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This is filed pursuant to Rule 497(c).
File Nos. 33-66630 and 811-07916.
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ALLIANCE UTILITY INCOME FUND, INC
________________________________________________________________
c/o Alliance Fund Services, Inc.
P.O. Box 1520, Secaucus, New Jersey 07096-1520
Toll Free (800) 221-5672
For Literature: Toll Free (800) 227-4618
_________________________________________________________________
STATEMENT OF ADDITIONAL INFORMATION
February 1, 2000 (as amended as of November 1, 2000)
_________________________________________________________________
This Statement of Additional Information is not a
prospectus but supplements and should be read in conjunction with
the current Prospectus, dated November 1, 2000, for Alliance
Utility Income Fund, Inc. (the "Fund") that offers Class A,
Class B and Class C shares of the Fund and the current
Prospectus, dated November 1, 2000, for the Fund that offers the
Advisor Class shares of the Fund (the "Advisor Class Prospectus"
and, together with the Prospectus for the Fund that offers the
Class A, Class B and Class C shares of the Fund, the
"Prospectus"). Copies of the Prospectuses may be obtained by
contacting Alliance Fund Services, Inc. at the address or the
"For Literature" telephone number shown above.
TABLE OF CONTENTS
PAGE
DESCRIPTION OF THE FUND................................... 2
MANAGEMENT OF THE FUND.................................... 31
EXPENSES OF THE FUND...................................... 38
PURCHASE OF SHARES........................................ 42
REDEMPTION AND REPURCHASE OF SHARES....................... 61
SHAREHOLDER SERVICES...................................... 64
NET ASSET VALUE........................................... 71
DIVIDENDS, DISTRIBUTIONS AND TAXES........................ 74
PORTFOLIO TRANSACTIONS...................... 81
GENERAL INFORMATION....................................... 84
REPORT OF INDEPENDENT ACCOUNTANTS AND FINANCIAL
STATEMENTS.............................................. 88
APPENDIX A: DESCRIPTION OF OBLIGATIONS ISSUED
OR GUARANTEED BY U.S. GOVERNMENT AGENCIES
OR INSTRUMENTALITIES................................. A-1
APPENDIX B: BOND AND COMMERCIAL PAPER RATINGS............ B-1
APPENDIX C: OPTIONS...................................... C-1
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APPENDIX D: FUTURES CONTRACTS, OPTIONS ON
FUTURES CONTRACTS AND OPTIONS ON
FOREIGN CURRENCIES................................... D-1
APPENDIX E: CERTAIN EMPLOYEE BENEFIT PLANS............... E-1
___________________
(R): This registered service mark used under license from the
owner, Alliance Capital Management L.P.
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_______________________________________________________________
DESCRIPTION OF THE FUND
_______________________________________________________________
Alliance Utility Income Fund, Inc. (the "Fund") is a
diversified, open-end investment company. Except as otherwise
indicated, the 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 Board of Directors without a
shareholder vote. However, the Fund will not change its
investment policies without contemporaneous written notice to its
shareholders. The Fund's investment objective may not be changed
without shareholder approval. There can be, of course, no
assurance that the Fund will achieve its investment objective.
Investment Objective
The Fund's investment objective is to seek current
income and capital appreciation by investing primarily in equity
and fixed-income securities of companies in the utilities
industry.
How the Fund Pursues its Objective
The Fund may invest in securities of both United States
and foreign issuers, although no more than 15% of the Fund's
total assets will be invested in issuers in any one foreign
country. The utilities industry consists of companies engaged in
(i) the manufacture, production, generation, provision,
transmission, sale and distribution of gas and electric energy,
and communications equipment and services, including telephone,
telegraph, satellite, microwave and other companies providing
communication facilities for the public or (ii) the provision of
other utility or utility-related goods and services, including,
but not limited to, entities engaged in water provision,
cogeneration, waste disposal system provision, solid waste
electric generation, independent power producers and non-utility
generators. As a matter of fundamental policy, the Fund will,
under normal circumstances, invest at least 65% of the value of
its total assets in securities of companies in the utilities
industry. The Fund considers a company to be in the utilities
industry if, during the most recent twelve-month period, at least
50% of the company's gross revenues, on a consolidated basis, is
derived from its utilities activities. At least 65% of the
Fund's total assets are to be invested in income-producing
securities.
The Fund's investment objective and policies are
designed to take advantage of the characteristics and historical
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performance of securities of companies in the utilities industry.
Many of these companies have established a reputation for paying
regular dividends and for increasing their common stock dividends
over time. In evaluating particular issuers, Alliance Capital
Management L.P., (the "Adviser" or "Alliance") will consider a
number of factors, including historical growth rates and rates of
return on capital, financial condition and resources, management
skills and such industry factors as regulatory environment and
energy sources. With respect to investments in equity
securities, the Adviser will consider the prospective growth in
earnings and dividends in relation to price/earnings ratios,
yield and risk. The Adviser believes that above-average dividend
returns and below-average price/earnings ratios are factors that
not only provide current income but also generally tend to
moderate risk and to afford opportunity for appreciation of
securities owned by the Fund.
The Fund will invest in equity securities, such as
common stocks, securities convertible into common stocks and
rights and warrants to subscribe for purchase of common stocks,
and in fixed-income securities, such as bonds and preferred
stocks. There are no fixed percentage limits on the allocation
of the Fund's investments between equity securities and fixed
income securities. Rather, the Fund may vary the percentage of
assets invested in any one type of security based upon the
Adviser's evaluation as to the appropriate portfolio structure
for achieving the Fund's investment objective under prevailing
market, economic and financial conditions. Certain securities
(such as fixed-income securities) will be selected on the basis
of their current yield, while other securities may be purchased
for their growth potential. The values of fixed-income
securities change as the general levels of interest rates
fluctuate. When interest rates decline, the values of fixed
income securities can be expected to increase, and when interest
rates rise, the values of fixed income securities can be expected
to decrease. The Adviser expects that the average weighted
maturity of the Fund's portfolio of fixed-income securities may,
depending upon market conditions, vary between 5 and 25 years.
The Fund may maintain up to 35% of its net assets in
fixed-income securities rated below Baa by Moody's Investors
Service, Inc. ("Moody's") or below BBB by Standard & Poor's
Ratings Services ("S&P") or Fitch IBCA, Inc. ("Fitch") or, if not
rated, of comparable investment quality as determined by the
Adviser. Such high-risk, high-yield securities (commonly
referred to as "junk bonds") are considered to have speculative
or, in the case of relatively low ratings, predominantly
speculative characteristics. See "Certain Risk
Considerations--Investments in Lower-Rated Fixed-Income
Securities." The Fund will not retain a security which is
downgraded below B, or if unrated, determined by the Adviser to
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have undergone similar credit quality deterioration subsequent to
purchase.
Convertible Securities. Utilities frequently issue
convertible securities. Convertible securities include bonds,
debentures, corporate notes and preferred stocks that are
convertible at a stated exchange rate into common stock. Prior to
their 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. As with all
debt securities, the market value of convertible securities tends
to decline as interest rates increase and, conversely, to
increase as interest rates decline. While convertible securities
generally offer lower interest or dividend yields than non-
convertible debt securities of similar quality, they do enable
the investor to benefit from increases in the market price of the
underlying common stock. When the market price of the common
stock underlying a convertible security increases, the price of
the convertible security increasingly reflects the value of the
underlying common stock and may rise accordingly. As the market
price of the underlying common stock declines, the convertible
security tends to trade increasingly on a yield basis, and thus
may not depreciate to the same extent as the underlying common
stock. Convertible securities rank senior to common stocks on an
issuer's capital structure. They are consequently of higher
quality and entail less risk than the issuer's common stock,
although the extent to which such risk is reduced depends in
large measure upon the degree to which the convertible security
sells above its value as a fixed-income security. The Fund may
invest up to 30% of its net assets in the convertible securities
of companies whose common stocks are eligible for purchase by the
Fund under the investment policies described above.
Rights and Warrants. The Fund may invest up to 5% of
its net assets in rights or warrants which entitle the holder to
buy equity securities at a specific price for a specific period
of time, but will do so only if the equity securities themselves
are deemed appropriate by the Adviser for inclusion in the Fund's
portfolio. Rights and warrants may be considered more
speculative than certain other types of investments in that they
do not entitle a holder to dividends or voting rights with
respect to the securities which may be purchased nor do they
represent any rights in the assets of the issuing company. Also,
the value of a right or warrant does not necessarily change with
the value of the underlying securities and a right or warrant
ceases to have value if it is not exercised prior to the
expiration date.
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Utilities Industry
United States Utilities. The United States utilities
industry has experienced significant changes in recent years.
Electric utility companies in general have been favorably
affected by lower fuel costs, the full or near completion of
major construction programs and lower financing costs. In
addition, many utility companies have generated cash flows in
excess of current operating expenses and construction
expenditures, permitting some degree of diversification into
unregulated businesses. Some electric utilities have also taken
advantage of the right to sell power outside of their historical
territories. At this time, there are certain institutional
impediments to the wide-scale deregulation of electric utilities,
including among other things, limitations on the redistribution
of power. The Adviser believes, however, that recent
developments, including the enactment of the Energy Policy Act of
1992, may alleviate certain existing restrictions.
Electric utilities that use coal in connection with the
production of electric power are particularly susceptible to
environmental regulation, including the requirements of the
federal Clean Air Act and of similar state laws. Such regulation
may necessitate large capital expenditures in order for the
utility to achieve compliance. Due to the public, regulatory and
governmental concern with the cost and safety of nuclear power
facilities in general, certain electric utilities with incomplete
nuclear power facilities may have problems completing and
licensing such facilities. Regulatory changes with respect to
nuclear and conventionally fueled generating facilities could
increase costs or impair the ability of such electric utilities
to operate such facilities, thus reducing their ability to
service dividend payments with respect to the securities they
issue. Electric utilities that utilize nuclear power facilities
must apply for recommissioning from the Nuclear Regulatory
Commission after 40 years. Failure to obtain recommissioning
could result in an interruption of service or the need to
purchase more expensive power from other entities, and could
subject the utility to significant capital construction costs in
connection with building new nuclear or alternative-fuel power
facilities, upgrading existing facilities or converting such
facilities to alternative fuels.
Rates of return of utility companies generally are
subject to review and limitation by state public utilities
commissions and tend to fluctuate with marginal financing costs.
Rate changes, however, ordinarily lag behind the changes in
financing costs, and thus can favorably or unfavorably affect the
earnings or dividend pay-outs on utilities stocks depending upon
whether such rates and costs are declining or rising.
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Gas transmission companies, gas distribution companies
and telecommunications companies are also undergoing significant
changes. Gas utilities have been adversely affected by declines
in the prices of alternative fuels, and have also been affected
by oversupply conditions and competition. Telephone utilities
are still experiencing the effects of the break-up of American
Telephone & Telegraph Company, including increased competition
and rapidly developing technologies with which traditional
telephone companies now compete. Potential sources of
competition and new products are cable television systems, shared
tenant services and other noncarrier systems, which are capable
of by-passing traditional telephone services providers' local
plants, either completely or partially, through substitutions of
special access for switched access or through concentration of
telecommunications traffic on fewer of the traditional telephone
services providers' lines. Although there can be no assurance
that increased competition and other structural changes will not
adversely affect the profitability of such utilities, or that
other negative factors will not develop in the future, in the
Adviser's opinion, increased competition and change may provide
better positioned utility companies with opportunities for
enhanced profitability.
Less traditional utility companies are emerging as new
technologies develop and as old technologies are refined. Such
issuers include entities engaged in cogeneration, waste disposal
system provision, solid waste electric generation, independent
power producers and non-utility generators.
Utility companies historically have been subject to the
risks of increases in fuel and other operating costs, high
interest costs on borrowings needed for capital construction
programs, costs associated with compliance with environmental and
nuclear safety regulations, service interruption due to
environmental, operational or other mishaps, the effects of
economic slowdowns, surplus capacity, competition and changes in
the regulatory climate. In particular, regulatory changes with
respect to nuclear and conventionally fueled generating
facilities could increase costs or impair the ability of utility
companies to operate such facilities, thus reducing utility
companies' earnings or resulting in losses. There can also be no
assurance that regulatory policies or accounting standard changes
will not negatively affect utility companies' earnings or
dividends. Utility companies are subject to regulation by
various authorities and may be affected by the imposition of
special tariffs and changes in tax laws. To the extent that
rates are established or reviewed by governmental authorities,
utility companies are subject to the risk that such authorities
will not authorize increased rates. In addition, because of the
Fund's policy of concentrating its investments in securities of
utility companies, the Fund may be more susceptible than an
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investment company without such a policy to any single economic,
political or regulatory occurrence affecting the utilities
industry. Under market conditions that are unfavorable to the
utilities industry, the Adviser may significantly reduce the
Fund's investment in that industry.
Foreign Utilities. Foreign utility companies, like
utility companies located in the United States, are generally
subject to regulation, although such regulations may or may not
be comparable to those in the United States. Foreign utility
companies in certain countries may be more heavily regulated by
their respective governments than utility companies located in
the United States and, as in the United States, generally are
required to seek government approval for rate increases. In
addition, because many foreign utility companies use fuels that
cause more pollution than those used in the United States such
utilities may, in the future, be required to invest in pollution
control equipment if the countries in which the utilities are
located adopt pollution restrictions that more closely resemble
United States pollution restrictions. Foreign utility regulatory
systems vary from country to country and may evolve in ways
different from regulation in the United States.
The Fund's investment policies are designed to enable it
to capitalize on evolving investment opportunities throughout the
world. For example, the rapid growth of certain foreign
economies will necessitate expansion of capacity in the utility
industries in those countries. Although many foreign utility
companies currently are government-owned, thereby limiting
current investment opportunities for the Fund, the Adviser
believes that, in order to attract significant capital for
growth, some foreign governments may engage in a program of
privatization of their utilities industry, and that the
securities issued by privatized utility companies may offer
attractive investment opportunities with the potential for long-
term growth. Privatization, which refers to the trend toward
investor ownership, rather than government ownership, of assets
is expected to occur both in newer, faster-growing economies and
in mature economies. In addition, efforts toward modernization
in Eastern Europe, as well as the potential of economic
unification of European markets, in the view of the Adviser, may
improve economic growth, reduce costs and increase competition in
Europe, which could result in opportunities for investment by the
Fund in utilities industries in Europe. There can be no
assurance that securities of privatized companies will be offered
to the public or to foreign companies such as the Fund, or that
investment opportunities in foreign markets for the Fund will
increase for this or other reasons.
The percentage of the Fund's assets invested in issuers
of particular countries will vary depending on the relative
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yields and growth and income potential of such securities, the
economies of the countries in which the investments are made,
interest rate conditions in such countries and the relationship
of such countries' currencies to the U.S. Dollar. Currency is
judged on the basis of fundamental economic criteria (e.g.,
relative inflation levels and trends, growth rate forecasts,
balance of payments status, and economic policies) as well as
technical and political data. As mentioned above, the Fund will
not invest more than 15% of its total assets in issuers in any
one foreign country. See "Certain Risk Considerations--Risks of
Investments in Foreign Securities."
Other Securities
While the Fund's investment strategy normally emphasizes
securities of companies in the utilities industry, the Fund may,
where consistent with its investment objective, invest up to 35%
of its total assets in equity and fixed-income securities of
domestic and foreign issuers other than companies in the
utilities industry, including (i) securities issued or guaranteed
by the United States Government, its agencies or
instrumentalities ("U.S. Government Securities") and repurchase
agreements pertaining thereto, as discussed below, (ii) foreign
securities, as discussed below, (iii) corporate fixed-income
securities of domestic issuers of quality comparable to the
fixed-income securities described above, (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 Prime 1 or higher by
Moody's or A-1 or higher by S&P or, if not rated, issued by
companies which have an outstanding debt issue rated Aa or higher
by Moody's or AA or higher by S&P, (vi) equity securities of
domestic corporate issuers and (vii) the additional derivative
vehicles discussed below under the caption "Investment Policies
and Practices."
U.S. Government Securities. U.S. Government Securities
include: (i) U.S. Treasury obligations, which differ only in
their interest rates, maturities and times of issuance: U.S.
Treasury bills (maturity of one year or less), U.S. Treasury
notes (maturities of one to 10 years) and U.S. Treasury bonds
(generally maturities of greater than 10 years), all of which are
backed by the full faith and credit of the United States; and
(ii) obligations issued or guaranteed by U.S. Government agencies
or instrumentalities, including government guaranteed
mortgage-related securities. Some such obligations are backed by
the full faith and credit of the U.S. Treasury, e.g., direct
pass-through certificates of the Government National Mortgage
Association, some are supported by the right of the issuer to
borrow from the U.S. Government, e.g., obligations of Federal
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Home Loan Banks, and some are backed only by the credit of the
issuer itself, e.g., obligations of the Student Loan Marketing
Association. See Appendix A for a further description of
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities.
U.S. Government Securities do not generally involve the
credit risks associated with other types of interest-bearing
securities, although, as a result, the yields available from U.S.
Government Securities are generally lower than the yields
available from other interest-bearing securities. Like other
fixed-income securities, however, the values of U.S. Government
Securities change as interest rates fluctuate. When interest
rates decline, the values of U.S. Government Securities can be
expected to increase and when interest rates rise, the values of
U.S. Government Securities can be expected to decrease.
For a general description of obligations issued or
guaranteed by U.S. Government agencies or instrumentalities, see
Appendix A.
Foreign Securities. Foreign fixed-income securities in
which the Fund invests may include fixed-income securities of
quality comparable to the fixed-income securities described above
as determined by the Adviser (i) issued or guaranteed, as to
payment of principal and interest, by governments, quasi-
governmental entities, governmental agencies or other
governmental entities (collectively, "Government Entities") and
(ii) of foreign corporate issuers, denominated in foreign
currencies or in U.S. Dollars (including fixed-income securities
of a Government Entity or foreign corporate issuer in a country
denominated in the currency of another country). The Fund may
also invest in equity securities of foreign corporate issuers.
See "How the Fund Pursues its Objective--Utilities Industry-
-Foreign Utilities" and "Certain Risk Considerations--Risks of
Investments in Foreign Securities."
In addition to purchasing corporate securities of
foreign issuers in foreign securities markets, the Fund may
invest in American Depositary Receipts (ADRs), Global Depositary
Receipts (GDRs) and other types of Depositary Receipts (which,
together with ADRs and GDRs, are hereinafter referred to as
"Depositary Receipts"). Depositary Receipts may not necessarily
be denominated in the same currency as the underlying securities
into which they may be converted. In addition, the issuers of
the stock of unsponsored Depositary Receipts are not obligated to
disclose material information in the United States and,
therefore, there may not be a correlation between such
information and the market value of the Depositary Receipts.
ADRs are Depositary Receipts typically issued by a United States
bank or trust company which evidence ownership of underlying
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securities issued by a foreign corporation. GDRs and other types
of Depositary Receipts are typically issued by foreign banks or
trust companies, although they also may be issued by United
States banks or trust companies, and evidence ownership of
underlying securities issued by either a foreign or a United
States corporation. Generally, Depositary Receipts in registered
form are designed for use in the U.S. securities markets and
Depositary Receipts in bearer form are designed for use in
foreign securities markets. For purposes of the Fund's
investment policies, the Fund's investments in ADRs will be
deemed to be investments in securities issued by United States
issuers and the Fund's investments in GDRs and other types of
Depositary Receipts will be deemed to be investments in the
underlying securities.
The Fund will also be authorized to invest in securities
of supranational entities denominated in the currency of any
country, including the euro. A supranational entity is an entity
designated or supported by the national government of one or more
countries to promote economic reconstruction or development.
Examples of supranational entities include, among others, the
International Bank for Reconstruction and Development (the "World
Bank") and the European Investment Bank. The governmental
members, or "stockholders," usually make initial capital
contributions to the supranational entity and in many cases are
committed to make additional contributions if the supranational
entity is unable to repay its borrowings. Each supranational
entity's lending activities are limited to a percentage of its
total capital (including "callable capital" contributed by
members at the entity's call), reserves and net income. The Fund
is further authorized to invest in "semi-governmental
securities," which are securities issued by entities owned by
either a national, state or equivalent government or are
obligations of one of such government jurisdictions which are not
backed by its full faith and credit and general taxing powers.
An example of a semi-governmental issuer is the City of
Stockholm.
Defensive Position. It is the Fund's policy that under
normal circumstances, the total assets of the Fund will be
primarily invested in equity and fixed-income securities of
companies in the utilities industry. For temporary defensive
purposes, the Fund may vary from its investment policy during
periods in which the Adviser believes that business or financial
conditions warrant and invest without limit in high grade fixed-
income securities or hold its assets in cash equivalents,
including (i) short-term U.S. Government Securities,
(ii) certificates of deposit, bankers' acceptances and interest-
bearing savings deposits of banks having total assets of more
than $1 billion and which are members of the Federal Deposit
Insurance Corporation and (iii) commercial paper of prime quality
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rated A-1 or higher by S&P or Prime 1 or higher by Moody's or, if
not rated, issued by companies which have an outstanding debt
issue rated AA or higher by S&P or Aa or higher by Moody's.
Investment Policies and Practices
The following additional investment policies and
practices supplement those in the Prospectus.
Options. In an effort to increase current income and to
reduce fluctuations in net asset value, the Fund intends to write
covered put and call options and purchase put and call options on
securities of the types in which it is permitted to invest that
are traded on U.S. and foreign securities exchanges. There are
no specific limitations on the Fund's writing and purchasing of
options.
A put option gives the purchaser of such option, upon
payment of a premium, the right to deliver a specified amount of
a security to the writer of the option on or before a fixed date
at a predetermined price. A call option gives the purchaser of
the option, upon payment of a premium, the right to call upon the
writer to deliver a specified amount of a security on or before a
fixed date at a predetermined price. A call option written by
the Fund is "covered" if the Fund owns the underlying security
covered by the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or
for additional cash consideration held in a segregated account by
its Custodian) upon conversion or exchange of other securities
held in its portfolio. A call option is also covered if the Fund
holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call
held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call
written if the difference is maintained by the Fund in liquid
assets in a segregated account with its Custodian. A put option
written by the Fund is "covered" if the Fund maintains liquid
assets with a value equal to the exercise price in a segregated
account with its Custodian, or else holds a put on the same
security and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater
than the exercise price of the put written. The premium paid by
the purchaser of an option will reflect, among other things, the
relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the
option, supply and demand and interest rates.
The Fund may write call options for cross-hedging
purposes. A call option is for cross-hedging purposes if the
Fund does not own the underlying security, and is designed to
provide a hedge against a decline in value in another security
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which the Fund owns or has the right to acquire. In such
circumstances, the Fund collateralizes its obligation under the
option by maintaining in a segregated account with the Fund's
Custodian liquid assets in an amount not less than the market
value of the underlying security, marked to market daily. The
Fund would write a call option for cross-hedging purposes,
instead of writing a covered call option, when the premium to be
received from the cross-hedge transaction would exceed that which
would be received from writing a covered call option, while at
the same time achieving the desired hedge.
In purchasing a call option, the Fund would be in a
position to realize a gain if, during the option period, the
price of the underlying security increased by an amount in excess
of the premium paid. It would realize a loss if the price of the
underlying security declined or remained the same or did not
increase during the period by more than the amount of the
premium. In purchasing a put option, the Fund would be in a
position to realize a gain if, during the option period, the
price of the underlying security declined by an amount in excess
of the premium paid. It would realize a loss if the price of the
underlying security increased or remained the same or did not
decrease during that period by more than the amount of the
premium. If a put or call option purchased by the Fund were
permitted to expire without being sold or exercised, its premium
would be lost by the Fund.
If a put option written by the Fund were exercised, the
Fund would be obligated to purchase the underlying security at
the exercise price. If a call option written by the Fund were
exercised, the Fund would be obligated to sell the underlying
security at the exercise price. The risk involved in writing a
put option is that there could be a decrease in the market value
of the underlying security caused by rising interest rates or
other factors. If this occurred, the option could be exercised
and the underlying security would then be sold by the option
holder to the Fund at a higher price than its current market
value. The risk involved in writing a call option is that there
could be an increase in the market value of the underlying
security caused by declining interest rates or other factors. If
this occurred, the option could be exercised and the underlying
security would then be sold by the Fund at a lower price than its
current market value. These risks could be reduced by entering
into a closing transaction. The Fund retains the premium
received from writing a put or call option whether or not the
option is exercised.
The Fund may purchase or write options on securities of
the types in which it is permitted to invest in privately
negotiated (i.e., over-the-counter) transactions. The Fund will
effect such transactions only with investment dealers and other
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financial institutions (such as commercial banks or savings and
loan institutions) deemed creditworthy by the Adviser, and the
Adviser has adopted procedures for monitoring the
creditworthiness of such entities. Options purchased or written
by the Fund in negotiated transactions are illiquid and it may
not be possible for the Fund to effect a closing transaction at a
time when the Adviser believes it would be advantageous to do so.
See "Illiquid Securities."
For additional information on the use, risks and costs
of options, see Appendix C.
Options on Securities Indices. The Fund may purchase
and sell exchange-traded options on any securities index composed
of the types of securities in which it may invest. An option on
a securities index is similar to an option on a security except
that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index
gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the chosen
index is greater than (in the case of a call) or less than (in
the case of a put) the exercise price of the option. There are
no specific limitations on the Fund's purchasing and selling of
options on securities indices.
Through the purchase of listed index options, the Fund
could achieve many of the same objectives as through the use of
options on individual securities. Price movements in the Fund's
portfolio securities probably will not correlate perfectly with
movements in the level of the index and, therefore, the Fund
would bear a risk of loss on index options purchased by it if
favorable price movements of the hedged portfolio securities do
not equal or exceed losses on the options or if adverse price
movements of the hedged portfolio securities are greater than
gains realized from the options.
Futures Contracts and Options on Futures Contracts. The
Fund may enter into contracts for the purchase or sale for future
delivery of fixed-income securities or foreign currencies, or
contracts based on financial indices, including any index of U.S.
Government Securities, securities issued by foreign Government
Entities ("Foreign Government Securities"), corporate fixed-
income securities or common stocks ("futures contracts") and may
purchase and write put and call options to buy or sell futures
contracts ("options on futures contracts"). A "sale" of a
futures contract means the acquisition of a contractual
obligation to deliver the securities or foreign currencies called
for by the contract at a specified price on a specified date. A
"purchase" of a futures contract means the incurring of a
contractual obligation to acquire the securities or foreign
currencies called for by the contract at a specified price on a
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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 ("current
contract value") and the price at which the contract was
originally struck. No physical delivery of the securities
underlying the index is made. Options on futures contracts
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 market conditions and interest or exchange rates which
otherwise might either adversely affect the value of the Fund's
portfolios securities or adversely affect the prices of
securities which the Fund intends to purchase at a later date.
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 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 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, the correlation
between movements in the price of futures contracts or options on
futures contracts and movements in the price of the securities
and currencies hedged or used for cover will not be perfect and
could produce unanticipated losses.
The 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 restricted the
Fund's use of futures contracts so that the aggregate of the
market value of the outstanding futures contracts purchased by
the Fund and the market value of the currencies and futures
contracts subject to outstanding options written by the Fund may
not exceed 50% of the market value of the total assets of the
Fund. These restrictions will not be changed by the Fund's Board
of Directors without considering the policies and concerns of the
various applicable federal and state regulatory agencies.
The Fund will not enter into any futures contracts or
options on futures contracts if immediately thereafter 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.
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For additional information on the use, risks and costs
of futures contracts and options on futures contracts, see
Appendix D.
Options on Foreign Currencies. The Fund may purchase
and write put and call options on foreign currencies for the
purpose of protecting against declines in the U.S. Dollar value
of foreign currency-denominated portfolio securities and against
increases in the U.S. Dollar cost of such securities to be
acquired. As in the case of other kinds of options, however, the
writing of an option on a foreign currency constitutes only a
partial hedge, up to the amount of the premium received, and the
Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on a foreign currency may constitute an
effective hedge against fluctuations in exchange rates although,
in the event of rate movements adverse to the Fund's position, it
may forfeit the entire amount of the premium plus related
transaction costs. Options on foreign currencies to be written
or purchased by the Fund are traded on U.S. and foreign exchanges
or over-the-counter. There is no specific percentage limitation
on the Fund's investments in options on foreign currencies.
For additional information on the use, risks and costs
of futures contracts and options on futures contracts, see
Appendix D.
Forward Foreign Currency Exchange Contracts. The Fund
may purchase or sell forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk to the Fund
from adverse changes in the relationship between the U.S. Dollar
and foreign currencies. A forward contract is an obligation to
purchase or sell a specific currency for an agreed price at a
future date, and is individually negotiated and privately traded
by currency traders and their customers. The Fund may enter into
a forward contract, for example, when it enters into a contract
for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. Dollar price of the
security ("transaction hedge"). The Fund may not engage in
transaction hedges with respect to the currency of a particular
country to an extent greater than the aggregate amount of the
Fund's transactions in that currency. Additionally, for example,
when the Fund believes that a foreign currency may suffer a
substantial decline against the U.S. Dollar, it may enter into a
forward sale contract to sell an amount of that foreign currency
approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency, or when the Fund
believes that the U.S. Dollar may suffer a substantial decline
against a foreign currency, it may enter into a forward purchase
contract to buy that foreign currency for a fixed dollar amount
("position hedge"). In this situation the Fund may, in the
15
<PAGE>
alternative, enter into a forward contract to sell a different
foreign currency for a fixed U.S. Dollar amount where the Fund
believes that the U.S. Dollar value of the currency to be sold
pursuant to the forward contract will fall whenever there is a
decline in the U.S. Dollar value of the currency in which
portfolio securities of the Fund are denominated ("cross-hedge").
To the extent required by applicable law, the Fund's Custodian
will place liquid assets in a segregated account of the Fund
having a value equal to the aggregate amount of the Fund's
commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the liquid
assets placed in a segregated account declines, additional liquid
assets will be placed in the account on a daily basis so that the
value of the account will equal the amount of the Fund's
commitments with respect to such contracts. As an alternative to
maintaining all or part of the segregated account, the Fund may
purchase a call option permitting the Fund to purchase the amount
of foreign currency being hedged by a forward sale contract at a
price no higher than the forward contract price or the Fund may
purchase a put option permitting the Fund to sell the amount of
foreign currency subject to a forward purchase contract at a
price as high or higher than the forward contract price. In
addition, the Fund may use such other methods of "cover" as are
permitted by applicable law.
While these contracts are not presently regulated by the
Commodity Futures Trading Commission ("CFTC"), the CFTC may in
the future assert authority to regulate forward contracts. In
such event the Fund's ability to utilize forward contracts in the
manner set forth in the Prospectus may be restricted. Forward
contracts will reduce the potential gain from a positive change
in the relationship between the U.S. Dollar and foreign
currencies. Unanticipated changes in currency prices may result
in poorer overall performance for the Fund than if it had not
entered into such contracts. The use of foreign currency forward
contracts will not eliminate fluctuations in the underlying U.S.
Dollar equivalent value of the proceeds of or rates of return on
the Fund's foreign currency-denominated portfolio securities and
the use of such techniques will subject the Fund to certain
risks.
The matching of the increase in value of a forward
contract and the decline in the U.S. Dollar equivalent value of
the foreign-currency denominated asset that is the subject of the
hedge generally will not be precise. In addition, the Fund may
not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit the Fund's
ability to use such contracts to hedge or cross-hedge its assets.
Also, with regard to the Fund's use of cross-hedges, there can be
no assurance that historical correlations between the movement of
certain foreign currencies relative to the U.S. Dollar will
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<PAGE>
continue. Thus, poor correlation may exist at any time between
movements in the exchange rates of the foreign currencies
underlying the Fund's cross-hedges and the movements in the
exchange rates of the foreign currencies in which the Fund's
assets that are the subject of such cross-hedges are denominated.
Interest Rate Transactions. The Fund may 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 exchange commitments can
involve payments in the same currency or in different currencies.
The purchase of an interest rate cap entitles the purchaser, to
the extent that a specified index exceeds a predetermined
interest rate, to receive payments of interest on a
contractually-based principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index
falls below a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling
such interest rate floor.
The Fund may enter into interest rate swaps, caps and
floors on either an asset-based or liability-based basis,
depending upon 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 liquid assets having an aggregate 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 would maintain a segregated
account with its Custodian in the full amount accrued on a daily
basis of the Fund's obligations with respect to the swap. The
Fund will not enter into any interest rate swap, cap or floor
transaction unless the unsecured senior debt or the claims-paying
ability of the other party thereto is rated in the highest rating
category of at least one nationally recognized rating
organization at the time of entering into the transaction. The
Adviser will monitor the creditworthiness of counterparties on an
ongoing basis. If there is a default by the other party to such
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<PAGE>
a transaction, the Fund will have contractual remedies pursuant
to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and
as 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 with its Custodian liquid assets having
an aggregate value at least equal to the full amount, accrued on
a daily basis, of the Fund's obligations with respect to any caps
or floors. The use of interest rate swaps is a highly
specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its
forecasts of market values, interest rates and other applicable
factors, the investment performance of the Fund would diminish
compared to 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 of principal. Accordingly, the risk of loss
with respect to interest rate swaps is limited to the net amount
of interest payments that the Fund is contractually obligated to
make. If the other party to an interest rate swap defaults, the
Fund's risk of loss consists of the net amount of interest
payments that the Fund contractually is entitled to receive. The
Fund may purchase and sell (i.e., write) caps and floors without
limitation, subject to the segregated account requirement
described above.
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, the settlement
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<PAGE>
date occurs within two months after the transaction, but 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 prices.
In periods of falling interest rates and rising bond prices, the
Fund might sell a security in its portfolio and purchase the same
or a similar security on a when-issued or forward commitment
basis, thereby obtaining the benefit of currently higher cash
yields. However, if the Adviser were to forecast incorrectly the
direction of interest rate movements, the Fund might be required
to complete such when-issued or forward transactions at prices
inferior to the then current market values. No forward
commitments will be made by the Fund if, as a result, the Fund's
aggregate commitments under such transactions would be more than
30% of the then current value of the Fund's total assets.
The Fund's right to receive or deliver a security under
a forward commitment may be sold prior to the settlement date,
but the Fund will enter into forward commitments only with the
intention of actually receiving or delivering the securities, as
the case may be. To facilitate such transactions, the Fund's
Custodian will maintain, in a segregated account of the Fund,
liquid assets 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 may 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.
Standby Commitment Agreements. The Fund may from time
to time enter into standby commitment agreements. Such
agreements commit the Fund, for a stated period of time, to
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<PAGE>
purchase a stated amount of a security which 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 or not the security is
ultimately issued, which is typically approximately 0.5% of the
aggregate purchase price of the security which the Fund has
committed to purchase. The fee is payable whether or not the
security is ultimately issued. The Fund will enter into such
agreements only for the purpose of investing in the security
underlying the commitment at a yield and price which are
considered advantageous to the Fund and which are unavailable on
a firm commitment basis. The Fund will not enter into a standby
commitment with a remaining term in excess of 45 days and will
limit its investment in such commitments so that the aggregate
purchase price of the securities subject to such commitments will
not exceed 20% of its assets taken at the time of acquisition of
such commitment of security. The Fund will at all times maintain
a segregated account with its Custodian of liquid assets in an
aggregate amount equal to the purchase price of the securities
underlying the commitment.
There can be no assurance that the securities subject to
a standby commitment will be issued and 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
underlying the commitment is at the option of the issuer, the
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.
The purchase of a security subject to a standby
commitment agreement and the related commitment fee will be
recorded on the date on which the security can reasonably be
expected to be issued and the value of the security will
thereafter be reflected in the calculation of the Fund's net
asset value. The cost basis of the security will be adjusted by
the amount of the commitment fee. In the event the security is
not issued, the commitment fee will be recorded as income on the
expiration date of the standby commitment.
Short Sales. The Fund may make short sales of
securities or maintain a short position only for the purpose of
deferring realization of gain or loss for U.S. federal income tax
purposes, provided that at all times when a short position is
open the Fund owns an equal amount of such securities of the same
issue as, and equal in amount to, the securities sold short. In
addition, the Fund may not make a short sale if more than 10% of
the Fund's net assets (taken at market value) is held as
collateral for short sales at any one time. Pursuant to the
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Taxpayer Relief Act of 1997, if the Fund has unrealized gain with
respect to a security and enters into a short sale with respect
to such security, the Fund generally will be deemed to have sold
the appreciated security and thus will recognize gain for tax
purposes. If the price of the security sold short increases
between the time of the short sale and the time the Fund replaces
the borrowed security, the Fund will incur a loss; conversely, if
the price declines, the Fund will realize a capital gain.
Although the Fund's gain is limited to the price at which it sold
the security short, its potential loss is unlimited. See
"Investment Restrictions" in the Statement of Additional
Information. See "Dividends, Distributions and Taxes-Tax
Straddles" in the Statement of Additional Information for a
discussion of certain special federal income tax considerations
that may apply to short sales which are entered into by the Fund.
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 or forward contracts or
may realize losses and thus be in a worse position than if such
strategies had not been used. Unlike many exchange-traded
futures contracts and options on futures contracts, there are no
daily price fluctuation limits with respect to options on
currencies and forward contracts, and adverse market movements
could therefore continue to an unlimited extent over a period of
time. In addition, the correlation between movements in the
prices of such instruments and movements in the prices of the
securities and currencies hedged or used for cover will not be
perfect and could produce unanticipated losses.
The Fund's ability to dispose of its position in futures
contracts, options and forward contracts will depend on the
availability of liquid markets in such instruments. Markets in
options and futures with respect to a number of fixed-income
securities and currencies are relatively new and still
developing. It is impossible to predict the amount of trading
interest that may exist in various types of futures contracts,
options and forward contracts. If a secondary market does not
exist with respect to an option purchased or written by the Fund
over-the-counter, it might not be possible to effect a closing
transaction in the option (i.e., dispose of the option) with the
result that (i) an option purchased by the Fund would have to be
exercised in order for the Fund to realize any profit and
(ii) the Fund may not be able to sell currencies or portfolio
securities covering an option written by the Fund until the
option expires or it delivers the underlying futures contract or
currency upon exercise. Therefore, no assurance can be given
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that the Fund will be able to utilize these instruments
effectively for the purposes set forth above.
Additional Investment Policies
Loans of Portfolio Securities. The Fund may make
secured loans of its portfolio securities to brokers, dealers and
financial institutions provided that liquid assets or bank
letters of credit equal to at least 100% of the market value of
the securities loaned, are deposited and maintained by the
borrower with the Fund. The risks in lending portfolio
securities, as with other extensions of credit, consist of
possible loss of rights in the collateral should the borrower
fail financially. In determining whether to lend securities to a
particular borrower, the Adviser (subject to review by the Board
of Directors) will consider all relevant facts and circumstances,
including the creditworthiness of the borrower. While securities
are on loan, the borrower will pay the Fund any income earned
thereon and the Fund may invest any cash collateral in portfolio
securities, thereby earning additional income, or receive an
agreed-upon amount of income from a borrower who has delivered
equivalent collateral. The Fund will have the right to regain
record ownership of loaned securities or equivalent securities in
order to exercise ownership rights such as voting rights,
subscription rights and rights to dividends, interest or other
distributions. The Fund may pay reasonable finders',
administrative and custodial fees in connection with a loan. The
Fund will not lend portfolio securities in excess of 20% of the
value of its total assets, nor will the Fund lend its portfolio
securities to any officer, director, employee or affiliate of the
Fund or the Adviser. The Board of Directors will monitor the
Fund's lending of portfolio securities.
Repurchase Agreements. The Fund may enter into
agreements pertaining to U.S. Government Securities with member
banks of the Federal Reserve System or "primary dealers" (as
designated by the Federal Reserve Bank of New York) in such
securities. There is no percentage restriction on the Fund's
ability to enter into repurchase agreements. Currently the Fund
enters into repurchase agreements only with its Custodian and
such primary dealers. A repurchase agreement arises when a buyer
purchases a security and simultaneously agrees to resell it to
the vendor at an agreed-upon future date, normally one day or a
few days later. The resale price is greater than the purchase
price, reflecting an agreed-upon interest rate which is effective
for the period of time the buyer's money is invested in the
security and which is related to the current market rate rather
than the coupon rate on the purchased security. Such agreements
permit the Fund to keep all of its assets at work while retaining
"overnight" flexibility in pursuit of investments of a longer-
term nature. The Fund requires continual maintenance by its
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Custodian for its account in the Federal Reserve/Treasury Book
Entry System of collateral in an amount equal to, or in excess
of, the resale price. 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 its 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.
Repurchase agreements may exhibit the characteristics of
loans by the Fund. During the term of the repurchase agreement,
the Fund retains the security subject to the repurchase agreement
as collateral securing the seller's repurchase obligation,
continually monitors on a daily basis the market value of the
security subject to the agreement and requires the seller to
deposit with the Fund collateral equal to any amount by which the
market value of the security subject to the repurchase agreement
falls below the resale amount provided under the repurchase
agreement.
Illiquid Securities. The Fund will not maintain more
than 15% of its net assets in illiquid securities. For this
purpose, illiquid securities include, among others, 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).
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"), and securities which are
otherwise not readily marketable. Securities which have not been
registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not
typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale
and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a
mutual fund might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions within seven
days. A mutual fund might also have to register such restricted
securities in order to dispose of them resulting in additional
23
<PAGE>
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 foreign securities.
Institutional investors depend on an efficient institutional
market in which the unregistered security can be readily resold
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.
The Fund may invest up to 5% of its net assets (taken at
market value) in restricted securities (excluding Rule 144A
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 and only to institutional investors and in private
transactions; they cannot be resold to the general public without
registration.
Rule 144A under the Securities Act allows a broader
institutional trading market for securities otherwise subject to
restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of
the Securities Act for resales of certain securities to qualified
institutional buyers. An insufficient number of qualified
institutional buyers interested in purchasing certain restricted
securities held by the Fund, however, could affect adversely the
marketability of such portfolio securities and the Fund might be
unable to dispose of such securities promptly or at reasonable
prices. Rule 144A has already produced enhanced liquidity for
many restricted securities, and market liquidity for such
securities may continue to expand as a result of this regulation
and the consequent inception of the PORTAL System, an automated
system for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers which is sponsored by
the National Association of Securities Dealers, Inc.
The Fund's Adviser, acting under the supervision of the
Board of Directors, will monitor the liquidity of restricted
securities in the Fund's portfolio that are eligible for resale
pursuant to Rule 144A. In reaching liquidity decisions, the
Adviser will consider, among others, the following
factors: (1) the frequency of trades and quotes for the
security; (2) the number of dealers making quotations to purchase
or sell the security; (3) the number of other potential
purchasers of the security; (4) the number of dealers undertaking
to make a market in the security; (5) the nature of the security
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<PAGE>
(including its unregistered nature) and the nature of the
marketplace for the security (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics
of the transfer); and (6) any applicable Securities and Exchange
Commission (the "Commission") interpretation or position with
respect to such type of securities.
Investment in Closed-End Investment Companies. The Fund
may invest in closed-end investment companies whose investment
objectives and policies are consistent with those of the Fund.
The Fund may invest up to 5% of its net assets in securities of
closed-end investment companies. However, the Fund may not own
more than 3% of the total outstanding voting stock of any closed-
end investment company. If the Fund acquires shares in closed-
end investment companies, shareholders would bear both their
proportionate share of expenses in the Fund (including advisory
fees) and, indirectly, the expenses of such investment companies
(including management and advisory fees).
Future Developments. The Fund may, following written
notice to its shareholders, take advantage of other investment
practices which are not at present contemplated for use by the
Fund or which currently are not available but which may be
developed, to the extent such investment practices are both
consistent with the Fund's investment objective and legally
permissible for the Fund. Such investment practices, if they
arise, may involve risks which exceed those involved in the
activities described above.
Portfolio Turnover. The Fund may engage in active
short-term trading in connection with its investment in shorter-
term fixed-income securities in order to benefit from yield
disparities among different issues of securities, to seek short-
term profits during periods of fluctuating interest rates, or for
other reasons. Such trading will increase the Fund's rate of
turnover and the incidence of short-term capital gain taxable as
ordinary income. It is anticipated that the Fund's annual
turnover rate will not exceed 200%. An annual turnover rate of
200% occurs, for example, when all of the securities in the
Fund's portfolio are replaced twice in a period of one year. A
portfolio turnover rate approximating 200% involves
correspondingly greater brokerage commissions than would a lower
rate, which expenses must be borne by the Fund and its
shareholders and may result in the Fund realizing more short-term
capital gains or losses than would a lower rate. See "Dividends,
Distributions and Taxes."
25
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Certain Risk Considerations
Utility Company Risks. Utility companies may be subject
to a variety of risks depending, in part, on such factors as the
type of utility involved and its geographic location. The
revenues of domestic and foreign utilities companies generally
reflect the economic growth and development in the geographic
areas in which they do business. The Adviser will take into
account anticipated economic growth rates and other economic
developments when selecting securities of utility companies. Some
of the risks involved in investing in the principal sectors of
the utilities industry are discussed below.
Telecommunications regulation typically limits rates
charged, returns earned, providers of services, types of
services, ownership, areas served and terms for dealing with
competitors and customers. Telecommunications regulation
generally has tended to be less stringent for newer services,
such as mobile services, than for traditional telephone service,
although there can be no assurances that such newer services will
not be heavily regulated in the future. Regulation may limit
rates based on an authorized level of earnings, a price index or
some other formula. Telephone rate regulation may include
government-mandated cross-subsidies that limit the flexibility of
existing service providers to respond to competition. Regulation
may also limit the use of new technologies and hamper efficient
depreciation of existing assets. If regulation limits the use of
new technologies by established carriers or forces cross-
subsidies, large private networks may emerge.
Many gas utilities generally have been adversely
affected by oversupply conditions, and by increased competition
from other providers of utility services. In addition, some gas
utilities entered into long-term contracts with respect to the
purchase or sale of gas at fixed prices, which prices have since
changed significantly in the open market. In many cases, such
price changes have been to the disadvantage of the gas utility.
Gas utilities are particularly susceptible to supply and demand
imbalances due to unpredictable climate conditions and other
factors and are subject to regulatory risks as well.
Electric utilities that utilize coal in connection with
the production of electric power are particularly susceptible to
environmental regulation, including the requirements of the
federal Clean Air Act and of similar state laws. Such regulation
may necessitate large capital expenditures in order for the
utility to achieve compliance. Due to the public, regulatory and
governmental concern with the cost and safety of nuclear power
facilities in general, certain electric utilities with
uncompleted nuclear power facilities may have problems completing
and licensing such facilities. Regulatory changes with respect
26
<PAGE>
to nuclear and conventionally fueled generating facilities could
increase costs or impair the ability of such electric utilities
to operate such facilities, thus reducing their ability to
service dividend payments with respect to the securities they
issue. Electric utilities that utilize nuclear power facilities
must apply for recommissioning from the Nuclear Regulatory
Commission after 40 years. Failure to obtain recommissioning
could result in an interruption of service or the need to
purchase more expensive power from other entities and could
subject the utility to significant capital construction costs in
connection with building new nuclear or alternative-fuel power
facilities, upgrading existing facilities or converting such
facilities to alternative fuels.
Investments in Lower-Rated Fixed-Income Securities.
Securities rated below investment grade, i.e., Ba and lower by
Moody's or BB and lower by S&P ("lower-rated securities"), or, if
not rated, determined by the Adviser to be of equivalent quality,
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 by Moody's or BB by
S&P 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 by Moody's
and S&P are judged to have highly speculative elements or to be
predominantly speculative. Such securities may have small
assurance of interest and principal payments. Securities rated
Baa by Moody's are also judged to have speculative
characteristics.
The market for lower-rated securities may be thinner and
less active than that for higher-rated securities, which can
adversely affect the prices at which these securities can be
sold. Adverse publicity and investor perceptions about
lower-rated securities, whether or not based on fundamental
analysis, may tend to decrease the market value and liquidity of
such lower-rated securities. To the extent that there is no
established secondary market for lower-rated securities, the Fund
may experience difficulty in valuing such securities and, in
turn, the Fund's assets.
27
<PAGE>
The Adviser 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,
the Adviser's research and credit analysis are a correspondingly
more important aspect of its program for managing the Fund's
securities than would be the case if the Fund did not invest in
lower-rated securities. In considering investments for the Fund,
the Adviser will attempt to identify those high-risk, high-yield
securities whose financial condition is adequate to meet future
obligations, has improved or is expected to improve in the
future. The Adviser's analysis focuses on relative values based
on such factors as interest or dividend coverage, asset coverage
earnings prospects and the experience and managerial strength of
the issuer.
Non-rated securities will also be considered for
investment by the Fund when the Adviser believes that the
financial condition of the issuers of such securities, or the
protection afforded by the terms of the securities themselves,
limits the risk to the Fund to a degree comparable to that of
rated securities which are consistent with the Fund's objective
and policies.
In seeking to achieve the 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 the 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 the Fund.
Ratings of fixed-income securities by Moody's, S&P 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 a security 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 the credit risk of securities
within each rating category. See Appendix B for a description of
Moody's, S&P's and Fitch's bond and commercial paper ratings.
Certain lower-rated securities in which the Fund may
invest may contain call or buy-back features that permit the
28
<PAGE>
issuers thereof to call or repurchase such securities. Such
securities may present risks based on prepayment expectations.
If an issuer exercises such a provision, the Fund may have to
replace the called security with a lower yielding security,
resulting in a decreased rate of return to the Fund.
Risks of Investments 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 conversion of currencies held 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.
Certain Fundamental Investment Policies
The following restrictions may not be changed without
shareholder approval, which means the affirmative vote of the
holders of (i) 67% or more or the shares represented at a meeting
at which more than 50% of the outstanding shares are represented
or (ii) more than 50% of the outstanding shares, whichever is
less.
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 except the U.S.
Government, although with respect to 25% of its
total assets it may invest in any number of
issuers;
(ii) invest 25% or more of its total assets in the
securities of issuers conducting their principal
business activities in any one industry, other than
the utilities industry, except that this
29
<PAGE>
restriction does not apply to U.S. Government
Securities;
(iii) purchase more than 10% of any class of the voting
securities of any one issuer;
(iv) 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;
(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 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 net
assets would be invested in securities of any one
or more closed-end investment companies;
(vi) make loans except through (i) the purchase of debt
obligations in accordance with its investment
objectives and policies; (ii) the lending of
portfolio securities; or (iii) the use of
repurchase agreements;
(vii) participate on a joint or joint and several basis
in any securities trading account;
(viii) invest in companies for the purpose of exercising
control;
(ix) issue any senior security within the meaning of the
1940 Act, except that the Fund may write put and
call options;
(x) 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,
30
<PAGE>
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);
or
(xi) (a) purchase or sell real estate, except that it
may purchase and sell securities of companies which
deal in real estate or interests therein;
(b) purchase or sell commodities or commodity
contracts (except currencies, futures contracts on
currencies and related options, forward contracts
or contracts for the future acquisition or delivery
of securities and related options, futures
contracts and options on futures contracts and
options on futures contracts and other similar
contracts); (c) invest in interests in oil, gas, or
other mineral exploration or development programs;
(d) purchase securities on margin, except for such
short-term credits as may be necessary for the
clearance of transactions; and (e) act as an
underwriter of securities, except that the Fund may
acquire restricted securities under circumstances
in which, if such securities were sold, the Fund
might be deemed to be an underwriter for purposes
of the Securities Act.
________________________________________________________________
MANAGEMENT OF THE FUND
________________________________________________________________
Adviser
Alliance Capital Management L.P. (the "Adviser" or
"Alliance"), a Delaware limited partnership with principal
offices at 1345 Avenue of the Americas, New York, New York 10105,
has been retained under an investment advisory agreement (the
"Advisory Agreement") to provide investment advice and, in
general, to conduct the management and investment program of the
Fund under the supervision of the Fund's Board of Directors (see
"Management of the Fund" in the Prospectus).
The Adviser is a leading international adviser managing
client accounts with assets as of June 30, 2000totaling more than
$388 billion (of which more than $185 billion represented assets
of investment companies). As of June 30, 2000, the Adviser
31
<PAGE>
managed retirement assets for many of the largest public and
private employee benefit plans (including 29 of the nation's
FORTUNE 100 companies), for public employee retirement funds in
33 states, for investment companies, and for foundations,
endowments, banks and insurance companies worldwide. The 52
registered investment companies managed by the Adviser,
comprising 122 separate investment portfolios, currently have
approximately 6.1 million shareholder accounts.
Alliance Capital Management Corporation ("ACMC") is the
general partner of Alliance and an indirect wholly-owned
subsidiary of AXA Financial, Inc. ("AXA Financial"), a Delaware
corporation whose shares are traded on the New York Stock
Exchange ("NYSE"). As of October 2, 2000, AXA Financial and
certain of its subsidiaries were the beneficial owners of
approximately 52% of the outstanding Alliance units. Alliance
Capital Management Holding L.P. ("Alliance Holding") owned
approximately 30% of the outstanding Alliance units.* Equity
interests in Alliance Holding are traded on the NYSE in the form
of units. Approximately 98% of such units are owned by the
public and management or employees of Alliance and approximately
2% are owned by AXA Financial. As of June 30, 2000, AXA, a
French insurance holding company, owned approximately 60% of the
issued and outstanding shares of common stock of AXA Financial.
Under the Advisory Agreement, the Adviser furnishes
advice and recommendations with respect to the Fund's portfolio
of securities and investments and provides persons satisfactory
to the Board of Directors to act as officers and employees of the
Fund. Such officers and employees may be employees of the
Adviser or its affiliates.
The Adviser is, under the Advisory Agreement,
responsible for certain expenses incurred by the Fund, including,
for example, office facilities and certain administrative
services, and any expenses incurred in promoting the sale of Fund
shares (other than the portion of the promotional expenses borne
by the Fund in accordance with an effective plan pursuant to Rule
____________________
* Until October 29, 1999, Alliance Holding served as the
investment adviser to the Fund. On that date, Alliance
Holding reorganized by transferring its business to the
Adviser. Prior thereto, the Adviser had no material
business operations. One result of the organization was
that the Advisory Agreement, then between the Fund and
Alliance Holding, was transferred to the Adviser, and
ownership of Alliance Fund Distributors, Inc. and Alliance
Fund Services, Inc., the Fund's principal underwriter and
transfer agent, respectively, also was transferred to the
Adviser.
32
<PAGE>
12b-1 under the 1940 Act, and the costs of printing Fund
prospectuses and other reports to shareholders and fees related
to registration with the Commission and with state regulatory
authorities).
The Fund has, under the Advisory Agreement, assumed the
obligation for payment of all of its other expenses. As to the
obtaining of services other than those specifically provided to
the Fund by the Adviser, the Fund may employ its own personnel.
For such services, it may also utilize personnel employed by the
Adviser or by other subsidiaries of Equitable and, in such event,
the services will be provided to the Fund at cost and the
payments therefore must be specifically approved by the Fund's
Directors. The Fund paid to the Adviser a total of $124,000 in
respect of such services during the fiscal year of the Fund ended
in 1999.
For the services rendered by the Adviser under the
Advisory Agreement, the Fund pays the Adviser at the annual rate
of .75 of 1% of the average daily value of the Fund's net assets.
The fee is accrued daily and paid monthly. The Adviser has
agreed for the current fiscal year to waive its fee and bear
certain expenses so that total expenses do not exceed on an
annual basis 1.50%, 2.20%, 2.20% and 1.20% of average net assets,
respectively, for Class A, Class B, Class C and Advisor Class
shares. For the fiscal years of the Fund ended in 1999, 1998 and
1997, the Adviser received from the Fund $684,771, $248,119 and
$153,604, respectively, in advisory fees.
The Advisory Agreement became effective on September 28,
1993, having been 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 that purpose and held on September 14, 1993, and by the
Fund's initial shareholder on September 15, 1993.
The Advisory Agreement continues in effect for
successive twelve-month periods computed from each August 1,
provided that such continuance is approved at least annually by a
vote of a majority of the Fund's outstanding voting securities or
by the Fund's Board of Directors, including in either case,
approval by a majority of the Directors who are not parties to
the Advisory Agreement or interested persons of any such party as
defined by the 1940 Act. The Advisory Agreement was approved for
another annual term by a vote, cast in person, of the Board of
Directors, including a majority of the Directors who are not
parties to the Advisory Agreement or interested persons of any
such party, at their regular meeting held on July 14, 1999.
33
<PAGE>
The Advisory Agreement may be terminated 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.
Certain other clients of the Adviser may have investment
objectives and policies similar to those of the Fund. The
Adviser may, from time to time, make recommendations which result
in the purchase or sale of a particular security by its other
clients simultaneously with the Fund. If transactions on behalf
of more than one client during the same period increase the
demand for securities being purchased, or the supply of
securities being sold, there may be an adverse effect on price or
quantity. It is the policy of the Adviser to allocate advisory
recommendations and the placing of orders in a manner which is
deemed equitable by the Adviser to the accounts involved,
including the Fund. When two or more of the clients of the
Adviser (including the Fund) are purchasing or selling the same
security on a given day from the same broker-dealer, such
transactions may be averaged as to price.
The Adviser may act as an investment adviser to other
persons, firms or corporations, including investment companies,
and is investment adviser to AFD Exchange Reserves, Alliance All-
Asia Investment Fund, Inc., Alliance Balanced Shares, Inc.,
Alliance Bond Fund, Inc., Alliance Capital Reserves, Alliance
Disciplined Value Fund, Inc., Alliance Global Dollar Government
Fund, Inc., Alliance Global Small Cap Fund, Inc., Alliance
Global Strategic Income Trust, Inc., Alliance Government
Reserves, Alliance Greater China '97 Fund, Inc., Alliance Growth
and Income Fund, Inc., Alliance Health Care Fund, Inc., Alliance
High Yield Fund, Inc., Alliance Institutional Funds, Inc.,
Alliance Institutional Reserves, Inc., Alliance International
Fund, Alliance International Premier Growth Fund, Inc., Alliance
Limited Maturity Government Fund, Inc., Alliance Money Market
Fund, Alliance Mortgage Securities Income Fund, Inc., Alliance
Multi-Market Strategy Trust, Inc., Alliance Municipal Income
Fund, Inc., Alliance Municipal Income Fund II, Alliance Municipal
Trust, Alliance New Europe Fund, Inc., Alliance North American
Government Income Trust, Inc., Alliance Premier Growth Fund,
Inc., Alliance Quasar Fund, Inc., Alliance Real Estate Investment
Fund, Inc., Alliance Select Investor Series, Inc., Alliance
Technology Fund, Inc., Alliance Utility Income Fund, Inc.,
Alliance Variable Products Series Fund, Inc., Alliance Worldwide
Privatization Fund, Inc., The Alliance Fund, Inc., The Alliance
34
<PAGE>
Portfolios, and EQ Advisors Trust, all registered open-end
investment companies; and to ACM Government Income Fund, Inc.,
ACM Government Securities Fund, Inc., ACM Government Spectrum
Fund, Inc., ACM Government Opportunity Fund, Inc., ACM Managed
Income Fund, Inc., ACM Managed Dollar Income Fund, Inc., ACM
Municipal Securities Income Fund, Inc., Alliance All-Market
Advantage Fund, Inc., Alliance World Dollar Government Fund,
Inc., Alliance World Dollar Government Fund II, Inc., The Austria
Fund, Inc., The Korean Investment Fund, Inc., The Southern Africa
Fund, Inc. and The Spain Fund, Inc., all registered closed-end
investment companies.
Directors and Officers
The business and affairs of the Fund are managed under
the direction of the Board of Directors. The Directors and
principal 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 director, trustee or officer
of other registered investment companies sponsored by the
Adviser. Unless otherwise specified, the address of each of the
following persons is 1345 Avenue of the Americas, New York, New
York 10105.
Directors
JOHN D. CARIFA,** 55, Chairman of the Board, is the
President, Chief Operating Officer and a Director of ACMC, with
which he has been associated since prior to 1995.
RUTH BLOCK, 69, was formerly an Executive Vice President
and the Chief Insurance Officer of The Equitable; Chairman and
Chief Executive Officer of Evlico; a Director of Avon, Tandem
Financial Group and Donaldson, Lufkin & Jenrette Securities
Corporation. She is currently a Director of Ecolab Incorporated
(specialty chemicals) and BP Amoco Corporation (oil and gas).
Her address is P.O. Box 4623, Stamford, Connecticut 06903.
DAVID H. DIEVLER, 71, is an independent consultant.
Until December 1994 he was Senior Vice President of ACMC
responsible for mutual fund administration. Prior to joining
ACMC in 1984 he was Chief Financial Officer of Eberstadt Asset
Management since 1968. Prior to that he was a Senior Manager at
Price Waterhouse & Co. Member of American Institute of Certified
Public Accountants since 1953. His address is P.O. Box 167,
Spring Lake, New Jersey 07762.
____________________
** An "interested person" of the Fund as defined in the 1940
Act.
35
<PAGE>
JOHN H. DOBKIN, 58, Consultant. Formerly a Senior
Advisor from June 1999 - June 2000 and President from December
1989 - May 1999 of Historic Hudson Valley (historic
preservation). Previously, he was Director of the National
Academy of Design. During 1988-92, he was a Director and
Chairman of the Audit Committee of ACMC. His address is P.O. Box
12, Annandale, New York 12504.
WILLIAM H. FOULK, JR., 68, is an Investment Adviser and
an independent consultant. He was formerly Senior Manager of
Barrett Associates, Inc., a registered investment adviser, with
which he had been associated since prior to 1995. He was
formerly Deputy Comptroller of the State of New York and, prior
thereto, Chief Investment Officer of the New York Bank for
Savings. His address is Room 100, 2 Greenwich Plaza, Greenwich,
Connecticut 06830.
DR. JAMES M. HESTER, 76, has been President of the Harry
Frank Guggenheim Foundation, with which he has been associated
since prior to 1995. He was formerly President of New York
University and the New York Botanical Garden, Rector of the
United Nations University and Vice Chairman of the Board of the
Federal Reserve Bank of New York. His address is 25 Cleveland
Lane, Princeton, New Jersey 08540.
CLIFFORD L. MICHEL, 61, is a member of the law firm of
Cahill Gordon & Reindel, with which he has been associated since
prior to 1995. He is President and Chief Executive Officer of
Wenonah Development Company (investments) and a Director of
Placer Dome, Inc. (mining). His address is St. Bernard's Road,
Gladstone, New Jersey 07934.
DONALD J. ROBINSON, 66, is Senior Counsel to the law
firm of Orrick, Herrington & Sutcliffe LLP since January 1995.
He was formerly a senior partner and a member of the Executive
Committee of that firm. He was also a member of the Municipal
Securities Rulemaking Board and Trustee of the Museum of the City
of New York. His address is 98 Hell's Peak Road, Weston, Vermont
05161.
Officers
JOHN D. CARIFA, Chairman and President, see biography
above.
KATHLEEN A. CORBET, Senior Vice President, 40, is an
Executive Vice President of ACMC, with which she has been
associated since prior to 1995.
36
<PAGE>
PAUL C. RISSMAN, Senior Vice President, 43, is an
Executive Vice President of ACMC, with which he has been
associated since prior to 1995.
THOMAS J. BARDONG, Vice President, 55, is a Senior Vice
President of ACMC, with which he has been associated since prior
to 1995.
ANNIE TSAO, Vice President, 45, is a Vice President of
ACMC, with which she has been associated since prior to 1995.
EDMUND P. BERGAN, JR., Secretary, 50, is a Senior Vice
President and the General Counsel of Alliance Fund Distributors,
Inc. ("AFD") and Alliance Fund Services, Inc. ("AFS"), with which
he has been associated since prior to 1995.
ANDREW L. GANGOLF, Assistant Secretary, 46, is a Senior
Vice President and Assistant General Counsel of AFD, with which
he has been associated since prior to 1995.
DOMENICK PUGLIESE, Assistant Secretary, 39, is a Senior
Vice President and Assistant General Counsel of AFD, with which
he has been associated since May 1995.
MARK D. GERSTEN, Treasurer and Chief Financial Officer,
49, is a Senior Vice President of AFS, with which he has been
associated since prior to 1995.
VINCENT S. NOTO, Controller, 35, is a Vice President of
AFS, with which he has been associated since prior to 1995.
The aggregate compensation paid by the Fund to each of
the Directors during its fiscal year ended November 30, 1999, the
aggregate compensation paid to each of the Directors during
calendar year 1999 by all of the registered investment companies
to which the Adviser provides investment advisory services
(collectively, the "Alliance Fund Complex") and the total number
of registered investment companies (and separate investment
portfolios within those companies) in the Alliance Fund Complex
with respect to which each of the Directors serves as a director
or trustee, are set forth below. Neither the Fund nor any other
registered investment company in the Alliance Fund Complex
provides compensation in the form of pension or retirement
benefits to any of its directors or trustees. Each of the
Directors is a director or trustee of one or more other
registered investment companies in the Alliance Fund Complex.
37
<PAGE>
Total Number Total Number
of Investment of Investment
Companies in Portfolios
the Alliance within the
Total Fund Complex, Alliance Fund
Compensation Including the Complex,
From the Fund, as to including the
Alliance Fund which the Fund,as to which
Aggregate Complex, Director is a the Director
Name of Compensation Including the Director or is a Director
Director From the Fund Fund Trustee or Trustee
John D. Carifa $0 $0 49 107
Ruth Block $3,730 $154,263 38 83
David H. Dievler $3,848 $210,188 44 90
John H. Dobkin $3,849 $206,488 41 87
William H. Foulk, Jr. $3,851 $246,413 45 102
Dr. James M. Hester $3,853 $164,138 39 84
Clifford L. Michel $3,853 $183,388 39 86
Donald J. Robinson $3,097 $154,313 41 96
As of October 6, 2000, 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 Principal Underwriter to distribute
the Fund's shares and to permit the Fund to pay distribution
services fees to defray expenses associated with distribution of
its Class A, Class B and Class C shares in accordance with a plan
of distribution which is included in the Agreement and has been
duly adopted and approved in accordance with Rule 12b-1 under the
[5~1940 Act (the "Rule 12b-1 Plan").
During the Fund's fiscal year ended November 30, 1999,
the Fund paid distribution services fees for expenditures under
the Agreement, with respect to Class A shares, in amounts
aggregating $53,207 which constituted .30%, annualized, of the
Fund's aggregate average daily net assets attributable to Class A
shares during the period, and the Adviser made payments from its
own resources as described above aggregating $244,824. Of the
$298,031 paid by the Fund and the Adviser under the Rule 12b-1
38
<PAGE>
Plan with respect to the Class A shares, $15,903 was spent on
advertising, $4,195 on the printing and mailing of prospectuses
for persons other than current shareholders, $121,421for
compensation to broker-dealers and other financial intermediaries
(including, $50,586 to the Fund's Principal Underwriter), $23,906
for compensation to sales personnel and $132,606 was spent on
printing of sales literature, travel, entertainment, due
diligence and other promotional expenses.
During the Fund's fiscal year ended November 30, 1999,
the Fund paid distribution services fees for expenditures under
the Agreement, with respect to Class B shares, in amounts
aggregating $588,156, which constituted 1.0%, annualized, of the
Fund's aggregate average daily net assets attributable to Class B
shares during the period, and the Adviser made payments from its
own resources as described above aggregating $1,932,069. Of the
$2,520,225 paid by the Fund and the Adviser under the Rule 12b-1
Plan with respect to the Class B shares, $64,118 was spent on
advertising, $12,337 on the printing and mailing of prospectuses
for persons other than current shareholders, $2,014,922 for
compensation to broker-dealers and other financial intermediaries
(including, $172,897 to the Fund's Principal Underwriter),
$30,723 for compensation to sales personnel, $303,183 was spent
on printing of sales literature, travel, entertainment, due
diligence and other promotional expenses and $94,942 was spent on
interest on Class B shares financing.
During the Fund's fiscal year ended November 30, 1999,
the Fund paid distribution services fees for expenditures under
the Agreement, with respect to Class C shares, in amounts
aggregating $135,914, which constituted 1.0%, annualized, of the
Fund's aggregate 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 $191,917. Of the
$327,831 paid by the Fund and the Adviser under the Rule 12b-1
Plan with respect to the Class C shares, $14,509 was spent on
advertising, $2,576 on the printing and mailing of prospectuses
for persons other than current shareholders, $231,476 for
compensation to broker-dealers and other financial intermediaries
(including, $38,940 to the Fund's Principal Underwriter), $7,422
for compensation to sales personnel, $68,757 was spent on
printing of sales literature, travel, entertainment, due
diligence and other promotional expenses and $3,091 was spent on
interest on Class C shares financing.
Distribution services fees are accrued daily and paid
monthly and are charged as expenses of the Fund as accrued. The
distribution services fees attributable to the Class B shares and
Class C shares are designed to permit an investor to purchase
such shares through broker-dealers without the assessment of an
initial sales charge, and at the same time to permit the
39
<PAGE>
Principal Underwriter to compensate broker-dealers in connection
with the sale of such shares. In this regard the purpose and
function of the combined contingent deferred sales charge and
distribution services fee on the Class B shares and Class C
shares are the same as those of the initial sales charge and
distribution services fee with respect to the Class A shares in
that in each case the sales charge and distribution services fee
provide for the financing of the distribution of the relevant
class of the Fund's shares.
With respect to Class A shares of the Fund, distribution
expenses accrued by AFD in one fiscal year may not be paid from
distribution services fees received from the Fund in subsequent
fiscal years. AFD's compensation with respect to Class B and
Class C shares for any given year, however, will probably exceed
the distribution services fee payable under the Rule 12b-1 Plan
with respect to the class involved and, in the case of Class B
and Class C shares, payments received from contingent deferred
sales charges ("CDSCs"). The excess will be carried forward by
AFD and reimbursed from distribution services fees payable under
the Rule 12b-1 Plan with respect to the class involved and, in
the case of Class B and Class C shares, payments subsequently
received through CDSCs, so long as the Rule 12b-1 Plan is in
effect.
Unreimbursed distribution expenses incurred as of the
end of the 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 the Fund were, respectively,
$4,267,239 (5.28% of the net assets of Class B) and $720,372
(3.50% of the net assets of Class C).
The Rule 12b-1 Plan is in compliance with rules of the
National Association of Securities Dealers, Inc. which
effectively limit the annual asset-based sales charges and
service fees that a mutual fund may pay on a class of shares to
.75% and .25%, respectively, of the average annual net assets
attributable to that class. The rules also limit the aggregate
of all front-end, deferred and asset-based sales charges imposed
with respect to a class of shares by a mutual fund that also
charges a service fee to 6.25% of cumulative gross sales of
shares of that class, plus interest at the prime rate plus 1% per
annum.
In approving the Rule 12b-1 Plan, the Directors of the
Fund determined that there was a reasonable likelihood that the
Rule 12b-1 Plan would benefit the Fund and its shareholders. The
distribution services fee of a particular class will not be used
to subsidize the provision of distribution services with respect
to any other class.
40
<PAGE>
The Adviser may from time to time and from its own funds
or such other resources as may be permitted by rules of the
Commission make payments for distribution services to the
Principal Underwriter; the latter may in turn pay part or all of
such compensation to brokers or other persons for their
distribution assistance.
The Agreement will continue in effect for successive
twelve-month periods (computed from each August 1) with respect
to each class of the Fund, provided, however, that such
continuance is specifically approved at least annually by the
Directors of the Fund or by vote of the holders of a majority of
the outstanding voting securities (as defined in the 1940 Act) of
that class, and in either case, by a majority of the Directors of
the Fund who are not parties to this agreement or interested
persons, as defined in the 1940 Act, of any such party (other
than as Directors of the Fund) and who have no direct or indirect
financial interest in the operation of the Rule 12b-1 Plan or any
agreement related thereto. The Agreement was approved for
another annual term 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
July 14, 1999.
In the event that the Rule 12b-1 Plan is terminated
or not continued with respect to the Class A shares, Class B
shares or Class C shares, (i) no distribution services fees
(other than current amounts accrued but not yet paid) would
be owed by the Fund to the Principal Underwriter with
respect to that class, and (ii) the Fund would not be
obligated to pay the Principal Underwriter for any amounts
expended under the Agreement not previously recovered by the
Principal Underwriter from distribution services fees in
respect of shares of such class or through deferred sales
charges.
Transfer Agency Agreement
Alliance Fund Services, Inc., an indirect wholly-
owned subsidiary of the Adviser located at 500 Plaza Drive,
Secaucus, New Jersey 07094, receives a transfer agency fee
per account holder of the Class A, Class B, Class C and
Advisor Class shares of the Fund, plus reimbursement for
out-of-pocket expenses. The transfer agency fee with
respect to the Class B and Class C shares is higher than the
transfer agency fee with respect to the Class A and Advisor
Class shares, reflecting the additional costs associated
with the Class B and Class C contingent deferred sales
charges. For the fiscal year ended November 30, 1999, the
Fund paid AFS $165,472 pursuant to the Transfer Agency
Agreement.
41
<PAGE>
Code of Ethics
The Fund, the Adviser and the Principal Underwriter
have each adopted codes of ethics pursuant to Rule 17j-1 of
the 1940 Act. These codes of ethics permit personnel
subject to the codes to invest in securities, including
securities that may be purchased or held by the Fund.
___________________________________________________________
PURCHASE OF SHARES
___________________________________________________________
The following information supplements that set
forth in the Fund's Prospectus under the heading "Purchase
of Shares--How to Buy Shares."
General
Shares of the Fund are offered on a continuous
basis at a price equal to their net asset value plus an
initial sales charge at the time of purchase ("Class A
shares"), with a contingent deferred sales charge ("Class B
shares"), without any initial sales charge and, as long as
the shares are held for one year or more, without any
contingent deferred sales charge ("Class C shares"), or, to
investors eligible to purchase Advisor Class shares, without
any initial, contingent deferred or asset-based sales
charge, in each case as described below. Shares of the Fund
that are offered subject to a sales charge are offered
through (i) investment dealers that are members of the
National Association of Securities Dealers, Inc. and have
entered into selected dealer agreements with the Principal
Underwriter ("selected dealers"), (ii) depository
institutions and other financial intermediaries or their
affiliates, that have entered into selected agent agreements
with the Principal Underwriter ("selected agents") and
(iii) the Principal Underwriter.
Advisor Class shares of the Fund may be purchased
and held solely (i) through accounts established under fee-
based programs, sponsored and maintained by registered
broker-dealers or other financial intermediaries and
approved by the Principal Underwriter, (ii) through self-
directed defined contribution employee benefit plans (e.g.,
401(k) plans) that have at least 1,000 participants or $25
million in assets or (iii) by the categories of investors
described in clauses (i) through (iv) below under "Sales at
Net Asset Value" (other than officers, directors and present
and full-time employees of selected dealers or agents, or
relatives of such person, or any trust, individual
42
<PAGE>
retirement account or retirement plan account for the
benefit of such relative, none of whom is eligible on the
basis solely of such status to purchase and hold Advisor
Class shares) or (iv) by directors and present or retired
full-time employees of CB Richard Ellis, Inc. Generally, a
fee-based program must charge an asset-based or other
similar fee and must invest at least $250,000 in Advisor
Class shares of the Fund in order to be approved by the
Principal Underwriter for investment in Advisor Class
shares.
Investors may purchase shares of the Fund either
through selected broker-dealers, agents, financial
intermediaries or other financial representatives or
directly through the Principal Underwriter. A transaction,
service, administrative or other similar fee may be charged
by your broker-dealer, agent, financial intermediary or
other financial representative with respect to the purchase,
sale or exchange of Class A, Class B, Class C or Advisor
Class shares made through such financial representative.
Such financial representative may also impose requirements
with respect to the purchase, sale or exchange of shares
that are different from, or in addition to, those imposed by
the Fund, including requirements as to the minimum initial
and subsequent investment amounts. Sales personnel of
selected dealers and agents distributing the Fund's shares
may receive differing compensation for selling Class A,
Class B, Class C or Advisor Class shares.
The Fund may refuse any order for the purchase of
shares. The Fund reserves the right to suspend the sale of
its shares to the public in response to conditions in the
securities markets or for other reasons.
The public offering price of shares of the Fund is
their net asset value, plus, in the case of Class A shares,
a sales charge which will vary depending on the purchase
alternative chosen by the investor, as shown in the table
below under "--Class A Shares." On each Fund business day
on which a purchase or redemption order is received by the
Fund and trading in the types of securities in which the
Fund invests might materially affect the value of Fund
shares, the per share net asset value is computed in
accordance with the Fund's Articles of Incorporation and By-
Laws as of the next close of regular trading on the New York
Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern
time) by dividing the value of the Fund's total assets, less
its liabilities, by the total number of its shares then
outstanding. A Fund business day is any day on which the
Exchange is open for trading.
43
<PAGE>
The respective per share net asset values of the
Class A, Class B, Class C and Advisor Class shares are
expected to be substantially the same. Under certain
circumstances, however, the per share net asset values of
the Class B and Class C shares may be lower than the per
share net asset values of the Class A and Advisor Class
shares, as a result of the differential daily expense
accruals of the distribution and transfer agency fees
applicable with respect to those classes of shares. Even
under those circumstances, the per share net asset values of
the four classes eventually will tend to converge
immediately after the payment of dividends, which will
differ by approximately the amount of the expense accrual
differential among the classes.
The Fund will accept unconditional orders for its
shares to be executed at the public offering price equal to
their net asset value next determined (plus applicable
Class A sales charges), as described below. Orders received
by the Principal Underwriter prior to the close of regular
trading on the Exchange on each day the Exchange is open for
trading are priced at the net asset value computed as of the
close of regular trading on the Exchange on that day (plus
applicable Class A sales charges). In the case of orders
for purchase of shares placed through selected dealers,
agents or financial representatives, as applicable, the
applicable public offering price will be the net asset value
as so determined, but only if the selected dealer, agent or
financial representative receives the order prior to the
close of regular trading on the Exchange and transmits it to
the Principal Underwriter prior to 5:00 p.m. Eastern time.
The selected dealer, agent or financial representative, as
applicable, is responsible for transmitting such orders by
5:00 p.m. Eastern time (certain selected dealers, agents or
financial representatives may enter into operating
agreements permitting them to transmit purchase information
to the Principal Underwriter after 5:00 p.m. Eastern time
and receive that day's net asset value). If the selected
dealer, agent or financial representative fails to do so,
the investor's right to that day's closing price must be
settled between the investor and the selected dealer, agent
or financial representative, as applicable. If the selected
dealer, agent or financial representative, as applicable,
receives the order after the close of regular trading on the
Exchange, the price will be based on the net asset value
determined as of the close of regular trading on the
Exchange on the next day it is open for trading.
Following the initial purchase of Fund shares, a
shareholder may place orders to purchase additional shares
by telephone if the shareholder has completed the
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<PAGE>
appropriate portion of the Subscription Application or an
"Autobuy" application obtained by calling the "For
Literature" telephone number shown on the cover of this
Statement of Additional Information. Except with respect to
certain omnibus accounts, telephone purchase orders may not
exceed $500,000. Payment for shares purchased by telephone
can be made only by electronic funds transfer from a bank
account maintained by the shareholder at a bank that is a
member of the National Automated Clearing House Association
("NACHA"). If a shareholder's telephone purchase request is
received before 3:00 p.m. Eastern time on a Fund business
day, the order to purchase shares is automatically placed
the following Fund business day, and the applicable public
offering price will be the public offering price determined
as of the close of business on such following business day.
Full and fractional shares are credited to a
subscriber's account in the amount of his or her
subscription. As a convenience to the subscriber, and to
avoid unnecessary expense to the Fund, share certificates
representing shares of the Fund are not issued except upon
written request to the Fund by the shareholder or his or her
authorized selected dealer or agent. This facilitates later
redemption and relieves the shareholder of the
responsibility for and inconvenience of lost or stolen
certificates. No certificates are issued for fractional
shares, although such shares remain in the shareholder's
account on the books of the Fund.
In addition to the discount or commission paid to
dealers or agents, the Principal Underwriter from time to
time pays additional cash or other incentives to dealers or
agents in connection with the sale of shares of the 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 may take the form
of payment for attendance at seminars, meals, sporting
events or theater performances, or payment for travel,
lodging and entertainment incurred in connection with travel
taken by persons associated with a dealer or agent to
locations within or outside the United States. Such dealer
or agent may elect to receive cash incentives of equivalent
amount in lieu of such payments.
Class A, Class B, Class C and Advisor Class shares
each represent an interest in the same portfolio of
investments of the Fund, have the same rights and are
identical in all respects, except that (i) Class A shares
bear the expense of the initial sales charge (or contingent
deferred sales charge, when applicable) and Class B and
45
<PAGE>
Class C 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 than
that borne by Class A shares, and Advisor Class shares do
not bear such a fee, (iii) Class B shares and Class C shares
bear higher transfer agency costs than those borne by
Class A shares and Advisor Class shares, (iv) each of
Class A, Class B and Class C shares has exclusive voting
rights with respect to provisions of the Rule 12b-1 Plan
pursuant to which its distribution services fee is paid and
other matters for which separate class voting is appropriate
under applicable law, provided that, if the Fund submits to
a vote of the Class A shareholders, an amendment to the Rule
12b-1 Plan that would materially increase the amount to be
paid thereunder with respect to the Class A shares, then
such amendment will also be submitted to the Class B
shareholders and Advisor Class shareholders and the Class A,
Class B and Advisor Class shareholders will vote separately
by class, and (v) Class B shares and Advisor Class shares
are subject to a conversion feature. Each class has
different exchange privileges and certain different
shareholder service options available.
The Directors of the Fund have determined that
currently no conflict of interest exists between or among
the Class A, Class B, Class C and Advisor Class shares. On
an ongoing basis, the Directors of the Fund, pursuant to
their fiduciary duties under the 1940 Act and state law,
will seek to ensure that no such conflict arises.
Alternative Retail Purchase Arrangements -- Class A, Class B
and Class C Shares***
The alternative purchase arrangements available
with respect to Class A, Class B and Class C shares permit
an investor to choose the method of purchasing shares that
is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares, and
other circumstances. Investors should consider whether,
during the anticipated life of their investment in the Fund,
the accumulated distribution services fee and contingent
deferred sales charge on Class B shares prior to conversion,
or the accumulated distribution services fee and contingent
deferred sales charge on Class C shares, would be less than
the initial sales charge and accumulated distribution
services fee on Class A shares purchased at the same time,
and to what extent such differential would be offset by the
____________________
*** Advisor Class shares are sold only to investors
described above in this section under "General."
46
<PAGE>
higher return of Class A shares. Class A shares will
normally be more beneficial than Class B shares to the
investor who qualifies for reduced initial sales charges on
Class A shares, as described below. In this regard, the
Principal Underwriter will reject any order (except orders
from certain retirement plans and certain employee benefit
plans) for more than $250,000 for Class B shares. (See
Appendix E for information concerning the eligibility of
certain employee benefit plans to purchase Class B shares at
net asset value without being subject to a contingent
deferred sales charge and the ineligibility of certain such
plans to purchase Class A shares.) Class C shares will
normally not be suitable for the investor who qualifies to
purchase Class A shares at net asset value. For this
reason, the Principal Underwriter will reject any order for
more than $1,000,000 for Class C shares.
Class A shares are subject to a lower distribution
services fee and, accordingly, pay correspondingly higher
dividends per share than Class B shares or Class C shares.
However, because initial sales charges are deducted at the
time of purchase, investors purchasing Class A shares would
not have all their funds invested initially and, therefore,
would initially own fewer shares. Investors not qualifying
for reduced initial sales charges who expect to maintain
their investment for an extended period of time might
consider purchasing Class A shares because the accumulated
continuing distribution charges on Class C shares may exceed
the initial sales charge on Class A shares during the life
of the investment. Again, however, such investors must
weigh this consideration against the fact that, because of
such initial sales charges, not all their funds will be
invested initially.
Other investors might determine, however, that it
would be more advantageous to purchase Class B shares or
Class C shares in order to have all their funds invested
initially, although remaining subject to higher continuing
distribution charges and being subject to a contingent
deferred sales charge for a four-year period and one-year
period, respectively. For example, based on current fees
and expenses, an investor subject to the 4.25% initial sales
charge on Class A shares would have to hold his or her
investment approximately seven years for the Class C
distribution services fee to exceed the initial sales charge
plus the accumulated distribution services fee of Class A
shares. In this example, an investor intending to maintain
his or her investment for a longer period might consider
purchasing Class A shares. This example does not take into
account the time value of money, which further reduces the
impact of the Class C distribution services fees on the
47
<PAGE>
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 four-year period during which Class B shares
are subject to a contingent deferred sales charge may find
it more advantageous to purchase Class C shares.
During the Fund's fiscal years ended in 1999, 1998
and 1997, the aggregate amounts of underwriting commission
payable with respect to shares of the Fund were $701,974,
$161,331 and $20,029, respectively. Of that amount, the
Principal Underwriter received the amount of $28,108, $5,701
and $707, respectively, representing that portion of the
sales charges paid on shares of the Fund sold during the
year which was not reallowed to selected dealers (and was,
accordingly, retained by the Principal Underwriter). During
the Fund's fiscal years ended in 1999, 1998 and 1997, the
Principal Underwriter received contingent deferred sales and
charges of $487, $0, respectively, on Class A shares,
$137,893, $52,306 and $20,323, respectively, on Class B
shares, and $3,371, $1,252, and $1,261, respectively, on
Class C shares.
48
<PAGE>
Class A Shares
The public offering price of Class A shares is the
net asset value plus a sales charge, as set forth below.
Sales Charge
Discount or
Commission
As % of To Dealers
As % of the or Agents
Net Public As % of
Amount of Amount Offering Offering
Purchase Invested Price Price
Less than
$100,000 4.44% 4.25% 4.00%
$100,000 but
less than
$250,000 3.36 3.25 3.00
$250,000 but
less than
$500,000 2.30 2.25 2.00
$500,000 but
less than
$1,000,000* 1.78 1.75 1.50
____________________
* There is no initial sales charge on transactions of $1,000,000
or more.
With respect to purchases of $1,000,000 or more, Class A
shares redeemed within one year of purchase will be subject to a
contingent deferred sales charge equal to 1% of the lesser of the
cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no sales charge will be imposed
on increases in net asset value above the initial purchase price.
In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions. The
contingent deferred sales charge on Class A shares will be waived
on certain redemptions, as described below under "--Class B
Shares." In determining the contingent deferred sales charge
applicable to a redemption of Class A shares, it will be assumed
that the redemption is, first, of any shares that are not subject
to a contingent deferred sales charge (for example, because an
initial sales charge was paid with respect to the shares, or the
shares have been held beyond the period during which the charge
applies or were acquired upon the reinvestment of dividends or
distributions) and, second, of shares held longest during the
time they are subject to the sales charge. Proceeds from the
contingent deferred sales charge on Class A shares are paid to
49
<PAGE>
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 and agents, the Adviser may,
pursuant to the Distribution Services Agreement described above,
pay such dealers or agents from its own resources a fee of up to
1% of the amount invested to compensate such dealers or agents
for their distribution assistance in connection with such
purchases.
No initial sales charge is imposed on Class A shares
issued (i) pursuant to the automatic reinvestment of income
dividends or capital gains distributions, (ii) in exchange for
Class A shares of other "Alliance Mutual Funds" (as that term is
defined under "Combined Purchase Privilege" below), except that
an initial sales charge will be imposed on Class A shares issued
in exchange for Class A shares of AFD Exchange Reserves ("AFDER")
that were purchased for cash without the payment of an initial
sales charge and without being subject to a contingent deferred
sales charge or (iii) upon the automatic conversion of Class B
shares or Advisor Class shares as described below under "-
-Class B Shares--Conversion Feature" and "--Conversion of Advisor
Class Shares to Class A Shares." The Fund receives the entire
net asset value of its Class A shares sold to investors. The
Principal Underwriter's commission is the sales charge shown
above less any applicable discount or commission "reallowed" to
selected dealers and agents. The Principal Underwriter will
reallow discounts to selected dealers and agents in the amounts
indicated in the table above. In this regard, the Principal
Underwriter may elect to reallow the entire sales charge to
selected dealers and agents for all sales with respect to which
orders are placed with the Principal Underwriter. A selected
dealer who receives reallowance in excess of 90% of such a sales
charge may be deemed to be an "underwriter" under the Securities
Act.
Investors choosing the initial sales charge alternative
may under certain circumstances be entitled to pay (i) no initial
sales charge (but may be subject in most such cases to a
contingent deferred sales charge) or (ii) a reduced initial sales
charge. The circumstances under which such investors may pay a
reduced initial sales charge are described below.
Combined Purchase Privilege. Certain persons may
qualify for the sales charge reductions indicated in the schedule
of such charges above by combining purchases of shares of the
Fund into a single "purchase," if the resulting "purchase" totals
at least $100,000. The term "purchase" refers to: (i) a single
50
<PAGE>
purchase by an individual, or to concurrent purchases, which in
the aggregate are at least equal to the prescribed amounts, by an
individual, his or her spouse and their children under the age of
21 years purchasing shares of the Fund for his, her or their own
account(s); (ii) a single purchase by a trustee or other
fiduciary purchasing shares for a single trust, estate or single
fiduciary account although more than one beneficiary is involved;
or (iii) a single purchase for the employee benefit plans of a
single employer. The term "purchase" also includes purchases by
any "company," as the term is defined in the 1940 Act, but does
not include purchases by any such company which has not been in
existence for at least six months or which has no purpose other
than the purchase of shares of the Fund or shares of other
registered investment companies at a discount. The term
"purchase" does not include purchases by any group of individuals
whose sole organizational nexus is that the participants therein
are credit card holders of a company, policy holders of an
insurance company, customers of either a bank or broker-dealer or
clients of an investment adviser. A "purchase" may also include
shares, purchased at the same time through a single selected
dealer or agent, of any other "Alliance Mutual Fund." Currently,
the Alliance Mutual Funds include:
AFD Exchange Reserves
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
Alliance Bond Fund, Inc.
-Corporate Bond Portfolio
-Quality Bond Portfolio
-U.S. Government Portfolio
Alliance Disciplined Value Fund, Inc.
Alliance Global Dollar Government Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Global Strategic Income Trust, Inc.
Alliance Greater China '97 Fund, Inc.
Alliance Growth and Income Fund, Inc.
Alliance Health Care Fund, Inc.
Alliance High Yield Fund, Inc.
Alliance International Fund
Alliance International Premier Growth Fund, Inc.
Alliance Limited Maturity Government Fund, Inc.
Alliance Mortgage Securities Income Fund, Inc.
Alliance Multi-Market Strategy Trust, Inc.
Alliance Municipal Income Fund, Inc.
-California Portfolio
-Insured California Portfolio
-Insured National Portfolio
-National Portfolio
-New York Portfolio
Alliance Municipal Income Fund II
51
<PAGE>
-Arizona Portfolio
-Florida Portfolio
-Massachusetts Portfolio
-Michigan Portfolio
-Minnesota Portfolio
-New Jersey Portfolio
-Ohio Portfolio
-Pennsylvania Portfolio
-Virginia Portfolio
Alliance New Europe Fund, Inc.
Alliance North American Government Income Trust, Inc.
Alliance Premier Growth Fund, Inc.
Alliance Quasar Fund, Inc.
Alliance Real Estate Investment Fund, Inc.
Alliance Select Investor Series, Inc.
-Biotechnology Portfolio
-Premier Portfolio
-Technology Portfolio
Alliance Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
Alliance Worldwide Privatization Fund, Inc.
The Alliance Fund, Inc.
The Alliance Portfolios
-Alliance Growth Fund
-Alliance Conservative Investors Fund
-Alliance Growth Investors Fund
Prospectuses for the Alliance Mutual Funds may be
obtained without charge by contacting Alliance Fund Services,
Inc. at the address or the "For Literature" telephone number
shown on the front cover of this Statement of Additional
Information.
Cumulative Quantity Discount (Right of Accumulation).
An investor's purchase of additional Class A shares of the Fund
may qualify for a Cumulative Quantity Discount. The applicable
sales charge will be based on the total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on
the previous day) of (a) all shares of the Fund
held by the investor and (b) all shares of any
other Alliance Mutual Fund held by the investor;
and
(iii) the net asset value of all shares described in
paragraph (ii) owned by another shareholder
eligible to combine his or her purchase with that
52
<PAGE>
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 sales charges shown in the table above by
means of a written Statement of Intention, which expresses the
investor's intention to invest not less than $100,000 within a
period of 13 months in Class A shares (or Class A, Class B,
Class C and/or Advisor Class shares) of the Fund or any other
Alliance Mutual Fund. Each purchase of shares under a Statement
of Intention will be made at the public offering price or prices
applicable at the time of such purchase to a single transaction
of the dollar amount indicated in the Statement of Intention. At
the investor's option, a Statement of Intention may include
purchases of shares of the Fund or any other Alliance Mutual Fund
made not more than 90 days prior to the date that the investor
signs the Statement of Intention; however, the 13-month period
during which the Statement of Intention is in effect will begin
on the date of the earliest purchase to be included.
Investors qualifying for the Combined Purchase Privilege
described above may purchase shares of the Alliance Mutual Funds
under a single Statement of Intention. For example, if at the
time an investor signs a Statement of Intention to invest at
least $100,000 in Class A shares of the Fund, the investor and
the investor's spouse each purchase shares of the Fund worth
$20,000 (for a total of $40,000), it will only be necessary to
invest a total of $60,000 during the following 13 months in
shares of the Fund or any other Alliance Mutual Fund, to qualify
for the 3.25% sales charge on the total amount being invested
(the sales charge applicable to an investment of $100,000).
The Statement of Intention is not a binding obligation
upon the investor to purchase the full amount indicated. The
minimum initial investment under a Statement of Intention is 5%
of such amount. Shares purchased with the first 5% of such
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amount will be held in escrow (while remaining registered in the
name of the investor) to secure payment of the higher sales
charge applicable to the shares actually purchased if the full
amount indicated is not purchased, and such escrowed shares will
be involuntarily redeemed to pay the additional sales charge, if
necessary. Dividends on escrowed shares, whether paid in cash or
reinvested in additional Fund shares, are not subject to escrow.
When the full amount indicated has been purchased, the escrow
will be released. To the extent that an investor purchases more
than the dollar amount indicated on the Statement of Intention
and qualifies for a further reduced sales charge, the sales
charge will be adjusted for the entire amount purchased at the
end of the 13-month period. The difference in the sales charge
will be used to purchase additional shares of the Fund subject to
the rate of the sales charge applicable to the actual amount of
the aggregate purchases.
Investors wishing to enter into a Statement of Intention
in conjunction with their initial investment in Class A shares of
the Fund should complete the appropriate portion of the
Subscription Application found in the Prospectus while current
Class A shareholders desiring to do so can obtain a form of
Statement of Intention by contacting Alliance Fund Services, Inc.
at the address or telephone numbers shown on the cover of this
Statement of Additional Information.
Certain Retirement Plans. Multiple participant payroll
deduction retirement plans may also purchase shares of the Fund
or any other Alliance Mutual Fund at a reduced sales charge on a
monthly basis during the 13-month period following such a plan's
initial purchase. The sales charge applicable to such initial
purchase of shares of the Fund will be that normally applicable,
under the schedule of sales charges set forth in this Statement
of Additional Information, to an investment 13 times larger than
such initial purchase. The sales charge applicable to each
succeeding monthly purchase will be that normally applicable,
under such schedule, to an investment equal to the sum of (i) the
total purchase previously made during the 13-month period and
(ii) the current month's purchase multiplied by the number of
months (including the current month) remaining in the 13-month
period. Sales charges previously paid during such period will
not be retroactively adjusted on the basis of later purchases.
Reinstatement Privilege. A shareholder who has caused
any or all of his or her Class A or Class B shares of the Fund to
be redeemed or repurchased may reinvest all or any portion of the
redemption or repurchase proceeds in Class A shares of the Fund
at net asset value without any sales charge, provided that
(i) such reinvestment is made within 120 calendar days after the
redemption or repurchase date, and (ii) for Class B shares, a
contingent deferred sales charge has been paid and the Principal
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Underwriter has approved at its discretion, the reinvestment of
such shares. Shares are sold to a reinvesting shareholder at the
net asset value next determined as described above. A
reinstatement pursuant to this privilege will not cancel the
redemption or repurchase transaction; therefore, any gain or loss
so realized will be recognized for Federal income tax purposes
except that no loss will be recognized to the extent that the
proceeds are reinvested in shares of the Fund within 30 calendar
days after the redemption or repurchase transaction. Investors
may exercise the reinstatement privilege by written request sent
to the Fund at the address shown on the cover of this Statement
of Additional Information.
Sales at Net Asset Value. The Fund may sell its Class A
shares at net asset value (i.e., without an initial sales charge)
and without a contingent deferred sales charge to certain
categories of investors including: (i) investment management
clients of the Adviser or its affiliates; (ii) officers and
present or former Directors of the Fund; present or former
directors and trustees of other investment companies managed by
the Adviser; present or retired full-time employees of the
Adviser, the Principal Underwriter, Alliance Fund Services, Inc.
and their affiliates; officers and directors of ACMC, the
Principal Underwriter, Alliance Fund Services, Inc. and their
affiliates; officers, directors and present full-time employees
of selected dealers or agents; or the spouse, sibling, direct
ancestor or direct descendant (collectively "relatives") of any
such person; or any trust, individual retirement account or
retirement plan account for the benefit of any such person or
relative; or the estate of any such person or relative, if such
shares are purchased for investment purposes (such shares may not
be resold except to the Fund); (iii) the Adviser, the Principal
Underwriter, Alliance Fund Services, Inc. and their affiliates;
and certain employee benefit plans for employees of the Adviser,
the Principal Underwriter, Alliance Fund Services, Inc. and their
affiliates; (iv) registered investment advisers or other
financial intermediaries who charge a management, consulting or
other fee for their services and who purchase shares through a
broker or agent approved by the Principal Underwriter and clients
of such registered investment advisers or financial
intermediaries whose accounts are linked to the master account of
such investment adviser or financial intermediary on the books of
such approved broker or agent; (v) persons participating in a
fee-based program, sponsored and maintained by a registered
broker-dealer or other financial intermediary and approved by the
Principal Underwriter, pursuant to which such persons pay an
asset-based fee to such broker-dealer or financial intermediary,
or its affiliates or agents, for services in the nature of
investment advisory or administrative services; and
(vi) employer-sponsored qualified pension or profit-sharing plans
(including Section 401(k) plans), custodial accounts maintained
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pursuant to Section 403(b)(7) retirement plans and individual
retirement accounts (including individual retirement accounts to
which simplified employee pension ("SEP") contributions are
made), if such plans or accounts are established or administered
under programs sponsored by administrators or other persons that
have been approved by the Principal Underwriter.
Class B Shares
Investors may purchase Class B shares at the public
offering price equal to the net asset value per share of the
Class B shares on the date of purchase without the imposition of
a sales charge at the time of purchase. The Class B shares are
sold without an initial sales charge so that the Fund will
receive the full amount of the investor's purchase payment.
Proceeds from the contingent deferred sales charge on
the Class B shares are paid to the Principal Underwriter and are
used by the Principal Underwriter to defray the expenses of the
Principal Underwriter related to providing distribution-related
services to the Fund in connection with the sale of the Class B
shares, such as the payment of compensation to selected dealers
and agents for selling Class B shares. The combination of the
contingent deferred sales charge and the distribution services
fee enables the Fund to sell the Class B shares without a sales
charge being deducted at the time of purchase. The higher
distribution services fee incurred by Class B shares will cause
such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares.
Contingent Deferred Sales Charge. Class B shares that
are redeemed within 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 that an investor purchased on or
after November 19, 1993 100 Class B shares at $10 per share (at a
cost of $1,000) and in the second year after purchase, the net
asset value per share is $12 and, during such time, the investor
has acquired 10 additional Class B shares upon dividend
reinvestment. If at such time the investor makes his or her
first redemption of 50 Class B shares (proceeds of $600), 10
Class B shares will not be subject to the charge because of
dividend reinvestment. With respect to the remaining 40 Class B
shares, the charge is applied only to the original cost of $10
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<PAGE>
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 3.0% (the applicable rate in the second year
after purchase as set forth below).
The amount of the contingent deferred sales charge, if
any, will vary depending on the number of years from the time of
payment for the purchase of Class B shares until the time of
redemption of such shares.
Contingent Deferred Sales Charge as a %
of Dollar Amount Subject to Charge
Shares Purchased Shares Purchased
Years before on or after
Since Purchase November 19, 1993 November 19, 1993
First 5.0% 4.0%
Second 4.0% 3.0%
Third 3.0% 2.0%
Fourth 2.5% 1.0%
Fifth 1.0% None
Sixth and thereafter None None
In determining the contingent deferred sales charge
applicable to a redemption of Class B shares, it will be assumed
that the redemption is, first, of any shares that were acquired
upon the reinvestment of dividends or distributions and, second,
of shares held longest during the time they are subject to the
sales charge. When shares acquired in an exchange are redeemed,
the applicable contingent deferred sales charge and conversion
schedules will be the schedules that applied at the time of the
purchase of shares of the corresponding class of the Alliance
Mutual Fund originally purchased by the shareholder.
The contingent deferred sales charge is waived on
redemptions of shares (i) following the death or disability, as
defined in the Internal Revenue Code of 1986, as amended (the
"Code"), of a shareholder, (ii) to the extent that the redemption
represents a minimum required distribution from an individual
retirement account or other retirement plan to a shareholder who
has attained the age of 70-1/2, (iii) that had been purchased by
present or former Directors of the Fund, by the relative of any
such person, by any trust, individual retirement account or
retirement plan account for the benefit of any such person or
relative or by the estate of any such person or relative or
(iv) pursuant to a systematic withdrawal plan (see "Shareholder
Services--Systemic Withdrawal Plan" below).
Conversion Feature. Eight years after the end of the
calendar month in which the shareholder's purchase order was
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accepted, Class B shares will automatically convert to Class A
shares and will no longer be subject to a higher distribution
services fee. Such conversion will occur on the basis of the
relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. The purpose
of the conversion feature is to reduce the distribution services
fee paid by holders of Class B shares that have been outstanding
long enough for the Principal Underwriter to have been
compensated for distribution expenses incurred in the sale of
such shares.
For purposes of conversion to Class A, Class B shares
purchased through the reinvestment of dividends and distributions
paid in respect of Class B shares in a shareholder's account will
be considered to be held in a separate sub-account. Each time
any Class B shares in the shareholder's account (other than those
in the sub-account) convert to Class A, an equal pro-rata portion
of the Class B shares in the sub-account will also convert to
Class A.
The conversion of Class B shares to Class A shares is
subject to the continuing availability of an opinion of counsel
to the effect that the conversion of Class B shares to Class A
shares does not constitute a taxable event under federal income
tax law. The conversion of Class B shares to Class A shares may
be suspended if such an opinion is no longer available at the
time such conversion is to occur. In that event, no further
conversions of Class B shares would occur, and shares might
continue to be subject to the higher distribution services fee
for an indefinite period which may extend beyond the period
ending eight years after the end of the calendar month in which
the shareholder's purchase order was accepted.
Class C Shares. Investors may purchase Class C shares
at the public offering price equal to the net asset value per
share of the Class C shares on the date of purchase without the
imposition of a sales charge either at the time of purchase or as
long as the shares are held for one year or more, upon
redemption. Class C shares are sold without an initial sales
charge so that the Fund will receive the full amount of the
investor's purchase payment and, as long as the shares are held
for one year or more, without a contingent deferred sales charge
so that the investor will receive as proceeds upon redemption the
entire net asset value of his or her Class C shares. The Class C
distribution services fee enables the Fund to sell Class C shares
without either an initial or contingent deferred sales charge, as
long as the shares are held for one year or more. Class C shares
do not convert to any other class of shares of the Fund and incur
higher distribution services fees and transfer agency costs than
Class A shares and Advisor Class shares, and will thus have a
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higher expense ratio and pay correspondingly lower dividends than
Class A shares and Advisor Class shares.
Class C shares that are redeemed within one year of
purchase will be subject to a contingent deferred sales charge of
1%, charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of
the cost of the shares being redeemed or their net asset value at
the time of redemption. Accordingly, no sales charge will be
imposed on increases in net asset value above the initial
purchase price. In addition, no charge will be assessed on shares
derived from reinvestment of dividends or capital gains
distributions. The contingent deferred sales charge on Class C
shares will be waived on certain redemptions, as described above
under "--Class B Shares."
In determining the contingent deferred sales charge
applicable to a redemption of Class C shares, it will be assumed
that the redemption is, first, of any shares that are not subject
to a contingent deferred sales charge (for example, because the
shares have been held beyond the period during which the charge
applies or were acquired upon the reinvestment of dividends or
distributions) and, second, of shares held longest during the
time they are subject to the sales charge.
Proceeds from the contingent deferred sales charge are
paid to the Principal Underwriter and are used by the Principal
Underwriter to defray the expenses of the Principal Underwriter
related to providing distribution-related services to the Fund in
connection with the sale of the Class C shares, such as the
payment of compensation to selected dealers and agents for
selling Class C shares. The combination of the contingent
deferred sales charge and the distribution services fee enables
the Fund to sell the Class C shares without a sales charge being
deducted at the time of purchase. The higher distribution
services fee incurred by Class C shares will cause such shares to
have a higher expense ratio and to pay lower dividends than those
related to Class A shares and Advisor Class shares.
The contingent deferred sales charge is waived on
redemptions of shares (i) following the death or disability, as
defined in the Code, of a shareholder, (ii) to the extent that
the redemption represents a minimum required distribution from an
individual retirement account or other retirement plan to a
shareholder who has attained the age of 70-1/2, (iii) that had
been purchased by present or former Directors of the Fund, by the
relative of any such person, by any trust, individual retirement
account or retirement plan account for the benefit of any such
person or relative, or by the estate of any such person or
relative, (iv) pursuant to a systematic withdrawal plan (see
"Shareholder Services - Systematic Withdrawal Plan" below), or
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(v) sold through programs offered by financial intermediaries and
approved by AFD where such programs offer only shares which are
not subject to a contingent deferred sales charge and where the
financial intermediary establishes a single omnibus account for
each Fund.
Conversion of Advisor Class Shares to Class A Shares
Advisor Class shares may be held solely through the fee-
based program accounts and employee benefit plans and registered
investment advisory or other financial intermediary relationships
described above under "Purchase of Shares--General," and by
investment advisory clients of, and by certain other persons
associated with the Adviser and its affiliates or the Fund. If
(i) a holder of Advisor Class shares ceases to participate in the
fee-based program or plan, or to be associated with the
investment adviser or financial intermediary, in each case, that
satisfies the requirements to purchase shares set forth under
"Purchase of Shares--General" or (ii) the holder is otherwise no
longer eligible to purchase Advisor Class shares as described in
the Advisor Class Prospectus and this Statement of Additional
Information (each, a "Conversion Event"), then all Advisor Class
shares held by the shareholder will convert automatically to
Class A shares of the Fund during the calendar month following
the month in which the Fund is informed of the occurrence of the
Conversion Event. The Fund will provide the shareholder with at
least 30 days' notice of the conversion. The failure of a
shareholder or a fee-based program to satisfy the minimum
investment requirements to purchase Advisor Class shares will not
constitute a conversion event. The conversion would occur on the
basis of the relative net asset values of the two classes and
without the imposition of any sales load, fee or other charge.
Class A shares currently bear a .30% distribution services fee.
Advisor Class shares do not have any distribution services fee.
As a result, Class A shares have a higher expense ratio and may
pay correspondingly lower dividends and have a lower net asset
value than Advisor Class shares.
The conversion of Advisor Class shares to Class A shares
is subject to the continuing availability of an opinion of
counsel to the effect that the conversion of Advisor Class shares
to Class A shares does not constitute a taxable event under
federal income tax law. The conversion of Advisor Class shares
to Class A shares may be suspended if such an opinion is no
longer available at the time such conversion is to occur. In
that event, the Advisor Class shareholder would be required to
redeem his Advisor Class shares, which would constitute a taxable
event under federal income tax law.
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________________________________________________________________
REDEMPTION AND REPURCHASE OF SHARES
________________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus under the heading "Purchase and Sale of
Share--How to Sell Shares." If you are an Advisor Class
shareholder through an account established under a fee-based
program your fee-based program may impose requirements with
respect to the purchase, sale or exchange of Advisor Class shares
of the Fund that are different from those described herein. A
transaction fee may be charged by your financial representative
with respect to the purchase, sale or exchange of Advisor Class
shares made through such financial representative.
Redemption
Subject only to the limitations described below, the
Fund's Articles of Incorporation require that the Fund redeem the
shares tendered to it, as described below, at a redemption price
equal to their net asset value as next computed following the
receipt of shares tendered for redemption in proper form. Except
for any contingent deferred sales charge which may be applicable
to Class A, Class B or Class C shares, there is no redemption
charge. Payment of the redemption price will be made within
seven days after the Fund's receipt of such tender for
redemption. If a shareholder is in doubt about what documents
are required by his or her fee-based program or employee benefit
plan, the shareholder should contact his or her financial
representative.
The right of redemption may not be suspended or the date
of payment upon redemption postponed for more than seven days
after shares are tendered for redemption, except for any period
during which the Exchange is closed (other than customary weekend
and holiday closings) or during which the Commission determines
that trading thereon is restricted, or for any period during
which an emergency (as determined by the Commission) exists as a
result of which disposal by the Fund of securities owned by it is
not reasonably practicable or as a result of which it is not
reasonably practicable for the Fund fairly to determine the value
of its net assets, or for such other periods as the Commission
may by order permit for the protection of security holders of the
Fund.
Payment of the redemption price will be made in cash.
The value of a shareholder's shares on redemption or repurchase
may be more or less than the cost of such shares to the
shareholder, depending upon the market value of the Fund's
portfolio securities at the time of such redemption or
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repurchase. Redemption proceeds on Class A, Class B and Class C
shares will reflect the deduction of the contingent deferred
sales charge, if any. Payment received by a shareholder upon
redemption or repurchase of his shares, assuming the shares
constitute capital assets in his hands, will result in long-term
or short-term capital gains (or loss) depending upon the
shareholder's holding period and basis in respect of the shares
redeemed.
To redeem shares of the Fund for which no stock
certificates have been issued, the registered owner or owners
should forward a letter to the Fund containing a request for
redemption. The signature or signatures on the letter must be
guaranteed by an "eligible guarantor institution" as defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended.
To redeem shares of the Fund represented by stock
certificates, the investor should forward the appropriate stock
certificate or certificates, endorsed in blank or with blank
stock powers attached, to the Fund with the request that the
shares represented thereby, or a specified portion thereof, be
redeemed. The stock assignment form on the reverse side of each
stock certificate surrendered to the Fund for redemption must be
signed by the registered owner or owners exactly as the
registered name appears on the face of the certificate or,
alternatively, a stock power signed in the same manner may be
attached to the stock certificate or certificates or, where
tender is made by mail, separately mailed to the Fund. The
signature or signatures on the assignment form must be guaranteed
in the manner described above.
Telephone Redemption By Electronic Funds Transfer. Each
Fund shareholder is entitled to request redemption by electronic
funds transfer of shares for which no stock certificates have
been issued by telephone at (800) 221-5672 by a shareholder who
has completed the appropriate portion of the Subscription
Application or, in the case of an existing shareholder, an
"Autosell" application obtained from Alliance Fund Services, Inc.
A telephone redemption request by electronic funds transfer may
not exceed $100,000 (except for certain omnibus accounts) and
must be made by 4:00 p.m. Eastern time on a Fund business day as
defined above. Proceeds of telephone redemptions will be sent by
electronic funds transfer to a shareholder's designated bank
account at a bank selected by the shareholder that is a member of
the NACHA.
Telephone Redemption By Check. Each Fund shareholder is
eligible to request redemption by check of Fund shares for which
no stock certificates have been issued by telephone at
(800) 221-5672 before 4:00 p.m. Eastern time on a Fund business
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day in an amount not exceeding $50,000. Proceeds of such
redemptions are remitted by check to the shareholder's address of
record. A shareholder otherwise eligible for telephone
redemption by check may cancel the privilege by written
instruction to Alliance Fund Services, Inc., or by checking the
appropriate box on the Subscription Application found in the
Prospectus.
Telephone Redemptions - General. During periods of
drastic economic or market developments, such as the market break
of October 1987, it is possible that shareholders would have
difficulty in reaching Alliance Fund Services, Inc. by telephone
(although no such difficulty was apparent at any time in
connection with the 1987 market break). If a shareholder were to
experience such difficulty, the shareholder should issue written
instructions to Alliance Fund Services, Inc. at the address shown
on the cover of this Statement of Additional Information. The
Fund reserves the right to suspend or terminate its telephone
redemption service at any time without notice. Telephone
redemption is not available with respect to shares (i) for which
certificates have been issued, (ii) held in nominee or "street
name" accounts, (iii) held by a shareholder who has changed his
or her address of record within the preceding 30 calendar days or
(iv) held in any retirement plan account. Neither the Fund nor
the Adviser, the Principal Underwriter or Alliance Fund Services,
Inc. will be responsible for the authenticity of telephone
requests for redemptions that the Fund reasonably believes to be
genuine. The Fund will employ reasonable procedures in order to
verify that telephone requests for redemptions are genuine,
including, among others, recording such telephone instructions
and causing written confirmations of the resulting transactions
to be sent to shareholders. If the Fund did not employ such
procedures, it could be liable for losses arising from
unauthorized or fraudulent telephone instructions. Selected
dealers or agents may charge a commission for handling telephone
requests for redemptions.
Repurchase
The Fund may repurchase shares through the Principal
Underwriter, selected financial intermediaries or selected
dealers or agents. The repurchase price will be the net asset
value next determined after the Principal Underwriter receives
the request (less the contingent deferred sales charge, if any,
with respect to the Class A, Class B and Class C shares), except
that requests placed through selected dealers or agents before
the close of regular trading on the Exchange on any day will be
executed at the net asset value determined as of such close of
regular trading on that day if received by the Principal
Underwriter prior to its close of business on that day (normally
5:00 p.m. Eastern time). The financial intermediary or selected
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dealer or agent is responsible for transmitting the request to
the Principal Underwriter by 5:00 p.m. Eastern time (certain
selected dealers, agents or financial representatives may enter
into operating agreements permitting them to transmit purchase
information to the Principal Underwriter after 5:00 p.m. Eastern
time and receive that day's net asset value). If the financial
intermediary or selected dealer or agent fails to do so, the
shareholder's right to receive that day's closing price must be
settled between the shareholder and the dealer or agent. A
shareholder may offer shares of the Fund to the Principal
Underwriter either directly or through a selected dealer or
agent. Neither the Fund nor the Principal Underwriter charges a
fee or commission in connection with the repurchase of shares
(except for the contingent deferred sales charge, if any, with
respect to Class A, Class B and Class C shares). Normally, if
shares of the Fund are offered through a financial intermediary
or selected dealer or agent, the repurchase is settled by the
shareholder as an ordinary transaction with or through the
selected dealer or agent, who may charge the shareholder for this
service. The repurchase of shares of the Fund as described above
is a voluntary service of the Fund and the Fund may suspend or
terminate this practice at any time.
General
The Fund reserves the right to close out an account that
through redemption has remained below $200 for 90 days.
Shareholders will receive 60 days' written notice to increase the
account value before the account is closed. No contingent
deferred sales charge will be deducted from the proceeds of this
redemption. In the case of a redemption or repurchase of shares
of the Fund recently purchased by check, redemption proceeds will
not be made available until the Fund is reasonably assured that
the check has cleared, normally up to 15 calendar days following
the purchase date.
________________________________________________________________
SHAREHOLDER SERVICES
________________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus under the heading "Purchase and Sale of
Shares--Shareholder Services." The shareholder services set
forth below are applicable to Class A, Class B, Class C and
Advisor Class shares unless otherwise indicated. If you are an
Advisor Class shareholder through an account established under a
fee-based program your fee-based program may impose requirements
with respect to the purchase, sale or exchange of Advisor Class
shares of the Fund that are different from those described
herein. A transaction fee may be charged by your financial
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representative with respect to the purchase, sale or exchange of
Advisor Class shares made through such financial representative.
Automatic Investment Program
Investors may purchase shares of the Fund through an
automatic investment program utilizing electronic funds transfer
drawn on the investor's own bank account. Under such a program,
pre-authorized monthly drafts for a fixed amount (at least $25)
are used to purchase shares through the selected dealer or
selected agent designated by the investor at the public offering
price next determined after the Principal Underwriter receives
the proceeds from the investor's bank. In electronic form,
drafts can be made on or about a date each month selected by the
shareholder. Investors wishing to establish an automatic
investment program in connection with their initial investment
should complete the appropriate portion of the Subscription
Application found in the Prospectus. Current shareholders should
contact Alliance Fund Services, Inc. at the address or telephone
numbers shown on the cover of this Statement of Additional
Information to establish an automatic investment program.
Exchange Privilege
You may exchange your investment in the Fund for shares
of the same class of other Alliance Mutual Funds (including AFD
Exchange Reserves, a money market fund managed by the Adviser).
In addition, (i) present officers and full-time employees of the
Adviser, (ii) present Directors or Trustees of any Alliance
Mutual Fund and (iii) certain employee benefit plans for
employees of the Adviser, the Principal Underwriter, Alliance
Fund Services, Inc. and their affiliates may, on a tax-free
basis, exchange Class A shares of the Fund for Advisor Class
shares of the Fund. Exchanges of shares are made at the net
asset value next determined and without sales or service charges.
Exchanges may be made by telephone or written request. Telephone
exchange requests must be received by Alliance Fund Services,
Inc. by 4:00 p.m. Eastern time on a Fund business day in order to
receive that day's net asset value.
Shares will continue to age without regard to exchanges
for purpose of determining the CDSC, if any, upon redemption and,
in the case of Class B shares, for the purpose of conversion to
Class A shares. After an exchange, your Class B shares will
automatically convert to Class A shares in accordance with the
conversion schedule applicable to the Class B shares of the
Alliance Mutual Fund you originally purchased for cash ("original
shares"). When redemption occurs, the CDSC applicable to the
original shares is applied.
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Please read carefully the prospectus of the mutual fund
into which you are exchanging before submitting the request.
Call Alliance Fund Services, Inc. at (800) 221-5672 to exchange
uncertificated shares. Except with respect to exchanges of
Class A shares of the Fund for Advisor Class shares of the Fund,
exchanges of shares as described above in this section are
taxable transactions for federal income tax purposes. The
exchange service may be changed, suspended or terminated on 60
days' written notice.
All exchanges are subject to the minimum investment
requirements and any other applicable terms set forth in the
prospectus for the Alliance Mutual Fund whose shares are being
acquired. An exchange is effected through the redemption of the
shares tendered for exchange and the purchase of shares being
acquired at their respective net asset values as next determined
following receipt by the Alliance Mutual Fund whose shares are
being exchanged of (i) proper instructions and all necessary
supporting documents as described in such fund's prospectus or
(ii) a telephone request for such exchange in accordance with the
procedures set forth in the following paragraph. Exchanges
involving the redemption of shares recently purchased by check
will be permitted only after the Alliance Mutual Fund whose
shares have been tendered for exchange is reasonably assured that
the check has cleared, normally up to 15 calendar days following
the purchase date. Exchanges of shares of Alliance Mutual Funds
will generally result in the realization of a capital gain or
loss for federal income tax purposes.
Each Fund shareholder, and the shareholder's selected
dealer, agent or financial representative, as applicable, are
authorized to make telephone requests for exchanges unless
Alliance Fund Services, Inc., receives written instruction to the
contrary from the shareholder, or the shareholder declines the
privilege by checking the appropriate box on the Subscription
Application found in the Prospectus. Such telephone requests
cannot be accepted with respect to shares then represented by
stock certificates. Shares acquired pursuant to a telephone
request for exchange will be held under the same account
registration as the shares redeemed through such exchange.
Eligible shareholders desiring to make an exchange
should telephone Alliance Fund Services, Inc. with their account
number and other details of the exchange, at (800) 221-5672
before 4:00 p.m., Eastern time, on a Fund business day as defined
above. Telephone requests for exchange received before 4:00 p.m.
Eastern time on a Fund business day will be processed as of the
close of business on that day. During periods of drastic
economic or market developments, such as the market break of
October 1987, it is possible that shareholders would have
difficulty in reaching Alliance Fund Services, Inc. by telephone
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(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 following
Fund business day prior thereto.
None of the Alliance Mutual Funds, the Adviser, the
Principal Underwriter or Alliance Fund Services, Inc. will be
responsible for the authenticity of telephone requests for
exchanges that the Fund reasonably believes to be genuine. The
Fund will employ reasonable procedures in order to verify that
telephone requests for exchanges are genuine, including, among
others, recording such telephone instructions and causing written
confirmations of the resulting transactions to be sent to
shareholders. If the Fund did not employ such procedures, it
could be liable for losses arising from unauthorized or
fraudulent telephone instructions. Selected dealers, agents or
financial representatives, as applicable, may charge a commission
for handling telephone requests for exchanges.
The exchange privilege is available only in states where
shares of the Alliance Mutual Fund being acquired may be legally
sold. Each Alliance Mutual Fund reserves the right, at any time
on 60 days' notice to its shareholders, to reject any order to
acquire its shares through exchange or otherwise to modify,
restrict or terminate the exchange privilege.
Retirement Plans
The Fund may be a suitable investment vehicle for part
or all of the assets held in various types of retirement plans,
such as those listed below. The Fund has available forms of such
plans pursuant to which investments can be made in the Fund and
other Alliance Mutual Funds. Persons desiring information
concerning these plans should contact Alliance Fund Services,
Inc. at the "For Literature" telephone number on the cover of
this Statement of Additional Information, or write to:
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Alliance Fund Services, Inc.
Retirement Plans
P.O. Box 1520
Secaucus, New Jersey 07096-1520
Individual Retirement Account ("IRA"). Individuals who
receive compensation, including earnings from self-employment,
are entitled to establish and make contributions to an IRA.
Taxation of the income and gains paid to an IRA by the Fund is
deferred until distribution from the IRA. An individual's
eligible contribution to an IRA will be deductible if neither the
individual nor his or her spouse is an active participant in an
employer-sponsored retirement plan. If the individual or his or
her spouse is an active participant in an employer-sponsored
retirement plan, the individual's contributions to an IRA may be
deductible, in whole or in part, depending on the amount of the
adjusted gross income of the individual and his or her spouse.
Employer-Sponsored Qualified Retirement Plans. Sole
proprietors, partnerships and corporations may sponsor qualified
money purchase pension and profit-sharing plans, including
Section 401(k) plans ("qualified plans"), under which annual tax-
deductible contributions are made within prescribed limits based
on compensation paid to participating individuals. The minimum
initial investment requirement may be waived with respect to
certain of these qualified plans.
If the aggregate net asset value of shares of the
Alliance Mutual Funds held by a qualified plan reaches $1 million
on or before December 15 in any year, all Class B or Class C
shares of the Fund held by the plan can be exchanged at the
plan's request, without any sales charge, for Class A shares of
the Fund.
Simplified Employee Pension Plan ("SEP"). Sole
proprietors, partnerships and corporations may sponsor a SEP
under which they make annual tax-deductible contributions to an
IRA established by each eligible employee within prescribed
limits based on employee compensation.
403(b)(7) Retirement Plan. Certain tax-exempt
organizations and public educational institutions may sponsor
retirement plans under which an employee may agree that monies
deducted from his or her compensation (minimum $25 per pay
period) may be contributed by the employer to a custodial account
established for the employee under the plan.
The Alliance Plans Division of Frontier Trust Company, a
subsidiary of Equitable, which serves as custodian or trustee
under the retirement plan prototype forms available from the
Fund, charges certain nominal fees for establishing an account
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and for annual maintenance. A portion of these fees is remitted
to Alliance Fund Services, Inc. as compensation for its services
to the retirement plan accounts maintained with the Fund.
Distributions from retirement plans are subject to
certain Code requirements in addition to normal redemption
procedures. For additional information please contact Alliance
Fund Services, Inc.
Dividend Direction Plan
A shareholder who already maintains, in addition to his
or her Class A, Class B, Class C or Advisor Class Fund account, a
Class A, Class B, Class C or Advisor Class account with one or
more other Alliance Mutual Funds may direct that income dividends
and/or capital gains paid on the shareholder's Class A, Class B,
Class C or Advisor Class Fund shares be automatically reinvested,
in any amount, without the payment of any sales or service
charges, in shares of the same class of such other Alliance
Mutual Fund(s). Further information can be obtained by
contacting Alliance Fund Services, Inc. at the address or the
"For Literature" telephone number shown on the cover of this
Statement of Additional Information. Investors wishing to
establish a dividend direction plan in connection with their
[5~initial investment should complete the appropriate section of
the Subscription Application found in the Prospectus. Current
shareholders should contact Alliance Fund Services, Inc. to
establish a dividend direction plan.
Systematic Withdrawal Plan
General. Any shareholder who owns or purchases shares
of the Fund having a current net asset value of at least $4,000
(for quarterly or less frequent payments), $5,000 (for bi-monthly
payments) or $10,000 (for monthly payments) may establish a
systematic withdrawal plan under which the shareholder will
periodically receive a payment in a stated amount of not less
than $50 on a selected date. Systematic withdrawal plan
participants must elect to have their dividends and distributions
from the Fund automatically reinvested in additional shares of
the Fund.
Shares of the Fund owned by a participant in the Fund's
systematic withdrawal plan will be redeemed as necessary to meet
withdrawal payments and such payments will be subject to any
taxes applicable to redemptions and, except as discussed below,
any applicable contingent deferred sales charge. Shares acquired
with reinvested dividends and distributions will be liquidated
first to provide such withdrawal payments and thereafter other
shares will be liquidated to the extent necessary, and depending
upon the amount withdrawn, the investor's principal may be
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depleted. A systematic withdrawal plan may be terminated at any
time by the shareholder or the Fund.
Withdrawal payments will not automatically end when a
shareholder's account reaches a certain minimum level. Therefore,
redemptions of shares under the plan may reduce or even liquidate
a shareholder's account and may subject the shareholder to the
Fund's involuntary redemption provisions. See "Redemption and
Repurchase of Shares--General." Purchases of additional shares
concurrently with withdrawals are undesirable because of sales
charges when purchases are made. While an occasional lump-sum
investment may be made by a holder of Class A shares who is
maintaining a systematic withdrawal plan, such investment should
normally be an amount equivalent to three times the annual
withdrawal or $5,000, whichever is less.
Payments under a systematic withdrawal plan may be made
by check or electronically via the Automated Clearing House
("ACH") network. Investors wishing to establish a systematic
withdrawal plan in conjunction with their initial investment in
shares of the Fund should complete the appropriate portion of the
Subscription Application found in the Prospectus, while current
Fund shareholders desiring to do so can obtain an application
form by contacting Alliance Fund Services, Inc. at the address or
the "For Literature" telephone number shown on the cover of this
Statement of Additional Information.
CDSC Waiver for Class B Shares and Class C Shares.
Under a systematic withdrawal plan, up to 1% monthly, 2%
bi-monthly or 3% quarterly of the value at the time of redemption
of the Class B or Class C shares in a shareholder's account may
be redeemed free of any contingent deferred sales charge.
With respect to Class B shares, the waiver applies only
with respect to shares acquired after July 1, 1995. Class B
shares that are not subject to a contingent deferred sales charge
(such as shares acquired with reinvested dividends or
distributions) will be redeemed first and will count toward the
foregoing limitations. Remaining Class B shares July 1, 1995
that are held the longest will be redeemed next. Redemptions of
Class B shares July 1, 1995 in excess of the foregoing
limitations will be subject to any otherwise applicable
contingent deferred sales charge.
With respect to Class C shares, shares held the longest
will be redeemed first and will count toward the foregoing
limitations. Redemptions in excess of those limitations will be
subject to any otherwise applicable contingent deferred sales
charge.
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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 accountants,
PricewaterhouseCoopers LLP, as well as a confirmation of each
purchase and redemption. By contacting his or her broker or
Alliance Fund Services, Inc., a shareholder can arrange for
copies of his or her account statements to be sent to another
person.
________________________________________________________________
NET ASSET VALUE
________________________________________________________________
The per share net asset value is computed in accordance
with the Fund's Articles of Incorporation and By-Laws at the next
close of regular trading on the Exchange (ordinarily 4:00 p.m.
Eastern time) following receipt of a purchase or redemption order
by the Fund on each Fund business day on which such an order is
received and on such other days as the Board of Directors deems
appropriate or necessary in order to comply with Rule 22c-1 under
the 1940 Act. The Fund's per share net asset value is calculated
by dividing the value of the Fund's total assets, less its
liabilities, by the total number of its shares then outstanding.
A Fund business day is any weekday on which the Exchange is open
for trading.
In accordance with applicable rules under the 1940 Act,
portfolio securities are valued at current market value or at
fair value as determined in good faith by the Board of Directors.
The Board of Directors has delegated to the Adviser certain of
the Board's duties with respect to the following procedures.
Readily marketable securities listed on the Exchange or on a
foreign securities exchange (other than foreign securities
exchanges whose operations are similar to those of the United
States over-the-counter market) are valued, except as indicted
below, at the last sale price reflected on the consolidated tape
at the close of the Exchange or, in the case of a foreign
securities exchange, at the last quoted sale price, in each case
on the business day as of which such value is being determined.
If there has been no sale on such day, the securities are valued
at the mean of the closing bid and asked prices on such day. If
no bid or asked prices are quoted on such day, then the security
is valued in good faith at fair value by, or in accordance with
procedures established by, the Board of Directors. Readily
marketable securities not listed on the Exchange or on a foreign
securities exchange but listed on other United States national
securities exchanges or traded on The Nasdaq Stock Market, Inc.
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are valued in like manner. Portfolio securities traded on the
Exchange and on one or more foreign or other national securities
exchanges, and portfolio securities not traded on the Exchange
but traded on one or more foreign or other national securities
exchanges are valued in accordance with these procedures by
reference to the principal exchange on which the securities are
traded.
Readily marketable securities traded in the over-the-
counter market, securities listed on a foreign securities
exchange whose operations are similar to those of the United
States over-the-counter market, and securities listed on a U.S.
national securities exchange whose primary market is believed to
be over-the-counter (but excluding securities traded on The
Nasdaq Stock Market, Inc.), are valued at the mean of the current
bid and asked prices as reported by Nasdaq or, in the case of
securities not quoted by Nasdaq, the National Quotation Bureau or
another comparable sources.
Listed put or call options purchased by the Fund are
valued at the last sale price. If there has been no sale on that
day, such securities will be valued at the closing bid prices on
that day.
Open futures contracts and options thereon will be
valued using the closing settlement price or, in the absence of
such a price, the most recent quoted bid price, If there are no
quotations available for the day of valuations, the last
available closing settlement price will be used.
U.S. Government Securities and other debt instruments
having 60 days or less remaining until maturity are valued at
amortized cost if their original maturity was 60 days or less, or
by amortizing their fair value as of the 61st day prior to
maturity if their original term to maturity exceeded 60 days
(unless in either case the Board of Directors determines that
this method does not represent fair value).
Fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities.
The prices provided by pricing service take into account many
factors, including institutional size trading in similar groups
of securities and any developments related to specific
securities. Mortgage-backed and asset-backed securities may be
valued at prices obtained from a bond pricing service or at a
price obtained from one or more of the major broker/dealers in
such securities. In cases where broker/dealer quotes are
obtained, the Adviser may establish procedures whereby changes in
market yields or spreads are used to adjust, on a daily basis, a
recently obtained quoted bid price on a security.
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All other assets of the Fund are valued in good faith at
fair value by, or in accordance with procedures established by,
the Board of Directors.
Trading in securities on Far Eastern and European
securities exchanges and over-the-counter markets is normally
completed well before the close of business of each Fund business
day. In addition, trading in foreign markets may not take place
on all Fund business days. Furthermore, trading may take place
in various foreign markets on days that are not Fund business
days. The Fund's calculation of the net asset value per share,
therefore, does not always take place contemporaneously with the
most recent determination of the prices of portfolio securities
in these markets. Events affecting the values of these portfolio
securities that occur between the time their prices are
determined in accordance with the above procedures and the close
of the Exchange will not be reflected in the Fund's calculation
of net asset value unless it is believed that these prices do not
reflect current market value, in which case the securities will
be valued in good faith by, or in accordance with procedures
established by, the Board of Directors at fair value.
The Board of Directors may suspend the determination of
the Fund's, net asset value (and the offering and sale of
shares), subject to the rules of the Commission and other
governmental rules and regulations, at a time when: (1) the
Exchange is closed, other than customary weekend and holiday
closings, (2) an emergency exists as a result of which it is not
reasonably practicable for the Fund to dispose of securities
owned by it or to determine fairly the value of its net assets,
or (3) for the protection of shareholders, the Commission by
order permits a suspension of the right of redemption or a
postponement of the date of payment on redemption.
For purposes of determining the Fund's net asset value
per share, all assets and liabilities initially expressed in a
foreign currency will be converted into U.S. dollars at the mean
of the current bid and asked prices of such currency against the
U.S. dollar last quoted by a major bank that is a regular
participant in the relevant foreign exchange market or on the
basis of a pricing service that takes into account the quotes
provided by a number of such major banks. If such quotations are
not available as of the close of the Exchange, the rate of
exchange will be determined in good faith by, or under the
direction of, the Board of Directors.
The assets attributable to the Class A shares, Class B
shares, Class C shares and Advisor Class shares will be invested
together in a single portfolio. The net asset value of each
class will be determined separately by subtracting the
liabilities allocated to that class from the assets belonging to
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that class in conformance with the provisions of a plan adopted
by the Fund in accordance with Rule 18f-3 under the 1940 Act.
____________________________________________________________
DIVIDENDS, DISTRIBUTIONS AND TAXES
________________________________________________________________
Dividends paid by the Fund, if any, with respect to
Class A, Class B, Class C and Advisor Class 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 applicable to Class B and C shares, and any
incremental transfer agency costs relating to Class B and Class C
shares, will be borne exclusively by the class to which they
relate.
General
The Fund intends for each taxable year to qualify to be
taxed as a "regulated investment company" under the Code. To so
qualify, the Fund must, among other things, (i) derive at least
90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from
the sale or other disposition of stock or securities or foreign
currency, or certain other income (including, but not limited to,
gains from options, futures and forward contracts) derived with
respect to its business of investing in stock, securities or
currency; and (ii) diversify its holdings so that, at the end of
each quarter of its taxable year, the following two conditions
are met: (a) at least 50% of the value of the Fund's assets is
represented by cash, U.S. Government Securities, securities of
other regulated investment companies and other securities with
respect to which the Fund's investment is limited, in respect of
any one issuer, to an amount not greater than 5% of the Fund's
total assets and 10% of the outstanding voting securities of such
issuer and (b) not more than 25% of the value of the Fund's
assets is invested in securities of any one issuer (other than
U.S. Government Securities or securities of other regulated
investment companies).
If the Fund qualifies as a regulated investment company
for any taxable year and makes timely distributions to its
shareholders of 90% or more of its net investment income for that
year (calculated without regard to its net capital gain, i.e.,
the excess of its net long-term capital gain over its net short-
term capital loss) it will not be subject to federal income tax
on the portion of its taxable income for the year (including any
net capital gain) that it distributes to shareholders.
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The Fund will also avoid the 4% federal excise tax that
would otherwise apply to certain undistributed income for a given
calendar year if it makes timely distributions to shareholders
equal to the sum of (i) 98% of its ordinary income for such year
(ii) 98% of its capital gain net income and foreign currency
gains for the twelve-month period ending on October 31 (or
November 30 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
treated as if paid by the Fund on December 31 of such calendar
year, and will be taxable to these shareholders for the year
declared, and not for the year in which the shareholders actually
receive the dividend.
The information set forth in the following discussion
relates solely to the significant United States federal income
tax consequences of dividends and distributions by the Fund and
of sales or redemptions of Fund shares, and assumes that the Fund
qualifies to be taxed as a regulated investment company.
Investors should consult their own tax counsel with respect to
the specific tax consequences of their being shareholders of the
Fund, including the effect and applicability of federal, state
and local tax laws to their own particular situation and the
possible effects of changes therein.
Dividends and Distributions. The Fund intends to make
timely distributions of the Fund's taxable income (including any
net capital gain) so that the Fund will not be subject to federal
income and excise taxes. 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.
In the case of corporate shareholders, a portion of the
Fund's dividends may be eligible for the dividends-received
deduction. The amount eligible for the deduction is limited to
the amount of qualifying dividends received by the Fund. A
corporation's dividends-received deduction generally will be
disallowed unless the corporation holds shares in the Fund at
least 46 days during the 90-day period beginning 45 days before
the date on which the corporation becomes entitled to receive the
dividend. Furthermore, the dividends-received deduction will be
disallowed to the extent a corporation's investment in shares of
the Fund is financed with indebtedness.
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Distributions of net capital gain are taxable as long-
term capital gain, regardless of how long a shareholder has held
shares in the Fund. Any dividend or distribution received by a
shareholder on shares of the 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 as described
above. Dividends are taxable in the manner discussed regardless
of whether they are paid to the shareholder in cash or are
reinvested in additional shares of the Fund.
After the end of the calendar year, the Fund will notify
shareholders of the federal income tax status of any
distributions made by the Fund to shareholders during such year.
A dividend or capital gains distribution with respect to
shares of the Fund held by a tax-deferred or qualified plan, such
as an individual retirement account, 403(b)(7) retirement plan or
corporate pension or profit-sharing plan, generally will not be
taxable to the plan. Distributions from such plans will be
taxable to individual participants under applicable tax rules
without regard to the character of the income earned by the
qualified plan.
It is the present policy of the Fund to distribute to
shareholders all net investment income quarterly and to
distribute net realized capital gains, if any, annually. The
amount of any such distributions must necessarily depend upon the
realization by the Fund of income and capital gains from
investments.
Sales and Redemptions. Any gain or loss arising from a
sale or redemption of Fund shares generally will be capital gain
or loss except in the case of a dealer or a financial
institution, and will be long-term capital gain or loss if
shareholder has held such shares for more than one year at the
time of the sale or redemption; otherwise it will be short-term
capital gain or loss. If a shareholder has held shares in the
Fund for six months or less and during that period has received a
distribution of net capital gain, any loss recognized by the
shareholder on the sale of those shares during the six-month
period will be treated as a long-term capital loss to the extent
of the distribution. In determining the holding period of such
shares for this purpose, any period during which a shareholder's
risk of loss is offset by means of options, short sales or
similar transactions is not counted.
Any loss realized by a shareholder on a sale or exchange
of shares of the Fund will be disallowed to the extent the shares
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disposed of are replaced within a period of 61 days beginning 30
days before and ending 30 days after the shares are sold or
exchanged. For this purpose, acquisitions pursuant to the
Dividend Reinvestment Plan would constitute a replacement if made
within the period. If disallowed, the loss will be reflected in
an upward adjustment to the basis of the shares acquired.
Backup Withholding. The Fund may be required to
withhold United States federal income tax at the rate of 31% of
all distributions payable to shareholders who fail to provide the
Fund with their correct taxpayer identification numbers or to
make required certifications, or who have been notified by the
Internal Revenue Service that they are subject to backup
withholding. Corporate shareholders and certain other types of
shareholders specified in the Code are exempt from such backup
withholding. Backup withholding is not an additional tax; any
amounts so withheld may be credited against a shareholder's
United States federal income tax liability or refunded.
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. If more than 50% of the
value of the Fund's total assets at the close of its taxable year
consists of stocks or securities of foreign corporations, the
Fund will be eligible and intends to file an election with the
Internal Revenue Service to pass through to its shareholders the
amount of foreign taxes paid by the Fund. However, there can be
no assurance that the Fund will be able to do so. Certain
shareholders may be subject to rules which limit their ability to
fully deduct, or claim a credit for, their pro rata share of the
foreign taxes paid by the Fund. A shareholder's foreign tax
credit with respect to a dividend received from the Fund will be
disallowed unless the shareholder holds shares in the Fund on the
ex-dividend date and for at least 15 other days during the 30-day
period beginning 15 days prior to the ex-dividend date. If the
Fund is unable to pass through to its shareholders the amount of
foreign taxes paid by the Fund, the Fund will be entitled to
claim a deduction of such taxes for United States federal income
tax purposes. However, any such taxes will reduce the income
available for distribution to the Fund's shareholders.
Taxation of Foreign Stockholders. The foregoing
discussion relates only to United States federal income tax law
as it affects shareholders who are United States citizens or
residents or United States corporations. The effects of federal
income tax law on shareholders who are non-resident alien
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<PAGE>
individuals or foreign corporations may be substantially
different. Foreign investors should therefore consult their
counsel for further information as to the United States tax
consequences of receipt of income from the Fund.
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.
Passive Foreign Investment Companies. If the Fund owns
shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax
purposes and the Fund does not elect to treat the foreign
corporation as a "qualified electing fund" within the meaning of
the Code, the Fund may be subject to United States federal income
taxation on a portion of any "excess distribution" it receives
from the PFIC or any gain it derives from the disposition of such
shares, even if such income is distributed as a taxable dividend
by the Fund to its shareholders. The Fund may also be subject to
additional interest charges in respect of deferred taxes arising
from such distributions or gains. Any tax paid by the Fund as a
result of its ownership of shares in a PFIC will not give rise to
any deduction or credit to the Fund or to any shareholder. A
PFIC means any foreign corporation if, for the taxable year
involved, either (i) it derives at least 75% of its gross income
from "passive income" (including, but not limited to, interest,
dividends, royalties, rents and annuities), or (ii) on average,
at least 50% of the value (or adjusted tax basis, if elected) of
the assets held by the corporation produce "passive income." The
Fund could elect to "mark-to-market" stock in a PFIC. Under such
an election, the Fund would include in income each year an amount
equal to the excess, if any, of the fair market value of the PFIC
stock as of the close of the taxable year over the Fund's
adjusted basis in the PFIC stock. The Fund would be allowed a
deduction for the excess, if any, of the adjusted basis of the
PFIC stock over the fair market value of the PFIC stock as of the
close of the taxable year, but only to the extent of any net
mark-to-market gains included by the Fund for prior taxable
years. The Fund's adjusted basis in the PFIC stock would be
adjusted to reflect the amounts included in, or deducted from,
income under this election. Amounts included in income pursuant
to this election, as well as gain realized on the sale or any
other disposition of the PFIC stock, would be treated as ordinary
income. The deductible portion of any mark-to-market loss, as
well as loss realized on the sale or other disposition of the
PFIC stock to the extent that such loss does not exceed the net
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mark-to-market gains previously included by the Fund, would be
treated as ordinary loss. The Fund generally would not be subject
to the deferred tax and interest charge provisions discussed
above with respect to PFIC stock for which a mark-to-market
election has been made. If the Fund purchases shares in a PFIC
and the Fund does elect to treat the foreign corporation as a
"qualified electing fund" under the Code, the Fund may be
required to include in its income each year a portion of the
ordinary income and net capital gains of the foreign corporation,
even if this income is not distributed to the Fund. Any such
income would be subject to the 90% and calendar year distribution
requirements described above.
Currency Fluctuations--"Section 988" Gains or Losses.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities
are treated as ordinary income or ordinary loss. Similarly,
gains or losses from the disposition of foreign currencies, from
the disposition of debt securities denominated in a foreign
currency, or from the disposition of a forward contract
denominated in a foreign currency which are attributable to
fluctuations in the value of the foreign currency between the
date of acquisition of the asset and the date of disposition also
are treated as ordinary 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 Fund shares. If such
distributions exceed such shareholder's basis, such excess will
be treated as a gain from the sale of shares.
Options and Futures Contracts. Certain listed options,
regulated futures contracts and forward foreign currency
contracts are considered "section 1256 contracts" for federal
income tax purposes. Section 1256 contracts held by the Fund at
the end of each taxable year will be "marked to market" and
treated for federal income tax purposes as though sold for fair
market value on the last business day of such taxable year. Gain
or loss realized by the Fund on section 1256 contracts other than
forward foreign currency contracts will be considered 60% long-
term and 40% short-term capital gain or loss. Gain or loss
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realized by the Fund on forward foreign currency contracts
generally will be treated as section 988 gain or loss and will
therefore be characterized as ordinary income or loss and will
increase or decrease the amount of the Fund's net investment
income available to be distributed to holders as ordinary income,
as described above. The Fund can elect to exempt its section
1256 contracts which are part of a "mixed straddle" (as described
below) from the application of section 1256.
The Treasury Department has the authority to issue
regulations that would permit or require the Fund either to
integrate a foreign currency hedging transaction with the
investment that is hedged and treat the two as a single
transaction, or otherwise to treat the hedging transaction in a
manner that is consistent with the hedged investment. The
regulations issued under this authority generally should not
apply to the type of hedging transactions in which the Fund
intends to engage.
With respect to equity options or options traded over-
the-counter or on certain foreign exchanges, 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 an option that the Fund has written
is exercised, gain or loss on the option will not be separately
recognized but the premium received or paid will be included in
the calculation of gain or loss upon disposition of the property
underlying the option.
Gain or loss realized by the Fund on the lapse or sale
of put and call options on foreign currencies which are traded
over-the-counter or on certain foreign exchanges will be treated
as section 988 gain or loss and will therefore be characterized
as ordinary income or loss and will increase or decrease the
amount of the Fund's net investment income available to be
distributed to shareholders as ordinary income, as described
above. The amount of such gain or loss shall be determined by
subtracting the amount paid, if any, for or with respect to the
option (including any amount paid by the Fund upon termination of
an option written by the Fund) from the amount received, if any,
for or with respect to the option (including any amount received
by the Fund upon termination of an option held by the Fund). In
general, if the Fund exercises such an option on a foreign
currency, or such an option that the Fund has written is
exercised, gain or loss on the option will be recognized in the
same manner as if the Fund had sold the option (or paid another
person to assume the Fund's obligation to make delivery under the
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option) on the date on which the option is exercised, for the
fair market value of the option. The foregoing rules will also
apply to other put and call options which have as their
underlying property foreign currency and which are traded over-
the-counter or on certain foreign exchanges to the extent gain or
loss with respect to such options is attributable to fluctuations
in foreign currency exchange rates.
Tax Straddles. Any option, futures contract, forward
foreign currency contract, interest rate swap, cap or floor or
other position entered into or held by the Fund in conjunction
with any other position held by the Fund may constitute a
"straddle" for federal income tax purposes. A straddle of which
at least one, but not all, the positions are section 1256
contracts may constitute a "mixed straddle". In general,
straddles are subject to certain rules that may affect the
character and timing of the Fund's gains and losses with respect
to straddle positions by requiring, among other things, that
(i) loss realized on disposition of one position of a straddle
not be recognized to the extent that the Fund has unrealized
gains with respect to the other position in such straddle;
(ii) the Fund's holding period in straddle positions be suspended
while the straddle exists (possibly resulting in gain being
treated as short-term capital gain rather than long-term capital
gain); (iii) losses recognized with respect to certain straddle
positions which are part of a mixed straddle and which are non-
section 1256 positions be treated as 60% long-term and 40% short-
term capital loss; (iv) losses recognized with respect to certain
straddle positions which would otherwise constitute short-term
capital losses be treated as long-term capital losses; and
(v) the deduction of interest and carrying charges attributable
to certain straddle positions may be deferred. The Treasury
Department is authorized to issue regulations providing for the
proper treatment of a mixed straddle where at least one position
is ordinary and at least one position is capital. No such
regulations have yet been issued. Various elections are
available to the Fund which may mitigate the effects of the
straddle rules, particularly with respect to mixed straddles. In
general, the straddle rules described above do not apply to any
straddles held by the Fund all of the offsetting positions of
which consist of section 1256 contracts.
________________________________________________________________
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 orders for portfolio
transactions for the Fund. The Adviser determines the broker to
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be used in each specific transaction with the objective of
negotiating a combination of the most favorable commission and
the best price obtainable on each transaction (generally defined
as best execution). When consistent with the objective of
obtaining best execution, brokerage may be directed to persons or
firms supplying investment information to the Adviser. There may
be occasions where the transaction cost charged by a broker may
be greater than that which another broker may charge if the Fund
determines in good faith that the amount of such transaction cost
is reasonable in relation to the value of the brokerage, research
and statistical services provided by the executing broker.
Neither the Fund nor the Adviser has entered into
agreements or understandings with any brokers regarding the
placement of securities transactions because of research services
they provide. To the extent that such persons or firms supply
investment information to the Adviser for use in rendering
investment advice to the Fund, such information may be supplied
at no cost to the Adviser and, therefore, may have the effect of
reducing the expenses of the Adviser in rendering advice to the
Fund. While it is impossible to place an actual dollar value on
such investment information, its receipt by the Adviser probably
does not reduce the overall expenses of the Adviser to any
material extent.
The investment information provided to the Adviser is of
the type described in Section 28(e)(3) of the Securities Exchange
Act of 1934 and is designed to augment the Adviser's own internal
research and investment strategy capabilities. Research services
furnished by brokers through which the Fund effects securities
transactions are used by the Adviser in carrying out its
investment management responsibilities with respect to all its
client accounts.
The Fund may deal in some instances in securities which
are not listed on a national stock exchange but are traded in the
over-the-counter market. The Fund may also purchase listed
securities through the third market, i.e., from a dealer which is
not a member of the exchange on which a security is listed.
Where transactions are executed in the over-the-counter market or
third market, the Fund will seek to deal with the primary market
makers; but when necessary in order to obtain the best price and
execution, it will utilize the services of others. In all cases,
the Fund will attempt to negotiate best execution.
The extent to which commissions that will be charged by
broker-dealers selected by the Fund may reflect an element of
value for research cannot presently be determined. To the extent
that research services of value are provided by broker-dealers
with or through whom the Fund places portfolio transactions, the
Adviser may be relieved of expenses which it might otherwise
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bear. Research services furnished by broker-dealers could be
useful and of value to the Adviser in servicing its other clients
as well as the Fund; but, on the other hand, certain research
services obtained by the Adviser as a result of the placement of
portfolio brokerage of other clients could be useful and of value
to it in serving the Fund. Consistent with the Conduct Rules of
the National Association of Securities Dealers, Inc. and subject
to seeking best execution, the Fund may consider sales of shares
of the Fund or other investment companies managed by the Adviser
as a factor in the selection of brokers to execute portfolio
transactions for the Fund.
The Fund may from time to time place orders for the
purchase or sale of securities (including listed call options)
with Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"),
an affiliate of the Adviser, and with brokers which may have
their transactions cleared or settled, or both, by the Pershing
Division of DLJ, for which DLJ may receive a portion of the
brokerage commissions. In such instances, the placement of
orders with such brokers would be consistent with the Fund's
objective of obtaining best execution and would not be dependent
upon the fact that DLJ is an affiliate of the Adviser. With
respect to orders placed with DLJ for execution on a national
securities exchange, commissions received must conform to Section
17(e)(2)(A) of the 1940 Act and Rule 17e-1 thereunder, which
permit an affiliated person of a registered investment company
(such as the Fund), or any affiliated person of such person, to
receive a brokerage commission from such registered investment
company provided that such commission is reasonable and fair
compared to the commissions received by other brokers in
connection with comparable transactions involving similar
securities during a comparable period of time.
During the fiscal years ended November 30, 1999, 1998
and 1997, the Fund incurred brokerage commissions amounting in
the aggregate to $97,332, $23,651 and $21,809, respectively.
During the fiscal years ended November 30, 1999, 1998 and 1997,
brokerage commissions amounting in the aggregate to $-0-,$-0- and
$-0-, respectively, were paid to DLJ and brokerage commissions
amounting in the aggregate to $0, $-0- and $-0-, respectively,
were paid to brokers utilizing the Pershing Division of DLJ.
During the fiscal year ended November 30, 1999, the brokerage
commissions paid to DLJ constituted 0% of the Fund's aggregate
brokerage commission and the brokerage commissions paid to
brokers utilizing the Pershing Division of DLJ constituted 0% of
the Fund's aggregate brokerage commissions. During the fiscal
year ended November 30, 1999, of the Fund's aggregate dollar
amount of brokerage transactions involving the payment of
commissions, 0% were effected through DLJ and 0% were effected
through brokers utilizing the Pershing Division of DLJ. During
the fiscal year ended November 30, 1999, transactions in
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portfolio securities of the Fund aggregating $63,462,402 with
associated brokerage commissions of approximately $44,012 were
allocated to persons or firms supplying research services to the
Fund or the Adviser.
________________________________________________________________
GENERAL INFORMATION
________________________________________________________________
Capitalization
The Fund was organized as a corporation in Maryland in
1993. The authorized Capital Stock of the Fund consists of
3,000,000,000 shares of Class A common stock, 3,000,000,000
shares of Class B common stock, 3,000,000,000 shares of Class C
common stock and 3,000,000,000 shares of Advisor Class common
stock, each having $.001 par value.
All shares of the Fund, when issued, are fully paid and
non-assessable. The Directors are authorized to reclassify and
issue any unissued shares to any number of additional series and
classes without shareholder approval. Accordingly, the Directors
in the future, for reasons such as the desire to establish one or
more additional portfolios with different investment objectives,
policies or restrictions, may create additional classes or series
of shares. Any issuance of shares of another class or series
would be governed by the 1940 Act and the law of the State of
Maryland. If shares of another series were issued in connection
with the creation of a second portfolio, each share of either
portfolio would normally be entitled to one vote for all
purposes. Generally, shares of both portfolios would vote as a
single series on matters, such as the election of Directors, that
affected both portfolios in substantially the same manner. As to
matters affecting each portfolio differently, such as approval of
the Advisory Agreement and changes in investment policy, shares
of each portfolio would vote as a 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 will be available to shareholders of the Fund. The
rights of the holders of shares of a series may not be modified
except by the vote of a majority of the outstanding shares of
such series.
It is anticipated that annual shareholder meetings will
not be held; shareholder meetings will be held only when required
by federal or state law. Shareholders have available certain
procedures for the removal of Directors.
A shareholder will be entitled to share pro rata with
other holders of the same class of shares all dividends and
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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
Fund is empowered to establish, without shareholder approval,
additional portfolios, which may have different investment
objectives and policies than those of the Fund, and additional
classes of shares within the Fund. If an additional portfolio or
class were established in the 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, B, C and Advisor Class shares have identical
voting, dividend, liquidation and other rights, except that each
class bears its own transfer agency expenses, each of Class A,
Class B and Class C shares of the Fund bears its own distribution
expenses and Class B shares and Advisor Class shares convert to
Class A shares under certain circumstances. Each class of shares
of the Fund votes separately with respect to the Fund's Rule 12b-
1 distribution plan and other matters for which separate class
voting is appropriate under applicable law. Shares are freely
transferable, are entitled to dividends as determined by the
Directors and, in liquidation of the Fund, are entitled to
receive the net assets of the Fund.
At October 6, 2000, there were 11,786,600 shares of
common stock of the Fund outstanding including 2,971,497 Class A
shares, 7,084,118 Class B shares, 1,661,118 Class C shares and
69,867 Advisor Class shares. To the knowledge of the Fund, the
following persons owned of record or beneficially, 5% or more of
a class of the outstanding shares of the Fund as of October 6,
2000:
No. of % of
Shares % of % of % of Advisor
Name and Address of Class Class A Class B Class C Class
MLPF&S 187,153 6.31%
For the Sole Benefit 1,783,676 25.33%
of Its Customers 432,138 26.07%
4800 Deer Lake Dr. East 39,643 56.83.45%
2nd Floor
Jacksonville, FL 32246-6484
Ray L. Lillywhite and
Eloise H. Lillywhite Ttees
FBO Ray L. and Eloise
H. Lillywhite
1227 Ballena Blvd.
Alameda, CA 94501-3668 3,904 5.60%
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Custodian
State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110, will act as the Fund's
custodian for the assets of the Fund but plays no part in
deciding the purchase or sale of portfolio securities. Subject
to the supervision of the Fund's Directors, State Street Bank and
Trust Company may enter into sub-custodial agreements for the
holding of the Fund's foreign securities.
Principal Underwriter
Alliance Fund Distributors, Inc. an indirect wholly-
owned subsidiary of Alliance, located at 1345 Avenue of the
Americas, New York, New York 10105, is the principal underwriter
of shares of the Fund. Under the Agreement in the absence of its
willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations thereunder, against certain civil
liabilities, including liabilities under the Securities Act.
Counsel
Legal matters in connection with the issuance of the
shares of Common Stock offered hereby are passed upon by Seward &
Kissel LLP, New York, New York. Seward & Kissel LLP has relied
upon the opinion of Venable, Baetjer and Howard LLP, Baltimore,
Maryland, for matters relating to Maryland law.
Independent Accountants
PricewaterhouseCoopers LLP, New York, New York, has been
appointed as independent accountants for the Fund.
Performance Information
From time to time, the Fund advertises its "yield,"
"actual distribution rate" and "total return." Computed
separately for each class, the Fund's yield for any 30-day (or
one month) period is computed by dividing the net investment
income per share earned during such period by the maximum public
offering price per share on the last day of the period, and then
annualizing such 30-day (or one month) yield in accordance with a
formula prescribed by the Commission which provides for
compounding on a semi-annual basis. The Fund's "actual
distribution rate," which may be advertised in items of sales
literature, is computed in the same manner as yield except that
actual income dividends declared per share during the period in
question is substituted for net investment income per share.
Computed separately for each class, the Fund's "total return" is
its average annual compounded total return for recent one, five
and ten year periods. The Fund's actual distribution rate is
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computed separately for Class A, Class B, Class C and Advisor
Class shares. The Fund's total return for such a 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 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 maximum sales charge
applicable to purchases of Fund shares is assumed to have been
paid.
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,
its 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 calculates average annual total return
information in the Performance Table in the Risk/Return Summary
according to the Commission formula as described above. In
accordance with Commission guidelines, total return information
is presented for each class for the same time periods, i.e., the
1, 5 and 10 years (or over the life of the Fund, if the Fund is
less than 10 years old) ending on the last day of the most recent
calendar year. Since different classes may have first been sold
on different dates ("Actual Inception Dates"), in some cases this
can result in return information being presented for a class for
periods prior to its Actual Inception Date. Where return
information is presented for periods prior to the Actual
Inception Date of a Class (a "Younger Class"), such information
is calculated by using the historical performance of the class
with the earliest Actual Inception Date (the "Oldest Class").
For this purpose, the Fund calculates the difference in total
annual fund operating expenses (as a percentage of average net
assets) between the Younger Class and the Oldest Class, divides
the difference by 12, and subtracts the result from the monthly
performance at net asset value (including reinvestment of all
dividends and distributions) of the Oldest Class for each month
prior to the Younger Class's Actual Inception Date for which
performance information is to be shown. The resulting "pro
forma" monthly performance information is used to calculate the
Younger Class's average annual returns for these periods. Any
conversion feature applicable to the Younger Class is assumed to
occur in accordance with the Actual Inception Date for that
class, not its hypothetical inception date.
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The Fund's total return is computed separately for
Class A, Class B, Class C and Advisor Class shares. The average
annual compounded total return based on net asset value for each
class of shares for the one- and five-year periods ended May 31,
2000 (or since inception through that date, as noted) was as
follows:
12 months ended 5 years ended 10 years ended
5/31/00 5/31/00 5/31/00
Class A 8.23% 18.27% 14.15%*
Class B 7.43% 17.46% 13.34%*
Class C 7.42% 17.45% 13.40%*
Advisor Class 8.53% 22.56%* N/A
*Class A and Class B shares inception date: October 18, 1993
*Class C shares inception date: October 27, 1993
*Advisor Class shares inception date: October 1, 1996
Advertisements quoting performance ranking or ratings of
the Fund as measured by financial publications or independent
organizations such as Lipper, Inc. and Morningstar, Inc. and
advertisements presenting the historical record of payments of
income dividends by the Fund may also from time to time be sent
to investors or placed in newspapers, magazines such as Barrons,
Business Week, Changing Times, Forbes, Investor's Daily, Money
Magazine, The New York Times and The Wall Street Journal or other
media on behalf of the Fund.
Additional Information
Any shareholder inquiries may be directed to the
shareholder's broker or other financial adviser or to Alliance
Fund Services, Inc. at the address or telephone numbers shown on
the front cover of this Statement of Additional Information. This
Statement of Additional Information does not contain all the
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.
________________________________________________________________
REPORT OF INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
________________________________________________________________
The financial statements and the report of
PricewaterhouseCoopers LLP for Alliance Utility Income Fund, Inc.
are incorporated herein by reference to its annual and semi-
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annual report filings made with the SEC pursuant to Section 30(b)
of the 1940 Act and Rule 30b-2 thereunder. The annual report is
dated November 30, 1999 and the semi-annual report is dated May
31, 2000 and they were filed on February 2, 2000 and August 1,
2000, respectively. They are available without charge upon
request by calling Alliance Fund Services, Inc. at (800) 227-
4618.
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APPENDIX A: DESCRIPTION OF OBLIGATIONS ISSUED OR
GUARANTEED BY U.S. GOVERNMENT AGENCIES OR INSTRUMENTALITIES
Federal Farm Credit System Notes and Bonds --are bonds
issued by a cooperatively owned nationwide system of banks and
associations supervised by the Farm Credit Administration, an
independent agency of the U.S. Government. These bonds are not
guaranteed by the U.S. Government.
Maritime Administration Bonds --are bonds issued and
provided by the Department of Transportation of the U.S.
Government and are guaranteed by the U.S. Government.
FHA Debentures --are debentures issued by the Federal
Housing Administration of the U.S. Government and are guaranteed
by the U.S. Government.
GNMA Certificates are mortgage-backed securities which
represent a partial ownership interest in a pool of mortgage
loans issued by lenders such as mortgage bankers, commercial
banks and savings and loan associations. Each mortgage loan
included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration.
FHLMC Bonds --are bonds issued and guaranteed by the
Federal Home Loan Mortgage Corporation.
FNMA Bonds --are bonds issued and guaranteed by the
Federal National Mortgage Association.
Federal Home Loan Bank Notes and Bonds --are notes and
bonds issued by the Federal Home Loan Bank System and are not
guaranteed by the U.S. Government.
Student Loan Marketing Association ("Sallie Mae") Notes
and Bonds --are notes and bonds issued by the Student Loan
Marketing Association.
Although this list includes a description of the primary
types of U.S. Government agency or instrumentality obligations in
which the Fund intends to invest, the Fund may invest in
obligations of U.S. Government agencies or instrumentalities
other than those listed above.
A-1
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APPENDIX B: BOND AND COMMERCIAL PAPER RATINGS
Standard & Poor's Bond Ratings
A Standard & Poor's municipal bond 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 Standard & Poor's. 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. Debt rated "BBB" is regarded
as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest
and to repay principal for debt in this category than for higher
rated categories.
Debt rated "BB", "B", "CCC" or "CC" is regarded, on
balance, as predominately speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of
the obligation. "BB" indicates the lowest degree of speculation
and "CC" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to
adverse conditions. The rating "C" is reserved for income bonds
on which no interest is being paid. Debt rated "D" is in default
and payments of interest and/or repayment of principal are in
arrears.
The ratings from "AAA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within
the major rating categories.
Moody's Bond Ratings
Excerpts from Moody's description of its municipal bond
ratings: Aaa -judged to be the best quality, carry the smallest
degree of investment risk; Aa - judged to be of high quality by
all standards; A - possess many favorable investment attributes
and are to be considered as higher medium grade obligations;
Baa - considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured and have speculative
characteristics as well; Ba, B, Caa, Ca, C - protection of
interest and principal payments is questionable; Ba indicates
some speculative elements while Ca represents a high degree of
speculation and C represents the lowest rated class of bonds;
B-1
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Caa, Ca and C bonds may be in default. Moody's applies numerical
modifiers 1, 2 and 3 in each generic rating classification from
Aa to B in 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 at the
lower end of its generic rating category.
Fitch IBCA, Inc. Bond Ratings
AAA. Securities of this rating are regarded as strictly
high-grade, broadly marketable, suitable for investment by
trustees and fiduciary institutions, and liable to but slight
market fluctuation other that through changes in the money rate.
The factor last named is of importance varying with the length of
maturity. Such securities are mainly senior issues of strong
companies, and are most numerous in the railway and public
utility fields, though some industrial obligations have this
rating. The prime feature of an AAA rating is showing of
earnings several times or many times interest requirements with
such stability of applicable earnings that safety is beyond
reasonable question whatever changes occur in conditions. Other
features may enter in, such as a wide margin of protection
through collateral security or direct lien on specific property
as in the case of high class equipment certificates or bonds that
are first mortgages on valuable real estate. Sinking funds or
voluntary reduction of the debt by call or purchase are often
factors, while guarantee or assumption by parties other than the
original debtor may also influence the rating.
AA. Securities in this group are of safety virtually
beyond question, and as a class are readily salable while many
are highly active. Their merits are not greatly unlike those of
the AAA class, but a security so rated may be of junior though
strong lien--in many cases directly following an AAA security--or
the margin of safety is less strikingly broad. The issue may be
the obligation of a small company, strongly secured but
influenced as to ratings by the lesser financial power of the
enterprise and more local type of market.
A. A securities are strong investments and in many
cases of highly active market, but are not so heavily protected
as the two upper classes or possibly are of similar security but
less quickly salable. As a class they are more sensitive in
standing and market to material changes in current earnings of
the company. With favoring conditions such securities are likely
to work into a high rating, but in occasional instances changes
cause the rating to be lowered.
BBB. BBB rated bonds are considered to be investment
grade and of satisfactory quality. The obligor's ability to pay
B-2
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interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to weaken this ability than bonds with
higher ratings.
Fitch Commercial Paper and
Certificate of Deposit Ratings
Fitch Commercial Paper Ratings are assigned at the
request of an issuer to debt obligations with an original
maturity not in excess of 270 days. The ratings reflect Fitch
current appraisal of the degree of assurance of timely payment of
such debt. Fitch compensated for this service by an annual fee
paid by the issuer under a contractual agreement which specifies
among other things that ratings may be changed or withdrawn at
any time if, in Fitch's sole judgment, changing circumstances
warrant such action.
Fitch Certificate of Deposit ratings are assigned at the
request of the issuer to deposits with maturities of up to three
years. Ratings apply to uninsured principal and interest and
reflect only those credit characteristics inherent in
certificates of deposit. Such ratings should be considered only
in the context of ratings assigned to certificates of deposit and
not to ratings which may be assigned to non-deposit liabilities.
Ratings for CDs with maturities over 3 years will be assigned
bond rating symbols. For definitions refer to page 1 of the
Rating Register.
Fitch commercial paper ratings are grouped into four
categories, two of which are defined below:
Fitch-1 (Highest Grade) Commercial paper assigned this
rating is regarded as having the strongest degree of assurance
for timely payment.
Fitch-2 (Very Good Grade) issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than the strongest issues.
Fitch Investment Note Ratings
Fitch investment Note Ratings are grouped into four
categories with the indicated symbols. The ratings on notes with
maturities generally up to three years reflect Fitch's current
appraisal of the degree of assurance of timely payment, whatever
the source.
FIN-1 -- Notes assigned this rating are regarded as
having the strongest degree of assurance for timely payment.
B-3
<PAGE>
FIN-2 -- Notes assigned this rating reflect a degree of
assurance for timely payment only slightly less in degree than
the highest category.
A plus symbol may be used in the three highest
categories to indicate relative standing. The Note Ratings will
usually correspond with Bond Ratings, although certain security
enhancements or market access may mean that notes will not track
bond.
Duff & Phelps Long-Term Rating Scale
AAA: Highest credit quality. The risk factors are
negligible.
AA+, AA, AA-: High credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to
time because of economic conditions.
A+, A, A-: Protection factors are average but adequate.
However, risk factors are more variable and greater in periods of
economic stress.
BBB+, BBB, BBB-: Below average protection factors but
still considered sufficient for prudent investment. Considerable
variability in risk during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely
to meet obligations when due. Present or prospective financial
protection factors fluctuate according to industry conditions or
company fortunes. Overall quality may move up or down frequently
within this category.
B+, B, B-: Below investment grade and possessing risk
that obligations will not be met when due. Financial protection
factors will fluctuate widely according to economic cycles,
industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a
higher or lower rating grade.
CCC: Well below investment grade securities.
Considerable uncertainty exists as to timely payment of
principal, interest or preferred dividends. Protection factors
are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company
developments.
DD: Defaulted debt obligations. Issuer failed to meet
scheduled principal and/or interest payments.
B-4
<PAGE>
Further Rating Distinctions
While ratings provide an assessment of the obligor's
capacity to pay debt service, it should be noted that the
definition of obligor expands as layers of security are added. If
municipal securities are guaranteed by third parties then the
"underlying" issuers as well as the "primary" issuer will be
evaluated during the rating process. In some cases, depending on
the scope of the guaranty, such as bond insurance, bank letters
of credit or collateral, the credit enhancement will provide the
sole basis for the rating given.
Minimum Rating(s) Requirements
For minimum rating(s) requirements for the Fund's
securities, please refer to "Description of the Fund" in the
Prospectus.
B-5
<PAGE>
APPENDIX C: OPTIONS
Options
The Fund will only write "covered" put and call options,
unless such options are written for cross-hedging purposes. The
manner in which such options will be deemed "covered" is
described in the Prospectus under the heading "Investment
Objective and Policies --Investment Practices --Options."
The writer of an option may have no control over when
the underlying securities must be sold, in the case of a call
option, or purchased, in the case of a put option, since with
regard to certain options, the writer may be assigned an exercise
notice at any time prior to the termination of the obligation.
Whether or not an option expires unexercised, the writer retains
the amount of the premium. This amount, of course, may, in the
case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period.
If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. If a put option
is exercised, the writer must fulfill the obligation to purchase
the underlying security at the exercise price, which will usually
exceed the then market value of the underlying security.
The writer of a listed option that wishes to terminate
its obligation may effect a "closing purchase transaction." This
is accomplished by buying an option of the same series as the
option previously written. The effect of the purchase is that
the writer's position will be cancelled by the clearing
corporation. However, a writer may not effect a closing purchase
transaction after being notified of the exercise of an option.
Likewise, an investor who is the holder of a listed option may
liquidate its position by effecting a "closing sale transaction".
This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that
either a closing purchase or a closing sale transaction can be
effected.
Effecting a closing transaction in the case of a written
call option will permit the Fund to write another call option on
the underlying security with either a different exercise price or
expiration date or both, or in the case of a written put option
will permit the Fund to write another put option to the extent
that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction
will permit the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other Fund
investments. If the Fund desires to sell a particular security
from its portfolio on which it has written a call option, it will
effect a closing transaction prior to or concurrent with the sale
of the security.
C-1
<PAGE>
The Fund will realize a profit from a closing
transaction if the price of the transaction is less than the
premium received from writing the option or is more than the
premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is
more than the premium received from writing the option or is less
than the premium paid to purchase the option. Because increases
in the market price of a call option will generally reflect
increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to
be offset in whole or in part by appreciation of the underlying
security owned by the Fund.
An option position may be closed out only where there
exists a secondary market for an option of the same series. If a
secondary market does not exist, it might not be possible to
effect closing transactions in particular options with the result
that the Fund would have to exercise the options in order to
realize any profit. If the Fund is unable to effect a closing
purchase transaction in a secondary market, it will not be able
to sell the underlying security until the option expires or it
delivers the underlying security upon exercise. Reasons for the
absence of a liquid secondary market include the following:
(i) there may be insufficient trading interest in certain
options, (ii) restrictions may be imposed by a national
securities exchange ("Exchange") on opening transactions or
closing transactions or both, (iii) trading halts, suspensions or
other restrictions may be imposed with respect to particular
classes or series of options or underlying securities,
(iv) unusual or unforeseen circumstances may interrupt normal
operations on an Exchange, (v) the facilities of an Exchange or
the Options Clearing Corporation may not at all times be adequate
to handle current trading volume, or (vi) one or more Exchanges
could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a
particular class or series of options), in which event the
secondary market on that Exchange (or in that class or series of
options) would cease to exist, although outstanding options on
that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue
to be exercisable in accordance with their terms.
The Fund may write options in connection with buy-and-
write transactions; that is, the Fund may purchase a security and
then write a call option against that security. The exercise
price of the call the Fund determines to write will depend upon
the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"),
equal to ("at-the-money") or above ("out-of-the-money") the
current value of the underlying security at the time the option
is written. Buy-and-write transactions using in-the-money call
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<PAGE>
options may be used when it is expected that the price of the
underlying security will remain flat or decline moderately during
the option period. Buy-and-write transactions using at-the-money
call options may be used when it is expected that the price of
the underlying security will remain fixed or advance moderately
during the option period. Buy-and-write transactions using out-
of-the-money call options may be used when it is expected that
the premiums received from writing the call option plus the
appreciation in the market price of the underlying security up to
the exercise price will be greater than the appreciation in the
price of the underlying security alone. If the call options are
exercised in such transactions, the Fund's maximum gain will be
the premium received by it for writing the option, adjusted
upwards or downwards by the difference between the Fund's
purchase price of the security and the exercise price. If the
options are not exercised and the price of the underlying
security declines, the amount of such decline will be offset in
part, or entirely, by the premium received.
The writing of covered put options is similar in terms
of risk/return characteristics to buy-and-write transactions. If
the market price of the underlying security rises or otherwise is
above the exercise price, the put option will expire worthless
and the Fund's gain will be limited to the premium received. If
the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the
position or take delivery of the security at the exercise price
and the Fund's return will be the premium received from the put
option minus the amount by which the market price of the security
is below the exercise price. Out-of-the-money, at-the-money, and
in-the-money put options may be used by the Fund in the same
market environments that call options are used in equivalent buy-
and-write transactions.
The Fund may purchase put options to hedge against a
decline in the value of its portfolio. By using put options in
this way, the Fund will reduce any profit it might otherwise have
realized in the underlying security by the amount of the premium
paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an
increase in the price of securities that the Fund anticipates
purchasing in the future. The premium paid for the call option
plus any transaction costs will reduce the benefit, if any,
realized by the Fund upon exercise of the option, and, unless the
price of the underlying security rises sufficiently, the option
may expire worthless to the Fund.
C-3
<PAGE>
APPENDIX D: FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS
AND OPTIONS ON 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 or stock indices
including any index of U.S. Government Securities, Foreign
Government Securities, corporate debt securities or common
stocks. U.S. futures contracts have been designed by exchanges
which have been designated "contracts markets" by the Commodity
Futures Trading Commission ("CFTC"), and must be executed through
a futures commission merchant, or brokerage firm, which is a
member of the relevant contract market. Futures contracts trade
on a number of exchange markets, and, through their clearing
corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange.
At the same time a futures contract is purchased or
sold, 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 price or
interest rate from that specified in the contract. In some (but
not many) cases, securities called for by a futures contract may
not have been issued when the contract was written.
Although futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the
contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical futures contract calling for
delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation
to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled
through a clearinghouse associated with the exchange on which the
contracts are traded, the Fund will incur brokerage fees when it
purchases or sells futures contracts.
D-1
<PAGE>
Interest Rate Futures
The purpose of the acquisition or sale of a futures
contract, in the case of a portfolio, such as the portfolio of
the Fund, which holds or intends to acquire fixed-income
securities, is to attempt to protect the Fund from fluctuations
in interest or foreign exchange rates without actually buying or
selling fixed-income securities or foreign currency. For
example, if interest rates were expected to increase, the Fund
might enter into futures contracts for the sale of debt
securities. Such a sale would have much the same effect as
selling an equivalent value of the debt securities owned by the
Fund. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the
futures contracts to the Fund would increase at approximately the
same rate, thereby keeping the net asset value of the Fund from
declining as much as it otherwise would have. The Fund could
accomplish similar results by selling debt securities and
investing in bonds with short maturities when interest rates are
expected to increase. However, since the futures market is more
liquid than the cash market, the use of futures contracts as an
investment technique allows the Fund to maintain a defensive
position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may
decline, futures contracts may be purchased to attempt to hedge
against anticipated purchases of debt securities at higher
prices. Since the fluctuations in the value of futures contracts
should be similar to those of debt securities, the Fund could
take advantage of the anticipated rise in the value of debt
securities without actually buying them until the market had
stabilized. At that time, the futures contracts could be
liquidated and the Fund could then buy debt securities on the
cash market. To the extent the Fund enters into futures
contracts for this purpose, the assets in the segregated account
maintained 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 deposit and variation
margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts
through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the
D-2
<PAGE>
liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of
speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the
securities market. Therefore, increased participation by
speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct
forecast of general interest rate trends by the Adviser may still
not result in a successful transaction.
In addition, futures contracts entail risks. Although
the Fund believes that use of such contracts will benefit the
Fund, if the Adviser's investment judgment about the general
direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any
such contract. For example, if the Fund has hedged against the
possibility of an increase in interest rates which would
adversely affect the price of debt securities held in its
portfolio and interest rates decrease instead, the Fund will lose
part or all of the benefit of the increased value of its debt
securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to
sell debt securities from its portfolio to meet daily variation
margin requirements. Such sales of bonds may be, but will not
necessarily be, at increased prices which reflect the rising
market. The Fund may have to sell securities at a time when it
may be disadvantageous to do so.
Stock Index Futures
The Fund may purchase and sell stock index futures as a
hedge against movements in the equity markets. There are several
risks in connection with the use of stock index futures by the
Fund as a hedging device. One risk arises because of the
imperfect correlation between movements in the price of the stock
index futures and movements in the price of the securities which
are the subject of the hedge. The price of the stock index
futures may move more than or less than the price of the
securities being hedged. If the price of the stock index futures
moves less than the price of the securities which are the subject
of the hedge, the hedge will not be fully effective but, if the
price of the securities being hedged has moved in an unfavorable
direction, the Fund would be in a better position than if it had
not hedged at all. If the price of the securities being hedged
has moved in a favorable direction, this advantage will be
partially offset by the loss on the index future. If the price
of the future moves more than the price of the stock, the Fund
D-3
<PAGE>
will experience either a loss or gain on the future which will
not be completely offset by movements in the price of the
securities which are subject to the hedge. To compensate for the
imperfect correlation of movements in the price of securities
being hedged and movements in the price of the stock index
futures, the Fund may buy or sell stock index futures contracts
in a greater dollar amount than the dollar amount of securities
being hedged if the volatility over a particular time period of
the prices of such securities has been greater than the
volatility over such time period of the index, or if otherwise
deemed to be appropriate by the Adviser. Conversely, the Fund
may buy or sell fewer stock index futures contracts if the
volatility over a particular time period of the prices of the
securities being hedged is less than the volatility over such
time period of the stock index, or it is otherwise deemed to be
appropriate by the Adviser. It is also possible that, where the
Fund has sold futures to hedge its portfolio against a decline in
the market, the market may advance and the value of securities
held in the Fund may decline. If this occurred, the Fund would
lose money on the futures and also experience a decline in value
in its portfolio securities. However, over time the value of a
diversified portfolio should tend to move in the same direction
as the market indices upon which the futures are based, although
there may be deviations arising from differences between the
composition of the Fund and the stocks comprising the index.
Where futures are purchased to hedge against a possible
increase in the price of stock before the Fund is able to invest
its cash (or cash equivalents) in stocks (or options) in an
orderly fashion, it is possible that the market may decline
instead. If the Fund then concludes not to invest in stock or
options at that time because of concern as to possible further
market decline or for other reasons, the Fund will realize a loss
on the futures contract that is not offset by a reduction in the
price of securities purchased.
In addition, the possibility that there may be an
imperfect correlation, or no correlation at all, between
movements in the stock index futures and the portion of the
portfolio being hedged, the price of stock index futures may not
correlate perfectly with movement in the stock index due to
certain market distortions. Rather than meeting additional
margin deposit requirements, investors may close futures
contracts through offsetting transactions which could distort the
normal relationship between the index and futures markets.
Secondly, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price
distortion in the futures market, and because of the imperfect
D-4
<PAGE>
correlation between the movements in the stock index and
movements in the price of stock index futures, a correct forecast
of general market trends by the investment adviser may still not
result in a successful hedging transaction over a short time
frame.
Positions in stock index futures may be closed out only
on an exchange or board of trade which provides a secondary
market for such futures. Although the Fund intends to purchase
or sell futures only on exchanges or boards of trade where there
appear to be active secondary markets, there is no assurance that
a liquid secondary market on any exchange or board of trade will
exist for any particular contract or at any particular time. In
such event, it may not be possible to close a futures investment
position, and in the event of adverse price movements, the Fund
would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have
been used to hedge portfolio securities, such securities will not
be sold until the futures contract can be terminated. In such
circumstances, an increase in the price of the securities, if
any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price
movements in the futures contract and thus provide an offset on a
futures contract.
The Adviser intends to purchase and sell futures
contracts on the stock index for which it can obtain the best
price with due consideration to liquidity.
Options on Futures Contracts
The Fund intends to purchase and write options on
futures contracts for hedging purposes. The Fund is not a
commodity pool and all transactions in futures contracts and
options on futures contracts engaged in by the Fund must
constitute bona fide hedging or other permissible transactions in
accordance with the rules and regulations promulgated by the
CFTC. The purchase of a call option on a futures contract is
similar in some respects to the purchase of a call option on an
individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which
it is based or the price of the underlying debt securities, it
may or may not be less risky than ownership of the futures
contract or underlying debt securities. As with the purchase of
futures contracts, when the Fund is not fully invested it may
[5~purchase a call option on a futures contract to hedge against
adverse market conditions.
The writing of a call option on a futures contract
constitutes a partial hedge against declining prices of the
D-5
<PAGE>
security or foreign currency which is deliverable upon exercise
of the futures contract or securities comprising an index. If
the futures price at expiration of the option is below the
exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline
that may have occurred in the Fund's portfolio holdings. The
writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the security or
foreign currency which is deliverable upon exercise of the
futures contract or securities comprising an index. If the
futures price at expiration of the option is higher than the
exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any
increase in the price of securities which the Fund intends to
purchase. If a put or call option the Fund has written is
exercised, the Fund will incur a loss which will be reduced by
the amount of the premium it receives. Depending on the degree
of correlation between changes in the value of its portfolio
securities and changes in the value of its futures positions, the
Fund's losses from existing options on futures may to some extent
be reduced or increased by changes in the value of portfolio
securities.
The purchase of a put option on a futures contract is
similar in some respects to the purchase of protective put
options on portfolio securities. For example, the Fund may
purchase a put option on a futures contract to hedge the Fund's
portfolio against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an
option on a futures contract is the premium paid for the option
plus related transaction costs. In addition to the correlation
risks discussed above, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract
will not be fully reflected in the value of the option purchased.
Options on Foreign Currencies
The Fund may purchase and write options on foreign
currencies for hedging purposes in a manner similar to that in
which futures contracts on foreign currencies, or forward
contracts, will be utilized. For example, a decline in the
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
D-6
<PAGE>
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. As in the case of other
types of options, however, the benefit to the Fund deriving from
purchases of foreign currency options will be reduced by the
amount of the premium and related transaction costs. In
addition, where currency exchange rate do not move in the
direction or to the extent anticipated, the Fund could sustain
losses on transactions in foreign currency options which would
require it to forego a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write options on foreign currencies for the
same types of hedging purposes. For example, where the Fund
anticipates a decline in the dollar value of foreign currency
denominated securities due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs,
the option will most likely not be exercised, and the diminution
in value of portfolio securities will be offset by the amount of
the premium received.
Similarly, instead of purchasing a call option to hedge
against an anticipated increase in the dollar cost of securities
to be acquired, the Fund could write a put option on the relevant
currency which, if rates move in the manner projected, will
expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. As in the case of other
types of options, however, the writing of a foreign currency
option will constitute only a partial hedge up to the amount of
the premium, and only if rates move in the expected direction.
If this does not occur, the option may be exercised and the Fund
would be required to purchase or sell the underlying currency at
a loss which may not be offset by the amount of the premium.
Through the writing of options on foreign currencies, the Fund
also may be required to forego all or a portion of the benefits
which might otherwise have been obtained from favorable movements
in exchange rates.
The Fund intends to write covered call options on
foreign currencies. A call option written on a foreign currency
by the Fund is "covered" if the Fund owns the underlying foreign
currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a
D-7
<PAGE>
segregated account by its Custodian) upon conversation or
exchange of other foreign currency held in its portfolio. A call
option is also covered if the Fund has a call on the same foreign
currency and in the same principal amount as the call written
where the exercise price of the call held (a) is equal to or less
than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is
maintained by the Fund in cash, U.S. Government Securities and
other 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 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 U.S. Government
Securities or other 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,
Forward Contracts and Options on Foreign Currencies
Unlike transactions entered into by the Fund in futures
contracts, options on foreign currencies and forward contracts
are not traded on contract markets regulated by the CFTC or (with
the exception of certain foreign currency options) by the SEC.
To the contrary, such instruments are traded through financial
institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges,
such as the Philadelphia Stock Exchange and the Chicago Board
Options Exchange, subject to SEC regulation. Similarly, options
on securities may be traded over-the-counter. In an over-the-
counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there
are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose
more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option
writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such
positions.
Options on foreign currencies traded on national
securities exchanges are within the jurisdiction of the SEC, as
D-8
<PAGE>
are other securities traded on such exchanges. As a result, many
of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on
a national securities exchange are cleared and guaranteed by the
Options Clearing Corporation ("OCC"), thereby reducing the risk
of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more
readily available than in the over-the-counter market,
potentially permitting the Fund to liquidate open positions at a
profit prior to exercise or expiration, or to limit losses in the
event of adverse market movements.
The purchase and sale of exchange-traded foreign
currency options, however, is subject to the risks of the
availability of a liquid secondary market described above, as
well as the risks regarding adverse market movements, margining
of options written,the nature of the foreign currency market,
possible intervention by governmental authorities and the effects
of other political and economic events. In addition, exchange-
traded options on foreign currencies involve certain risks not
presented by the over-the-counter market. For example, exercise
and settlement of such options must be made exclusively through
the OCC, which has established banking relationships in
applicable foreign countries for this purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency
option 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.
In addition, futures contracts, options on futures
contracts, forward contracts and options on foreign currencies
may be traded on foreign exchanges. Such transactions are
subject to the risk of governmental actions affecting trading in
or the prices of foreign currencies or securities. The value of
such positions also could be adversely affected by (i) other
complex foreign political and economic factors, (ii) lesser
availability than in the United States of data on which to make
trading decisions, (iii) delays in the 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.
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<PAGE>
APPENDIX E: CERTAIN EMPLOYEE BENEFIT PLANS
Employee benefit plans described below which are
intended to be tax-qualified under section 401(a) of the Internal
Revenue Code of 1986, as amended ("Tax Qualified Plans"), for
which Merrill Lynch, Pierce, Fenner & Smith Incorporated or an
affiliate thereof ("Merrill Lynch") is recordkeeper (or with
respect to which recordkeeping services are provided pursuant to
certain arrangements as described in paragraph (ii) below)
("Merrill Lynch Plans") are subject to specific requirements as
to the Fund shares which they may purchase. Notwithstanding
anything to the contrary contained elsewhere in this Statement of
Additional Information, the following Merrill Lynch Plans are not
eligible to purchase Class A shares and are eligible to purchase
Class B shares of the Fund at net asset value without being
subject to a contingent deferred sales charge:
(i) Plans for which Merrill Lynch is the recordkeeper on a
daily valuation basis, if when the plan is established
as an active plan on Merrill Lynch's recordkeeping
system:
(a) the plan is one which is not already
investing in shares of mutual funds or
interests in other commingled investment
vehicles of which Merrill Lynch Asset
Management, L.P. is investment adviser or
manager ("MLAM Funds"), and either (A) the
aggregate assets of the plan are less than
$3 million or (B) the total of the sum of
(x) the employees eligible to participate in
the plan and (y) those persons, not
including any such employees, for whom a
plan account having a balance therein is
maintained, is less than 500, each of (A)
and (B) to be determined by Merrill Lynch in
the normal course prior to the date the plan
is established as an active plan on Merrill
Lynch's recordkeeping system (an "Active
Plan"); or
(b) the plan is one which is already investing
in shares of or interests in MLAM Funds and
the assets of the plan have an aggregate
value of less than $5 million, as determined
by Merrill Lynch as of the date the plan
becomes an Active Plan.
For purposes of applying (a) and (b), there
are to be aggregated all assets of any Tax-
Qualified Plan maintained by the sponsor of
E-1
<PAGE>
the Merrill Lynch Plan (or any of the
sponsor's affiliates) (determined to be such
by Merrill Lynch) which are being invested
in shares of or interests in MLAM Funds,
Alliance Mutual Funds or other mutual funds
made available pursuant to an agreement
between Merrill Lynch and the principal
underwriter thereof (or one of its
affiliates) and which are being held in a
Merrill Lynch account.
(ii) Plans for which the recordkeeper is not Merrill Lynch,
but which are recordkept on a daily valuation basis by
a recordkeeper with which Merrill Lynch has a
subcontracting or other alliance arrangement for the
performance of recordkeeping services, if the plan is
determined by Merrill Lynch to be so eligible and the
assets of the plan are less than $3 million.
Class B shares of the Fund held by any of the above-
described Merrill Lynch Plans are to be replaced at Merrill
Lynch's direction through conversion, exchange or otherwise by
Class A shares of the Fund on the earlier of the date that the
value of the plan's aggregate assets first equals or exceeds $5
million or the date on which any Class B share of the Fund held
by the plan would convert to a Class A share of the Fund as
described under "Purchase of Shares" and "Redemption and
Repurchase of Shares."
Any Tax Qualified Plan, including any Merrill Lynch
Plan, which does not purchase Class B shares of the Fund without
being subject to a contingent deferred sales charge under the
above criteria is eligible to purchase Class B shares subject to
a contingent deferred sales charge as well as other classes of
shares of the Fund as set forth above under "Purchase of Shares"
and "Redemption and Repurchase of Shares."
E-2
00250156.AX4
