AFD EXCHANGE RESERVES
ANNUAL REPORT
SEPTEMBER 30, 1996
LETTER TO SHAREHOLDERS AFD EXCHANGE RESERVES
_______________________________________________________________________________
October 24, 1996
Dear Shareholder:
We are pleased to provide an overview of market and Fund activity during AFD
Exchange Reserves' most recent fiscal reporting period. AFD Exchange Reserves
serves as the money market fund exchange vehicle for the Alliance mutual funds.
The Fund's investment objective is to provide maximum current income consistent
with safety of principal and liquidity.*
The Fund's assets at the end of September totaled approximately $120.4 million.
The Fund remains invested in high quality money market securities, which
include marketable obligations issued or guaranteed by the U.S. government and
its agencies. The average weighted maturity of the portfolio was 31 days on
September 30, slightly shorter than the average weighted maturity at the time
of our last report.
ECONOMIC COMMENTARY
During the reporting period, the Federal Reserve left short-term interest rates
unchanged, maintaining the Federal Funds rate at 5.25%. While the overall U.S.
economy appears to be quite healthy, certain economic indicators are signaling
a slowdown. We expect modest growth of 2.5% in the third quarter and further
slowing in the final months of 1996. At this time, we expect no Federal Reserve
action on interest rates in the near term.
We appreciate your continued interest and investment in AFD Exchange Reserves.
Sincerely,
John D. Carifa
Chairman and President
1
STATEMENT OF NET ASSETS
September 30, 1996 AFD Exchange Reserves
_______________________________________________________________________________
Principal
Amount
(000) Security Yield Value
- -------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS-98.4%
FEDERAL NATIONAL MORTGAGE ASSOCIATION-37.7%
8,500 10/16/96 5.33% $ 8,481,123
5,000 11/01/96 5.35 4,976,965
22,000 10/15/96 5.38 21,953,971
10,000 5.47%, 4/04/97 FRN 5.57 9,997,628
------------
45,409,687
FEDERAL HOME LOAN MORTGAGE CORPORATION-22.4%
10,000 10/10/96 5.22 9,986,950
4,000 10/11/96 5.24 3,994,178
11,000 10/10/96 5.29 10,985,452
2,000 10/01/96 5.70 2,000,000
------------
26,966,580
FEDERAL HOME LOAN BANK-18.6%
22,500 11/12/96 5.33 22,360,088
TENNESSEE VALLEY AUTHORITY-9.5%
11,500 11/07/96 5.20 11,438,539
STUDENT LOAN MARKETING ASSOCIATION-4.5%
5,500 12/18/96 5.34 5,436,365
U.S. TREASURY NOTE-4.2%
5,000 6.88%, 3/31/97 5.52 5,032,429
FEDERAL FARM CREDIT BANK-1.5%
1,800 11/06/96 5.31 1,790,442
Total U.S. Government & Agency Obligations
(amortized cost $118,434,130) 118,434,130
TOTAL INVESTMENTS-98.4%
(amortized cost $118,434,130) 118,434,130
Other assets less liabilities-1.6% 1,985,309
NET ASSETS-100%
(offering and redemption price of $1.00
per share; 42,195,404 Class A shares;
65,009,678 Class B shares and 13,216,543
Class C shares outstanding) $120,419,439
Glossary:
FRN - Floating Rate Note
See notes to financial statements
2
STATEMENT OF OPERATIONS
Year Ended September 30, 1996 AFD Exchange Reserves
_______________________________________________________________________________
INVESTMENT INCOME
Interest $6,495,746
EXPENSES
Advisory fee $297,876
Distribution fee-Class A 199,591
Distribution fee-Class B 660,870
Distribution fee-Class C 98,588
Transfer agency 173,439
Registration fees 120,032
Custodian 92,963
Administrative 92,765
Audit and legal 62,722
Amortization of organizational expense 44,310
Printing 28,075
Trustees' fees 24,945
Miscellaneous 8,999
Total expenses 1,905,175
Net investment income 4,590,571
REALIZED GAIN ON INVESTMENTS
Net realized gain on investments 105
NET INCREASE IN NET ASSETS FROM OPERATIONS $4,590,676
STATEMENTS OF CHANGES IN NET ASSETS
_______________________________________________________________________________
Year Ended Year Ended
Sep. 30,1996 Sep. 30,1995
------------- -------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income $ 4,590,571 $ 5,170,964
Net realized gain (loss) on investments 105 (1,256)
Net increase in net assets from operations 4,590,676 5,169,708
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income
Class A (1,654,846) (1,730,554)
Class B (2,424,825) (2,869,673)
Class C (510,900) (570,737)
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Net increase 3,761,761 62,057,743
Total increase 3,761,866 62,056,487
NET ASSETS
Beginning of year 116,657,573 54,601,086
End of year $120,419,439 $116,657,573
See notes to financial statements.
3
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AFD EXCHANGE RESERVES
_______________________________________________________________________________
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
AFD Exchange Reserves (the "Fund") is registered under the Investment Company
Act of 1940 as a diversified open-end investment company. The Fund offers Class
A, Class B, Class C and Advisor Class shares. All four classes of shares have
identical voting, dividend, liquidation and other rights, except that each
class bears its own distribution and transfer agency expenses and has exclusive
voting rights with respect to its distribution plan.
Class A shares are sold for cash without any initial sales charge at the time
of purchase. On cash purchases of $1,000,000 or more, however, a contingent
deferred sales charge ("CDSC") equal to 1% of the lesser of net asset value at
the time of redemption or original cost if redeemed within one year will be
charged. Class A shares may be exchanged for Class A shares of other Alliance
Mutual Funds, subject, in the case of Class A shares of the Fund that were
purchased for cash, to any applicable initial sales charge at the time of
exchange. Class A shares of the Fund also are offered in exchange for Class A
shares of other Alliance Mutual Funds without any sales charge at the time of
purchase, but on Class A shares that were received in exchange for Alliance
Mutual Fund Class A shares that were not subject to an initial sales charge
when originally purchased for cash because the purchase was of $1,000,000 or
more, a 1% CDSC may be assessed if shares of the Fund are redeemed within one
year of the Alliance Mutual Fund Class A shares originally purchased for cash.
Class B shares are sold for cash without an initial sales charge. However, a
CDSC is charged if shares are redeemed within four years after purchase. The
CDSC charge declines from 4% to zero depending on the period of time the shares
are held. Class B shares purchased for cash will automatically convert to Class
A shares after eight years. Class B shares may be exchanged for Class B shares
of other Alliance Mutual Funds. Class B shares also are offered in exchange for
Class B shares of other Alliance Mutual Funds without any initial sales charge.
However, a CDSC may be charged if shares are redeemed within a certain number
of years of the original purchase of Alliance Mutual Fund Class B shares. When
redemption occurs, the applicable CDSC schedule is that which applied to the
Alliance Mutual Fund Class B shares originally purchased for cash at the time
of their purchase.
Class C shares are sold for cash or in exchange for Class C shares of another
Alliance Mutual Fund without any initial sales charge or CDSC. Class C shares
do not convert to any other class of shares of the Fund. Class C shares may be
exchanged for Class C shares of other Alliance Mutual Funds.
Effective October 1, 1996, Advisor Class shares are sold for cash or in
exchange for Advisor Class shares of another Alliance Mutual Fund without any
initial or contingent CDSC and are not subject to ongoing distribution
expenses. Advisor Class shares are offered solely to (i) investors
participating in fee-based programs meeting certain standards established by
Alliance Fund Distributors, Inc., the Fund's principal underwriter, (ii)
participants in self-directed defined contribution employee benefit plans
(e.g., 401(k) plans) that meet certain minimum standards and (iii) investment
advisory clients of, and certain other persons associated with, Alliance
Capital Management L.P. and its affiliates or the Fund.
The following is a summary of significant accounting policies followed by the
Fund.
1. Valuation of Securities
Securities in which the Fund invests are traded primarily in the
over-the-counter market and are valued at amortized cost, under which method a
portfolio instrument is valued at cost and any premium or discount is amortized
on a constant basis to maturity.
2. Organization Expenses
Organization expenses of approximately $198,644 have been deferred and are
being amortized on a straight-line basis through March, 1999.
3. Taxes
It is the Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
investment company taxable income and net realized gains, if applicable, to its
shareholders. Therefore, no provisions for federal income or excise taxes are
required.
4. Dividends
The Fund declares dividends daily and automatically reinvests such dividends in
additional shares at net asset value. Net realized capital gains on
investments, if any, are expected to be distributed near calendar year end.
5. Investment Income and Security Transactions
Interest income is accrued daily. Security transactions are recorded on the
date securities are purchased or sold. Security gains and losses are determined
on the identified cost basis. It is the Fund's policy to take
possession of securities as collateral under repurchase agreements and to
determine on a daily basis that the value of such securities are sufficient to
cover the value of the repurchase agreements.
4
AFD EXCHANGE RESERVES
_______________________________________________________________________________
NOTE B: ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund pays its Adviser, Alliance Capital Management L.P. an advisory fee at
the annual rate of .25 of 1% on the first $1.25 billion of average daily net
assets; .24 of 1% on the next $.25 billion; .23 of 1% on the next $.25 billion;
.22 of 1% on the next $.25 billion; .21 of 1% on the next $1 billion; and .20
of 1% in excess of $3 billion. In addition to the advisory fee, the Fund also
reimburses the Adviser for certain legal and accounting services provided to
the Fund by the Adviser. For the year ended September 30, 1996, the Fund
incurred costs of $92,765.
The Fund compensates Alliance Fund Services, Inc. (a wholly-owned subsidiary of
the Adviser) for providing personnel and facilities to perform transfer agency
services. Such compensation amounted to $129,936 for the year ended September
30, 1996.
NOTE C: DISTRIBUTION SERVICES AGREEMENT
The Fund has adopted a Distribution Services Agreement (the "Agreement")
pursuant to Rule 12B-1 under the Investment Company Act of 1940 for Class A,
Class B and Class C. Under the Agreement, the Fund pays a distribution fee to
the Distributor at an annual rate of up to .50 of 1% of the Fund's average
daily net assets attributable to Class A shares, 1.00% of the average daily net
assets attributable to Class B shares and .75 of 1% of the average daily net
assets attributable to Class C shares. Such fee is accrued daily and paid
monthly. The Agreement provides that the Distributor will use such payments in
their entirety for distribution assistance and promotional activities. The
Agreement also provides that the Adviser may use its own resources to finance
the distribution of the Fund's shares.
NOTE D: INVESTMENT TRANSACTIONS
At September 30, 1996, the cost of securities for federal income tax purposes
was the same as the cost for financial reporting purposes. At September 30,
1996, the Portfolio had a capital loss carryforward of $2,186, of which $930
expires in 2002 and $1,256 expires in 2003.
NOTE E: TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
An unlimited number of shares ($.001 par value) are authorized. At September
30, 1996, capital paid-in aggregated $42,195,404 for Class A, $65,009,678 for
Class B and $13,216,543 for Class C. Transactions, all at $1.00 per share, were
as follows:
CLASS A
------------------------------
YEAR ENDED YEAR ENDED
SEP. 30, 1996 SEP. 30, 1995
------------- -------------
Shares sold 382,975,223 254,814,516
Shares issued on reinvestments of dividends 1,654,846 1,730,554
Shares converted from Class B 1,090,820 0
Shares redeemed (384,645,564) (233,640,310)
Net increase 1,075,325 22,904,760
CLASS B
------------------------------
YEAR ENDED YEAR ENDED
SEP. 30, 1996 SEP. 30, 1995
------------- -------------
Shares sold 166,636,823 235,826,904
Shares issued on reinvestments of dividends 2,424,825 2,869,673
Shares converted to Class A (1,090,820) 0
Shares redeemed (168,231,937) (204,665,847)
Net increase (decrease) (261,109) 34,030,730
CLASS C
------------------------------
YEAR ENDED YEAR ENDED
SEP. 30, 1996 SEP. 30, 1995
------------- -------------
Shares sold 90,072,507 72,011,656
Shares issued on reinvestments of dividends 510,900 570,737
Shares redeemed (87,635,862) (67,460,140)
Net increase 2,947,545 5,122,253
5
NOTES TO FINANCIAL STATEMENTS (CONTINUED) AFD EXCHANGE RESERVES
_______________________________________________________________________________
NOTE F: FINANCIAL HIGHLIGHTS
Selected data for a share outstanding throughout each period.
CLASS A
--------------------------------------
YEAR ENDED SEPTEMBER 30 MARCH 25,
------------------------ 1994(a) TO
1996 1995 SEP. 30,1994
----------- ----------- ------------
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .0416 .0453 .0126
LESS: DISTRIBUTIONS
Dividends from net investment income (.0416) (.0453) (.0126)
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
TOTAL RETURN
Total investment return based on
net asset value (b) 4.24% 4.64% 2.45%(c)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in millions) $41 $41 $18
Ratio of average net assets to:
Expenses, net of waivers 1.29% 1.21% 1.82%(c)
Expenses, before waivers 1.29% 1.29% 1.82%(c)
Net investment income 4.15% 4.63%(d) 2.62%(c)
CLASS B
--------------------------------------
YEAR ENDED SEPTEMBER 30 MARCH 25,
------------------------ 1994(a) TO
1996 1995 SEP. 30,1994
----------- ----------- ------------
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .0366 .0404 .0101
LESS: DISTRIBUTIONS
Dividends from net investment income (.0366) (.0404) (.0101)
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
TOTAL RETURN
Total investment return based on
net asset value (b) 3.72% 4.12% 1.95%(c)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in millions) $65 $65 $31
Ratio of average net assets to:
Expenses, net of waivers 1.79% 1.70% 2.35%(c)
Expenses, before waivers 1.79% 1.78% 2.35%(c)
Net investment income 3.67% 4.17%(d) 1.91%(c)
(a) Commencement of operations.
(b) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period. Contingent deferred sales charge is
not reflected in the calculation of total investment return.
(c) Annualized.
(d) Net of expenses waived by the Adviser.
6
AFD EXCHANGE RESERVES
_______________________________________________________________________________
CLASS C
--------------------------------------
YEAR ENDED SEPTEMBER 30 MARCH 25,
------------------------ 1994(a) TO
1996 1995 SEP. 30,1994
----------- ----------- ------------
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .0390 .0430 .0112
LESS: DISTRIBUTIONS
Dividends from net investment income (.0390) (.0430) (.0112)
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
TOTAL RETURN
Total investment return based on
net asset value (b) 3.98% 4.39% 2.18%(c)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in millions) $13 $10 $5
Ratio of average net assets to:
Expenses, net of waivers 1.55% 1.45% 2.08%(c)
Expenses, before waivers 1.55% 1.52% 2.08%(c)
Net investment income 3.89% 4.41%(d) 2.14%(c)
(a) Commencement of operations.
(b) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period. Contingent deferred sales charge is
not reflected in the calculation of total investment return.
(c) Annualized.
(d) Net of expenses waived by the Adviser.
7
INDEPENDENT AUDITOR'S REPORT AFD EXCHANGE RESERVES
_______________________________________________________________________________
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS AFD EXCHANGE RESERVES
We have audited the accompanying statements of net assets of AFD Exchange
Reserves as of September 30, 1996 and the related statements of operations,
changes in net assets, and financial highlights for the periods indicated in
the accompanying financial statements. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1996 by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of AFD
Exchange Reserves as of September 30, 1996, and the results of its operations,
changes in its net assets, and financial highlights for the periods indicated,
in conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
New York, New York
October 21, 1996
8
AFD EXCHANGE RESERVES
_______________________________________________________________________________
AFD EXCHANGE RESERVES
1345 Avenue of the Americas
New York, NY 10105
Toll-free 1(800) 221-5672
TRUSTEES
JOHN D. CARIFA, CHAIRMAN AND PRESIDENT
RUTH BLOCK (1)
DAVID H. DIEVLER (1)
JOHN H. DOBKIN (1)
WILLIAM H. FOULK, JR. (1)
JAMES M. HESTER (1)
CLIFFORD L. MICHEL (1)
ROBERT C. WHITE (1)
DONALD J. ROBINSON (1)
OFFICERS
KATHLEEN A. CORBET, SENIOR VICE PRESIDENT
WAYNE D. LYSKI, SENIOR VICE PRESIDENT
JOHN F. CHIODI, JR., VICE PRESIDENT
PAMELA F. RICHARDSON, VICE PRESIDENT
EDMUND P. BERGAN, JR., SECRETARY
MARK D. GERSTEN, TREASURER & CHIEF FINANCIAL OFFICER
JOSEPH J. MANTINEO, CONTROLLER
CUSTODIAN
STATE STREET BANK AND TRUST COMPANY
P.O. Box 1912
Boston, MA 02105
LEGAL COUNSEL
SEWARD & KISSEL
One Battery Park Plaza
New York, NY 10004
AUDITORS
MCGLADREY & PULLEN, LLP
555 Fifth Avenue
New York, NY 10017
TRANSFER AGENT
ALLIANCE FUND SERVICES, INC.
P.O. Box 1520
Secaucus, NJ 07096-1520
DISTRIBUTOR
ALLIANCE FUND DISTRIBUTORS, INC.
1345 Avenue of the Americas
New York, NY 10105
(1) Member of the audit committee.
Distribution of this report other than to shareholders must be preceded
or accompanied by the Fund's current prospectus, which contains further
information about the Fund.
R These registered service marks used under license from the owner,
Alliance Capital Management L.P.
9
