and will thereby offset, in whole or
in part, the adverse effect on its portfolio which otherwise
would have resulted.
Conversely, where a rise in the U.S. Dollar value of a
currency in which securities to be acquired are denominated is
projected, thereby increasing the cost of such securities, the
Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to the Fund deriving from
purchases of foreign currency options will be reduced by the
amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the
direction or to the extent anticipated, the Fund could sustain
losses on transactions in foreign currency options which would
require it to forego a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write options on foreign currencies for the
same types of hedging purposes. For example, where the Fund
anticipates a decline in the U.S. Dollar value of foreign
currency denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected
decline occurs, the option will most likely not be exercised, and
the diminution in value of portfolio securities will be offset by
the amount of the premium received.
Similarly, instead of purchasing a call option to hedge
against an anticipated increase in the U.S. Dollar cost of
securities to be acquired, the Fund could write a put option on
the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge
such increased cost up to the amount of the premium. As in the
case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the
amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised
and the Fund would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on foreign currencies,
the Fund also may be required to lose all or a portion of the
benefits which might otherwise have been obtained from favorable
movements in exchange rates.
The Fund intends to write covered call options on
foreign currencies. A call option written on a foreign currency
by the Fund is "covered" if the Fund owns the underlying foreign
C-8
<PAGE>
currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a
segregated account by its Custodian) upon conversion or exchange
of other foreign currency held in its portfolio. A call option
is also covered if the Fund has a call on the same foreign
currency and in the same principal amount as the call written
where the exercise price of the call held (a) is equal to or less
than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is
maintained by the Fund in cash or liquid high-grade Government
Securities in a segregated account with its Custodian.
The Fund also intends to write call options on foreign
currencies that are not covered for cross-hedging purposes. A
call option on a foreign currency is for cross-hedging purposes
if it is not covered, but is designed to provide a hedge against
a decline in the U.S. Dollar value of a security which the Fund
owns or has the right to acquire and which is denominated in the
currency underlying the option due to an adverse change in the
exchange rate. In such circumstances, the Fund collateralizes
the option by maintaining in a segregated account with the Fund's
Custodian, cash or liquid high-grade Government Securities in an
amount not less than the value of the underlying foreign currency
in U.S. Dollars marked to market daily.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS
FORWARD CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
Unlike transactions entered into by the Fund in futures
contracts, options on foreign currencies and forward contracts
are not traded on contract markets regulated by the CFTC or (with
the exception of certain foreign currency options) by the
Commission. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign
currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation.
Similarly, options on currencies may be traded over-the-counter.
In an over-the- counter trading environment, many of the
protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation
limits, and adverse market movements could therefore continue to
an unlimited extent over a period of time. Although the
purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could
be lost. Moreover, the option writer and a trader of forward
contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral
requirements associated with such positions.
C-9
<PAGE>
Options on foreign currencies traded on national
securities exchanges are within the jurisdiction of the SEC, as
are other securities traded on such exchanges. As a result, many
of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on
a national securities exchange are cleared and guaranteed by the
Options Clearing Corporation ("OCC"), thereby reducing the risk
of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more
readily available than in the over-the-counter market,
potentially permitting the Fund to liquidate open positions at a
profit prior to exercise or expiration, or to limit losses in the
event of adverse market movements.
The purchase and sale of exchange-traded foreign
currency options, however, is subject to the risks of the
availability of a liquid secondary market described above, as
well as the risks regarding adverse market movements, margining
of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects
of other political and economic events. In addition, exchange-
traded options on foreign currencies involve certain risks not
presented by the over-the-counter market. For example, exercise
and settlement of such options must be made exclusively through
the OCC, which has established banking relationships in
applicable foreign countries for this purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency
option exercises, or would result in undue burdens on the OCC or
its clearing member, impose special procedures on exercise and
settlement, such as technical changes in the mechanics of
delivery of currency, the fixing of dollar settlement prices or
prohibitions, on exercise.
In addition, options on U.S. Government Securities,
futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on
foreign exchanges. Such transactions are subject to the risk of
governmental actions affecting trading in or the prices of
foreign currencies or securities. The value of such positions
also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in
the United States of data on which to make trading decisions,
(iii) delays in the Fund's ability to act upon economic events
occurring in foreign markets during nonbusiness hours in the
United States, (iv) the imposition of different exercise and
settlement terms and procedures and margin requirements than in
the United States, and (v) lesser trading volume period.
C-10
<PAGE>
APPENDIX D:
CERTAIN EMPLOYEE BENEFIT PLANS
Employee benefit plans described below which are
intended to be tax-qualified under section 401(a) of the Internal
Revenue Code of 1986, as amended ("Tax Qualified Plans"), for
which Merrill Lynch, Pierce, Fenner & Smith Incorporated or an
affiliate thereof ("Merrill Lynch") is recordkeeper (or with
respect to which recordkeeping services are provided pursuant to
certain arrangements as described in paragraph (ii) below)
("Merrill Lynch Plans") are subject to specific requirements as
to the Fund shares which they may purchase. Notwithstanding
anything to the contrary contained elsewhere in this Statement of
Additional Information, the following Merrill Lynch Plans are not
eligible to purchase Class A shares and are eligible to purchase
Class B shares of the Fund at net asset value without being
subject to a contingent deferred sales charge:
(i) Plans for which Merrill Lynch is the recordkeeper on a
daily valuation basis, if when the plan is established
as an active plan on Merrill Lynch's recordkeeping
system:
(a) the plan is one which is not already
investing in shares of mutual funds or
interests in other commingled investment
vehicles of which Merrill Lynch Asset
Management, L.P. is investment adviser or
manager ("MLAM Funds"), and either (A) the
aggregate assets of the plan are less than
$3 million or (B) the total of the sum of
(x) the employees eligible to participate in
the plan and (y) those persons, not
including any such employees, for whom a
plan account having a balance therein is
maintained, is less than 500, each of (A)
and (B) to be determined by Merrill Lynch in
the normal course prior to the date the plan
is established as an active plan on Merrill
Lynch's recordkeeping system (an "Active
Plan"); or
(b) the plan is one which is already investing
in shares of or interests in MLAM Funds and
the assets of the plan have an aggregate
value of less than $5 million, as determined
by Merrill Lynch as of the date the plan
becomes an Active Plan.
D-1
<PAGE>
For purposes of applying (a) and (b), there
are to be aggregated all assets of any Tax-
Qualified Plan maintained by the sponsor of
the Merrill Lynch Plan (or any of the
sponsor's affiliates) (determined to be such
by Merrill Lynch) which are being invested
in shares of or interests in MLAM Funds,
Alliance Mutual Funds or other mutual funds
made available pursuant to an agreement
between Merrill Lynch and the principal
underwriter thereof (or one of its
affiliates) and which are being held in a
Merrill Lynch account.
(ii) Plans for which the recordkeeper is not Merrill Lynch,
but which are recordkept on a daily valuation basis by
a recordkeeper with which Merrill Lynch has a
subcontracting or other alliance arrangement for the
performance of recordkeeping services, if the plan is
determined by Merrill Lynch to be so eligible and the
assets of the plan are less than $3 million.
Class B shares of the Fund held by any of the above-
described Merrill Lynch Plans are to be replaced at Merrill
Lynch's direction through conversion, exchange or otherwise by
Class A shares of the Fund on the earlier of the date that the
value of the plan's aggregate assets first equals or exceeds $5
million or the date on which any Class B share of the Fund held
by the plan would convert to a Class A share of the Fund as
described under "Purchase of Shares" and "Redemption and
Repurchase of Shares."
Any Tax Qualified Plan, including any Merrill Lynch
Plan, which does not purchase Class B shares of the Fund without
being subject to a contingent deferred sales charge under the
above criteria is eligible to purchase Class B shares subject to
a contingent deferred sales charge as well as other classes of
shares of the Fund as set forth above under "Purchase of Shares"
and "Redemption and Repurchase of Shares."
D-2
00250117.AZ2
