As filed with the Securities and Exchange
Commission on February 28, 1995
File Nos. 33-47031
811-06627
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 8
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 9
Alliance Mortgage Strategy Trust, Inc.
(Exact Name of Registrant as Specified in Charter)
1345 Avenue of the Americas, New York, New York 10105
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 969-1000
EDMUND P. BERGAN, JR.
Alliance Capital Management L.P.
1345 Avenue of the Americas
New York, New York 10105
(Name and address of agent for service)
It is proposed that this filing will become effective (check
appropriate box)
X immediately upon filing pursuant to paragraph (b)
-----
----- on (date) pursuant to paragraph (b)
----- 60 days after filing pursuant to paragraph (a)
----- on (date) pursuant to paragraph (a) of rule 485.
<PAGE>
Registrant has registered an indefinite number of shares of
Common Stock pursuant to Rule 24f-2 under the Investment Company Act
of 1940. Registrant filed a notice pursuant to such Rule for its
fiscal year ended November 30, 1994 on January 26, 1995.
<PAGE>
CROSS REFERENCE SHEET
(as required by Rule 404(c))
N-1A ITEM NO. LOCATION IN PROSPECTUS
(CAPTION)
PART A
Item 1. Cover Page Cover Page
Item 2. Synopsis The Fund At a Glance
Item 3. Condensed Financial Information Financial
Highlights
Item 4. General Description of Registrant Description of the
Fund; General
Information
Item 5. Management of the Fund Management of the
Fund;
General Information
Item 6. Capital Stock and Other
Securities Dividends,
Distributions
and Taxes; General
Information
Item 7. Purchase of Securities Being
Offered Purchase and Sale of
Shares; General
Information
Item 8. Redemption or Repurchase Purchase and Sale of
Shares; General
Information
Item 9. Pending Legal Proceedings Not Applicable
Item 10. Cover Page Cover Page
Item 11. Table of Contents Cover Page
Item 12. General Information and History Description of the
Fund;
General Information
Item 13. Investment Objectives and
Policies Investment
<PAGE>
Objective,
Policies and
Restrictions
Item 14. Management of the Registrant Management of the
Fund
Item 15. Control Persons and Principal
Holders of Securities Management of the
Fund; General
Information
Item 16. Investment Advisory and
Other Services Management of the
Fund
Item 17. Brokerage Allocation and
Other Practices General Information
Item 18. Capital Stock and Other
Securities General Information
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered Redemption and
Repurchase of
Shares; Net Asset
Value
Item 20. Tax Status Investment
Objective,
Policies and
Restrictions;
Dividends,
Distributions and
Taxes
Item 21. Underwriters General Information
Item 22. Calculation of Performance Data General Information
Item 23. Financial Statements Financial
Statements;
Report of
Independent
Auditors
<PAGE>
- --------------------------------------------------------------------------------
THE ALLIANCE
- --------------------------------------------------------------------------------
BOND FUNDS
- --------------------------------------------------------------------------------
P.O. Box 1520, Secaucus, New Jersey 07096-1520
Toll Free (800) 221-5672
For Literature: Toll Free (800) 227-4618
Prospectus and Application
March 1, 1995
U.S. Government Funds
- --Alliance Short-Term U.S. Government Fund
- --U.S. Government Portfolio
Mortgage Funds
- --Alliance Mortgage Strategy Trust
- --Alliance Mortgage Securities Income Fund
Multi-Market Funds
- --Alliance World Income Trust
- --Alliance Short-Term Multi-Market Trust
- --Alliance Multi-Market Strategy Trust
Global Bond Funds
- --Alliance North American Government Income Trust
- --Alliance Global Dollar Government Fund
Corporate Bond Fund
- --Corporate Bond Portfolio
<TABLE>
<CAPTION>
Table of Contents Page
<S> <C>
The Funds at a Glance.................................. 2
Expense Information.................................... 4
Financial Highlights................................... 7
Glossary............................................... 13
Description of the Funds............................... 14
Investment Objectives and Policies................ 14
Additional Investment Practices................... 20
Certain Fundamental Investment Policies........... 31
Risk Considerations............................... 32
Purchase and Sale of Shares............................ 36
Management of the Funds................................ 39
Dividends, Distributions and Taxes..................... 41
General Information.................................... 42
Appendix A: Bond Ratings............................... A-1
Appendix B: General Information About Canada,
Mexico and Argentina.............................. B-1
</TABLE>
Adviser
Alliance Capital Management L.P.
1345 Avenue Of The Americas
New York, New York 10105
The Alliance Bond Funds provide a broad selection of investment alternatives to
investors seeking high current income. The U.S. Government Funds invest mainly
in U.S. Government securities and the Mortgage Funds invest in mortgage-related
securities, while the Multi-Market Funds diversify their investments among debt
markets around the world and the Global Bond Funds invest primarily in foreign
government securities. The Corporate Bond Fund invests primarily in corporate
debt securities.
Each fund or portfolio (each a "Fund") is, or is a series of, an open-end
management investment company. This Prospectus sets forth concisely the
information which a prospective investor should know about each Fund before
investing. A "Statement of Additional Information" for each Fund that provides
further information regarding certain matters discussed in this Prospectus and
other matters that may be of interest to some investors has been filed with the
Securities and Exchange Commission and is incorporated herein by reference. For
a free copy, call or write Alliance Fund Services, Inc. at the indicated address
or "Literature" telephone number.
Each Fund offers three classes of shares that may be purchased at the investor's
choice at a price equal to their net asset value (i) plus an initial sales
charge imposed at the time of purchase (the "Class A shares"), (ii) with a
contingent deferred sales charge imposed on most redemptions made within three
years of purchase (the "Class B shares"), or (iii) without any initial or
contingent deferred sales charge (the "Class C shares"), except that Alliance
World Income Trust offers only one class of shares which may be purchased at a
price equal to its net asset value without any initial or contingent deferred
sales charge. See "Purchase and Sale of Shares."
An investment in these securities is not a deposit or obligation of, or
guaranteed or endorsed by, any bank and is not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other agency.
Investors are advised to read this Prospectus carefully and to retain it for
future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
ALLIANCE(R)
Mutual funds without the Mystery./SM/
(R)/SM These are registered marks used under licenses from the owner, Alliance
Capital Management L.P.
<PAGE>
The Funds At A Glance
The following summary is qualified in its entirety by the more detailed
information contained in this Prospectus.
The Funds' Investment Manager Is . . .
Alliance Capital Management L.P. ("Alliance"), a global investment manager
providing diversified services to institutions and individuals through a broad
line of investments including 103 mutual funds. Since 1971, Alliance has earned
a reputation as a leader in the investment world with over $121 billion in
assets under management. Alliance provides investment management services to 29
of the FORTUNE 100 companies.
U.S. Government Funds
Short-Term U.S. Government Fund
Seeks . . . High current income consistent with preservation of capital.
Invests primarily in . . . A diversified portfolio of U.S. Government
securities.
U.S. Government Portfolio
Seeks . . . As high a level of current income as is consistent with safety of
principal.
Invests solely in . . . A diversified portfolio of U.S. Government securities
backed by the full faith and credit of the United States.
Mortgage Funds
Mortgage Strategy Trust
Seeks . . . The highest level of current income, consistent with low volatility
of net asset value, that is available from a portfolio of mortgage-related
securities of the highest quality.
Invests primarily in . . . A diversified portfolio of adjustable and fixed-rate
mortgage-related securities that are U.S. Government securities or rated AAA by
S&P or Aaa by Moody's or, if not rated, are of equivalent investment quality.
The Fund's portfolio is structured to achieve low volatility of net asset value
approximating that of a portfolio investing exclusively in two-year U.S.
Treasury securities.
Mortgage Securities Income Fund
Seeks . . . A high level of current income consistent with prudent investment
risk.
Invests primarily in . . . A diversified portfolio of mortgage-related
securities.
Multi-Market Funds
World Income Trust
Seeks . . . The highest level of current income that is available from a
portfolio of high-quality debt securities having remaining maturities of not
more than one year.
Invests primarily in . . . A non-diversified portfolio of debt securities
denominated in the U.S. Dollar and selected foreign currencies. The Fund
maintains at least 35% of its net assets in U.S. Dollar-denominated securities.
Short-Term Multi-Market Trust
Seeks . . . The highest level of current income through investment in a
portfolio of high-quality debt securities having remaining maturities of not
more than three years.
Invests primarily in . . . A non-diversified portfolio of debt securities
denominated in the U.S. Dollar and selected foreign currencies. While the Fund
normally will maintain a substantial portion of its assets in debt securities
denominated in foreign currencies, the Fund will invest at least 25% of its net
assets in U.S. Dollar-denominated securities.
Multi-Market Strategy Trust
Seeks . . . The highest level of current income that is available from a
portfolio of high-quality debt securities having remaining maturities of not
more than five years.
Invests primarily in . . . A non-diversified portfolio of debt securities
denominated in the U.S. Dollar and selected foreign currencies. The Fund
expects to maintain at least 70% of its assets in debt securities denominated in
foreign currencies, but not more than 25% of the Fund's total assets may be
invested in debt securities denominated in a single currency other than the U.S.
Dollar.
Global Bond Funds
North American Government Income Trust
Seeks . . . The highest level of current income that is available from a
portfolio of investment grade debt securities issued or guaranteed by the
governments of the United States, Canada and Mexico.
Invests primarily in . . . A non-diversified portfolio of government securities
denominated in the U.S. Dollar, the Canadian Dollar and the Mexican Peso, and
expects to maintain at least 25% of its assets in securities denominated in the
U.S. Dollar. In addition, the Fund may invest up to 25% of its total assets in
debt securities issued by governmental entities in Argentina.
2
<PAGE>
Global Dollar Government Fund
Seeks . . . Primarily a high level of current income and, secondarily, capital
appreciation.
Invests primarily in . . . A non-diversified portfolio of sovereign debt
obligations and in U.S. and non-U.S. corporate fixed-income securities.
Substantially all of the Fund's assets are invested in lower-rated securities.
Corporate Bond Fund
Corporate Bond Portfolio
Seeks . . . Primarily to maximize income over the long term consistent with
providing reasonable safety in the value of each shareholder's investment;
secondarily, the Fund will attempt to increase its capital through appreciation
of its investments in order to preserve and, if possible, increase the
purchasing power of each shareholder's investment.
Invests primarily in . . . A diversified portfolio of corporate bonds issued by
domestic and foreign issuers that give promise of relatively attractive yields.
A Word About Risk . . .
The prices of the shares of the Alliance Bond Funds will fluctuate as the daily
prices of the individual bonds in which they invest fluctuate, so that your
shares, when redeemed, may be worth more or less than their original cost.
Price fluctuations may be caused by changes in the general level of interest
rates or changes in bond credit quality ratings. Changes in interest rates have
a greater effect on bonds with longer maturities than those with shorter
maturities. The prices of non-U.S. Dollar denominated bonds also fluctuate with
changes in foreign exchange rates. Investment in the Global Bond Funds, the
Multi-Market Funds and any other Fund that may invest a significant amount of
its assets in non-U.S. securities involves risks not associated with Funds that
invest primarily in securities of U.S. issuers. While the Funds invest
principally in bonds and fixed-income securities, in order to achieve their
investment objectives, the Funds may at times use certain types of derivative
instruments, such as options, futures, forwards and swaps. These instruments
involve risks different from, and, in certain cases, greater than, the risks
presented by more traditional investments. These risks are fully discussed in
this Prospectus. See "Description of the Funds-Additional Investment Practices"
and "--Risk Considerations."
Getting Started . . .
Shares of the Funds are available through your financial representative and most
banks, insurance companies and brokerage firms nationwide. Shares of each Fund
can be purchased for a minimum initial investment of $250, and subsequent
investments can be made for as little as $50. For detailed information about
purchasing and selling shares, see "Purchase and Sale of Shares." In addition,
the Funds offer several time and money saving services to investors. Be sure to
ask your financial representative about:
Automatic Reinvestment
Automatic Investment Program
Retirement Plans
Shareholder Communications
Dividend Direction Plans
Auto Exchange
Systematic Withdrawals
Check-writing
A Choice Of Purchase Plans
Telephone Transactions
24 Hour Information
ALLIANCE (R)
Mutual funds without the Mystery./SM/
(R)/SM These are registered marks used under licenses from the owner, Alliance
Capital Management L.P.
3
<PAGE>
- --------------------------------------------------------------------------------
EXPENSE INFORMATION
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses are one of several factors to consider when you
invest in a Fund. The following tables summarize your maximum transaction costs
from investing in a Fund, other than World Income, and annual operating expenses
for each class of shares of each Fund. World Income, which has only one class
of shares, has no sales charge on purchases or reinvested dividends, deferred
sales charge, redemption fee or exchange fee. For each Fund, the "Examples"
below show the cumulative expenses attributable to a hypothetical $1,000
investment, assuming a 5% annual return, in each class for the periods
specified.
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class C Shares
-------------- -------------- --------------
<S> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of
offering price).................... 4.25%(a) None None
Sales charge imposed on dividend
reinvestments...................... None None None
Deferred sales charge (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower)................. None 3.0% None
during the
first year,
decreasing 1.0%
annually to 0%
after the
third year (b)
Exchange fee........................ None None None
</TABLE>
(a) Reduced for larger purchases. See "Purchase and Sale of Shares--How to Buy
Shares" --page 36.
(b) Class B shares of each Fund automatically convert to Class A shares after
six years. See "Purchase and Sale of Shares--How to Buy Shares" --page 36.
<TABLE>
<CAPTION>
Annual Operating Expenses Examples
- ---------------------------------------------------------- -------------------------------------------------------------
Short-Term U.S.
Government Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees(b)(after
waiver) None None None After 1 year $ 56 $ 51 $ 21 $ 21
12b-1 fees .30% 1.00% 1.00% After 3 years $ 85 $ 76 $ 66 $ 66
Other expenses(a)(b)(after After 5 years $116 $113 $113 $113
reimbursement) 1.10% 1.10% 1.10% After 10 years $203 $209 $209 $243
---- ---- ----
Total fund operating
expenses(b) 1.40% 2.10% 2.10%
==== ==== ====
<CAPTION>
U. S. Government Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees .54% .54% .54% After 1 year $ 52 $ 47 $ 17 $ 17
12b-1 fees .30% 1.00% 1.00% After 3 years $ 74 $ 64 $ 54 $ 54
Other expenses(a) .18% .18% .16% After 5 years $ 96 $ 93 $ 93 $ 92
---- ---- ---- After 10 years $162 $167 $167 $201
Total fund operating
expenses 1.02% 1.72% 1.70%
==== ==== ====
<CAPTION>
Mortgage Strategy Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees .65% .65% .65% After 1 year $ 56 $ 51 $ 21 $ 21
12b-1 fees .30% 1.00% 1.00% After 3 years $ 83 $ 75 $ 65 $ 64
Other expenses(a) .39% .43% .39% After 5 years $113 $112 $112 $110
---- ---- ---- After 10 years $197 $205 $205 $237
Total fund operating
expenses 1.34% 2.08% 2.04%
==== ==== ====
<CAPTION>
Mortgage Securities Income Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees .48% .48% .48% After 1 year $ 55 $ 50 $ 20 $ 20
12b-1 fees .30% 1.00% 1.00% After 3 years $ 82 $ 73 $ 63 $ 62
Other expenses(a) .51% .52% .49% After 5 years $110 $108 $108 $106
---- ---- ---- After 10 years $192 $198 $198 $230
Total fund operating
expenses 1.29% 2.00% 1.97%
---- ---- ----
</TABLE>
Please refer to the footnotes on page 5.
4
<PAGE>
<TABLE>
<CAPTION>
Annual Operating Expenses Examples
- ---------------------------------------------------------- -------------------------------------------------------------
<S> <C> <C> <C>
World Income
Management fees(c)(after
waiver) .49% After 1 year $ 17
12b-1 fees(c)(after
waiver) .68% After 3 years $ 54
Other expenses(c) .53% After 5 years $ 92
---- After 10 years $201
Total fund operating
expenses(c) 1.70%
=====
<CAPTION>
Short-Term
Multi-Market Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees .55% .55% .55% After 1 year $ 54 $ 49 $ 19 $ 19
12b-1 fees .30% 1.00% 1.00% After 3 years $ 77 $ 68 $ 58 $ 58
Other expenses(a) .28% .30% .28% After 5 years $102 $100 $100 $ 99
---- ---- ---- After 10 years $174 $181 $181 $215
Total fund operating
expenses 1.13% 1.85% 1.83%
==== ==== ====
<CAPTION>
Multi-Market
Strategy Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees(d) .60% .60% .60% After 1 year $ 56 $ 51 $ 21 $ 21
12b-1 fees .30% 1.00% 1.00% After 3 years $ 85 $ 76 $ 66 $ 65
Other expenses After 5 years $116 $113 $113 $112
Interest expense .11% .10% .09% After 10 years $204 $210 $210 $241
Other operating
expenses(a) .40% .40% .39%
--- --- ----
Total other expenses .51% .51% .48%
---- ---- -----
Total fund operating
expenses(e) 1.41% 2.11% 2.08%
==== ==== ====
<CAPTION>
North American
Government Income Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees(f) .69% .69% .68% After 1 year $ 59 $ 54 $ 24 $ 24
12b-1 fees .30% 1.00% 1.00% After 3 years $ 94 $ 85 $ 75 $ 75
Other expenses After 5 years $131 $129 $129 $128
Interest expense .33% .34% .33% After 10 years $235 $241 $241 $273
Other operating
expenses(a) .38% .38% .38%
--- --- ---
Total other expenses .71% .72% .71%
---- ---- ----
Total fund operating
expenses(g) 1.70% 2.41% 2.39%
==== ==== ====
<CAPTION>
Global Dollar Government Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees(h) .75% .75% .75% After 1 year $ 58 $ 54 $ 24 $ 24
12b-1 fees .30% 1.00% 1.00% After 3 years $ 92 $ 83 $ 73 $ 73
Other expenses After 5 years $127 $126 $126 $125
Interest expense 0.00% 0.00% 0.00% After 10 years $228 $234 $234 $268
Other operating
expenses(a) .58% .60% .59%
---- ---- -----
Total other expenses .58% .60% .59%
---- ---- ----
Total fund operating
expenses 1.63% 2.35% 2.34%
==== ==== ====
<CAPTION>
Corporate Bond Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees .63% .63% .63% After 1 year $ 55 $ 50 $ 20 $ 20
12b-1 fees .30% 1.00% 1.00% After 3 years $ 82 $ 73 $ 63 $ 62
Other expenses(a) .37% .37% .36% After 5 years $111 $108 $108 $107
---- ---- ---- After 10 years $193 $198 $198 $232
Total fund operating
expenses 1.30% 2.00% 1.99%
==== ==== ====
</TABLE>
- --------------------------------------------------------------------------------
+ Assumes redemption at end of period and, with respect to shares held ten
years, conversion of Class B shares to Class A shares after six years.
++ Assumes no redemption at end of period and, with respect to shares held ten
years, conversion of Class B shares to Class A shares after six years.
(a) These expenses include a transfer agency fee payable to Alliance Fund
Services, Inc., an affiliate of Alliance, based on a fixed dollar amount
charged to the Fund for each shareholder's account.
(b) Net of voluntary fee waivers and expense reimbursements. Absent such
waivers and reimbursements, annualized management fees would have been
.55%, annualized other expenses would have been 2.10% for Class A, 2.05%
for Class B and 2.09% for Class C and annualized total fund operating
expenses would have been 2.95% for Class A, 3.60% for Class B and 3.64% for
Class C.
(c) Net of voluntary fee waivers. Absent such waivers, management fees would
have been .65%, Rule 12b-1 fees would have been .90% and total fund
operating expenses would have been 2.08%.
(d) Represents .60 of 1% of the average daily value of the Fund's adjusted
total net assets.
(e) Excluding interest expense, total fund operating expenses would have been
for Class A, 1.30%, for Class B, 2.01% and for Class C, 1.99%.
(f) Represents .65 of 1% of the average daily value of the Fund's adjusted
total net assets.
(g) Excluding interest expense, total fund operating expenses would have been
for Class A, 1.37%, for Class B, 2.07% and for Class C, 2.06%.
(h) Reflects management fee in effect during the Fund's current fiscal year.
5
<PAGE>
The purpose of the tables on pages 4 and 5 is to assist the investor in
understanding the various costs and expenses that an investor in a Fund will
bear directly or indirectly. Long-term shareholders of a Fund may pay aggregate
sales charges totaling more than the economic equivalent of the maximum initial
sales charges permitted by the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. See "Management of the Funds-
Distribution Services Agreements." The Rule 12b-1 fee for each class comprises a
service fee not exceeding .25% of the aggregate average daily net assets of the
Fund attributable to the class and an asset-based sales charge equal to the
remaining portion of the Rule 12b-1 fee. With respect to each of Multi-Market
Strategy and North American Government Income, "interest expense" represents
interest paid by the Fund on borrowings for the purpose of making additional
portfolio investments. Such borrowings are intended to enable each of those
Funds to produce higher net yields to shareholders than the Funds could pay
without such borrowings. See "Risk Considerations-Effects of Borrowing."
Excluding interest expense, total fund operating expenses of each of Multi-
Market Strategy and North American Government Income would be lower (see notes
(e) and (g) above) and the cumulative expenses shown in the Examples above with
respect to those Funds would be lower. The information shown in the table for
Short-Term U.S. Government reflects annualized expenses based on the Fund's most
recent fiscal period. The management fee rate of Global Dollar Government is
higher than that paid by most other investment companies, but Alliance believes
the fee is comparable to those paid by investment companies of similar
investment orientation. The expense ratios for Class B and Class C shares of
Multi-Market Strategy and North American Government Income are higher than the
expense ratios of most other mutual funds, but are comparable to the expense
ratios of mutual funds whose shares are similarly priced. The Examples set forth
above assume reinvestment of all dividends and distributions and utilize a 5%
annual rate of return as mandated by Commission regulations. The Examples should
not be considered representative of past or future expenses; actual expenses may
be greater or less than those shown.
6
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The tables on the following pages present, for each Fund, per share income and
capital changes for a share outstanding throughout each period indicated. The
information in the tables for Short-Term U.S. Government has been audited by
Price Waterhouse LLP, the independent accountants for the Fund, and for U.S.
Government, Mortgage Strategy, Mortgage Securities Income, World Income, Short-
Term Multi-Market, Multi-Market Strategy, North American Government Income,
Global Dollar Government and Corporate Bond has been audited by Ernst & Young
LLP, the independent auditors for each Fund. A report of Price Waterhouse LLP or
Ernst & Young LLP, as the case may be, on the information with respect to each
Fund appears in the Fund's Statement of Additional Information. The following
information for each Fund should be read in conjunction with the financial
statements and related notes which are included in the Fund's Statement of
Additional Information.
Further information about a Fund's performance is contained in the Fund's annual
report to shareholders, which may be obtained without charge by contacting
Alliance Fund Services, Inc. at the address or the "Literature" telephone number
shown on the cover of this Prospectus.
7
<PAGE>
<TABLE>
<CAPTION>
Net Net Net
Asset Realized and Increase
Value Unrealized (Decrease) in Dividends From Distributions
Beginning Of Net Investment Gain (Loss) On Net Asset Value Net Investment From Net
Fiscal Year or Period Period Income (Loss) Investments From Operations Income Realized Gains
- --------------------- ------------ -------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Short-Term U.S. Government+
Class A
Period Ended 8/31/94**....... $ 9.77 $ .14 $ (.09) $ .05 $ (.12) $ 0.00
Year Ended 4/30/94........... 10.22 .35 (.29) .06 (.42) 0.00
5/4/92+ to 4/30/93........... 10.00 .46 .34 .80 (.46) (.12)
Class B
Period Ended 8/31/94**....... $ 9.88 $ .10 $ (.07) $ .03 $ (.11) $ 0.00
Year Ended 4/30/94........... 10.31 .40 (.39) .01 (.35) 0.00
5/4/92+ to 4/30/93........... 10.00 .38 .33 .71 (.38) (.02)
Class C
Period Ended 8/31/94**....... $ 9.87 $ .10 $ (.07) $ .03 $ (.11) $ 0.00
8/2/93++ to 4/30/94.......... 10.34 .26 (.42) (.16) (.25) 0.00
U.S. Government
Class A
Year Ended 6/30/94........... $ 8.64 $ .65 $ (.80) $ (.15) $ (.65) $ 0.00
Year Ended 6/30/93........... 8.34 .69 .29 .98 (.68) 0.00
Year Ended 6/30/92........... 8.01 .70 .35 1.05 (.72) 0.00
Year Ended 6/30/91........... 8.14 .81 (.11) .70 (.83) 0.00
Year Ended 6/30/90........... 8.49 .86 (.38) .48 (.83) 0.00
Year Ended 6/30/89........... 8.51 .89 (.03) .86 (.88) 0.00
Year Ended 6/30/88........... 8.90 .93 (.39) .54 (.93) 0.00
Year Ended 6/30/87........... 9.24 .98 (.34) .64 (.98) 0.00
12/1/85+ to 6/30/86.......... 9.45 .63 (.21) .42 (.63) 0.00
Class B
Year Ended 6/30/94........... $ 8.64 $ .59 $ (.80) $ (.21) $ (.59) $ 0.00
Year Ended 6/30/93........... 8.34 .62 .30 .92 (.62) 0.00
9/30/91++ to 6/30/92......... 8.25 .49 .09 .58 (.49) 0.00
Class C
Year Ended 6/30/94........... $ 8.64 $ .59 $ (.81) $ (.22) $ (.59) $ 0.00
4/30/93++ to 6/30/93......... 8.56 .10 .08 .18 (.10) 0.00
Mortgage Securities Income
Class A
Year Ended 12/31/94.......... $ 9.29 $ .57 $ (1.13) $ (.56) $ (.58) $ 0.00
Year Ended 12/31/93.......... 9.08 .67 .23 .90 (.67) 0.00
Year Ended 12/31/92.......... 9.21 .77 (.09) .68 (.81) 0.00
Year Ended 12/31/91.......... 8.79 .88 .41 1.29 (.87) 0.00
Year Ended 12/31/90.......... 8.76 .87 .03 .90 (.87) 0.00
Year Ended 12/31/89.......... 8.81 .97 (.05) .92 (.97) 0.00
Year Ended 12/31/88.......... 9.03 .99 (.23) .76 (.98) 0.00
Year Ended 12/31/87.......... 9.74 1.00 (.68) .32 (1.00) (.03)
Year Ended 12/31/86.......... 9.97 1.06 (.02) 1.04 (1.06) (.21)
Year Ended 12/31/85.......... 9.54 1.22 .43 1.65 (1.22) 0.00
Class B
Year Ended 12/31/94.......... $ 9.29 $ .51 $(1.14) $(.63) $ (.51) $ 0.00
Year Ended 12/31/93.......... 9.08 .61 .22 .83 (.60) 0.00
1/30/92++ to 12/31/92........ 9.16 .68 (.08) .60 (.68) 0.00
Class C
Year Ended 12/31/94.......... $ 9.29 $ .51 $(1.14) $(.63) $ (.51) $ 0.00
5/3/93++ to 12/31/93......... 9.30 .40 0.00 .40 (.40) 0.00
Mortgage Strategy
Class A
Year Ended 11/30/94.......... $ 9.94 $ .42 $ (.32) $ .10 $ (.48) $ (.01)
Year Ended 11/30/93.......... 9.84 .57 .11 .68 (.58) 0.00
6/1/92+ to 11/30/92.......... 10.00 .35 (.17) .18 (.34) 0.00
Class B
Year Ended 11/30/94.......... $ 9.94 $ .39 $ (.35) $ .04 $ (.42) $ (.01)
Year Ended 11/30/93.......... 9.84 .49 .12 .61 (.51) 0.00
6/1/92+ to 11/30/92.......... 10.00 .31 (.17) .14 (.30) 0.00
Class C
Year Ended 11/30/94.......... $ 9.94 $ .37 $ (.33) $ .04 $ (.42) $ (.01)
5/3/93++ to 11/30/93......... 9.98 .27 (.03) .24 (.28) 0.00
World Income
Year Ended 10/31/94.......... $ 1.90 $ .18 $ (.12) $ .06 $ (.05) $ 0.00
Year Ended 10/31/93.......... 1.91 .22 (.16) .06 (.07) 0.00
Year Ended 10/31/92.......... 1.98 .19 (.17) .02 (.09) 0.00
12/3/90+ to 10/31/91......... 2.00 .14 (.03) .11 (.13) 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the footnotes on page 12.
8
<PAGE>
<TABLE>
<CAPTION>
Distributions Total Net Assets
In Excess Total Investment At End Of
of Net Return Dividends Net Asset Return Period
Investment of and Value End Based on Net (000's
Income Capital Distributions of Period Asset Value (b) Omitted)
------------- ----------- ------------- --------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Short-Term U.S. Government+
Class A
Period Ended 8/31/94**....... $ (.03)(a) $ 0.00 $ (.15)(c) $9.67 .53% $2,272
Year Ended 4/30/94........... (.09)(a) 0.00 (.51)(c) 9.77 .52 2,003
5/4/92+ to 4/30/93........... 0.00 0.00 (.58)(c) 10.22 8.20 6,081
Class B
Period Ended 8/31/94**....... $ (.02)(a) $ 0.00 $ (.13)(c) $9.78 .28 % $6,281
Year Ended 4/30/94........... (.09)(a) 0.00 (.44)(c) 9.88 .03 7,184
5/4/92+ to 4/30/93........... 0.00 0.00 (.40)(c) 10.31 7.22 1,292
Class C
Period Ended 8/31/94**....... $ (.02)(a) $ 0.00 $ (.13)(c) $9.77 .28 % $7,128
8/2/93++ to 4/30/94.......... (.06)(a) 0.00 (.31)(c) 9.87 (1.56) 8,763
U.S. Government
Class A
Year Ended 6/30/94........... $0.00 $ 0.00 $ (.65) $7.84 (1.93)% $482,595
Year Ended 6/30/93........... 0.00 0.00 (.68) 8.64 12.23 527,968
Year Ended 6/30/92........... 0.00 0.00 (.72) 8.34 13.52 492,448
Year Ended 6/30/91........... 0.00 0.00 (.83) 8.01 8.97 491,910
Year Ended 6/30/90........... 0.00 0.00 (.83) 8.14 5.99 510,675
Year Ended 6/30/89........... 0.00 0.00 (.88) 8.49 10.87 532,525
Year Ended 6/30/88........... 0.00 0.00 (.93) 8.51 6.41 529,909
Year Ended 6/30/87........... 0.00 0.00 (.98) 8.90 7.00 496,600
12/1/85+ to 6/30/86.......... 0.00 0.00 (.63) 9.24 4.53 128,870
Class B
Year Ended 6/30/94........... $0.00 $ 0.00 $ (.59) $7.84 (2.63)% $756,282
Year Ended 6/30/93........... 0.00 0.00 (.62) 8.64 11.45 552,471
9/30/91++ to 6/30/92......... 0.00 0.00 (.49) 8.34 6.95 32,227
Class C
Year Ended 6/30/94........... $0.00 $ 0.00 $ (.59) $7.83 (2.75)% $231,859
4/30/93++ to 6/30/93......... 0.00 0.00 (.10) 8.64 2.12 67,757
Mortgage Securities Income
Class A
Year Ended 12/31/94.......... $0.00 $ (.02) $ (.60) $8.13 (6.14)% $553,889
Year Ended 12/31/93.......... (.02) 0.00 (.69) 9.29 10.14 848,069
Year Ended 12/31/92.......... 0.00 0.00 (.81) 9.08 7.73 789,898
Year Ended 12/31/91.......... 0.00 0.00 (.87) 9.21 15.44 544,171
Year Ended 12/31/90.......... 0.00 0.00 (.87) 8.79 11.01 495,353
Year Ended 12/31/89.......... 0.00 0.00 (.97) 8.76 10.98 556,077
Year Ended 12/31/88.......... 0.00 0.00 (.98) 8.81 8.64 619,572
Year Ended 12/31/87.......... 0.00 0.00 (1.03) 9.03 3.49 682,650
Year Ended 12/31/86.......... 0.00 0.00 (1.27) 9.74 11.18 756,730
Year Ended 12/31/85.......... 0.00 0.00 (1.22) 9.97 18.35 609,566
Class B
Year Ended 12/31/94.......... $0.00 $ (.02) $ (.53) $8.13 (6.84)% $921,418
Year Ended 12/31/93.......... (.02) 0.00 (.62) 9.29 9.38 1,454,303
1/30/92++ to 12/31/92........ 0.00 0.00 (.68) 9.08 7.81 1,153,957
Class C
Year Ended 12/31/94.......... $0.00 $ (.02) $ (.53) $8.13 (6.84)% $ 58,338
5/3/93++ to 12/31/93......... (.01) 0.00 (.41) 9.29 4.38 91,724
Mortgage Strategy
Class A
Year Ended 11/30/94.......... $ 0.00 $ (.04) $ (.53) $9.51 1.03% $ 43,173
Year Ended 11/30/93.......... 0.00 0.00 (.58) 9.94 7.02 59,215
6/1/92+ to 11/30/92.......... 0.00 0.00 (.34) 9.84 1.84 24,186
Class B
Year Ended 11/30/94.......... $0.00 $ (.03) $ (.46) $9.52 .42% $136,458
Year Ended 11/30/93.......... 0.00 0.00 (.51) 9.94 6.27 168,157
6/1/92+ to 11/30/92.......... 0.00 0.00 (.30) 9.84 1.50 149,188
Class C
Year Ended 11/30/94.......... $0.00 $ (.03) $ (.46) $9.52 .42% $141,838
5/3/93++ to 11/30/93......... 0.00 0.00 (.28) 9.94 2.40 228,703
World Income
Year Ended 10/31/94.......... $0.00 $ (.03) $ (.08) $1.88 3.27% $103,310
Year Ended 10/31/93.......... 0.00 0.00 (.07) 1.90 3.51 149,623
Year Ended 10/31/92.......... 0.00 0.00 (.09) 1.91 1.26 318,716
12/3/90+ to 10/31/91......... 0.00 0.00 (.13) 1.98 6.08 1,059,222
<CAPTION>
Ratio of Net
Ratio Investment
Of Expenses Income (Loss) Portfolio
To Average To Average Turnover
Net Assets Net Assets Rate
----------- ------------- ---------
<S> <C> <C> <C>
Short-Term U.S. Government+
Class A
Period Ended 8/31/94**....... 1.40%(d) 3.98% 144%
Year Ended 4/30/94........... 1.27(d) 4.41 55
5/4/92+ to 4/30/93........... 1.00*(d) 4.38* 294
Class B
Period Ended 8/31/94**....... 2.10%(d) 3.22% 144%
Year Ended 4/30/94........... 2.05(d) 3.12 55
5/4/92+ to 4/30/93........... 1.75*(d) 3.36* 294
Class C
Period Ended 8/31/94**....... 2.10%(d) 3.26% 144%
8/2/93++ to 4/30/94.......... 2.10*(d) 2.60* 55
U.S. Government
Class A
Year Ended 6/30/94........... 1.02% 7.76% 188%
Year Ended 6/30/93........... 1.10 8.04 386
Year Ended 6/30/92........... 1.12 8.43 418
Year Ended 6/30/91........... 1.07 10.02 402
Year Ended 6/30/90........... 1.09 10.35 455
Year Ended 6/30/89........... 1.11 10.70 148
Year Ended 6/30/88........... 1.14 10.70 149
Year Ended 6/30/87........... 1.07(d) 10.36 255
12/1/85+ to 6/30/86.......... 1.01*(d) 9.30* 193
Class B
Year Ended 6/30/94........... 1.72% 7.04% 188%
Year Ended 6/30/93........... 1.81 7.25 386
9/30/91++ to 6/30/92......... 1.80* 7.40* 418
Class C
Year Ended 6/30/94........... 1.70% 6.97% 188%
4/30/93++ to 6/30/93......... 1.80* 6.00* 386
Mortgage Securities Income
Class A
Year Ended 12/31/94.......... 1.29% 6.77% 438%
Year Ended 12/31/93.......... 1.00 7.20 622
Year Ended 12/31/92.......... 1.18 8.56 555
Year Ended 12/31/91.......... 1.16 9.92 439
Year Ended 12/31/90.......... 1.12 10.09 393
Year Ended 12/31/89.......... 1.13 11.03 328
Year Ended 12/31/88.......... 1.11 10.80 239
Year Ended 12/31/87.......... 1.15 10.79 211
Year Ended 12/31/86.......... 1.00 10.86 190
Year Ended 12/31/85.......... .87 12.30 164
Class B
Year Ended 12/31/94.......... 2.00% 6.05% 438%
Year Ended 12/31/93.......... 1.70 6.47 622
1/30/92++ to 12/31/92........ 1.67* 5.92* 555
Class C
Year Ended 12/31/94.......... 1.97% 6.06% 438%
5/3/93++ to 12/31/93......... 1.67* 5.92* 622
Mortgage Strategy
Class A
Year Ended 11/30/94.......... 1.34%(e) 4.78% 375%
Year Ended 11/30/93.......... 1.54 (e) 5.66 499
6/1/92+ to 11/30/92.......... 1.44*(d)(e) 6.58*(d) 101
Class B
Year Ended 11/30/94.......... 2.08%(e) 4.12% 375%
Year Ended 11/30/93.......... 2.26 (e) 4.98 499
6/1/92+ to 11/30/92.......... 2.13*(d)(e) 6.01*(d) 101
Class C
Year Ended 11/30/94.......... 2.04%(e) 4.10% 375%
5/3/93++ to 11/30/93......... 1.58*(e) 3.70* 499
World Income
Year Ended 10/31/94.......... 1.70%(d) 3.96%(d) N/A
Year Ended 10/31/93.......... 1.54 (d) 5.14 (d) N/A
Year Ended 10/31/92.......... 1.59 (d) 7.21 (d) N/A
12/3/90+ to 10/31/91......... 1.85*(d) 7.29*(d) N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the footnotes on page 12.
9
<PAGE>
<TABLE>
<CAPTION>
Net Net Net
Asset Realized and Increase
Value Unrealized (Decrease) in Dividends From Distributions
Beginning Of Net Investment Gain (Loss) On Net Asset Value Net Investment From Net
Fiscal Year or Period Period Income (Loss) Investments From Operations Income Realized Gains
- --------------------- ------------ -------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Short-term Multi-Market
Class A
Year Ended 10/31/94 $ 9.25 $ .93 $ (.86) $ .07 $ 0.00 $0.00
Year Ended 10/31/93 9.25 .92 (.32) .60 (.60) 0.00
Year Ended 10/31/92 9.94 .91 (.86) .05 (.72) (.02)
Year Ended 10/31/91 9.89 .97 .06 1.03 (.97) (.01)
Year Ended 10/31/90 9.69 1.09 .19 1.28 (1.08) 0.00
5/5/89+ to 10/31/89 9.70 .53 (.01) .52 (.53) 0.00
Class B
Year Ended 10/31/94 $ 9.25 $ .94 $ (.93) $ .01 $ 0.00 $0.00
Year Ended 10/31/93 9.25 .87 (.34) .53 (.53) 0.00
Year Ended 10/31/92 9.94 .84 (.86) (.02) (.65) (.02)
Year Ended 10/31/91 9.89 .89 .07 .96 (.90) (.01)
2/5/90++ to 10/31/90 9.77 .74 .12 .86 (.74) 0.00
Class C
Year Ended 10/31/94 $ 9.25 $ .58 $ (.57) $ .01 $ 0.00 $0.00
5/3/93++ to 10/31/93 9.18 .28 .05 .33 (.26) 0.00
Multi-Market Strategy
Class A
Year Ended 10/31/94 $ 8.94 $ .85 $(1.08) $ (.23) $ (.09) $0.00
Year Ended 10/31/93 8.85 1.02 (.26) .76 (.67) 0.00
Year Ended 10/31/92 9.91 1.00 (1.23) (.23) (.81) (.02)
5/29/91+ to 10/28/91 10.00 .42 (.09) .33 (.42) 0.00
Class B
Year Ended 10/31/94 $ 8.94 $ .88 $(1.18) $ (.30) $ (.08) $0.00
Year Ended 10/31/93 8.85 .92 (.22) .70 (.61) 0.00
Year Ended 10/31/92 9.91 1.04 (1.34) (.30) (.74) (.02)
5/29/91+ to 10/28/91 10.00 .39 (.09) .30 (.39) 0.00
Class C
Year Ended 10/31/94 $ 8.94 $ .46 $ (.75) $ (.29) $ (.09) $0.00
5/3/93++ to 10/31/93 8.76 .32 .16 .48 (.30) 0.00
North American Government Income
Class A
Year Ended 11/30/94 $10.35 $1.02 $(2.12) $(1.10) $(.91) $0.00
Year Ended 11/30/93 9.70 1.09 .66 1.75 (1.09) (.01)
3/27/92+ to 11/30/92 10.00 .69 (.31) .38 (.68) 0.00
Class B
Year Ended 11/30/94 $10.34 $ .96 $(2.13) $(1.17) $ (.84) $0.00
Year Ended 11/30/93 9.70 1.01 .67 1.68 (1.02) (.01)
3/27/92+ to 11/30/92 10.00 .64 (.31) .33 (.63) 0.00
Class C
Year Ended 11/30/94 $10.34 $ .96 $(2.12) $(1.16) $(.84) $0.00
5/3/93++ to 11/30/93 10.04 .58 .30 .88 (.58) 0.00
Global Dollar Government
Class A
2/25/94+ to 8/31/94 $10.00 $ .45 $ (.86) $ (.41) $ (.45) $0.00
Class B
2/25/94+ to 8/31/94 $10.00 $ .42 $ (.86) $ (.44) $ (.42) $0.00
Class C
2/25/94+ to 8/31/94 $10.00 $ .42 $ (.86) $ (.44) $ (.42) $0.00
Corporate Bond
Class A
Year Ended 6/30/94 $14.15 $1.11 $(1.36) $ (.25) $(1.11) $(.25)
Year Ended 6/30/93 12.01 1.25 2.13 3.38 (1.24) 0.00
Year Ended 6/30/92 11.21 1.06 .82 1.88 (1.08) 0.00
Year Ended 6/30/91 11.39 1.11 (.06) 1.05 (1.23) 0.00
Year Ended 6/30/90 12.15 1.24 (.86) .38 (1.14) 0.00
Year Ended 6/30/89 11.82 1.12 .32 1.44 (1.11) 0.00
Year Ended 6/30/88 12.24 1.10 (.38) .72 (1.14) 0.00
Nine Months Ended 6/30/87 12.25 .86 (.06) .80 (.81) 0.00
Year Ended 9/30/86 11.52 1.20 .73 1.93 (1.20) 0.00
Year Ended 9/30/85 10.50 1.24 1.04 2.28 (1.26) 0.00
Year Ended 9/30/84 11.11 1.25 (.60) .65 (1.26) 0.00
Class B
Year Ended 6/30/94 $14.15 $1.02 $(1.37) $ (.35) $(1.04) $(.25)
1/8/93++ to 6/30/93 12.47 .49 1.69 2.18 (.50) 0.00
Class C
Year Ended 6/30/94 $14.15 $1.02 $(1.37) $ (.35) $(1.05) $(.25)
5/30/93++ to 6/30/93 13.63 .16 .53 .69 (.17) 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the footnotes on page 12.
10
<PAGE>
<TABLE>
<CAPTION>
Distributions Total Net Assets
In Excess Total Investment At End Of
of Net Return Dividends Net Asset Return Period
Investment of and Value End Based on Net (000's
Fiscal Year or Period Income Capital Distributions of Period Asset Value (b) Omitted)
- --------------------- ------------- ---------- ------------- --------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Short-term Multi-Market
Class A
Year Ended 10/31/94 $ 0.00 $ (.61) $ (.61) $ 8.71 .84% $ 593,677
Year Ended 10/31/93 0.00 0.00 (.60) 9.25 6.67 953,571
Year Ended 10/31/92 0.00 0.00 (.74) 9.25 .49 1,596,903
Year Ended 10/31/91 0.00 0.00 (.98) 9.94 10.91 2,199,393
Year Ended 10/31/90 0.00 0.00 (1.08) 9.89 13.86 1,346,035
5/5/89+ to 10/31/89 0.00 0.00 (.53) 9.69 5.57 210,294
Class B
Year Ended 10/31/94 $ 0.00 $ (.55) $ (.55) $ 8.71 (.12)% 1,003,633
Year Ended 10/31/93 0.00 0.00 (.53) 9.25 5.91 1,742,703
Year Ended 10/31/92 0.00 0.00 (.67) 9.25 (.24) 2,966,071
Year Ended 10/31/91 0.00 0.00 (.91) 9.94 10.11 3,754,003
2/5/90++ to 10/31/90 0.00 0.00 (.74) 9.89 9.07 1,950,330
Class C
Year Ended 10/31/94 $ 0.00 $ (.55) $ (.55) $ 8.71 (.12)% $ 8,136
5/3/93++ to 10/31/93 0.00 0.00 (.26) 9.25 3.66 5,538
Multi-Market Strategy
Class A
Year Ended 10/31/94 $ 0.00 $ (.58) $ (.67) $ 8.04 (2.64)% $ 52,385
Year Ended 10/31/93 0.00 0.00 (.67) 8.94 9.01 82,977
Year Ended 10/31/92 0.00 0.00 (.83) 8.85 (2.80) 141,526
5/29/91+ to 10/28/91 0.00 0.00 (.42) 9.91 3.68 143,594
Class B
Year Ended 10/31/94 $ 0.00 $ (.52) $ (.60) $ 8.04 (3.35)% $ 233,896
Year Ended 10/31/93 0.00 0.00 (.61) 8.94 8.25 431,186
Year Ended 10/31/92 0.00 0.00 (.76) 8.85 (3.51) 701,465
5/29/91+ to 10/28/91 0.00 0.00 (.39) 9.91 3.36 662,981
Class C
Year Ended 10/31/94 $ 0.00 $ (.52) $ (.61) $ 8.04 (3.34)% $ 1,252
5/3/93++ to 10/31/93 0.00 0.00 (.30) 8.94 5.54 718
North American Government Income
Class A
Year Ended 11/30/94 $ 0.00 $ (.21) $(1.12) $8.13 (11.32)% $303,538
Year Ended 11/30/93 0.00 0.00 (1.10) 10.35 18.99 268,233
3/27/92+ to 11/30/92 0.00 0.00 (.68) 9.70 3.49 61,702
Class B
Year Ended 11/30/94 $ 0.00 $ (.21) $(1.05) $8.13 (11.89)% $1,639,602
Year Ended 11/30/93 0.00 0.00 (1.03) 10.35 18.15 1,313,591
3/27/92+ to 11/30/92 0.00 0.00 (.63) 9.70 3.30 216,317
Class C
Year Ended 11/30/94 $ 0.00 $ (.21) $(1.05) $8.13 (11.89)% $369,714
5/3/93++ to 11/30/93 0.00 0.00 (.58) 10.34 9.00 310,230
Global Dollar Government
Class A
2/25/94+ to 8/31/94 $ 0.00 $ 0.00 $ (.45) $9.14 (3.77)% $ 10,995
Class B
2/25/94+ to 8/31/94 $ 0.00 $ 0.00 $ (.42) $9.14 (4.17)% $ 47,030
Class C
2/25/94+ to 8/31/94 $ 0.00 $ 0.00 $ (.42) $9.14 (4.16)% $ 10,404
Corporate Bond
Class A
Year Ended 6/30/94 $ (.03) $ 0.00 $(1.39) $12.51 (2.58)% $ 219,182
Year Ended 6/30/93 0.00 0.00 (1.24) 14.15 29.62 216,171
Year Ended 6/30/92 0.00 0.00 (1.08) 12.01 17.43 60,356
Year Ended 6/30/91 0.00 0.00 (1.23) 11.21 9.71 62,268
Year Ended 6/30/90 0.00 0.00 (1.14) 11.39 3.27 68,049
Year Ended 6/30/89 0.00 0.00 (1.11) 12.15 12.99 52,381
Year Ended 6/30/88 0.00 0.00 (1.14) 11.82 6.24 37,587
Nine Months Ended 6/30/87 0.00 0.00 (.81) 12.24 7.32 41,072
Year Ended 9/30/86 0.00 0.00 (1.20) 12.25 17.19 45,178
Year Ended 9/30/85 0.00 0.00 (1.26) 11.52 22.66 40,631
Year Ended 9/30/84 0.00 0.00 (1.26) 10.50 6.44 36,435
Class B
Year Ended 6/30/94 $ (.01) $ 0.00 $(1.30) $12.50 (3.27)% $ 184,129
1/8/93++ to 6/30/93 0.00 0.00 .50 14.15 17.75 55,508
Class C
Year Ended 6/30/94 $ 0.00 $ 0.00 $(1.30) $12.50 (3.27)% $ 50,860
5/30/93++ to 6/30/93 0.00 0.00 (.17) 14.15 5.08 5,115
<CAPTION>
Ratio of Net
Ratio Investment
Of Expenses Income (Loss) Portfolio
To Average To Average Turnover
Fiscal Year or Period Net Assets Net Assets Rate
- --------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Short-term Multi-Market
Class A
Year Ended 10/31/94 1.13% 7.28% 109%
Year Ended 10/31/93 1.16 8.26 182
Year Ended 10/31/92 1.10 9.00 133
Year Ended 10/31/91 1.09 9.64 146
Year Ended 10/31/90 1.18 10.81 152
5/5/89+ to 10/31/89 1.14* 10.83* 10
Class B
Year Ended 10/31/94 1.85 % 6.58 % 109 %
Year Ended 10/31/93 1.87 7.57 182
Year Ended 10/31/92 1.81 8.28 133
Year Ended 10/31/91 1.81 8.87 146
2/5/90++ to 10/31/90 1.86* 9.90* 152
Class C
Year Ended 10/31/94 1.83% 6.50% 109%
5/3/93++ to 10/31/93 1.82* 7.19* 182
Multi-Market Strategy
Class A
Year Ended 10/31/94 1.41%(f) 7.17% 605%
Year Ended 10/31/93 1.94 (f) 9.17(g) 200
Year Ended 10/31/92 2.53 (f) 10.58(g) 239
5/29/91+ to 10/28/91 2.81*(f) 10.17*(g) 121
Class B
Year Ended 10/31/94 2.11%(f) 6.33% 605%
Year Ended 10/31/93 2.64 (f) 8.46(g) 200
Year Ended 10/31/92 3.24 (f) 9.83(g) 239
5/29/91+ to 10/28/91 3.53*(f) 9.40*(g) 121
Class C
Year Ended 10/31/94 2.08%(f) 6.10% 605%
5/3/93++ to 10/31/93 2.44*(f) 7.17*(g) 200
North American Government Income
Class A
Year Ended 11/30/94 1.70%(f) 11.22% 131%
Year Ended 11/30/93 1.61 (f) 10.77 254
3/27/92+ to 11/30/92 2.45*(d)(f) 10.93*(d) 86
Class B
Year Ended 11/30/94 2.41%(f) 10.53% 131%
Year Ended 11/30/93 2.31 (f) 10.01 254
3/27/92+ to 11/30/92 3.13*(d)(f) 10.16*(d) 86
Class C
Year Ended 11/30/94 2.39%(f) 10.46% 131%
5/3/93++ to 11/30/93 2.21*(f) 9.74* 254
Global Dollar Government
Class A
2/25/94+ to 8/31/94 .75%*(d) 9.82%* 100%
Class B
2/25/94+ to 8/31/94 1.45%*(d) 9.11%* 100%
Class C
2/25/94+ to 8/31/94 1.45%*(d) 9.05%* 100%
Corporate Bond
Class A
Year Ended 6/30/94 1.30% 7.76% 372%
Year Ended 6/30/93 1.39 9.29 579
Year Ended 6/30/92 1.48 8.98 610
Year Ended 6/30/91 1.44 9.84 357
Year Ended 6/30/90 1.51 10.70 480
Year Ended 6/30/89 1.84 9.53 104
Year Ended 6/30/88 1.81 9.24 98
Nine Months Ended 6/30/87 1.27 9.17 95
Year Ended 9/30/86 1.08 9.80 240
Year Ended 9/30/85 1.15 11.00 142
Year Ended 9/30/84 1.18 11.88 10
Class B
Year Ended 6/30/94 2.00% 7.03% 372%
1/8/93++ to 6/30/93 2.10* 7.18* 579
Class C
Year Ended 6/30/94 1.99% 6.98% 372%
5/30/93++ to 6/30/93 2.05* 5.51* 579
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the footnotes on page 12.
11
<PAGE>
+ Prior to July 22, 1993, Equitable Capital Management Corporation
("Equitable") served as the investment adviser to The Alliance Portfolios
(the "Trust"), of which Short-Term U.S. Government is a series. On July 22,
1993, Alliance acquired the business and substantially all of the assets of
Equitable and became investment adviser of the Trust.
+ Commencement of operations.
++ Commencement of distribution.
* Annualized.
** Reflects newly adopted fiscal year end.
(a) Includes with respect to Short-Term U.S. Government a return of capital for
the year ended April 30, 1994 of $(0.08) for Class A, $(0.08) for Class B
and $(0.05) for Class C and for the period ended August 31, 1994 of $(0.03)
for Class A and $(0.02) for Class B and Class C.
(b) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at the net asset value during the period, and a
redemption on the last day of the period. Initial sales charge or
contingent deferred sales charge is not reflected in the calculation of
total investment return. Total investment returns calculated for periods of
less than one year are not annualized.
(c) "Total dividends and distributions" includes dividends in excess of net
investment income and return of capital. Short-Term U.S. Government had
dividends in excess of net investment income with respect to Class A
shares, for the year ended April 30, 1994, of $(.01); with respect to Class
B shares, $(.01); and with respect to Class C shares, $(.01).
(d) Net of expenses assumed and/or waived/reimbursed. If Short-Term U.S.
Government had borne all expenses, the expense ratios would have been with
respect to Class A shares, 2.20% (annualized) for 1993, 2.17% for the year
ended April 30, 1994 and 2.95% (annualized) for the period ended August 31,
1994; with respect to Class B shares, 4.81% (annualized) for 1993, 3.21%
for the year ended April 30, 1994 and 3.60% (annualized) for the period
ended August 31, 1994; and with respect to Class C shares, 3.10%
(annualized) for the year ended April 30, 1994 and 3.64% (annualized) for
the period ended August 31, 1994. If U.S. Government had borne all
expenses, the expense ratios would have been 1.22% for 1986 and 1.09% for
1987. If Mortgage Strategy had borne all expenses, the expense ratios would
have been with respect to Class A shares, 1.55% (annualized) for 1992; and
with respect to Class B shares, 2.28% (annualized) for 1992. The ratio of
net investment income to average net assets would have been with respect to
Class A shares, 6.47% (annualized) for 1992; and with respect to Class B
shares, 5.86% (annualized) for 1992. If World Income had borne all
expenses, the expense ratios would have been 1.87% for 1992, 1.92% for 1993
and 2.08% for 1994. If North American Government Income had borne all
expenses, the expense ratios would have been with respect to Class A
shares, 2.49% (annualized) for 1992; and with respect to Class B shares,
3.16% (annualized) for 1992. If Global Dollar Government had borne all
expenses, the expense ratios would have been with respect to Class A
shares, 1.91% (annualized); with respect to Class B shares, 2.63%
(annualized); and with respect to Class C shares, 2.59% (annualized).
(e) Includes interest expenses. If Mortgage Strategy had not borne interest
expenses, the ratio of expenses to average net assets would have been with
respect to Class A shares, 1.42% (annualized) for 1992, 1.33% for 1993 and
1.20% for 1994; with respect to Class B shares, 2.10% (annualized) for
1992, 2.07% for 1993 and 1.91% for 1994; and with respect to Class C
shares, 1.74% (annualized) for 1993 and 1.89% for 1994.
(f) Includes interest expenses. If Multi-Market Strategy had not borne interest
expenses, the ratio of expenses to average net assets would have been with
respect to Class A shares, 1.33% (annualized) for 1991, 1.33% for 1992,
1.40% for 1993 and 1.30% for 1994; with respect to Class B shares, 2.05%
(annualized) for 1991, 2.05% for 1992, 2.11% for 1993 and 2.01% for 1994;
and with respect to Class C shares, 2.11% (annualized) for 1993 and 1.99%
for 1994. If North American Government Income had not borne interest
expenses, the ratio of expenses (net of interest expenses) to average net
assets would have been with respect to Class A shares, 1.66% (annualized)
for 1992, 1.33% for 1993 and 1.37% for 1994; with respect to Class B
shares, 2.35% (annualized) for 1992, 2.04% for 1993 and 2.07% for 1994;
and with respect to Class C shares, 2.04% (annualized) for 1993 and 2.06%
for 1994.
(g) Includes loan fees. If Multi-Market Strategy had not incurred loan fees,
the ratio of net investment income to average net assets would have been
with respect to Class A shares, 11.65% (annualized) for 1991, 11.78% for
1992 and 9.73% for 1993; with respect to Class B shares, 10.88%
(annualized) for 1991, 11.02% for 1992 and 8.99% for 1993; and with respect
to Class C shares, 7.50% (annualized) for 1993.
12
<PAGE>
- --------------------------------------------------------------------------------
Glossary
- --------------------------------------------------------------------------------
The following terms are frequently used in this Prospectus. Many of these terms
are explained in greater detail under "Description of the Funds--Additional
Investment Practices" and in Appendix A.
Bonds are fixed, floating and variable rate debt obligations.
Debt securities are bonds, debentures, notes, bills and repurchase agreements.
Fixed-income securities are debt securities, convertible securities and
preferred stocks and include floating rate and variable rate instruments. Fixed-
income securities may be rated (or if unrated, for purposes of the Funds'
investment policies may be determined by Alliance to be of equivalent quality to
those rated) triple-A (Aaa or AAA), high quality (Aa or AA or above), high grade
(A or above) or investment grade (Baa or BBB or above) by, as the case may be,
Moody's, S&P, Duff & Phelps or Fitch, or may be lower-rated securities, as
defined below. In the case of "split-rated" fixed-income securities (i.e.,
securities assigned non-equivalent credit quality ratings, such as Baa by
Moody's but BB by S&P, or, to take another example, Ba by Moody's and BB by S&P
but B by Fitch), a Fund will use the rating deemed by Alliance to be the most
appropriate under the circumstances.
Lower-rated securities are fixed-income securities rated Ba and BB or below, or
determined by Alliance to be of equivalent quality and are commonly referred to
as "junk bonds."
Equity securities are common and preferred stocks, securities convertible into
common and preferred stocks and rights and warrants to subscribe for the
purchase of common and preferred stocks.
Convertible securities are bonds, debentures, corporate notes and preferred
stocks that are convertible into common and preferred stock.
U.S. Government securities are securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. These securities include
securities backed by the full faith and credit of the United States, those
supported by the right of the issuer to borrow from the U.S. Treasury and those
backed only by the credit of the issuing agency itself. The first category
includes U.S. Treasury securities (which are U.S. Treasury bills, notes and
bonds) and certificates issued by GNMA (see below). U.S. Government securities
not backed by the full faith and credit of the United States include
certificates issued by FNMA and FHLMC (see below).
Mortgage-related securities are pools of mortgage loans that are assembled for
sale to investors (such as mutual funds) by various governmental, government-
related and private organizations. These securities include:
ARMS, which are adjustable-rate mortgage securities,
SMRS, which are stripped mortgage-related securities,
CMOs, which are collateralized mortgage obligations,
GNMA certificates, which are securities issued by the Government National
Mortgage Association,
FNMA certificates, which are securities issued by the Federal National
Mortgage Association, and
FHLMC certificates, which are securities issued by the Federal Home Loan
Mortgage Corporation.
Interest-only or IO securities receive only the interest payments on an
underlying debt that has been structured to have two classes, one of which is
the IO class and another of which is the principal-only or PO class, which class
receives only the principal payments on the underlying obligation. POs are
similar to, and are sometimes referred to as, zero coupon securities, which are
debt securities issued without interest coupons.
Foreign government securities are securities issued or guaranteed, as to payment
of principal and interest, by a foreign government or any of its political
subdivisions, authorities, agencies or instrumentalities.
Sovereign debt obligations are foreign government debt securities, loan
participations between foreign governments and financial institutions and
interests in entities organized and operated for the purpose of restructuring
the investment characteristics of foreign government securities.
World Bank is the commonly used name for the International Bank for
Reconstruction and Development.
LIBOR is the London Interbank Offered Rate.
Moody's is Moody's Investors Service, Inc.
S&P is Standard & Poor's Corporation.
Duff & Phelps is Duff & Phelps Credit Rating Co.
Fitch is Fitch Investors Service, Inc.
Prime commercial paper is commercial paper rated Prime-1 or higher by Moody's,
A-1 or higher by S&P, Fitch-1 by Fitch or Duff 1 by Duff & Phelps.
Qualifying bank deposits are certificates of deposit, bankers' acceptances and
interest-bearing savings deposits of banks having total assets of more than $1
billion and which are members of the Federal Deposit Insurance Corporation.
Rule 144A securities are securities that may be resold pursuant to Rule 144A
under the Securities Act of 1933, as amended (the "Securities Act").
1940 Act is the Investment Company Act of 1940, as amended.
Code is the Internal Revenue Code of 1986, as amended.
Commission is the Securities and Exchange Commission.
13
<PAGE>
- --------------------------------------------------------------------------------
DESCRIPTION OF THE FUNDS
- --------------------------------------------------------------------------------
Except as noted, (i) the Funds' investment objectives are "fundamental" and
cannot be changed without a shareholder vote, and (ii) the Funds' investment
policies are not fundamental and thus can be changed without a shareholder vote.
No Fund will change a non-fundamental objective or policy without notifying its
shareholders. There is no guarantee that any Fund will achieve its investment
objective.
INVESTMENT OBJECTIVES AND POLICIES
U.S. GOVERNMENT FUNDS
The U.S. Government Funds are diversified investment companies that have been
designed to offer investors high current income consistent with preservation of
capital by investing primarily in U.S. Government securities.
Alliance Short-Term U.S. Government Fund
Alliance Short-Term U.S. Government Fund ("Short-Term U.S. Government") seeks
high current income consistent with preservation of capital by investing
primarily in a portfolio of U.S. Government securities. Under normal
circumstances, the Fund maintains an average dollar-weighted portfolio maturity
of not more than three years and invests at least 65% of its total assets in
U.S. Government securities and repurchase agreements and forward commitments
relating to U.S. Government securities. The Fund's investment objective is not
fundamental.
In addition to investing in U.S. Government securities, the Fund may invest a
portion of its assets in securities of non-governmental issuers. Although these
investments will be of high quality at the time of purchase, they generally
involve higher levels of credit risk than do U.S. Government securities, as well
as the risk (present with all fixed-income securities) of fluctuations in value
as interest rates change. The Fund will not be obligated to dispose of any
security whose credit quality falls below high quality.
The Fund may also (i) invest in certain SMRS, (ii) invest in variable, floating
and inverse floating rate instruments, (iii) make short sales "against the box,"
(iv) enter into various hedging transactions, such as interest rate swaps, caps
and floors, (v) enter into reverse repurchase agreements, (vi) purchase and sell
futures contracts for hedging purposes, (vii) purchase and sell call and put
options on futures contracts or on securities, for hedging purposes or to earn
additional income, (viii) make secured loans of portfolio securities, (ix) enter
into repurchase agreements, and (x) purchase securities for future delivery. The
Fund may not invest more than 15% of its total assets in illiquid securities or
more than 5% of its total assets in securities the disposition of which is
restricted under Federal securities laws (excluding, to the extent permitted by
applicable law, Rule 144A securities). For additional information on the use,
risks and costs of these practices, see "Additional Investment Practices."
U.S. Government Portfolio
U.S. Government Portfolio ("U.S. Government") seeks as high a level of current
income as is consistent with safety of principal. As a matter of fundamental
policy, the Fund pursues its objective by investing solely in U.S. Government
securities that are backed by the full faith and credit of the U.S. Government.
These include U.S. Treasury securities, including zero coupon Treasury
securities, and GNMA certificates, including certain SMRS and variable and
floating rate instruments. The average weighted maturity of the Fund's portfolio
of U.S. Government securities is expected to vary between one year or less and
30 years. For additional information on the use, risks and cost of these
practices, see "Additional Investment Practices." The Fund's investment
objective is not fundamental.
Counsel to the Fund has advised the Fund that, in their view, shares of the Fund
are a legal investment for, among other investors, (i) savings and loan
associations and commercial banks chartered under the laws of the United States,
(ii) savings and loan associations chartered under the laws of Alabama, Arizona,
Arkansas, Colorado, Connecticut, Delaware, Illinois, Louisiana, Maine, Missouri,
Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, Oklahoma, Pennsylvania,
Tennessee, Utah, Washington and Wyoming, (iii) credit unions chartered under the
laws of Alaska*, California, Florida*, Maine, Nevada, New York, Ohio and Utah
and (iv) commercial banks chartered under the laws of Alabama, Alaska, Arizona,
California, Colorado, Connecticut, Delaware, Idaho, Indiana, Kentucky,
Louisiana, Maine, Maryland, Michigan, Minnesota, Missouri, Nebraska, Nevada, New
Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oregon, Rhode
Island, Tennessee, Texas, Washington and West Virginia. Institutions in the
asterisked(*) states should obtain prior state regulatory approval before
investing in shares of the Fund. In addition, the Fund believes that it is
currently a legal investment for savings and loan associations, credit unions
and commercial banks chartered under the laws of certain other states.
MORTGAGE FUNDS
The Mortgage Funds are diversified investment companies that have been designed
to offer investors high current income from investment in mortgage-related
securities.
Alliance Mortgage Strategy Trust
Alliance Mortgage Strategy Trust, Inc. ("Mortgage Strategy") seeks the highest
level of current income, consistent with low volatility of net asset value, that
is available from a portfolio of mortgage-related securities of the highest
quality. As a matter of fundamental policy the Fund normally has at least 65% of
the value of its total assets invested in mortgage-related securities. The Fund
will purchase only those mortgage-related securities that are triple-A
securities or U.S. Government securities. The Fund's portfolio is structured to
achieve low volatility of net asset value approximating that of
14
<PAGE>
a portfolio investing exclusively in two-year U.S. Treasury securities. The Fund
invests primarily in ARMS and fixed-rate mortgage securities and is designed to
provide a more consistent and less volatile net asset value than that
characteristic of a mutual fund investing primarily in fixed-rate mortgage
securities and a higher yield than that of a mutual fund investing in ARMS.
The Fund believes that because of the nature of its assets, it is not exposed to
any material risk of loss as a result of default on its portfolio securities.
The Fund is, however, exposed to the risk that the prices of such securities
will fluctuate, in some cases significantly, as interest rates change.
Mortgage-related securities in which the Fund may invest include (i) pass-
through mortgage-related securities, including pass-through securities backed by
ARMS and issued by GNMA, FNMA, FHLMC and by private organizations, (ii) CMOs and
multi-class pass-through securities, including floating rate CMOs that are ARMS,
(iii) SMRS, (iv) high coupon fixed-rate mortgage securities, and (v) foreign
mortgage-related securities. For a description of these mortgage-related
securities, see "Additional Investment Practices--Mortgage-Related Securities."
The Fund expects that new types of ARMS, other mortgage-related securities,
asset-backed securities and other securities in which the Fund may invest will
be developed from time to time and will consider investing in such new types of
securities.
The Fund may invest up to 35% of its total assets in (i) triple-A asset-backed
securities, (ii) non-mortgage-related U.S. Government securities, including
certain zero coupon Treasury securities, (iii) Treasury securities issued by
private corporate issuers, (iv) qualifying bank deposits, (v) prime commercial
paper or, if not rated, issued by companies which have outstanding triple-A debt
issues and (vi) triple-A debt securities secured by mortgages on commercial real
estate or residential rental properties.
The Fund may also (i) enter into futures contracts and purchase and write
options on futures contracts, (ii) enter into forward commitments for the
purchase or sale of securities, (iii) enter into interest rate swaps, caps and
floors, (iv) invest in Eurodollar instruments, (v) purchase and write put and
call options on foreign currencies, (vi) invest in variable, floating and
inverse floating rate instruments, (vii) enter into repurchase agreements
pertaining to the types of securities in which it invests, (viii) use reverse
repurchase agreements and dollar rolls and (ix) make secured loans of its
portfolio securities. For additional information on the use, risks and costs of
these practices, see "Additional Investment Practices."
Alliance Mortgage Securities Income Fund
Alliance Mortgage Securities Income Fund, Inc. ("Mortgage Securities Income")
seeks a high level of current income to the extent consistent with prudent
investment risk. The Fund invests primarily in a diversified portfolio of
mortgage-related securities, including CMOs, and, as a matter of fundamental
policy, maintains at least 65% of its total assets in mortgage-related
securities.
The Fund expects that governmental, government-related or private entities may
create mortgage loan pools offering pass-through investments in addition to
those described in this Prospectus. The mortgages underlying these securities
may be instruments whose principal or interest payments may vary or whose terms
to maturity may differ from customary long-term fixed-rate mortgages. As new
types of mortgage-related securities are developed and offered to investors, the
Fund will consider making investments in such new types of securities. The Fund
may invest up to 20% of its total assets in lower-rated mortgage-related
securities. See "Risk Considerations--Securities Ratings" and "--Investment in
Lower-Rated Fixed-Income Securities." The average weighted maturity of the
Fund's portfolio of fixed-income securities is expected to vary between two and
ten years.
The Fund may invest up to 35% of the value of its total assets in (i) U.S.
Government securities, (ii) qualifying bank deposits, (iii) prime commercial
paper or, if not rated, issued by companies which have an outstanding high
quality debt issue, (iv) high grade debt securities secured by mortgages on
commercial real estate or residential rental properties, and (v) high grade
asset-backed securities.
The Fund may also (i) invest in repurchase agreements pertaining to the types of
securities in which it invests, (ii) enter into forward commitments for the
purchase or sale of securities, (iii) purchase put and call options written by
others and write covered put and call options on the types of securities in
which the Fund may invest for hedging purposes, (iv) enter into interest rate
swaps, caps and floors, (v) enter into interest rate futures contracts, (vi)
invest in variable floating and inverse floating rate instruments, and (vii)
lend portfolio securities. The Fund will not invest in illiquid securities if,
as a result, more than 10% of its total assets would be illiquid. For additional
information on the use, risk and costs of these practices, see "Additional
Investment Practices."
MULTI-MARKET FUNDS
The Multi-Market Funds are non-diversified investment companies that have been
designed to offer investors a higher yield than a money market fund and less
fluctuation in net asset value than a longer-term bond fund.
Alliance World Income Trust
Alliance Short-Term Multi-Market Trust
Alliance Multi-Market Strategy Trust
Alliance World Income Trust, Inc. ("World Income"), Alliance Short-Term Multi-
Market Trust, Inc. ("Short-Term Multi-Market") and Alliance Multi-Market
Strategy Trust, Inc. ("Multi-Market Strategy") each seek the highest level of
current income, consistent with what Alliance considers to be prudent investment
risk, that is available from a portfolio of high quality debt securities having
remaining maturities of not more than, with respect to World Income, one year,
with respect to Short-Term Multi-Market, three years, and with respect to Multi-
Market Strategy, five years. Each Fund seeks high current yields by investing in
a portfolio of debt securities
15
<PAGE>
denominated in the U.S. Dollar and selected foreign currencies. The Multi-Market
Funds seek investment opportunities in foreign, as well as domestic, securities
markets. World Income, which is not a money market fund, will maintain at least
35% of its net assets in U.S. Dollar-denominated securities. Short-Term Multi-
Market will normally maintain a substantial portion of its assets in debt
securities denominated in foreign currencies but will invest at least 25% of its
net assets in U.S. Dollar-denominated securities. Multi-Market Strategy normally
expects to maintain at least 70% of its assets in debt securities denominated in
foreign currencies.
In pursuing their investment objectives, the Multi-Market Funds seek to minimize
credit risk and fluctuations in net asset value by investing only in short-term
debt securities. Normally, a high proportion of these Funds' portfolios consists
of money market instruments. Alliance actively manages the Multi-Market Funds'
portfolios in accordance with a multi-market investment strategy, allocating a
Fund's investments among securities denominated in the U.S. Dollar and the
currencies of a number of foreign countries and, within each such country, among
different types of debt securities. Alliance adjusts each Multi-Market Fund's
exposure to each currency such that the percentage of assets invested in
securities of a particular country or denominated in a particular currency
varies in accordance with Alliance's assessment of the relative yield and
appreciation potential of such securities and the relative strength of a
country's currency. Fundamental economic strength, credit quality and interest
rate trends are the principal factors considered by Alliance in determining
whether to increase or decrease the emphasis placed upon a particular type of
security or industry sector within the Fund's investment portfolio. None of the
Multi-Market Funds invests more than 25% of its net assets in debt securities
denominated in a single currency other than the U.S. Dollar.
The returns available from short-term foreign currency-denominated debt
instruments can be adversely affected by changes in exchange rates. Alliance
believes that the use of foreign currency hedging techniques, including "cross-
hedges" (see "Additional Investment Practices--Forward Foreign Currency Exchange
Contracts"), can help protect against declines in the U.S. Dollar value of
income available for distribution to shareholders and declines in the net asset
value of a Fund's shares resulting from adverse changes in currency exchange
rates. For example, the return available from securities denominated in a
particular foreign currency would diminish in the event the value of the U.S.
Dollar increased against such currency. Such a decline could be partially or
completely offset by an increase in value of a cross-hedge involving a forward
exchange contract to sell a different foreign currency, where such contract is
available on terms more advantageous to a Fund than a contract to sell the
currency in which the position being hedged is denominated. It is Alliance's
belief that cross-hedges can therefore provide significant protection of net
asset value in the event of a general rise in the U.S. Dollar against foreign
currencies. However, a cross-hedge cannot protect against exchange rate risks
perfectly, and if Alliance is incorrect in its judgment of future exchange rate
relationships, a Fund could be in a less advantageous position than if such a
hedge had not been established.
Each Multi-Market Fund invests in debt securities denominated in the currencies
of countries whose governments are considered stable by Alliance. In addition to
the U.S. Dollar, such currencies include, among others, the Australian Dollar,
Austrian Schilling, British Pound Sterling, Canadian Dollar, Danish Krone, Dutch
Guilder, European Currency Unit ("ECU"), French Franc, Irish Pound, Italian
Lira, Japanese Yen, Mexican Peso, New Zealand Dollar, Norwegian Krone, Spanish
Peseta, Swedish Krona, Swiss Franc and German Mark.
An issuer of debt securities purchased by a Fund may be domiciled in a country
other than the country in whose currency the instrument is denominated. In
addition, the Multi-Market Funds may purchase debt securities denominated in one
currency the principal amounts of which and value of interest payments on which
are determined with reference (or "linked") to another currency. In this regard,
as of the date of this Prospectus each Fund has invested in U.S. Dollar
denominated securities issued by Mexican issuers and/or Peso-linked securities.
The value of these investments may fluctuate inversely in correlation with
changes in the Peso-Dollar exchange rate and with the general level of interest
rates in Mexico, and, when added to a Multi-Market Fund's investments in Mexican
Peso denominated securities, may exceed 25% of the value of the Fund's net
assets. For a general description of Mexico, see Appendix B and each Fund's
Statement of AdditionalInformation.
Each Multi-Market Fund may invest in debt securities denominated in the ECU,
which is a "basket" consisting of specified amounts of the currencies of certain
of the member states of the European Union, a twelve-nation organization engaged
in cooperative economic activities. The specific amounts of currencies
comprising the ECU may be adjusted by the Council of Ministers of the European
Union to reflect changes in relative values of the underlying currencies.
Each Multi-Market Fund may invest in debt securities issued by supranational
organizations including the World Bank, which was chartered to finance
development projects in developing member countries; the European Union; the
European Coal and Steel Community, which is an economic union of various
European nations' steel and coal industries; and the Asian Development Bank,
which is an international development bank established to lend funds, promote
investment and provide technical assistance to member nations in the Asian and
Pacific regions.
Each Multi-Market Fund seeks to minimize investment risk by limiting its
portfolio investments to debt securities of high quality, and World Income will
invest 65% (and normally substantially all) of its total assets in high quality
income-producing debt securities. Accordingly, the Multi-Market Funds' portfolio
securities will consist of (i) U.S. Government securities, (ii) high quality
foreign government securities, (iii) obligations issued by supranational
entities and corporate debt securities having a triple-A rating, with respect to
World
16
<PAGE>
Income, or a high quality rating, with respect to Short-Term Multi-Market and
Multi-Market Strategy, (iv) certificates of deposit and bankers' acceptances
issued or guaranteed by, or time deposits maintained at, banks (including
foreign branches of foreign banks) having total assets of more than $1 billion,
with respect to World Income, or $500 million, with respect to Short-Term Multi-
Market and Multi-Market Strategy, and determined by Alliance to be of high
quality, and (v) prime commercial paper or, if not rated, issued by U.S. or
foreign companies having outstanding high quality debt securities.
As a matter of fundamental policy, each Multi-Market Fund concentrates at least
25% of its total assets in debt instruments issued by domestic and foreign
companies engaged in the banking industry, including bank holding companies.
Such investments may include certificates of deposit, time deposits, bankers'
acceptances, and obligations issued by bank holding companies, as well as
repurchase agreements entered into with banks (as distinct from non-banks) in
accordance with the policies set forth with respect to the Funds in "Additional
Investment Practices--Repurchase Agreements." See "Risk Considerations--
Investment in the Banking Industry."
Each Multi-Market Fund may also (i) invest in indexed commercial paper, (ii)
enter into futures contracts and purchase and write options on futures
contracts, (iii) purchase and write put and call options on foreign currencies,
(iv) purchase or sell forward foreign currency exchange contracts, (v) with
respect to Short-Term Multi-Market and Multi-Market Strategy, enter into
interest rate swaps, caps and floors, (vi) invest in variable, floating and
inverse floating rate instruments, (vii) make secured loans of its portfolio
securities, and (viii) enter into repurchase agreements. A Multi-Market Fund
will not invest in illiquid securities if as a result more than 10% of its
assets would be so invested. For additional information on the use, risks and
costs of these practices, see "Additional Investment Practices." Multi-Market
Strategy maintains borrowings of approximately 25% of its total assets less
liabilities (other than the amount borrowed). See "Risk Considerations-Effects
of Borrowing."
GLOBAL BOND FUNDS
The Global Bond Funds are non-diversified investment companies that have been
designed to offer investors a high level of current income through investments
primarily in foreign government securities.
Alliance North American Government Income Trust
Alliance North American Government Income Trust, Inc. ("North American
Government Income") seeks the highest level of current income, consistent with
what Alliance considers to be prudent investment risk, that is available from a
portfolio of debt securities issued or guaranteed by the United States, Canada
and Mexico, their political subdivisions (including Canadian provinces but
excluding states of the United States), agencies, instrumentalities or
authorities ("Government securities"). The Fund invests in investment grade
securities denominated in the U.S. Dollar, the Canadian Dollar and the Mexican
Peso and expects to maintain at least 25% of its assets in securities
denominated in the U.S. Dollar. In addition, the Fund may invest up to 25% of
its total assets in debt securities issued by governmental entities of Argentina
("Argentine Government securities"). The Fund expects that it will not retain a
debt security which is down-graded below BBB or Baa, or, if unrated, determined
by Alliance to have undergone similar credit quality deterioration, subsequent
to purchase by the Fund. The average weighted maturity of the Fund's portfolio
of fixed-income securities is expected to vary between one year or less and 30
years.
Alliance believes that the increasingly integrated economic relationship among
the United States, Canada and Mexico, characterized by the reduction and
projected elimination of most barriers to free trade among the three nations and
the growing coordination of their fiscal and monetary policies, will over the
long term benefit the economic performance of all three countries and promote
greater correlation of currency fluctuation among the U.S. and Canadian Dollars
and the Mexican Peso. See, however, Appendix B and the Fund's Statement of
Additional Information with respect to the current economic crisis and Peso
devaluation in Mexico.
Alliance will actively manage the Fund's assets in relation to market conditions
and general economic conditions and adjust the Fund's investments in an effort
to best enable the Fund to achieve its investment objective. Thus, the
percentage of the Fund's assets invested in a particular country or denominated
in a particular currency will vary in accordance with Alliance's assessment of
the relative yield and appreciation potential of such securities and the
relationship of the country's currency to the U.S. Dollar. The Fund invests at
least, and normally substantially more than, 65% of its total assets in
Government securities. To the extent that its assets are not invested in
Government securities, however, the Fund may invest the balance of its total
assets in investment grade debt securities issued by the governments of
countries located in Central and South America or any of their political
subdivisions, agencies, instrumentalities or authorities, provided that such
securities are denominated in their local currencies. The Fund will not invest
more than 10% of its total assets in debt securities issued by the governmental
entities of any one such country, except that the Fund may invest up to 25% of
its total assets in Argentine Government securities. The Fund will normally
invest at least 65% of its total assets in income-producing securities. For a
general description of Canada, Mexico and Argentina, see Appendix B and the
Fund's Statement of Additional Information.
Canadian Government securities include the sovereign debt of Canada or any of
its provinces and Government of Canada bonds and Government of Canada Treasury
bills. Canada Treasury bills are debt obligations with maturities of less than
one year. A new issue of Government of Canada bonds frequently consists of
several different bonds with maturities ranging from one to 25 years.
All Canadian provinces have outstanding bond issues and several provinces also
guarantee bond issues of provincial authorities, agents and Crown corporations.
Each new issue yield is based upon a spread from an outstanding Government of
Canada issue of comparable term and coupon. Many Canadian municipalities,
municipal financial authorities and
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Crown corporations raise funds through the bond market in order to finance
capital expenditures. Unlike U.S. municipal securities, which have special tax
status, Canadian municipal securities have the same tax status as other Canadian
Government securities and trade similarly to such securities. The Canadian
municipal market may be less liquid than the provincial bond market.
Canadian Government securities in which the Fund may invest include a modified
pass-through vehicle issued pursuant to the program established under the
National Housing Act of Canada. Certificates issued pursuant to this program
benefit from the guarantee of the Canada Mortgage and Housing Corporation, a
federal Crown corporation that is (except for certain limited purposes) an
agency of the Government of Canada whose guarantee is an unconditional
obligation of the Government of Canada in most circumstances (similar to that of
GNMA in the United States).
Mexican Government securities denominated and payable in the Mexican Peso
include (i) Cetes, which are book-entry securities sold directly by the Mexican
Government on a discount basis and with maturities that range from seven to 364
days, (ii) Bondes, which are long-term development bonds issued directly by the
Mexican Government with a minimum term of 364 days, and (iii) Ajustabonos, which
are adjustable-rate bonds with a minimum three-year term issued directly by the
Mexican Government with the face amount adjusted each quarter by the quarterly
inflation rate.
The Fund may invest up to 25% of its total assets in Argentine Government
securities that are denominated and payable in the Argentine Peso. Argentine
Government securities include (i) Bono de Inversion y Crecimiento ("BIC"), which
are investment and growth bonds issued directly by the Argentine Government with
maturities of up to ten years, (ii) Bono de Consolidacion Economica ("BOCON"),
which are economic consolidation bonds issued directly by the Argentine
Government with maturities of up to ten years and (iii) Bono de Credito a la
Exportacion ("BOCREX"), which are export credit bonds issued directly by the
Argentine government with maturities of up to four years. To date, Argentine
Government securities are not rated by either S&P, Moody's, Duff & Phelps or
Fitch. Alliance, however, believes, that there are Argentine Government
securities that are of investment grade quality.
The Fund may also (i) enter into futures contracts and purchase and write
options on futures contracts for hedging purposes, (ii) purchase and write put
and call options on foreign currencies, (iii) purchase or sell forward foreign
currency exchange contracts, (iv) write covered put and call options and
purchase put and call options on U.S. Government and foreign government
securities traded on U.S. and foreign securities exchanges, and write put and
call options for cross-hedging purposes, (v) enter into interest rate swaps,
caps and floors, (vi) enter into forward commitments for the purchase or sale of
securities, (vii) invest in variable, floating and inverse floating rate
instruments, (viii) make secured loans of its portfolio securities, and (ix)
enter into repurchase agreements. The Fund will not invest in illiquid
securities if as a result 10% of its net assets would be so invested. For
additional information on the use, risks and costs of these practice, see
"Additional Investment Practices." The Fund also maintains borrowings of
approximately one-third of the Fund's total assets less liabilities (other than
the amount borrowed). See "Risk Considerations--Effects of Borrowing."
Alliance Global Dollar Government Fund
Alliance Global Dollar Government Fund, Inc. ("Global Dollar Government") seeks
primarily a high level of current income, and secondarily capital appreciation.
In seeking to achieve these objectives, the Fund invests at least 65% of its
total assets in sovereign debt obligations. The Fund's investments in sovereign
debt obligations will emphasize obligations of a type customarily referred to as
"Brady Bonds" that are issued as part of debt restructurings and that are
collateralized in full as to principal due at maturity by zero coupon U.S.
Government securities ("collateralized Brady Bonds"). See "Additional Investment
Practices--Brady Bonds." The Fund may also invest up to 35% of its total assets
in U.S. and non-U.S. corporate fixed-income securities. See "Risk
Considerations--U.S. Corporate Fixed-Income Securities." The Fund will limit its
investments in sovereign debt obligations and U.S. and non-U.S. corporate fixed-
income securities to U.S. Dollar-denominated securities. Alliance expects that,
based upon current market conditions, the Fund's portfolio of U.S. fixed-income
securities will have an average maturity range of approximately nine to 15 years
and the Fund's portfolio of non-U.S. fixed-income securities will have an
average maturity range of approximately 15 to 25 years. Alliance anticipates
that the Fund's portfolio of sovereign debt obligations will have a longer
average maturity.
Substantially all of the Fund's assets will be invested in lower-rated
securities, which may include securities having the lowest rating for non-
subordinated debt instruments (i.e., rated C by Moody's or CCC or lower by S&P,
Duff & Phelps and Fitch) and unrated securities of comparable investment
quality. These securities are considered to have extremely poor prospects of
ever attaining any real investment standing, to have a current identifiable
vulnerability to default, to be unlikely to have the capacity to pay interest
and repay principal when due in the event of adverse business, financial or
economic conditions, and/or to be in default or not current in the payment of
interest or principal. For a description of bond ratings, see Appendix A. The
Fund may also invest in investment grade securities. Unrated securities will be
considered for investment by the Fund when Alliance believes that the financial
condition of the issuers of such obligations and the protection afforded by the
terms of the obligations themselves limit the risk to the Fund to a degree
comparable to that of rated securities which are consistent with the Fund's
investment objectives and policies. As of August 31, 1994, the percentages of
the Fund's assets invested in securities rated (or considered by Alliance to be
of equivalent quality to securities rated) in particular rating categories were
14.3% in A and above, 3.0% in Baa or BBB, 35.4% in Ba or BB, 39.1% in B, 6.6% in
Caa or CCC, and 1.6% non-rated. See "Risk Considerations--Securities Ratings,"
"--Investment in Fixed-
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Income Securities Rated Baa and BBB," "--Investment in Lower-Rated Fixed-Income
Securities" and Appendix A.
With respect to its investments in sovereign debt obligations and non-U.S.
corporate fixed-income securities, the Fund will emphasize investments in
countries that are considered at the time of purchase to be emerging or
developing countries by the World Bank. A substantial part of the Fund's initial
investment focus is expected to be in securities or obligations of Argentina,
Brazil, Mexico, Morocco, the Philippines and Venezuela because these countries
are now, or are expected by Alliance at a future date to be, the principal
participants in debt restructuring programs (including, in the case of
Argentina, Mexico, the Philippines and Venezuela, issuers of currently
outstanding Brady Bonds) that, in Alliance's opinion, will provide the most
attractive investment opportunities for the Fund. See Appendix A to the Fund's
Statement of Additional Information for information about those six countries.
Alliance anticipates that other countries that will provide initial investment
opportunities for the Fund include, among others, Bolivia, Costa Rica, the
Dominican Republic, Ecuador, Jordan, Nigeria, Panama, Peru, Poland, Thailand,
Turkey and Uruguay. See "Additional Investment Practices--Brady Bonds."
The Fund may invest up to 30% of its total assets in the sovereign debt
obligations and corporate fixed-income securities of issuers in any one of
Argentina, Brazil, Mexico, Morocco, the Philippines or Venezuela, each of which
is an emerging market country, and the Fund will limit investments in the
sovereign debt obligations of each such country (or of any other single foreign
country) to less than 25% of its total assets. The Fund expects that it will not
invest more than 10% of its total assets in the sovereign debt obligations and
corporate fixed-income securities of issuers in any other single foreign country
and is not required to invest any minimum amount of its assets in the securities
or obligations of issuers located in any particular country.
A substantial portion of the Fund's investments will be in (i) securities which
were initially issued at discounts from their face values ("Discount
Obligations") and (ii) securities purchased by the Fund at a price less than
their stated face amount or, in the case of Discount Obligations, at a price
less than their issue price plus the portion of "original issue discount"
previously accrued thereon, i.e., purchased at a "market discount."
The Fund may also (i) invest in structured securities, (ii) invest in fixed and
floating rate loans that are arranged through private negotiations between an
issuer of sovereign debt obligations and one or more financial institutions and
in participations in and assignments of these types of loans, (iii) invest in
other investment companies, (iv) invest in warrants, (v) enter into interest
rate swaps, caps and floors, (vi) enter into forward commitments for the
purchase or sale of securities, (vii) make secured loans of its portfolio
securities, (viii) enter into repurchase agreements pertaining to the types of
securities in which it invests, (ix) use reverse repurchase agreements and
dollar rolls, (x) enter into standby commitment agreements, (xi) make short
sales of securities or maintain a short position, (xii) write put and call
options on securities of the types in which it is permitted to invest and write
call options for cross-hedging purposes, (xiii) purchase and sell exchange-
traded options on any securities index composed of the types of securities in
which it may invest, and (xiv) invest in variable, floating and inverse floating
rate instruments. The Fund may also at any time, with respect to up to 35% of
its total assets, temporarily invest funds awaiting reinvestment or held for
reserves for dividends and other distributions to shareholders in U.S. Dollar-
denominated money market instruments. For additional information on the use,
risks and costs of these practices, see "Additional Investment Practices." While
the Fund does not currently intend to do so, it reserves the right to borrow an
amount not to exceed one-third of the Fund's assets less liabilities (other than
the amount borrowed). See "Risk Considerations--Effects of Borrowing."
CORPORATE BOND FUND
Corporate Bond Portfolio
Corporate Bond Portfolio ("Corporate Bond") is a diversified investment company
that seeks primarily to maximize income over the long term consistent with
providing reasonable safety in the value of each shareholder's investment, and
secondarily to increase its capital through appreciation of its investments in
order to preserve and, if possible, increase the purchasing power of each
shareholder's investment. In pursuing these objectives, the Fund's policy is to
invest in readily marketable securities which give promise of relatively
attractive yields, but which do not involve substantial risk of loss of capital.
The Fund follows a policy of maintaining at least 65% of its net assets invested
in debt securities. Such objectives and policies cannot be changed without the
approval of the shareholders. Although the Fund also follows a policy of
maintaining at least 65% of its total assets invested in corporate bonds, it is
permitted to invest in securities of non-corporate issuers.
There is no minimum rating requirement applicable to the Fund's investments in
fixed-income securities, except the Fund expects that it will not retain a
security that is downgraded below B, or if unrated, determined by Alliance to
have undergone similar credit quality deterioration subsequent to purchase.
Currently, the Fund believes its objectives and policies may best be implemented
by investing at least 65% of its total assets in fixed-income securities
considered investment grade or higher. The remainder of the Fund's assets may be
invested in lower-rated fixed-income securities. See "Risk Considerations--
Securities Ratings," "--Investment in Fixed-Income Securities Rated Baa and
BBB," "--Investment in Lower-Rated Fixed-Income Securities" and Appendix A.
During the fiscal year ended June 30, 1994, on a weighted average basis, the
percentages of the Fund's assets invested in securities rated (or considered by
Alliance to be of equivalent quality to securities rated) in particular rating
categories were 22% in A and above, 46% in Baa or BBB, 19% in Ba or BB, and 10%
in B. The Fund did not invest in securities rated below B by each of Moody's,
S&P, Duff & Phelps and Fitch or, if not rated, considered by Alliance to be of
equivalent quality to securities so rated.
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The Fund has complete flexibility as to the types of securities in which it will
invest and the relative proportions thereof, and the Fund plans to vary the
proportions of its holdings of long- and short-term fixed-income securities and
of equity securities in order to reflect its assessment of prospective cyclical
changes even if such action may adversely affect current income. However,
substantially all of the Fund's investments will be income producing. The
average weighted maturity of the Fund's portfolio of fixed-income securities is
expected to vary between one year or less and 30 years.
The Fund may invest up to 50% of the value of its total assets in foreign debt
securities which will consist primarily of corporate fixed-income securities and
sovereign debt obligations. Not more than 15% of the Fund's total assets may be
invested in these other sovereign debt obligations, which may be lower rated and
considered to be predominantly speculative as regards the issuer's capacity to
pay interest and repay principal.
The Fund may also (i) invest in structured securities, (ii) invest in fixed and
floating rate loans that are arranged through private negotiations between an
issuer of sovereign debt obligations and one or more financial institutions and
in participations in and assignments of these type of loans, (iii) for hedging
purposes, purchase put and call options written by others and write covered put
and call options on the types of securities in which the Fund may invest, (iv)
for hedging purposes, enter into various hedging transactions, such as interest
rate swaps, caps and floors, (v) invest in variable, floating and inverse
floating rate instruments, (vi) invest in zero coupon and pay-in-kind
securities, and (vii) invest in CMOs and multi-class pass-through. As a matter
of fundamental policy, the Fund will not purchase illiquid securities. For
additional information on the use, risks and costs of these practices, see
"Additional Investment Practices."
ADDITIONAL INVESTMENT PRACTICES
Some or all of the Funds may engage in the following investment practices to the
extent described in this Prospectus. See the Statement of Additional Information
of each Fund for a further discussion of the uses, risks and costs of engaging
in these practices.
Derivatives. The Funds may use derivatives in furtherance of their investment
objectives. Derivatives are financial contracts whose value depends on, or is
derived from, the value of an underlying asset, reference rate or index. These
assets, rates, and indices may include bonds, stocks, mortgages, commodities,
interest rates, currency exchange rates, bond indices and stock indices.
Derivatives can be used to earn income or protect against risk, or both. For
example, one party with unwanted risk may agree to pass that risk to another
party who is willing to accept the risk, the second party being motivated, for
example, by the desire either to earn income in the form of a fee or premium
from the first party, or to reduce its own unwanted risk by attempting to pass
all or part of that risk to the first party.
Derivatives can be used by investors such as the Funds to earn income and
enhance returns, to hedge or adjust the risk profile of a portfolio, and either
in place of more traditional direct investments or to obtain exposure to
otherwise inaccessible markets. Each of the Funds is permitted to use
derivatives for one or more of these purposes, although most of the Funds
generally use derivatives primarily as direct investments in order to enhance
yields and broaden portfolio diversification. Each of these uses entails greater
risk than if derivatives were used solely for hedging purposes. Derivatives are
a valuable tool which, when used properly, can provide significant benefit to
Fund shareholders. Alliance is not an aggressive user of derivatives with
respect to any of the Funds. However, a Fund may take a significant position in
those derivatives that are within its investment policies if, in Alliance's
judgement, this represents the most effective response to current or anticipated
market conditions. The Multi-Market Funds in particular generally make extensive
use of carefully selected forwards and other derivatives to achieve the currency
hedging that is an integral part of their investment strategy. Alliance's use of
derivatives is subject to continuous risk assessment and control from the
standpoint of each Fund's investment objectives and policies.
Derivatives may be (i) standardized, exchange-traded contracts or (ii)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments--options, futures,
forwards and swaps--from which virtually any type of derivative transaction can
be created.
. Options--An option, which may be standardized and exchange-traded, or
customized and privately negotiated, is an agreement that, for a premium
payment or fee, gives the option holder (the buyer) the right but not the
obligation to buy or sell the underlying asset (or settle for cash an amount
based on an underlying asset, rate or index) at a specified price (the
exercise price) during a period of time or on a specified date. A call option
entitles the holder to purchase, while a put option entitles the holder to
sell, the underlying asset (or settle for cash an amount based on an
underlying asset, rate or index). Likewise, when an option is exercised the
writer of the option would be obligated to sell (in the case of a call option)
or to purchase (in the case of a put option) the underlying asset (or settle
for cash an amount based on an underlying asset, rate or index).
. Futures--A futures contract is an agreement that obligates the buyer to buy
and the seller to sell a specified quantity of an underlying asset (or settle
for cash the value of a contract based on an underlying asset, rate or index)
at a specific price on the contract maturity date. Futures contracts are
standardized, exchange-traded instruments and are fungible (i.e., considered
to be perfect substitutes for each other). This fungibility allows futures
contracts to be readily offset or cancelled through the acquisition of equal
but opposite positions, which is the primary method
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in which futures contracts are liquidated. A cash-settled futures contract
does not require physical delivery of the underlying asset but instead is
settled for cash equal to the difference between the values of the contract on
the date it is entered into and its maturity date.
. Forwards--A forward contract is an obligation by one party to buy, and the
other party to sell, a specific quantity of an underlying commodity or other
tangible asset for an agreed upon price at a future date. Forward contracts
are customized, privately negotiated agreements designed to satisfy the
objectives of each party. A forward contract usually results in the delivery
of the underlying asset upon maturity of the contract in return for the agreed
upon payment.
. Swaps--A swap is a customized, privately negotiated agreement that obligates
two parties to exchange a series of cash flows at specified intervals (payment
dates) based upon or calculated by reference to changes in specified prices or
rates (interest rates in the case of interest rate swaps, currency exchange
rates in the case of currency swaps) for a specified amount of an underlying
asset (the "notional" principal amount). The payment flows are netted against
each other, with the difference being paid by one party to the other. Except
for currency swaps, the notional principal amount is used solely to calculate
the payment streams but is not exchanged. With respect to currency swaps,
actual principal amounts of currencies may be exchanged by the counterparties
at the initiation, and again upon the termination, of the transaction.
Debt instruments that incorporate one or more of these building blocks for the
purpose of determining the principal amount of and/or rate of interest payable
on the debt instruments are often referred to as "structured securities." An
example of this type of structured security is indexed commercial paper. The
term is also used to describe certain securities issued in connection with the
restructuring of certain foreign obligations. See "Indexed Commercial Paper" and
"Structured Securities" below. The term "derivative" is also sometimes used to
describe securities involving rights to a portion of the cash flows from an
underlying pool of mortgages or other assets from which payments are passed
through to the owner of, or that collateralize, the securities. These securities
are described below under "Mortgage-Related Securities" and "Other Asset-Backed
Securities."
While the judicious use of derivatives by highly experienced investment managers
such as Alliance can be quite beneficial, derivatives also involve risks
different from, and, in certain cases, greater than, the risks presented by more
traditional investments. Following is a general discussion of important risk
factors and issues concerning the use of derivatives that investors should
understand before investing in a Fund.
. Market Risk--This is the general risk attendant to all investments that the
value of a particular investment will change in a way detrimental to the
Fund's interest.
. Management Risk--Derivative products are highly specialized instruments that
require investment techniques and risk analyses different from those
associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument but also of the derivative
itself, without the benefit of observing the performance of the derivative
under all possible market conditions. In particular, the use and complexity of
derivatives require the maintenance of adequate controls to monitor the
transactions entered into, the ability to assess the risk that a derivative
adds to a Fund's portfolio and the ability to forecast price, interest rate or
currency exchange rate movements correctly.
. Credit Risk--This is the risk that a loss may be sustained by a Fund as a
result of the failure of a another party to a derivative (usually referred to
as a "counterparty") to comply with the terms of the derivative contract. The
credit risk for exchange-traded derivatives is generally less than for
privately negotiated derivatives, since the clearing house, which is the
issuer or counterparty to each exchange-traded derivative, provides a
guarantee of performance. This guarantee is supported by a daily payment
system (i.e., margin requirements) operated by the clearing house in order to
reduce overall credit risk. For privately negotiated derivatives, there is no
similar clearing agency guarantee. Therefore, the Funds consider the
creditworthiness of each counterparty to a privately negotiated derivative in
evaluating potential credit risk.
. Liquidity Risk--Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many
privately negotiated derivatives), it may not be possible to initiate a
transaction or liquidate a position at an advantageous price.
. Leverage Risk--Since many derivatives have a leverage component, adverse
changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss generally is related
to a notional principal amount, even if the parties have not made any initial
investment. Certain derivatives have the potential for unlimited loss,
regardless of the size of the initial investment.
. Other Risks--Other risks in using derivatives include the risk of mispricing
or improper valuation of derivatives and the inability of derivatives to
correlate perfectly with underlying assets, rates and indices. Many
derivatives, in particular privately negotiated derivatives, are complex and
often valued subjectively. Improper valuations can result in increased cash
payment requirements to counterparties or a loss of value to a Fund.
Derivatives do not always perfectly or even highly correlate or track the
value of the assets, rates or indices they are designed to closely track.
Consequently, a Fund's use of derivatives may not always be an effective means
of, and sometimes could be counterproductive to, furthering the Fund's
investment objective.
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Derivatives Used by the Funds. Following is a description of specific
derivatives currently used by one or more of the Funds.
Options on Securities. In purchasing an option on securities, a Fund would be in
a position to realize a gain if, during the option period, the price of the
underlying securities increased (in the case of a call) or decreased (in the
case of a put) by an amount in excess of the premium paid; otherwise the Fund
would experience a loss not greater than the premium paid for the option. Thus,
a Fund would realize a loss if the price of the underlying security declined or
remained the same (in the case of a call) or increased or remained the same (in
the case of a put) or otherwise did not increase (in the case of a put) or
decrease (in the case of a call) by more than the amount of the premium. If a
put or call option purchased by a Fund were permitted to expire without being
sold or exercised, its premium would represent a loss to the Fund.
A Fund may write a put or call option in return for a premium, which is retained
by the Fund whether or not the option is exercised. Except with respect to
uncovered call options written for cross-hedging purposes, none of the Funds
will write uncovered call or put options. A call option written by a Fund is
"covered" if the Fund owns the underlying security, has an absolute and
immediate right to acquire that security upon conversion or exchange of another
security it holds, or holds a call option on the underlying security with an
exercise price equal to or less than that of the call option it has written. A
put option written by a Fund is covered if the Fund holds a put option on the
underlying securities with an exercise price equal to or greater than that of
the put option it has written.
The risk involved in writing an uncovered put option is that there could be a
decrease in the market value of the underlying securities. If this occurred, a
Fund could be obligated to purchase the underlying security at a higher price
than its current market value. Conversely, the risk involved in writing an
uncovered call option is that there could be an increase in the market value of
the underlying security, and a Fund could be obligated to acquire the underlying
security at its current price and sell it at a lower price. The risk of loss
from writing an uncovered put option is limited to the exercise price of the
option, whereas the risk of loss from writing an uncovered call option is
potentially unlimited.
A Fund may write a call option on a security that it does not own in order to
hedge against a decline in the value of a security that it owns or has the right
to acquire, a technique referred to as "cross-hedging." A Fund would write a
call option for cross-hedging purposes, instead of writing a covered call
option, when the premium to be received from the cross-hedge transaction exceeds
that to be received from writing a covered call option, while at the same time
achieving the desired hedge. The correlation risk involved in cross-hedging may
be greater than the correlation risk involved from other hedging strategies.
Short-Term U.S. Government, Mortgage Securities Income, North American
Government Income, Global Dollar Government and Corporate Bond generally
purchase or write privately negotiated options on securities. A Fund that
purchases or writes privately negotiated options on securities will effect such
transactions only with investment dealers and other financial institutions (such
as commercial banks or savings and loan institutions) deemed creditworthy by
Alliance, and Alliance has adopted procedures for monitoring the
creditworthiness of such counterparties. Privately negotiated options purchased
or written by a Fund may be illiquid, and it may not be possible for the Fund to
effect a closing transaction at an advantageous time. See "Illiquid Securities"
below. Neither Mortgage Securities Income nor Corporate Bond will purchase an
option on a security if, immediately thereafter, the aggregate cost of all
outstanding options purchased by such Fund would exceed 2% of the Fund's total
assets. Nor will either such Fund write an option if, immediately thereafter,
the aggregate value of the Fund's portfolio securities subject to outstanding
options would exceed 15% of the Fund's total assets.
Options on Securities Indices. An option on a securities index is similar to an
option on a security except that, rather than taking or making delivery of a
security at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the chosen index is greater than (in the case of a call) or
less than (in the case of a put) the exercise price of the option.
Options on Foreign Currencies. A Fund invests in options on foreign currencies
that are privately negotiated or traded on U.S. or foreign exchanges for the
purpose of protecting against declines in the U.S. Dollar value of foreign
currency denominated portfolio securities and against increases in the U.S.
Dollar cost of securities to be acquired. The purchase of an option on a foreign
currency may constitute an effective hedge against fluctuations in exchange
rates, although if rates move adversely, a Fund may forfeit the entire amount of
the premium plus related transaction costs.
Warrants. Global Dollar Government may invest in warrants, which are option
securities permitting their holders to subscribe for other securities. Global
Dollar Government may invest in warrants for debt securities or for equity
securities that are acquired in connection with debt instruments. Warrants do
not carry with them dividend or voting rights with respect to the underlying
securities, or any rights in the assets of the issuer. As a result, an
investment in warrants may be considered more speculative than certain other
types of investments. In addition, the value of a warrant does not necessarily
change with the value of the underlying securities, and a warrant ceases to have
value if it is not exercised prior to its expiration date.
Futures Contracts and Options on Futures Contracts. Futures contracts that a
Fund may buy and sell may include futures contracts on fixed-income or other
securities or foreign
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currencies, and contracts based on interest rates or financial indices,
including any index of U.S. Government securities, foreign government securities
or corporate debt securities.
Options on futures contracts are options that call for the delivery upon
exercise of futures contracts. Options on futures contracts written or purchased
by a Fund will be traded on U.S. or foreign exchanges and, except with respect
to Short-Term U.S. Government, will be used only for hedging purposes.
Mortgage Strategy, World Income, Short-Term Multi-Market, Multi-Market Strategy,
and North American Government Income will not enter into a futures contract or
option on a futures contract if immediately thereafter the market values of the
outstanding futures contracts of the Fund and the currencies and futures
contracts subject to outstanding options written by the Fund would exceed 50% of
its total assets. Nor will Mortgage Strategy, Mortgage Securities Income, World
Income, Short-Term Multi-Market, Multi-Market Strategy or North American
Government Income do so if immediately thereafter the aggregate of initial
margin deposits on all the outstanding futures contracts of the Fund and
premiums paid on outstanding options on futures contracts would exceed 5% of the
market value of the total assets of the Fund. In addition, Mortgage Securities
Income will not enter into (i) options on futures contracts, (ii) any futures
contract other than one on fixed-income securities or based on interest rates,
or (iii) any futures contract if immediately thereafter the sum of the then
aggregate futures market prices of financial instruments required to be
delivered under open futures contract sales and the aggregate futures market
prices of instruments required to be delivered under open futures contract
purchases would exceed 30% of the value of the Fund's total assets.
Eurodollar Instruments. Eurodollar instruments are essentially U.S. Dollar-
denominated futures contracts or options thereon that are linked to LIBOR.
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. Mortgage
Strategy intends to use Eurodollar futures contracts and options thereon to
hedge against changes in LIBOR (to which many short-term borrowings and floating
rate securities in which the Fund invests are linked).
Forward Foreign Currency Exchange Contracts. Each Fund that purchases or sells
forward contracts on foreign currencies ("forward contracts") attempts to
minimize the risk to it from adverse changes in the relationship between the
U.S. Dollar and other currencies. A Fund may enter into a forward contract, for
example, when it enters into a contract for the purchase or sale of a security
denominated in a foreign currency in order to "lock in" the U.S. Dollar price of
the security ("transaction hedge"). When a Fund believes that a foreign currency
may suffer a substantial decline against the U.S. Dollar, it may enter into a
forward sale contract to sell an amount of that foreign currency approximating
the value of some or all of the Fund's portfolio securities denominated in such
foreign currency, or when the Fund believes that the U.S. Dollar may suffer a
substantial decline against a foreign currency, it may enter into a forward
purchase contract to buy that foreign currency for a fixed dollar amount
("position hedge"). Instead of entering into a position hedge, a Fund may, in
the alternative, enter into a forward contract to sell a different foreign
currency for a fixed U.S. Dollar amount where the Fund believes that the U.S.
Dollar value of the currency to be sold pursuant to the forward contract will
fall whenever there is a decline in the U.S. Dollar value of the currency in
which portfolio securities of the Fund are denominated ("cross-hedge").
Forward Commitments. Forward commitments are forward contracts for the purchase
or sale of securities, including purchases on a "when-issued" basis or purchases
or sales on a "delayed delivery" basis. In some cases, a forward commitment may
be conditioned upon the occurrence of a subsequent event, such as approval and
consummation of a merger, corporate reorganization or debt restructuring or
approval of a proposed financing by appropriate authorities (i.e., a "when, as
and if issued" trade).
When forward commitments with respect to fixed-income securities are negotiated,
the price, which is generally expressed in yield terms, is fixed at the time the
commitment is made, but payment for and delivery of the securities take place at
a later date. Normally, the settlement date occurs within two months after the
transaction, but settlements beyond two months may be negotiated. Securities
purchased or sold under a forward commitment are subject to market fluctuation,
and no interest or dividends accrues to the purchaser prior to the settlement
date. At the time a Fund enters into a forward commitment, it records the
transaction and thereafter reflects the value of the security purchased or, if a
sale, the proceeds to be received, in determining its net asset value. Any
unrealized appreciation or depreciation reflected in such valuation would be
canceled if the required conditions did not occur and the trade were canceled.
The use of forward commitments helps a Fund to protect against anticipated
changes in interest rates and prices. For instance, in periods of rising
interest rates and falling bond prices, a Fund might sell securities in its
portfolio on a forward commitment basis to limit its exposure to falling bond
prices. In periods of falling interest rates and rising bond prices, a Fund
might sell a security in its portfolio and purchase the same or a similar
security on a when-issued or forward commitment basis, thereby obtaining the
benefit of currently higher cash yields. No forward commitments will be made by
Mortgage Strategy, North American Government Income or Global Dollar Government
if, as a result, the Fund's aggregate forward commitments under such
transactions would be more than 30% of its total assets.
A Fund's right to receive or deliver a security under a forward commitment may
be sold prior to the settlement date. The Funds enter into forward commitments,
however, only with the intention of actually receiving securities or delivering
them, as
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the case may be. If a Fund, however, chooses to dispose of the right to acquire
a when-issued security prior to its acquisition or dispose of its right to
deliver or receive against a forward commitment, it may incur a gain or loss.
Interest Rate Transactions (Swaps, Caps and Floors). Each Fund that may enter
into interest rate swap, cap or floor transactions expects to do so primarily
for hedging purposes, which may include preserving a return or spread on a
particular investment or portion of its portfolio or protecting against an
increase in the price of securities the Fund anticipates purchasing at a later
date. The Funds do not intend to use these transactions in a speculative manner.
Interest rate swaps involve the exchange by a Fund with another party of their
respective commitments to pay or receive interest (e.g., an exchange of floating
rate payments for fixed rate payments) computed based on a contractually-based
principal (or "notional") amount. Interest rate swaps are entered into on a net
basis (i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments). Interest
rate caps and floors are similar to options in that the purchase of an interest
rate cap or floor entitles the purchaser, to the extent that a specified index
exceeds (in the case of a cap) or falls below (in the case of a floor) a
predetermined interest rate, to receive payments of interest on a notional
amount from the party selling the interest rate cap or floor. A Fund may enter
into interest rate swaps, caps and floors on either an asset-based or liability-
based basis, depending upon whether it is hedging its assets or liabilities.
There is no limit on the amount of interest rate transactions that may be
entered into by a Fund that is permitted to enter into such transactions. Short-
Term Multi-Market, Multi-Market Strategy and North American Government Income
may enter into interest rate swaps involving payments to the same currency or in
different currencies. Short-Term U.S. Government, Mortgage Strategy, Mortgage
Securities Income, Global Dollar Government and Corporate Bond will not enter
into an interest rate swap, cap or floor transaction unless the unsecured senior
debt or the claims-paying ability of the other party thereto is then rated in
the highest rating category of at least one nationally recognized rating
organization. Each of Short-Term Multi-Market, Multi-Market Strategy and North
American Government Income will enter into interest rate swap, cap or floor
transactions with its respective custodian, and with other counterparties, but
only if: (i) for transactions with maturities under one year, such other
counterparty has outstanding prime commercial paper; or (ii) for transactions
with maturities greater than one year, the counterparty has outstanding high
quality debt securities.
The swap market has grown substantially in recent years, with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become well established and relatively liquid. Caps and floors are less liquid
than swaps. These transactions do not involve the delivery of securities or
other underlying assets or principal. Accordingly, unless there is a
counterparty default, the risk of loss to a Fund from interest rate transactions
is limited to the net amount of interest payments that the Fund is contractually
obligated to make.
Standby Commitment Agreements. Standby commitment agreements are similar to put
options that commit a Fund, for a stated period of time, to purchase a stated
amount of a security that may be issued and sold to the Fund at the option of
the issuer. The price and coupon of the security are fixed at the time of the
commitment. At the time of entering into the agreement, the Fund is paid a
commitment fee regardless of whether the security ultimately is issued. The
Funds will enter into such agreements only for the purpose of investing in the
security underlying the commitment at a yield and price considered advantageous
and unavailable on a firm commitment basis. The Funds will not enter into
standby commitments with a remaining term in excess of 45 days and will limit
their investments in such commitments so that the aggregate purchase price of
the securities subject to the commitments does not exceed 20% of their
respective assets.
There is no guarantee that the security subject to a standby commitment will be
issued. In addition, the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
is at the option of the issuer, a Fund will bear the risk of capital loss in the
event the value of the security declines and may not benefit from an
appreciation in the value of the security during the commitment period if the
issuer decides not to issue and sell the security to the Fund.
Indexed Commercial Paper. Indexed commercial paper may have its principal linked
to changes in foreign currency exchange rates whereby its principal amount is
adjusted upwards or downwards (but not below zero) at maturity to reflect
changes in the referenced exchange rate. Each Fund that invests in such
commercial paper may do so without limitation. A Fund will purchase such
commercial paper with the currency in which it is denominated and, at maturity,
will receive interest and principal payments thereon in that currency, but the
amount of principal payable by the issuer at maturity will change in proportion
to the change (if any) in the exchange rate between the two specified currencies
between the date the instrument is issued and the date the instrument matures.
While such commercial paper entails the risk of loss of principal, the potential
for realizing gains as a result of changes in foreign currency exchange rates
enables a Fund to hedge (or cross-hedge) against a decline in the U.S. Dollar
value of investments denominated in foreign currencies while providing an
attractive money market rate of return. A Fund will purchase such commercial
paper for hedging purposes only, not for speculation.
Mortgage-Related Securities. The mortgage-related securities in which a Fund may
invest typically are securities representing interests in pools of mortgage
loans made to home owners. Mortgage-related securities bear interest at either a
fixed rate or an adjustable rate determined by reference to an index rate. The
mortgage loan pools may be assembled for sale to investors (such as a Fund) by
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governmental or private organizations. Mortgage-related securities issued by
GNMA are backed by the full faith and credit of the United States; those issued
by FNMA and FHLMC are not so backed.
Securities representing interests in pools created by private issuers generally
offer a higher rate of interest than securities representing interests in pools
created by governmental issuers because there are no direct or indirect
governmental guarantees of the underlying mortgage payments. However, private
issuers sometimes obtain committed loan facilities, lines of credit, letters of
credit, surety bonds or other forms of liquidity and credit enhancement to
support the timely payment of interest and principal with respect to their
securities if the borrowers on the underlying mortgages fail to make their
mortgage payments. The ratings of such non-governmental securities are generally
dependent upon the ratings of the providers of such liquidity and credit support
and would be adversely affected if the rating of such an enhancer were
downgraded. A Fund may buy mortgage-related securities without credit
enhancement if the securities meet the Fund's investment standards. Although the
market for mortgage-related securities is becoming increasingly liquid, those of
certain private organizations may not be readily marketable.
One type of mortgage-related security is of the "pass-through" variety. The
holder of a pass-through security is considered to own an undivided beneficial
interest in the underlying pool of mortgage loans and receives a pro rata share
of the monthly payments made by the borrowers on their mortgage loans, net of
any fees paid to the issuer or guarantor of the securities. Prepayments of
mortgages resulting from the sale, refinancing or foreclosure of the underlying
properties are also paid to the holders of these securities. Some mortgage-
related securities, such as securities issued by GNMA, are referred to as
"modified pass-through" securities. The holders of these securities are entitled
to the full and timely payment of principal and interest, net of certain fees,
regardless of whether payments are actually made on the underlying mortgages.
Another form of mortgage-related security is a "pay-through" security, which is
a debt obligation of the issuer secured by a pool of mortgage loans pledged as
collateral that is legally required to be paid by the issuer regardless of
whether payments are actually made on the underlying mortgages.
Collateralized mortgage obligations (CMOs) are the predominant type of "pay-
through" mortgage-related security. CMOs are designed to reduce the risk of
prepayment for investors by issuing multiple classes of securities, each having
different maturities, interest rates and payment schedules, and with the
principal and interest on the underlying mortgages allocated among the several
classes in various ways. The collateral securing the CMOs may consist of a pool
of mortgages, but may also consist of mortgage-backed bonds or pass-through
securities. CMOs may be issued by a U.S. Government instrumentality or agency or
by a private issuer. Although payment of the principal of, and interest on, the
underlying collateral securing privately issued CMOs may be guaranteed by GNMA,
FNMA or FHLMC, these CMOs represent obligations solely of the private issuer and
are not insured or guaranteed by GNMA, FNMA, FHLMC, any other governmental
agency or any other person or entity.
Another type of mortgage-related security, known as adjustable-rate mortgage
securities (ARMS), bears interest at a rate determined by reference to a
predetermined interest rate or index. There are two main categories of rates or
indices: (i) rates based on the yield on U.S. Treasury securities and (ii)
indices derived from a calculated measure such as a cost of funds index or a
moving average of mortgage rates. Some rates and indices closely mirror changes
in market interest rate levels, while others tend to lag changes in market rate
levels and tend to be somewhat less volatile.
ARMS may be secured by adjustable-rate mortgages or fixed-rate mortgages. ARMS
secured by fixed-rate mortgages generally have lifetime caps on the coupon rates
of the securities. To the extent that general interest rates increase faster
than the interest rates on the ARMS, these ARMS will decline in value. The
adjustable-rate mortgages that secure ARMS will frequently have caps that limit
the maximum amount by which the interest rate or the monthly principal and
interest payments on the mortgages may increase. These payment caps can result
in negative amortization (i.e., an increase in the balance of the mortgage
loan). Furthermore, since many adjustable-rate mortgages only reset on an annual
basis, the values of ARMS tend to fluctuate to the extent that changes in
prevailing interest rates are not immediately reflected in the interest rates
payable on the underlying adjustable-rate mortgages.
Stripped mortgage-related securities (SMRS) are mortgage-related securities that
are usually structured with two classes of securities collateralized by a pool
of mortgages or a pool of mortgaged-backed bonds or pass-through securities,
with each class receiving different proportions of the principal and interest
payments from the underlying assets. A common type of SMRS has one class of
interest-only securities (IOs) receiving all of the interest payments from the
underlying assets, while the other class of securities, principal-only
securities (POs), receives all of the principal payments from the underlying
assets. IOs and POs are extremely sensitive to interest rate changes and are
more volatile than mortgage-related securities that are not stripped. IOs tend
to decrease in value as interest rates decrease, while POs generally increase in
value as interest rates decrease. If prepayments of the underlying mortgages are
greater than anticipated, the amount of interest earned on the overall pool will
decrease due to the decreasing principal balance of the assets. Changes in the
values of IOs and POs can be substantial and occur quickly, such as occurred in
the first half of 1994 when the value of many POs dropped precipitously due to
increases in interest rates. For this reason, none of the Funds relies on IOs
and POs as the principal means of furthering its investment objective.
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The value of mortgage-related securities is affected by a number of factors.
Unlike traditional debt securities, which have fixed maturity dates, mortgage-
related securities may be paid earlier than expected as a result of prepayment
of the underlying mortgages. If property owners make unscheduled prepayments of
their mortgage loans, these prepayments will result in the early payment of the
applicable mortgage-related securities. In that event a Fund may be unable to
invest the proceeds from the early payment of the mortgage-related securities in
an investment that provides as high a yield as the mortgage-related securities.
Consequently, early payment associated with mortgage-related securities causes
these securities to experience significantly greater price and yield volatility
than experienced by traditional fixed-income securities. The occurrence of
mortgage prepayments is affected by the level of general interest rates, general
economic conditions and other social and demographic factors. During periods of
falling interest rates, the rate of mortgage prepayments tends to increase,
thereby tending to decrease the life of mortgage-related securities. During
periods of rising interest rates, the rate of mortgage prepayments usually
decreases, thereby tending to increase the life of mortgage-related securities.
If the life of a mortgage-related security is inaccurately predicted, a Fund may
not be able to realize the rate of return it expected.
As with fixed-income securities generally, the value of mortgage-related
securities can also be adversely affected by increases in general interest rates
relative to the yield provided by such securities. Such adverse effect is
especially possible with fixed-rate mortgage securities. If the yield available
on other investments rises above the yield of the fixed-rate mortgage securities
as a result of general increases in interest rate levels, the value of the
mortgage-related securities will decline. Although the negative effect could be
lessened if the mortgage-related securities were to be paid earlier (thus
permitting a Fund to reinvest the prepayment proceeds in investments yielding
the higher current interest rate), as described above the rate of mortgage
prepayments and early payment of mortgage-related securities generally tends to
decline during a period of rising interest rates.
Although the value of ARMS may not be affected by rising interest rates as much
as the value of fixed-rate mortgage securities is affected by rising interest
rates, ARMS may still decline in value as a result of rising interest rates.
Although, as described above, the yield on ARMS varies with changes in the
applicable interest rate or index, there is often a lag between increases in
general interest rates and increases in the yield on ARMS as a result of
relatively infrequent interest rate reset dates. In addition, adjustable-rate
mortgages and ARMS often have interest rate or payment caps that limit the
ability of the adjustable-rate mortgages or ARMS to fully reflect increases in
the general level of interest rates.
Mortgage Strategy may invest up to 15% of the value of its total assets in
mortgage-related securities denominated in U.S. Dollars or in foreign currencies
and issued or guaranteed by foreign governments or issued by foreign non-
governmental issuers, provided that such foreign mortgage-related securities are
triple-A rated. The percentage of Mortgage Strategy's assets invested in foreign
mortgage-related securities will vary and its portfolio of foreign mortgage-
related securities may include those of a number of foreign countries or,
depending upon market conditions, those of a single country. See "Risk
Considerations--Foreign Investment."
Other Asset-Backed Securities. The securitization techniques used to develop
mortgage-related securities are being applied to a broad range of financial
assets. Through the use of trusts and special purpose corporations, various
types of assets, including automobile loans and leases, credit card receivables,
home equity loans, equipment leases and trade receivables, are being securitized
in structures similar to the structures used in mortgage securitizations. These
asset-backed securities are subject to risks associated with changes in interest
rates and prepayment of underlying obligations similar to the risks of
investment in mortgage-related securities discussed above.
Each type of asset-backed security also entails unique risks depending on the
type of assets involved and the legal structure used. For example, credit card
receivables are generally unsecured obligations of the credit card holder and
the debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
There have also been proposals to cap the interest rate that a credit card
issuer may charge. In some transactions, the value of the asset-backed security
is dependent on the performance of a third party acting as credit enhancer or
servicer. Furthermore, in some transactions (such as those involving the
securitization of vehicle loans or leases) it may be administratively burdensome
to perfect the interest of the security issuer in the underlying collateral and
the underlying collateral may become damaged or stolen.
U.S. Government Securities. U.S. Government securities may be backed by the full
faith and credit of the United States, supported only by the right of the issuer
to borrow from the U.S. Treasury or backed only by the credit of the issuing
agency itself. These securities include:
(i) the following U.S. Treasury securities, which are backed by the full
faith and credit of the United States and differ only in their
interest rates, maturities and times of issuance: U.S. Treasury bills
(maturities of one year or less with no interest paid and hence
issued at a discount and repaid at full face value upon maturity),
U.S. Treasury notes (maturities of one to ten years with interest
payable every six months) and U.S. Treasury bonds (generally
maturities of greater than ten years with interest payable every six
months);
(ii) obligations issued or guaranteed by U.S. Government agencies and
instrumentalities that are supported by
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the full faith and credit of the U.S. Government, such as securities
issued by GNMA, the Farmers Home Administration, the Department of
Housing and Urban Development, the Export-Import Bank, the General
Services Administration and the Small Business Administration; and
(iii) obligations issued or guaranteed by U.S. Government agencies and
instrumentalities that are not supported by the full faith and credit
of the U.S. Government, such as securities issued by FNMA and FHLMC,
and governmental CMOs.
The maturities of the U.S. Government securities listed in paragraphs (i) and
(ii) above usually range from three months to 30 years. Such securities, except
GNMA certificates, normally provide for periodic payments of interest in fixed
amounts with principal payments at maturity or specified call dates. For
information regarding GNMA, FNMA and FHLMC certificates and CMOs, see "Mortgage-
Related Securities" above.
U.S. Government securities also include zero coupon securities and principal-
only securities and certain SMRS. In addition, other U.S. Government
agencies and instrumentalities have issued stripped securities that are similar
to SMRS. Such securities include those that are issued with an IO class and a PO
class. See "Mortgage-Related Securities" above and "Zero Coupon and Principal-
Only Securities" below. Although these stripped securities are purchased and
sold by institutional investors through several investment banking firms acting
as brokers or dealers, these securities were only recently developed. As a
result, established trading markets have not yet developed and, accordingly,
these securities may be illiquid.
Guarantees of securities by the U.S. Government or its agencies or
instrumentalities guarantee only the payment of principal and interest on the
securities, and do not guarantee the securities' yield or value or the yield or
value of the shares of a Fund that holds the securities.
U.S. Government securities are considered among the safest of fixed-income
investments. As a result, however, their yields are generally lower than the
yields available from other fixed-income securities.
Zero Coupon and Principal-Only Securities. Zero coupon securities and principal-
only (PO) securities are debt securities that have been issued without interest
coupons or stripped of their unmatured interest coupons, and include receipts or
certificates representing interests in such stripped debt obligations and
coupons. Such a security pays no interest to its holder during its life. Its
value to an investor consists of the difference between its face value at the
time of maturity and the price for which it was acquired, which is generally an
amount significantly less than its face value. Such securities usually trade at
a deep discount from their face or par value and are subject to greater
fluctuations in market value in response to changing interest rates than debt
obligations of comparable maturities and credit quality that make current
distributions of interest. On the other hand, because there are no periodic
interest payments to be reinvested prior to maturity, these securities eliminate
reinvestment risk and "lock in" a rate of return to maturity.
Zero coupon Treasury securities are U.S. Treasury bills issued without interest
coupons. Principal-only Treasury securities are U.S. Treasury notes and bonds
that have been stripped of their unmatured interest coupons, and receipts or
certificates representing interests in such stripped debt obligations and
coupons. Currently the only U.S. Treasury security issued without coupons is the
Treasury bill. Although the U.S. Treasury does not itself issue Treasury notes
and bonds without coupons, under the U.S. Treasury STRIPS program interest and
principal payments on certain long-term Treasury securities may be maintained
separately in the Federal Reserve book entry system and may be separately traded
and owned. In addition, in the last few years a number of banks and brokerage
firms have separated ("stripped") the principal portions from the coupon
portions of U.S. Treasury bonds and notes and sold them separately in the form
of receipts or certificates representing undivided interests in these
instruments (which instruments are generally held by a bank in a custodial or
trust account). The staff of the Commission has indicated that, in its view,
these receipts or certificates should be considered as securities issued by the
bank or brokerage firm involved and, therefore, should not be included in a
Fund's categorization of U.S. Government securities. The Funds disagree with the
staff's position but will not treat such securities as U.S. Government
securities until final resolution of the issue.
Current federal tax law requires that a holder (such as a Fund) of a zero coupon
security accrue a portion of the discount at which the security was purchased as
income each year even though the holder receives no interest payment in cash on
the security during the year. As a result, in order to make the distributions
necessary for a Fund not to be subject to federal income or excise taxes, the
Fund might be required to pay out as an income distribution each year an amount,
obtained by liquidation of portfolio securities or borrowings if necessary,
greater than the total amount of cash that the Fund has actually received as
interest during the year. Each Fund believes, however, that it is highly
unlikely that it would be necessary to liquidate portfolio securities or borrow
money in order to make such required distributions or to meet its investment
objective. For a discussion of the tax treatment of zero coupon Treasury
securities, see "Dividends, Distributions and Taxes--Zero Coupon Treasury
Securities" in the Statement of Additional Information of each Fund that is
permitted to invest in such securities.
Corporate Bond may also invest in "pay-in-kind" debentures (i.e., debt
obligations the interest on which may be paid in the form of obligations of the
same type rather than cash), which have characteristics similar to zero coupon
securities.
Variable, Floating and Inverse Floating Rate Instruments. Fixed-income
securities may have fixed, variable or floating
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rates of interest. Variable and floating rate securities pay interest at rates
that are adjusted periodically, according to a specified formula. A "variable"
interest rate adjusts at predetermined intervals (e.g., daily, weekly or
monthly), while a "floating" interest rate adjusts whenever a specified
benchmark rate (such as the bank prime lending rate) changes.
A Fund may invest in fixed-income securities that pay interest at a coupon rate
equal to a base rate, plus additional interest for a certain period of time if
short-term interest rates rise above a predetermined level or "cap." The amount
of such an additional interest payment typically is calculated under a formula
based on a short-term interest rate index multiplied by a designated factor.
Leveraged inverse floating rate debt instruments are sometimes known as inverse
floaters. The interest rate on an inverse floater resets in the opposite
direction from the market rate of interest to which the inverse floater is
indexed. An inverse floater may be considered to be leveraged to the extent that
its interest rate varies by a magnitude that exceeds the magnitude of the change
in the index rate of interest. The higher degree of leverage inherent in inverse
floaters is associated with greater volatility in market value, such that,
during periods of rising interest rates, the market values of inverse floaters
will tend to decrease more rapidly than those of fixed rate securities.
Structured Securities. Structured securities in which Global Dollar Government
and Corporate Bond may invest represent interests in entities organized and
operated solely for the purpose of restructuring the investment characteristics
of sovereign debt obligations, with respect to Global Dollar Government, or
foreign government securities, with respect to Corporate Bond. This type of
restructuring involves the deposit with or purchase by an entity, such as a
corporation or trust, of specified instruments (such as commercial bank loans or
Brady Bonds) and the issuance by that entity of one or more classes of
structured securities backed by, or representing interests in, the underlying
instruments. The cash flow on the underlying instruments may be apportioned
among the newly issued structured securities to create securities with different
investment characteristics such as varying maturities, payment priorities and
interest rate provisions, and the extent of the payments made with respect to
structured securities is dependent on the extent of the cash flow on the
underlying instruments. Because structured securities typically involve no
credit enhancement, their credit risk generally will be equivalent to that of
the underlying instruments. Structured securities of a given class may be either
subordinated or unsubordinated to the right of payment of another class.
Subordinated structured securities typically have higher yields and present
greater risks than unsubordinated structured securities. Global Dollar
Government may invest up to 25% of its total assets, and Corporate Bond may
invest without limit, in these types of structured securities.
Loan Participations and Assignments. A Fund's investments in loans are expected
in most instances to be in the form of participations in loans and assignments
of all or a portion of loans from third parties. A Fund's investment in loan
participations typically will result in the Fund having a contractual
relationship only with the lender and not with the borrower. A Fund will acquire
participations only if the lender interpositioned between the Fund and the
borrower is a lender having total assets of more than $25 billion and whose
senior unsecured debt is rated investment grade or higher. When a Fund purchases
a loan assignment from a lender it will acquire direct rights against the
borrower on the loan. Because loan assignments are arranged through private
negotiations between potential assignees and potential assignors, however, the
rights and obligations acquired by a Fund as the purchaser of an assignment may
differ from, and be more limited than, those held by the assigning lender. The
assignability of certain sovereign debt obligations, with respect to Global
Dollar Government, or foreign government securities, with respect to Corporate
Bond, is restricted by the governing documentation as to the nature of the
assignee such that the only way in which the Fund may acquire an interest in a
loan is through a participation and not an assignment. A Fund may have
difficulty disposing of assignments and participations because to do so it will
have to assign such securities to a third party. Because there is no liquid
market for such securities, such securities can probably be sold only to a
limited number of institutional investors. The lack of a liquid secondary market
may have an adverse effect on the value of such securities and a Fund's ability
to dispose of particular assignments or participations when necessary to meet
its liquidity needs in response to a specific economic event such as a
deterioration in the creditworthiness of the borrower. The lack of a liquid
secondary market for assignments and participations also may make it more
difficult for the Fund to assign a value to these securities for purposes of
valuing the Fund's portfolio and calculating its net asset value.
Global Dollar Government may invest up to 25%, and Corporate Bond may invest up
to 15%, of their total assets, in loan participations and assignments. The
government that is the borrower on the loan will be considered by a Fund to be
the issuer of a loan participation or assignment for purposes of its fundamental
investment policy that it may not invest 25% or more of its total assets in
securities of issuers conducting their principal business activities in the same
industry (i.e., foreign government).
Brady Bonds. Brady Bonds are created through the exchange of existing commercial
bank loans to foreign entities for new obligations in connection with debt
restructurings under a plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady (the "Brady Plan"). Brady Bonds have been issued only
recently, and, accordingly, do not have a long payment history. They may be
collateralized or uncollateralized and issued in various currencies (although
most are U.S. Dollar-denominated) and they are actively traded in the over-the-
counter secondary market.
U.S. Dollar-denominated, collateralized Brady Bonds, which may be fixed-rate par
bonds or floating rate discount bonds,
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are generally collateralized in full as to principal due at maturity by U.S.
Treasury zero coupon obligations that have the same maturity as the Brady Bonds.
Interest payments on these Brady Bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments based on the applicable interest
rate at that time and is adjusted at regular intervals thereafter. Certain Brady
Bonds are entitled to "value recovery payments" in certain circumstances, which
in effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having up to four valuation
components: (i) collateralized repayment of principal at final maturity, (ii)
collateralized interest payments, (iii) uncollateralized interest payments, and
(iv) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In the event of a
default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments that would have then been due on the Brady Bonds in the
normal course. In addition, in light of the residual risk of Brady Bonds and,
among other factors, the history of defaults with respect to commercial bank
loans by public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.
Convertible Securities. Convertible securities include bonds, debentures,
corporate notes and preferred stocks that are convertible into common stock.
Prior to conversion, convertible securities have the same general
characteristics as non-convertible debt securities, which provide a stable
stream of income with generally higher yields than those of equity securities of
the same or similar issuers. The price of a convertible security will normally
vary with changes in the price of the underlying stock, although the higher
yield tends to make the convertible security less volatile than the underlying
common stock. As with debt securities, the market value of convertible
securities tends to decline as interest rates increase and increase as interest
rates decline. While convertible securities generally offer lower interest or
dividend yields than non-convertible debt securities of similar quality, they
enable investors to benefit from increases in the market price of the underlying
common stock. Convertible debt securities that are rated Baa or lower by Moody's
or BBB or lower by S&P, Duff & Phelps or Fitch and comparable unrated securities
may share some or all of the risks of debt securities with those ratings. For a
description of these risks, see "Risk Considerations--Investment in Lower-Rated
Fixed-Income Securities."
Short Sales. A short sale is effected by selling a security that a Fund does not
own, or if the Fund owns the security, it is not to be delivered upon
consummation of the sale. A short sale is "against the box" if a Fund owns or
has the right to obtain without payment securities identical to those sold
short. Short-Term U.S. Government and Global Dollar Government each may make
short sales only against the box and only for the purpose of deferring
realization of gain or loss for U.S. federal income tax purposes. In addition,
each of these Funds may not make a short sale if, as a result, more than 10% of
net assets (taken at market value), with respect to Global Dollar Government,
and 10% of total assets, with respect to Short-Term U.S. Government, would be
held as collateral for short sales. If the price of the security sold short
increases between the time of the short sale and the time a Fund replaces the
borrowed security, the Fund will incur a loss; conversely, if the price
declines, the Fund will realize a capital gain. Certain special federal income
tax considerations may apply to short sales entered into by a Fund. See
"Dividends, Distributions and Taxes" in the relevant Fund's Statement of
Additional Information.
Repurchase Agreements. A repurchase agreement arises when a buyer purchases a
security and simultaneously agrees to resell it to the vendor at an agreed-upon
future date, normally a day or a few days later. The resale price is greater
than the purchase price, reflecting an agreed-upon interest rate for the period
the buyer's money is invested in the security. Such agreements permit a Fund to
keep all of its assets at work while retaining "overnight" flexibility in
pursuit of investments of a longer-term nature. A Fund requires continual
maintenance of collateral in an amount equal to, or in excess of, the resale
price. If a vendor defaults on its repurchase obligation, a Fund would suffer a
loss to the extent that the proceeds from the sale of the collateral were less
than the repurchase price. If a vendor goes bankrupt, a Fund might be delayed
in, or prevented from, selling the collateral for its benefit. There is no
percentage restriction on any Fund's ability to enter into repurchase
agreements, except that Short-Term U.S. Government may enter into repurchase
agreements on not more than 25% of its total assets. The Funds may enter into
repurchase agreements with member banks of the Federal Reserve System or
"primary dealers" (as designated by the Federal Reserve Bank of New York),
although Mortgage Strategy, World Income, Short-Term Multi-Market, Multi-Market
Strategy, North American Government Income and Global Dollar Government
currently enter into repurchase agreements only with their custodians and such
primary dealers.
Reverse Repurchase Agreements and Dollar Rolls. Reverse repurchase agreements
involve sales by a Fund of portfolio assets concurrently with an agreement by
the Fund to repurchase the same assets at a later date at a fixed price. During
the reverse repurchase agreement period, the Fund continues to receive principal
and interest payments on these securities. Generally, the effect of such a
transaction is that a Fund can recover all or most of the cash invested in the
portfolio securities involved during the term of the reverse repurchase
agreement, while it will be able to keep the interest income associated with
those portfolio securities. Such transactions are only advantageous if the
interest cost to a
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Fund of the reverse repurchase transaction is less than the cost of otherwise
obtaining the cash.
Dollar rolls involve sales by a Fund of securities for delivery in the current
month and the Fund's simultaneously contracting to repurchase substantially
similar (same type and coupon) securities on a specified future date. During the
roll period, a Fund forgoes principal and interest paid on the securities. A
Fund is compensated by the difference between the current sales price and the
lower forward price for the future purchase (often referred to as the "drop") as
well as by the interest earned on the cash proceeds of the initial sale.
Reverse repurchase agreements and dollar rolls involve the risk that the market
value of the securities a Fund is obligated to repurchase under the agreement
may decline below the repurchase price. In the event the buyer of securities
under a reverse repurchase agreement or dollar roll files for bankruptcy or
becomes insolvent, a Fund's use of the proceeds of the agreement may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls are speculative techniques and
are considered borrowings by the Funds. Short-Term U.S. Government may enter
into reverse repurchase agreements with commercial banks and registered broker-
dealers in order to increase income, in an amount up to 33-1/3% of its total
assets. Under normal circumstances, Mortgage Strategy does not expect to engage
in reverse repurchase agreements and dollar rolls with respect to greater than
50% of its total assets. Reverse repurchase agreements and dollar rolls together
with any borrowings by Global Dollar Government will not exceed 33% of its total
assets less liabilities (other than amounts borrowed). See "Risk Considerations-
Effects of Borrowing."
Loans of Portfolio Securities. A Fund may make secured loans of portfolio
securities to brokers, dealers and financial institutions, provided that cash,
liquid high-grade debt securities or bank letters of credit equal to at least
100% of the market value of the securities loaned is deposited and maintained by
the borrower with the Fund. The risks in lending portfolio securities, as with
other extensions of credit, consist of possible loss of rights in the collateral
should the borrower fail financially. In determining whether to lend securities
to a particular borrower, Alliance will consider all relevant facts and
circumstances, including the creditworthiness of the borrower. While securities
are on loan, the borrower will pay the Fund any income earned thereon and the
Fund may invest any cash collateral in portfolio securities, thereby earning
additional income, or receive an agreed upon amount of income from a borrower
who has delivered equivalent collateral. Each Fund will have the right to regain
record ownership of loaned securities to exercise beneficial rights such as
voting rights, subscription rights and rights to dividends, interest or
distributions. A Fund may pay reasonable finders', administrative and custodial
fees in connection with a loan. A Fund will not lend portfolio securities in
excess of 25%, with respect to Short-Term U.S. Government, and 20%, with respect
to each of Mortgage Strategy, Mortgage Securities Income, World Income, Short-
Term Multi-Market, Multi-Market Strategy, North American Government Income and
Global Dollar Government, of its total assets, nor will a Fund lend portfolio
securities to any officer, director, employee or affiliate of the Fund or
Alliance.
Illiquid Securities. Subject to any more restrictive applicable investment
policies, none of the Funds will maintain more than 15% of its net assets in
illiquid securities. Illiquid securities generally include (i) direct placements
or other securities that are subject to legal or contractual restrictions on
resale or for which there is no readily available market (e.g., when trading in
the security is suspended or, in the case of unlisted securities, when market
makers do not exist or will not entertain bids or offers), including many
currency swaps and any assets used to cover currency swaps, (ii) over-the-
counter options and assets used to cover over-the-counter options, and (iii)
repurchase agreements not terminable within seven days. Rule 144A securities
that have legal or contractual restrictions on resale but have a readily
available market are not deemed illiquid. Alliance will monitor the liquidity of
each Fund's Rule 144A portfolio securities under the supervision of the
Directors of that Fund. A Fund that invests in illiquid securities may not be
able to sell such securities and may not be able to realize their full value
upon sale.
Investment in Other Investment Companies. Global Dollar Government may invest in
other investment companies whose investment objectives and policies are
consistent with those of the Fund. Under the 1940 Act, the Fund may invest not
more than 10% of its total assets in securities of other investment companies.
In addition, under the 1940 Act the Fund may not own more than 3% of the total
outstanding voting stock of any investment company and not more than 5% of the
value of the Fund's total assets may be invested in the securities of any
investment company. If the Fund acquired shares in investment companies,
shareholders would bear both their proportionate share of expenses in the Fund
(including management and advisory fees) and, indirectly, the expenses of such
investment companies (including management and advisory fees).
Future Developments. A Fund may, following written notice to its shareholders,
take advantage of other investment practices that are not currently contemplated
for use by the Fund or are not available but may yet be developed, to the extent
such investment practices are consistent with the Fund's investment objective
and legally permissible for the Fund. Such investment practices, if they arise,
may involve risks that exceed those involved in the practices described above.
Defensive Position. For temporary defensive purposes, each Fund may invest in
certain types of short-term, liquid, high grade or high quality (depending on
the Fund) debt securities. These securities may include U.S. Government
securities, qualifying bank deposits, money market instruments, prime commercial
paper and other types of short-term debt securities including notes and bonds.
For Funds that may invest in foreign countries, such securities may also include
short-term, foreign-currency denominated securities of the type mentioned above
issued by foreign governmental entities, companies and supranational
organizations. For a complete
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description of the types of securities in which a Fund may invest while in a
temporary defensive position, see the Fund's Statement of Additional
Information.
Portfolio Turnover. Portfolio turnover rates are set forth under "Financial
Highlights." These rates of portfolio turnover are greater than those of most
other investment companies. A high rate of portfolio turnover involves
correspondingly greater brokerage and other expenses than a lower rate, which
must be borne by the Fund and its shareholders. High portfolio turnover also may
result in the realization of substantial net short-term capital gains. See
"Dividends, Distributions and Taxes" in each Fund's Statement of Additional
Information.
CERTAIN FUNDAMENTAL INVESTMENT POLICIES
Each Fund has adopted certain fundamental investment policies listed below,
which may not be changed without the approval of its shareholders. Additional
investment restrictions with respect to a Fund are set forth in its Statement of
Additional Information.
Short-Term U.S. Government may not (i) invest more than 5% of its total assets
in the securities of any one issuer (other than U.S. Government securities and
repurchase agreements relating thereto), although up to 25% of the Fund's total
assets may be invested without regard to this restriction, or (ii) invest 25% or
more of its total assets in the securities of any one industry.
U.S. Government may not (i) borrow money except from banks for temporary or
emergency purposes and then only in an amount not exceeding 5% of the value of
its total assets at the time the borrowing is made, (ii) make loans to other
persons, (iii) effect a short sale of any security, (iv) purchase securities on
margin, but it may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities, or (v) write, purchase or sell
puts, calls or combinations thereof.
Mortgage Strategy may not (i) invest more than 5% of its total assets in the
securities of any one issuer or own more than 10% of the outstanding voting
securities of such issuer (other than U.S. Government securities), except that
up to 25% of the value of the Fund's total assets may be invested without regard
to the 5% and 10% limitations, (ii) invest 25% or more of its total assets in
securities of companies engaged principally in any one industry, except that
this restriction does not apply to investments in the mortgage and mortgage-
financed industry (in which more than 25% of the value of the Fund's total
assets will, except for temporary defensive positions, be invested) or U.S.
Government securities, (iii) borrow money except from banks for emergency or
temporary purposes in an amount not exceeding 5% of the value of the total
assets of the Fund, except that the Fund may engage in reverse repurchase
agreements and dollar rolls in an amount up to 50% of the Fund's total assets,
and (iv) pledge, hypothecate, mortgage or otherwise encumber its assets, except
to secure permitted borrowings.
Mortgage Securities Income may not (i) invest more than 5% of the value of its
total assets in the securities of any one issuer (other than U.S. Government
securities), except that up to 25% of the value of the Fund's total assets may
be invested without regard to this limitation, (ii) invest more than 25% of the
value of its total assets in the securities of issuers conducting their
principal business activities in a single industry, except that this limitation
shall not apply to investments in the mortgage and mortgage-financed industry
(in which more than 25% of the value of the Fund's total assets will, except for
temporary defensive positions, be invested) or U.S. Government securities, (iii)
borrow money except from banks for temporary or emergency purposes, including
the meeting of redemption requests which might require the untimely disposition
of securities, borrowing in the aggregate may not exceed 15%, and borrowing for
purposes other than meeting redemptions may not exceed 5% of the value of the
Fund's total assets (including the amount borrowed) less liabilities (not
including the amount borrowed) at the time the borrowing is made, outstanding
borrowings in excess of 5% of the value of the Fund's total assets will be
repaid before any subsequent investments are made, (iv) pledge, hypothecate,
mortgage or otherwise encumber its assets, except in an amount of not more than
15% of the value of its total assets to secure borrowings for temporary or
emergency purposes and except as provided in (vi) below, provided, however, that
this limitation does not apply to deposits made in connection with the entering
into and holding of interest rate futures contracts, (v) invest more than 10% of
the value of its total assets in the aggregate in illiquid securities or other
illiquid investments and repurchase agreements maturing in more than seven days,
or (vi) lend its portfolio securities if immediately after such a loan more than
20% of the value of the Fund's total assets would be subject to such loans.
World Income may not (i) invest 25% or more of its total assets in securities of
companies engaged principally in any one industry other than the banking
industry except that this restriction does not apply to U.S. Government
securities, (ii) borrow money except from banks for temporary or emergency
purposes, including the meeting of redemption requests which might require the
untimely disposition of securities; borrowing in the aggregate may not exceed
15%, and borrowing for purposes other than meeting redemptions may not exceed 5%
of the value of the Fund's total assets (including the amount borrowed) less
liabilities (not including the amount borrowed) at the time the borrowing is
made; securities will not be purchased while borrowings in excess of 5% of the
value of the Fund's total assets are outstanding, or (iii) pledge, hypothecate,
mortgage or otherwise encumber its assets, except to secure permitted
borrowings.
Short-Term Multi-Market may not (i) invest 25% or more of its total assets in
securities of companies engaged principally in any one industry other than the
banking industry, except that this restriction does not apply to U.S. Government
securities, (ii) borrow money except from banks for temporary or emergency
purposes, including the meeting of redemption requests which might require the
untimely disposition of securities; borrowing in the aggregate may not exceed
15%, and borrowing for purposes other than meeting redemptions
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may not exceed 5% of the value of the Fund's total assets (including the amount
borrowed) less liabilities (not including the amount borrowed) at the time the
borrowing is made; securities will not be purchased while borrowings in excess
of 5% of the value of the Fund's total assets are outstanding, or (iii) pledge,
hypothecate, mortgage or otherwise encumber its assets, except to secure
permitted borrowings.
Multi-Market Strategy may not (i) invest 25% or more of its total assets in
securities of companies engaged principally in any one industry other than the
banking industry, except that this restriction does not apply to U.S. Government
securities, (ii) borrow money, except the Fund may, in accordance with
provisions of the 1940 Act, (a) borrow from a bank, if after such borrowing,
there is asset coverage of at least 300% as defined in the 1940 Act, and (b)
borrow for temporary or emergency purposes in an amount not exceeding 5% of the
value of the total assets of the Fund, or (iii) pledge, hypothecate, mortgage or
otherwise encumber its assets, except to secure permitted borrowings.
North American Government Income may not (i) invest 25% or more of its total
assets in securities of companies engaged principally in any one industry except
that this restriction does not apply to U.S. Government securities, (ii) borrow
money, except that the Fund may, in accordance with provisions of the 1940 Act,
(a) borrow from a bank, if after such borrowing, there is asset coverage of at
least 300% as defined in the 1940 Act, and (b) borrow for temporary or emergency
purposes in an amount not exceeding 5% of the value of the total assets of the
Fund, or (iii) pledge, hypothecate, mortgage or otherwise encumber its assets,
except to secure permitted borrowings.
Global Dollar Government may not (i) invest 25% or more of its total assets in
the securities of issuers conducting their principal business activities in any
one industry, except that this restriction does not apply to U.S. Government
securities, (ii) purchase more than 10% of any class of the voting securities of
any one issuer, (iii) borrow money, except the Fund may, in accordance with
provisions of the 1940 Act, (a) borrow from a bank, if after such borrowing,
there is asset coverage of at least 300% as defined in the 1940 Act, and (b)
borrow for temporary or emergency purposes in an amount not exceeding 5% of the
value of the total assets of the Fund, (iv) pledge, hypothecate, mortgage or
otherwise encumber its assets, except to secure permitted borrowings, or (v)
purchase a security if, as a result (unless the security is acquired pursuant to
a plan of reorganization or an offer of exchange), the Fund would own more than
3% of the total outstanding voting stock of any investment company or more than
5% of the value of the Fund's net assets would be invested in securities of any
one or more investment companies.
Corporate Bond may not (i) invest more than 5% of its total assets in the
securities of any one issuer other than U.S. Government securities, or (ii) own
more than 10% of the outstanding voting securities of any issuer.
RISK CONSIDERATIONS
Fixed-Income Securities. The value of each Fund's shares will fluctuate with the
value of its investments. The value of each Fund's investments will change as
the general level of interest rates fluctuates. During periods of falling
interest rates, the values of a Fund's securities generally rise. Conversely,
during periods of rising interest rates, the values of a Fund's securities
generally decline.
In seeking to achieve a Fund's investment objective, there will be times, such
as during periods of rising interest rates, when depreciation and realization of
capital losses on securities in a Fund's portfolio will be unavoidable.
Moreover, medium- and lower-rated securities and non-rated securities of
comparable quality may be subject to wider fluctuations in yield and market
values than higher-rated securities under certain market conditions. Such
fluctuations after a security is acquired do not affect the cash income received
from that security but are reflected in the net asset value of a Fund.
U.S. Corporate Fixed-Income Securities. The U.S. corporate fixed-income
securities in which Global Dollar Government invests may include securities
issued in connection with corporate restructurings such as takeovers or
leveraged buyouts, which may pose particular risks. Securities issued to finance
corporate restructurings may have special credit risks due to the highly
leveraged conditions of the issuer. In addition, such issuers may lose
experienced management as a result of the restructuring. Finally, the market
price of such securities may be more volatile to the extent that expected
benefits from the restructuring do not materialize. The Fund may also invest in
U.S. corporate fixed-income securities that are not current in the payment of
interest or principal or are in default, so long as Alliance believes such
investment is consistent with the Fund's investment objectives. The Fund's
rights with respect to defaults on such securities will be subject to applicable
U.S. bankruptcy, moratorium and other similar laws.
Foreign Investment. The securities markets of many foreign countries are
relatively small, with the majority of market capitalization and trading volume
concentrated in a limited number of companies representing a small number of
industries. Consequently, a Fund whose investment portfolio includes such
securities may experience greater price volatility and significantly lower
liquidity than a portfolio invested solely in equity securities of U.S.
companies. These markets may be subject to greater influence by adverse events
generally affecting the market, and by large investors trading significant
blocks of securities, than is usual in the United States. Securities settlements
may in some instances be subject to delays and related administrative
uncertainties. Furthermore, foreign investment in the securities markets of
certain foreign countries is restricted or controlled to varying degrees. These
restrictions or controls may at times limit or preclude investment in certain
securities and may increase the cost and expenses of a Fund. In addition, the
repatriation of investment income, capital or the proceeds of sales of
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securities from certain of the countries is controlled under regulations,
including in some cases the need for certain advance government notification or
authority, and if a deterioration occurs in a country's balance of payments, the
country could impose temporary restrictions on foreign capital remittances. A
Fund could be adversely affected by delays in, or a refusal to grant, any
required governmental approval for repatriation, as well as by the application
to it of other restrictions on investment. Investing in local markets may
require a Fund to adopt special procedures or seek local governmental approvals
or other actions, any of which may involve additional costs to a Fund. The
liquidity of a Fund's investments in any country in which any of these factors
exists could be affected and Alliance will monitor the effect of any such factor
or factors on a Fund's investments. Furthermore, transaction costs including
brokerage commissions for transactions both on and off the securities exchanges
in many foreign countries are generally higher than in the U.S.
Issuers of securities in foreign jurisdictions are generally not subject to the
same degree of regulation as are U.S. issuers with respect to such matters as
insider trading rules, restrictions on market manipulation, shareholder proxy
requirements and timely disclosure of information. The reporting, accounting and
auditing standards of foreign countries may differ, in some cases significantly,
from U.S. standards in important respects and less information may be available
to investors in foreign securities than to investors in U.S. securities.
Substantially less information is publicly available about certain non-U.S.
issuers than is available about U.S. issuers.
The economies of individual foreign countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product or gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Nationalization,
expropriation or confiscatory taxation, currency blockage, political changes,
government regulation, political or social instability or diplomatic
developments could affect adversely the economy of a foreign country or the
Fund's investments in such country. In the event of expropriation,
nationalization or other confiscation, a Fund could lose its entire investment
in the country involved. In addition, laws in foreign countries governing
business organizations, bankruptcy and insolvency may provide less protection to
security holders such as the Fund than that provided by U.S. laws.
World Income may invest a portion of its net assets in securities denominated in
the ECU. There are risks associated with concentration of investments in a
particular region of the world such as Western Europe since the economies and
markets of the countries in the region tend to be interrelated and may be
adversely affected by political, economic and other events in a similar manner.
Alliance believes that, except for currency fluctuations between the U.S. Dollar
and the Canadian Dollar, the matters described above are not likely to have a
material adverse effect on North American Government Income's investments in the
securities of Canadian issuers or investments denominated in Canadian issuers or
investments denominated in Canadian Dollars. The factors described above are
more likely to have a material adverse effect on the Fund's investments in the
securities of Mexican and other non-Canadian foreign issuers, including
investments in securities denominated in Mexican Pesos or other non-Canadian
foreign currencies. If not hedged, however, currency fluctuations could affect
the unrealized appreciation and depreciation of Canadian Government securities
as expressed in U.S. Dollars.
Currency Considerations. Those Funds that invest some portion of their assets in
securities denominated in, and receive revenues in, foreign currencies will be
adversely affected by reductions in the value of those currencies relative to
the U.S. Dollar. These changes will affect a Fund's net assets, distributions
and income. If the value of the foreign currencies in which a Fund receives
income falls relative to the U.S. Dollar between receipt of the income and the
making of Fund distributions, a Fund may be required to liquidate securities in
order to make distributions if the Fund has insufficient cash in U.S. Dollars to
meet the distribution requirements that the Fund must satisfy to qualify as a
regulated investment company for federal income tax purposes. Similarly, if an
exchange rate declines between the time a Fund incurs expenses in U.S. Dollars
and the time cash expenses are paid, the amount of the currency required to be
converted into U.S. Dollars in order to pay expenses in U.S. Dollars could be
greater than the equivalent amount of such expenses in the currency at the time
they were incurred. In light of these risks, a Fund may engage in certain
currency hedging transactions, which themselves, involve certain special risks.
See "Additional Investment Practices" above.
Sovereign Debt Obligations. No established secondary markets may exist for many
of the sovereign debt obligations in which Global Dollar Government will invest.
Reduced secondary market liquidity may have an adverse effect on the market
price and the Fund's ability to dispose of particular instruments when necessary
to meet its liquidity requirements or in response to specific economic events
such as a deterioration in the creditworthiness of the issuer. Reduced secondary
market liquidity for certain sovereign debt obligations may also make it more
difficult for the Fund to obtain accurate market quotations for the purpose of
valuing its portfolio. Market quotations are generally available on many
sovereign debt obligations only from a limited number of dealers and may not
necessarily represent firm bids of those dealers or prices for actual sales.
By investing in sovereign debt obligations, the Fund will be exposed to the
direct or indirect consequences of political, social and economic changes in
various countries. Political changes in a country may affect the willingness of
a foreign government to make or provide for timely payments of its obligations.
The country's economic status, as reflected,
33
<PAGE>
among other things, in its inflation rate, the amount of its external debt and
its gross domestic product, will also affect the government's ability to honor
its obligations.
The sovereign debt obligations in which the Fund will invest in most cases
pertain to countries that are among the world's largest debtors to commercial
banks, foreign governments, international financial organizations and other
financial institutions. In recent years, the governments of some of these
countries have encountered difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Certain governments have not been able to make payments of interest on or
principal of sovereign debt obligations as those payments have come due.
Obligations arising from past restructuring agreements may affect the economic
performance and political and social stability of those issuers.
The ability of governments to make timely payments on their obligations is
likely to be influenced strongly by the issuer's balance of payments, including
export performance, and its access to international credits and investments. To
the extent that a country receives payment for its exports in currencies other
than dollars, its ability to make debt payments denominated in dollars could be
adversely affected. To the extent that a country develops a trade deficit, it
will need to depend on continuing loans from foreign governments, multi-lateral
organizations or private commercial banks, aid payments from foreign governments
and on inflows of foreign investment. The access of a country to these forms of
external funding may not be certain, and a withdrawal of external funding could
adversely affect the capacity of a government to make payments on its
obligations. In addition, the cost of servicing debt obligations can be affected
by a change in international interest rates since the majority of these
obligations carry interest rates that are adjusted periodically based upon
international rates.
The Fund is permitted to invest in sovereign debt obligations that are not
current in the payment of interest or principal or are in default so long as
Alliance believes it to be consistent with the Fund's investment objectives. The
Fund may have limited legal recourse in the event of a default with respect to
certain sovereign debt obligations it holds. For example, remedies from defaults
on certain sovereign debt obligations, unlike those on private debt, must, in
some cases, be pursued in the courts of the defaulting party itself. Legal
recourse therefore may be significantly diminished. Bankruptcy, moratorium and
other similar laws applicable to issuers of sovereign debt obligations may be
substantially different from those applicable to issuers of private debt
obligations. The political context, expressed as the willingness of an issuer of
sovereign debt obligations to meet the terms of the debt obligation, for
example, is of considerable importance. In addition, no assurance can be given
that the holders of commercial bank debt will not contest payments to the
holders of securities issued by foreign governments in the event of default
under commercial bank loan agreements.
Effects of Borrowing. A Fund's loan agreements provide for additional borrowings
and for repayments and reborrowings from time to time, and each Fund that may
borrow expects to effect borrowings and repayments at such times and in such
amounts as will maintain investment leverage in an amount approximately equal to
its borrowing target. The loan agreements provide for a selection of interest
rates that are based on the bank's short-term funding costs in the U.S. and
London markets.
Borrowings by a Fund result in leveraging of the Fund's shares of common stock.
Utilization of leverage, which is usually considered speculative, however,
involves certain risks to a Fund's shareholders. These include a higher
volatility of the net asset value of a Fund's shares of common stock and the
relatively greater effect on the net asset value of the shares. So long as a
Fund is able to realize a net return on its investment portfolio that is higher
than the interest expense paid on borrowings, the effect of leverage will be to
cause the Fund's shareholders to realize a higher current net investment income
than if the Fund were not leveraged. On the other hand, interest rates on U.S.
Dollar-denominated and foreign currency-denominated obligations change from time
to time as does their relationship to each other, depending upon such factors as
supply and demand forces, monetary and tax policies within each country and
investor expectations. Changes in such factors could cause the relationship
between such rates to change so that rates on U.S. Dollar-denominated
obligations may substantially increase relative to the foreign currency-
denominated obligations in which the Fund may be invested. To the extent that
the interest expense on borrowings approaches the net return on a Fund's
investment portfolio, the benefit of leverage to the Fund's shareholders will be
reduced, and if the interest expense on borrowings were to exceed the net return
to shareholders, a Fund's use of leverage would result in a lower rate of return
than if a Fund were not leveraged. Similarly, the effect of leverage in a
declining market could be a greater decrease in net asset value per share than
if the Fund were not leveraged. In an extreme case if a Fund's current
investment income were not sufficient to meet the interest expense on
borrowings, it could be necessary for the Fund to liquidate certain of its
investments, thereby reducing the net asset value of a Fund's shares.
In the event of an increase in rates on U.S. Government securities or other
changed market conditions, to the point where leverage by either Multi-Market
Strategy or North American Government Income could adversely affect the Funds'
shareholders, as noted above, or in anticipation of such changes, either Fund
may increase the percentage of its investment portfolio invested in U.S.
Government securities, which would tend to offset the negative impact of
leverage on Fund shareholders. Either Fund may also reduce the degree to which
it is leveraged by repaying amounts borrowed.
34
<PAGE>
Under the 1940 Act, a Fund is not permitted to borrow unless immediately after
such borrowing there is "asset coverage," as that term is defined and used in
the 1940 Act, of at least 300% for all borrowings of the Fund. In addition,
under the 1940 Act, in the event asset coverage falls below 300%, a Fund must
within three days reduce the amount of its borrowing to such an extent that the
asset coverage of its borrowings is at least 300%. Assuming, for example,
outstanding borrowings representing not more than one-third of a Fund's total
assets less liabilities (other than such borrowings), the asset coverage of the
Fund's portfolio would be 300%; while outstanding borrowings representing 25% of
the Fund's total assets less liabilities (other than such borrowings), the asset
coverage of the Fund's portfolio would be 400%. A Fund will maintain asset
coverage of outstanding borrowings of at least 300% and if necessary will, to
the extent possible, reduce the amounts borrowed by making repayments from time
to time in order to do so. Such repayments could require a Fund to sell
portfolio securities at times considered disadvantageous by Alliance. In the
event that a Fund is required to sell portfolio securities in order to make
repayments, such sales of portfolio securities could cause the Fund to incur
related transaction costs and might cause the Fund to realize gains on
securities held for less than three months. Because not more than 30% of a
Fund's gross income may be derived from the sale or disposition of stocks and
securities held for less than three months to maintain the Fund's tax status as
a regulated investment company, such gains would limit the ability of a Fund to
sell other securities held for less than three months that a Fund might wish to
sell in the ordinary course of its portfolio management and thus might adversely
affect the Fund's yield. See "Dividends, Distributions and Taxes."
Each of Multi-Market Strategy, North American Government Income and Global
Dollar Government may also borrow to repurchase its shares or to meet redemption
requests. In addition, each Fund may borrow for temporary purposes (including
the purposes mentioned in the preceding sentence) in an amount not exceeding 5%
of the value of the assets of the Fund. Borrowings for temporary purposes are
not subject to the 300% asset average limit described above. See "Certain
Fundamental Investment Policies." Short-Term U.S. Government, Multi-Market
Strategy, North American Government Income and Global Dollar Government may also
borrow through the use of reverse repurchase agreements, and Global Dollar
Government also through the use of dollar rolls to the extent permitted by the
1940 Act. See "Investment Objectives and Policies--Reverse Repurchase Agreements
and Dollar Rolls."
Investment in the Banking Industry. Due to the investment policies of Multi-
Market Strategy, World Income and Short-Term Multi-Market with respect to
investments in the banking industry, those Funds will have greater exposure to
the risk factors which are characteristic of such investments. In particular,
the value of and investment return on each Fund's shares will be affected by
economic or regulatory developments in or related to the banking industry.
Sustained increases in interest rates can adversely affect the availability and
cost of funds for a bank's lending activities, and a deterioration in general
economic conditions could increase the exposure to credit losses. The banking
industry is also subject to the effects of: the concentration of loan portfolios
in particular business such as real estate, energy, agriculture or high
technology-related companies; national and local regulation; and competition
within those industries as well as with other types of financial institutions.
In addition, each Fund's investments in commercial banks located in several
foreign countries are subject to additional risks due to the combination in such
banks of commercial banking and diversified securities activities. As discussed
above, however, the Funds will seek to minimize their exposure to such risks by
investing only in debt securities which are determined to be of high quality.
Securities Ratings. The ratings of fixed-income securities by S&P, Moody's, Duff
& Phelps and Fitch are a generally accepted barometer of credit risk. They are,
however, subject to certain limitations from an investor's standpoint. The
rating of an issuer is heavily weighted by past developments and does not
necessarily reflect probable future conditions. There is frequently a lag
between the time a rating is assigned and the time it is updated. In addition,
there may be varying degrees of difference in credit risk of securities within
each rating category.
Investment in Fixed-Income Securities Rated Baa and BBB. Securities rated Baa or
BBB are considered to have speculative characteristics and share some of the
same characteristics as lower-rated securities, as described below. Sustained
periods of deteriorating economic conditions or of rising interest rates are
more likely to lead to a weakening in the issuer's capacity to pay interest and
repay principal than in the case of higher-rated securities.
Investment in Lower-Rated Fixed-Income Securities. Lower-rated securities are
subject to greater risk of loss of principal and interest than higher-rated
securities. They are also generally considered to be subject to greater market
risk than higher-rated securities, and the capacity of issuers of lower-rated
securities to pay interest and repay principal is more likely to weaken than is
that of issuers of higher-rated securities in times of deteriorating economic
conditions or rising interest rates. In addition, lower-rated securities may be
more susceptible to real or perceived adverse economic conditions than
investment grade securities, although the market values of securities rated
below investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities.
Securities rated Ba or BB are judged to have speculative elements or to be
predominantly speculative with respect to the issuer's ability to pay interest
and repay principal. Securities rated B are judged to have highly speculative
elements or to be predominantly speculative. Such securities may have small
assurance of interest and principal payments. Securities rated Baa by Moody's
are also judged to have speculative characteristics.
The market for lower-rated securities may be thinner and less active than that
for higher-rated securities, which can
35
<PAGE>
adversely affect the prices at which these securities can be sold. To the extent
that there is no established secondary market for lower-rated securities, a Fund
may experience difficulty in valuing such securities and, in turn, the Fund's
assets. Under the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989, federally-insured savings and loan associations were required to have
divested their investments in non-investment grade corporate debt securities by
July 1, 1994. Such divestiture and continuing restrictions on the ability of
such associations to acquire lower-rated securities could have a material
adverse effect on the market and prices of such securities.
Alliance will try to reduce the risk inherent in investment in lower-rated
securities through credit analysis, diversification and attention to current
developments and trends in interest rates and economic and political conditions.
However, there can be no assurance that losses will not occur. Since the risk of
default is higher for lower-rated securities, Alliance's research and credit
analysis are a correspondingly more important aspect of its program for managing
a Fund's securities than would be the case if a Fund did not invest in lower-
rated securities. In considering investments for the Fund, Alliance will attempt
to identify those high-yielding securities whose financial condition is adequate
to meet future obligations, has improved, or is expected to improve in the
future. Alliance's analysis focuses on relative values based on such factors as
interest or dividend coverage, asset coverage, earnings prospects, and the
experience and managerial strength of the issuer.
Non-rated Securities. Non-rated securities will also be considered for
investment by North American Government Income, Global Dollar Government and
Corporate Bond when Alliance believes that the financial condition of the
issuers of such securities, or the protection afforded by the terms of the
securities themselves, limits the risk to the Fund to a degree comparable to
that of rated securities which are consistent with the Fund's objective and
policies.
Non-diversified Status. Each of World Income, Short-Term Multi-Market, Multi-
Market Strategy, North American Government Income and Global Dollar Government
is a "non-diversified" investment company, which means the Fund is not limited
in the proportion of its assets that may be invested in the securities of a
single issuer. However, each Fund intends to conduct its operations so as to
qualify to be taxed as a "regulated investment company" for purposes of the
Code, which will relieve the Fund of any liability for federal income tax to the
extent its earnings are distributed to shareholders. See "Dividends,
Distributions and Taxes" in each Fund's Statement of Additional Information. To
so qualify, among other requirements, each Fund will limit its investments so
that, at the close of each quarter of the taxable year, (i) not more than 25% of
the Fund's total assets will be invested in the securities of a single issuer,
and (ii) with respect to 50% of its total assets, not more than 5% of its total
assets will be invested in the securities of a single issuer and the Fund will
not own more than 10% of the outstanding voting securities of a single issuer. A
Fund's investments in U.S. Government securities are not subject to these
limitations. Because World Income, Short-Term Multi-Market, Multi-Market
Strategy, North American Government Income and Global Dollar Government is each
a non-diversified investment company, it may invest in a smaller number of
individual issuers than a diversified investment company, and an investment in
such Fund may, under certain circumstances, present greater risk to an investor
than an investment in a diversified investment company.
Foreign government securities are not treated like U.S. Government securities
for purposes of the diversification tests described in the preceding paragraph,
but instead are subject to these tests in the same manner as the securities of
non-governmental issuers. In this regard sovereign debt obligations issued by
different issuers located in the same country are often treated as issued by a
single issuer for purposes of these diversification tests. Certain issuers of
structured securities and loan participations may be treated as separate issuers
for the purposes of these tests. Accordingly, in order to meet the
diversification tests and thereby maintain its status as a regulated investment
company, North American Government Income will be required to diversify its
portfolio of foreign government securities in a manner which would not be
necessary if the Fund had made similar investments in U.S. Government
securities.
- --------------------------------------------------------------------------------
PURCHASE AND SALE OF SHARES
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
You can purchase shares of any of the Funds through broker-dealers, banks or
other financial intermediaries, or directly through Alliance Fund Distributors,
Inc. ("AFD"), each Fund's principal underwriter. The minimum initial investment
in each Fund is $250. The minimum for subsequent investments in each Fund is
$50. Investments of $25 or more are allowed under the automatic investment
program of each Fund. Share certificates are issued only upon request. See the
Subscription Application and Statements of Additional Information for more
information.
Each Fund offers three classes of shares, Class A, Class B and Class C, except
that World Income offers only one class of shares that you can purchase without
any initial sales charge or contingent deferred sales charge ("CDSC").
Class A Shares--Initial Sales Charge Alternative
You can purchase Class A shares at net asset value plus an initial sales charge,
as follows:
36
<PAGE>
<TABLE>
<CAPTION>
as % of Commission to
Net Amount as % of Dealer/Agent as %
Amount Purchased Invested Offering Price of Offering Price
---------------- ---------- -------------- -----------------
<S> <C> <C> <C>
Less than $100,000 4.44% 4.25% 4.00%
$100,000 to
less than $250,000 3.36 3.25 3.00
$250,000 to
less than $500,000 2.30 2.25 2.00
$500,000 to
less than $1,000,000 1.78 1.75 1.50
</TABLE>
On purchases of $1,000,000 or more, you pay no initial sales charge but may pay
a CDSC equal to 1% of the lesser of net asset value at the time of redemption or
original cost if you redeem within one year; Alliance may pay the dealer or
agent a fee of up to 1% of the dollar amount purchased. Certain purchases of
Class A shares may qualify for reduced or eliminated sales charges in accordance
with a Fund's Combined Purchase Privilege, Cumulative Quantity Discount,
Statement of Intention, Privilege for Certain Retirement Plans, Reinstatement
Privilege and Sales at Net Asset Value programs. Consult the Subscription
Application and Statements of Additional Information.
Class B Shares--Deferred Sales Charge Alternative
You can purchase Class B shares at net asset value without an initial sales
charge. However, you may pay a CDSC if you redeem shares within three years
after purchase. Shares obtained from dividend or distribution reinvestment are
not subject to the CDSC. The amount of the CDSC (expressed as a percentage of
the lesser of the current net asset value or original cost) will vary according
to the number of years from the purchase of Class B shares until the redemption
of those shares. The amount of the CDSC for each Fund is as set forth below.
Class B shares of a Fund purchased prior to the date of this Prospectus may be
subject to a different CDSC schedule, which was disclosed in the Fund's
prospectus in use at the time of purchase and is set forth in the Fund's current
Statement of Additional Information.
<TABLE>
<CAPTION>
Year Since Purchase CDSC
------------------- ----
<S> <C>
First......................................... 3.0%
Second........................................ 2.0%
Third......................................... 1.0%
Fourth........................................ None
</TABLE>
Class B shares are subject to higher distribution fees than Class A shares for a
period of six years (after which they convert to Class A shares). The higher
fees mean a higher expense ratio, so Class B shares pay correspondingly lower
dividends and may have a lower net asset value than Class A shares.
Class C Shares--Asset-Based Sales Charge Alternative
You can purchase Class C shares without any initial sales charge or a CDSC. A
Fund will thus receive the full amount of your purchase, and you will receive
the entire net asset value of your shares upon redemption. Class C shares incur
higher distribution fees than Class A shares and do not convert to any other
class of shares of the Fund. The higher fees mean a higher expense ratio, so
Class C shares pay correspondingly lower dividends and may have a lower net
asset value than Class A shares.
Application of the CDSC
Shares obtained from dividend or distribution reinvestment are not subject to
the CDSC on Class A and Class B shares. The CDSC is deducted from the amount of
the redemption and is paid to AFD. The CDSC will be waived on redemptions of
shares following the death or disability of a shareholder or to meet the
requirements of certain qualified retirement plans. See the Statements of
Additional Information.
How the Funds Value Their Shares
The net asset value of each class of shares of a Fund is calculated by dividing
the value of the Fund's net assets allocable to that class by the outstanding
shares of that class. Shares are valued each day the New York Stock Exchange
(the "Exchange") is open as of the close of regular trading (currently 4:00 p.m.
Eastern time). The securities in a Fund are valued at their current market value
determined on the basis of market quotations or, if such quotations are not
readily available, such other methods as the Fund's Directors believe would
accurately reflect fair market value.
General
The decision as to which class of shares is more beneficial to you depends on
the amount and intended length of your investment. If you are making a large
investment, thus qualifying for a reduced sales charge, you might consider Class
A shares. If you are making a smaller investment, you might consider Class B
shares because 100% of your purchase is invested immediately. If you are unsure
of the length of your investment, you might consider Class C shares because
there are no initial or contingent deferred sales charges. Consult your
financial agent. Dealers and agents may receive differing compensation for
selling Class A, Class B or Class C shares. There is no size limit on purchases
of Class A shares. The maximum purchase of Class B shares is $250,000. The
maximum purchase of Class C shares is $5,000,000. The Funds may refuse any order
to purchase shares.
In addition to the discount or commission paid to dealers or agents, AFD from
time to time pays additional cash or other incentives to dealers or agents,
including Equico Securities, Inc., an affiliate of AFD, in connection with the
sale of shares of the Funds. Such additional amounts may be utilized, in whole
or in part, in some cases together with other revenues of such dealers or
agents, to provide additional compensation to registered representatives who
sell shares of the Funds. On some occasions, such cash or other incentives will
be conditioned upon the sale of a specified minimum dollar amount of the shares
of a Fund and/or other Alliance Mutual Funds during a specific period of time.
Such incentives may take the form of payment for attendance at seminars, meals,
sporting events or theater performances, or payment for travel, lodging and
entertainment incurred in connection with
37
<PAGE>
travel by persons associated with a dealer or agent and their immediate family
members to urban or resort locations within or outside the United States. Such
dealer or agent may elect to receive cash incentives of equivalent amount in
lieu of such payments.
HOW TO SELL SHARES
You may "redeem", i.e., sell your shares in a Fund to the Fund on any day the
Exchange is open, either directly or through your financial intermediary. The
price you will receive is the net asset value (less any applicable CDSC for
Class B shares) next calculated after the Fund receives your request in proper
form. Proceeds generally will be sent to you within seven days. However, for
shares recently purchased by check or electronic funds transfer, a Fund will not
send proceeds until it is reasonably satisfied that the check or electronic
funds transfer has been collected (which may take up to 15 days).
Selling Shares Through Your Broker
A Fund must receive your broker's request before 4:00 p.m. Eastern time for you
to receive that day's net asset value (less any applicable CDSC for Class B
shares). Your broker is responsible for furnishing all necessary documentation
to a Fund and may charge you for this service.
Selling Shares Directly to a Fund
Send a signed letter of instruction or stock power form to Alliance Fund
Services, Inc. ("AFS"), each Fund's registrar, transfer agent and dividend-
disbursing agent, along with certificates, if any, that represent the shares you
want to sell. For your protection, signatures must be guaranteed by a bank, a
member firm of a national stock exchange or other eligible guarantor
institution. Stock power forms are available from your financial intermediary,
AFS, and many commercial banks. Additional documentation is required for the
sale of shares by corporations, intermediaries, fiduciaries and surviving joint
owners. For details contact:
Alliance Fund Services
P.O. Box 1520
Secaucus, NJ 07096-1520
800-221-5672
Alternatively, a request for redemption of shares for which no stock
certificates have been issued can also be made by telephone to 800-221-5672 by a
shareholder who has completed the Subscription Application or an "Autosell"
application obtained from AFS. Telephone redemption requests must be for a least
$500 and may not exceed $100,000, and must be made between 9 a.m. and 4 p.m. New
York time on a Fund business day. Proceeds of telephone redemptions will be send
by electronic funds transfer. Proceeds of telephone redemptions also may be sent
by check to a shareholder's address of record, but only once in any 30-day
period and in amount not exceeding $25,000. Telephone redemption by check is not
available for shares purchased within 15 calendar days prior to the redemption
request, shares held in nominee or "street name" accounts or retirement plan
accounts or shares held by a shareholder who has changed his or her address of
record within the previous 30 calendar days.
General
The sale of shares is a taxable transaction for federal tax purposes. Under
unusual circumstances, a Fund may suspend redemptions or postpone payment for up
to seven days or longer, as permitted by federal securities law. The Funds
reserve the right to close an account that through redemption has remained below
$200 for 90 days. Shareholders will receive 60 days' written notice to increase
the account value before the account is closed.
During drastic economic or market developments, you might have difficulty
reaching AFS by telephone, in which event you should issue written instructions
to AFS. AFS is not responsible for the authenticity of telephonic requests to
purchase, sell or exchange shares. AFS will employ reasonable procedures to
verify that telephone requests are genuine, and could be liable for losses
resulting from unauthorized transactions if it failed to do so. Dealers and
agents may charge a commission for handling telephonic requests. The telephone
service may be suspended or terminated at any time without notice.
SHAREHOLDER SERVICES
AFS offers a variety of shareholder services. For more information about these
services or your account, call AFS's toll-free number, 800-221-5672. Some
services are described in the attached Application. A shareholder's manual
explaining all available services will be provided upon request. To request a
shareholder manual, call 800-227-4618.
HOW TO EXCHANGE SHARES
You may exchange your shares of World Income for Class A shares of other
Alliance Mutual Funds and shares of most Alliance money market funds. You may
exchange your shares of any other Fund for shares of the same class of other
Alliance Mutual Funds (including AFD Exchange Reserves, a money market fund
managed by Alliance). Exchanges of shares are made at the net asset values next
determined, without sales or service charges. Exchanges may be made by telephone
or written request.
Class A and Class B shares will continue to age without regard to exchanges for
the purpose of determining the CDSC, if any, upon redemption and, in the case of
Class B shares, for the purpose of conversion to Class A shares. After an
exchange, your Class B shares will automatically convert to Class A shares in
accordance with the conversion schedule applicable to the Class B shares of the
Alliance Mutual Fund you originally purchased for cash ("original shares"). When
redemption occurs, the CDSC applicable to the original shares is applied.
Please read carefully the prospectus of the mutual fund into which you are
exchanging before submitting the request. Call AFS at 800-221-5672 to exchange
uncertificated shares. An exchange is a taxable capital transaction for federal
tax purposes. The exchange service may be changed, suspended, or terminated on
60 days' written notice.
38
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUNDS
- --------------------------------------------------------------------------------
ADVISER
Alliance, which is a Delaware limited partnership with principal offices at 1345
Avenue of the Americas, New York, New York 10105, has been retained under an
advisory agreement (the "Advisory Agreement") to provide investment advice and,
in general, to conduct the management and investment program of each Fund,
subject to the general supervision and control of the Directors of the Fund.
Alliance is a leading international investment manager supervising client
accounts with assets as of December 31, 1994 totaling more than $121 billion (of
which more than $37 billion represented the assets of investment companies).
Alliance's clients are primarily major corporate employee benefit funds, public
employee retirement systems, investment companies, foundations and endowment
funds. The 51 registered investment companies managed by Alliance comprising 103
separate investment portfolios currently have over one million shareholders. As
of December 31, 1994, Alliance was retained as an investment manager for 29 of
the Fortune 100 companies.
Alliance Capital Management Corporation ("ACMC"), the sole general partner of,
and the owner of a 1% general partnership interest in, Alliance, is an indirect
wholly-owned subsidiary of The Equitable Life Assurance Society of the United
States ("Equitable"), one of the largest life insurance companies in the United
States, which is a wholly-owned subsidiary of The Equitable Companies
Incorporated, a holding company controlled by AXA, a French insurance holding
company. Certain information concerning the ownership and control of Equitable
by AXA is set forth in each Fund's Statement of Additional Information under
"Management of the Fund."
The following table lists the person or persons who are primarily responsible
for the day-to-day management of each Fund's portfolio, the length of time that
each person has been primarily responsible, and each person's principal
occupation during the past five years.
<TABLE>
<CAPTION>
Principal occupation
Employee; time period; during the past
Fund title with ACMC five years
---- ------------------------- --------------------
<S> <C> <C>
Short-Term Paul J. DeNoon since 1993-- Associated with
U.S. Government Vice President Alliance since
January 1992; prior
thereto, a Vice President
at Manufacturers Hanover
Trust
U.S. Government Wayne D. Lyski since 1983 Associated with
--Executive Vice President Alliance
Paul J. DeNoon since (see above)
January 1992-(see above)
Mortgage Strategy Patricia J. Young since Associated with
inception Alliance since
-Senior Vice President March 1992;
prior thereto, a managing
director and portfolio
manager for Hyperion
Capital since March 1991
and a managing director
with Fischer, Francis,
Trees & Watts
Paul A. Ullman Associated with
since inception- Alliance since
Vice President March 1992;
prior thereto, a director
and portfolio manager for
Hyperion Capital since
July 1990 and a Vice
President at Salomon
Brothers Inc.
Mortgage Securities Patricia J. Young since (see above)
Income March 1992--(see above)
Paul A. Ullman since (see above)
March 1992--(see above)
World Income Robert M. Sinche since Associated with
inception--Senior Vice Alliance
President
Douglas J. Peebles since Associated with
inception--Vice President Alliance
Short-Term Robert M. Sinche since (see above)
Multi-Market inception--(see above)
Multi-Market Strategy Robert M. Sinche since (see above)
inception--(see above)
Douglas J. Peebles since (see above)
inception--(see above)
North American Wayne D. Lyski since (see above)
Government Income inception--(see above)
Robert M. Sinche since (see above)
inception--(see above)
Global Dollar Wayne D. Lyski since (see above)
Government inception--(see above)
Corporate Bond Wayne D. Lyski since (see above)
1987--(see above)
Paul J. DeNoon since (see above)
January 1992--(see above)
</TABLE>
DISTRIBUTION SERVICES AGREEMENTS
Rule 12b-1 adopted by the Commission under the 1940 Act permits an investment
company to pay expenses associated with the distribution of its shares in
accordance with a duly
39
<PAGE>
adopted plan. Each Fund has adopted one or more "Rule 12b-1 plans" (for each
Fund, a "Plan") and has entered into a Distribution Services Agreement (the
"Agreement") with AFD. Pursuant to its Plan, a Fund pays to AFD a Rule 12b-1
distribution services fee, which may not exceed for each Fund other than World
Income an annual rate of .30% (.50% with respect to Short-Term U.S. Government)
of the Fund's aggregate average daily net assets attributable to the Class A
shares, 1.00% of the Fund's aggregate average daily net assets attributable to
the Class B shares and 1.00% of the Fund's aggregate average daily net assets
attributable to the Class C shares, and for World Income may not exceed an
annual rate of .90% of the Fund's aggregate average daily net assets, for
distribution expenses. The Directors of Short-Term U.S. Government currently
limit payments with respect to Class A shares under the Plan to .30% of the
Fund's aggregate average daily net assets attributable to Class A shares. The
Plans provide that a portion of the distribution services fee in an amount not
to exceed .25% of the aggregate average daily net assets of each Fund
attributable to each class of shares constitutes a service fee used for personal
service and/or the maintenance of shareholder accounts.
The Plans provide that AFD will use the distribution services fee received from
a Fund in its entirety for payments (i) to compensate broker-dealers or other
persons for providing distribution assistance, (ii) to otherwise promote the
sale of shares of the Fund, and (iii) to compensate broker-dealers, depository
institutions and other financial intermediaries for providing administrative,
accounting and other services with respect to the Fund's shareholders. In this
regard, some payments under the Plans are used to compensate financial
intermediaries with trail or maintenance commissions in an amount equal to, with
respect to each Fund other than World Income, .25%, annualized, with respect to
Class A shares and Class B shares, and 1.00%, annualized, with respect to Class
C shares, and, with respect to World Income, .90%, annualized, of the assets
maintained in a Fund by their customers. Distribution services fees received
from World Income and the other Funds, except Short-Term U.S. Government, with
respect to Class A shares will not be used to pay any interest expenses,
carrying charges or other financing costs or allocation of overhead of AFD.
Distribution services fees received from the Funds, with respect to Class B and
Class C shares, may be used for these purposes. The Plans also provide that
Alliance may use its own resources to finance the distribution of each Fund's
shares.
The Funds are not obligated under the Plans to pay any distribution services fee
in excess of the amounts set forth above. Except as noted below for Short-Term
U.S. Government, with respect to Class A shares of each Fund, distribution
expenses accrued by AFD in one fiscal year may not be paid from distribution
services fees received from the Fund in subsequent fiscal years. AFD's
compensation with respect to Class B and Class C shares under the Plans of the
other Funds is directly tied to the expenses incurred by AFD. Actual
distribution expenses for Class B and Class C shares for any given year,
however, will probably exceed the distribution services fees payable under the
applicable Plan with respect to the class involved and, in the case of Class B
shares, payments received from CDSCs. The excess will be carried forward by AFD
and reimbursed from distribution services fees payable under the Plan with
respect to the class involved and, in the case of Class B shares, payments
subsequently received through CDSCs, so long as the Plan is in effect. Since
AFD's compensation under the Plan of Short-Term U.S. Government is not directly
tied to its expenses incurred, the amount of compensation received by it during
any year may be more or less than its actual expenses.
Unreimbursed distribution expenses incurred as of the end of each Fund's most
recently completed fiscal year, and carried over for reimbursement in future
years in respect of the Class B and Class C shares for all Funds (except Short-
Term U.S. Government), were, as of that time, as follows:
<TABLE>
<CAPTION>
Amount of Unreimbursed Distribution Expenses
(as % of Net Assets of Class)
--------------------------------------------
Class B Class C
-------------------- -------------------
<S> <C> <C> <C> <C>
Short-Term U.S.
Government............... $ 165,033 (2.63%) $ 354,366 (4.97%)
U.S. Government............ $13,948,924 (1.84%) $1,761,762 (.76%)
Mortgage Strategy.......... $ 1,042,848 (.76%) $1,875,176 (1.32%)
Mortgage Securities
Income................... $16,372,116 (1.76%) $1,459,018 (2.50%)
Short-Term Multi-Market.... $12,115,694 (1.20%) $ 798,673 (9.82%)
Multi-Market Strategy...... $ 7,234,301 (3.10%) $ 286,168 (2.29%)
North American
Government Income........ $29,558,594 (1.80%) $2,355,558 (.64%)
Global Dollar Government $ 1,072,560 (2.28%) $ 88,662 (.85%)
Corporate Bond $ 4,172,860 (2.27%) $ 391,688 (.77%)
</TABLE>
The Plans are in compliance with rules of the National Association of Securities
Dealers, Inc. which effectively limit the annual asset-based sales charges and
service fees that a mutual fund may pay on a class of shares to .75% and .25%,
respectively, of the average annual net assets attributable to that class. The
rules also limit the aggregate of all front-end, deferred and asset-based sales
charges imposed with respect to a class of shares by a mutual fund that also
charges a service fee to 6.25% of cumulative gross sales of shares of that
class, plus interest at the prime rate plus 1% per annum.
The Glass-Steagall Act and other applicable laws may limit the ability of a bank
or other depository institution to become an underwriter or distributor of
securities. However, in the opinion of the Funds' management, based on the
advice of counsel, these laws do not prohibit such depository institutions from
providing services for investment companies such as the administrative,
accounting and other services referred to in the Agreements. In the event that a
change in these laws prevented a bank from providing such services, it is
expected that other service arrangements would be made and that shareholders
would not be adversely affected. The State of Texas requires that shares of a
Fund may be sold in that state only by dealers or other financial institutions
that are registered there as broker-dealers.
40
<PAGE>
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS
- --------------------------------------------------------------------------------
AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends on shares of a Fund will be declared on each Fund business day from
the Fund's net investment income. Dividends on shares for Saturdays, Sundays and
holidays will be declared on the previous business day. Each Fund pays dividends
on its shares after the close of business on the last business day each month.
At your election (which you may change at least 30 days prior to the record date
for a particular dividend or distribution), dividends and distributions are paid
in cash or reinvested in additional shares without charge.
If you receive an income dividend or capital gains distribution in cash you may,
within 30 days following the date of its payment, reinvest the dividend or
distribution in additional shares of that Fund without charge by returning to
Alliance, with appropriate instructions, the check representing such dividend or
distribution. Thereafter, unless you otherwise specify, you will be deemed to
have elected to reinvest all subsequent dividends and distributions in shares of
that Fund.
Cash dividends can be paid by check or, if the shareholder so elects,
electronically via the ACH network. There is no sales or other charge in
connection with the reinvestment of dividends and capital gains distributions.
Dividends paid by a Fund, if any, with respect to Class A, Class B and Class C
shares will be calculated in the same manner at the same time on the same day
and will be in the same amount, except that the higher distribution services
fees applicable to Class B and Class C shares, and any incremental transfer
agency costs relating to Class B shares, will be borne exclusively by the class
to which they relate.
While it is the intention of each Fund to distribute to its shareholders
substantially all of each fiscal year's net income and net realized capital
gains, if any, the amount and time of any such dividend or distribution must
necessarily depend upon the realization by such Fund of income and capital gains
from investments. There is no fixed dividend rate, and there can be no assurance
that a Fund will pay any dividends or realize any capital gains.
If you buy shares just before a Fund deducts a distribution from its net asset
value, you will pay the full price for the shares and then receive a portion of
the price back as a taxable distribution.
FOREIGN INCOME TAXES
Investment income received by a Fund from sources within foreign countries may
be subject to foreign income taxes withheld at the source. To the extent that
any Fund is liable for foreign income taxes withheld at the source, each Fund
intends, if possible, to operate so as to meet the requirements of the Code to
"pass through" to the Fund's shareholders credits for foreign income taxes paid,
but there can be no assurance that any Fund will be able to do so.
U.S. FEDERAL INCOME TAXES
Each Fund intends to qualify to be taxed as a "regulated investment company"
under the Code. To the extent that a Fund distributes its taxable income and net
capital gain to its shareholders, qualification as a regulated investment
company relieves that Fund of federal income and excise taxes on that part of
its taxable income including net capital gains which it pays out to its
shareholders. Dividends out of net ordinary income and distributions of net
short-term capital gains are taxable to the recipient shareholders as ordinary
income. In the case of corporate shareholders, such dividends from certain Funds
may be eligible for the dividends-received deduction, except that the amount
eligible for the deduction is limited to the amount of qualifying dividends
received by the Fund. A corporation's dividends-received deduction will be
disallowed unless the corporation holds shares in the Fund at least 46 days.
Furthermore, the dividends-received deduction will be disallowed to the extent a
corporation's investment in shares of a Fund is financed with indebtedness.
The excess of net long-term capital gains over the net short-term capital losses
realized and distributed by each Fund to its shareholders as capital gains
distributions is taxable to the shareholders as long-term capital gains,
irrespective of the length of time a shareholder may have held his or her stock.
Long-term capital gains distributions are not eligible for the dividends-
received deduction referred to above.
Under the current federal tax law the amount of an income dividend or capital
gains distribution declared by a Fund during October, November or December of a
year to shareholders of record as of a specified date in such a month that is
paid during January of the following year is includable in the prior year's
taxable income of shareholders that are calendar year taxpayers.
Any dividend or distribution received by a shareholder on shares of a Fund will
have the effect of reducing the net asset value of such shares by the amount of
such dividend or distribution. Furthermore, a dividend or distribution made
shortly after the purchase of such shares by a shareholder, although in effect a
return of capital to that particular shareholder, would be taxable to him or her
as described above. If a shareholder held shares six months or less and during
that period received a distribution taxable to such shareholder as long-term
capital gain, any loss realized on the sale of such shares during such six-month
period would be a long-term capital loss to the extent of such distribution.
A dividend or capital gains distribution with respect to shares of a Fund held
by a tax-deferred or qualified plan, such as an
41
<PAGE>
individual retirement account, 403(b)(7) retirement plan or corporate pension or
profit-sharing plan, will not be taxable to the plan. Distributions from such
plans will be taxable to individual participants under applicable tax rules
without regard to the character of the income earned by the qualified plan.
Distributions by a Fund may be subject to state and local taxes. U.S.
Government, Mortgage Strategy, Mortgage Securities Income, World Income, Short-
Term Multi-Market, Multi-Market Strategy, North American Government Income and
Corporate Bond are qualified to do business in the Commonwealth of Pennsylvania
and, therefore, are subject to the Pennsylvania foreign franchise and corporate
net income tax in respect of their business activities in Pennsylvania.
Accordingly, shares of such Funds are exempt from Pennsylvania personal property
taxes. These Funds anticipate continuing such business activities but reserve
the right to suspend them at any time, resulting in the termination of the
exemptions.
A Fund will be required to withhold 31% of any payments made to a shareholder if
the shareholder has not provided a certified taxpayer identification number to
the Fund, or the Secretary of the Treasury notifies a Fund that a shareholder
has not reported all interest and dividend income required to be shown on the
shareholder's Federal income tax return.
Shareholders will be advised annually as to the federal tax status of dividends
and capital gains distributions made by a Fund for the preceding year.
Shareholders are urged to consult their tax advisers regarding their own tax
situation.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., and subject to seeking best price and execution, a
Fund may consider sales of its shares as a factor in the selection of dealers to
enter into portfolio transactions with the Fund.
ORGANIZATION
Each of the following Funds is a Maryland corporation organized in the year
indicated: U.S. Government Portfolio and Corporate Bond Portfolio (each a series
of Alliance Bond Fund, Inc.) (1973), Alliance Mortgage Strategy Trust, Inc.
(1992), Alliance Mortgage Securities Income Fund, Inc. (1983), Alliance World
Income Trust, Inc. (1990), Alliance Short-Term Multi-Market Trust, Inc. (1989),
Alliance Multi-Market Strategy Trust, Inc. (1991), Alliance North American
Government Income Trust, Inc. (1992) and Alliance Global Dollar Government Fund,
Inc. (1993). Prior to January 4, 1993, Corporate Bond Portfolio was known as
Monthly Income Portfolio. Alliance Short-Term U.S. Government Fund is a series
of The Alliance Portfolios, a Massachusetts business trust that was organized in
1987. Prior to August 2, 1993, The Alliance Portfolios was known as The
Equitable Funds and Short-Term U.S. Government was known as The Equitable Short-
Term U.S. Government Fund.
It is anticipated that annual shareholder meetings will not be held; shareholder
meetings will be held only when required by federal, or in the case of the Funds
organized as Maryland corporations, state law. Shareholders have available
certain procedures for the removal of Directors.
A shareholder in a Fund will be entitled to his or her pro rata share of all
dividends and distributions arising from the Fund's assets and, upon redeeming
shares, will receive the then current net asset value of the Fund represented by
the redeemed shares less any applicable CDSC. The Funds are empowered to
establish, without shareholder approval, additional portfolios, which may have
different investment objectives, and additional classes of shares. If an
additional portfolio or class were established in a Fund, each share of the
portfolio or class would normally be entitled to one vote for all purposes.
Generally, shares of each portfolio and class would vote together as a single
class on matters, such as the election of Directors, that affect each portfolio
and class in substantially the same manner. Class A, Class B and Class C shares
have identical voting, dividend, liquidation and other rights, except that each
class bears its own distribution and transfer agency expenses. Each class of
shares votes separately with respect to a Fund's Rule 12b-1 distribution plan
and other matters for which separate class voting is appropriate under
applicable law. Shares are freely transferable, are entitled to dividends as
determined by the Directors and, in liquidation of a Fund, are entitled to
receive the net assets of the Fund. Since this Prospectus sets forth information
about all the Funds, it is theoretically possible that a Fund might be liable
for any materially inaccurate or incomplete disclosure in this Prospectus
concerning another Fund. Based on the advice of counsel, however, the Funds
believe that the potential liability of each Fund with respect to the disclosure
in this Prospectus extends only to the disclosure relating to that Fund. Certain
additional matters relating to a Fund's organization are discussed in its
Statement of Additional Information.
PENDING LEGAL PROCEEDINGS INVOLVING NORTH AMERICAN GOVERNMENT INCOME
Between January 6 and February 15, 1995, nine complaints were filed by groups
of shareholders of North American Government Income alleging, among other
things, violations of various federal securities laws as well as fraud,
negligence, negligent misrepresentations and omissions, breach of fiduciary duty
and breach of contract in connection with the Fund's investments in Mexican and
Argentine securities. Four of the actions were filed in the United States
District Court for the Southern District of California, and five actions were
filed in the United States District Court for the Southern District of New York.
Each of the actions is brought against the Fund, Alliance and ACMC. Other
defendants named in certain of the complaints are AFS and certain officers of
the fund and ACMC.
42
<PAGE>
Each of the actions seeks to have a plaintiff class certified consisting of all
shareholders of the Fund who purchased or owned shares in the Fund at varying
times between February 1992 and December 1994. The actions seek an unspecified
amount of damages, costs and attorneys' fees. The Fund believes that the
allegations in each of the actions are without merit and intends to vigorously
defend against the claims in the actions.
REGISTRAR, TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
AFS, an indirect wholly-owned subsidiary of Alliance, located at 500 Plaza
Drive, Secaucus, New Jersey 07094, acts as each Fund's registrar, transfer agent
and dividend-disbursing agent for a fee based upon the number of shareholder
accounts maintained for the Fund. The transfer agency fee with respect to Class
B shares will be higher than the transfer agency fee with respect to Class A
shares or Class C shares.
PRINCIPAL UNDERWRITER
AFD, an indirect wholly-owned subsidiary of Alliance, located at 1345 Avenue of
the Americas, New York, New York 10105, is the principal underwriter of shares
of the Funds.
PERFORMANCE INFORMATION
From time to time, the Funds advertise their "yield" and "total return," which
are computed separately for Class A, Class B and Class C shares. A Fund's yield
for any 30-day (or one-month) period is computed by dividing the net investment
income per share earned during such period by the maximum public offering price
per share on the last day of the period, and then annualizing such 30-day (or
one-month) yield in accordance with a formula prescribed by the Commission which
provides for compounding on a semi-annual basis. A Fund may also state in sales
literature an "actual distribution rate" for each class which is computed in the
same manner as yield except that actual income dividends declared per share
during the period in question are substituted for net investment income per
share. The actual distribution rate is computed separately for Class A, Class B
and Class C shares. Advertisements of a Fund's total return disclose its average
annual compounded total return for the periods prescribed by the Commission. A
Fund's total return for each such period is computed by finding, through the use
of a formula prescribed by the Commission, the average annual compounded rate of
return over the period that would equate an assumed initial amount invested to
the value of the investment at the end of the period. For purposes of computing
total return, income dividends and capital gains distributions paid on shares of
a Fund are assumed to have been reinvested when paid and the maximum sales
charges applicable to purchases and redemptions of a Fund's shares are assumed
to have been paid. A Fund will include performance data for each class of its
shares in any advertisement or sales literature using performance data of that
Fund. These advertisements may quote performance rankings or ratings of a Fund
by financial publications or independent organizations such as Lipper Analytical
Services, Inc. and Morningstar, Inc. or compare a Fund's performance to various
indices.
ADDITIONAL INFORMATION
This Prospectus and the Statements of Additional Information, which have been
incorporated by reference herein, do not contain all the information set forth
in the Registration Statements filed by the Funds with the Commission under the
Securities Act. Copies of the Registration Statements may be obtained at a
reasonable charge from the Commission or may be examined, without charge, at the
offices of the Commission in Washington, D.C.
43
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A:
- --------------------------------------------------------------------------------
BOND RATINGS
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than the Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa--Bonds which are rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Absence of Rating--When no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that are
not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note--Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
STANDARD & POOR'S CORPORATION
AAA--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C--Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation
A-1
<PAGE>
and CCC the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
CI--The rating CI is reserved for income bonds on which no interest is being
paid.
D--Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-)--The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR--Not rated.
DUFF & PHELPS CREDIT RATING CO.
AAA--Highest claims paying ability. Risk factors are negligible.
AA+, AA, AA--Very high claims paying ability. Protection factors are strong.
Risk is modest, but may vary slightly over time due to economic and/or
underwriting conditions.
A+, A, A--High claims paying ability. Protection factors are average and there
is an expectation of variability in risk over time due to economic and/or
underwriting conditions.
BBB+, BBB, BBB--Adequate claims paying ability. Protection factors are
adequate. There is considerable variability in risk over time due to economic
and/or underwriting conditions.
BB+, BB, BB--Uncertain claims paying ability and less than investment-grade
quality. However, the company is deemed likely to meet these obligations when
due. Protection factors will vary widely with changes in economic and/or
underwriting conditions.
B+, B, B--Possessing risk that policy holder and contract-holder obligations
will not be paid when due. Protection factors will vary widely with changes in
economic and/or underwriting conditions or company fortunes.
CCC--There is substantial risk that policy holder and contract holder
obligations will not be paid when due. Company has been or is likely to be
placed under state insurance department supervision.
DD--Company is under an order of liquidation.
FITCH INVESTORS SERVICE, INC.
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F 1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and therefore impair
timely payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default.
The ability to meet obligations requires an advantageous business and economic
environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C-Bonds are in imminent default in payment of interest or principal.
DDD, DD, D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) Minus (-)--Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the AAA, DDD, DD or D categories.
NR--Indicates that Fitch does not rate the specific issue.
A-2
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B:
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
ABOUT CANADA, MEXICO
- --------------------------------------------------------------------------------
AND ARGENTINA
- --------------------------------------------------------------------------------
General Information About Canada
Canada consists of a federation of ten Provinces and two federal territories
(which generally fall under federal authority) with a constitutional division of
powers between the federal and Provincial governments. The Parliament of Canada
has jurisdiction over all areas not assigned exclusively to the Provincial
legislatures, and has jurisdiction over such matters as the federal public debt
and property, the regulation of trade and commerce, currency and coinage, banks
and banking, national defense, the postal services, navigation and shipping and
unemployment insurance.
The Canadian economy is based on the free enterprise system with business
organizations ranging from small owner-operated businesses to large
multinational corporations. Manufacturing and resource industries are large
contributors to the country's economic output, but as in many other highly
developed countries, there has been a gradual shift from a largely goods-
producing economy to a predominantly service-based one. Agriculture and other
primary production play a small but key role in the economy. Canada is also an
exporter of energy to the United States in the form of natural gas (of which
Canada has substantial reserves) and hydroelectric power, and has significant
mineral resources. The Canadian economy had experienced little or no growth over
the past several years, and the rate of growth of Canada's gross domestic
product (on an inflation adjusted basis) has declined.
Canadian Dollars are fully exchangeable into U.S. Dollars without foreign
exchange controls or other legal restriction. Since the major developed country
currencies were permitted to float freely against one another, the range of
fluctuation in the U.S. Dollar/Canadian Dollar exchange rate has been narrower
than the range of fluctuation between the U.S. Dollar and most other major
currencies. Recently, however, Canada has experienced a weakening of its
currency. Through January 31, 1995, the Canadian Dollar decreased in value
compared to the U.S. Dollar by approximately 21% from October 1991 and
approximately 5% from September 1994. The range of fluctuation that occurred in
the past is not necessarily indicative of the range of fluctuation that will
occur in the future. Future rates of exchange cannot be predicted.
General Information About The United Mexican States
The United Mexican States ("Mexico") is a nation formed by 31 states and a
Federal District (Mexico City). The Political Constitution of Mexico, which took
effect on May 1, 1917, established Mexico as a Federal Republic and provides for
the separation of executive, legislative and judicial branches. The President
and the members of the General Congress are elected by popular vote.
While in recent years the Mexican economy has experienced improvement in a
number of areas, including five consecutive years of growth in gross domestic
product and a substantial reduction in the rate of inflation and in public
sector financial deficit, beginning in 1994, Mexico has experienced an economic
crisis that led to the devaluation of the Peso in December 1994. Much of the
past improvement in the Mexican economy has been attributable to a series of
economic policy initiatives initiated by the Mexican government over the past
decade, which seek to modernize and reform the Mexican economy, control
inflation, reduce the financial deficit, increase public revenues through the
reform of the tax system, establish a competitive and stable currency exchange
rate, liberalize trade restrictions and increase investment and productivity,
while reducing the government's role in the economy. In this regard, the Mexican
government has been proceeding with a program for privatizing certain state
owned enterprises, developing and modernizing the securities markets, increasing
investment in the private sector and permitting increased levels of foreign
investment. The recent adoption by Canada, the United States and Mexico of the
North American Free Trade Agreement could also contribute to the growth of the
Mexican economy.
Relatively high rates of interest, inflation, unemployment and, most
recently, the economic crisis that led to the devaluation of the Peso beginning
in December 1994 continue to affect the Mexican economy adversely. Mexico is
currently the second largest debtor nation (among developing countries) to
commercial banks and foreign governments. The successful implementation of the
economic policy initiatives and the growth of the Mexican economy involve
significant structural changes to the Mexican economy and will necessitate
continued economic and fiscal discipline. In addition, as a condition to
receiving assistance from the United States, other countries and certain
international agencies to stabilize the Mexican economy, the Mexican government
has agreed to adhere to a program of strict economic reform. An important aspect
of Mexico's economic policy is the ability of the government to be successful in
its continuing efforts to control its financial deficit, finance its current
account deficit, further reduce inflation and stabilize the Mexican Peso.
Mexico's economy may also be influenced by international economic conditions,
particularly those in the United States, and by world prices for oil and other
commodities. There is no assurance that Mexico's economic policy initiatives
will be successful or that succeeding administrations will continue these
initiatives.
In August 1976, the Mexican government established a policy of allowing the
Mexican Peso to float against the U.S. Dollar and other currencies. Under this
policy, the value of the Mexican Peso consistently declined against the U.S.
Dollar. Under economic policy initiatives implemented since
B-1
<PAGE>
December 1987, the Mexican government introduced a series of schedules allowing
for the gradual devaluation of the Mexican Peso against the U.S. Dollar. These
gradual devaluations continued until December 1994. On December 20, 1994, the
Mexican government announced a new policy that would allow a more substantial
yet still controlled devaluation of the Mexican Peso. On December 22, 1994 the
Mexican government announced that it would not continue with the policy
announced two days earlier and would instead permit the Peso to float against
other currencies, resulting in a continued decline against the U.S. Dollar.
In 1982, Mexico imposed strict foreign exchange controls which shortly
thereafter were relaxed and were eliminated in 1991. There is no assurance that
future regulatory actions in Mexico would not affect the Fund's ability to
obtain U.S. Dollars in exchange for Mexican Pesos.
GENERAL INFORMATION ABOUT THE REPUBLIC OF ARGENTINA
The Republic of Argentina ("Argentina") consists of 23 provinces and the federal
capital of Buenos Aires. Its federal constitution provides for an executive
branch headed by a President, a legislative branch and a judicial branch. Each
province has its own constitution, and elects its own governor, legislators and
judges, without the intervention of the federal government.
The military has intervened in the political process on several occasions since
the 1930's and has ruled the country for 22 of the past 62 years. The most
recent military government ruled the country from 1976 to 1983. Four
unsuccessful military uprisings have occurred since 1983, the most recent in
December 1990.
Shortly after taking office in 1989, the country's current President adopted
market-oriented and reformist policies, including a large privatization program,
a reduction in the size of the public sector and an opening of the economy to
international competition.
In the decade prior to the current announcement of a new economic plan in March
1991, the Argentine economy was characterized by low and erratic growth,
declining investment rates and rapidly worsening inflation. Despite its
strengths, which include a well-balanced natural resource base and a high
literacy rate, the Argentine economy failed to respond to a series of economic
plans in the 1980's. The Economy Minister's plan represented a pronounced
departure from its predecessors in calling for raised revenues, reduced
expenditures and a reduced public deficit. The extensive privatization program
commenced in 1989 was accelerated, the domestic economy deregulated and opened
up to foreign trade and the frame-work for foreign investment reformed.
Significant progress was also made in 1992 in rescheduling Argentina's debt with
both external and domestic creditors, which improved fiscal cash flows in the
medium terms and allowed a return to voluntary credit markets. Further reforms
are currently being implemented in order to sustain and continue the progress to
date. There is no assurance that Argentina's economic policy initiatives will be
successful or that succeeding administrations will continue these initiatives.
The Argentine Peso has been the Argentine currency since January 1, 1992. The
rate of exchange from the Argentine Peso to the U.S. Dollar has been
approximately one to one. However, the historic range is not necessarily
indicative of fluctuations that may occur in the exchange rate over time and
there can be no assurance that future rates of exchange can be accurately
predicted. The Argentine foreign exchange market was highly controlled until
December 1989, when a free exchange rate was established for all foreign
currency transactions. Argentina has eliminated restrictions on foreign direct
investment and capital repatriation. On September 8, 1993, legislation was
adopted abolishing previous requirements of a three-year waiting period for
capital repatriation. Under the new legislation, foreign investors will be
permitted to remit profits at any time.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
THIS PROSPECTUS IS INTENDED TO CONSTITUTE AN OFFER BY EACH FUND ONLY OF THE
SECURITIES OF WHICH IT IS THE ISSUER AND IS NOT INTENDED TO CONSTITUTE AN OFFER
BY ANY FUND OF THE SECURITIES OF ANY OTHER FUND WHOSE SECURITIES ARE ALSO
OFFERED BY THIS PROSPECTUS. NO FUND INTENDS TO MAKE ANY REPRESENTATION AS TO THE
ACCURACY OR COMPLETENESS OF THE DISCLOSURE IN THIS PROSPECTUS RELATING TO ANY
OTHER FUND. SEE "GENERAL INFORMATION--ORGANIZATION."
B-2
<PAGE>
- --------------------------------------------------------------------------------
ALLIANCE SUBSCRIPTION APPLICATION
- --------------------------------------------------------------------------------
Alliance Bond Funds
Short-Term U.S. Government Fund Short-Term Multi-Market Trust
U.S. Government Portfolio Multi-Market Strategy Trust
Mortgage Strategy Trust North American Government Income Trust
Mortgage Securities Income Fund Global Dollar Government Fund
World Income Trust Corporate Bond Portfolio
INFORMATION AND INSTRUCTIONS
To Open Your New Alliance Account
Please complete the application and mail it to:
Alliance Fund Services, Inc., P.O. Box 1520, Secaucus, New Jersey 07096-1520
Signatures - Please Be Sure To Sign the Application (Section 7)
If shares are registered in the name of:
. an individual, the individual should sign.
. joint tenants, both should sign.
. a custodian for a minor, the custodian should sign.
. a corporation or other organization, an authorized officer should sign (please
indicate corporate office or title).
. a trustee or other fiduciary, the fiduciary or fiduciaries should sign (please
indicate capacity).
Registration
To ensure proper tax reporting to the IRS:
. Individuals, Joint Tenants and Gift/Transfer to a Minor:
- Indicate your name exactly as it appears on your social security card.
. Trust/Other:
- Indicate the name of the entity exactly as it appeared on the notice you
received from the IRS when your Employer Identification number was assigned.
Please Note:
. Certain legal documents will be required from corporations or other
organizations, executors and trustees, or if a redemption is requested by
anyone other than the shareholder of record. If you have any questions
concerning a redemption, contact the Fund at the number below.
. In the case of redemptions or repurchases of shares recently purchased by
check, redemption proceeds will not be made available until the Fund is
reasonably assured that the check has cleared, normally up to 15 calendar days
following the purchase date.
If We Can Assist You In Any Way, Please Do Not Hesitate To Call Us At:
1-(800)221-5672.
<PAGE>
- -------------------------------------------------------------------------------
SUBSCRIPTION APPLICATION
- -------------------------------------------------------------------------------
Alliance Bond funds
(see instructions at the front of the application)
- -------------------------------------------------------------------------------
1. YOUR ACCOUNT REGISTRATION (Please Print)
- -------------------------------------------------------------------------------
[_] INDIVIDUAL OR JOINT ACCOUNT
------------------------------- --------------- ---------------------
Owner's Name (First Name) (MI) (Last Name)
- -
-------------------------------
Social Security Number (Required to open account)
------------------------------- --------------- ---------------------
Joint Owner's Name* (First Name) (MI) (Last Name)
*Joint Tenants with right of survivorship unless otherwise indicated
[_] GIFT/TRANSFER TO A MINOR
------------------------------- --------------- ---------------------
Custodian -- One Name Only (First Name) (MI) (Last Name)
------------------------------- --------------- ---------------------
Minor's (First Name) (MI) (Last Name)
- -
-------------------------------
Minor's Social Security Number (Required to open account)
Under the State of (Minor's Residence) Uniform Gifts/Transfer
---------
to Minor's Act
[_] TRUST ACCOUNT
------------------------------------------------------------------------
Name of Trustee
------------------------------------------------------------------------
Name of Trust
------------------------------------------------------------------------
Name of Trust (cont'd)
------------ ---------------------------------------------------------
Trust Dated Tax ID or Social Security Number (Required to open account)
[_] OTHER
------------------------------------------------------------------------
Name of Corporation, Partnership or other Entity
----------------------
Tax ID Number
- -------------------------------------------------------------------------------
2. ADDRESS
- -------------------------------------------------------------------------------
-------------------------------------------------------------------------
Street
-------------------------------------------------------------------------
City State Zip Code
-------------------------------------------------------------------------
If Non-U.S., Specify Country
- - - -
--------------------------- -------------------------------------
Daytime Phone Evening Phone
I am a: [_] U.S. Citizen [_] Non-Resident Alien
[_] Resident Alien [_] Other
----------------------------------
++++ ++++
+ +
+ +
For Alliance Use Only
+ +
+ +
++++ ++++
<PAGE>
================================================================================
3. INITIAL INVESTMENT
================================================================================
Minimum: $250; Maximum: Class B only - $250,000; Class C only - $5,000,000. Make
all checks payable to The Alliance Bond Fund in which you are investing.
I hereby subscribe for shares of the following Alliance Bond Fund(s):
<TABLE>
<CAPTION>
Class A Class B Class C
(Initial Sales Dollar (Contingent Deferred Dollar (Asset-based Sales Dollar
Charge) Amount Sales Charge) Amount Charge) Amount
-------------- ------ -------------------- ------ ------------------ ------
<S> <C> <C> <C> <C> <C> <C>
[_] Short-Term U.S. Government [_] (37) ______ [_] (51) ______ [_] (337) ______
[_] U.S. Government [_] (46) ______ [_] (76) ______ [_] (346) ______
[_] Mortgage Strategy [_] (88) ______ [_] (89) ______ [_] (388) ______
[_] Mortgage Securities Income [_] (52) ______ [_] (63) ______ [_] (352) ______
[_] World Income+ [_] (54) ______ not offered ______ not offered ______
[_] Short-Term Multi-Market [_] (70) ______ [_] (68) ______ [_] (370) ______
[_] Multi-Market Strategy [_] (22) ______ [_] (23) ______ [_] (322) ______
[_] North American Government [_] (55) ______ [_] (56) ______ [_] (355) ______
[_] Global Dollar Government [_] (166) ______ [_] (266) ______ [_] (366) ______
[_] Corporate Bond+ [_] (95) ______ [_] (295) ______ [_] (395) ______
</TABLE>
to be purchased with the enclosed check or draft for $
-------------------
+ No checkwriting available on these funds.
+-----------------------------------+
+ DEALER USE ONLY +
+ Wire Confirm No.: +
+-----------------------------------+
================================================================================
4. REDUCED CHARGES (Class A Only)
================================================================================
If you, your spouse or minor children own shares in other Alliance funds, you
may be eligible for a reduced sales charge. Please list below any existing
accounts to be considered and complete the Right of Accumulation section or the
Statement of Intent section.
- ------------------- --------------------- ----------------- -----------------
Fund Account Number Fund Account Number
A. Right of Accumulation
[_] Please link the accounts listed above for Right of Accumulation privileges,
so that this and future purchases will receive any discount for which they
are eligible.
B. Statement of Intent
[_] I want to reduce my sales charge by agreeing to invest the following amount
over a 13-month period:
[_] $100,000 [_] $250,000 [_] $500,000 [_] $1,000,000
If the full amount indicated is not purchased within 13 months, I understand an
additional sales charge must be paid from my account.
- ------------------- --------------------- ----------------- -----------------
Name on Account Account Number Name on Account Account Number
================================================================================
5. DISTRIBUTION OPTIONS
================================================================================
If no box is checked, all distributions will be reinvested in additional shares
of the Fund
<TABLE>
<S> <C> <C> <C>
Income Dividends: (elect one) [_] Reinvest dividends [_] Pay dividends in cash [_] Use Dividend Direction Plan
Capital Gains Distribution: (elect one) [_] Reinvest capital gains [_] Pay capital gains in cash [_] Use Dividend Direction Plan
</TABLE>
If you elect to receive your income dividends or capital gains distributions in
cash, please enclose a preprinted voided check from the bank account you wish to
have your dividends deposited into.**
If you wish to utilize the Dividend Direction Plan, please designate the
Alliance account you wish to have your dividends reinvested in:
- ---------------------------------- --------------------------------------------
Fund Name Existing Account No.
Special Distribution Instructions: [_] Please pay my distributions via check
and send to the address indicated in
Section 2.
[_] Please mail my distributions to the
person and/or address designated below:
- ------------------------------------ ------------------------------------------
Name Address
- ------------------------------------ ----------------------- -----------------
City State Zip
================================================================================
6. SHAREHOLDER OPTIONS
================================================================================
A. AUTOMATIC INVESTMENT PROGRAM (AIP)**
I hereby authorize Alliance Fund Services, Inc. to draw on my bank account,
on or about the ____ day of each month for a monthly investment in my Fund
account in the amount of $________ (minimum $25 per month). Please attach a
preprinted voided check from the bank account you wish to use.
NOTE: If your bank is not a member of the NACHA, your Alliance account will
be credited on or about the 20th of each month.
The Fund requires signatures of bank account owners exactly as they appear on
bank records.
- ---------------------------------- ------- ---------------------- -----------
Individual Account Date Joint Account Date
** Your bank must be a member of the National Automated Clearing House
Association (NACHA).
<PAGE>
B. TELEPHONE TRANSACTIONS
You can call our toll-free number 1-800-221-5672 and instruct Alliance Fund
Services, Inc. in a recorded conversation to purchase, redeem or exchange shares
for your account. Purchase and redemption requests will be processed via
electronic funds transfer (EFT) to and from your bank account.
Instructions: . Review the information in the Prospectus about telephone
transaction services.
. Check the box next to the telephone transaction
service(s) you desire.
. If you select the telephone purchase or redemption
privilege, you must write "VOID" across the face of a
check from the bank account you wish to use and attach
it to this application.
Purchases and Redemptions via EFT**
[_] I hereby authorize Alliance Fund Services, Inc. to effect the purchase
and/or redemption of Fund shares for my account according to my
telephone instructions or telephone instructions from my Broker/Agent,
and to withdraw money or credit money for such shares via EFT from the
bank account I have selected.
The fund requires signatures of bank account owners exactly as they appear on
bank records.
------------------------- -------- --------------------- --------
Individual Account Owner Date Joint Account Owner Date
Telephone Exchanges and Redemptions by Check
Unless I have checked one or both boxes below, these privileges will
automatically apply, and by signing this application, I hereby authorize
Alliance Fund Services, Inc. to act on my telephone instructions, or on
telephone instructions from any person representing himself to be an
authorized employee of an investment dealer or agent requesting a redemption
or exchange on my behalf. (NOTE: Telephone exchanges may only be processed
between accounts that have identical registrations.) Telephone redemption
checks will only be mailed to the name and address of record; and the address
must have no change within the last 30 days. The maximum telephone redemption
amount is $25,000. This service can be enacted once every 30 days.
[_] I do not elect the telephone exchange service.
---
[_] I do not elect the telephone redemption by check service.
---
C. SYSTEMATIC WITHDRAWAL PLAN (SWP)**
In order to establish a SWP, an investor must own or purchase shares of the
Fund having a current net asset value of at least:
. $10,000 for monthly payments;
. $5,000 for bi-monthly payments;
. $4,000 for quarterly or less frequent payments
[_] I authorize this service to begin in ___________, 19__, for the amount of
Month
$__________ ($50.00 minimum)
Frequency: (Please select one) [_] Monthly [_] Bi-Monthly [_] Quarterly
[_] Annually [_] In the months circled: J F M A M J J A S O N D
Please send payments to: (please select one)
[_] My checking account. Select the date of the month on or about which you
wish the EFT payments to be made: ___________. Please enclose a
preprinted voided check to ensure accuracy.
[_] My address of record designated in Section 2.
[_] The payee and address specified below:
-------------------------------- -------------------------------------------
Name of Payee Address
-------------------------------- -------------------------- ---------------
City State Zip
D. AUTO EXCHANGE
[_] I authorize Alliance Fund Services, Inc. to initiate a monthly exchange
for $________($25.00 minimum) on the ______ day of the month, into the
Alliance Fund noted below:
Fund Name:_____________________________________
[_] Existing account number:___________________ [_] New account
Shares exchanged will be redeemed at net asset value computed on the date
of the month selected. (If the date selected is not a fund business day
the transaction will be processed on the prior fund business day.)
Certificates must remain unissued.
================================================================================
7. SHAREHOLDER AUTHORIZATION This section MUST be completed
================================================================================
I certify under penalty of perjury that the number shown in Section 1 of this
form is my correct tax identification number or social security number and that
I have not been notified that this account is subject to backup withholding.
By selecting any of the above telephone privileges, I agree that neither the
Fund nor its Investment Adviser, Principal Underwriter, Transfer Agent or other
Fund Agent will be liable for any loss, injury, damage or expense as a result of
acting upon telephone instructions purporting to be on my behalf, that the Fund
reasonably believes to be genuine, and that neither the Fund nor any such party
will be responsible for the authenticity of such telephone instructions. I
understand that any or all of these privileges may be discontinued by me or the
Fund at any time. I understand and agree that the Fund reserves the right to
refuse any telephone instructions and that my investment dealer or agent
reserves the right to refuse to issue any telephone instructions I may request.
For non-residents only: Under penalties of perjury, I certify that to the best
of my knowledge and belief, I qualify as a foreign person as indicated in
Section 2.
I am of legal age and capacity and have received and read the Prospectus and
agree to its terms.
- ----------------------------------- -------------------------------------------
Signature Date
- ----------------------------------- ------------------ -----------------------
Signature Date Acceptance Date:
================================================================================
DEALER/AGENT AUTHORIZATION For selected Dealers or Agents ONLY.
================================================================================
We hereby authorize Alliance Fund Services, Inc. to act as our agent in
connection with transactions under this authorization form; and we guarantee the
signature(s) set forth in Section 7, as well as the legal capacity of the
shareholder.
Dealer/Agent Firm ________________ Authorized Signature ______________________
Representative First Name ___________________ MI ____ Last Name ______________
Representative Number __________________________________________________________
Branch Office Address __________________________________________________________
City _______________________________ State ____________ Zip Code _____________
Branch Number _________________________ Branch Phone ( )_____________________
** Your bank must be a member of the National Automated Clearing House
Association (NACHA).
<page
ALLIANCE MORTGAGE
STRATEGY TRUST, INC.
P.O. Box 1520, Secaucus, New Jersey 07096-1520
Toll Free (800) 221-5672
For Literature: Toll Free (800) 227-4618
- ----------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1995
- ----------------------------------------------------------------
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Fund's current Prospectus.
A copy of the Prospectus may be obtained by contacting Alliance
Fund Services, Inc. at the address or telephone numbers shown
above.
TABLE OF CONTENTS
PAGE
Description of the Fund
Management of the Fund
Expenses of the Fund
Purchase of Shares
Redemption and Repurchase of Shares
Shareholder Services
Net Asset Value
Dividends, Distributions and Taxes
Portfolio Transactions
General Information
Report of Independent Auditors and Financial
Statements
Appendix A (Bond and Commercial Paper Ratings) A-1
Appendix B (Futures Contracts and Options on
Futures Contracts and Foreign Currencies) B-1
<page
- ---------------------------------------------------------------
DESCRIPTION OF THE FUND
- ---------------------------------------------------------------
The following investment policies and restrictions
supplement, and should be read in conjunction with, the
information set forth in the Prospectus of Alliance Mortgage
Strategy Trust, Inc. (the "Fund") of under the heading
"Description of the Fund." Except as otherwise indicated,
investment policies of the Fund are not designated "fundamental
policies" within the meaning of the Investment Company Act of
1940, as amended (the "1940 Act"), 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 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 is a diversified, open-end management investment
company which seeks the highest level of current income,
consistent with low volatility of net asset value, that is
available from a portfolio of mortgage-related securities of the
highest quality. Except when the Fund assumes a temporary
defensive position, it will have at least 65% of the value of its
total assets invested in mortgage-related securities. The Fund
will only purchase mortgage-related securities that are issued or
guaranteed by the United States Government, its agencies or
instrumentalities, or are rated AAA by Standard & Poor's
Corporation ("S&P") or Aaa by Moody's Investors Service, Inc.
("Moody's") or, if not rated, are of equivalent investment
quality as determined by Alliance Capital Management L.P. (the
"Adviser"), the Fund's investment adviser. The Fund's portfolio
is structured to achieve low volatility of net asset value
approximating that of a portfolio investing exclusively in two-
year U.S. Treasury securities. The Fund is designed for the
investor who seeks a more consistent and less volatile net asset
value than that characteristic of a mutual fund investing
primarily in fixed-rate mortgage-related securities, and a higher
yield than that of a mutual fund investing in adjustable rate
mortgage-related securities.
The Adviser continuously monitors the ratings of securities
held by the Fund and the creditworthiness of their issuers. For
a description of the ratings used by S&P and Moody's, see
Appendix A.
2
<page
HOW THE FUND PURSUES ITS OBJECTIVE
In seeking to achieve its investment objective, the Fund will
invest primarily in adjustable and fixed-rate mortgage-related
securities. Adjustable rate mortgage-related securities
("adjustable rate mortgage securities" or "ARMS") have adjustable
interest rates which reset at periodic intervals. The value of
ARMS, as well as fixed-rate mortgage securities, like other debt
securities, generally varies inversely with changes in market
interest rates. However, the value of ARMS should generally be
more resistant to price swings than that of fixed-rate debt
securities because the interest rates of ARMS move with market
interest rates. Accordingly, as interest rates change, the value
of the Fund's shares should be more stable than that of funds
which invest primarily in fixed-rate mortgage-related securities
or in fixed-rate non-mortgage-related debt securities, which do
not provide for adjustment of their interest rates. See
"Adjustable Rate Mortgage Securities," below.
The Adviser seeks to provide a relatively stable net asset
value by investing the Fund's assets in a portfolio of securities
which the Adviser believes, in the aggregate, will experience
relatively low price volatility. A group of mortgage-related
securities may, in the aggregate, experience lower price
volatility if, for example, the group contains adjustable rate
securities the value of which tends to fluctuate less
significantly as compared to fixed-rate securities of comparable
maturities, and securities the value of which tends to move in
opposite directions relative to other mortgage-related securities
in response to changes in interest rates, such as the interest-
only class (as defined below) of stripped mortgage-related
securities. See "Adjustable Rate Mortgage Securities" and
"Stripped Mortgage-Related Securities," below.
The Fund believes that because of the nature of the Fund's
assets, it is not exposed to any material risk of loss as a
result of default on any securities held by the Fund. Like all
investors in interest-bearing securities, however, the Fund is
exposed to the risk that the prices of individual securities held
by it can fluctuate, in some cases significantly, in response to
changes in prevailing interest rates.
The Fund's investment policy of investing at least 65% of the
value of its total assets in mortgage-related securities (except
when in a temporary defensive posture) is deemed fundamental and
may not be changed without shareholder approval. The Fund's other
investment polices are not fundamental and, therefore, may be
changed by the Board of Directors without shareholder approval.
For this purpose (and for the purpose of changing the Fund's
investment restrictions and approving the Fund's advisory
agreement, each as more fully described below), the approval of a
3
<page
majority of the Fund's outstanding voting securities means the
affirmative vote of (i) 67% or more of the shares represented at
a meeting at which more than 50% of the outstanding shares are
present in person or by proxy, or (ii) more than 50% of the
outstanding shares, whichever is less.
PASS-THROUGH MORTGAGE-RELATED SECURITIES -- GENERAL. The
mortgage-related securities in which the Fund may invest provide
funds for mortgage loans made to residential home buyers. These
include securities which represent interests in pools of mortgage
loans made by lenders such as savings and loan institutions,
mortgage bankers and commercial banks. Pools of mortgage loans
are assembled for sale to investors (such as the Fund) by various
governmental, government-related and private organizations.
Interests in pools of mortgage-related securities differ from
other forms of traditional debt securities, which normally
provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead,
mortgage-related securities provide a monthly payment which
consists of both interest and principal. In effect, these
payments are a "pass-through" of the monthly interest and
principal payments made by the individual borrowers on their
residential mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments result from
repayments of principal resulting from the sale of the underlying
residential property, refinancing or foreclosure, net of fees or
costs which may be incurred. Some mortgage-related securities,
such as securities issued by the Government National Mortgage
Association ("GNMA"), are described as "modified pass-through."
These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain
fees, regardless of whether or not the mortgagors actually make
mortgage payments when due.
The investment characteristics of pass-through mortgage-
related securities differ from those of traditional fixed income
securities. The major differences include the payment of interest
and principal on the mortgage-related securities on a more
frequent schedule, as described above, and the possibility that
principal may be prepaid at any time due to prepayments on the
underlying mortgage loans or other assets. These differences can
result in significantly greater price and yield volatility than
is the case with traditional fixed income securities.
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-related
securities are often subject to more rapid prepayment of
principal than their stated maturity would indicate. Prepayment
4
<page
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.
Generally, prepayments on pass-through mortgage-related
securities increase during periods of falling mortgage interest
rates and decrease during periods of rising mortgage interest
rates, although social and demographic factors and general
economic conditions may also affect the occurrence of
prepayments. Reinvestment of prepayments may occur at higher or
lower interest rates than the original investment, thus affecting
the yield of the Fund.
Since the inception of the pass-through mortgage-related
security in 1970, the market for these securities has expanded
considerably. The size of the primary issuance market and active
participation in the secondary market by securities dealers and
many types of investors makes government and government-related
pass-through pools highly liquid. Private conventional pools of
mortgages (pooled by commercial banks, savings and loans
institutions and others, with no relationship with government and
government-related entities) have also achieved broad market
acceptance and consequently an active secondary market has
emerged. However, the market for conventional pools is smaller
and less liquid than the market for the government and
government-related mortgage pools. The Fund may purchase some
mortgage-related securities through private placement, in which
case only a limited secondary market exists, and the security may
be considered illiquid and therefore subject to the investment
policy for illiquid securities described below.
GOVERNMENT AGENCY PASS-THROUGH MORTGAGE-RELATED SECURITIES.
Mortgages backing the mortgage-related securities issued or
guaranteed by the United States Government that the Fund may
invest in 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. Principal and
interest payments on the mortgage-related securities are
guaranteed by the United States Government 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.
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The principal governmental (i.e., backed by the full faith
and credit of the United States Government) guarantor of
mortgage-related securities is GNMA. GNMA is a wholly-owned
United States Government corporation within the Department of
Housing and Urban Development.
GNMA CERTIFICATES. Certificates of GNMA ("GNMA
Certificates") are mortgage-related securities which evidence-an
undivided interest in a pool or pools of mortgages. GNMA
Certificates that the Fund may purchase 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 mortgagors actually make mortgage payments when due.
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. The GNMA
guarantee is backed by the full faith and credit of the United
States Government. GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any
payments required under its guarantee.
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.
FNMA CERTIFICATES. FNMA was established in 1938 to create a
secondary market in mortgages insured by 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 Government.
Government-related (i.e., not backed by the full faith and
credit of the United States Government) guarantors include the
Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"). FNMA was established in
1938 to create a secondary market in mortgages insured by the
Federal Housing Administration (the "FHA"). FNMA is a
government-sponsored corporation owned entirely by private
stockholders. Pass-through securities issued by FNMA are
guaranteed as to timely payment of principal and interest by FNMA
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but are not backed by the full faith and credit of the United
States Government. 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.
FHLMC SECURITIES. 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 pass-through mortgage-related
securities: 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 FHLMC guarantee is not backed by
the full faith and credit of the United States Government.
PRIVATE PASS-THROUGH MORTGAGE-RELATED SECURITIES. Commercial
banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers
also create pass-through pools of conventional residential
mortgage loans. Such issuers may also be the originators of the
underlying mortgage loans as well as the guarantors of the
mortgage-related securities. Pools created by such non-
governmental issuers generally offer a higher rate of interest
than government and government-related pools because there are no
direct or indirect government guarantees of payments in the
former pools. However, timely payment of interest and principal
of these pools is generally supported by various forms of
insurance or guarantees, including individual loan, title, pool
and hazard insurance. The insurance and guarantees are issued by
government entities, private insurers and the mortgage poolers.
Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a
mortgage-related security meets the Fund's investment quality
standards. There can be no assurance that the private insurers
can meet their obligations under the policies. The Fund may buy
mortgage-related securities without insurance or guarantees if
through an examination of the loan experience and practices of
the poolers the Adviser determines that the securities meet the
Fund's quality standards.
Although the market for such securities is becoming
increasingly liquid, securities issued by certain private
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organizations may not be readily marketable. See the investment
policy for illiquid securities described below.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-
THROUGH SECURITIES. Mortgage-related securities in which the
Fund may invest may also include collateralized mortgage
obligations ("CMOs") and multi-class pass-through securities.
CMOs are debt obligations issued by special purpose entities that
are secured by mortgage-backed certificates, including, in many
cases, certificates issued by governmental and government-related
guarantors, including GNMA, FNMA and FHLMC, together with certain
funds and other collateral. Multi-class pass-through securities
are equity interests in a trust composed of mortgage loans or
other mortgage-related securities. Payments of principal and
interest on underlying collateral provide the funds to pay debt
service on the CMO or make scheduled distributions on the multi-
class pass-through security. CMOs and multi-class pass-through
securities (collectively CMOs unless the context indicates
otherwise) may be issued by agencies or instrumentalities of the
United States Government or by private organizations. The issuer
of a CMO may elect to be treated as a Real Estate Mortgage
Investment Conduit ("REMIC").
A CMO, one of a series of bonds or certificates, is issued in
multiple classes. Each class of CMOs, often referred to as a
"tranche," is issued at a specific coupon rate and has a stated
maturity or final distribution date. Principal prepayments on
collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final
distribution dates. Interest is paid or accrues on all classes of
a CMO on a monthly, quarterly or semi-annual basis. The principal
and interest on the underlying mortgages may be allocated among
the several classes of a series of a CMO in many ways. In a
common structure, payments of principal, including any principal
prepayments, on the underlying mortgages are applied to the
classes of the series of a CMO in the order of their respective
stated maturities or final distribution dates, so that no payment
of principal will be made on any class of a CMO until all other
classes having an earlier stated maturity or final distribution
date have been paid in full.
One or more tranches of a CMO may have coupon rates which
reset periodically at a specified increment over an index such as
the London Interbank Offered Rate ("LIBOR"). These adjustable
rate tranches known as "floating rate CMOs" will be considered as
ARMS by the Fund. Floating rate CMOs may be backed by fixed or
adjustable rate mortgages. To date, fixed-rate mortgages have
been more commonly utilized for this purpose. Floating rate CMOs
are typically issued with lifetime caps on the coupon rate
thereon. These caps, similar to the caps on adjustable rate
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mortgages described in "Adjustable Rate Mortgage Securities,"
below, represent a ceiling beyond which the coupon rate on a
floating rate CMO may not be increased regardless of increases in
the interest rate index to which the floating rate CMO is geared.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate
mortgage securities in which the Fund may invest include (i)
pass-through securities backed by adjustable rate mortgages and
issued by GNMA, FNMA, FHLMC and by private organizations and (ii)
floating rate CMOs. The interest rates on ARMS are reset at
periodic intervals to an increment over some predetermined
interest rate index. There are two main categories of indices:
(i) those based on U.S. Treasury securities and (ii) those
derived from a calculated measure such as a cost of funds index
or a moving average of mortgage rates. Commonly utilized indices
include the one-year Treasury rate, the three-month Treasury bill
rate, the six-month Treasury bill rate, rates on longer-term
Treasury securities, the 11th District Federal Home Loan Bank
Cost of Funds Index, the National Median Cost of Funds, the one-
month or three-month LIBOR, the prime rate of a specific bank or
commercial paper rates. Some indices, such as the one-year
Treasury rate, closely mirror changes in market interest rate
levels. Others, such as the 11th District Home Loan Bank Cost of
Funds Index (often related to ARMS issued by FNMA), tend to lag
changes in market rate levels and tend to be somewhat less
volatile. The Adviser will seek to diversify the Fund's
investments in ARMS among a variety of indices and reset periods
so that the Fund is not at any one time unduly exposed to the
risk of interest rate fluctuations. In selecting a type of ARMS
for investment, the Adviser will also consider the liquidity of
the market for such ARMS.
The underlying adjustable rate mortgages which back ARMS in
which the Fund may invest will frequently have caps and floors
which limit the maximum amount by which the loan rate to the
residential borrower may change up or down (i) per reset or
adjustment interval and (ii) over the life of the loan. Some
residential adjustable rate mortgage loans restrict periodic
adjustments by limiting changes in the borrower's monthly
principal and interest payments rather than limiting interest
rate changes. These payment caps may result in negative
amortization, i.e., an increase in the balance of the mortgage
loan. ARMS in which the Fund may invest may also be backed by
fixed-rate mortgages. Such ARMS, known as floating rate CMOs (as
described above), generally have lifetime caps on the coupon
rates. To the extent that interest rates rise faster than the
allowable caps on ARMS, such ARMS will behave more like
securities backed by fixed-rate mortgages than by adjustable rate
mortgage loans. Consequently, interest rate increases in excess
of caps can be expected to cause ARMS to behave more like
traditional debt securities than adjustable rate securities and,
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accordingly, to decline in value to a greater extent than would
be the case in the absence of such caps.
As noted above, because the interest rates on ARMS are
adjusted in response to changing interest rates, fluctuations in
prices of ARMS due to changes in interest rates will be less than
in the case of traditional debt securities. The adjustable rate
feature of ARMS will not, however, eliminate such price
fluctuations, particularly during periods of extreme fluctuations
in interest rates. Also, since many adjustable rate mortgages
only reset on an annual basis, it can be expected that the prices
of ARMS will 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.
ARMS, like other mortgage-related securities, differ from
conventional bonds in that principal is to be paid back over the
life of ARMS rather than at maturity. As a result, the holder of
the ARMS (i.e., the Fund) receives monthly scheduled payments of
principal and interest and may receive unscheduled principal
payments representing prepayments on the underlying mortgages.
When the holder reinvests the payments and any unscheduled
prepayments it receives, it may receive a rate of interest on the
reinvestment which is lower than the rate on the existing ARMS.
For this reason, ARMS are less effective than longer-term debt
securities as a means of "locking in" longer-term interest rates.
ARMS, while having less risk of price decline during periods
of rapidly rising rates than certain fixed-rate mortgage-related
securities of comparable maturities, will have less potential for
capital appreciation than such securities. In addition, to the
extent ARMS are purchased at a premium, mortgage foreclosures and
unscheduled principal prepayments will result in some loss of the
holders' principal investment to the extent of the premium paid.
On the other hand, if ARMS are purchased at a discount, an
unscheduled prepayment of principal will increase total return
and accelerate the recognition of income to the Fund and, as a
result, will increase the amount of income received by
shareholders to the extent that the Fund distributes such income.
For a discussion of the tax treatment of the distribution of
income to shareholders, see "Dividends, Distributions and Taxes."
STRIPPED MORTGAGE-RELATED SECURITIES. Stripped mortgage-
related securities ("SMRS") are derivative multi-class mortgage-
related securities. SMRS may be issued by the United States
Government, its agencies or instrumentalities, or by private
originators of, or investors in, mortgage loans, including
savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the
foregoing.
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SMRS are usually structured with two classes that receive
different proportions of the interest and principal distributions
on a pool of GNMA, FNMA or FHLMC certificates, whole loans or
private pass-through mortgage-related securities ("Mortgage
Assets"). A common type of SMRS will have one class receiving
some of the interest and most of the principal from the Mortgage
Assets, while the other class will receive most of the interest
and the remainder of the principal. In the most extreme case, one
class will receive all of the interest (the interest-only or "IO"
class), while the other class will receive all of the principal
(the principal-only or "PO" class). The yield to maturity on an
IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying Mortgage
Assets, and a rapid rate of principal prepayments may have a
material adverse effect on the yield to maturity of the IO class.
The rate of principal prepayment will change as the general level
of interest rates fluctuates. If the underlying Mortgage Assets
experience greater than anticipated principal prepayments, the
Fund may fail to fully recoup its initial investment in these
securities, even if the securities are rated AAA by S&P or Aaa by
Moody's. Due to their structure and underlying cash flows, SMRS
may be more volatile than mortgage-related securities that are
not stripped.
Although SMRS are purchased and sold by institutional
investors through several investment banking firms acting as
brokers or dealers, these securities were only recently
developed. As a result, established trading markets have not yet
developed and, accordingly, these securities may be illiquid. The
staff of the Securities and Exchange Commission (the
"Commission") currently considers certain SMRS, other than fixed
IO and PO class SMRS issued by the United States Government, its
agencies or instrumentalities, to be illiquid securities. The
Fund will treat such securities as illiquid so long as the staff
maintains that position. Fixed IO and PO class SMRS issued by the
United States Government, its agencies or instrumentalities will
be treated as liquid provided they are so determined by, or under
procedures approved by, the Board of Directors.
HIGH COUPON FIXED-RATE MORTGAGE-RELATED SECURITIES. High
coupon fixed-rate mortgage-related securities provide the holder
with a stated rate of interest ("coupon rate") that is higher at
the time of purchase than the then prevailing market rate yield.
Such securities are purchased at a price greater than par since
the coupon rate is higher than the market rate. The Fund believes
that high coupon fixed-rate mortgage-related securities that have
been outstanding for a period of time sufficient to establish
their payment and prepayment experience offer greater price
stability than other mortgage-related securities. Their prices do
not tend to rise as rapidly as those of traditional fixed-rate
securities in declining interest rate environments and tend to
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decline more slowly in increasing interest rate environments. If
the Fund purchases such mortgage-related securities at a premium,
a prepayment rate that is faster than expected will reduce both
market value and income from that which was anticipated, while a
prepayment rate that is slower than expected will have the
opposite effect of increasing income and market value.
TYPES OF CREDIT SUPPORT. To lessen the effect of failures by
obligors on underlying mortgages to make payments, mortgage-
related securities may contain credit support. Such credit
support falls into two categories: (i) liquidity protection and
(ii) protection against losses resulting from ultimate default by
an obligor on underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering
the pool of assets, to ensure that the pass-through of payments
due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the
likelihood of ultimate payment of the obligations on at least a
portion of the assets in the pool. The protections may be
provided through guarantees, insurance policies or letters of
credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a
combination of these approaches. The Fund will not pay any
additional fees for such credit support, although the existence
of credit support may increase the price of a security.
The ratings of securities for which third-party credit
enhancement provides liquidity protection or protection against
losses from default are generally dependent upon the continued
creditworthiness of the enhancement provider. The ratings of such
securities could be subject to reduction in the event of
deterioration in the credit-worthiness of the enhancement
provider even in cases where the delinquency and loss experience
on the underlying pool of assets is better than expected.
Examples of credit support arising out of the structure of
the transaction include "senior-subordinated securities"
(multiple class securities with one or more classes subordinate
to other classes as to the payment of principal thereof and
interest thereon, with the result that defaults on the underlying
assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments, sometimes
funded from a portion of the payments on the underlying assets,
are held in reserve against future losses) and "over-
collateralization" (where the scheduled payments on, or the
principal amount of, the underlying assets exceed those expected
to be required to make payment on the securities and pay any
servicing or other fees). The degree of credit support provided
for each issue is generally based on historical information with
respect to the level of credit risk associated with the
underlying assets. Other information which may be considered
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includes demographic factors, loan underwriting practices and
general market and economic conditions. Delinquency or loss in
excess of that which is anticipated could adversely affect the
return on an investment in such a security.
FOREIGN MORTGAGE-RELATED SECURITIES. The Fund may invest up
to 15% of the value of its total assets in mortgage-related
securities denominated in the U.S. Dollar or foreign currencies
that (i) are issued or guaranteed by foreign governments or their
political subdivisions, authorities, agencies or
instrumentalities and rated AAA by S&P or Aaa by Moody's or, if
not rated, are of equivalent investment quality as determined by
the Adviser and (ii) are issued by non-governmental issuers
located in foreign countries and rated AAA by S&P or Aaa by
Moody's. The percentage of the Fund's assets invested in foreign
mortgage-related securities will vary depending on the relative
yields of such securities, the economies, financial markets, and
interest rate climates of the countries in which the investments
are made and the relationship of such countries' currencies to
the U.S. Dollar. The Fund's portfolio of foreign mortgage-related
securities may include those of a number of foreign countries or,
depending upon market conditions, those of a single country.
Investors should be aware that there are risks associated
with investment by the Fund in foreign securities. Foreign
securities investments are affected by changes in currency rates
or exchange control regulations as well as by changes in
governmental administration, economic or monetary policy (in the
United States or abroad) and changed circumstances in dealings
between nations. Currency exchange rate movements will increase
or reduce the U.S. Dollar value of the Fund's net assets and
income attributable to foreign securities. Costs are incurred in
connection with the purchase or sale of foreign mortgage-related
securities by the Fund. There may be less publicly available
information about foreign issuers than about domestic issuers,
and foreign issuers may not be subject to accounting, auditing
and financial reporting standards and requirements comparable to
those of domestic issuers. Securities of some foreign issuers are
less liquid and more volatile than securities of comparable
domestic issuers, and foreign brokerage commissions are generally
higher than in the United States. Foreign securities markets may
be less liquid, more volatile and less subject to governmental
supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the
United States, including expropriation, confiscatory taxation and
potential difficulties in enforcing contractual obligations.
DIRECT INVESTMENT IN MORTGAGES. The Fund may invest up to
10% of the value of its total assets directly in mortgages
securing residential real estate (i.e., the Fund becomes the
mortgagee). Such investments are not "mortgage-related
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securities" as described above. They are normally available from
lending institutions which group together a number of mortgages
for resale (usually from 10 to 50 mortgages) and which act as
servicing agent for the purchaser with respect to, among other
things, the receipt of principal and interest payments. (Such
investments are also referred to as "whole loans.") The vendor
of such mortgages receives a fee from the Fund for acting as
servicing agent. The vendor does not provide any insurance or
guarantees covering the repayment of principal or interest on the
mortgages. Unlike pass-through securities, whole loans constitute
direct investments in mortgages inasmuch as the Fund, rather than
a financial intermediary, becomes the mortgagee with respect to
such loans purchased by the Fund. At present, such investments
are considered to be illiquid by the Adviser. The Fund will
invest in such mortgages only if the Adviser has determined
through an examination of the mortgage loans and their
originators (which may include an examination of such factors as
{percentage of family income dedicated to loan service and
relationship between loan value and market value) that the
purchase of the mortgages should not present a significant risk
of loss to the Fund. The Fund has no present intention of making
any direct investments in mortgages.
OTHER SECURITIES--GENERAL. The Fund may invest up to 35% of
the value of its total assets in (i) securities backed by assets
such as automobile or credit card receivables or home equity
loans ("asset-backed securities" described below) rated AAA by
S&P or Aaa by Moody's or, if not rated, of equivalent investment
quality as determined by the Adviser, (ii) non-mortgage-related
securities issued or guaranteed by the United States Government,
its agencies and instrumentalities, including certain "zero
coupon" Treasury securities, described below, (iii) "zero coupon"
Treasury securities issued by private corporate issuers,
described below, (iv) certificates of deposit, bankers'
acceptances and interest-bearing savings deposits of banks having
total assets of more than $1 billion and which are members of the
Federal Deposit Insurance Corporation, (v) commercial paper of
prime quality rated A-1 by S&P or Prime-1 by Moody's or, if not
rated, issued by companies which have an outstanding debt issue
rated AAA by S&P or Aaa by Moody's and (vi) debt securities
which, although not mortgage-related securities, are secured by
mortgages on commercial real estate or residential rental
properties, provided such securities are rated AAA by S&P or Aaa
by Moody's or, if not rated, are of equivalent investment quality
as determined by the Adviser; such securities may entitle the
holder to participate in income derived from the mortgaged
properties or from sales thereof. When business or financial
conditions warrant, the Fund may take a temporary defensive
position and invest without limit in the foregoing securities.
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ASSET-BACKED SECURITIES. The securitization techniques used
to develop mortgage-related securities are now being applied to a
broad range of assets. Through the use of trusts and special
purpose corporations, various types of assets, primarily
automobile and credit card receivables and home equity loans, are
being securitized in pass-through structures similar to the
mortgage pass-through structures described above or in a pay-
through structure similar to the CMO structure.
In general, the collateral supporting asset-backed securities
is of shorter maturity than mortgage loans and is less likely to
experience unexpected levels of prepayments. As with mortgage-
related securities, asset-backed securities are often backed by a
pool of assets representing the obligations of a number of
different parties and use similar credit enhancement techniques.
Asset-backed securities do not have the benefit of the same
security interest in the related collateral as do mortgage-
related securities. Credit card receivables are generally
unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on
the credit cards, thereby reducing the balance due. Most issuers
of automobile receivables permit the servicers to retain
possession of the underlying obligations. If the servicer were to
sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the
holders of the related automobile receivables. In addition,
because of the large number of vehicles involved in a typical
issuance and the technical requirements of state laws, the
trustee for the holders of the automobile receivables may not
have a perfected security interest in all of the obligations
backing such receivables. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some cases,
be available to support payments on these securities.
"ZERO COUPON" TREASURY SECURITIES. The Fund may invest in
"zero coupon" Treasury securities, which are U.S. Treasury bills
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 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 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
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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 additional
discussion of the tax treatment of "zero coupon" Treasury
securities, see "Dividends, Distributions and Taxes--United
States Federal Income Taxation of the Fund--Zero Coupon Treasury
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
U.S. Treasury bonds and notes and sold them separately in the
form of receipts or certificates representing undivided interests
in these instruments (which instruments are generally held by a
bank in a custodial or trust account). The staff of the
Commission has indicated that, in its view, these receipts or
certificates should be considered as securities issued by the
bank or brokerage firm involved and, therefore, should not be
included in the Fund's categorization of U.S. Government
Securities (as defined below in "Certain Fundamental Investment
Policies"). The Fund disagrees with the staff's position but will
not treat such securities as U.S. Government Securities until
final resolution of the issue.
NEW INSTRUMENTS. The Fund expects that new types of ARMS,
other mortgage-related securities, asset-backed securities and
other securities in which the Fund may invest will be developed
and marketed from time to time. Consistent with the Fund's
investment objective, policies and quality standards, the Adviser
will consider investing in such new types of securities.
ADDITIONAL INVESTMENT POLICIES AND PRACTICES
The following additional investment policies supplement those
set forth above.
FUTURES CONTRACTS AND OPTIONS THEREON. The Fund may enter
into contracts for the purchase or sale for future delivery of
fixed-income securities or foreign securities, or contracts based
on financial indices including any index of (i) securities issued
or guaranteed by the United States Government, its agencies or
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instrumentalities or (ii) corporate debt 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
securities called for by the contract at a specified price on a
specified date. A "purchase" of a futures contract means the
incurring of a contractual obligation to acquire the securities
or foreign securities called for by the contract at a specified
price on a specified date. The purchaser of a futures contract on
an index agrees to take or make delivery of an amount of cash
equal to the difference between a specified dollar multiple of
the value of the index on the expiration date of the contract and
the price at which the contract was originally struck. 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. These
investment techniques will be used only to hedge against
anticipated future changes in interest or exchange rates which
otherwise might either adversely affect the value of the Fund's
portfolio securities or adversely affect the prices of securities
which the Fund intends to purchase at a later date. These
investment techniques will not be used for speculation.
The successful use of such instruments 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 rate movements correctly.
Should interest or exchange rates move in an unexpected manner,
the Fund may not achieve the anticipated benefits of futures
contracts or options on futures contracts or may realize losses
and thus will be in a worse position than if such strategies had
not been used. In addition to the correlation between movements
in the price of futures contracts or options on futures contracts
and movements in the price of the securities hedged or used for
cover will not be perfect and could produce unanticipated losses.
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:
(i) 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) 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
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Directors without considering the policies and concerns of the
various applicable federal and state regulatory agencies.
See Appendix B for further discussion of the use, risks and
costs of futures contracts and options on futures contracts.
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 cancelled in the event that the
required condition did not occur and the trade was cancelled.
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 bond
prices. In periods of falling interest rates and rising bond
prices, the Fund might sell a security in its portfolio and
purchase the same or a similar security on a when-issued or
forward commitment basis, thereby obtaining the benefit of
currently higher cash yields. However, if the Adviser were to
forecast incorrectly the direction of interest rate movements,
the Fund might be required to complete such when-issued or
forward transactions at prices less favorable than current market
values. 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
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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,
cash or high-quality liquid debt 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.
INTEREST RATE TRANSACTIONS. The Fund may, without limit,
enter into interest rate swaps and may purchase or sell interest
rate caps and floors. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio. The Fund may
also enter into these transactions to protect against any
increase in the price of securities the Fund anticipates
purchasing at a later date. The Fund does not intend to use these
transactions in a speculative manner. Interest rate swaps involve
the exchange by the Fund with another party of their respective
commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed-rate payments. The purchase of
an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount
from the party selling the interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually-based principal
amount from the party selling the interest rate floor.
The Fund may enter into interest rate swaps, caps and floors
on either an asset-based or liability-based basis, depending on
whether it is hedging its assets or its liabilities, and will
usually enter into interest rate swaps on a net basis, i.e., the
two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest
rate swap will be accrued on a daily basis and an amount of cash
or high-quality liquid debt securities having an aggregate net
asset value at least equal to the accrued excess will be
maintained in a segregated account by the Fund's custodian. If
the Fund enters into an interest rate swap on other than a net
basis, the Fund will maintain a segregated account in the full
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amount accrued on a daily basis of the Fund's obligations with
respect to the swap. The Fund will not enter into any interest
rate swap, cap or floor transaction unless the unsecured senior
debt or the claims-paying ability of the other party thereto is
then rated in the highest rating category of at least one
nationally recognized rating organization. The Adviser will
monitor the creditworthiness of counterparties on an ongoing
basis. If there were a default by such a counterparty, the Fund
would have contractual remedies. The swap market has grown
substantially in recent years with a large number of banks and
investment banking firms acting both as principals and agents
utilizing standardized swap documentation. The Adviser has
determined that, as a result, the swap market has become
relatively liquid. Caps and floors are more recent innovations
for which standardized documentation has not yet been developed
and, accordingly, they are less liquid than swaps. To the extent
the Fund sells (i.e., writes) caps and floors, it will maintain
in a segregated account cash or high-quality liquid debt
securities having an aggregate net asset value at least equal to
the full amount, accrued on a daily basis, of the Fund's
obligations with respect to the caps or floors. The use of
interest rate swaps is a highly specialized activity which
involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. If
the Adviser is incorrect in its forecasts of the market values,
interest rates and other applicable factors, the investment
performance of the Fund would diminish compared with what it
would have been if these investment techniques were not used.
Moreover, even if the Adviser is correct in its forecasts, there
is a risk that the swap position may correlate imperfectly with
the price of the asset or liability being hedged.
There is no limit on the amount of interest rate swap
transactions that may be entered into by the Fund. These
transactions do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate swaps is limited to the net amount
of interest payments that the Fund is contractually obligated to
make. If the other party to an interest rate swap defaults, the
Fund's risk of loss consists of the net amount of interest
payments that the Fund contractually is entitled to receive. The
Fund may purchase and sell (i.e., write) caps and floors without
limitation, subject to the segregated account requirement
described all over.
EURODOLLAR INSTRUMENTS. The Fund may invest in Eurodollar
instruments for hedging purposes. Eurodollar instruments are
essentially U.S. dollar-denominated futures contracts or options
thereon that are linked to the LIBOR. Eurodollar futures
contracts enable purchasers to obtain a fixed-rate for the
lending of funds and sellers to obtain a fixed-rate for
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borrowings. The Fund intends to use Eurodollar futures contracts
and options thereon to hedge against changes in the LIBOR to
which many short-term borrowings and floating rate securities are
linked. Eurodollar instruments are subject to the same
limitations and risks as other futures contracts and options
thereon as described above and below and in the Fund's Statement
of Additional Information.
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. Options on foreign currencies to be written or
purchased by the Fund are traded on U.S. and foreign exchanges or
over-the-counter. As in the case of other kinds of options, the
writing of an option on a foreign currency constitutes only a
partial hedge, up to the amount of the premium received. The Fund
must offset an exchange-traded option which it has written
through a closing purchase transaction. 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. The
Fund must offset an exchange-traded option which it has purchased
by entering into a closing sale transaction. In connection with
options written or purchased by the Fund over-the-counter, the
Fund can only look to the counter-party for purposes of offset.
There is no specific percentage limitation on the Fund's
investments in options on foreign currencies.
For additional information on the use, risks and costs of
options on foreign currencies, see Appendix B.
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 commitment 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
adverse market movements could therefore continue to an unlimited
extent over a period of time. In addition, the correlation
between movements in the prices of such instruments and movements
in the values of the securities and currencies hedged will not be
perfect and could produce unanticipated losses.
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The Fund's ability to dispose of its position in futures
contracts, options, interest rate transaction and forward
commitment contracts will depend on the availability of liquid
markets in such instruments. Markets for these vehicles with
respect to a number of fixed-income securities and currencies are
relatively new and still developing. If, for example, a secondary
market did not exist with respect to an option purchased or
written by 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 portfolio
securities covering an option written by the Fund until the
option expired or it delivered the underlying currency or futures
contract upon exercise. No assurance can be given that the Fund
will be able to utilize these instruments effectively for the
purposes set forth above. Furthermore, the Fund's ability to
engage in options and futures transactions may be limited by tax
considerations. See "Dividends, Distributions and Taxes."
REPURCHASE AGREEMENTS. The Fund may enter into "repurchase
agreements," pertaining to the types of securities in which it
invests, with member banks of the Federal Reserve System or
"primary dealers" (as designated by the Federal Reserve Bank of
New York) in U.S. Government Securities (as defined below). 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. 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
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.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. The Fund may
also use reverse repurchase agreements and dollar rolls. Reverse
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repurchase agreements involve sales by the Fund of portfolio
assets concurrently with an agreement by the Fund to repurchase
the same assets at a later date at a fixed price. Generally, the
effect of such a transaction is that the Fund can recover all or
most of the cash invested in the portfolio securities involved
during the term of the reverse repurchase agreement, while it
will be able to keep the interest income associated with those
portfolio securities. Such transactions are only advantageous if
the interest cost to the Fund of the reverse repurchase
transaction is less than the cost of obtaining the cash
otherwise.
The Fund may enter into dollar rolls in which the Fund sells
securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar securities on a
specified future date. During the roll period, the Fund foregoes
principal and interest paid on the securities. The Fund is
compensated by the difference between the current sales price and
the lower forward price for the future purchase as well as by the
interest earned on the cash proceeds of the initial sale.
The Fund will establish a segregated account in which it will
maintain cash or high-quality liquid debt securities equal in
value to its obligations in respect of reverse repurchase
agreements and dollar rolls. Reverse repurchase agreements and
dollar rolls involve the risk that the market value of the
securities the 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, the 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 Fund.
Under the requirements of the Investment Company Act of 1940 (the
"1940 Act"), the Fund is required to maintain an asset coverage
(including the proceeds of the borrowings) of at least 300% of
all borrowings. However, under normal circumstances, the Fund
does not expect to engage in reverse repurchase agreements and
dollar rolls with respect to greater than 50% of the Fund's total
assets.
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 (as defined below), its agencies or instrumentalities
or bank letters of credit equal to at least 100% of the market
value of the securities loaned are deposited and maintained by
23
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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 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.
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 maintain more than 15% of the
Fund's net assets (taken at market value) in illiquid securities.
For this purpose, illiquid securities include, among others, (i)
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), (ii) options
purchased by the Fund over-the-counter and the cover for options
written by the Fund over-the-counter, and (iii) repurchase
agreements not terminable within seven days. Securities eligible
for resale under Rule 144A under the Securities Act of 1933, as
amended, that have legal or contractual restrictions on resale
but have a readily available market are not deemed illiquid for
purposes of this limitation. The Adviser will monitor the
liquidity of such securities under the supervision of the Board
of Directors of the Fund.
Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because
they have not been registered under the Securities Act of 1933 as
amended (the "Securities Act"), securities which are otherwise
not readily marketable and repurchase agreements having a
maturity of longer than seven days. Securities which have not
been registered under the Securities Act are referred to as
private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual funds
do not typically hold a significant amount of these restricted or
other illiquid securities because of the potential delays on
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resale and uncertainty in valuation. Limitations on resale may
have an adverse effect on the marketability of portfolio
securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to
register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has
developed for certain securities that are not registered under
the Securities Act including repurchase agreements, commercial
paper, foreign securities, municipal securities and corporate
bonds and notes. Institutional investors depend on an efficient
institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such
investments.
During the coming year, the Fund may invest up to 5% of its
net assets (taken at market value) in restricted securities
issued under Section 4(2) of the Securities Act, which exempts
from registration "transactions by an issuer not involving any
public offering." Section 4(2) instruments are restricted in the
sense that they can only be resold through the issuing dealer to
institutional investors and in private transactions; cannot be
resold to the general public without registration.
Rule 144A under the Securities Act allows a broader
institutional trading market for securities otherwise subject to
restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of
the Securities Act for resales of certain securities to qualified
institutional buyers. An insufficient number of qualified
institutional buyers interested in purchasing certain restricted
securities held by the Fund, however, could affect adversely the
marketability of such portfolio securities and the Fund might be
unable to dispose of such securities promptly or at reasonable
prices. Rule 144A has already produced enhanced liquidity for
many restricted securities, and market liquidity for such
securities may continue to expand as a result of this regulation
and the consequent inception of the PORTAL System sponsored by
the National Association of Securities Dealers, Inc., an
automated system for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers.
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The Adviser, acting under the supervision of the Board of
Directors, will monitor the liquidity of restricted securities in
the Fund's portfolio. In reaching liquidity decisions, the
Adviser will consider, inter alia, the following factors: (i) the
frequency of trades and quotes for the security; (ii) the number
of dealers making quotations to purchase or sell the security;
(iii) the number of other_potential purchasers of the security;
(iv) the number of dealers undertaking to make a market in the
security; (v) the nature of the security (including its
unregistered nature) and the nature of the marketplace for the
security (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer);
and (vi) any applicable Commission interpretation or position
with respect to such type of securities.
PORTFOLIO TURNOVER
The investment activities described above are likely to
result in the Fund engaging in a considerable amount of trading
of securities held for less than one year. Accordingly, it can be
expected that the Fund will have a higher turnover rate, and,
thus, a higher incidence of short-term capital gains taxable as
ordinary income, than might be expected from investment companies
which invest substantially all of their funds on a long-term
basis. For the fiscal years ended November 30, 1993 and
November 30, 1994 the portfolio turnover rates of the securities
of the Fund were 499% and 375%, respectively. Management
anticipates that the annual turnover in the Fund will not exceed
500%. An annual turnover rate of 500% occurs, for example, when
all the securities in the Fund's portfolio are replaced five
times in a period of one year. A higher 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."
FUNDAMENTAL INVESTMENT POLICIES
The following restrictions, which supplement those set forth
in the Fund's Prospectus, may not be changed without a vote of a
majority of the Fund's outstanding voting securities which means
the vote of (1)467% or more of the shares represented at a
meeting at which more than 50% of the outstanding shares of the
Fund are represented or (2) more than 50% of the outstanding
shares of the Fund, whichever is less.
The Fund may not:
1. Make loans except through (i) the purchase of debt
obligations in accordance with its investment objective and
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policies; (ii) the lending of portfolio securities; and (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;
6. (i) Purchase or sell real estate, except that it may
invest in mortgage-related securities and whole loans and
purchase and sell securities of companies which deal in real
estate or interests therein; (ii) purchase or sell commodities or
commodities contracts, except that it may invest in futures
contracts and options on futures contracts and contracts for the
future acquisition or delivery of fixed-income securities; (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 are sold, the Fund
might be deemed to be an underwriter for purposes of the
Securities Act.
To maintain portfolio diversification and reduce investment
risk, as a matter of fundamental policy, the Fund may not: (i)
invest more than 5% of its total assets in the securities of any
one issuer or own more than 10% of the outstanding voting
securities of such issuer, other than securities issued or
guaranteed by the United States Government, its agencies or
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instrumentalities ("U.S. Government Securities"), except that up
to 25% of the value of the Fund's total assets may be invested
without regard to the 5% and 10% limitations; (ii) invest 25% or
more of its total assets in securities of companies engaged
principally in any one industry, except that this restriction
does not apply to investments in the mortgage and mortgage-
financed industry (in which more than 25% of the value of the
Fund's total assets will, except for temporary defensive
positions, be invested) or U.S. Government Securities; (iii)
borrow money except from banks for emergency or temporary
purposes in an amount not exceeding 5% of the value of the total
assets of the Fund, except that the Fund may engage in reverse
repurchase agreements and dollar rolls in an amount up to 50% of
the Fund's total assets; and (iv) pledge, hypothecate, mortgage
or otherwise encumber its assets, except to secure permitted
borrowings.
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 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 also undertakes that it will not purchase
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 and that it will not purchase the
securities of any company that has a record of less than three
years of continuous operation (including that of predecessors) if
such purchase at the time thereof would cause more than 5% of its
total assets, taken at current value, to be invested in the
securities of such companies.
Whenever any investment policy or restriction states a
minimum or maximum percentage of the Fund's assets which may be
invested in any security or other asset, it is intended that such
minimum or maximum percentage limitation be determined
immediately after and as a result of the Fund's acquisition of
such security or other asset. Accordingly, any later increase or
decrease in percentage beyond the specified limitations resulting
from a change in values or net assets will not be considered a
violation.
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- ---------------------------------------------------------------
MANAGEMENT OF THE FUND
- ---------------------------------------------------------------
ADVISER
Alliance Capital Management L.P., a New York Stock Exchange
listed company with principal offices at 1345 Avenue of the
Americas, New York, New York 10105, has been retained under an
investment advisory agreement (the "Advisory Agreement") to
provide investment advice and, in general, to conduct the
management and investment program of the Fund under the
supervision and control of the Fund's Board of Directors.
The Adviser is a leading international investment manager
supervising client accounts with assets as of December 31, 1994
of more than $121 billion (of which more than $37 billion
represented the assets of investment companies). The Adviser's
clients are primarily major corporate employee benefit funds,
public employee retirement systems, investment companies,
foundations and endowment funds. The Adviser and its
subsidiaries employ approximately 1,450 employees who operate out
of domestic offices and the overseas offices of subsidiaries in
Bombay, Istanbul, London, Sydney, Tokyo, Toronto, Bahrain,
Luxembourg and Singapore. The 50 registered investment companies
comprising 102 separate investment portfolios managed by the
Adviser currently have more than one million shareholders. As of
December 31, 1994, the Adviser was retained as an investment
manager by 29 of the FORTUNE 100 Companies.
Alliance Capital Management Corporation ("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"), a holding company controlled by
AXA, a French insurance holding company. As of December 31,
1994, ACMC, Inc. and Equitable Capital Management Corporation,
each a wholly-owned direct or indirect subsidiary of Equitable,
owned in the aggregate approximately 59% of the issued and
outstanding units representing assignments of beneficial
ownership of limited partnership interests in the Adviser
("Units"). As of December 31, 1994, approximately 32% and 9% of
the Units were owned by the public and employees of the Adviser
and its subsidiaries, respectively, including employees of the
Adviser who serve as Directors of the Fund.
AXA owns approximately 60% of the outstanding voting shares
of common stock of ECI. AXA is the holding company for an
29
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international group of insurance and related financial services
companies. AXA's insurance operations are comprised of
activities in life insurance, property and casualty insurance and
reinsurance. The insurance operations are diverse geographically
with activities in France, the United States, the United Kingdom,
Canada and other countries, principally in Europe. AXA is also
engaged in asset management, investment banking and brokerage,
real estate and other financial services activities in the United
States and Europe. Based on information provided by AXA, as of
January 1, 1995, 42.3% of the issued shares (representing 54.7%
of the voting power) of AXA were owned by Midi Participations, a
French corporation that is a holding company. The voting shares
of Midi Participations are in turn owned 60% by Finaxa, a French
corporation that is a holding company, and 40% by subsidiaries of
Assicurazioni Generali S.p.A., an Italian corporation
("Generali") (one of which, Belgica Insurance Holding S.A., a
Belgian corporation, owned 34.1%). As of January 1, 1995, 62.1%
of the issued shares (representing 75.7% of the voting power) of
Finaxa were owned by five French mutual insurance companies (the
"Mutuelles AXA") (one of which, AXA Assurances I.A.R.D. Mutuelle,
owned 31.8% of the issued shares) (representing 39.0% of the
voting power), and 26.5% of the issued shares (representing 16.6%
of the voting power) of Finaxa were owned by Banque Paribas, a
French bank ("Paribas"). Including the shares owned by Midi
Participations, as of January 1, 1995, the Mutuelles AXA directly
or indirectly owned 51.3% of the issued shares (representing
65.8% of the voting power) of AXA. In addition, certain
subsidiaries of AXA own 0.4% of the shares of AXA which are not
entitled to be voted. Acting as a group, the Mutuelles AXA
control AXA, Midi Participations and Finaxa.
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 sold, there may be an adverse effect
on price. 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.
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
30
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affiliates also furnishes the Fund, without charge, management
supervision and assistance and office facilities and provides
persons satisfactory to the Fund's Board of Directors to serve as
the Fund's officers.
The 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 replaced an earlier, substantially
identical agreement (the "First Advisory Agreement") that
terminated because of its technical assignment as a result of
AXA's acquisition of control over Equitable. In anticipation of
the assignment of the First Advisory Agreement, the Advisory
Agreement was approved by the unanimous vote, cast in person, of
the Fund's Directors (including the Directors who are not parties
to the Advisory Agreement or "interested persons", as defined in
the 1940 Act, of any such party) at a meeting called for the
purpose held on April 29, 1992, and by the Fund's initial
shareholder of the Fund on April 29, 1992.
The Advisory Agreement continues in force for successive
twelve-month periods (computed from each December 1), provided
that such continuance is specifically approved at least annually
by the Fund's Directors or by a majority vote of the holders of
the outstanding voting securities of the Fund, and, in either
case, by a majority of the Directors who are not parties to the
Advisory Agreement or interested persons, as defined in the 1940
Act, of any such party. Most recently, the continuance of the
Advisory Agreement until November 30, 1995 was approved by a
vote, cast in person, of the Directors, including a majority of
the Directors who are not parties to the Advisory Agreement or
interested persons of any such party, at a meeting called for
that purpose and held on September 13, 1994. The Advisory
Agreement may be terminated without penalty on 60 days' written
notice at the option of either party or by a vote of the
shareholders; it will automatically terminate in the event of
assignment. The Adviser is not liable for any action or inaction
in regard to its obligations under the Advisory Agreement as long
as it does not exhibit willful misfeasance, bad faith, gross
negligence, or reckless disregard of its obligations.
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For the services rendered by the Adviser under the Advisory
Agreement, the Fund pays the Adviser at an annual rate of .65 of
1% of the Fund's average net assets. For the fiscal years ended
November 30, 1994 and November 30, 1993 and for the fiscal period
June 1, 1992 (commencement of operations) to November 30, 1992,
the Adviser received from the Fund advisory fees in the amounts
of $3,005,558, $1,704,432 and $217,753, respectively.
The Adviser may act as an investment adviser to other
persons, firms or corporations, including investment companies,
and is investment adviser to ACM Institutional Reserves, Inc.,
AFD Exchange Reserves, Inc., The Alliance Fund, Inc., Alliance
All-Asia Investment Fund, Inc., Alliance Balanced Shares, Inc.,
Alliance Bond Fund, Inc., Alliance Capital Reserves, Alliance
Counterpoint Fund, Alliance Developing Markets Fund, Inc.,
Alliance Global Fund, Alliance Global Dollar Government Fund,
Inc., Alliance Global Small Cap Fund, Inc., Alliance Government
Reserves, Alliance Growth and Income Fund, Inc., Alliance
International Fund, Alliance Mortgage Securities Income Fund,
Inc., Alliance Mortgage Strategy Trust, Inc., Alliance Multi-
Market Strategy Trust, Inc., Alliance Municipal Income Fund,
Inc., Alliance Municipal Income Fund II, Alliance Municipal
Trust, Alliance New Europe Fund, Inc., Alliance North American
Government Income Trust, Inc., Alliance Premier Growth Fund,
Inc., Alliance Quasar Fund, Inc., Alliance Short-Term Multi-
Market Trust, Inc., Alliance Technology Fund, Inc., Alliance
Utility Income Fund, Inc., Alliance Variable Products Series
Fund, Inc., Alliance World Income Trust, Inc., Alliance Worldwide
Privatization Fund, Inc., The Alliance Portfolios, Fiduciary
Management Associates and The Hudson River Trust, all registered
open-end investment companies; ACM Government Income Fund, Inc.,
ACM Government Securities Fund, Inc., ACM Government Spectrum
Fund, Inc., ACM Government Opportunity Fund, Inc., ACM Managed
Income Fund, Inc., ACM Managed Multi-Market Trust, Inc., ACM
Managed Dollar Income Fund, Inc., ACM Municipal Securities Income
Fund, Inc., Alliance All-Market Advantage Fund, Inc., Alliance
Global Environment Fund, Inc., Alliance World Dollar Government
Fund, Inc., Alliance World Dollar Government Fund II, Inc., The
Austria Fund, Inc., The Global Privatization Fund, Inc., The
Korean Investment Fund, Inc., The Southern Africa Fund, Inc. and
The Spain Fund, Inc., all registered closed-end investment
companies; and Alliance Global Bond Fund, SICAV, Alliance Global
Leisure Fund, Alliance Global Growth Trends Portfolio, Alliance
Global Income Fund, Alliance International Currency Reserves,
Alliance International Health Care Fund, SICAV, Alliance
International Technology Fund, SICAV, Alliance Worldwide Income
Fund, India Liberalisation Fund, SICAV, ML-Alliance Asset
Allocation N.V. and The Spanish Smaller Companies Fund, all
foreign investment companies.
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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.
DIRECTORS
JOHN D. CARIFA,* 49, Chairman of the Board, is the President
and Chief Operating Officer and a Director of ACMC with which he
has been associated since prior to 1990.
RUTH BLOCK, 64, is a Director of Ecolab Incorporated
(specialty chemicals) and Amoco Corporation (oil and gas).
Previously, she was an Executive Vice President and the Chief
Insurance Officer of The Equitable Life Assurance Society of the
United States since prior to 1990. Her address is P.O. Box 4653,
Stamford, Connecticut 06903.
DAVID H. DIEVLER, 65, was formerly Chairman and President of
the Fund and a Senior Vice President of ACMC with which he had
been associated since prior to 1990. He is currently an
independent consultant. His address is P.O. Box 167, Spring
Lake, New Jersey 07762.
JOHN H. DOBKIN, 51, is President of Historic Hudson Valley
(historic preservation) since 1990. Previously, he was Director
of the National Academy of Design. From 1987 to 1992, he was a
Director of ACMC. His address is 105 West 55th Street, New York,
New York 10019.
WILLIAM H. FOULK, JR., 62, was formerly a Senior Manager of
Barrett Associates, Inc., a registered investment adviser, since
prior to 1990. His address is 2 Hekma Road, Greenwich,
Connecticut 06831.
____________________
* An "interested person" of the Fund as defined in the 1940
Act.
33
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DR. JAMES M. HESTER, 70, is President of the Harry Frank
Guggenheim Foundation and a Director of Union Carbide Corporation
with which he has been associated since prior to 1990. He was
formerly President of New York University, the New York Botanical
Garden and Rector of the United Nations University. His address
is 45 East 89th Street, New York, New York 10128.
CLIFFORD L. MICHEL, 55, is a partner of the law firm of
Cahill Gordon & Reindel with which he has been associated since
prior to 1990. He is also Chief Executive Officer of Wenonah
Development Company (investments) and a Director of Placer Dome,
Inc. (mining) and Faber-Castell Corporation (writing products).
His address is St. Bernard's Road, Gladstone, New Jersey 07934.
ROBERT C. WHITE, 74, is a Vice President and Chief Financial
Officer of the Howard Hughes Medical Institute with which he has
been associated since prior to 1990. He is also a Trustee of
St. Clair Fixed Income Fund, St. Clair Tax-Free Fund and
St. Clair Equity Fund (registered investment companies) and
Director of MEDSTAAT, Systems, Inc. (health care information).
His address is 30835 River Crossing, Bingham Farms, Michigan
48025.
OFFICERS
JOHN D. CARIFA, Chairman and President, see biography, above.
PATRICIA J. YOUNG, 40, Senior Vice President, is a Senior
Vice President of ACMC with which she has been associated since
March 1992. Previously, she was a Managing Director and
Portfolio Manager for Hyperion Capital since March 1991. Prior
thereto, she was a Managing Director with Fischer, Francis, Trees
& Watts since prior to 1989.
PAUL A. ULLMAN, 37, Senior Vice President, is a Vice
President of ACMC with which he has been associated since March
1992. Previously, he was a Director and Portfolio Manager at
Hyperion Capital since July 1990. Prior thereto, he was a Vice
President at Salomon Brothers since prior to 1989.
EDMUND P. BERGAN, JR., 44, Secretary, is a Senior Vice
President and General Counsel of Alliance Fund Distributors, Inc.
and Alliance Fund Services, Inc., and Vice President and
Assistant General Counsel of ACMC, with which he has been
associated since prior to 1989.
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EMILIE D. WRAPP, 39, Assistant Secretary, is Special Counsel
of ACMC, with which she has been associated since 1989.
MARK D. GERSTEN, 44, Treasurer and Chief Financial Officer,
is a Senior Vice President of Alliance Fund Services, Inc., with
which he has been associated since prior to 1989.
JOSEPH J. MANTINEO, 35, Controller, is a Vice President of
Alliance Fund Services, Inc., with which he has been associated
since prior to 1989.
PATRICK J. FARRELL, 35, Assistant Controller, is a Vice
President of Alliance Fund Services, Inc., with which he has been
associated since prior to 1989.
JUAN RODRIQUEZ, 37, Assistant Controller, is a Fixed Income
Manager, Mutual Funds, of Alliance Fund Services, Inc., with
which he has been associated since prior to 1989.
The Fund does not pay any fees to, or reimburse expenses of,
its Directors who are considered "interested persons" of the
Fund. The aggregate compensation paid by the Fund to each of the
Directors during its fiscal period ended November 30, 1994, and
the aggregate compensation paid to each of the Directors during
calendar year 1994 by all of the registered investment companies
to which the Adviser provides investment advisory services
(collectively, the "Alliance Fund Complex"), are set forth below.
Each of the directors is a director or trustee of one or more
other registered investment companies in the Alliance Fund
Complex.
35
<page
Pension or
Retirement
Benefits Estimated Total
Accrued Annual Compensation
Aggregate As Part Benefits from the Alliance
Name of Director Compensation of Fund upon Fund Complex,
of the Fund from the Fund Expenses Retirement Including the Fund
________________ _____________ __________ ___________ __________________
David H. Dievler $0 $-0- $-0- $0
Ruth Block $3,211 $-0- $-0- $157,000
John D. Carifa $0 $-0- $-0- $0
John H. Dobkin $3,986 $-0- $-0- $110,750
William H. Foulk, Jr. $4,081 $-0- $-0- $141,500
Dr. James M. Hester $3,586 $-0- $-0- $154,500
Clifford L. Michel $3,211 $-0- $-0- $120,500
Robert C. White $3,577 $-0- $-0- $133,500
As of February 3, 1995, the Directors and officers of the
Fund as a group owned less than 1% of the shares of the Fund.
- ---------------------------------------------------------------
EXPENSES OF THE FUND
- ---------------------------------------------------------------
DISTRIBUTION SERVICES AGREEMENT
The Fund has entered into, a Distribution Services Agreement
(the "Agreement") with Alliance Fund Distributors, Inc., the
Fund's principal underwriter (the "Principal Underwriter"), to
permit the Fund directly or indirectly to pay expenses associated
with the distribution of its shares in accordance with a plan of
distribution 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").
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, in the case of Class C shares, without
the assessment of a contingent deferred sales charge, and at the
same time to permit the Principal Underwriter to compensate
broker-dealers in connection with the sale of such shares. In
this regard the purpose and function of the combined contingent
deferred sales charge and distribution services fee on the Class
B shares, and the distribution services fee on the Class C
36
<page
shares, are the same as those of the initial sales charge (or
contingent deferred sales charge, when applicable) and
distribution services fee with respect to the Class A shares in
that in each case the sales charge and/or distribution services
fee provide for the financing of the distribution of the Fund's
shares.
Under the Agreement, the Treasurer of the Fund reports the
amounts expended under the Rule 12b-1 Plan and the purposes for
which such expenditures were made to the Directors of the Fund
for their review on a quarterly basis. Also, the Agreement
provides that the selection and nomination of Directors who are
not "interested persons" of the Fund, as defined in the 1940 Act,
are committed to the discretion of such disinterested Directors
then in office.
The Agreement became effective on July 22, 1992 and was
amended as of April 30, 1993 to permit the distribution of an
additional class of shares, Class C shares. The amendment to the
Agreement was approved by the unanimous vote, cast in person, of
the disinterested Directors at a meeting called for that purpose
and held on February 23, 1993, and by the initial holder of Class
C shares of the Fund on April 30, 1993.
The Adviser may from time to time and from its own funds or
such other resources as may be permitted by rules of the
Securities and Exchange Commission make payments for distribution
services to the Principal Underwriter; the latter may in turn pay
part or all of such compensation to brokers or other persons for
their distribution assistance.
During the fiscal year ended November 30, 1994, the Fund
paid distribution services fees for expenditures under the
Agreement with respect to Class A shares, in amounts aggregating
$233,954 which constituted .30 of 1%, annualized, of the Fund's
average daily net assets during the period, and the Adviser made
payments from its own resources as described above aggregating
$281,890. Of the $515,844 paid by the Fund and the Adviser under
the Plan with respect to Class A shares, $22,397 was spent on
advertising, $7,560 on the printing and mailing of prospectuses
for persons other than current shareholders, $220,617 for
compensation to broker-dealers and other financial intermediaries
(including, $37,217 to the Fund's Principal Underwriter), $
for compensation to sales personnel and $183,762 was spent on the
printing of sales literature, travel, entertainment, due
diligence and other promotional expenses.
During the fiscal year ended November 30, 1994, with respect
to Class B shares, the Fund paid distribution services fees for
expenditures under the Agreement in the aggregate amount of
37
<page
$1,659,349 which constituted approximately 1% of 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 $-0-. Of the $1,659,349 paid by the
Fund and the Adviser under the Plan, $13,713 was spent on
advertising, $8,661 on printing and mailing of prospectuses for
persons other than current shareholders, $578,585 for
compensation to broker-dealers and other financial intermediaries
(including, $37,567 to the Fund's Principal Underwriter), $35,427
for compensation to sales personnel and $44,709 was spent on the
printing of sales literature, travel, entertainment, due
diligence and other promotional expenses.
During the fiscal year ended November 30, 1994, with respect
to Class C shares the Fund paid distribution services fees for
expenditures under the Agreement in the aggregate amount of
amount $2,184,741 which constituted approximately 1%, annualized,
of the Fund's average daily net assets attributable to Class C
shares during the period and the Adviser made payments from its
own resources as described above aggregating $1,098,493. Of the
$3,283,234 paid by the Fund and the Adviser under the Plan with
respect to Class C shares, $84,017 was spent on advertising,
$26,400 on printing and mailing of prospectuses for persons other
than current shareholders, $2,565,230 for compensation to broker-
dealers and other financial intermediaries (including, $426,255
to the Fund's Principal Underwriter), $259,279 for compensation
to sales personnel and $348,308 was spent on the printing of
sales literature, travel, entertainment, due diligence and other
promotional expenses.
The Agreement will continue in effect for successive twelve-
month periods (computed from each October 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 September 30, 1995 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 September 13,
1994.
In the event that the Agreement is terminated or not
continued with respect to the Class A shares, Class B shares or
38
<page
Class C shares, (i) no distribution services fees (other than
current amounts accrued but not yet paid) would be owed by the
Fund to the Principal Underwriter with respect to that class, and
(ii) the Fund would not be obligated to pay the Principal
Underwriter for any amounts expended under the Agreement not
previously recovered by the Principal Underwriter from
distribution services fees in respect of shares of such class or
through deferred sales charges.
All material amendments to the Agreement must be approved by
a vote of the Directors or the holders of the Fund's outstanding
voting securities, voting separately by class, and in either
case, by a majority of the disinterested Directors, cast in
person at a meeting called for the purpose of voting on such
approval; and the Agreement may not be amended in order to
increase materially the costs that the Fund may bear pursuant to
the Agreement without the approval of a majority of the holders
of the outstanding voting shares of the class affected. The
Agreement may be terminated (a) by the Fund without penalty at
any time by a majority vote of the holders of the outstanding
voting securities of the Fund, voting separately by class or by a
majority vote of the directors who are not "interested persons"
as defined in the 1940 Act, or (b) by the Principal Underwriter.
To terminate the Agreement, any party must give the other parties
60 days' written notice; to terminate the Rule 12b-1 Plan only,
the Fund need give no notice to the Principal Underwriter. The
Agreement will terminate automatically in the event of its
assignment.
TRANSFER AGENCY AGREEMENT
Alliance Fund Services, Inc., an indirect wholly-owned
subsidiary of the Adviser, receives a transfer agency fee per
account holder of each of the Class A shares, Class B shares and
Class C shares of the Fund, plus reimbursement for out-of-pocket
expenses. The transfer agency fee with respect to the Class B
shares is higher than the transfer agency fee with respect to the
Class A shares or the Class C shares reflecting the additional
costs associated with the Class B contingent deferred sales
charge. For the fiscal year ended November 30, 1994, the Fund
paid Alliance Fund Services, Inc. $432,483 for transfer agency
services.
- ---------------------------------------------------------------
PURCHASE OF SHARES
- ---------------------------------------------------------------
The following information supplements that set forth in the
Fund's Prospectus under the heading "Purchase and Sale of Shares
- -- How To Buy Shares."
39
<page
GENERAL
Shares of the Fund are offered on a continuous basis at a
price equal to their net asset value plus an initial sales charge
at the time of purchase (the "initial sales charge alternative"),
with a contingent deferred sales charge (the "deferred sales
charge alternative"), or without any initial or contingent
deferred sales charge (the "asset-based sales charge
alternative"), as described below. Shares of the Fund are
offered on a continuous basis through (i) investment dealers that
are members of the National Association of Securities Dealers,
Inc. and have entered into selected dealer agreements with the
Principal Underwriter ("selected dealers"), (ii) depository
institutions and other financial intermediaries or their
affiliates, that have entered into selected agent agreements with
the Principal Underwriter ("selected agents"), or (iii) the
Principal Underwriter. The minimum for initial investments is
$250; subsequent investments (other than reinvestments of
dividends and capital gains distributions in shares) must be in
the minimum amount of $50. As described under "Shareholder
Services," the Fund offers an automatic investment program and a
403(b)(7) retirement plan which permit investments of $25 or
more. The subscriber may use the Subscription Application found
in the Prospectus for his or her initial investment. Sales
personnel of selected dealers and agents distributing the Fund's
shares may receive differing compensation for selling Class A,
Class B or Class C shares.
Investors may purchase shares of the Fund in the United
States either through selected dealers or agents or directly
through the Principal Underwriter. Shares may also be sold in
foreign countries where permissible. The Fund may refuse any
order for the purchase of shares. The Fund reserves the right to
suspend the sale of 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 most purchases of Class A
shares, a sales charge which will vary depending on the purchase
alternative chosen by the investor and the amount of the
purchase, as shown in the table below under "Initial Sales Charge
Alternative -- Class A Shares". On each Fund business day on
which a purchase or redemption order is received by the Fund and
trading in the types of securities in which the Fund invests
might materially affect the value of Fund shares, the per share
net asset value is computed in accordance with the Fund's
Articles of Incorporation and By-Laws as of the next close of
regular trading on the New York Stock Exchange (the "Exchange")
(currently 4:00 p.m. New York time) by dividing the value of the
Fund's total assets, less its liabilities, by the total number of
its shares then outstanding. The respective per share net asset
40
<page
values of the Class A, Class B and Class C shares are expected to
be substantially the same. Under certain circumstances, however,
the per share net asset values of the Class B and Class C shares
may be lower than the per share net asset value of the Class A
shares as a result of the daily expense accruals of the
distribution and transfer agency fees applicable with respect to
the Class B and Class C shares. Even under those circumstances,
the per share net asset values of the three classes eventually
will tend to converge immediately after the payment of dividends,
which will differ by approximately the amount of the expense
accrual differential among the classes. A Fund business day is
any weekday, exclusive of national holidays on which the Exchange
is closed and Good Friday. For purposes of this computation,
Exchange-listed securities and over-the-counter securities
admitted to trading on the NASDAQ National List are valued at the
last quoted sale or, if no sale, at the mean of closing bid and
asked prices and portfolio bonds are presently valued by a
recognized pricing service. If accurate quotations are not
available, securities will be valued at fair value determined in
good faith by the Board of Directors.
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
or agents, the applicable public offering price will be the net
asset value as so determined, but only if the selected dealer or
agent receives the order prior to the close of regular trading on
the Exchange and transmits it to the Principal Underwriter prior
to its close of business that same day (normally 5:00 p.m. New
York time). The selected dealer or agent is responsible for
transmitting such orders by 5:00 p.m. If the selected dealer or
agent fails to do so, the investor's right to that day's closing
price must be settled between the investor and the selected
dealer or agent. If the selected dealer or agent receives the
order after the close of regular trading on the Exchange, the
price will be based on the net asset value determined as of the
close of regular trading on the Exchange on the next day it is
open for trading.
Following the initial purchase of Fund shares, a shareholder
may place orders to purchase additional shares by telephone if
the shareholder has completed the appropriate portion of the
Subscription Application or an "Autobuy" application obtained by
calling the "Literature" telephone number shown on the cover of
this Statement of Additional Information. Payment for shares
41
<page
purchased by telephone can be made only by Electronic Funds
Transfer from a bank account maintained by the shareholder at a
bank that is a member of the National Automated Clearing House
Association ("NACHA"). If a shareholder's telephone purchase
request is received before 3:00 p.m. New York time on a Fund
business day, the order to purchase shares is automatically
placed the following Fund business day, and the applicable public
offering price will be the public offering price determined as of
the close of business on such following business day. Full and
fractional shares are credited to a subscriber's account in the
amount of his or her subscription. As a convenience to the
subscriber, and to avoid unnecessary expense to the Fund, stock
certificates representing shares of the Fund are not issued
except upon written request to the Fund by the shareholder or his
or her authorized selected dealer or agent. This facilitates
later redemption and relieves the shareholder of the
responsibility for and inconvenience of lost or stolen
certificates. No certificates are issued for fractional shares,
although such shares remain in the shareholder's account on the
books of the Fund.
In addition to the discount or commission paid to dealers or
agents, the Principal Underwriter from time to time pays
additional cash or other incentives to dealers or agents,
including Equico Securities, Inc., an affiliate of the Principal
Underwriter, in connection with the sale of shares of the Fund.
Such additional amounts may be utilized, in whole or in part, to
provide additional compensation to registered representatives who
sell shares of the Fund. On some occasions, such cash or other
incentives will be conditioned upon the sale of a specified
minimum dollar amount of the shares of the Fund and/or other
Alliance Mutual Funds, as defined below, during a specific period
of time. On some occasions, such cash or other incentives may
take the form of payment for attendance at seminars, meals,
sporting events or theater performances, or payment for travel,
lodging and entertainment incurred in connection with travel
taken by persons associated with a dealer or agent and their
immediate family members to urban or resort locations within or
outside the United States. Such dealer or agent may elect to
receive cash incentives of equivalent amount in lieu of such
payments.
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund issues three classes of shares: Class A shares are
sold to investors choosing the initial sales charge alternative,
Class B shares are sold to investors choosing the deferred sales
charge alternative, and Class C shares are sold to investors
choosing the asset-based sales charge alternative. The three
classes of shares each represent an interest in the same
portfolio of investments of the Fund, have the same rights and
42
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are identical in all respects, except that (i) Class A shares
bear the expense of the initial sales charge (or contingent
deferred sales charge, when applicable) and Class B shares bear
the expense of the contingent deferred sales charge, (ii) Class B
shares and Class C shares each bear the expense of a higher
distribution services fee and in the case of Class B shares,
higher transfer agency costs, (iii) each class has exclusive
voting rights with respect to provisions of the Rule 12b-1 Plan
pursuant to which its distribution services fee is paid which
relates to a specific class and other matters for which separate
class voting is appropriate under applicable law, provided that,
if the Fund submits to a vote of both the Class A shareholders
and the Class B shareholders an amendment to the Rule 12b-1 Plan
that would materially increase the amount to be paid thereunder
with respect to the Class A shares, the Class A shareholders and
the Class B shareholders will vote separately by Class, and (iv)
only the Class B shares are subject to a conversion feature.
Each class has different exchange privileges and certain
different shareholder service options available.
The alternative purchase arrangements permit an investor to
choose the method of purchasing shares that is most beneficial
given the amount of the purchase, the length of time the investor
expects to hold the shares, and other circumstances. Investors
should consider whether, during the anticipated life of their
investment in the Fund, the accumulated distribution services fee
and contingent deferred sales charges on Class B shares prior to
conversion, or the accumulated distribution services fee on Class
C shares, would be less than the initial sales charge and
accumulated distribution services fee on Class A shares purchased
at the same time, and to what extent such differential would be
offset by the higher return of Class A shares. Class A shares
will normally be more beneficial than Class B shares to the
investor who qualifies for reduced initial sales charges on Class
A shares, as described below. In this regard, the Principal
Underwriter will reject any order (except orders from certain
retirement plans) for more than $250,000 for Class B shares.
Class C shares will normally not be suitable for the investor who
qualifies to purchase Class A shares at net asset value. In
addition, the Principal Underwriter will reject any order for
more than $5,000,000 for Class C shares.
Class A shares are subject to a lower distribution services
fee and, accordingly, pay correspondingly higher dividends per
share than Class B shares or Class C shares. However, because
initial sales charges are deducted at the time of purchase, most
investors purchasing Class A shares would not have all their
funds invested initially and, therefore, would initially own
fewer shares. Investors not qualifying for reduced initial sales
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charges who expect to maintain their investment for an extended
period of time might consider purchasing Class A shares because
the accumulated continuing distribution charges on Class B shares
or Class C shares may exceed the initial sales charge on Class A
shares during the life of the investment. Again, however, such
investors must weigh this consideration against the fact that,
because of such initial sales charges, not all their funds will
be invested initially.
Other investors might determine, however, that it would be
more advantageous to purchase Class B shares or Class C shares in
order to have all their funds invested initially, although
remaining subject to higher continuing distribution charges and,
in the case of Class B shares, being subject to a contingent
deferred sales charge for a three-year period. For example,
based on current fees and expenses, an investor subject to the
4.25% initial sales charge would have to hold his or her
investment approximately seven years for the Class C distribution
services fee to exceed the initial sales charge plus the
accumulated distribution services fee of Class A shares. In this
example, an investor intending to maintain his or her investment
for a longer period might consider purchasing Class A shares.
This example does not take into account the time value of money,
which further reduces the impact of the Class C distribution
services fees on the investment, fluctuations in net asset value
or the effect of different performance assumptions.
Those investors who prefer to have all of their funds
invested initially but may not wish to retain Fund shares for the
three-year period during which Class B shares are subject to a
contingent deferred sales charge may find it more advantageous to
purchase Class C shares.
The Directors of the Fund have determined that currently no
conflict of interest exists between or among the Class A, Class B
and Class C shares. On an ongoing basis, the Directors of the
Fund, pursuant to their fiduciary duties under the 1940 Act and
state laws, will seek to ensure that no such conflict arises.
During the Fund's fiscal years ended November 30, 1994,
November 30, 1993 and the fiscal period June 1, 1992
(commencement of operations) through November 30, 1992, the
aggregate amount of underwriting commission payable with respect
to Class A shares of the Fund were $825,625, $837,723 and
$758,559, respectively. Of those amounts, the Principal
Underwriter, received the amounts of $28,083, $2,132 and $1,281,
respectively, representing that portion of the sales charges paid
on shares of the Fund sold during the year which was not
44
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reallowed to selected dealers (and was, accordingly, retained by
the Principal Underwriter).
During the Fund's fiscal year ended November 30, 1994, the
Principal Underwriter received $590,655 in contingent deferred
sales charges with respect to Class B shares.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The public offering price of Class A shares for purchasers
choosing the initial sales charge alternative is the net asset
value plus a sales charge, as set forth below.
INITIAL SALES CHARGE
Discount or
Commission
As % of to Dealers
As % of the or Agents
Net Public As % of
Amount of Amount Offering Offering
Purchase Invested Price Price
Less than
$100,000. . . 4.44% 4.25% 4.00%
$100,000 but
less than
250,000. . . 3.36 3.25 3.00
250,000 but
less than
500,000. . . 2.30 2.25 2.00
500,000 but
less than
1,000,000. . . 1.78 1.75 1.50
____________________
There is no initial sales charge on transactions of $1,000,000 or
more.
With respect to purchases of $1,000,000 or more, Class A
shares redeemed within one year of purchase will be subject to a
contingent deferred sales charge equal to 1% of the lesser of the
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
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on certain redemptions, and such charge will be applied to
redemptions of shares by shareholders who hold both Class A and
Class B shares, as described below under "Deferred Sales Charge
Alternative--Class B Shares." Proceeds from the contingent
deferred sales charge on Class A shares are paid to the Principal
Underwriter and are used by the Principal Underwriter to defray
the expenses of the Principal Underwriter related to providing
distribution-related services to the Fund in connection with the
sales of Class A shares, such as the payment of compensation to
selected dealers and agents for selling Class A Shares. With
respect to purchases of $1,000,000 or more made through selected
dealers or agents, the Adviser may, pursuant to the Agreement
described above, pay such dealers or agents from its own
resources a fee of up to 1% of the amount invested to compensate
such dealers or agents for their distribution assistance in
connection with such purchases.
Shares issued pursuant to the automatic reinvestment of
income dividends or capital gains distributions are not subject
to any sales charges. The Fund receives the entire net asset
value of its Class A shares sold to investors. The Principal
Underwriter's commission is the sales charge shown above less any
applicable discount or commission "reallowed" to selected dealers
and agents. The Principal Underwriter will reallow discounts to
selected dealers and agents in the amounts indicated in the table
above. The Principal Underwriter may, however, elect to reallow
the entire sales charge to selected dealers and agents for all
sales with respect to which orders are placed with the Principal
Underwriter. A selected dealer who receives reallowance in
excess of 90% of such a sales charge may be deemed to be an
"underwriter" under the Securities Act of 1933, as amended.
Set forth below is an example of the method of computing the
offering price of the Class A shares. The example assumes a
purchase of Class A shares of the Fund aggregating less than
$100,000 subject to the schedule of sales charges set forth above
at a price based upon the net asset value of Class A shares of
the Fund on November 30, 1994.
Net Asset Value per Class A
Share at November 30, 1994 $9.51
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $0.42
Class A Per Share Offering Price
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to the Public $9.93
======
An investor choosing the initial sales charge alternative
may under certain circumstances be entitled to pay (i) no initial
sales charge (but be subject in most cases to a contingent
deferred sales charge) or (ii) a reduced initial sales charge.
The circumstances under which an investor may pay a reduced
initial sales charge or no initial sales charge are described
below.
COMBINED PURCHASE PRIVILEGE. Certain persons may qualify
for the sales charge reductions indicated in the schedule of such
charges above by combining purchases of shares of the Fund into a
single "purchase," if the resulting "purchase" totals at least
$100,000. The term "purchase" refers to: (i) a single purchase by
an individual, or to concurrent purchases, which in the aggregate
are at least equal to the prescribed amounts, by an individual,
his or her spouse and their children under the age of 21 years
purchasing shares of the Fund for his, her or their own
account(s); (ii) a single purchase by a trustee or other
fiduciary purchasing shares for a single trust, estate or single
fiduciary account although more than one beneficiary is involved;
or (iii) a single purchase for the employee benefit plans of a
single employer. The term "purchase" also includes purchases by
any "company," as the term is defined in the 1940 Act, but does
not include purchases by any such company which has not been in
existence for at least six months or which has no purpose other
than the purchase of shares of the Fund or shares of other
registered investment companies at a discount. The term
"purchase" does not include purchases by any group of individuals
whose sole organizational nexus is that the participants therein
are credit card holders of a company, policy holders of an
insurance company, customers of either a bank or broker-dealer or
clients of an investment adviser. A "purchase" may also include
shares, purchased at the same time through a single selected
dealer or agent, of any other "Alliance Mutual Fund." Currently,
the Alliance Mutual Funds include:
AFD Exchange Reserves
The Alliance Fund, Inc.
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
Alliance Bond Fund, Inc.
-Corporate Bond Portfolio
-U.S. Government Portfolio
Alliance Counterpoint Fund
Alliance Developing Markets Fund, Inc.
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Alliance Global Dollar Government Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Growth and Income Fund, Inc.
Alliance Income Builder Fund, Inc.
Alliance International Fund
Alliance Mortgage Securities Income Fund, Inc.
Alliance Mortgage Strategy Trust, Inc.
Alliance Multi-Market Strategy Trust, Inc.
Alliance Municipal Income Fund, 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 Short-Term Multi-Market Trust, Inc.
Alliance Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
Alliance World Income Trust, Inc.
Alliance Worldwide Privatization Fund, Inc.
The Alliance Portfolios
-The Alliance Growth Fund
-The Alliance Conservative Investors Fund
-The Alliance Growth Investors Fund
-The Alliance Strategic Balanced Fund
-The Alliance Short-Term U.S. Government Fund
The Hudson River Trust
Prospectuses for the Alliance Mutual Funds may be obtained
without charge by contacting Alliance Fund Services, Inc. at the
address or the "Literature" telephone number shown on the front
cover of this Statement of Additional Information.
CUMULATIVE QUANTITY DISCOUNT (RIGHT OF ACCUMULATION). An
investor's purchase of additional Class A shares of the Fund may
qualify for a Cumulative Quantity Discount. The applicable sales
charge will be based on the total of:
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(i) the investor's current purchase;
(ii) the net asset value (at the close of business on the
previous day) of (a) all Class A, Class B and Class C
shares of the Fund held by the investor and (b) all
shares of any other Alliance Mutual Fund held by the
investor; and
(iii) the net asset value of all shares described in paragraph
(ii) owned by another shareholder eligible to combine
his or her purchase with that of the investor into a
single "purchase" (see above).
For example, if an investor owned shares of an Alliance
Mutual Fund worth $200,000 at their then current net asset value
and, subsequently, purchased Class A shares of the Fund worth an
additional $100,000, the initial sales charge for the $100,000
purchase would be at the 2.25% rate applicable to a single
$300,000 purchase of shares of the Fund, rather than the 3.25%
rate.
To qualify for the Combined Purchase Privilege or to obtain
the Cumulative Quantity Discount on a purchase through a selected
dealer or agent, the investor or selected dealer or agent must
provide the Principal Underwriter with sufficient information to
verify that each purchase qualifies for the privilege or
discount.
STATEMENT OF INTENTION. Class A investors may also obtain
the reduced initial sales charges shown in the table above by
means of a written Statement of Intention, which expresses the
investor's intention to invest not less than $100,000 within a
period of 13 months in Class A shares (or Class A, Class B and/or
Class C shares) of the Fund or any other Alliance Mutual Fund.
Each purchase of shares under a Statement of Intention will be
made at the public offering price or prices applicable at the
time of such 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
49
<page
the investor's spouse each purchase shares of the Fund worth
$20,000 (for a total of $40,000), it will be necessary to invest
only a total of $60,000 during the following 13 months in shares
of the Fund or any other Alliance Mutual Fund, to qualify for the
3.25% initial sales charge on the total amount being invested
(the initial sales charge applicable to an investment of
$100,000).
The Statement of Intention is not a binding obligation upon
the investor to purchase the full amount indicated. The minimum
initial investment under a Statement of Intention is 5% of such
amount. Shares purchased with the first 5% of such amount will
be held in escrow (while remaining registered in the name of the
investor) to secure payment of the higher initial sales charge
applicable to the shares actually purchased if the full amount
indicated is not purchased, and such escrowed shares will be
involuntarily redeemed to pay the additional 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 initial
sales charge will be adjusted for the entire amount purchased at
the end of the 13-month period. The difference in the initial
sales charge will be used to purchase additional shares of the
Fund subject to the rate of the initial sales charge applicable
to the actual amount of the aggregate purchases.
Investors wishing to enter into a Statement of Intention in
conjunction with their initial investment in Class A shares of
the Fund should complete the appropriate portion of the
Subscription Application found in the Prospectus while current
Class A shareholders desiring to do so can obtain a form of
Statement of Intention by contacting Alliance Fund Services, Inc.
at the address or telephone numbers shown on the cover of this
Statement of Additional Information.
CERTAIN RETIREMENT PLANS. Multiple participant payroll
deduction retirement plans may also purchase shares of the Fund
or any other Alliance Mutual Fund at a reduced initial sales
charge on a monthly basis during the 13-month period following
such a plan's initial purchase. The initial sales charge
applicable to such initial purchase of shares of the Fund will be
that normally applicable, under the schedule of the initial sales
charges set forth in this Statement of Additional Information, to
an investment 13 times larger than such initial purchase. The
sales charge applicable to each succeeding monthly purchase will
50
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be that normally applicable, under such schedule, to an
investment equal to the sum of (i) the current month's purchase
multiplied by the number of months (including the current month)
remaining in the 13-month period and (ii) the total purchase
previously made during the 13-month period. Sales charges
previously paid during such period will not be retroactively
adjusted on the basis of later purchases.
REINSTATEMENT PRIVILEGE. A shareholder who has caused any
or all of his or her Class A shares of the Fund to be redeemed or
repurchased may reinvest all or any portion of the redemption or
repurchase proceeds in Class A shares of the Fund at net asset
value without any sales charge, provided that such reinvestment
is made within 30 calendar days after the redemption or
repurchase date. Shares are sold to a reinvesting shareholder at
the net asset value next determined as described above. A
reinstatement pursuant to this privilege will not cancel the
redemption or repurchase transaction; therefore, any gain or loss
so realized will be recognized for Federal tax purposes except
that no loss will be recognized to the extent that the proceeds
are reinvested in shares of the Fund. The reinstatement
privilege may be used by the shareholder only once, irrespective
of the number of shares redeemed or repurchased, except that the
privilege may be used without limit in connection with
transactions whose sole purpose is to transfer a shareholder's
interest in the Fund to his or her individual retirement account
or other qualified retirement plan account. Investors may
exercise the reinstatement privilege by written request sent to
the Fund at the address shown on the cover of this Statement of
Additional Information.
SALES AT NET ASSET VALUE. The Fund may sell its Class A
shares at net asset value (i.e., without an initial sales charge)
and without a contingent deferred sales charge to certain
categories of investors including: (i) investment advisory
clients of the Adviser or its affiliates; (ii) officers and
present or former Directors of the Fund; present or former
directors and trustees of other investment companies managed by
the Adviser; present or retired full-time employees of the
Adviser; officers, directors and present or retired full-time
employees of ACMC, the Principal Underwriter, Alliance Fund
Services, Inc. and their affiliates; officers, directors and
present and full-time employees of selected dealers or agents; or
the spouse, sibling, direct ancestor or direct descendant
(collectively "relatives") of any such person; or any trust,
individual retirement account or retirement plan account for the
benefit of any such person or relative; or the estate of any such
person or relative, if such shares are purchased for investment
purposes (such shares may not be resold except to the Fund);
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(iii) certain employee benefit plans for employees of the
Adviser, the Principal Underwriter, Alliance Fund Services, Inc.
and their affiliates; (iv) persons who were shareholders of the
Fund before the commencement of sales of shares of the Fund
subject to a sales charge; and (v) persons participating in a
fee-based program, sponsored and maintained by a registered
broker-dealer and approved by the Principal Underwriter, pursuant
to which such persons pay an asset-based fee to such broker-
dealer, or its affiliate or agent, for service in the nature of
investment advisory or administrative services.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Investors choosing the deferred sales charge alternative
purchase Class B shares at the public offering price equal to the
net asset value per share of the Class B shares on the date of
purchase without the imposition of a sales charge at the time of
purchase. The Class B shares are sold without an initial sales
charge so that the Fund will receive the full amount of the
investor's purchase payment.
Proceeds from the contingent deferred sales charge on the
Class B shares are paid to the Principal Underwriter and are used
by the Principal Underwriter to defray the expenses of the
Principal Underwriter related to providing distribution-related
services to the Fund in connection with the sale of the Class B
shares, such as the payment of compensation to selected dealers
and agents for selling Class B shares. The combination of the
contingent deferred sales charge and the distribution services
fee enables the Fund to sell the Class B shares without a sales
charge being deducted at the time of purchase. The higher
distribution services fee incurred by Class B shares will cause
such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares.
CONTINGENT DEFERRED SALES CHARGE. Class B shares which are
redeemed within four years of purchase will be subject to a
contingent deferred sales charge at the rates set forth below
charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of
the cost of the shares being redeemed or their net asset value at
the time of redemption. Accordingly, no sales charge will be
imposed on increases in net asset value above the initial
purchase price. In addition, no charge will be assessed on
shares derived from reinvestment of dividends or capital gains
distributions.
To illustrate, assume 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
52
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shares upon dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 Class B shares (proceeds
of $600), 10 Class B shares will not be subject to charge because
of dividend reinvestment. With respect to the remaining 40
Class B shares, the charge is applied only to the original cost
of $10 per share and not to the increase in net asset value of $2
per share. Therefore, $400 of the $600 redemption proceeds will
be charged at a rate of 2.0% (the applicable rate in the second
year after purchase as set forth below).
The amount of the contingent deferred sales charge, if any,
will vary depending on the number of years from the time of
payment for the purchase of Class B shares until the time of
redemption of such shares.
Contingent Deferred Sales as a %
Year Since Purchase of Dollar Amount Subject to Charge
First 3.0%
Second 2.0%
Third 1.0%
Fourth None
In determining the contingent deferred sales charge
applicable to a redemption, it will be assumed that the
redemption is first of any shares in the shareholder's Fund
account that are not subject to a contingent deferred sales
charge, second of Class B shares held for over three years and
third of Class A shares that are subject to a contingent deferred
sales charge held shortest during the one-year period during
which such shares are subject to the sales charge. When Class B
shares acquired in an exchange are redeemed, the applicable
contingent deferred sales charge and conversion schedules will be
the schedules that applied to Class B shares of the Alliance
Mutual Fund originally purchased by the shareholder at the time
of their purchase.
The contingent deferred sales charges on Class A and Class B
shares are waived on redemptions of shares (i) following the
death or disability, as defined in the Internal Revenue Code of
1986, as amended (the "Code"), of a shareholder, (ii) to the
extent that the redemption represents a minimum required
distribution from an individual retirement account or other
retirement plan to a shareholder who has attained the age of 70-
1/2 or (iii) that had been purchased by present or former
Directors 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.
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CONVERSION FEATURE. At the end of the period ending six
years after the end of the calendar month in which the
shareholder's purchase order was accepted, Class B shares will
automatically convert to Class A shares and will no longer be
subject to a higher distribution services fee. Such conversion
will be on the basis of the relative net asset values of the two
classes, without the imposition of any sales load, fee or other
charge. The purpose of the conversion feature is to reduce the
distribution services fee paid by holders of Class B shares that
have been outstanding long enough for the Principal Underwriter
to have been compensated for distribution expenses incurred in
the sale of such shares.
For purposes of conversion to Class A, Class B shares
purchased through the reinvestment of dividends and distributions
paid in respect of Class B shares in a shareholder's account will
be considered to be held in a separate sub-account. Each time
any Class B shares in the shareholder's account (other than those
in the sub-account) convert to Class A, an equal pro-rata portion
of the Class B shares in the sub-account will also convert to
Class A.
The conversion of Class B shares to Class A shares is
subject to the continuing availability of an opinion of counsel
to the effect that (i) the assessment of the higher distribution
services fee and transfer agency costs with respect to Class B
shares does not result in the Fund's dividends or distributions
constituting "preferential dividends" under the Code, and (ii)
the conversion of Class B shares to Class A shares does not
constitute a taxable event under federal income tax law. The
conversion of Class B shares to Class A shares may be suspended
if such an opinion is no longer available at the time such
conversion is to occur. In that event, no further conversions of
Class B shares would occur, and shares might continue to be
subject to the higher distribution services fee for an indefinite
period which may extend beyond the period ending six years after
the end of the calendar month in which the shareholder's purchase
order was accepted.
ASSET-BASED SALES CHARGE ALTERNATIVE--CLASS C SHARES
Investors choosing the asset-based sales charge alternative
purchase Class C shares at the public offering price equal to the
net asset value per share of the Class C shares on the date of
purchase without the imposition of a sales charge either at the
time of purchase or upon redemption. Class C shares are sold
without an initial sales charge so that the Fund will receive the
full amount of the investor's purchase payment and without a
contingent deferred sales charge so that the investor will
receive as proceeds upon redemption the entire net asset value of
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his or her Class C shares. The Class C distribution services fee
enables the Fund to sell Class C shares without either an initial
or contingent deferred sales charge. Class C shares do not
convert to any other class of shares of the Fund and incur higher
distribution services fees than Class A shares, and will thus
have a higher expense ratio and pay correspondingly lower
dividends than Class A shares.
- ---------------------------------------------------------------
REDEMPTION AND REPURCHASE OF SHARES
- ---------------------------------------------------------------
The following information supplements that set forth in the
Fund's Prospectus under the heading "Purchase and Sale of
Shares--How to Sell Shares."
REDEMPTION
Subject only to the limitations described below, the Fund's
Articles of Incorporation require that the Fund redeem the shares
tendered to it, as described below, at a redemption price equal
to their net asset value as next computed following the receipt
of shares tendered for redemption in proper form. Except for any
contingent deferred sales charge which may be applicable to Class
A shares or Class B shares, there is no redemption charge.
Payment of the redemption price will be made within seven days
after the Fund's receipt of such tender for redemption.
The right of redemption may not be suspended or the date of
payment upon redemption postponed for more than seven days after
shares are tendered for redemption, except for any period during
which the New York Stock Exchange (the "Exchange") is closed
(other than customary weekend and holiday closings) or during
which the Securities and Exchange Commission determines that
trading thereon is restricted, or for any period during which an
emergency (as determined by the Securities and Exchange
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 Securities and Exchange Commission may by
order permit for the protection of security holders of the Fund.
Payment of the redemption price will be made in cash. The
value of a shareholder's shares on redemption or repurchase may
be more or less than the cost of such shares to the shareholder,
depending upon the market value of the Fund's portfolio
securities at the time of such redemption or repurchase.
Redemption proceeds on Class A shares and Class B shares will
reflect the deduction of the contingent deferred sales charge, if
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any. Payment (either in cash or in portfolio securities)
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
institution that is an "eligible guarantor" as defined in Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended.
TELEPHONE REDEMPTION BY ELECTRONIC FUNDS TRANSFER. Requests
for redemption of shares for which no stock certificates have
been issued can also be made by telephone at (800) 221-5672 by a
shareholder who has completed the appropriate portion of the
Subscription Application or, in the case of an existing
shareholder, an "Autosell" application obtained from Alliance
Fund Services, Inc. A telephone redemption request must be for
at least $500 and may not exceed $100,000, and must be made
between 9:00 a.m. and 4:00 p.m. New York time on a Fund business
day as defined above. Proceeds of telephone redemptions will be
sent by Electronic Funds Transfer to a shareholder's designated
bank account at a bank selected by the shareholder that is a
member of the NACHA.
TELEPHONE REDEMPTION BY CHECK. Except as noted below, each
Fund shareholder is eligible to request redemption, once in any
30-day period, of Fund shares by telephone at (800) 221-5672
before 4:00 p.m. New York time on a Fund business day in an
amount not exceeding $25,000. Proceeds of such redemptions are
remitted by check to the shareholder's address of record.
Telephone redemption by check is not available with respect to
shares (i) for which certificates have been issued, (ii) held in
nominee or "street name" accounts, (iii) purchased within 15
calendar days prior to the redemption request, (iv) held by a
shareholder who has changed his or her address of record within
the preceding 30 calendar days or (v) held in any retirement plan
account. A shareholder otherwise eligible for telephone
redemption by check may cancel the privilege by written
instruction to Alliance Fund Services, Inc., or by checking the
appropriate box on the Subscription Application found in the
Prospectus.
GENERAL. During periods of drastic economic or market
developments, such as the market break of October 1987, it is
possible that shareholders would have difficulty in reaching
Alliance Fund Services, Inc. by telephone (although no such
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difficulty was apparent at any time in connection with the 1987
market break). If a shareholder were to experience such
difficulty, the shareholder should issue written instructions to
Alliance Fund Services, Inc. at the address shown on the cover of
this Statement of Additional Information. The Fund reserves the
right to suspend or terminate its telephone redemption service at
any time without notice. Neither the Fund nor the Adviser, the
Principal Underwriter or Alliance Fund Services, Inc. will be
responsible for the authenticity of telephone requests for
redemptions that the Fund reasonably believes to be genuine. The
Fund will employ reasonable procedures in order to verify that
telephone requests for redemptions are genuine, including, among
others, recording such telephone instructions and causing written
confirmations of the resulting transactions to be sent to
shareholders. If the Fund did not employ such procedures, it
could be liable for losses arising from unauthorized or
fraudulent telephone instructions. Selected dealers or agents
may charge a commission for handling telephone requests for
redemptions.
To redeem shares of the Fund represented by stock
certificates, the investor should forward the appropriate stock
certificate or certificates, endorsed in blank or with blank
stock powers attached, to the Fund with the request that the
shares represented thereby, or a specified portion thereof, be
redeemed. The stock assignment form on the reverse side of each
stock certificate surrendered to the Fund for redemption must be
signed by the registered owner or owners exactly as the
registered name appears on the face of the certificate or,
alternatively, a stock power signed in the same manner may be
attached to the stock certificate or certificates or, where
tender is made by mail, separately mailed to the Fund. The
signature or signatures on the assignment form must be guaranteed
in the manner described above.
REPURCHASE
The Fund may repurchase shares through the Principal
Underwriter or selected dealers or agents. The repurchase price
will be the net asset value next determined after the Principal
Underwriter receives the request (less the contingent deferred
sales charge, if any, with respect to the Class A shares and
Class B shares), except that requests placed through selected
dealers or agents before the close of regular trading on the
Exchange on any day will be executed at the net asset value
determined as of such close of regular trading on that day if
received by the Principal Underwriter prior to its close of
business on that day (normally 5:00 p.m. New York time). The
selected dealer or agent is responsible for transmitting the
request to the Principal Underwriter by 5:00 p.m. If the
selected dealer or agent fails to do so, the shareholder's right
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to receive that day's closing price must be settled between the
shareholder and the dealer or agent. A shareholder may offer
shares of the Fund to the Principal Underwriter either directly
or through a selected dealer or agent. Neither the Fund nor the
Principal Underwriter charges a fee or commission in connection
with the repurchase of shares (except for the contingent deferred
sales charge, if any, with respect to Class A shares and Class B
shares). Normally, if shares of the Fund are offered through a
selected dealer or agent, the repurchase is settled by the
shareholder as an ordinary transaction with or through the
selected dealer or agent, who may charge the shareholder for this
service. The repurchase of shares of the Fund as described above
is a voluntary service of the Fund and the Fund may suspend or
terminate this practice at any time.
GENERAL
The Fund reserves the right to close out an account that
through redemption has remained below $200 for at least 60 days
after at least 30 days' written notice to the shareholder
subsequent to such period. No contingent deferred sales charge
will be deducted from the proceeds of this redemption. In the
case of a redemption or repurchase of shares of the Fund recently
purchased by check, redemption proceeds will not be made
available until the Fund is reasonably assured that the check has
cleared, normally up to 15 calendar days following the purchase
date.
- ---------------------------------------------------------------
SHAREHOLDER SERVICES
- ---------------------------------------------------------------
The following information supplements that set forth in the
Fund's Prospectus under the heading "Purchase and Sale of Shares-
- -Shareholder Services." The shareholder services set forth below
are applicable to all three classes of shares of the Fund.
AUTOMATIC INVESTMENT PROGRAM
Investors may purchase shares of the Fund through an
automatic investment program utilizing "pre-authorized check"
drafts drawn on the investor's own bank account. Under such a
program, pre-authorized monthly drafts for a fixed amount (at
least $25) are used to purchase shares through the selected
dealer or selected agent designated by the investor at the public
offering price next determined after the Principal Underwriter
receives the proceeds from the investor's bank. Drafts may be
made in paper form or, if the investor's bank is a member of the
NACHA, in electronic form. If made in paper form, the draft is
normally made on the 20th day of each month, or the next business
day thereafter. If made in electronic form, drafts can be made
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on or about a date each month selected by the shareholder.
Investors wishing to establish an automatic investment program in
connection with their initial investment should complete the
appropriate portion of the Subscription Application found in the
Prospectus. Current shareholders should contact Alliance Fund
Services, Inc. at the address or telephone numbers shown on the
cover of this Statement of Additional Information to establish an
automatic investment program.
EXCHANGE PRIVILEGE
Class A shareholders of the Fund can exchange their Class A
shares for Class A shares of any other Alliance Mutual Fund that
offers Class A shares and for shares of Alliance World Income
Trust, Inc. without the payment of any sales or service charges.
For purposes of applying any applicable contingent deferred sales
charge upon the newly acquired Class A shares, the period of time
the Class A shares surrendered in the exchange have been held is
added to the period of time the newly acquired shares have been
held. Prospectuses for each Alliance Mutual Fund may be obtained
by contacting Alliance Fund Services, Inc. at the address shown
on the cover of this Statement of Additional Information or by
telephone at (800) 227-4618 or, in Illinois, (800) 227-4170.
Class B shareholders of the Fund can exchange their Class B
shares ("original Class B shares") for Class B shares of any
other Alliance Mutual Fund that offers Class B shares ("new
Class B shares") without the payment of any contingent deferred
sales or service charges. For purposes of computing both the
time remaining before the new Class B shares convert to Class A
shares of that fund and the contingent deferred sales charge
payable upon disposition of the new Class B shares, the period of
time for which the original Class B shares have been held is
added to the period of time for which the new Class B shares have
been held. After an exchange, new Class B shares will
automatically convert into Class A shares in accordance with the
conversion schedule applicable to the Alliance Mutual Fund Class
B shares originally purchased for cash, and when redemption
occurs, the contingent deferred sales charge schedule applicable
to the Class B shares originally purchased for cash is applied.
Class C shareholders of the Fund can exchange their Class C
shares for Class C shares of any other Alliance Mutual Fund that
offers Class C shares.
All exchanges are subject to the minimum investment
requirements and any other applicable terms set forth in the
Prospectus for the Alliance Mutual Fund whose shares are being
acquired. An exchange is effected through the redemption of the
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shares tendered for exchange and the purchase of shares being
acquired at their respective net asset values as next determined
following receipt by the Alliance Mutual Fund whose shares are
being exchanged of (i) proper instructions and all necessary
supporting documents as described in such fund's Prospectus, or
(ii) a telephone request for such exchange in accordance with the
procedures set forth in the following paragraph. Exchanges
involving the redemption of shares recently purchased by check
will be permitted only after the Alliance Mutual Fund whose
shares have been tendered for exchange is reasonably assured that
the check has cleared, normally up to 15 calendar days following
the purchase date. Exchanges of shares of Alliance Mutual Funds
will generally result in the realization of a capital gain or
loss for Federal income tax purposes.
Each Fund shareholder, and the shareholder's selected dealer
or agent, are authorized to make telephone requests for exchanges
unless Alliance Fund Services, Inc., receives written instruction
to the contrary from the shareholder, or the shareholder declines
the privilege by checking the appropriate box on the Subscription
Application found in the Prospectus. Such telephone requests
cannot be accepted with respect to shares then represented by
stock certificates. Shares acquired pursuant to a telephone
request for exchange will be held under the same account
registration as the shares redeemed through such exchange.
Eligible shareholders desiring to make an exchange should
telephone Alliance Fund Services, Inc. with their account number
and other details of the exchange, at (800) 221-5672 between 9:00
a.m. and 4:00 p.m., New York time, on a Fund business day as
defined above. Telephone requests for exchange received before
4:00 p.m. New York time on a Fund business day will be processed
as of the close of business on that day. During periods of
drastic economic or market developments, such as the market break
of October 1987, it is possible that shareholders would have
difficulty in reaching Alliance Fund Services, Inc. by telephone
(although no such difficulty was apparent at any time in
connection with the 1987 market break). If a shareholder were to
experience such difficulty, the 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.
Neither the Alliance Funds nor the Adviser, the Principal
Underwriter or Alliance Fund Services, Inc. will be responsible
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for the authenticity of telephone requests for exchanges that the
Fund reasonably believes to be genuine. The Fund will employ
reasonable procedures in order to verify that telephone requests
for exchanges are genuine, including, among others, recording
such telephone instructions and causing written confirmations of
the resulting transactions to be sent to shareholders. If the
Fund did not employ such procedures, it could be liable for
losses arising from unauthorized or fraudulent telephone
instructions. Selected dealers or agents may charge a commission
for handling telephone requests for exchanges.
The exchange privilege is available only in states where
shares of the Alliance Mutual Funds being acquired may be legally
sold. Each Alliance Mutual Fund reserves the right, at any time
on 60 days' notice to its shareholders, to reject any order to
acquire its shares through exchange or otherwise to modify,
restrict or terminate the exchange privilege.
RETIREMENT PLANS
The Fund may be a suitable investment vehicle for part or
all of the assets held in various types of retirement plans, such
as those listed below. The Fund has available forms of such
plans pursuant to which investments can be made in the Fund and
other Alliance Mutual Funds. Persons desiring information
concerning these plans should contact Alliance Fund Services,
Inc. at the "Literature" telephone number on the cover of this
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-
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deductible contributions are made within prescribed limits based
on compensation paid to participating individuals.
If the aggregate net asset value of shares of the Alliance
Mutual Funds held by the qualified plan reaches $5 million on or
before December 15 in any year, all Class B or C shares of the
Fund held by such plan can be exchanged at the Plan's request,
without any sales charge, for Class A shares of such Fund.
SIMPLIFIED EMPLOYEE PENSION PLAN ("SEP"). Sole proprietors,
partnerships and corporations may sponsor a SEP under which they
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 retirements plans
under which an employee may agree that monies deducted from his
or her compensation (minimum $25 per pay period) may be
contributed by the employer to a custodial account established
for the employee under the plan.
The Alliance Plans Division of Frontier Trust Company, a
subsidiary of The Equitable Life Assurance Society of the United
States, which serves as custodian or trustee under the retirement
plan prototype forms available from the Fund, charges certain
nominal fees for establishing an account and for annual
maintenance. A portion of these fees is remitted to Alliance
Fund Services, Inc. as compensation for its services to the
retirement plan accounts maintained with the Fund.
Distributions from retirement plans are subject to certain
Code requirements in addition to normal redemption procedures.
For additional information please contact Alliance Fund Services,
Inc.
DIVIDEND DIRECTION PLAN
A shareholder who already maintains, in addition to his or
her Class A, Class B or Class C Fund account, Class A, Class B or
Class C account(s) with one or more other Alliance Mutual Funds
may direct that income dividends and/or capital gains paid on his
or her Class A, Class B or Class C Fund shares be automatically
reinvested, in any amount, without the payment of any sales or
service charges, in shares of the same class of such other
Alliance Mutual Fund(s). Further information can be obtained by
contacting Alliance Fund Services, Inc. at the address or the
"Literature" telephone number shown on the cover of this
Statement of Additional Information. Investors wishing to
establish a dividend direction plan in connection with their
initial investment should complete the appropriate section of the
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Subscription Application found in the Prospectus. Current
shareholders should contact Alliance Fund Services, Inc. to
establish a dividend direction plan.
SYSTEMATIC WITHDRAWAL PLAN
Any shareholder who owns or purchases shares of the Fund
having a current net asset value of at least $4,000 (for
quarterly or less frequent payments), $5,000 (for bi-monthly
payments) or $10,000 (for monthly payments) may establish a
systematic withdrawal plan under which the shareholder will
periodically receive a payment in a stated amount of not less
than $50 on a selected date. Systematic withdrawal plan
participants must elect to have their dividends and distributions
from the Fund automatically reinvested in additional shares of
the Fund.
Shares of the Fund owned by a participant in the Fund's
systematic withdrawal plan will be redeemed as necessary to meet
withdrawal payments and such withdrawal payments will be subject
to any taxes applicable to redemptions. 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 shareholder of
Class A shares who is maintaining a systematic withdrawal plan,
such investment should normally be an amount equivalent to three
times the annual withdrawal or $5,000, whichever is less.
For Class A shareholders, Class B shareholders that
purchased their Class B shares under a retirement plan and Class
C shareholders, payments under a systematic withdrawal plan may
be made by check or electronically via the Automated Clearing
House ("ACH") network. Investors wishing to establish a
systematic withdrawal plan in conjunction with their initial
investment in shares of the Fund should complete the appropriate
portion of the Subscription Application found in the Prospectus,
while current Fund shareholders desiring to do so can obtain an
application form by contacting Alliance Fund Services, Inc. at
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the address or the "Literature" telephone number shown on the
cover of this Statement of Additional Information.
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.
- ---------------------------------------------------------------
NET ASSET VALUE
- ---------------------------------------------------------------
Securities which are traded over-the-counter and on a
national securities exchange will be valued according to the
broadest and most representative market, and it is expected that
for the fixed-income securities in which the Fund invests this
ordinarily will be the over-the-counter market. However, fixed-
income securities may be valued on the basis of prices provided
by a pricing service when such prices are believed by the Adviser
to reflect the fair market value of such securities. The prices
provided by a pricing service take into account institutional
size trading in similar groups of securities and any developments
related to specific securities. Securities not priced in this
manner are valued at the most recent quoted bid price, or, when
stock exchange valuations are used, at the latest quoted sale
price on the day of valuation. If there is no such reported
sale, the latest quoted bid price will be used. Futures
contracts and options on futures contracts will be valued in a
like manner, except that open futures contracts sales will be
valued using the closing settlement price or, in the absence of
such a price, the most recent quoted asked price. Portfolio
instruments having less than 60 days remaining until maturity are
valued at amortized cost, unless the Board of Directors
determines that such cost does not represent fair value. Other
assets and securities for which no quotations are readily
available will be valued in good faith at fair value using
methods determined by the Board of Directors.
For purposes of determining the Fund's net asset value per
share, all assets and liabilities initially expressed in foreign
currencies will be converted into U.S. Dollars at the mean of the
bid and asked prices of such currencies against the U.S. Dollar
last quoted by a major bank that is a regular participant in the
institutional foreign exchange markets or on the basis of a
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pricing service which takes into account the quotes provided by a
number of such major banks.
The assets belonging to the Class A shares, the Class B
shares and the Class C shares will be invested together in a
single portfolio. The net asset value of each class will be
determined separately by subtracting the accrued expenses and
liabilities allocated to that class from the assets belonging to
that class pursuant to an order issued by the Commission.
- ---------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
- ---------------------------------------------------------------
U.S. FEDERAL INCOME TAXATION OF DIVIDENDS AND DISTRIBUTIONS
GENERAL
The Fund qualified for the fiscal year ended November 30,
1994 and intends to qualify in the future for tax treatment as a
"regulated investment company" under the Internal Revenue Code of
1986, as amended (the "Code"). 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 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, (i) 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 securities or other income
(including but not limited to the gains from options, futures or
forward contracts) derived with respect to its business of
investing in securities, and (ii) derive less than 30% of its
gross income from the sale or other disposition of securities, or
certain options, futures or forward contracts held for less than
three months. These requirements limit the Fund's ability to
write and purchase options, to purchase and sell futures
contracts, to purchase or sell forward contracts, to enter into
interest rate swaps, and to purchase or sell interest rate caps
and floors.
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
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regulated investment company. An investor should consult his or
her own tax counsel with respect to the specific tax consequences
of being a shareholder of the Fund, including the effect and
applicability of federal, state and local tax laws to his or her
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 November 30 (or December 31 if
elected by the Fund) of such year and (iii) any ordinary income
or capital gain net income from the preceding calendar year that
was not distributed during such year. For this purpose, income
or gain retained by the 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
taxable to shareholders as ordinary income. Since the Fund
expects to derive substantially all of its gross income from
sources other than dividends, it is expected that none of the
Fund's dividends or distributions will qualify for the dividends-
received deduction for corporations.
The excess of net long-term capital gains over the net
short-term capital losses realized and distributed by the Fund to
its shareholders will be taxable to the shareholders as long-term
capital gains, irrespective of the length of time a shareholder
may have held his or her Fund shares. Any dividend or
distribution received by a shareholder on shares of the Fund 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 taxable to the shareholder as a long-term capital
gain, any loss recognized by the shareholder on the sale of those
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shares during the six-month period will be treated as a long-term
capital loss to the extent of the dividend.
Dividends are taxable in the manner discussed regardless of
whether they are paid to the shareholder in cash or are
reinvested in additional shares of the Fund.
The Fund generally will be required to withhold tax at the
rate of 31% with respect to dividends of net ordinary income and
net distributions of realized capital gains payable to a
noncorporate shareholder unless the shareholder certifies on his
or her subscription application that the social security or
taxpayer identification number provided is correct and that the
shareholder has not been notified by the Internal Revenue Service
that he or she is subject to backup withholding.
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 debt securities
denominated in a foreign currency which are attributable to
fluctuations in the value of the foreign currency between the
date of acquisition of the asset and the date of disposition also
are treated as ordinary gain or loss. 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.
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OPTIONS AND FUTURES CONTRACTS. Certain listed options and
regulated futures 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 generally will be considered 60% long-term and 40%
short-term capital gain or loss provided that the Fund may elect
to treat gain or loss realized by the Fund on section 1256
contracts with respect to foreign currencies as ordinary. 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). The
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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
contract, or other position entered into or held by the Fund in
conjunction with any other position held by the Fund may
constitute a "straddle" for federal income tax purposes. The
Treasury Department recently has issued proposed regulations
which, if adopted, would treat interest rate swaps, caps and
floors entered into or purchased by the Fund as positions which
may also constitute part of 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. 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. 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.
ZERO COUPON TREASURY SECURITIES. Under current federal tax
law, the Fund will receive net investment income in the form of
interest by virtue of holding Treasury bills, notes and bonds,
and will recognize interest attributable to it under the original
issue discount rules of the Code from holding zero coupon
Treasury securities. Current federal tax law requires that a
holder (such as the Fund) of a zero coupon security accrue a
69
<page
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 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.
MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through
securities such as GNMA Certificates, FNMA Certificates, FHLMC
Certificates, and privately issued mortgage-related securities
generally are taxable as trusts for federal income tax purposes,
with the certificate holders treated as the owners of the trust
involved. As a result, payments of interest, principal and
prepayments made on the underlying mortgage pool are taxed
directly to certificate holders such as the Fund. Payments of
interest, principal and prepayments made on the underlying
mortgage pool will therefore generally maintain their character
when received by the Fund.
STRIPPED MORTGAGE-RELATED SECURITIES. Certain classes of
MRS which are issued at a discount, the payments of which are
subject to acceleration by reason of prepayments of the
underlying Mortgage Assets securing such classes, are subject to
special rules for determining the portion of the discount at
which the class was issued which must be accrued as income each
year. Under Code section 1272(a)(6), a principal-only class or a
class which receives a portion of the interest and a portion of
the principal from the underlying Mortgage Assets is subject to
rules which require accrual of interest to be calculated and
included in the income of a holder (such as the Fund) based on
the increase in the present value of the payments remaining on
the class, taking into account payments includable in the class'
stated redemption price at maturity which are received during the
accrual period. For this purpose, the present value calculation
is made at the beginning of each accrual period (i) using the
yield to maturity determined for the class at the time of its
issuance (determined on the basis of compounding at the close of
each accrual period and properly adjusted for the length of the
accrual period), calculated on the assumption that certain
prepayments will occur, and (ii) taking into account any
prepayments that have occurred before the close of the accrual
period. Since interest included in the Fund's income as a result
of these rules will have been accrued and not actually paid, the
70
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Fund may be required to pay out as an income distribution each
year an amount which is greater than the total amount of cash
interest the Fund actually received, with possible results as
described above.
Code section 1272(a)(6) does not apply to interest-only
SMRS. Under proposed regulations governing contingent payment
obligations such as interest-only classes, interest payments made
prior to maturity on such a class would be treated as payments of
interest to the extent that interest has been deemed to accrue on
the class' issue price, and then as payments of principal.
Interest payments made at maturity would be treated as payments
of principal to the extent of the "outstanding principal balance"
of the class, and then as payments of interest to the extent of
any excess.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS. The Fund may
invest in REMICs. Interests in REMICs are classified as either
"regular" interests or "residual" interests. Regular interests
in a REMIC are treated as debt instruments for federal income tax
purposes to which the rules generally applicable to debt
obligations apply. If regular interests in a REMIC are issued at
a discount, the rules of Code section 1272(a)(6) as discussed
above under "stripped mortgage-related securities" apply for
determining the portion of the discount at which the interest was
issued which must be accrued as income each year. The
application of these rules may increase the amount of the Fund's
net investment income available to be distributed to
shareholders, potentially causing the Fund to pay out as an
income distribution each year an amount which is greater than the
total amount of cash interest the Fund actually received, as
discussed above.
Under the Code, special rules apply with respect to the
treatment of a portion of the Fund income from REMIC residual
interests. (Such portion is referred to herein as "Excess
Inclusion Income".) Excess Inclusion Income generally cannot be
offset by net operating losses and, in addition, constitutes
unrelated business taxable income to entities which are subject
to the unrelated business income tax. The Code provides that a
portion of Excess Inclusion Income attributable to REMIC residual
interests held by regulated investment companies such as the Fund
shall, pursuant to regulations, be allocated to the shareholders
of such regulated investment company in proportion to the
dividends received by such shareholders. Accordingly,
shareholders of the Fund will generally not be able to use net
operating losses to offset such Excess Inclusion Income. In
addition, if a shareholder of the Fund is a tax-exempt entity not
subject to the unrelated business income tax and is allocated any
amount of Excess Inclusion Income, the Fund must pay a tax on the
amount of Excess Inclusion Income allocated to such shareholder
71
<page
at the highest corporate rate. Any tax paid by the Fund as a
result of this requirement may be deducted by the Fund from the
gross income of the residual interest involved. A shareholder
subject to the unrelated business income tax may be required to
file a return and pay a tax on such Excess Inclusion Income even
though a shareholder might not have been required to pay such tax
or file such return absent the receipt of such Excess Inclusion
Income. It is anticipated that only a small portion, if any, of
the assets of the Fund will be invested in REMIC residual
interests. Accordingly, the amount of Excess Inclusion Income,
if any, received by the Fund and allocated to its shareholders
should be quite small. Shareholders that are subject to the
unrelated business income tax should consult their own tax
advisor regarding the treatment of their income derived from the
Fund.
FOREIGN TAXES. Income received by the Fund also 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. The Fund will not be
eligible to pass through to its shareholders the amount of
foreign taxes paid by the Fund for purposes of the "foreign tax
credit" under the federal income tax.
- ---------------------------------------------------------------
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. The transactions are normally on a net
basis which do not involve payment of brokerage commissions. The
cost of securities purchased from an underwriter usually includes
a commission paid by the issuer to the underwriter; transactions
with dealers normally reflect the spread between bid and asked
prices. Premiums are paid with respect to options purchased by
the Fund, and brokerage commissions are payable with respect to
transactions in exchange-traded 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
72
<page
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
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
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., and subject to seeking best price and execution,
the Fund may consider sales of shares of the Fund 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 The Equitable Life Assurance Society of the United States.
The investment activities described above are likely to
result in the Fund engaging in a considerable amount of trading
of securities held for less than one year. Accordingly, it can
be expected that the Fund will have a higher turnover rate, and,
thus, a higher incidence of short-term capital gains taxable as
ordinary income, than might be expected from investment companies
which invest substantially all of their funds on a long-term
basis. Management anticipates that the annual turnover in the
Fund will not be in excess of 500%. An annual turnover rate of
500% occurs, for example, when all the securities in the Fund's
portfolio are replaced five times in a period of one year. A
high rate of portfolio turnover involves correspondingly greater
expenses than a lower rate, which expenses must be borne by the
Fund and its shareholders. High portfolio turnover also may
result in the realization of substantial net short-term capital
gain. See "Dividends, Distributions and Taxes" and "General
Information-Portfolio Transactions" in the Prospectus.
- ---------------------------------------------------------------
GENERAL INFORMATION
- ---------------------------------------------------------------
CAPITALIZATION
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.
73
<page
The Board of Directors is authorized to reclassify and issue
any unissued shares to any number of additional series without
shareholder approval. Accordingly, the Board may create
additional series of shares in the future, for reasons such as
the desire to establish one or more additional portfolios of the
Fund with different investment objectives, policies or
restrictions. Any issuance of shares of another series would be
governed by the 1940 Act and the laws of the State of Maryland.
If shares of another series were issued in connection with the
creation of a second portfolio, each share of either portfolio
would normally be entitled to one vote for all purposes.
Generally, shares of both portfolios would vote as a single
series for the election of directors and on any other matter that
affected both portfolios in substantially the same manner. As to
matters affecting each portfolio differently, such as approval of
the Advisory Agreement and changes in investment policy, shares
of each portfolio would vote as separate series.
Procedures for calling a shareholders meeting for the
removal of Directors of the Fund, similar to those set forth in
Section 16(c) of the 1940 Act, are available to shareholders of
the Fund.
An order has been received from the Securities and Exchange
Commission permitting the issuance and sale of three classes of
shares representing interests in the Fund. The issuance and sale
of any additional classes will require an additional order from
the Securities and Exchange Commission. There is no assurance
that such exemptive relief would be granted.
At February 3, 1995, there were 4,238,379.017 Class A
shares, 13,502,191.046 Class B shares and 12,291,216.053 Class C
shares of common stock. Set forth and discussed below is certain
information as to all persons who owned of record or beneficially
5% or more of each class of the Fund's outstanding shares at
February 3, 1995.
No. of % of % of % of
Name and Address Shares Class A Class B Class C
Merrill Lynch 3,963,579 13%
Mutual Fund Operations
4800 Deer Lake Dr. East
3rd Floor
Jacksonville, Florida
32246-6484
Merrill Lynch 6,080,339 20%
Mutual Fund Operations
74
<page
4800 Deer Lake Dr. East
3rd Floor
Jacksonville, Florida
32246-6484
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110, acts as custodian for the securities
and cash of the Fund, but plays no part in deciding on the
purchase or sale of portfolio securities.
PRINCIPAL UNDERWRITER
Alliance Fund Distributors, Inc., 1345 Avenue of the
Americas, New York, New York 10105, serves as the Fund's
Principal Underwriter 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 of 1933.
COUNSEL
Legal matters in connection with the issuance of the shares
of Common Stock offered hereby are passed upon by Seward &
Kissel, One Battery Park Plaza, New York, New York 10004. Seward
& Kissel has relied upon the opinion of Venable, Baetjer and
Howard, 1800 Mercantile Bank & Trust Building, 2 Hopkins Plaza,
Baltimore, Maryland 21201, for matters relating to Maryland law.
INDEPENDENT AUDITORS
Ernst & Young LLP, 787 Seventh Avenue, New York, New York
10019, have been appointed as independent auditors for the Fund.
YIELD AND TOTAL RETURN QUOTATIONS
From time to time the Fund advertises its "yield," "actual
distribution rate" and "total return". The Fund's yield for any
30-day (or one-month) period is computed by dividing the net
investment income per share earned during such period by the
maximum public offering price per share on the last day of the
period, and then annualizing such 30-day (or one-month) yield in
accordance with a formula prescribed by the Commission which
provides for compounding on a semi-annual basis. The Fund's
"actual distribution rate," which may be advertised in items of
sales literature, is computed in the same manner as yield except
75
<page
that actual income dividends declared per share during the period
in question is substituted for net investment income per share.
The actual distribution rate is compounded separately for Class A
shares, Class B shares and Class C shares. Advertisements of the
Fund's total return disclose the Fund's average annual compounded
total return for its most recently completed one, five and ten
year periods (or the period since the Fund's inception). The
Fund's total return for 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 in the value of
such investment at the end of the period. For purposes of
computing total return, income dividends and capital gains
distributions paid on shares of the Fund are assumed to have been
reinvested when received and the maximum sales charge applicable
to purchases of Fund shares is assumed to have been paid.
The Fund's yield for the month ended November 30, 1994 was
4.72% for Class A shares, 4.22% for Class B shares and 4.22% for
Class C shares. The Fund's average annual total returns for the
fiscal year ended November 30, 1994 and for the period June 1,
1992 (commencement of operations) through November 30, 1994,
respectively, were 1.03% and 3.93% for Class A shares and .42%
and 3.24% for Class B shares; for the year ended November 30,
1994 and for the period May 3, 1993 (commencement of distribution
for Class C shares) through November 30, 1994, respectively, were
.42% and 1.77% for Class C shares. The Fund will compute yield
and total return figures separately for Class A shares, Class B
shares and Class C shares.
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
latter 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.
("Lipper"), 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,
76
<page
Investor's Daily, Money Magazine, Changing Times, Business Week
and Forbes or other media on behalf of the Fund. It is expected
that the Fund will be ranked by Lipper in the category known as
"U.S. Mortgage Bond 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 number 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.
77
PORTFOLIO OF INVESTMENTS
November 30, 1994 Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Value
<S> <C> <C>
MORTGAGE-RELATED SECURITIES-81.3%
COLLATERALIZED MORTGAGE
OBLIGATIONS-36.0%
ADJUSTABLE RATE-23.2%
Donaldson, Lufkin & Jenrette
Series 1993-20 A1
6.23%, 11/25/23 ............... 7,836 $ 7,744,980
Series 1994-QE1 A1
6.45%, 4/25/24 ................ 14,683 14,573,096
Guardian Savings & Loan
Assn. Series 1990-3
6.820%, 3/01/20 ............... 7,251 6,872,898
Resolution Trust Corp.
Series 1992-CHF A-2
6.65%, 12/25/20 ............... 27,342 27,590,508
Series 1992-5 A-4
9.24%, 5/25/26 ................ 17,621 17,797,210
------------
74,578,692
------------
FIXED RATE-12.8%
American Southwest Financial
Corp. Series 56C
8.25%, 4/25/16 ................ $ 5,371 5,360,116
Chase Mortgage Finance Corp.
Series 1993-D2 2A4
7.75%, 3/25/25 ................ 2,394 2,348,956
Federal Home Loan Mortgage Corp.
Series 1108 H
8.00%, 4/15/05+ ................ 10,530 10,509,939
Series 1016-Y
9.35%, 11/15/20+ ............... 7,475 7,605,684
Federal National Mortgage
Association
Series 1992-28A
6.25%, 12/25/16+ ............... 5,552 5,468,983
Series 1991-27J
8.20%, 4/25/01+ ................ 8,742 8,721,339
Residential Funding Corp.
Series 1993-S14
7.50%, 4/25/23 ................ 1,185 1,175,281
------------
41,190,298
------------
Total Collateralized Mortgage
Obligations (cost $118,638,250) 115,768,990
------------
FEDERAL HOME LOAN
MORTGAGE CORP-23.5%
5.31%, 8/01/24* ............... $ 2,123 $ 2,059,487
5.44%, 7/01/24* ............... 2,602 2,550,351
5.47%, 9/01/24* ............... 1,827 1,790,463
5.50%, (d)* ................... 10,000 9,863,000
5.50%, 7/01/24-9/01/24* ....... 1,547 1,516,395
5.55%, 9/01/24* ............... 3,354 3,282,681
5.58%, 9/01/24* ............... 538 527,050
5.63%, 9/01/24* ............... 3,759 3,663,718
5.64%, 8/01/24-10/01/24* ...... 517 506,699
5.65%, 10/26/24* .............. 15,008 14,803,762
5.67%, 4/01/22*+ ............... 14,147 14,090,622
5.68%, 8/01/24* ............... 4,714 4,675,484
5.70%, 9/01/24-11/01/24* ...... 1,489 1,459,485
5.76%, 9/01/24* ............... 829 811,974
5.94%, 10/01/24* .............. 1,675 1,649,928
5.98%,10/01/24* ............... 5,853 5,786,682
6.02%, 9/01/24* ............... 1,835 1,814,038
6.11%, 10/01/24* .............. 1,637 1,620,630
11.00%, 1/01/11-9/01/20 ....... 3,045 3,220,636
------------
Total Federal Home Loan
Mortgage Corp.
(cost $77,592,724) ............ 75,693,085
------------
FEDERAL NATIONAL
MORTGAGE ASSOCIATION-21.0%
5.50%, (d) .................... 16,000 15,640,000
5.55%, (d) .................... 8,000 7,830,000
5.70%, (d) .................... 7,000 6,860,000
5.71%, 10/01/24*+ .............. 6,480 6,399,375
5.75%, 9/01/24*+ ............... 14,827 14,705,333
5.75%, (d) .................... 6,000 5,887,500
5.86%, (d) .................... 7,000 6,860,000
7.50%, 4/01/08(c)* ............ 2 1,708
11.25%, 2/01/16 ............... 2,495 2,663,837
14.00%, 9/01/14 ............... 551 626,374
------------
Total Federal National
Mortgage Association
(cost $68,290,344) ............ 67,474,127
------------
</TABLE>
5
<PAGE>
PORTFOLIO OF INVESTMENTS (continued)
Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Value
<S> <C> <C>
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION-0.8%
6.75%, 5/20/23* ............... $ 72 $ 71,768
11.25%, 7/15/13-1/15/16 (GPM) 1,625 1,738,551
11.50%, 4/15/13 ............... 78 84,139
11.50%, 2/15/13-6/15/13 (GPM) . 536 579,702
11.75%, 1/20/16 (GPM) ......... 62 66,603
------------
Total Government National
Mortgage Association
(cost $2,614,300) ............. 2,540,763
------------
Total Mortgage-Related
Securities
(cost $267,135,618) ........... 261,476,965
--------------
ASSET BACKED SECURITIES-44.5%
Choice Credit Card
Master Trust Ser. 1992-2A
6.11%, 4/15/99 ................ 31,700 31,814,120
ITT Floorplan Receivables
Master Trust Ser. 1994-1A
5.58%, 2/15/01 ................ 27,000 26,983,800
Lehman Home Equity
Loan Trust Ser. 1994-2
5.79%, 6/15/24 ................ 23,218 23,185,407
LINCS Series 1994-2
7.29%, 8/10/95 ................ 25,000 24,937,500
MBNA Master Credit
Card Trust Ser. 1994-CA
5.62%, 3/15/04 ................ 18,000 17,987,400
World Omni Wholesale
Master Trust Ser. 1994-1-A
5.825%, 10/25/01 .............. $18,250 $ 18,242,700
------------
Total Asset Backed Securities
(cost $143,322,990) ........... 143,150,927
------------
FEDERAL AGENCY
SECURITIES-3.6%
Small Business
Administration-3.6%
RMO-F06 (I/O)
10.00%, 12/25/18*(a)(b) ....... 3,408 4,178,468
RMO-F07 (I/O)
10.00%, 12/25/18*(a)(b) ....... 4,725 4,223,214
RMO-F08 (I/O)
10.00%, 12/25/18*(a)(b) ....... 4,793 3,073,637
------------
Total Federal Agency
Securities
(cost $12,925,551) ............ 11,475,319
------------
COMMERCIAL PAPER-7.7%
Bankers Trust Co.
Peso Linked
zero coupon, 1/05/95
(cost $24,812,794) ............ 25,000 24,807,500
------------
TOTAL INVESTMENTS-137.1%
(cost $448,196,953) ........... 440,910,711
Other assets less liabilities-
(37.1)% (119,441,858)
------------
NET ASSETS-100% ............... $ 321,468,853
=============
</TABLE>
* Adjustable rate mortgages stated interest rate in effect at November 30,
1994.
+ Securities segregated to collateralize reverse repurchase agreements
with an aggregate market value of approximately $67,500,000.
(a) Illiquid security, valued at fair value (see Notes A&E).
(b) Interest rate represents yield to maturity.
(c) 15 year mortgage.
(d) Securities to be announced at a future date.
Glossary of terms:
GPM - Graduated payment mortgage.
I/O - Interest only.
LINCS - Linked certificates.
See notes to financial statements.
6
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1994 Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments in securities, at value (cost $448,196,953) $440,910,711
Cash .................................................. 2,049,985
Interest receivable ................................... 2,295,172
Receivable for investment securities sold ............. 1,037,697
Receivable for capital stock sold ..................... 445,601
Deferred organization expenses ........................ 152,110
Other assets .......................................... 12,022
------------
Total assets .......................................... 446,903,298
------------
LIABILITIES
Reverse repuchase agreement ........................... 65,866,000
Payable for investment securities purchased ........... 53,202,656
Payable for capital stock redeemed .................... 5,017,971
Dividends payable ..................................... 688,812
Distribution fee payable .............................. 251,362
Advisory fee payable .................................. 181,943
Accrued expenses ...................................... 225,701
------------
Total liabilities ..................................... 125,434,445
------------
NET ASSETS .............................................. $321,468,853
============
COMPOSITION OF NET ASSETS
Capital stock, at par ................................. $ 33,783
Additional paid-in capital ............................ 341,656,226
Distributions in excess of net investment income ...... (674,950)
Accumulated net realized loss ......................... (12,259,964)
Net unrealized depreciation of investments ............ (7,286,242)
------------
$321,468,853
============
CALCULATION OF MAXIMUM OFFERING PRICE
Class A Shares
Net asset value and redemption price per share
($43,172,980/4,538,655 shares of capital stock
issued and outstanding) ............................. $9.51
Sales charge-4.25% of public offering price ........... .42
-----
Maximum offering price ................................ $9.93
=====
Class B Shares
Net asset value and offering price per share
($136,458,147/14,339,255 shares of capital stock
issued and outstanding) ............................. $9.52
=====
Class C Shares
Net asset value, redemption and offering price
per share ($141,837,726/14,904,916 shares of
capital stock issued and outstanding) ............... $9.52
=====
</TABLE>
See notes to financial statements.
7
<PAGE>
STATEMENT OF OPERATIONS
Year Ended November 30, 1994 Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Interest ................................ $27,927,070
Fee income .............................. 565,857 $28,492,927
-----------
EXPENSES
Advisory fee ............................ 3,005,558
Distribution fee-Class A ................ 233,954
Distribution fee-Class B ................ 1,659,349
Distribution fee-Class C ................ 2,184,741
Transfer agency ......................... 432,483
Administrative .......................... 159,362
Registration ............................ 122,188
Printing ................................ 108,351
Audit and legal ......................... 104,800
Custodian ............................... 95,100
Amortization of organization expenses ... 55,302
Directors' fees ......................... 24,787
Miscellaneous ........................... 47,617
-----------
Total expenses before interest .......... 8,233,592
Interest expense ........................ 729,234
-----------
Total expenses .......................... 8,962,826
------------
Net investment income ................... 19,530,101
------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss on investments ........ (11,827,131)
Net change in unrealized depreciation
of investments ........................ (5,594,513)
------------
Net loss on investments ................. (17,421,644)
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 2,108,457
============
</TABLE>
See notes to financial statements.
8
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
November 30, November 30,
1994 1993
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income ............... $ 19,530,101 $ 12,771,877
Net realized gain (loss) on
investments ....................... (11,827,131) 692,217
Net change in unrealized appreciation
(depreciation) of investments ..... (5,594,513) 151,858
------------ ------------
Net increase in net assets from
operations ........................ 2,108,457 13,615,952
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Class A ........................... (3,836,051) (2,219,657)
Class B ........................... (7,086,010) (8,517,206)
Class C ........................... (9,332,006) (2,478,311)
Return of capital
Class A ........................... (320,880) -0-
Class B ........................... (592,734) -0-
Class C ........................... (780,607) -0-
Net realized gain on investments
Class A ........................... (74,284) -0-
Class B ........................... (184,922) -0-
Class C ........................... (274,605) -0-
CAPITAL STOCK TRANSACTIONS
Net increase (decrease) ............. (114,232,551) 282,299,912
------------ ------------
Total increase (decrease) ........... (134,606,193) 282,700,690
NET ASSETS
Beginning of year ................... 456,075,046 173,374,356
------------ ------------
End of year ......................... $321,468,853 $456,075,046
============ ============
</TABLE>
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
November 30, 1994 Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
NOTE A: Significant Accounting Policies
Alliance Mortgage Strategy Trust, Inc. (the "Fund"), was incorporated in
the state of Maryland on April 8, 1992 as a diversified, open-end management
investment company. The Fund had no operations until April 28, 1992, when it
sold 5,000 shares of common stock Class A and 5,000 shares of common stock Class
B for $100,000 to Alliance Capital Management, L.P. (the "Adviser"). Investment
operations commenced on June 1, 1992. On February 23, 1993, the Board of
Directors of the Fund approved the creation of a third class of shares, Class C
shares. The Fund currently offers three classes of shares. Class A shares are
sold with a front-end sales charge of up to 4.25%. Class B shares are sold with
a contingent deferred sales charge which declines from 3.0% to zero depending on
the period of time the shares are held. Class B shares will automatically
convert to Class A shares six years after the end of the calendar month of
purchase. Class C shares are sold without an initial or contingent deferred
sales charge. All three classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that each
class bears different distribution expenses and has exclusive voting rights with
respect to its distribution plan. Distribution of Class C shares commenced on
May 3, 1993. The following is a summary of significant accounting policies
followed by the Fund.
1. Security Valuation
Fixed-income securities are valued on the basis of prices provided by a
pricing service and brokers. However, securities which are traded
over-the-counter and on a national securities exchange may be valued
according to the broadest and most representative market. It is expected
that, for the fixed-income securities and options in which the Fund invests,
this ordinarily will be the over-the-counter market. Securities not priced in
this manner are valued at the latest quoted bid price, or when exchange valuat
ions are used, at the latest quoted sale price on the day of valuation. If
there is no such reported sale, the latest quoted bid price will be used.
Other securities for which quotations are not readily available or illiquid
securities are valued in good faith at fair value using methods determined by
the Board of Directors. In determining fair value, consideration is given to
cost, operations and other financial data. Securities which mature in 60
days or less are valued at amortized cost, which approximates market value.
2. Organization Expenses
Organization expenses of approximately $276,500 have been deferred and are
being amortized on a straight-line basis through August, 1997.
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 applicable, to
shareholders. Therefore, no provisions for federal income or excise taxes are
required.
4. Investment Income and Security Transactions
Interest income is accrued daily. Fee income is generated by participating in
forward commitments, in which the Fund agrees to the delayed settlement of
securities. By agreeing to the delayed settlement of securities, the Fund
receives a fee from the seller. The fee is accrued from the settlement date
of the associated sale transaction to the purchase settlement date. Security
transactions are accounted for on the date the securities are purchased or
sold. The Fund accretes original issue discount as adjustments to interest
income. Security gains or losses are determined on the identified cost basis.
5. Dividends and Distributions
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Distributions in excess of net investment income represent
distributions recognized in accordance with generally accepted accounting
principles but recognized in future periods for tax purposes.
6. Changes in Accounting for Distributions to Shareholders
Effective December 1, 1993, the Fund adopted Statement of Position 93-2
(SOP): Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain, and Return of Capital Distributions by Investment
Companies. The effect of the adoption of this SOP was a
10
<PAGE>
Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
decrease to distributions in excess of net investment income of $2,065,998
and a corresponding increase to accumulated net realized loss of $371,777 and
a decrease to additional paid-in capital of $1,694,221. The reclasses were
the result of permanent book to tax differences in the classification of
paydown losses, as well as reclassification of a tax return of capital to
additional paid-in capital. Net assets were not affected by the change.
- -------------------------------------------------------------------------------
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 daily net assets of the Fund. Such fee is accrued
daily and paid monthly.
The Adviser has agreed, under the terms of the investment advisory agreement,
to reimburse the Fund to the extent that its aggregate annual expenses
(exclusive of interest, taxes, brokerage, distribution fee, and extraordinary
expenses) in any year exceed 2.5% of the first $30 million of its average
daily net assets, 2.0% of the next $70 million of its average daily net
assets and 1.5% of its average daily net assets in excess of $100 million.
No such reimbursement was required for the year ended November 30, 1994.
Pursuant to the advisory agreement, the Fund paid $161,833 to the Adviser
representing the cost of certain legal and accounting services provided to
the Fund by the Adviser.
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 $268,150 for the year ended November 30, 1994.
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 $28,083 from the sale of Class A shares and
$590,655 in contingent deferred sales charge imposed upon redemptions by
shareholders of Class B shares for the year ended November 30, 1994.
- -------------------------------------------------------------------------------
NOTE C: Distribution Services Agreement
The Fund has adopted a Distribution Services Agreement (the "Agreement")
pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the
Agreement, the Fund pays a distribution fee to the Distributor at an annual
rate of up to .30 of 1% of the average daily net assets attributable to the
Class A shares and 1% of the average daily net assets attributable to the
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 $1,042,848 and $1,875,176 for Class B
and C shares, respectively; such costs may be recovered from the Fund in
future periods so long as the Agreement is in effect. In accordance with the
Agreement, there is no provision for recovery of unreimbursed distribution
costs, incurred by the Distributor, beyond the current fiscal year for Class
A shares. The Agreement also provides that the Adviser may use its own
resources to finance the distribution of the Fund's shares.
- -------------------------------------------------------------------------------
NOTE D: Investment Transactions
Purchases and sales of investment securities (excluding short-term
investments) aggregated $1,495,237,851 and $1,537,483,830, respectively, for
the year ended November 30, 1994.
At November 30, 1994, the cost of securities for federal income tax purposes
was the same as for financial reporting purposes. Accordingly, gross
unrealized appreciation of investments was $1,134 and gross unrealized
depreciation of investments was $7,287,376 resulting in net unrealized
depreciation of $7,286,242.
At November 30, 1994, for federal income tax purposes the Fund had a capital
loss carryforward totaling $12,259,964 of which $219,463 expires in the year
2000; $177,358 expires in the year 2001 and $11,863,143 expires in the year
2002.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued) Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTE E: Illiquid Securities Date
Security Acquired Cost
<S> <C> <C>
SMALL BUSINESS ADMINISTRATION
RMO--F06 (I/O)
10.00%, 12/25/18 .............................. 12/28/93 $ 4,793,303
RMO--F07 (1/O)
10.00%, 12/25/18 .............................. 12/28/93 4,724,603
RMO--F08 (1/O)
10.00%, 12/25/18 .............................. 12/28/93 3,407,645
-----------
$12,925,551
===========
</TABLE>
The securities shown are illiquid and have been valued at fair value in
accordance with the procedures described in Note A. The value of these
securities at November 30, 1994 was $11,475,319 representing 3.6% of net assets.
- -------------------------------------------------------------------------------
NOTE F: Capital Stock
There are 9,000,000,000 shares of $.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,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Class A
Shares sold ...................... 10,402,991 6,553,153 $102,403,447 $65,411,296
Shares issued in reinvestment of
dividends and distributions .... 196,834 144,129 1,920,619 1,437,002
Shares redeemed .................. (12,019,791) (3,197,123) (116,943,609) (31,861,489)
------------- ------------- ------------ -----------
Net increase (decrease) .......... (1,419,966) 3,500,159 $(12,619,543) $34,986,809
============= ============= ============ ===========
Class B
Shares sold ...................... 8,985,316 8,953,304 $ 87,892,802 $89,128,009
Shares issued in reinvestment of
dividends and distributions .... 517,255 508,652 5,040,145 5,068,394
Shares redeemed .................. (12,081,682) (7,703,221) (117,377,470) (76,811,539)
------------- ------------- ------------ -----------
Net increase (decrease) .......... (2,579,111) 1,758,735 $(24,444,523) $17,384,864
============= ============= ============ ===========
</TABLE>
12
<PAGE>
Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES AMOUNT
Year Ended May 3, 1993* Year Ended May 3, 1993*
November 30, to November 30, November 30, to November 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Class C
Shares sold ...................... 28,575,040 29,051,561 $281,368,499 $290,249,572
Shares issued in reinvestment
of dividends and distributions 796,235 121,830 7,769,566 1,217,899
Shares redeemed .................. (37,474,348) (6,165,402) (366,306,550) (61,539,232)
------------- ------------- ------------ ------------
Net increase (decrease) .......... (8,103,073) 23,007,989 $(77,168,485) $229,928,239
============= ============= ============ ============
</TABLE>
- -------------------------------------------------------------------------------
NOTE G: Reverse Repurchase Agreements
Under a reverse repurchase agreement, the Fund sells securities and agrees
to repurchase them at a mutually agreed upon date and price. At the time the
Fund enters into a reverse repurchase agreement, it may establish a segregated
account with the custodian containing cash, cash equivalents or liquid
high-grade debt securities having a value at least equal to the repurchase
price. As of November 30, 1994, the Fund had entered into a reverse repurchase
agreement in the amount of $65,866,000 with Prudential Securities with an
interest rate of 5.62% maturing on December 7, 1994. For the year ended November
30, 1994, the maximum amount of reverse repurchase agreements outstanding was
$82,585,000, the average amount outstanding was approximately $32,422,000, and
the daily weighted average interest rate was 4.51%.
* Commencement of distribution.
13
<PAGE>
FINANCIAL HIGHLIGHTS Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Class A
Year Ended Year Ended June 1, 1992*
November 30, November 30, to
1994 1993 November 30, 1992
<S>
<C> <C> <C>
Net asset value, beginning of period .. $9.94 $9.84 $10.00
----- ----- ------
Income From Investment Operations
Net investment income ................. .42 .57 .35(a)
Net realized and unrealized gain (loss)
on investments ...................... (.32) .11 (.17)
----- ----- ------
Net increase in net asset value
from operations ..................... .10 .68 .18
----- ----- ------
Less: Distributions
Dividends from net investment income .. (.48) (.58) (.34)
Return of capital ..................... (.04) -0- -0-
Distributions from net realized gains . (.01) -0- -0-
----- ----- ------
Total dividends and distributions ..... (.53) (.58) (.34)
----- ----- ------
Net asset value, end of period ........ $9.51 $9.94 $9.84
===== ===== ======
Total Return
Total investment return
based on net asset value (1) ........ 1.03% 7.02% 1.84%
===== ===== ======
Ratios/Supplemental Data
Net assets, end of period
(000's omitted) ..................... $43,173 $59,215 $24,186
Ratio of expenses to
average net assets .................. 1.34% 1.54% 1.44%(b)(d)
Ratio of expenses to average net assets
excluding interest expense (c) ...... 1.20% 1.33% 1.42%(b)
Ratio of net investment
income to average net assets ...... 4.78% 5.66% 6.58%(b)(d)
Portfolio turnover rate ............... 375% 499% 101%
</TABLE>
See footnote summary on page 16.
14
<PAGE>
Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Class B
Year Ended Year Ended June 1, 1992*
November 30, November 30, to
1994 1993 November 30, 1992
<S> <C> <C> <C>
Net asset value, beginning of period .. $9.94 $9.84 $10.00
----- ----- ------
Income From Investment Operations
Net investment income ................. .39 .49 .31(a)
Net realized and unrealized gain (loss)
on investments ...................... (.35) .12 (.17)
----- ----- ------
Net increase in net asset value
from operations ..................... .04 .61 .14
----- ----- ------
Less: Distributions
Dividends from net investment income .. (.42) (.51) (.30)
Return of capital ..................... (.03) -0- -0-
Distributions from net realized gains . (.01) -0- -0-
----- ----- ------
Total dividends and distributions ..... (.46) (.51) (.30)
----- ----- ------
Net asset value, end of period ........ $9.52 $9.94 $ 9.84
===== ===== ======
Total Return
Total investment return
based on net asset value (1) ........ .42% 6.27% 1.50%
===== ===== ======
Ratios/Supplemental Data
Net assets, end of period
(000's omitted) .....................$136,458 $168,157 $149,188
Ratio of expenses to
average net assets .................. 2.08% 2.26% 2.13%(b)(d)
Ratio of expenses to average net assets
excluding interest expense (c) ...... 1.91% 2.07% 2.10%(b)
Ratio of net investment
income to average net assets ........ 4.12% 4.98% 6.01%(b)(d)
Portfolio turnover rate ............... 375% 499% 101%
</TABLE>
See footnote summary on page 16.
15
<PAGE>
FINANCIAL HIGHLIGHTS (continued) Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Class C
Year Ended May 3, 1993**
November 30, to November 30,
1994 1993
<S> <C> <C>
Net asset value, beginning of period .. $9.94 $9.98
----- -----
Income From Investment Operations
Net investment income ................. .37 .27
Net realized and unrealized gain (loss)
on investments ...................... (.33) (.03)
----- -----
Net increase in net asset value
from operations ..................... .04 .24
----- -----
Less: Distributions
Dividends from net investment income .. (.42) (.28)
Return of capital ..................... (.03) -0-
Distributions from net realized gains . (.01) -0-
----- -----
Total dividends and distributions ..... (.46) (.28)
----- -----
Net asset value, end of period ........ $9.52 $9.94
===== =====
Total Return
Total investment return
based on net asset value (1) ........ .42% 2.40%
Ratios/Supplemental Data
Net assets, end of period
(000's omitted) .....................$141,838 $228,703
Ratio of expenses to
average net assets .................. 2.04% 1.58%(b)
Ratio of expenses to average net assets
excluding interest expense (c) ...... 1.89% 1.74%(b)
Ratio of net investment
income to average net assets ........ 4.10% 3.70%(b)
Portfolio turnover rate ............... 375% 499%
</TABLE>
* Commencement of operations.
** Commencement of distribution.
(a) Net of expenses waived by the Adviser.
(b) Annualized.
(c) Net of interest expenses on reverse repurchase agreements (see
Note G).
(d) If the Fund had borne all expenses, the expense ratios would have been
1.55% for Class A shares and 2.28% for Class B shares. The net investment
income ratios would have been 6.47% for Class A shares and 5.86% for
Class B shares.
(1) 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. Total investment return calculated for a period
of less than one year is not annualized.
16
<PAGE>
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
To the Shareholders and Board of Directors
Alliance Mortgage Strategy Trust, Inc.
We have audited the accompanying statement of assets and liabilities of
Alliance Mortgage Strategy Trust, Inc., including the portfolio of
investments, as of November 30, 1994, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of
the two years in the period then ended and the financial highlights for each
of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of November 30, 1994, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles
used and significant estimates made by management as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Alliance Mortgage Strategy Trust, Inc. at November 30, 1994, the results of
its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and the financial highlights
for each of the indicated periods, in conformity with generally accepted
accounting principles.
[SIGNATURE]
New York, New York
January 13, 1995
17
78
<PAGE>
APPENDIX A
BOND AND COMMERCIAL PAPER RATINGS
STANDARD & POOR'S BOND RATINGS
A Standard & Poor's Corporation ("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 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.
The ratings of "AA" and "A" 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 the description by Moody's Investors Service,
Inc. 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.
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A is the highest commercial paper rating category utilized by
S&P, which uses the numbers 1+, 1, 2 and 3 to denote relative
strength within its A classification. Commercial paper issuers
rated A by S&P have the following characteristics: Liquidity
ratios are better than industry average. Long-term debt rating
is A or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow are in an
upward trend. Typically, the issuer is a strong company in a
well-established industry and has superior management.
MOODY'S COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 (or related supporting institutions)
have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be
A-1
<PAGE>
evidenced by the following characteristics: Leading market
positions in well established industries; high rates of return on
funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high
internal cash generation; well established access to a range of
financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions)
have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions)
have an acceptable capacity for repayment of short-term
promissory obligations. The effect of industry characteristics
and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is
maintained.
A-2
<PAGE>
APPENDIX B
FUTURES CONTRACTS AND
OPTIONS ON FUTURES CONTRACTS AND FOREIGN CURRENCIES
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 securities issued or guaranteed by the United States
Government, its agencies or instrumentalities or corporate debt
securities. 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
United States Government, such as long-term U.S. Treasury Bonds,
Treasury Notes, Government National Mortgage Association modified
pass-through mortgage-related securities and three-month U.S.
Treasury Bills.
At the same time a futures contract is purchased or sold, the
Fund must allocate cash or securities as a deposit payment
("initial deposit"). It is expected that the initial deposit
would be approximately 1 1/2% to 5% of a contract's face value.
Daily thereafter, the futures contract is valued and the payment
of "variation margin" may be required, since each day the Fund
would provide or receive cash that reflects any decline or
increase in the contract's value.
At the time of delivery of securities pursuant to such a
contract, adjustments are made to recognize differences in value
arising from the delivery of securities with a different 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 in the case
of future contracts with respect to debt securities entered into
by the Fund and in all cases in the case of futures contracts
with respect to foreign currencies entered into by the Fund the
contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the
securities or foreign currencies. The offsetting of a
B-1
<PAGE>
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
or currency. 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 rates
without actually buying or selling fixed-income securities. 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.
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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
denominated in foreign currencies, is to attempt to protect the
Fund from fluctuations in foreign exchange rates without actually
buying or selling fixed-income securities or foreign currency.
For example, the Fund can sell futures contracts on a specified
currency to protect against a decline in value of such currency
and its portfolio securities which are denominated in such
currency. Similarly, the Fund may sell futures contracts on one
currency to hedge against fluctuations in the value of securities
denominated in a different currency if there is an established
historical record of correlation between the two currencies.
The Fund can purchase futures contracts on foreign currency
to fix the price in U.S. Dollars of a security denominated in
such currency that the Fund has acquired or expects to acquire.
This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the
necessary cash, but expects currency exchange rates then
available in the applicable market to be less favorable than
rates that are currently available. To the extent the Fund
enters into futures contracts for this purpose, the assets in the
segregated account maintained with the Fund's Custodian to cover
the Fund's obligations with respect to such futures contracts
will consist of cash, cash equivalents or high-grade 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.
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 margin and variation margin
requirements. Rather than meeting additional variation margin
requirements, investors may close-out futures contracts positions
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. Thi+d, 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 or foreign currency exchange
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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 or exchange 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 or currency. 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 or foreign currency, it may or may not
be less risky than ownership of the futures contract or
underlying debt securities or foreign currency. As with the
purchase of futures contracts against declining prices of foreign
currency, when the Fund is not fully invested it may purchase a
call option on a futures contract to hedge against a market
advance due to declining interest rates.
The writing of a call option on a futures contract
constitutes a partial hedge against declining prices of the
security which is deliverable upon exercise of the futures
contract or against declining prices of foreign currency. 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 which is deliverable upon
exercise of the futures contract and against increasing prices of
foreign currency. If the futures price at expiration of the
option is higher than the exercise price, the Fund will retain
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the full amount of the option premium which provides a partial
hedge against any increase in the price of securities which the
Fund intends to purchase or against any increase in the price of
currency. 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 or foreign currency. 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 and options on futures contracts on foreign currencies
will be utilized. For example, a decline in the dollar value of
a foreign currency in which portfolio securities are denominated
will reduce the dollar value of such securities, even if their
value in the foreign currency remains constant. In order to
protect against such diminutions in the value of portfolio
securities, the Fund may purchase put options on the foreign
currency. If the value of the currency does decline, the Fund
will have the right to sell such currency for a fixed amount in
dollars and will thereby offset, in whole or in part, the adverse
effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in
which securities to be acquired are denominated is projected,
thereby increasing the cost of such securities, the Fund may
purchase call options thereon. The purchase of such options
could offset, at least partially, the effects of the adverse
movements in exchange rates. The Fund must offset an exchange-
traded option which it has purchased by entering into a "closing
sale transaction." A closing sale transaction terminates the
obligation of the writer of the option and does not result in the
ownership of an option. The Fund realizes a profit or loss from
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a closing sale transaction if the premium received from the
transaction is more than or less than the cost of the option.
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. However, the
losses to the Fund would be limited to amount of premiums paid.
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. The Fund must offset an exchange-traded option which
it has written through a closing purchase transaction. The Fund
realizes a profit or a loss from a closing purchase transaction
if the cost of the transaction is less than or more than the
premium received by the Fund from writing the option. Through
the writing of options on foreign currencies, the Fund also may
be required to forego all or a portion of the benefits which
might otherwise have been obtained from favorable movements in
exchange rates.
In connection with options written or purchased by the Fund
over-the-counter, the Fund can only look to the counterparty for
purposes of offset.
The Fund intends to write covered call options on foreign
currencies. A call option is 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
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difference is maintained by the Fund in cash, or high-grade
liquid debt securities in a segregated account with its
Custodian.
The Fund also intends to write call options on foreign
currencies for cross-hedging purposes. An option that is cross-
hedged is not covered, but is designed to provide a hedge against
a decline in the U.S. Dollar value of a security which the Fund
owns or has the right to acquire and which is denominated in the
currency other than 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 high-grade liquid debt
securities in an amount not less than the value of the underlying
foreign currency in U.S. Dollars marked to market daily.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS AND OPTIONS
ON FOREIGN CURRENCIES.
Unlike transactions entered into by the Fund in futures
contracts and options on futures contracts, options on foreign
currencies contracts are not traded on contract markets regulated
by the CFTC or (with the exception of certain foreign currency
options) by the SEC. To the contrary, such instruments are
traded through financial institutions acting as market-makers,
although foreign currency options are also traded on certain
national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC
regulation. 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 could lose amounts
substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such
positions.
Options on foreign currencies traded on national securities
exchanges are within the jurisdiction of the SEC, as are other
securities traded on such exchanges. As a result, many of the
protections provided to traders on organized exchanges will be
available with respect to such transactions. In particular, all
foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options
Clearing Corporation ("OCC"), thereby reducing the risk of
counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more
readily available than in the over-the-counter market,
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<PAGE>
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 exercise, or would
result in undue burdens on the OCC or its clearing member, impose
special procedures on exercise and settlement, such as technical
changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise. These
risks could affect the ability of the Fund to offset positions in
a timely and profitable fashion.
In addition, futures contracts, options on futures 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.
B-8
00250110.AK1
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PART C
OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
(a) FINANCIAL STATEMENTS
Included in the Prospectus:
Financial Highlights
Included in the Statement of Additional Information:
Portfolio of Investments, November 30, 1994
Statement of Assets and Liabilities, November 30, 1994
Statement of Operations, year ended November 30, 1994
Statement of Changes in Net Assets, year ended
November 30, 1994 and November 30, 1993
Notes to Financial Statements, November 30, 1994
Financial Highlights, for Class A and Class B shares for
years ended November 30, 1994, November 30, 1993 and the
period June 1, 1992 (commencement of operations) to
November 30, 1992; for Class C shares for year ended
November 30, 1994 and for the period May 3, 1993
(commencement of operations) through November 30, 1993
Report of Independent Auditors
Included in Part C of the Registration Statement:
All other schedules are either inapplicable or the required
information is contained in the Financial Statement.
(b) EXHIBITS
(1) Copy of Articles of Incorporation of the Registrant -
Incorporated by reference from Registrant's Registration
Statement on Form N-1A, filed with the Securities and
Exchange Commission on April 8, 1992.
(1) (a) Articles of Amendment to Articles of Incorporation -
Incorporated by reference from Pre-Effective Amendment
No. 2 of Registrant's Registration Statement on Form N-
1A, filed with the Securities and Exchange Commission on
April 30, 1992.
(2) Copy of Amended By-Laws of the Registrant - Incorporated
by reference from Post-Effective Amendment No. 1 of
Registrant's Registration Statement on Form N-1A, filed
with the Securities and Exchange Commission on October
30, 1992.
(3) Not applicable.
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(4) (a) Form of Stock Certificate for Class A Shares -
Incorporated by reference from Pre-Effective Amendment
No. 2 to Registrant's Registration Statement on Form N-
1A, filed with the Securities and Exchange Commission on
April 30, 1992.
(b) Form of Stock Certificate for Class B Shares
-Incorporated by reference from Pre-Effective Amendment
No. 2 of Registrant's Registration Statement on Form N-
1A, filed with the Securities and Exchange Commission on
April 30, 1992.
(5) Copy of Advisory Agreement between the Registrant and
Alliance Capital Management L.P. - Incorporated by
reference from Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A, filed
with the Securities and Exchange Commission on October
30, 1992.
(6) (a) Distribution Services Agreement between the Registrant
and Alliance Fund Distributors, Inc. - Incorporated by
reference from Post-Effective Amendment No. 4 to
Registrant's Registration Statement on Form N1-A, filed
with the Securities and Exchange Commission on January
31, 1994.
(b) Selected Dealer Agreement between Alliance Fund
Distributors, Inc. and selected dealers offering shares
of Registrant - Incorporated by reference from Post-
Effective Amendment No. 3 to Registrant's Registration
Statement on Form N-1A, filed with the Securities and
Exchange Commission on March 2, 1993.
(c) Selected Agent Agreement between Alliance Fund
Distributors, Inc. and selected agents making available
shares of Registrant - Incorporated by reference from
Post-Effective Amendment No. 3 to Registrant's
Registration Statement on Form N-1A, filed with the
Securities and Exchange Commission on March 2, 1993.
(7) Not applicable.
(8) Copy of Custodian Contract between the Registrant and
State Street Bank and Trust Company - Incorporated by
reference from Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A, filed
with the Securities and Exchange Commission on October
30, 1992.
(9) Copy of Transfer Agency Agreement between the Registrant
and Alliance Fund Services, Inc. - Incorporated by
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reference from Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A, filed
with the Securities and Exchange Commission on October
30, 1992.
(10)(a) Opinion and Consent of Seward & Kissel - Incorporated by
reference from Pre-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A, filed
with the Securities and Exchange Commission on April 30,
1992.
(b) Opinion and Consent of Venable, Baetjer and Howard -
Incorporated by reference from Pre-Effective Amendment
No. 2 to Registrant's Registration Statement on Form N-
1A, filed with the Securities and Exchange Commission on
April 30, 1992.
(11) Consent of Independent Auditors - Filed herewith.
(12) Not applicable.
(13) Investment representation letter of Alliance Capital
Management L.P. - Incorporated by reference from Pre-
Effective Amendment No. 2 to Registrant's Registration
Statement on Form N-1A, filed with the Securities and
Exchange Commission on April 30, 1992.
(14) Not applicable.
(15) Rule 12b-1 Plan - See Exhibit 6(a).
(16) Schedule for computation of performance quotations -
Incorporated by reference from Pre-Effective Amendment
No. 2 to Registrant's Registration Statement on Form N-
1A, filed with the Securities and Exchange Commission on
April 30, 1992.
(27) Financial Data Schedule - Filed herewith.
Other Exhibit: Powers of Attorney of Ms. Block and
Messrs. Carifa, Dievler, Hester, Michel and White - Incorporated
by reference from Pre-Effective Amendment No. 2 of Registrant's
Registration Statement on Form N-1A, filed with the Securities
and Exchange Commission on April 30, 1992.
Power of Attorney of William H. Foulk, Jr. - Incorporated by
reference from Post-Effective Amendment No. 1 of Registrant's
Registration Statement on Form N-1A, filed with the Securities
and Exchange Commission on October 30, 1992.
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ITEM 25. Persons Controlled by or under Common Control with
Registrant.
None.
ITEM 26. Number of Holders of Securities.
As of February 3, 1995, the Registrant had 1,371 record
holders of Class A shares of common stock, 5,185 record holders
of Class B shares of common stock and 2,838 record holders of
Class C shares of common stock.
ITEM 27. Indemnification
It is the Registrant's policy to indemnify its directors and
officers, employees and other agents to the maximum extent
permitted by Section 2-418 of the General Corporation Law of the
State of Maryland and as set forth in Article EIGHTH of
Registrant's Articles of Incorporation, filed as Exhibit 1,
Article VII and Article VIII of the Registrant's By-Laws filed as
Exhibit 2 and Section 10 of the Distribution Services Agreement
filed as Exhibit 6(a), all as set forth below. The liability of
the Registrant's directors and officers is dealt with in
Article EIGHTH of Registrant's Articles of Incorporation, and
Article VII, Section 7 and Article VIII, Section 1 through
Section 6 of the Registrant's By-Laws, as set forth below. The
Adviser's liability for any loss suffered by the Registrant or
its shareholders is set forth in Section 4 of the Advisory
Agreement filed as Exhibit 5 to this Registration Statement, as
set forth below.
SECTION 2-418 OF THE MARYLAND GENERAL CORPORATION LAW READS AS
FOLLOWS:
"2-418 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
AGENTS.--(a) In this section the following words have the
meaning indicated.
(1) "Director" means any person who is or was a director of
a corporation and any person who, while a director of a
corporation, is or was serving at the request of the
corporation as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, other
enterprise, or employee benefit plan.
(2) "Corporation" includes any domestic or foreign
predecessor entity of a corporation in a merger,
consolidation, or other transaction in which the
predecessor's existence ceased upon consummation of the
transaction.
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(3) "Expenses" include attorney's fees.
(4) "Official capacity" means the following:
(i) When used with respect to a director, the office of
director in the corporation; and
(ii) When used with respect to a person other than a
director as contemplated in subsection (j), the elective
or appointive office in the corporation held by the
officer, or the employment or agency relationship
undertaken by the employee or agent in behalf of the
corporation.
(iii) "Official capacity" does not include service for
any other foreign or domestic corporation or any
partnership, joint venture, trust, other enterprise, or
employee benefit plan.
(5) "Party" includes a person who was, is, or is threatened
to be made a named defendant or respondent in a
proceeding.
(6) "Proceeding" means any threatened, pending or completed
action, suit or proceeding, whether civil, criminal,
administrative, or investigative.
(b)(1) A corporation may indemnify any director made a party
to any proceeding by reason of service in that capacity unless it
is established that:
(i) The act or omission of the director was material to
the matter giving rise to the proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and deliberate
dishonesty; or
(ii) The director actually received an improper personal
benefit in money, property, or services; or
(iii) In the case of any criminal proceeding, the
director had reasonable cause to believe that the act or
omission was unlawful.
(2) (i) Indemnification may be against judgments,
penalties, fines, settlements, and reasonable expenses
actually incurred by the director in connection with the
proceeding.
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<PAGE>
(ii) However, if the proceeding was one by or in the
right of the corporation, indemnification may not be
made in respect of any proceeding in which the director
shall have been adjudged to be liable to the
corporation.
(3) (i) The termination of any proceeding by judgment,
order or settlement does not create a presumption that
the director did not meet the requisite standard of
conduct set forth in this subsection.
(ii) The termination of any proceeding by conviction, or
a plea of nolo contendere or its equivalent, or an entry
of an order of probation prior to judgment, creates a
rebuttable presumption that the director did not meet
that standard of conduct.
(c) A director may not be indemnified under subsection (b)
of this section in respect of any proceeding charging
improper personal benefit to the director, whether or
not involving action in the director's official
capacity, in which the director was adjudged to be
liable on the basis that personal benefit was improperly
received.
(d) Unless limited by the charter:
(1) A director who has been successful, on the merits or
otherwise, in the defense of any proceeding referred to
in subsection (b) of this section shall be indemnified
against reasonable expenses incurred by the director in
connection with the proceeding.
(2) A court of appropriate jurisdiction upon application of
a director and such notice as the court shall require,
may order indemnification in the following
circumstances:
(i) If it determines a director is entitled to
reimbursement under paragraph (1) of this subsection,
the court shall order indemnification, in which case the
director shall be entitled to recover the expenses of
securing such reimbursement; or
(ii) If it determines that the director is fairly and
reasonably entitled to indemnification in view of all
the relevant circumstances, whether or not the director
has met the standards of conduct set forth in subsection
(b) of this section or has been adjudged liable under
the circumstances described in subsection (c) of this
section, the court may order such indemnification as the
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<PAGE>
court shall deem proper. However, indemnification with
respect to any proceeding by or in the right of the
corporation or in which liability shall have been
adjudged in the circumstances described in subsection
(c) shall be limited to expenses.
(3) A court of appropriate jurisdiction may be the same
court in which the proceeding involving the director's
liability took place.
(e)(1) Indemnification under subsection (b) of this section
may not be made by the corporation unless authorized for a
specific proceeding after a determination has been made that
indemnification of the director is permissible in the
circumstances because the director has met the standard of
conduct set forth in subsection (b) of this section.
(2) Such determination shall be made:
(i) By the board of directors by a majority vote of a
quorum consisting of directors not, at the time, parties
to the proceeding, or, if such a quorum cannot be
obtained, then by a majority vote of a committee of the
board consisting solely of two or more directors not, at
the time, parties to such proceeding and who were duly
designated to act in the matter by a majority vote of
the full board in which the designated directors who are
parties may participate;
(ii) By special legal counsel selected by the board or a
committee of the board by vote as set forth in
subparagraph (i) of this paragraph, or, if the requisite
quorum of the full board cannot be obtained therefor and
the committee cannot be established, by a majority vote
of the full board in which directors who are parties may
participate; or
(iii) By the stockholders.
(3) Authorization of indemnification and determination as to
reasonableness of expenses shall be made in the same
manner as the determination that indemnification is
permissible. However, if the determination that
indemnification is permissible is made by special legal
counsel, authorization of indemnification and
determination as to reasonableness of expenses shall be
made in the manner specified in subparagraph (ii) of
paragraph (2) of this subsection for selection of such
counsel.
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<PAGE>
(4) Shares held by directors who are parties to the
proceeding may not be voted on the subject matter under
this subsection.
(f)(1) Reasonable expenses incurred by a director who is a
party to a proceeding may be paid or reimbursed by the
corporation in advance of the final disposition of the
proceeding, upon receipt by the corporation of:
(i) A written affirmation by the director of the
director's good faith belief that the standard of
conduct necessary for indemnification by the corporation
as authorized in this section has been met; and
(ii) A written undertaking by or on behalf of the
director to repay the amount if it shall ultimately be
determined that the standard of conduct has not been
met.
(2) The undertaking required by subparagraph (ii) of
paragraph (1) of this subsection shall be an unlimited
general obligation of the director but need not be
secured and may be accepted without reference to
financial ability to make the repayment.
(3) Payments under this subsection shall be made as provided
by the charter, bylaws, or contract or as specified in
subsection (e) of this section.
(g) The indemnification and advancement of expenses provided
or authorized by this section may not be deemed
exclusive of any other rights, by indemnification or
otherwise, to which a director may be entitled under the
charter, the bylaws, a resolution of stockholders or
directors, an agreement or otherwise, both as to action
in an official capacity and as to action in another
capacity while holding such office.
(h) This section does not limit the corporation's power to
pay or reimburse expenses incurred by a director in
connection with an appearance as a witness in a
proceeding at a time when the director has not been made
a named defendant or respondent in the proceeding.
(i) For purposes of this section:
(1) The corporation shall be deemed to have requested a
director to serve an employee benefit plan where the
performance of the director's duties to the corporation
also imposes duties on, or otherwise involves services
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<PAGE>
by, the director to the plan or participants or
beneficiaries of the plan:
(2) Excise taxes assessed on a director with respect to an
employee benefit plan pursuant to applicable law shall
be deemed fines; and
(3) Action taken or omitted by the director with respect to
an employee benefit plan in the performance of the
director's duties for a purpose reasonably believed by
the director to be in the interest of the participants
and beneficiaries of the plan shall be deemed to be for
a purpose which is not opposed to the best interests of
the corporation.
(j) Unless limited by the charter:
(1) An officer of the corporation shall be indemnified as
and to the extent provided in subsection (d) of this
section for a director and shall be entitled, to the
same extent as a director, to seek indemnification
pursuant to the provisions of subsection (d);
(2) A corporation may indemnify and advance expenses to an
officer, employee, or agent of the corporation to the
same extent that it may indemnify directors under this
section; and
(3) A corporation, in addition, may indemnify and advance
expenses to an officer, employee, or agent who is not a
director to such further extent, consistent with law, as
may be provided by its charter, bylaws, general or
specific action of its board of directors or contract.
(k)(1) A corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee,
or agent of the corporation, or who, while a director, officer,
employee, or agent of the corporation, is or was serving at the
request, of the corporation as a director, officer, partner,
trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, other enterprise,
or employee benefit plan against any liability asserted against
and incurred by such person in any such capacity or arising out
of such person's position, whether or not the corporation would
have the power to indemnify against liability under the
provisions of this section.
(2) A corporation may provide similar protection, including
a trust fund, letter of credit, or surety bond, not
inconsistent with this section.
C-9
<PAGE>
(3) The insurance or similar protection may be provided by a
subsidiary or an affiliate of the corporation.
(l) Any indemnification of, or advance of expenses to, a
director in accordance with this section, if arising out
of a proceeding by or in the right of the corporation,
shall be reported in writing to the stockholders with
the notice of the next stockholders' meeting or prior to
the meeting."
ARTICLE EIGHTH OF THE REGISTRANT'S ARTICLES OF INCORPORATION
READS AS FOLLOWS:
"(1) To the full extent that limitations on the liability of
directors and officers are permitted by the Maryland General
Corporation Law, no director or officer of the Corporation shall
have any liability to the Corporation or its stockholders for
damages. This limitation on liability applies to events
occurring at the time a person serves as a director or officer of
the Corporation whether or not such person is a director or
officer at the time of any proceeding in which liability is
asserted.
"(2) The Corporation shall indemnify and advance expenses to
its currently acting and its former directors to the full extent
that indemnification of directors is permitted by the Maryland
General Corporation Law. The Corporation shall indemnify and
advance expenses to its officers to the same extent as its
directors and to such further extent as is consistent with law.
The Board of Directors may by By-Law, resolution or agreement
make further provisions for indemnification of directors,
officers, employees and agents to the full extent permitted by
the Maryland General Corporation Law.
"(3) No provision of this Article shall be effective to
protect or purport to protect any director or officer of the
Corporation against any liability to the Corporation or its
stockholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
"(4) References to the Maryland General Corporation Law in
this Article are to that law as from time to time amended. No
amendment to the Charter of the Corporation shall affect any
right of any person under this Article based on any event,
omission or proceeding prior to the amendment."
ARTICLE VII, SECTION 7 OF THE REGISTRANT'S BY-LAWS READS AS
FOLLOWS:
C-10
<PAGE>
Section 7. INSURANCE AGAINST CERTAIN LIABILITIES. The
Corporation shall not bear the cost of insurance that protects or
purports to protect directors and officers of the Corporation
against any liabilities to the Corporation or its security
holders to which any such director or officer would otherwise be
subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office.
ARTICLE VIII OF THE REGISTRANT'S BY-LAWS READS AS FOLLOWS:
Section 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The
Corporation shall indemnify its directors to the full extent that
indemnification of directors is permitted by the Maryland General
Corporation Law. The Corporation shall indemnify its officers to
the same extent as its directors and to such further extent as is
consistent with law. The Corporation shall indemnify its
directors and officers who while serving as directors or officers
also serve at the request of the Corporation as a director,
officer, partner, trustee, employee, agent or fiduciary of
another corporation, partnership, joint venture, trust, other
enterprise or employee benefit plan to the full extent consistent
with law. The indemnification and other rights provided by this
Article shall continue as to a person who has ceased to be a
director or officer and shall inure to the benefit of the heirs,
executors and administrators of such a person. This Article
shall not protect any such person against any liability to the
Corporation or any stockholder thereof to which such person would
otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in
the conduct of his office ("disabling conduct").
Section 2. ADVANCES. Any current or former director or
officer of the Corporation seeking indemnification within the
scope of this Article shall be entitled to advances from the
Corporation for payment of the reasonable expenses incurred by
him in connection with the matter as to which he is seeking
indemnification in the manner and to the full extent permissible
under the Maryland General Corporation Law. The person seeking
indemnification shall provide to the Corporation a written
affirmation of his good faith belief that the standard of conduct
necessary for indemnification by the Corporation has been met and
a written undertaking to repay any such advance if it should
ultimately be determined that the standard of conduct has not
been met. In addition, at least one of the following additional
conditions shall be met: (a) the person seeking indemnification
shall provide a security in form and amount acceptable to the
Corporation for his undertaking; (b) the Corporation is insured
against losses arising by reason of the advance; or (c) a
majority of a quorum of directors of the Corporation who are
neither "interested persons" as defined in Section 2(a)(19) of
C-11
<PAGE>
the Investment Company Act of 1940, as amended, nor parties to
the proceeding ("disinterested non-party directors"), or
independent legal counsel, in a written opinion, shall have
determined, based on a review of facts readily available to the
Corporation at the time the advance is proposed to be made, that
there is reason to believe that the person seeking
indemnification will ultimately be found to be entitled to
indemnification.
Section 3. PROCEDURE. At the request of any person claiming
indemnification under this Article, the Board of Directors shall
determine, or cause to be determined, in a manner consistent with
the Maryland General Corporation Law, whether the standards
required by this Article have been met. Indemnification shall be
made only following: (a) a final decision on the merits by a
court or other body before whom the proceeding was brought that
the person to be indemnified was not liable by reason of
disabling conduct or (b) in the absence of such a decision, a
reasonable determination, based upon a review of the facts, that
the person to be indemnified was not liable by reason of
disabling conduct by (i) the vote of a majority of a quorum of
disinterested non-party directors or (ii) an independent legal
counsel in a written opinion.
Section 4. INDEMNIFICATION OF EMPLOYEES AND AGENTS.
Employees and agents who are not officers or directors of the
Corporation may be indemnified, and reasonable expenses may be
advanced to such employees or agents, as may be provided by
action of the Board of Directors or by contract, subject to any
limitations imposed by the Investment Company Act of 1940.
Section 5. OTHER RIGHTS. The Board of Directors may make
further provision consistent with law for indemnification and
advance of expenses to directors, officers, employees and agents
by resolution, agreement or otherwise. The indemnification
provided by this Article shall not be deemed exclusive of any
other right, with respect to indemnification or otherwise, to
which those seeking indemnification may be entitled under any
insurance or other agreement or resolution of stockholders or
disinterested directors or otherwise. The rights provided to any
person by this Article shall be enforceable against the
Corporation by such person who shall be presumed to have relied
upon it in serving or continuing to serve as a director, officer,
employee, or agent as provided above.
Section 6. AMENDMENTS. References in this Article are to
the Maryland General Corporation Law and to the Investment
Company Act of 1940 as from time to time amended. No amendment
of these By-laws shall affect any right of any person under this
Article based on any event, omission or proceeding prior to the
amendment.
C-12
<PAGE>
The Advisory Agreement to be between the Registrant and Alliance
Capital Management L.P. provides that Alliance Capital Management
L.P. will not be liable under such agreements for any mistake of
judgment or in any event whatsoever except for lack of good faith
and that nothing therein shall be deemed to protect Alliance
Capital Management L.P. against any liability to the Registrant
or its security holders to which it would otherwise be subject by
reason of wilful misfeasance, bad faith or gross negligence in
the performance of its duties thereunder, or by reason of
reckless disregard of its duties and obligations thereunder.
The Distribution Services Agreement between the Registrant and
Alliance Fund Distributors, Inc. provides that the Registrant
will indemnify, defend and hold Alliance Fund Distributors, Inc.,
and any person who controls it within the meaning of Section 15
of the Securities Act of 1933 (the "Securities Act"), free and
harmless from and against any and all claims, demands,
liabilities and expenses which Alliance Fund Distributors, Inc.
or any controlling person may incur arising out of or based upon
any alleged untrue statement of a material fact contained in the
Registrant's Registration Statement, Prospectus or Statement of
Additional Information or arising out of, or based upon any
alleged omission to state a material fact required to be stated
in any one of the foregoing or necessary to make the statements
in any one of the foregoing not misleading.
The foregoing summaries are qualified by the entire text of
Registrant's Articles of Incorporation and By-Laws, the Advisory
Agreement between Registrant and Alliance Capital Management L.P.
and the Distribution Services Agreement between Registrant and
Alliance Fund Distributors, Inc. which were filed herewith as
Exhibits 1, 2, 5 and 6(a), respectively, in response to Item 24
and each of which are incorporated by reference herein.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that,
in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid
by a director, officer or the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public
C-13
<PAGE>
policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
In accordance with Release No. IC-11330 (September 2, 1980), the
Registrant will indemnify its directors, officers, investment
manager and principal underwriters only if (1) a final decision
on the merits was issued by the court or other body before whom
the proceeding was brought that the person to be indemnified (the
"indemnitee") was not liable by reason or willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office ("disabling conduct") or
(2) a reasonable determination is made, based upon a review of
the facts, that the indemnitee was not liable by reason of
disabling conduct, by (a) the vote of a majority of a quorum of
the directors who are neither "interested persons" of the
Registrant as defined in section 2(a)(19) of the Investment
Company Act of 1940 nor parties to the proceeding
("disinterested, non-party directors"), or (b) an independent
legal counsel in a written opinion. The Registrant will advance
attorneys fees or other expenses incurred by its directors,
officers, investment adviser or principal underwriters in
defending a proceeding, upon the undertaking by or on behalf of
the indemnitee to repay the advance unless it is ultimately
determined that he is entitled to indemnification and, as a
condition to the advance, (1) the indemnitee shall provide a
security for his undertaking, (2) the Registrant shall be insured
against losses arising by reason of any lawful advances, or (3) a
majority of a quorum of disinterested, non-party directors of the
Registrant, or an independent legal counsel in a written opinion,
shall determine, based on a review of readily available facts (as
opposed to a full trial-type inquiry), that there is reason to
believe that the indemnitee ultimately will be found entitled to
indemnification.
ITEM 28. Business and Other Connections of Investment Adviser.
The descriptions of Alliance Capital Management L.P. under the
captions "Management of the Fund" in the Prospectus and in the
Statement of Additional Information constituting Parts A and B,
respectively, of this Registration Statement are incorporated by
reference herein.
The information as to the directors and executive officers of
Alliance Capital Management Corporation, the general partner of
Alliance Capital Management L.P., set forth in Alliance Capital
Management L.P.'s Form ADV filed with the Securities and Exchange
Commission on April 21, 1988 (File No. 801-32361) and amended
through the date hereof, is incorporated by reference herein.
C-14
<PAGE>
ITEM 29. Principal Underwriters
(a) Alliance Fund Distributors, Inc. is the Registrant's
Principal Underwriter in connection with the sale of shares of
the Registrant, also acts as Principal Underwriter or
Distributor for the following investment companies:
ACM Institutional Reserves Inc.
AFD Exchange Reserves
The Alliance Fund, Inc.
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
Alliance Bond Fund, Inc.
Alliance Capital Reserves
Alliance Counterpoint Fund
Alliance Developing Markets Fund, Inc.
Alliance Global Dollar Government Fund, Inc.
Alliance Global Fund
Alliance Global Small Cap Fund, Inc.
Alliance Government Reserves
Alliance Growth and Income Fund, Inc.
Alliance Income Builder Fund, Inc.
Alliance International Fund
Alliance Mortgage Securities Income Fund, Inc.
Alliance Multi-Market Strategy Trust, Inc.
Alliance Municipal Income Fund, Inc.
Alliance Municipal Income Fund II
Alliance Municipal Trust
Alliance New Europe Fund, Inc.
Alliance North American Government Income Trust, Inc.
Alliance Premier Growth Fund, Inc.
Alliance Quasar Fund, Inc.
Alliance Short-Term Multi-Market Trust, Inc.
Alliance Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
Alliance World Income Trust, Inc.
Alliance Worldwide Privatization Fund, Inc.
Fiduciary Management Associates
The Alliance Portfolios
The Hudson River Trust
(b) The following are the Directors and officers of Alliance Fund
Distributors, Inc., the principal place of business of which is
1345 Avenue of the Americas, New York, New York, 10105.
C-15
<PAGE>
POSITIONS AND OFFICES POSITIONS AND NAME
NAME WITH UNDERWRITER WITH REGISTRANT
____ ____________________ __________________
Michael J. Laughlin Chairman
Robert L. Errico President
Kimberly A. Baumgardner Senior Vice President
Edmund P. Bergan, Jr. Senior Vice President Secretary
and General Counsel
Daniel J. Dart Senior Vice President
Byron M. Davis Senior Vice President
Mark D. Gersten Senior Vice President Treasurer and
Chief Financial
Officer
Geoffrey L. Hyde Senior Vice President
Barbara J. Krumseik Senior Vice President
William F. O'Grady Senior Vice President
Dusty W. Paschall Senior Vice President
Antonios G. Poleonadkis Senior Vice President
Gregory K. Shannahan Senior Vice President
James P. Syrett Senior Vice President
Peter J. Szabo Senior Vice President
Richard A. Winge Senior Vice President
Jim A. Yockey Senior Vice President
Michael T. Anderson Vice President
Kenneth F. Barkoff Vice President
Kevin T. Cannon Vice President
Mark J. Dunbar Vice President
C-16
<PAGE>
Linda A. Finnerty Vice President
Robert M. Frank Vice President
Gerard J. Friscia Vice President
Troy L. Glawe Vice President
James E. Gunter Vice President
Alan Halfenger Vice President
Steven P. Hecht Vice President
George R. Hrabovsky Vice President
Valerie J. Hugo Vice President
Mark H. Huston Vice President
Robert H. Joseph Vice President & Controller
Marek E. Lakotko Vice President
Sheila F. Lamb Vice President
Stephen R. Laut Vice President
Thomas Leavitt, III Vice President
Christopher J. MacDonald Vice President
George O. Martinez Vice President &
Associate General Counsel
John A. McClain Vice President
Gregory T. McCombs Vice President
Daniel D. McGinley Vice President
Matthew P. Mintzer Vice President
Nicole M. Nolan Vice President
Robert T. Pigozzi Vice President
Bruce W. Reitz Vice President
Dennis A Sanford Vice President
Joseph F. Sumanski Vice President
C-17
<PAGE>
Richard E. Tambourine Vice President
Nicholas K. Willett Vice President
Warren W. Babcock III Assistant Vice President
Benji A. Baer Assistant Vice President
Angela F. Bisagna Assistant Vice President
Casimir F. Bolanowski Assistant Vice President
Maria L. Carreras Assistant Vice President
Leo H. Cook Assistant Vice President
John W. Cronin Assistant Vice President
Richard W. Dabney Assistant Vice President
Gerard P. DiSalvo Assistant Vice President
Sohaila S. Farsheed Assistant Vice President
Leon M. Fern Assistant Vice President
William C. Fisher Assistant Vice President
Joseph W. Gibson Assistant Vice President
William B. Hanigan Assistant Vice President
Alan C. Hanson Assistant Vice President
Vicky M. Hayes Assistant Vice President
Daniel M. Hazard Assistant Vice President
John C. Hershock Assistant Vice President
James J. Hill Assistant Vice President
Kenneth R. Hill Assistant Vice President
Thomas K. Intoccia Assistant Vice President
Edward W. Kelly Assistant Vice President
Donna M. Lamback Assistant Vice President
David P. Lambert Assistant Vice President
C-18
<PAGE>
Nicholas J. Lapi Assistant Vice President
Michael F. Mahoney Assistant Vice President
Renate S. Mars Assistant Vice President
Daniel G. McCabe Assistant Vice President
Shawn P. McClain Assistant Vice President
Maura A. McGrath Assistant Vice President
Paul J. McIntyre Assistant Vice President
Charles R. Mechler Assistant Vice President
Thomas F. Monnerat Assistant Vice President
Joanna D. Murray Assistant Vice President
Jeanette M. Nardella Assistant Vice President
William E. Noe Assistant Vice President
Marilyn I. Noonan Assistant Vice President
Camilo R. Pedraza Assistant Vice President
Robert E. Powers Assistant Vice President
Patrick J. Pung Assistant Vice President
Carol H. Rappa Assistant Vice President
Karen C. Satterberg Assistant Vice President
Raymond S. Scalfani Assistant Vice President
Rodney J. Schull Assistant Vice President
Robert M. Smith Assistant Vice President
William J. Strott Assistant Vice President
Joseph T. Tocyloski Assistant Vice President
Neil B. Wood Assistant Vice President
Mark R. Manley Assistant Secretary
(c) Not applicable.
C-19
<PAGE>
ITEM 30. Location of Accounts and Records.
The majority of the accounts, books and other documents
required to be maintained by Section 31(a) of the Investment
Company Act of 1940 and the rules thereunder are maintained as
follows: journals, ledgers, securities records and other
original records are maintained principally at the offices of
Alliance Fund Services, Inc., 500 Plaza Drive, Secaucus, New
Jersey, 07094-1520 and at the offices of State Street Bank and
Trust Company, the Registrant's custodian, 225 Franklin Street,
Boston, MA 02110. All other records so required to be maintained
are maintained at the offices of Alliance Capital Management
L.P., 1345 Avenue of the Americas, New York, New York, 10105.
ITEM 31. Management Services.
Not applicable.
ITEM 32. Undertakings
The Registrant undertakes to provide assistance to
shareholders in communications concerning the removal of any
Director of the Fund in accordance with Section 16 of the
Investment Company Act of 1940.
(c) The Registrant undertakes to furnish each person to whom
a prospectus is delivered with a copy of the annual report to
shareholders upon request and without charge.
C-20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
as amended, and the Investment Company Act of 1940, as amended,
the Registrant certifies that it meets all of the requirements
for effectiveness of this Amendment to its Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has
duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York and State of New York, on the
28th day of February, 1995.
ALLIANCE MORTGAGE STRATEGY TRUST, INC.
By: John D. Carifa
---------------------------------------
John D. Carifa
Chairman and President
Pursuant to the requirements of the Securities Act of 1933,
as amended, this Amendment to the Registration Statement has been
signed below by the following persons in the capacities and on
the date indicated.
SIGNATURE TITLE DATE
_________ _____ ____
1. Principal
Executive Officer:
John D. Carifa
_________________ Chairman and February 28, 1995
John D. Carifa President
2. Principal Financial and
Accounting Officer:
Mark D. Gersten
_______________ Treasurer and Chief February 28, 1995
Mark D. Gersten Financial Officer
3. All of the Directors:
Ruth Block
John D. Carifa
David H. Dievler
John H. Dobkin
William H. Foulk, Jr.
Dr. James Hester
C-21
<PAGE>
Clifford L. Michel
Robert C. White
By: Edmund P. Bergan, Jr.
____________________ February 28, 1995
Edmund P. Bergan, Jr.
(Attorney-in-Fact)
C-22
<PAGE>
INDEX TO EXHIBITS
(11) Consent of Independent Auditors
(27) Financial Data Schedule
C-23
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions
"Financial Highlights" in the Prospectus and "Shareholder
Services - Statements and Reports" and "General Information -
Independent Auditors" in the Statement of Additional Information
and to the use of our report dated January 13, 1995, in this
Registration Statement (Form N-1A No. 33-47031) of Alliance
Mortgage Strategy Trust, Inc.
ERNST & YOUNG LLP
New York, New York
February 22, 1995
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<EISCAL-YEAR-END> NOV-30-1994
<PERIOD-END> NOV-30-l994
<INVESTMENTS-AT-COST> 448,196,953
<INVESTMENTS-AT-VALUE> 440,910,711
<RECEIVABLES> 3,778,470
<ASSETS-OTHER> 2,214,117
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 446,903,298
<PAYABLE-FOR-SECURITIES> 53,202,656
<SENIOR-LONG-TERM-DEST> 0
<OTHER-ITEMS-LIABILITIES> 72,231,789
<TOTAL-LIABILITIES> 125,434,445
<SENIOR-EOUITY> 33,783
<PAID-IN-CAPITAL-COMMON> 341,656,226
<SHARES-COMMON-STOCK> 33,782,826
<SHARES-COMMON-PRIOR> 45,884,976
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<OVERDISTRIBUTION-NII> 674,950
<ACCUMULATED-NET-GAINS> (12,259,964)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7,286,242)
<NET-ASSETS> 321,468,853
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 27,927,070
<OTHER-INCOME> 565,857
<EXPENSES-NET> 8,962,826
<NET-INVESTMENT-INCOME> 19,530,101
<REALIZED-GAINS-CURRENT> (11,827,131)
<APPREC-INCREASE-CURRENT> (5,594,513)
<NET-CHANGE-FROM-OPS> 2,108,457
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 20,254,067
<DISTRIBUTIONS-OF-GAINS> 1,694,221
<DISTRIBUTIONS-OTHER> 533,811
<NUMBER-OF-SHARES-SOLD> 471,664,748
<NUMBER-OF-SHARES-REDEEMED> 600,627,629
<SHARES-REINVESTED> 14,730,330
<NET-CHANGE-IN-ASSETS> (134,606,193)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 472,755
<OVERDISTRIB-NII-PRIOR> 322,761
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,005,558
<INTEREST-EXPENSE> 729,234
<GROSS-EXPENSE> 8,962,826
<AVERAGE-NET-ASSETS> 462,393,559
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
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