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This is filed pursuant to Rule 497(c).
File Nos. 33-84270 and 811-08776
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[LOGO]
ALLIANCE ALL-ASIA INVESTMENT 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, 1999
(as amended November 1, 1999)
________________________________________________________________
This Statement of Additional Information is not a
prospectus but supplements and should be read in conjunction with
the current Prospectus for Alliance All-Asia Investment Fund,
Inc. (the "Fund") that offers the Class A, Class B and Class C
shares of the Fund and the current Prospectus 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 such 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...............................
Management of the Fund................................
Expenses of the Fund..................................
Purchase of Shares....................................
Redemption and Repurchase of Shares...................
Shareholder Services..................................
Net Asset Value.......................................
Dividends, Distributions and Taxes....................
Portfolio Transactions................................
General Information...................................
Financial Statements and Report of Independent
Auditors..............................................
Appendix A: Options.................................. A-1
Appendix B: Futures Contracts, Options on Futures ...
Contracts and Options on Foreign .....................
Currencies............................................ B-1
Appendix C: Bond Ratings............................. C-1
Appendix D: Additional Information About Japan....... D-1
Appendix E: Certain Employee Benefit Plans........... E-1
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____________________
(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 All-Asia Investment Fund, Inc. (the "Fund") is
a diversified, open-end investment company. Except as otherwise
indicated, the investment policies of the Fund are not
"fundamental policies" and may, therefore, be changed by the
Board of Directors without a shareholder vote. However, the Fund
will not change its investment policies without contemporaneous
written notice to its shareholders. The Fund's investment
objective is fundamental and may not be changed without
shareholder approval. There can be, of course, no assurance that
the Fund will achieve its investment objective.
How the Fund Pursues its Objective
In seeking to achieve its investment objective, the Fund
will invest at least 65% of its total assets in equity securities
issued by Asian companies. The Fund may invest up to 35% of its
total assets in debt securities issued or guaranteed by Asian
companies or by Asian governments, their agencies or
instrumentalities. The Fund may also invest in equity or debt
securities issued by non-Asian issuers provided that the Fund
will invest at least 80% of its total assets in equity securities
issued by Asian companies and Asian debt securities referred to
above. The Fund expects to invest, from time to time, a
significant portion which may be in excess of 50%, of its assets
in equity securities of Japanese companies. For a description of
Japan, see Appendix D. Equity securities are common and
preferred stocks, securities convertible into common and
preferred stocks and equity-linked debt securities, but do not
include rights, warrants or options to subscribe for or purchase
common and preferred stocks.
The Fund defines an Asian company to be an entity that
(i) is organized under the laws of an Asian country and conducts
business in an Asian country, (ii) derives 50% or more of its
total revenues from business in Asian countries or (iii) issues
equity or debt securities that are traded principally on a stock
exchange in an Asian country.
For purposes of this Statement of Additional
Information, Asian countries include Australia, the Democratic
Socialist Republic of Sri Lanka ("Sri Lanka"), the Hong Kong
Special Administrative Region ("Hong Kong"), the Islamic Republic
of Pakistan ("Pakistan"), Japan, the Kingdom of Thailand
("Thailand"), Malaysia, Negara Brunei Darussalam ("Brunei"), New
Zealand, the People's Republic of China ("China"), the People's
Republic of Kampuchea ("Cambodia"), the Republic of China
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("Taiwan"), the Republic of India ("India"), the Republic of
Indonesia ("Indonesia"), the Republic of Korea ("South Korea"),
the Republic of the Philippines ("the Philippines"), the Republic
of Singapore ("Singapore"), the Socialist Republic of Vietnam
("Vietnam") and the Union of Myanmar ("Myanmar").
Investment in Asian Countries. In the past decade,
Asian countries generally have experienced a high level of real
economic growth due to political and economic changes, including
foreign investment and reduced government intervention in the
economy. Alliance Capital Management L.P., the Fund's investment
adviser (the "Adviser"), believes that certain conditions exist
in Asian countries which create the potential for continued rapid
economic growth. These conditions include favorable demographics
and competitive wage rates, increasing levels of foreign direct
investment, rising per capita incomes and consumer demand, a high
savings rate and numerous privatization programs. Asian countries
are also becoming more industrialized and are increasing their
intra-Asian exports while reducing their dependence on Western
export demand. The Adviser believes that these conditions are
important to the long-term economic growth of Asian countries.
As the economics of many Asian countries move through
the "emerging market" stage, thus increasing the supply of goods,
services and capital available to less developed Asian markets
and helping to spur economic growth in those markets, the
potential is created for many Asian companies to experience rapid
growth. In addition, many Asian companies, the securities of
which are listed on exchanges in more developed Asian countries,
will be participants in the rapid economic growth of the lesser
developed countries. These companies generally offer the
advantages of more experienced management and more developed
market regulation.
As their economies have grown, the securities markets in
Asian countries have also expanded. New exchanges have been
created and the number of listed companies, annual trading volume
and overall market capitalization have increased significantly.
Additionally, new markets continue to open to foreign
investments. For example, Korea and India have recently relaxed
investment restrictions and Vietnamese direct investments have
recently become available to U.S. investors. The Fund also
offers investors the opportunity to access relatively restricted
markets. The Adviser believes that investment opportunities in
Asian countries will continue to expand.
The Fund will invest in companies believed to possess
rapid growth potential. Thus, the Fund will invest in smaller,
emerging companies, but will also invest in larger, more
established companies in such growing economic sectors as capital
goods, telecommunications and consumer services.
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The Fund may maintain not more than 5% of its net assets
in lower-rated securities and lower-rated loans and other lower-
rated direct debt instruments rated below Baa by Moody's
Investors Service, Inc. ("Moody's") and BBB by Standard and
Poor's Ratings Services ("S&P"), or, if not rated, determined by
The Adviser to be of equivalent quality. The Fund will not
purchase a debt security that, at the time of purchase, is rated
below B by Moody's and S&P, or determined by the Adviser to be of
equivalent quality, but may retain a debt security the rating of
which drops below B. See "Certain Risk Considerations--
Securities Ratings" and Appendix C for a description of such
ratings.
Defensive Position. For temporary defensive purposes,
during periods in which conditions in securities markets or other
economic or political conditions warrant, the Fund may reduce its
position in equity securities and increase without limit its
position in short-term, liquid, high-grade debt securities, which
may include securities issued by the U.S. government, its
agencies and instrumentalities ("U.S. Government Securities"),
bank deposits, money market instruments, short-term (for this
purpose, securities with a remaining maturity of one year or
less) debt securities, including notes and bonds, and short-term
foreign currency denominated debt securities rated A or higher by
S&P or Moody's or, if not so rated, of equivalent investment
quality as determined by the Adviser. For this purpose, the Fund
will limit its investments in foreign currency denominated debt
securities to securities that are denominated in currencies in
which the Fund anticipates its subsequent investments will be
denominated.
Subject to its policy of investing at least 65% of its
total assets in equity securities of Asian companies, the Fund
may also at any time temporarily invest funds awaiting
reinvestment or held as reserves for dividends and other
distributions to shareholders in money market instruments
referred to above.
Additional Investment Policies and Practices
Except as otherwise noted, the Fund's investment
policies described below are not designated "fundamental
policies" within the meaning of the Investment Company Act of
1940, as amended (the "1940 Act") and, therefore, may be changed
by the Directors of the Fund without a shareholder vote. However,
the Fund will not change its investment policies without
contemporaneous written notice to shareholders.
Warrants. The Fund may invest up to 20% of its total
assets in rights or warrants which entitle the holder to buy
equity securities at a specific price for a specific period of
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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.
Convertible Securities. The Fund may invest up to 25%
of its total assets in convertible securities of issuers whose
common stocks are eligible for purchase by the Fund under the
investment policies described above. Convertible securities
include bonds, debentures, corporate notes and preferred stocks.
Convertible securities are such instruments 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 securities which provide a
stable stream of income with generally higher yields than those
of equity securities of the same or similar issuers. 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 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 in 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.
Depositary Receipts and Securities of Supranational
Entities. The Fund may invest in depositary receipts, securities
of supranational entities denominated in the currency of any
country, securities of multinational companies and "semi-
governmental securities". Depositary receipts may not
necessarily be denominated in the same currency as the underlying
securities into which they may be converted. In addition, the
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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 U.S. bank or
trust company that evidence ownership of underlying securities
issued by a foreign corporation. GDRs and other types of
depositary receipts are typically issued by foreign banks or
trust companies and evidence ownership of underlying securities
issued by either a foreign or a U.S. company. 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. The
investments of the Fund in depositary receipts are deemed to be
investments in the underlying securities.
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 World Bank
(International Bank for Reconstruction and Development) and the
European Investment Bank. "Semi-governmental securities," 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.
Equity-Linked Debt Securities. The Fund may, with the
objective of realizing capital appreciation, invest up to 25% of
its net assets in equity-linked debt securities. Equity-linked
debt securities are securities with respect to which the amount
of interest and/or principal that the issuer thereof is obligated
to pay is linked to the performance of a specified index of
equity securities. Such amount may be significantly greater or
less than payment obligations in respect of other types of debt
securities. Adverse changes in equity securities indices and
other adverse changes in the securities markets may reduce
payments made under, and/or the principal of, equity-linked debt
securities held by the Fund. Furthermore, as with any debt
securities, the values of equity-linked debt securities will
generally vary inversely with changes in interest rates. The
Fund's ability to dispose of equity-linked debt securities will
depend on the availability of liquid markets for such securities.
Investment in equity-linked debt securities may be considered to
be speculative. As with other securities, the Fund could lose
its entire investment in equity-linked debt securities.
Loans and other Direct Debt Instruments. The Fund may
invest up to 25% of its net assets in loans and other direct debt
instruments. Loans and other direct debt instruments are
interests in amounts owed by a corporate, governmental or other
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borrower to another party. They may represent amounts owed to
lenders or lending syndicates (loans and loan participations), to
suppliers of goods or services (trade claims or other
receivables), or to other creditors. Direct debt instruments
involve the risk of loss in case of default or insolvency of the
borrower and may offer less legal protection to the Fund in the
event of fraud or misrepresentation than debt securities. In
addition, loan participations involve a risk of insolvency of the
lending bank or other financial intermediary. Direct debt
instruments may also include standby financing commitments that
obligate the Fund to supply additional cash to the borrower on
demand. Loans and other direct debt instruments are generally
illiquid and may be transferred only through individually
negotiated private transactions.
Purchasers of loans and other forms of direct
indebtedness depend primarily upon the creditworthiness of the
borrower for payment of principal and interest. Direct debt
instruments may not be rated by any nationally recognized rating
service. If the Fund does not receive scheduled interest or
principal payments on such indebtedness, the Fund's share price
and yield could be adversely affected. Loans that are fully
secured offer the Fund more protection than unsecured loans in
the event of non-payment of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral
from a secured loan would satisfy the borrower's obligation, or
that the collateral can be liquidated. Indebtedness of borrowers
whose creditworthiness is poor may involve substantial risks, and
may be highly speculative. Borrowers that are in bankruptcy or
restructuring may never pay off their indebtedness, or may pay
only a small fraction of the amount owed. Direct indebtedness of
Asian countries will also involve a risk that the governmental
entities responsible for the repayment of the debt may be unable,
or unwilling, to pay interest and repay principal when due.
Investments in loans through direct assignment of a
financial institution's interests with respect to a loan may
involve additional risks to the Fund. For example, if a loan is
foreclosed, the Fund could become part owner of any collateral,
and would bear the costs and liabilities associated with owning
and disposing of the collateral. Direct debt instruments may also
involve a risk of insolvency of the lending bank or other
intermediary.
A loan is often administered by a bank or other
financial institution that acts as agent for all holders. The
agent administers the terms of the loan, as specified on the loan
agreement. Unless, under the terms of the loan or other
indebtedness, the Fund has direct recourse against the borrower,
it may have to rely on the agent to apply appropriate credit
remedies against a borrower. If assets held by the agent for the
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benefit of the Fund were determined to be subject to the claims
of the agent's general creditors, the Fund might incur certain
costs and delays in realizing payment on the loan or loan
participation and could suffer a loss of principal or interest.
Direct indebtedness purchased by the Fund may include
letters of credit, revolving credit facilities, or other standby
financing commitments obligating the Fund to pay additional cash
on demand. These commitments may have the effect of requiring
the Fund to increase its investment in a borrower at a time when
it would not otherwise have done so, even if the borrower's
condition makes it unlikely that the amount will ever be repaid.
The Fund will set aside appropriate liquid assets in a segregated
custodial account to cover its potential obligations under
standby financing commitments.
The Fund's investment in lower-rated loans and other
lower-rated direct debt instruments is subject to the Fund's
policy of maintaining not more than 5% of its net assets in
lower-rated securities.
Interest Rate Transactions. The Fund may enter into
interest rate swaps and may purchase or sell interest rate caps
and floors. The use of interest rate swaps is a highly
specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its
forecasts of market values, interest rates and other applicable
factors, the investment performance of the Fund would diminish
compared with what it would have been if these investment
techniques were not used. Moreover, even if the Adviser is
correct in its forecasts, there is a risk that the swap position
may correlate imperfectly with the price of the asset or
liability being hedged.
There is no limit on the amount of interest rate swap
transactions that may be entered into by the Fund. These
transactions do not involve the delivery of securities or other
underlying assets 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 in the Prospectus under "Description of the Fund--
Additional Investment Policies and Practices--Interest Rate
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Transactions."
Options. The Fund may 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 and over-the-counter, including
options on market indices. The Fund will only write "covered"
put and call options, unless such options are written for cross-
hedging purposes. 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 cash and
liquid high-grade debt securities 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. 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.
A call option is for cross-hedging purposes if the Fund
does not own the underlying security but seeks to provide a hedge
against a decline in value in another security which the Fund
owns or has the right to acquire. In such circumstances, the Fund
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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
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. 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 prior to the option expiration dates if a liquid
market is available. The Fund retains the premium received from
writing a put or call option whether or not the option is
exercised. For additional information on the use, risk and costs
of options, see Appendix A.
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
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effect such transactions only with investment dealers and other
financial institutions (such as commercial banks or savings and
loan institutions) deemed creditworthy by the Adviser, and the
Adviser has adopted procedures for monitoring the
creditworthiness of such entities. Options purchased or written
by the Fund in negotiated transactions are illiquid and it may
not be possible for the Fund to effect a closing transaction at a
time when the Adviser believes it would be advantageous to do so.
See "--Illiquid Securities."
Options on Market Indices. 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 exercises 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.
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, 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 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 portfolio securities or adversely
affect the prices of securities which the Fund intends to
purchase at a later date.
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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.
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 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 futures contracts.
For additional information on the use, risks and costs
of futures contracts and options on futures contracts, see
Appendix B.
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 options on
foreign currencies, see Appendix B.
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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 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 alternative,
enter into a forward contract to sell a different foreign
currency for a fixed U.S. Dollar amount where the Fund believes
that the U.S. Dollar value of the currency to be sold pursuant to
the forward contract will fall whenever there is a decline in the
U.S. Dollar value of the currency in which portfolio securities
of the Fund are denominated ("cross-hedge"). To the extent
required by applicable law, the Fund's Custodian will place
liquid assets in a segregated account of the Fund having a value
equal to the aggregate amount of the Fund's commitments under
forward contracts entered into with respect to position hedges
and cross-hedges. If the value of the assets placed in 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. Unanticipated
changes in currency prices may result in poorer overall
performance for the Fund than if it had not entered into such
contracts. In addition, the Fund may use such other methods of
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"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
continue. Thus, at any time poor correlation may exist 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.
For additional information on the use, risks and costs of forward
foreign currency exchange contracts, see Appendix B.
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 generally is expressed in yield terms, is fixed at
the time the commitment is made, but delivery and payment for the
securities take place at a later date. Normally, the settlement
date occurs within two months after the transaction, but delayed
settlements beyond two months may be negotiated. Securities
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<PAGE>
purchased or sold under a forward commitment are subject to
market fluctuation, and no interest or dividends accrue to the
purchaser prior to the settlement date. At the time the Fund
intends to enter into a forward commitment, it will record the
transaction and thereafter reflect the value of the security
purchased or, if a sale, the proceeds to be received, in
determining its net asset value. Any unrealized appreciation or
depreciation reflected in such valuation of a "when, as and if
issued" security would be canceled in the event that the required
conditions did not occur and the trade was canceled.
The use of forward commitments enables the Fund to
protect against anticipated changes in interest rates and prices.
For instance, in periods of rising interest rates and falling
bond prices, the Fund might sell securities in its portfolio on a
forward commitment basis to limit its exposure to falling prices.
In periods of falling interest rates and rising bond prices, the
Fund might sell a security in its portfolio and purchase the same
or a similar security on a when-issued or forward commitment
basis, thereby obtaining the benefit of currently higher cash
yields. However, if the Adviser were to forecast incorrectly the
direction of interest rate movements, the Fund might be required
to complete such when-issued or forward transactions at prices
inferior to 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
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
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<PAGE>
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
ultimately is issued, which is typically approximately 0.5% of
the aggregate purchase price of the security which the Fund has
committed to purchase. 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 the commitments will not exceed 50% of its
assets taken at the time of acquisition of such commitment. 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.
Currency Swaps. The Fund may enter into currency swaps
for hedging purposes. Currency swaps involve the exchange by the
Fund with another party of a series of payments in specified
currencies. Since currency swaps are individually negotiated,
the Fund expects to achieve an acceptable degree of correlation
between its portfolio investments and its currency swaps
positions. A currency swap may involve the delivery at the end
of the exchange period of a substantial amount of one designated
currency in exchange for the other designated currency. Therefore
the entire principal value of a currency swap is subject to the
risk that the other party to the swap will default on its
contractual delivery obligations. The net amount of the excess,
if any, of the Fund's obligations over its entitlements with
respect to each currency swap will be accrued on a daily basis
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<PAGE>
and an amount of liquid assets having an aggregate value at least
equal to the accrued excess will be maintained in a segregated
accounting by the Fund's custodian. The Fund will not enter into
any currency swap unless the credit quality of 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. If there is a default by the other party to
such a transaction, the Fund will have contractual remedies
pursuant to the agreements related to the transactions.
Repurchase Agreements. The Fund may enter into
repurchase 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 intends to enter 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. This results in a fixed rate of return
insulated from market fluctuations during such period. 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 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 Alliance 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
17
<PAGE>
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 (taken at market value) in illiquid
securities. For this purpose, illiquid securities include, among
others (a) direct placement or other securities which are subject
to legal or contractual restrictions on resale or for which there
is no readily available market (e.g., many individually
negotiated currency swaps and any assets used to cover currency
swaps, most privately negotiated investments in state enterprises
that have not yet conducted initial equity offerings, when
trading in the security is suspended or, in the case of unlisted
securities, when market makers do not exist or will not entertain
bids or offers), (b) over-the-counter options and all assets used
to cover over-the-counter options and (c) repurchase agreements
not terminable within seven days.
The Fund may not be able to readily sell illiquid
securities. Such securities are unlike securities which are
traded in the open market and which can be expected to be sold
immediately if the market is adequate. The sale price of
illiquid securities may be lower or higher than the Adviser's
most recent estimate of their fair value. Generally, less public
information is available with respect to the issuers of such
securities than with respect to companies whose securities are
traded on an exchange. Illiquid securities are more likely to be
issued by small businesses and therefore subject to greater
economic, business and market risks than the listed securities of
more well-established companies. Adverse conditions in the
public securities markets may at certain times preclude a public
offering of an issuer's securities. To the extent that the Fund
makes any privately negotiated investments in state enterprises,
such investments are likely to be in securities that are not
readily marketable. It is the intention of the Fund to make such
investments when the Adviser believes there is a reasonable
expectation that the Fund would be able to dispose of its
investment within three years. There is no law in a number of
the countries in which the Fund may invest similar to the U.S.
Securities Act of 1933, as amended (the "Securities Act")
requiring an issuer to register the public sale of securities
with a governmental agency or imposing legal restrictions on
resales of securities, either as to length of time the securities
may be held or manner of resale. However, there may be
contractual restrictions on resale of securities. In addition,
many countries do not have informational disclosure requirements
similar in scope to those required under the U.S. Securities
Exchange Act of 1934. The Adviser will monitor the illiquidity
of such securities under the supervision of the Board of
Directors.
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<PAGE>
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 as a result more
than 25% of the Fund's net assets (taken at market value) is held
as collateral for short sales at any one time. Pursuant to the
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.
Certain special federal income tax considerations may apply to
short sales which are entered into by the Fund. See "Dividends,
Distributions and Taxes--United States Federal Income Taxation of
the Fund--Tax Straddles."
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 price movements or currency
exchange rate movements correctly. Should 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 types of
securities and currencies are relatively new and still
developing, and there is no public market for forward contracts.
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
19
<PAGE>
in the option (i.e., dispose of the option) with the result that
(i) an option purchased by the Fund would have to be exercised in
order for the Fund to realize any profit and (ii) the Fund may
not be able to sell currencies or portfolio securities covering
an option written by the Fund until the option expires or it
delivers the underlying futures contract or currency upon
exercise. Therefore, no assurance can be given that the Fund
will be able to utilize these instruments effectively for the
purposes set forth above.
Additional Investment Policies
Loans of Portfolio Securities. The Fund may make
secured loans of its portfolio securities to entities with which
it can enter into repurchase agreements, provided that liquid
assets equal to at least 100% of the market value of the
securities loaned are deposited and maintained by the borrower
with the Fund. See "Additional Investment Policies and
Practices--Repurchase Agreements" above. The risks in lending
portfolio securities, as with other extensions of credit, consist
of possible loss of rights in the collateral should the borrower
fail financially. In determining whether to lend securities to a
particular borrower, the Adviser (subject to review by the Board
of Directors) will consider all relevant facts and circumstances,
including the creditworthiness of the borrower. While securities
are on loan, the borrower will pay the Fund any income earned
thereon and the Fund may invest any cash collateral in portfolio
securities, thereby earning additional income, or receive an
agreed upon amount of income from a borrower who has delivered
equivalent collateral. The Fund will have the right to regain
record ownership of loaned securities or equivalent securities in
order to exercise ownership rights such as voting rights,
subscription rights and rights to dividends, interest or
distributions. The Fund may pay reasonable finders',
administrative and custodial fees in connection with a loan. The
Fund will not lend portfolio securities in excess of 30% 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.
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.
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Portfolio Turnover. Generally, the Fund's policy with
respect to portfolio turnover is to sell any security whenever,
in the judgment of the Adviser, its appreciation possibilities
have been substantially realized or the business or market
prospects for such security have deteriorated, irrespective of
the length of time that such security has been held. The Adviser
anticipates that the Fund's annual rate of portfolio turnover
will not exceed 150%. A 150% annual turnover rate would occur if
all the securities in the Fund's portfolio were replaced one and
one-half times within a period of one year. The turnover rate has
a direct effect on the transaction costs to be borne by the Fund,
and as portfolio turnover increases it is more likely that the
Fund will realize short-term capital gains or losses.
Certain Risk Considerations
Investment in the Fund involves the special risk
considerations described below.
Investment in Asian Countries; Risks of Foreign
Investment. The securities markets of many Asian countries are
relatively small, with the majority of market capitalization and
trading volume concentrated in a limited number of companies
representing a small number of industries. Consequently, the
Fund's investment portfolio may experience greater price
volatility and significantly lower liquidity than a portfolio
invested in equity securities of U.S. companies. These markets
may be subject to greater influence by adverse events generally
affecting the market, and by large investors trading significant
blocks of securities, than is usual in the United States.
Securities settlements may in some instances be subject to delays
and related administrative uncertainties. These problems are
particularly severe in India, where settlement is through
physical delivery, and, where currently, a severe shortage of
vault capacity exists among custodial banks, although efforts are
being undertaken to alleviate the shortage.
Foreign investment in the securities markets of certain
Asian countries is restricted or controlled to varying degrees.
These restrictions or controls may at times limit or preclude
investment in certain securities and may increase the cost and
expenses of the Fund. As illustrations, certain countries
require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in
a particular company, or limit the investment by foreign persons
to only a specified percentage of an issuer's outstanding
securities or a specific class of securities of a company which
may have less advantageous terms (including price) than
securities of the company available for purchase by nationals or
impose additional taxes on foreign investors. The national
policies of certain countries may restrict investment
21
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opportunities in issuers deemed sensitive to national interests.
In addition, the repatriation of investment income, capital or
the proceeds of sales of securities from certain of the countries
is controlled under regulations, including in some cases the need
for certain advance government notification or authority, and if
a deterioration occurs in a country's balance of payments, the
country could impose temporary restrictions on foreign capital
remittances.
The Fund could be adversely affected by delays in, or a
refusal to grant, any required governmental approval for
repatriation, as well as by the application to it of other
restrictions on investment. Investing in local markets may
require the Fund to adopt special procedures, seek local
governmental approvals or other actions, any of which may involve
additional costs to the Fund. The liquidity of the Fund's
investments in any country in which any of these factors exist
could be affected and the Adviser will monitor the effect of any
such factor or factors on the Fund's investments. Furthermore,
transaction costs including brokerage commissions for
transactions both on and off the securities exchanges in many
Asian countries are generally higher than in the United States.
Issuers of securities in Asian jurisdictions are
generally not subject to the same degree of regulation as are
U.S. issuers with respect to such matters as insider trading
rules, restrictions on market manipulation, shareholder proxy
requirements and timely disclosure of information. The
reporting, accounting and auditing standards of Asian countries
may differ, in some cases significantly, from U.S. standards in
important respects and less information may be available to
investors in foreign securities than to investors in U.S.
securities. Asian issuers are subject to accounting, auditing
and financial standards and requirements that differ, in some
cases significantly, from those applicable to U.S. issuers. In
particular, the assets and profits appearing on the financial
statements of an Asian issuer may not reflect its financial
position or results of operations in the way they would be
reflected had the financial statements been prepared in
accordance with U.S. generally accepted accounting principles. In
addition, for an issuer that keeps accounting records in local
currency, inflation accounting rules in some of the countries in
which the Fund will invest require, for both tax and accounting
purposes, that certain assets and liabilities be restated on the
issuer's balance sheet in order to express items in terms of
currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits. Consequently, financial
data may be materially affected by restatements for inflation and
may not accurately reflect the real condition of those issuers
and securities markets. Substantially less information is
22
<PAGE>
publicly available about certain non-U.S. issuers than is
available about U.S. issuers.
The economies of individual Asian countries may differ
favorably or unfavorably from the U.S. economy in such respects
as growth of gross domestic product or gross national product,
rate of inflation, capital reinvestment, resource self-
sufficiency and balance of payments position. Nationalization,
expropriation or confiscatory taxation, currency blockage,
political changes, government regulation, political or social
instability or diplomatic developments could affect adversely the
economy of an Asian country or the Fund's investments in such
country. In the event of expropriation, nationalization or other
confiscation, the Fund could lose its entire investment in the
country involved. In addition, laws in Asian countries governing
business organizations, bankruptcy and insolvency may provide
less protection to security holders such as the Fund than that
provided by U.S. laws.
Investment in smaller, emerging Asian companies involves
greater risk than is customarily associated with securities of
more established companies. The securities of smaller companies
may have relatively limited marketability and may be subject to
more abrupt or erratic market movements than securities of larger
companies or broad market indices.
Currency Considerations. Because substantially all of
the Fund's assets will be invested in securities denominated in
foreign currencies and a corresponding portion of the Fund's
revenues will be received in such currencies, the dollar
equivalent of the Fund's net assets and distributions will be
adversely affected by reductions in the value of certain foreign
currencies relative to the U.S. Dollar. Such changes will also
affect the Fund's income. The Fund will, however, have the
ability to attempt to protect itself against adverse changes in
the values of foreign currencies by engaging in certain of the
investment practices listed above. While the Fund has this
ability, there is no certainty as to whether and to what extent
the Fund will engage in these practices. If the value of the
foreign currencies in which the Fund receives its income falls
relative to the U.S. Dollar between receipt of the income and the
making of Fund distributions, the Fund may be required to
liquidate securities in order to make distributions if the Fund
has insufficient cash in U.S. Dollars to meet distribution
requirements. Similarly, if an exchange rate declines between
the time the Fund incurs expenses in U.S. Dollars and the time
cash expenses are paid, the amount of the currency required to be
converted into U.S. Dollars in order to pay expenses in U.S.
Dollars could be greater than the equivalent amount of such
expenses in the currency at the time they were incurred.
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<PAGE>
U.S. and Foreign Taxes. Foreign taxes paid by the Fund
may be creditable or deductible by U.S. shareholders for U.S.
income tax purposes. No assurance can be given that applicable
tax laws and interpretations will not change in the future.
Moreover, non-U.S. investors may not be able to credit or deduct
such foreign taxes. Investors should review carefully the
information discussed below under the heading "Dividends,
Distributions and Taxes" and should discuss with their tax
advisers the specific tax consequences of investing in the Fund.
Investments in Lower-Rated Debt Securities. Debt
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 and are considered to be
predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal, which may in any case
decline during sustained periods of deteriorating economic
conditions or rising interest rates. They are also generally
considered to be subject to greater market risk than higher-
rated securities in times of deteriorating economic conditions.
In addition, lower-rated securities may be more susceptible to
real or perceived adverse economic and competitive industry
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. Debt
securities rated Ba by Moody's or BB by S&P are judged to have
speculative characteristics or to be predominantly speculative
with respect to the issuer's ability to pay interest and repay
principal. Debt securities rated B by Moody's and SEP are judged
to have highly speculative characteristics or to be predominantly
speculative. Such securities may have small assurance of
interest and principal payments. Debt securities having the
lowest ratings for non-subordinated debt instruments assigned by
Moody's or S&P (i.e., rated C by Moody's or CCC and lower by SEP)
are considered to have extremely poor prospects of ever attaining
any real investment standing, to have a current identifiable
vulnerability to default, to be unlikely to have the capacity to
pay interest and repay principal when due in the event of adverse
business, financial or economic conditions, and/or to be in
default or not current in the payment of interest or principal.
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. 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
24
<PAGE>
not occur. Since the risk of default is higher for lower-rated
securities, the Adviser's research and credit analysis are a
correspondingly 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.
Certain Fundamental Investment Policies. The following
restrictions, which supplement those set forth in the Fund's
Prospectus, may not be changed without approval by the vote of a
majority of the Fund's outstanding voting securities, 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.
To reduce investment risk, as a matter of fundamental
policy the Fund may not:
(i) invest 25% or more of its total assets in
securities of issuers conducting their principal
business activities in the same industry;
(ii) borrow money except from banks for temporary or
emergency purposes, including the meeting of
redemption requests which might require the
untimely disposition of securities; borrowing in
the aggregate may not exceed 15%, and borrowing for
purposes other than meeting redemptions may not
exceed 5% of the value of the Fund's total assets
(including the amount borrowed) less liabilities
(not including the amount borrowed) at the time the
borrowing is made; outstanding borrowings in excess
of 5% of the value of the Fund's total assets will
be repaid before any investments are made;
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<PAGE>
(iii) pledge, hypothecate, mortgage or otherwise encumber
its assets, except to secure permitted borrowings;
(iv) 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;
(v) participate on a joint or joint and several basis
in any securities trading account;
(vi) invest in companies for the purpose of exercising
control;
(vii) issue any senior security within the meaning of the
1940 Act;
(viii) make short sales of securities or maintain a short
position, unless at all times when a short position
is open an equal amount of such securities or
securities convertible into or exchangeable for,
without payment of any further consideration,
securities of the same issue as, and equal in
amount to, the securities sold short ("short sales
against the box") and unless not more than 25% 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);
(ix) (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 including futures contracts (except
foreign currencies, foreign currency options and
futures, options and futures on securities and
securities indices and forward contracts or
contracts for the future acquisition or delivery of
securities and foreign currencies and related
options on futures contracts and 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
26
<PAGE>
might be deemed to be an underwriter for purposes
of the Securities Act;
(x) purchase the securities of any company that has a
record of less than three years of continuous
operation (including that of predecessors) if such
purchase at the time thereof would cause more than
5% of its total assets, taken at current value, to
be in the securities of such companies; or
(xi) purchase puts, calls, straddles, spreads, and any
combination thereof if by reason thereof the value
of its aggregate investment in such classes of
securities will exceed 5% of its total assets.
In connection, with the qualification or registration of
the Fund's shares for sale under the securities laws of certain
states the Fund has agreed, in addition to the foregoing
investment restrictions, that it will not invest in warrants
(other than warrants acquired by the Fund as part of a unit or
attached to securities at the time of purchase) if as a result of
such warrants valued at the lower of such cost or market would
exceed 10% of the value of the Fund's assets at the time of
purchase.
___________________________________________________________
MANAGEMENT OF THE FUND
__________________________________________________________
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,* 54, Chairman of the Board, is the
President, Chief Operating Officer and a Director of Alliance
____________________
* An "interested person" of the Fund as defined in the 1940
Act.
27
<PAGE>
Capital Management Corporation ("ACMC"), with which he has been
associated since prior to 1994.
DAVID H. DIEVLER, 70, is an independent consultant. He
was formerly a Senior Vice President of ACMC until December 1994.
His address is P.O. Box 167, Spring Lake, New Jersey 07762.
JOHN H. DOBKIN, 57, has been the President of Historic
Hudson Valley (historic preservation) since prior to 1994.
Previously, he was Director of the National Academy of Design.
His address is 150 White Plains Road, Tarrytown, New York 10591.
W.H. HENDERSON, 72, joined the Royal Dutch/Shell Group
in 1948 and served in Singapore, Japan, South Africa, Hong Kong
and London. The greater part of his service was in Japan and
between 1969 and 1972 he was Managing Director and Chief
Executive Officer of the Shell Company of Hong Kong Limited.
Mr. Henderson retired from the Royal Dutch/Shell Group in 1974 in
order to establish his own oil and gas consultancy business.
Mr. Henderson is currently a Director of a number of investment
companies. His address is Quarrey House, Charlton Horethorne,
Sherborne, Dorset, DT9 4NY, England.
STIG HOST, 73, is the Chairman and Chief Executive
Officer of International Energy Corp. (oil and gas exploration),
with which he has been associated since prior to 1994. He is
also Chairman and Director of Kriti Exploration, Inc. (oil and
gas exploration and production), Managing Director of Kriti Oil
and Minerals, N.V., Chairman of Kriti Properties and Development
Corporation (real estate), Chairman of International Marine
Sales, Inc. (marine fuels), a Director of Florida Fuels, Inc.
(marine fuels) and President of Alexander Host Foundation. He is
also a Trustee of the Winthrop Focus Funds. His address is 103
Oneida Drive, Greenwich, Connecticut 06830.
ALAN J. STOGA, 48, has been President of Zemi
Investments, L.P., since 1995, President of Zemi Communications,
L.L.C. and its predecessor company since 1996, and a Managing
Director of Kissinger Associates, Inc. until 1995. He has
continued as a member of the Board of Directors of Kissinger
Associates. His address is Kissinger Associates, Inc., 350 Park
Avenue, New York, New York 10022.
Officers
JOHN D. CARIFA, Chairman and President, (see biography
above).
KATHLEEN A. CORBET, Senior Vice President, 39, is an
Executive Vice President of ACMC, with which she has been
associated since prior to 1994.
28
<PAGE>
SAMIR ARORA, Vice President, 37, is a Vice President of
ACMC and Chief Investment Officer -- Indian Operations and
Portfolio Manager, since prior to 1994.
THOMAS BARDONG, Vice President, 54, is a Senior Vice
President of ACMC, with which he has been associated since prior
to 1994.
RUSSELL BRODY, Vice President, 32, is a Vice President
and Head Trader of the London desk of ACL with which he has been
associated since July 1997. Prior thereto, he was Head of
European Equity Dealing with Lombard Odier et Cie, London office,
since prior to 1994.
HIROSHI MOTOKI, Vice President, 42, is a Senior Vice
President, a Portfolio Manager and Director of Asian Equities of
ACMC. Prior thereto, he was a Japanese Technology/Auto Analyst
for ACMC for with which he has been associated since prior to
1994.
MARK D. GERSTEN, Treasurer and Chief Financial Officer,
49, is a Senior Vice President of Alliance Fund Services, Inc.
("AFS") and a Vice President of Alliance Fund Distributors, Inc.
("AFD"), with which he has been associated since prior to 1994.
EDMUND P. BERGAN. JR., Secretary, 49, is a Senior Vice
President and the General Counsel of AFD and AFS, with which he
has been associated since prior to 1994.
DOMENICK PUGLIESE, Assistant Secretary, 38, is a Vice
President and Assistant General Counsel of AFD, with which he has
been associated since May 1995. Previously, he was a Vice
President and Counsel of Concord Financial Holding Corporation
since prior to 1994.
ANDREW L. GANGOLF, Assistant Secretary, 45, is a Vice
President and Assistant General Counsel of AFD, with which he has
been associated since December 1994. Prior thereto, he was a
Vice President and Assistant Secretary of Delaware Management
Company, Inc. since prior to 1994.
EMILIE D. WRAPP, Assistant Secretary, 43, is a Vice
President and Assistant General Counsel of AFD, with which she
has been associated since prior to 1994.
VINCENT S. NOTO, Controller, 34, is a Vice President of
AFS, with which he has been associated since prior to 1994.
The aggregate compensation to be paid by the Fund to
each of the Directors during the Fund's fiscal year ended
October 31, 1998, the aggregate compensation paid to each of the
29
<PAGE>
Directors during calendar year 1998 by all of the registered
investment companies to which the Adviser provides investment
advisory services (collectively, the "Alliance Fund Complex"),
and the total number of registered investment companies (and
separate investment portfolios within those companies) in the
Alliance Fund Complex with respect to which each of the Directors
serves as a director or trustee, are set forth below. Neither
the Fund nor any 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.
Total Number
Investment
Total Number Portfolios
of Investment within the
Companies in Alliance Fund
Total the Alliance Complex,
Compensation Complex, Including the
From the including the Fund, as to
Aggregate Alliance Fund Fund, as to which the
Compensation Complex, which Director Director is a
from the Including the is a Director Director or
Name of Director Fund Fund or Trustee Trustee
________________ ____________ _____________ ____________ ______________
John D. Carifa $0 $0 50 114
David H. Dievler $5,550 $216,288 43 80
John H. Dobkin $5,425 $185,363 41 91
W.H. Henderson $5,450 $ 26,950 4 4
Stig Host $5,450 $ 26,950 4 4
Alan Stoga $5,325 $ 26,450 4 4
As of October 8, 1999, the Directors and officers of the
Fund as a group owned less than 1% of any other class of shares
of the Fund.
Adviser
Alliance Capital Management L.P., a Delaware limited
partnership with principal offices at 1345 Avenue of the
Americas, New York, New York 10105, has been retained under an
investment advisory agreement (the "Advisory Agreement") to
provide investment advice and, in general, to conduct the
management and investment program of the Fund under the
supervision of the Fund's Board of Directors (see "Management of
the Fund" in the Prospectus).
30
<PAGE>
The Adviser is a leading international adviser managing
client accounts with assets as of September 30, 1999 totaling
more than $317 billion (of which more than $143 billion
represented assets of investment companies). As of September 30,
1999, the Adviser managed retirement assets for many of the
largest public and private employee benefit plans (including 28
of the nation's FORTUNE 100 companies), for public employee
retirement funds in 31 states, for investment companies, and for
foundations, endowments, banks and insurance companies worldwide.
The 52 registered investment companies managed by the Adviser,
comprising 118 separate investment portfolios, currently have
approximately 4.8 million shareholder accounts.
ACMC is the general partner of the Adviser. As of
September 30, 1999, The Equitable Life Assurance Society of the
United States ("Equitable"), ACMC, Inc. and Equitable Capital
Management Corporation ("ECMC") were the beneficial owners of
approximately 56% of the outstanding Units of the Adviser. ACMC,
ECMC and ACMC, Inc. are wholly owned subsidiaries of Equitable,
one of the largest life insurance companies in the United States.
ECMC is a registered investment adviser and ACMC, Inc. is a
holding company for Units of the Adviser. Equitable is a wholly
owned subsidiary of AXA Financial, Inc. ("AXA Financial"), a
Delaware corporation whose shares are traded on the New York
Stock Exchange. AXA Financial serves as the holding company for
the Adviser, Equitable and Donaldson, Lufkin & Jenrette, Inc., a
broker-dealer holding company. As of September 30, 1999, AXA, a
French insurance holding company, owned approximately 56% of the
issued and outstanding shares of the common stock of AXA
Financial.
Under the Advisory Agreement, the Adviser provides
investment advisory services and order placement facilities for
the Fund and pays all compensation of Directors and officers of
the Fund who are affiliated persons of the Adviser. The Adviser
or its affiliates also furnishes the Fund, without charge,
management supervision and assistance and office facilities and
provides persons satisfactory to the Fund's Board of Directors to
serve as the Fund's officers.
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 also may utilize
personnel employed by the Adviser or by other subsidiaries of
Equitable. In such event, the services will be provided to the
Fund at cost and the payments specifically approved by the Fund's
Board of Directors. The Fund paid to the Adviser a total of
$26,707 in respect of such services during the fiscal year of the
Fund ended October 31, 1998.
31
<PAGE>
Under the Advisory Agreement, the Fund pays the Adviser
a fee at the annual rate of 1.00% of the value of the average
daily net assets of the Fund. 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 accrual basis 3.00%, 3.70% 3.70% and 2.70%
of average net assets, respectively, for Class A, Class B, Class C and
Advisor Class shares. The fee is accrued daily and paid monthly.
For the fiscal years ended October 31, 1996, October31, 1997 and
October 31, 1998, the Adviser received advisory fees
of $290,315, $343,746 and $178,047, respectively, from the Fund.
Of that $71,729 was waived by the Adviser for the fiscal year
ended October 31, 1996, $42,986 was waived by the Adviser for the
fiscal year ended October 31, 1997 and 134,448 was waived by the
Adviser for the fiscal year ended October 31, 1998.
The Advisory Agreement became effective on October 21,
1994 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 October 20, 1994, and by the Fund's
initial shareholder on October 20, 1994.
The Advisory Agreement will remain in force for
successive twelve-month periods (computed from each July 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 Act. Most recently, the continuance of the
Advisory Agreement until June 30, 2000 was approved by a vote,
cast in person, of the Directors, including a majority of the
Directors who are not parties to the Advisory Agreement or
interested persons of any such party, at a meeting called for
that purpose and held on April 30, 1999.
The Advisory Agreement is terminable without penalty by
a vote of a majority of the Fund's outstanding voting securities
or by a vote of a majority of the Fund's Directors on 60 days'
written notice, or by the Adviser on 60 days' written notice, and
will automatically terminate in the event of its assignment. The
Advisory Agreement provides that in the absence of willful
misfeasance, bad faith or gross negligence on the part of the
Adviser, or of reckless disregard of its obligations thereunder,
the Adviser shall not be liable for any action or failure to act
in accordance with its duties thereunder.
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
32
<PAGE>
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
Balanced Shares, Inc., Alliance Bond Fund, Inc., Alliance Capital
Reserves, Alliance Global Dollar Government Fund, Inc., Alliance
Global Environment Fund, Inc., Alliance Global Small Cap Fund,
Inc., Alliance Global Strategic Income Trust, Inc., Alliance
Government Reserves, Alliance Greater China '97 Fund, Inc.,
Alliance Growth and Income Fund, Inc., Alliance 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 Investors
Series, Inc., Alliance Technology Fund, Inc., Alliance Utility
Income Fund, Inc., Alliance Variable Products Series Fund, Inc.,
Alliance Worldwide Privatization Fund, Inc., The Alliance Fund,
Inc., The Alliance Portfolios and The Hudson River Trust, all
registered open-end investment companies; and to ACM Government
Income Fund, Inc., ACM Government Securities Fund, Inc., ACM
Government Spectrum Fund, Inc., ACM Government Opportunity Fund,
Inc., ACM Managed Dollar Income Fund, Inc., ACM Managed Income
Fund, Inc., ACM Municipal Securities Income Fund, Inc., Alliance
All-Market Advantage Fund, Inc., Alliance World Dollar Government
Fund, Inc., Alliance World Dollar Government Fund II, Inc., The
Austria Fund, Inc., The Korean Investment Fund, Inc., The
Southern Africa Fund, Inc. and The Spain Fund, Inc., all
registered closed-end investment companies.
Administrator
Alliance Capital Management L.P. has been retained under
an administration agreement (the "Administration Agreement") to
perform administrative services necessary for the operation of
the Fund (in such capacity, the "Administrator").
33
<PAGE>
Pursuant to the Administration Agreement and in
consideration of its administrative fee, the Administrator will
perform or arrange for the performance of the following services
(i) prepare and assemble reports required to be sent to Fund
shareholders and arrange for the printing and dissemination of
such reports to shareholders; (ii) assemble reports required to
be filed with the Securities and Exchange Commission (the
"Commission") and file such completed reports with the
Commission; (iii) arrange for the dissemination to shareholders
of the Fund's proxy materials and oversee the tabulation of
proxies by the Fund's transfer agent; (iv) negotiate the terms
and conditions under which custodian services will be provided to
the Fund and the fees to be paid by the Fund to its custodian in
connection therewith; (v) negotiate the terms and conditions
under which dividend disbursing services will be provided to the
Fund, and the fees to be paid by the Fund in connection
therewith; review the provision of dividend disbursing services
to the Fund; (vi) calculate, or arrange for the calculation of,
the net asset value of the Fund's shares; (vii) determine the
amounts available for distribution as dividends and distributions
to be paid by the Fund to its shareholders; prepare and arrange
for the printing of dividend notices to shareholders; and provide
the Fund's dividend disbursing agent and custodian with such
information as is required for it to effect the payment of
dividends and distributions and to implement the Fund's dividend
reinvestment plan; (viii) assist in providing to the Fund's
independent accountants such information as is necessary for such
accountants to prepare and file the Fund's federal income and
excise tax returns and the Fund's state and local tax returns;
(ix) monitor compliance of the Fund's operations with the 1940
Act and with its investment policies and limitations as currently
in effect; (x) provide accounting and bookkeeping services
(including the maintenance of such accounts, books and records of
the Fund as may be required by Section 31(a) of the 1940 Act and
the rules and regulations thereunder); and (xi) make such reports
and recommendations to the Board as the Board reasonably requests
or deems appropriate.
For the services rendered to the Fund and related
expenses borne by the Administrator, the Fund will pay the
Administrator a monthly fee at the annual rate of .15 of 1% of
the Fund's average daily net assets. For the fiscal year ended
October 31, 1996, 1997 and 1998, the Administrator received
administration fees of $43,547, $32,908 and $26,707, respectively.
34
<PAGE>
_______________________________________________________________
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 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 1940 Act (the "Rule 12b-1
Plan").
During the Fund's fiscal year ended October 31,
1998, the Fund paid distribution services fees for expenditures
under the Agreement, with respect to Class A shares, in amounts
aggregating $13,958 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 $216,622. Of the
$230,580 paid by the Fund and the Adviser under the Rule 12b-1
Plan with respect to the Class A shares, $29,788 was spent on
advertising, $3,357 on the printing and mailing of prospectuses
for persons other than current shareholders, $92,943 for
compensation to broker-dealers and other financial intermediaries
(including, $60,203 to the Fund's Principal Underwriters), $6,615
for compensation to sales personnel, and $97,877 was spent on
printing of sales literature, travel, entertainment, due
diligence and other promotional expenses.
During the Fund's fiscal year ended October 31, 1998,
the Fund paid distribution services fees for expenditures under
the Agreement, with respect to Class B shares, in amounts
aggregating $100,279, 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 $321,096. Of the
$421,375 paid by the Fund and the Adviser under the Rule 12b-1
Plan with respect to the Class B shares, $41,823 was spent on
advertising, $3,331 on the printing and mailing of prospectuses
for persons other than current shareholders, $222,131 for
compensation to broker-dealers and other financial intermediaries
(including, $96,821 to the Fund's Principal Underwriters), $9,953
for compensation to sales personnel, $132,551 was spent on
printing of sales literature, travel, entertainment, due
35
<PAGE>
diligence and other promotional expenses, and $11,586 was spent
on interest relating to Class B shares financing.
During the Fund's fiscal year ended October 31, 1998,
the Fund paid distribution services fees for expenditures under
the Agreement, with respect to Class C shares, in amounts
aggregating $18,084, which constituted 1.00%, 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 $78,146. Of the
$96,230 paid by the Fund and the Adviser under the Rule 12b-1
Plan with respect to the Class C shares, $10,303 was spent on
advertising, $957 on the printing and mailing of prospectuses for
persons other than current shareholders, $47,953 for compensation
to broker-dealers and other financial intermediaries (including,
$23,668 to the Fund's Principal Underwriters), $2,071 for
compensation to sales personnel, $32,877 was spent on printing of
sales literature, travel, entertainment, due diligence, other
promotional expenses, and $2,069 was spent on interest relating
to Class C shares financing.</R?
Distribution services fees are accrued daily and paid
monthly and are charged as expenses of the Fund as accrued. The
distribution services fees attributable to the Class B shares and
Class C shares are designed to permit an investor to purchase
such shares through broker-dealers without the assessment of an
initial sales charge and at the same time to permit the Principal
Underwriter to compensate broker-dealers in connection with the
sale of such shares. In this regard the purpose and function of
the combined contingent deferred sales charge and respective
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
provides 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.
36
<PAGE>
Unreimbursed distribution expenses incurred as of
the end of the Fund's most recently completed fiscal period, and
carried over for reimbursement in future years in respect of the
Class B and Class C shares for the Fund were, respectively,
$2,011,503 (22.74% of the net assets of Class B) and $240,465
(14% 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 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.
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 July 1), provided,
however, that such continuance is specifically approved at least
annually by the Directors of the Fund or by vote of the holders
of a majority of the outstanding voting securities (as defined in
the 1940 Act) of that class, and, in either case, by a majority
of the Directors of the Fund who are not parties to the Agreement
or interested persons, as defined in the 1940 Act, of any such
party (other than as directors of the Fund) and who have no
direct or indirect financial interest in the operation of the
Rule 12b-1 Plan or any agreement related thereto. Most recently,
the continuance of the Agreement until June 30, 2000 was approved
by a vote, cast in person, of the Directors, including a majority
of the Directors who are not parties to the Agreement or
interested persons of any such party, at a meeting called for
that purpose and held on April 30, 1999.
37
<PAGE>
In the event that the Rule 12b-1 Plan is terminated
or not continued with respect to the Class A shares, Class B
shares or Class C shares, (i) no distribution services fees
(other than current amounts accrued but not yet paid) would be
owed by the Fund to the Principal Underwriter with respect to
that class, and (ii) the Fund would not be obligated to pay the
Principal Underwriter for any amounts expended under the
Agreement not previously recovered by the Principal Underwriter
from distribution services fees in respect of shares of such
class or through deferred sales charges.
The Glass-Steagall Act and other applicable laws may
limit the ability of a bank or other depository institution to
become an underwriter or distributor of securities. However, in
the opinion of the Fund's management, based on the advice of
counsel, these laws do not prohibit such depository institutions
from providing services for investment companies such as the
administrative, accounting and other services referred to in the
Agreement. In the event that a change in these laws prevented a
bank from providing such services, it is expected that other
services arrangements would be made and that shareholders would
not be adversely affected.
Transfer Agency Agreement
Alliance Fund Services, Inc., an indirect wholly-owned
subsidiary of the Adviser located at 500 Plaza Drive, Secaucus,
New Jersey 07094, receives a transfer agency fee per account
holder of each of the Class A shares, Class B shares, Class C
shares and Advisor Class shares of the Fund, plus reimbursement
for out-of-pocket expenses. The transfer agency fee with respect
to the Class B shares and Class C shares is higher than the
transfer agency fee with respect to the Class A shares and
Advisor Class shares, reflecting the additional costs associated
with the Class B and Class C contingent deferred sales charges.
For the fiscal year ended October 31, 1998, the Fund paid AFS
$125,660 for the transfer agency services.
_______________________________________________________________
PURCHASE OF SHARES
______________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus under the heading "Purchase and Sale of
Shares--How to Buy Shares."
38
<PAGE>
General
Shares of the Fund are offered on a continuous basis at
a price equal to their net asset value plus an initial sales
charge at the time of purchase ("Class A shares"), with a
contingent deferred sales charge ("Class B shares") without any
initial sales charge and, as long as the shares are held for one
year or more, without any contingent deferred sales charge
("Class C shares"), or, to investors eligible to purchase Advisor
Class shares, without any initial, contingent deferred or asset-
based sales charge, in each case as described below. Shares of
the Fund that are offered subject to a sales charge are offered
through (i) investment dealers that are members of the National
Association of Securities Dealers, Inc. and have entered into
selected dealer agreements with the Principal Underwriter
("selected dealers"), (ii) depository institutions and other
financial intermediaries or their affiliates, that have entered
into selected agent agreements with the Principal Underwriter
("selected agents"), and (iii) the Principal Underwriter.
Advisor Class shares of the Fund may be purchased and
held solely (i) through accounts established under fee-based
programs, sponsored and maintained by registered broker-dealers
or other financial intermediaries and approved by the Principal
Underwriter, (ii) through self-directed defined contribution
employee benefit plans (e.g., 401(k) plans) that have at least
1,000 participants or $25 million in assets, (iii) by the
categories of investors described in clauses (i) through (iv)
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
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
39
<PAGE>
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.
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 value 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
40
<PAGE>
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
representatives, as applicable, receives the order after the
close of regular trading on the Exchange, the price will be based
on the net asset value determined as of the close of regular
trading on the Exchange on the next day it is open for trading.
Following the initial purchase of Fund shares, a
shareholder may place orders to purchase additional shares by
telephone if the shareholder has completed the appropriate
portion of the Subscription Application or an "Autobuy"
application obtained by calling the "For Literature" telephone
number shown on the cover of this Statement of Additional
Information. Except with respect to certain omnibus accounts,
telephone purchase orders may not exceed $500,000. Payment for
shares purchased by telephone can be made only by electronic
funds transfer from a bank account maintained by the shareholder
at a bank that is a member of the National Automated Clearing
House Association ("NACHA"). If a shareholder's telephone
purchase request is received before 3:00 p.m. Eastern time on a
Fund business day, the order to purchase shares is automatically
placed the following Fund business day, and the applicable public
offering price will be the public offering price determined as of
the close of business on such following business day.
Full and fractional shares are credited to a
subscriber's account in the amount of his or her subscription. As
a convenience to the subscriber, and to avoid unnecessary expense
to the Fund, stock certificates representing shares of the Fund
are not issued except upon written request to the Fund by the
shareholder or his or her authorized selected dealer or agent.
This facilitates later redemption and relieves the shareholder of
the responsibility for and inconvenience of lost or stolen
certificates. No certificates are issued for fractional shares,
although such shares remain in the shareholder's account on the
books of the Fund.
41
<PAGE>
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 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 and Class C shares bear higher
transfer agency costs than those borne by Class A and Advisor
Class shares, (iv) each of Class A, B and 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 shareholders, the Class B
shareholders 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.
42
<PAGE>
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 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 B shares or Class C shares may exceed the initial sales
charge on Class A shares during the life of the investment.
Again, however, such investors must weigh this consideration
against the fact that, because of such initial sales charges, not
____________________
** Advisor Class shares are sold only to investors as
described above in this section under "--General."
43
<PAGE>
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 and one-year period, respectively. For example, based on
current fees and expenses, an investor subject to the 4.25%
initial sales charge on Class A shares would have to hold his or
her investment approximately seven years for the Class C
distribution services fee to exceed the initial sales charge plus
the accumulated distribution services fee of Class A shares. In
this example, an investor intending to maintain his or her
investment for a longer period might consider purchasing Class A
shares. This example does not take into account the time value
of money, which further reduces the impact of the Class C
distribution services fees on the investment, fluctuations in net
asset value or the effect of different performance assumptions.
Those investors who prefer to have all of their funds
invested initially but may not wish to retain Fund shares for the
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 October 31, 1996,
October 31, 1997 and October 31, 1998, the aggregate amount of
underwriting commissions payable with respect to shares of the
Fund was $326,972, $51,997, and $81,416, respectively. Of that
amount, the Principal Underwriter received the amount of $13,206,
$2,570 and $0, 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 1998, 1997, and 1996, the Principal
Underwriter received contingent deferred sales charges of $437,
$0 and $0, respectively, on Class A Shares, $69,438, $73,693 and
$9,985, respectively, on Class B shares, and $1,601, $1,152 and
$0, respectively, on Class C shares.
Class A Shares
The public offering price of Class A shares is the net
asset value plus a sales charge, as set forth below.
44
<PAGE>
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 they
have been held beyond the period during which the charge applies
or were acquired upon the reinvestment of dividends or
distributions) and, second, of shares held longest during the
time they are subject to the sales charge. Proceeds from the
contingent deferred sales charge on Class A shares are paid to
the Principal Underwriter and are used by the Principal
Underwriter to defray the expenses of the Principal Underwriter
related to providing distribution-related services to the Fund in
connection with the sales of Class A shares, such as the payment
45
<PAGE>
of compensation to selected dealers and agents for selling
Class A shares. With respect to purchases of $1,000,000 or more
made through selected dealers or agents, the Adviser may,
pursuant to the Distribution Services Agreement described above,
pay such dealers or agents from its own resources a fee of up to
1% of the amount invested to compensate such dealers or agents
for their distribution assistance in connection with such
purchases.
No initial sales charge is imposed on Class A shares
issued (i) pursuant to the automatic reinvestment of income
dividends or capital gains distributions, (ii) in exchange for
Class A shares of other "Alliance Mutual Funds" (as that term is
defined under "Combined Purchase Privilege" below), except that
an initial sales charge will be imposed on Class A shares issued
in exchange for Class A shares of AFD Exchange Reserves ("AFDER")
that were purchased for cash without the payment of an initial
sales charge and without being subject to a contingent deferred
sales charge or (iii) upon the automatic conversion of Class B
shares or Advisor Class shares as described below under "Class B
Shares--Conversion Feature" and "--Conversion of Advisor Class
Shares to Class A Shares." The Fund receives the entire net
asset value of its Class A shares sold to investors. The
Principal Underwriter's commission is the sales charge shown
above less any applicable discount or commission "reallowed" to
selected dealers and agents. The Principal Underwriter will
reallow discounts to selected dealers and agents in the amounts
indicated in the table above. In this regard, the Principal
Underwriter may elect to reallow the entire sales charge to
selected dealers and agents for all sales with respect to which
orders are placed with the Principal Underwriter. A selected
dealer who receives reallowance in excess of 90% of such a sales
charge may be deemed to be an "underwriter" under the Securities
Act.
Investors choosing the initial sales charge alternative
may under certain circumstances be entitled to pay (i) no initial
sales charge (but be subject in most such cases to a contingent
deferred sales charge) or (ii) a reduced initial sales charge.
The circumstances under which investors may pay a reduced initial
sales charge are described below.
Combined Purchase Privilege. Certain persons may
qualify for the sales charge reductions indicated in the schedule
of such charges above by combining purchases of shares of the
Fund into a single "purchase," if the resulting "purchase" totals
at least $100,000. The term "purchase" refers to: (i) a single
purchase by an individual, or to concurrent purchases, which in
the aggregate are at least equal to the prescribed amounts, by an
individual, his or her spouse and their children under the age of
46
<PAGE>
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 Global Dollar Government Fund, Inc.
Alliance Global Environment Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Global Strategic Income Trust, Inc.
Alliance Greater China '97 Fund, Inc.
Alliance Growth and Income Fund, Inc.
Alliance 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
-Arizona Portfolio
-Florida Portfolio
-Massachusetts Portfolio
-Michigan Portfolio
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<PAGE>
-Minnesota Portfolio
-New Jersey Portfolio
-Ohio Portfolio
-Pennsylvania Portfolio
-Virginia Portfolio
Alliance New Europe Fund, Inc.
Alliance North American Government Income Trust, Inc.
Alliance Premier Growth Fund, Inc.
Alliance Quasar Fund, Inc.
Alliance Real Estate Investment Fund, Inc.
Alliance Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
Alliance Worldwide Privatization Fund, Inc.
The Alliance Fund, Inc.
The Alliance Portfolios
-Alliance Growth Fund
-Alliance Conservative Investors Fund
-Alliance Growth Investors Fund
-Alliance Short-Term U.S. Government Fund
Prospectuses for the Alliance Mutual Funds may be
obtained without charge by contacting AFS 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
of the investor into a single "purchase" (see
above).
For example, if an investor owned shares of an Alliance
Mutual Fund worth $200,000 at their then current net asset value
and, subsequently, purchased Class A shares of the Fund worth an
additional $100,000, the sales charge for the $100,000 purchase
would be at the 2.25% rate applicable to a single $300,000
purchase of shares of the Fund, rather than the 3.25% rate.
48
<PAGE>
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 be necessary to invest
only a total of $60,000 during the following 13 months in shares
of the Fund or any other Alliance Mutual Fund, to qualify for the
3.25% sales charge on the total amount being invested (the sales
charge applicable to an investment of $100,000).
The Statement of Intention is not a binding obligation
upon the investor to purchase the full amount indicated. The
minimum initial investment under a Statement of Intention is 5%
of such amount. Shares purchased with the first 5% of such
amount will be held in escrow (while remaining registered in the
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
49
<PAGE>
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 AFS at the address or
telephone numbers shown on the cover of this Statement of
Additional Information.
Certain Retirement Plans. Multiple participant payroll
deduction retirement plans may also purchase shares of the Fund
or any other Alliance Mutual Fund at a reduced sales charge on a
monthly basis during the 13-month period following such a plan's
initial purchase. The sales charge applicable to such initial
purchase of shares of the Fund will be that normally applicable,
under the schedule of sales charges set forth in this Statement
of Additional Information, to an investment 13 times larger than
such initial purchase. The sales charge applicable to each
succeeding monthly purchase will be that normally applicable,
under such schedule, to an investment equal to the sum of (i) the
total purchase previously made during the 13-month period and
(ii) the current month's purchase multiplied by the number of
months (including the current month) remaining in the 13-month
period. Sales charges previously paid during such period will
not be retroactively adjusted on the basis of later purchases.
Reinstatement Privilege. A shareholder who has caused
any or all of his or her Class A or Class B shares of the Fund to
be redeemed or repurchased may reinvest all or any portion of the
redemption or repurchase proceeds in Class A shares of the Fund
at net asset value without any sales charge, provided that
(i) such reinvestment is made within 120 calendar days after the
redemption or repurchase date and (ii) for Class B shares, a
contingent deferred sales charge has been paid and the Principal
Underwriter has approved, at its discretion, the reinvestment of
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
50
<PAGE>
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 any 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 AFS and their
affiliates; officers and directors of ACMC, the
Principal Underwriter, AFS 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, AFS and
their affiliates; and certain employee benefit
plans for employees of the Adviser, the Principal
Underwriter, AFS 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 intermediaries, or its
51
<PAGE>
affiliates or agents, for services in the nature of
investment advisory or administrative services;
(vi) persons who establish to the Principal
Underwriter's satisfaction that they are investing
within such time period as may be designated by the
Principal Underwriter, proceeds of redemption of
shares of such other registered investment
companies as may be designated from time to time by
the Principal Underwriter; and
(vii) employer-sponsored qualified pension or profit-
sharing plans (including Section 401(k) plans),
custodial accounts maintained pursuant to
Section 403(b)(7) retirement plans and individual
retirement accounts (including individual
retirement accounts to which simplified employee
pension ("SEP") contributions are made), if such
plans or accounts are established or administered
under programs sponsored by administrators or other
persons that have been approved by the Principal
Underwriter.
Class B Shares
Investors may purchase Class B shares at the public
offering price equal to the net asset value per share of the
Class B shares on the date of purchase without the imposition of
a sales charge at the time of purchase. The Class B shares are
sold without an initial sales charge so that the Fund will
receive the full amount of the investor's purchase payment.
Proceeds from the contingent deferred sales charge on
the Class B shares are paid to the Principal Underwriter and are
used by the Principal Underwriter to defray the expenses of the
Principal Underwriter related to providing distribution-related
services to the Fund in connection with the sale of the Class B
shares, such as the payment of compensation to selected dealers
and agents for selling Class B shares. The combination of the
contingent deferred sales charge and the distribution services
fee enables the Fund to sell the Class B shares without a sales
charge being deducted at the time of purchase. The higher
distribution services fee incurred by Class B shares will cause
such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares.
Contingent Deferred Sales Charge. Class B shares that
are redeemed within 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
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cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no sales charge will be imposed
on increases in net asset value above the initial purchase price.
In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
To illustrate, assume that an investor purchased 100
Class B shares at $10 per share (at a cost of $1,000) and in the
second year after purchase, the net asset value per share is $12
and, during such time, the investor has acquired 10 additional
Class B shares upon dividend reinvestment. If at such time the
investor makes his or her first redemption of 50 Class B shares
(proceeds of $600), 10 Class B shares will not be subject to
charge because of dividend reinvestment. With respect to the
remaining 40 Class B shares, the charge is applied only to the
original cost of $10 per share and not to the increase in net
asset value of $2 per share. Therefore, $400 of the $600
redemption proceeds will be charged at a rate of 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
Years Since Purchase % of Dollar Amount Subject to Charge
___________________ ____________________________________
First 4.0%
Second 3.0%
Third 2.0%
Fourth 1.0%
Fifth and thereafter None
In determining the contingent deferred sales charge
applicable to a redemption of Class B shares, it will be assumed
that the redemption is, first, of any shares that were acquired
upon the reinvestment of dividends or distributions and, second,
of shares held longest during the time they are subject to the
sales charge. When shares acquired in an exchange are redeemed,
the applicable contingent deferred sales charge and conversion
schedules will be the schedules that applied at the time of the
purchase of shares of the corresponding class of the Alliance
Mutual Fund originally purchased by the shareholder.
The contingent deferred sales charge is waived on
redemptions of shares (i) following the death or disability, as
defined in the Code, of a shareholder, (ii) to the extent that
the redemption represents a minimum required distribution from an
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individual retirement account or other retirement plan to a
shareholder who has attained the age of 70-1/2, (iii) that had
been purchased by present or former Directors of the Fund, by the
relative of any such person, by any trust, individual retirement
account or retirement plan account for the benefit of any such
person or relative or by the estate of any such person or
relative, or (iv) pursuant to a systematic withdrawal plan (see
"Shareholder Services--Systematic Withdrawal Plan" below).
Conversion Feature. Eight years after the end of the
calendar month in which the shareholder's purchase order was
accepted, Class B shares will automatically convert to Class A
shares and will no longer be subject to a higher distribution
services fee. Such conversion will 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
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shares are sold without an initial sales charge so that the Fund
will receive the full amount of the investor's purchase payment
and, as long as the shares are held for one year or more, without
a contingent deferred sales charge so that the investor will
receive as proceeds upon redemption the entire net asset value of
his or her Class C shares. The Class C distribution services fee
enables the Fund to sell Class C shares without either an initial
or contingent deferred sales charge, as long as the shares are
held for one year or more. Class C shares do not convert to any
other class of shares of the Fund and incur higher distribution
services fees and transfer agency costs than Class A shares and
Advisor Class shares, and will thus have a higher expense ratio
and pay correspondingly lower dividends than Class A 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.
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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.
_______________________________________________________________
REDEMPTION AND REPURCHASE OF SHARES
______________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus under the heading "Purchase and Sale of
Shares--How to Sell Shares." If you are an Advisor Class
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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
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 or her shares, assuming the
shares constitute capital assets in his or her hands, will result
in long-term or short-term capital gains (or loss) depending upon
the shareholder's holding period and basis in respect of the
shares redeemed.
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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 AFS. A telephone redemption
request by electronic funds transfer may not exceed $100,000
(except for certain omnibus accounts), and must be made by
4:00 p.m. Eastern time on a Fund business day as defined above.
Proceeds of telephone redemptions will be sent by electronic
funds transfer to a shareholder's designated bank account at a
bank selected by the shareholder that is a member of the NACHA.
Telephone Redemption By Check. Each Fund shareholder is
eligible to request redemption by check of Fund shares for which
no stock certificates have been issued by telephone at (800) 221-
5672 before 4:00 p.m. Eastern time on a Fund business day in an
amount not exceeding $50,000. Proceeds of such redemptions are
remitted by check to the shareholder's address of record. A
shareholder otherwise eligible for telephone redemption by check
may cancel the privilege by written instruction to AFS, 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
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difficulty in reaching AFS 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
AFS 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
AFS will be responsible for the authenticity of telephone
requests for redemptions that the Fund reasonably believes to be
genuine. The Fund will employ reasonable procedures in order to
verify that telephone requests for redemptions are genuine,
including, among others, recording such telephone instructions
and causing written confirmations of the resulting transactions
to be sent to shareholders. If the Fund did not employ such
procedures, it could be liable for losses arising from
unauthorized or fraudulent telephone instructions. Selected
dealers or agents may charge a commission for handling telephone
requests for redemptions.
Repurchase
The Fund may repurchase shares through the Principal
Underwriter, selected financial intermediaries or selected
dealers or agents. The repurchase price will be the net asset
value next determined after the Principal Underwriter receives
the request (less the contingent deferred sales charge, if any,
with respect to the Class A, Class B and Class C shares), except
that requests placed through selected dealers or agents before
the close of regular trading on the Exchange on any day will be
executed at the net asset value determined as of such close of
regular trading on that day if received by the Principal
Underwriter prior to its close of business on that day (normally
5:00 p.m. Eastern time). The financial intermediary or selected
dealer or agent is responsible for transmitting the request to
the Principal Underwriter by 5:00 p.m. Eastern time (certain
selected dealers, agents or financial representatives may enter
into operating agreements permitting them to transmit purchase
information to the Principal Underwriter after 5:00 p.m. Eastern
time and receive that day's 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
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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 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
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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 AFS 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, AFS 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 AFS by 4:00 p.m. Eastern time on a Fund business
day, as defined above, in order to receive that day's net asset
value.
Shares will continue to age without regard to exchanges
for purposes of determining the CDSC, if any, upon redemption
and, in the case of Class B shares, for the purpose of conversion
to Class A shares. After an exchange, your Class B shares will
automatically convert to Class A shares in accordance with the
conversion schedule applicable to the Class B shares of the
Alliance Mutual Fund you originally purchased for cash ("original
shares"). When redemption occurs, the CDSC applicable to the
original shares is applied.
Please read carefully the prospectus of the mutual fund
into which you are exchanging before submitting the request.
Call AFS at (800) 221-5672 to exchange uncertificated shares.
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
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shares tendered for exchange and the purchase of shares being
acquired at their respective net asset values as next determined
following receipt by the Alliance Mutual Fund whose shares are
being exchanged of (i) proper instructions and all necessary
supporting documents as described in such fund's prospectus, or
(ii) a telephone request for such exchange in accordance with the
procedures set forth in the following paragraph. Exchanges
involving the redemption of shares recently purchased by check
will be permitted only after the Alliance Mutual Fund whose
shares have been tendered for exchange is reasonably assured that
the check has cleared, normally up to 15 calendar days following
the purchase date. Exchanges of shares of Alliance Mutual Funds
will generally result in the realization of a capital gain or
loss for federal income tax purposes.
Each Fund shareholder and the shareholder's selected
dealer, agent or financial representative, as applicable, are
authorized to make telephone requests for exchanges unless AFS,
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 AFS 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
exchanges 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 AFS
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 AFS at the address shown on the cover of
this Statement of Additional Information.
A shareholder may elect to initiate a monthly "Auto
Exchange" whereby a specified dollar amount's worth of his or her
Fund shares (minimum $25) is automatically exchanged for shares
of another Alliance Mutual Fund. Auto Exchange transactions
normally occur on the 12th day of each month, or the Fund
business day prior thereto.
None of the Alliance Mutual Funds, the Adviser, the
Principal Underwriter or AFS will be responsible for the
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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 AFS at the "For Literature"
telephone number on the cover of this Statement of Additional
Information, or write to:
Alliance Fund Services, Inc.
Retirement Plans
P.O. Box 1520
Secaucus, New Jersey 07096-1520
Individual Retirement Account ("IRA"). Individuals who
receive compensation, including earnings from self-employment,
are entitled to establish and make contributions to an IRA.
Taxation of the income and gains paid to an IRA by the Fund is
deferred until distribution from the IRA. An individual's
eligible contribution to an IRA will be deductible if neither the
individual nor his or her spouse is an active participant in an
employer-sponsored retirement plan. If the individual or his or
her spouse is an active participant in an employer-sponsored
retirement plan, the individual's contributions to an IRA may be
deductible, in whole or in part, depending on the amount of the
adjusted gross income of the individual and his or her spouse.
Employer-Sponsored Qualified Retirement Plans. Sole
proprietors, partnerships and corporations may sponsor qualified
money purchase pension and profit-sharing plans, including
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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 shares or
Class C shares of the Fund held by the plan can be exchanged at
the plan's request, without any sales charge, for Class A shares
of the Fund.
Simplified Employee Pension Plan ("SEP"). Sole
proprietors, partnerships and corporations may sponsor a SEP
under which they make annual tax-deductible contributions to an
IRA established by each eligible employee within prescribed
limits based on employee compensation.
403(b)(7) Retirement Plan. Certain tax-exempt
organizations and public educational institutions may sponsor
retirement plans under which an employee may agree that monies
deducted from his or her compensation (minimum $25 per pay
period) may be contributed by the employer to a custodial account
established for the employee under the plan.
The Alliance Plans Division of Frontier Trust Company, a
subsidiary of Equitable, which serves as custodian or trustee
under the retirement plan prototype forms available from the
Fund, charges certain nominal fees for establishing an account
and for annual maintenance. A portion of these fees is remitted
to AFS 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 AFS at the address or the "For Literature" telephone
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number shown on the cover of this Statement of Additional
Information. Investors wishing to establish a dividend direction
plan in connection with their initial investment should complete
the appropriate section of the Subscription Application found in
the Prospectus. Current shareholders should contact AFS to
establish a dividend direction plan.
Systematic Withdrawal Plan
General. Any shareholder who owns or purchases shares
of the Fund having a current net asset value of at least $4,000
(for quarterly or less frequent payments), $5,000 (for bi-monthly
payments) or $10,000 (for monthly payments) may establish a
systematic withdrawal plan under which the shareholder will
periodically receive a payment in a stated amount of not less
than $50 on a selected date. Systematic withdrawal plan
participants must elect to have their dividends and distributions
from the Fund automatically reinvested in additional shares of
the Fund.
Shares of the Fund owned by a participant in the Fund's
systematic withdrawal plan will be redeemed as necessary to meet
withdrawal payments and such payments will be subject to any
taxes applicable to redemptions and, except as discussed below,
any applicable contingent deferred sales charge. Shares acquired
with reinvested dividends and distributions will be liquidated
first to provide such withdrawal payments and thereafter other
shares will be liquidated to the extent necessary, and depending
upon the amount withdrawn, the investor's principal may be
depleted. A systematic withdrawal plan may be terminated at any
time by the shareholder or the Fund.
Withdrawal payments will not automatically end when a
shareholder's account reaches a certain minimum level. Therefore,
redemptions of shares under the plan may reduce or even liquidate
a shareholder's account and may subject the shareholder to the
Fund's involuntary redemption provisions. See "Redemption and
Repurchase of Shares--General." Purchases of additional shares
concurrently with withdrawals are undesirable because of sales
charges when purchases are made. While an occasional lump-sum
investment may be made by a holder of Class A shares who is
maintaining a systematic withdrawal plan, such investment should
normally be an amount equivalent to three times the annual
withdrawal or $5,000, whichever is less.
Payments under a systematic withdrawal plan may be made
by check or electronically via the Automated Clearing House
("ACH") network. Investors wishing to establish a systematic
withdrawal plan in conjunction with their initial investment in
shares of the Fund should complete the appropriate portion of the
Subscription Application found in the Prospectus, while current
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Fund shareholders desiring to do so can obtain an application
form by contacting AFS at the address or the "Literature"
telephone number shown on the cover of this Statement of
Additional Information.
CDSC Waiver for Class B and Class C Shares. Under a
systematic withdrawal plan, up to 1% monthly, 2% bi-monthly or 3%
quarterly of the value at the time of redemption of the Class B
or Class C shares in a shareholder's account may be redeemed free
of any contingent deferred sales charge.
With respect to Class B shares, the waiver applies only
with respect to shares acquired after July 1, 1995. Class B
shares that are not subject to a contingent deferred sales charge
(such as shares acquired with reinvested dividends or
distributions) will be redeemed first and will count toward the
foregoing limitations. Remaining Class B shares that are held
the longest will be redeemed next. Redemption of Class B shares
in excess of the foregoing limitations will be subject to any
otherwise applicable contingent deferred sales charge.
With respect to Class C shares, shares held the longest
will be redeemed first and will count toward the foregoing
limitations. Redemptions in excess of those limitations will be
subject to any otherwise applicable contingent deferred sales
charge.
Statements and Reports
Each shareholder of the Fund receives semi-annual and
annual reports which include a portfolio of investments,
financial statements and, in the case of the annual report, the
report of the Fund's independent auditors, Ernst & Young LLP, as
well as a confirmation of each purchase and redemption. By
contacting his or her broker or AFS, 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
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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 indicated
below, at the last sale price reflected on the consolidated tape
at the close of the Exchange or, in the case of a foreign
securities exchange, at the last quoted sale price, in each case
on the business day as of which such value is being determined.
If there has been no sale on such day, the securities are valued
at the 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.
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.
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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.
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
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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
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.
United States Federal Income Taxation
Of Dividends and Distributions
General. The Fund intends for each taxable year to
qualify to be taxed as a "regulated investment company" under
sections 851 through 855 of 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, 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
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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 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.
The Fund intends to 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 the
shareholders equal to at least the sum of (i) 98% of its ordinary
income for that year; (ii) 98% of its capital gain net income and
foreign currency gains for the twelve-month period ending on
October 31 of that year; and (iii) any ordinary income or capital
gain net income from the preceding calendar year that was not
distributed during that 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 of a given year but actually paid during the
immediately following January will be treated as if paid by the
Fund on December 31 of that 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 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 or excise taxes.
However, exchange control or other regulations on the
repatriation of investment income, capital or the proceeds of
securities sales, if any exist or are enacted in the future, may
limit the Fund's ability to make distributions sufficient in
amount to avoid being subject to one or both of such federal
taxes.
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Dividends and Distributions. 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.
The investment objective of the Fund is such that only a
small portion, if any, of the Fund's distributions is expected to
qualify for the dividends-received deduction for corporations.
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 taxable year, the Fund will notify
shareholders of the federal income tax status of any
distributions made by the Fund to shareholders during such year.
It is the present policy of the Fund to distribute to
shareholders all net investment income and to distribute realized
capital gains, if any, annually. There is no fixed dividend rate
and there can be no assurance that the Fund will pay any
dividends. The amount of any dividend or distribution paid on
shares of the Fund must necessarily depend upon the realization
of income and capital gains from the Fund's investments.
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.
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 the
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
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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
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.
Foreign Taxes. Income received by the Fund may also be
subject to foreign income taxes, including withholding taxes. 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. Pursuant to this
election a shareholder will be required to (i) include in gross
income (in addition to taxable dividends actually received) his
pro-rata share of foreign taxes paid by the Fund, (ii) treat his
pro-rata share of such foreign taxes as having been paid by him,
and (iii) either deduct such pro-rata share of foreign taxes in
computing his taxable income or treat such foreign taxes as a
credit against United States federal income taxes. Shareholders
who are not liable for federal income taxes, such as retirement
plans qualified under section 401 of the Code, will not be
affected by any such pass through of taxes by the Fund. No
deduction for foreign taxes may be claimed by an individual
shareholder who does not itemize deductions. In addition,
certain shareholders may be subject to rules which limit or
reduce their ability to fully deduct, or claim a credit for,
their pro rata share of the foreign taxes paid by the Fund. A
shareholder's foreign tax credit with respect to a dividend
received from the Fund will be disallowed unless the shareholder
holds shares in the Fund on the ex-dividend date and for at least
15 other days during the 30-day period beginning 15 days prior to
the ex-dividend date. Each shareholder will be notified within
60 days after the close of the Fund's taxable year whether the
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foreign taxes paid by the Fund will pass through for that year
and, if so, such notification will designate (i) the
shareholder's portion of the foreign taxes paid to each such
country and (ii) the portion of dividends that represents income
derived from sources within each such country.
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
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.
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
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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 to 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 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
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 income 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
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distributions exceed such shareholder's basis, such excess will
be treated as a gain from the sale of shares.
Options Futures and Forward 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
realized by the Fund on forward foreign currency contracts
generally will be treated as section 988 gain or loss and will
therefore be characterized as ordinary income or loss and will
increase or decrease the amount of the Fund's net investment
income available to be distributed to shareholders as ordinary
income, as described above. The Fund can elect to exempt its
section 1256 contracts which are part of a "mixed straddle" (as
described below) from the application of section 1256.
The Treasury Department has the authority to issue
regulations that would permit or require the Fund either to
integrate a foreign currency hedging transaction with the
investment that is hedged and treat the two as a single
transaction, or otherwise to treat the hedging transaction in a
manner that is consistent with the hedged investment. The
regulations issued under this authority generally should not
apply to the type of hedging transactions in which the Fund
intends to engage.
With respect to 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
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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
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, currency swap, 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
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do not apply to any straddles held by the Fund all of the
offsetting positions of which consist of section 1256 contracts.
Taxation of Foreign Stockholders
The foregoing discussion relates only to United States
federal income tax law as it affects shareholders who are United
States citizens or residents or United States corporations. The
effects of federal income tax law on shareholders who are non-
resident alien individuals or foreign corporations may be
substantially different. Foreign investors should therefore
consult their counsel for further information as to the United
States tax consequences of receipt of income from the Fund.
Other Taxation
As noted above, the Fund may be subject to other state
and local taxes.
_______________________________________________________________
PORTFOLIO TRANSACTIONS
______________________________________________________________
The management of the Fund has the responsibility for
allocating its brokerage orders and may direct orders to any
broker. It is the Fund's general policy to seek favorable net
prices and prompt reliable execution in connection with the
purchase or sale of all portfolio securities. In the purchase
and sale of over-the-counter securities, it is the Fund's policy
to use the primary market makers except when a better price can
be obtained by using a broker. The Board of Directors has
approved, as in the best interests of the Fund and the
shareholders, a policy of considering, among other factors, sales
of the Fund's shares as a factor in the selection of broker-
dealers to execute portfolio transactions, subject to best
execution. The Adviser is authorized under the Advisory
Agreement to place brokerage business with such brokers and
dealers. The use of brokers who supply supplemental research and
analysis and other services may result in the payment of higher
commissions than those available from other brokers and dealers
who provide only the execution of portfolio transactions. In
addition, the supplemental research and analysis and other
services that may be obtained from brokers and dealers through
which brokerage transactions are effected may be useful to the
Adviser in connection with advisory clients other than the Fund.
Investment decisions for the Fund are made independently
from those for other investment companies and other advisory
accounts managed by the Adviser. It may happen, on occasion,
that the same security is held in the portfolio of the Fund and
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one or more of such other companies or accounts. Simultaneous
transactions are likely when several funds or accounts are
managed by the same Adviser, particularly when a security is
suitable for the investment objectives of more than one of such
companies or accounts. When two or more companies or accounts
managed by the Adviser are simultaneously engaged in the purchase
or sale of the same security, the transactions are allocated to
the respective companies or accounts both as to amount and price,
in accordance with a method deemed equitable to each company or
account. In some cases this system may adversely affect the
price paid or received by the Fund or the size of the position
obtainable for the Fund.
Allocations are made by the officers of the Fund or of
the Adviser. Purchases and sales of portfolio securities are
determined by the Adviser and are placed with broker-dealers by
the order department of the Adviser.
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
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.
Many of the Fund's portfolio transactions in equity
securities will occur on foreign stock exchanges. Transactions
on stock exchanges involve the payment of brokerage commissions.
On many foreign stock exchanges these commissions are fixed.
78
<PAGE>
Securities traded in foreign over-the-counter markets (including
most fixed-income securities) are purchased from and sold to
dealers acting as principal. Over-the-counter transactions
generally do not involve the payment of a stated commission, but
the price usually includes an undisclosed commission or markup.
The prices of underwritten offerings, however, generally include
a stated underwriter's discount. The Adviser expects to effect
the bulk of its transactions in securities of companies based in
foreign countries through brokers, dealers or underwriters
located in such countries. U.S. Government or other U.S.
securities constituting permissible investments will be purchased
and sold through U.S. brokers, dealers or underwriters.
During the fiscal years ended October 31, 1996,
October 31, 1997 and October 31, 1998, the Fund incurred
brokerage commissions amounting in the aggregate to $395,188,
$294,710 and $121,751, respectively. During the fiscal years
ended October 31, 1996, October 31, 1997 and October 31, 1998,
brokerage commissions amounting in the aggregate to $-0-, $-0-
and $-0-, respectively, were paid to DLJ and brokerage
commissions amounting in the aggregate to $4,181, $7,572 and $-0-
respectively, were paid to brokers utilizing the Pershing
Division of DLJ. During the fiscal year ended in October 31,
1998, the brokerage commissions paid to DLJ constituted 0% of the
Fund's aggregate brokerage commissions 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 in October 31, 1998, 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 October 31, 1998, transactions in
portfolio securities of the Fund aggregating $33,739,307 with
associated brokerage commissions of approximately $98,651 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
1994. The authorized capital stock of the Fund currently
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 a par value of $.001 per
share.
79
<PAGE>
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 Contract 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
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
80
<PAGE>
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.
The outstanding voting shares of the Fund as of
October 8, 1999 consisted of 3,521,621 Class A, 3,640,707
Class B, 905,878 Class C and 399,942 Advisor Class shares. To
the knowledge of the Fund, the following persons owned of record
or beneficially 5% or more of the outstanding shares of the Fund
as of October 8, 1999:
No. of
Shares % of
Name and Address of Class Class
Class A
MLPF&S
For the Sole Benefit of
Its Customers
Attn Fund Administration (97FL3)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville,
FL 32246-6484 241,675 6.93%
Felipe Change OH OH
PMB #139
3171 W. Olympic Blvd
Los Angeles, CA 90006-2463 400,605 11.49%
Cecilia SEO OH
PMB #139
3171 W. Olympic Blvd.
Los Angeles, CA 90006-2463 175,824 5.04%
Chul H. Paik
La Pampa 2730 Piso #4
BS As Cap Fed (1428)
Argentina 533,668 15.30%
Ung K. Han & Myong J. Han JTTEN
PMB #139
3171 W. Olympic Blvd.
Los Angeles, Ca 90006-2463 279,035 8.00%
Hee J. Kim
PMB 531
81
<PAGE>
5300 Beach Blvd. Ste 110
Buena Park, CA 90621-1292 223,649 6.41%
Class B
MLPF&S
For the Sole Benefit of
Its Customers
Attn Fund Administration (97FL4)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville,
FL 32246-6484 633,265 17.47%
Class C
Merrill Lynch
Mutual Fund Admin (97 FL5)
4800 Deer Lake Dr.
East 2nd Floor
Jacksonville,
FL 32246-6484 164,622 18.08%
Advisor Class
Alliance Plan Div/F.T.C.
C/F Michael F. Delfino IRA
100 Montrose Station Road
Montrose, NY 10548-1015 29,247 8.31%
Alliance Plan Div/F.T.C.
FBO Maurice S. Mandel
Rollover IRA
14 Hillside Avenue
Port Washington,
NY 11050-2747-1015 33,444 9.50%
MLPF&S for the Sole Benefit 21,499 6.11%
of its Customers
Attn: Fund Adm (97LNO)
4800 Deer Lake Dr East 2nd Fl.
Jacksonville, FL 32246-6484
Trust for Profit Sharing Plan
For Employees of Alliance
Capital Mgmt L.P. Plan Y
Attn. Jill Smith 32nd Fl.
1345 Avenue of the Americas
New York, NY 10105-0302 234,407 66.58%
82
<PAGE>
Custodian
Brown Brothers Harriman & Co. ("Brown Brothers"),
40 Wall Street, Boston, Massachusetts 02109, 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, Brown Brothers may
enter into sub-custodial agreements for the holding of the Fund's
foreign securities.
Principal Underwriter
Alliance Fund Distributors, Inc., an indirect wholly-
owned subsidiary of the Adviser, located at 1345 Avenue of the
Americas, New York, New York 10105, is the principal underwriter
of shares of the Fund. Under the Agreement, the Fund has agreed
to indemnify the Principal Underwriter, in the absence of its
willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations thereunder, against certain civil
liabilities, including liabilities under the Securities Act.
Counsel
Legal matters in connection with the issuance of the
shares 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 Auditors
Ernst & Young LLP, New York, New York, has been
appointed as independent auditors for the Fund.
Performance Information
From time to time, the Fund advertises its "total
return," which is computed separately for Class A, Class B, Class
C and Advisor Class shares. Such advertisements disclose the
Fund's average annual compounded total return for the periods
prescribed by the Commission. The Fund's total return for each
such period is computed by finding, through the use of a formula
prescribed by the Commission, the average annual compounded rate
of return over the period that would equate an assumed initial
amount invested to the value of the investment at the end of the
period. For purposes of computing total return, income dividends
and capital gains distributions paid on shares of the Fund are
assumed to have been reinvested when paid and the maximum sales
charges applicable to purchases and redemptions of the Fund's
shares are assumed to have been paid.
83
<PAGE>
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.
The Fund's average annual total return for
the one-, five- and ten-year periods ended April 30, 1999 (or
since inception through that date, as noted) were as follows:
Year Ended 5 Years Ended 10 Years Ended
4/30/99 4/30/99 4/30/99
Class A 6.38% (5.02)%* N/A
Class B 5.53% (5.66)%* N/A
Class C 5.67% (5.60)%* N/A
Advisor Class 6.62% (13.70)%* N/A
*Inception Dates: Class A - November 28, 1994
Class B - November 28, 1994
Class C - November 28, 1994
Advisor Class - October 2, 1996
The Fund's total return is computed separately for
Class A, Class B, Class C and Advisor Class shares. The Fund's
total return is 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 and the Fund's
84
<PAGE>
expenses. Total return information is useful in reviewing the
Fund's performance but such information may not provide a basis
for comparison with bank deposits or other investments which pay
a fixed yield for a stated period of time. An investor's
principal invested in the Fund is not fixed and will fluctuate in
response to prevailing market conditions.
Advertisements quoting performance ratings of the Fund
as measured by financial publications or by 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 may be 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. The Fund is ranked by Lipper
in the category known as "Pacific Region Funds".
Additional Information
Any shareholder inquiries may be directed to the
shareholder's broker or to Alliance Fund Services, Inc. at the
address or telephone numbers shown on the front cover of this
Statement of Additional Information. This Statement of
Additional Information does not contain all the information set
forth in the Registration Statement filed by the Fund with the
Commission under the Securities Act. 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.
85
<PAGE>
_______________________________________________________________
FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT AUDITORS
______________________________________________________________
86
<PAGE>
ALLIANCE ALL-ASIA INVESTMENT FUND
SEMI-ANNUAL REPORT
APRIL 30, 1999
PORTFOLIO OF INVESTMENTS
APRIL 30, 1999 (UNAUDITED)
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON STOCKS & OTHER INVESTMENTS-92.3%
AUSTRALIA-10.4%
Lend Lease Corp., Ltd. 33,000 $ 444,900
National Australia Bank, Ltd. 22,000 428,311
Publishing & Broadcasting, Ltd. 70,000 470,498
Qantas Airways, Ltd. 220,000 604,178
Tabcorp Holdings, Ltd. 43,750 355,815
Telstra Corp., Ltd. 63,000 341,860
------------
2,645,562
HONG KONG-7.9%
Cheung Kong Holdings, Ltd. 24,000 218,301
China Telecom (Hong Kong), Ltd.
Cl. H (a) 160,000 365,384
Johnson Electric Holdings, Ltd. 80,000 238,945
Li & Fung, Ltd. 100,000 245,138
NG Fung Hong, Ltd. 220,000 212,883
Sun Hung Kai Properties, Ltd. 32,000 279,715
Television Broadcast, Ltd. 60,000 243,847
VTech Holdings, Ltd. 60,000 205,141
------------
2,009,354
INDIA-13.6%
BFL Software, Ltd. (a) 28,000 517,434
Digital Equipment India, Ltd. 21,000 201,951
India Information Technology Fund (a) 46,320 972,720
Infosys Technologies, Ltd. (ADR) (a) 18,200 751,888
New Shares (a) 8,500 525,921
Leading Edge Systems, Ltd. 200 1,483
NIIT, Ltd. Bonus Shares (a) 5,000 194,467
Zee Telefilms, Ltd. (a) 10,900 287,402
------------
3,453,266
JAPAN-42.7%
Acom Co., Ltd. 3,000 224,827
Aeon Credit Service, Ltd. 4,400 379,485
Ajinomoto Co., Inc. 30,000 346,912
Alps Electric Co., Ltd. 34,000 576,512
Bank of Tokyo-Mitsubishi, Ltd. 34,200 504,588
Banyu Pharmaceutical Co., Ltd. 27,000 497,383
Bridgestone Corp. 10,000 267,951
Canon, Inc. 11,000 268,955
Fuji Bank, Ltd. 60,000 468,244
Fuji Photo Film Co. 9,000 339,879
Honda Motor Co., Ltd. 6,000 264,266
Hoya Corp. 5,000 261,671
Ibiden Co., Ltd. 30,000 523,760
Japan Tobacco, Inc. 35 351,685
Kao Corp. 18,000 456,688
Kita Kyushu Coca-Cola Bottling Co.,
Ltd. 8,000 389,868
NTT Mobile Communications
Network, Inc. 4 234,457
Rohm Co., Ltd. 2,000 241,156
Santen Pharmaceutical Co., Ltd. 30,000 545,112
Shinko Electric Industries Co., Ltd. 7,000 269,625
Shiseido Co., Ltd. 21,000 330,584
Shohkoh Fund & Co., Ltd. 700 410,299
Takeda Chemical Industries 21,000 912,623
TDK Corp. 9,000 680,511
Tokyo Electron, Ltd. 14,000 797,153
Yamanouchi Pharmaceutical Co., Ltd. 9,000 284,865
------------
10,829,059
PHILIPPINES-1.7%
Bank of the Philippine Islands 135,000 426,036
6
ALLIANCE ALL-ASIA INVESTMENT FUND
_______________________________________________________________________________
SHARES OR
PRINCIPAL
AMOUNT
COMPANY (000) U.S. $ VALUE
- -------------------------------------------------------------------------
SINGAPORE-3.8%
Natsteel Electronics, Ltd. 74,000 $ 248,659
Pacific Internet, Ltd. (a) 4,400 349,250
Singapore Press Holdings, Ltd. 25,000 368,449
------------
966,358
SOUTH KOREA-7.3%
Housing & Commercial Bank, Korea (a) 30,000 706,773
Samsung Electronics 6,000 461,422
Samsung Fire & Marine Insurance 600 277,661
S.K. Telecom Co., Ltd. 227 249,430
ADR 10,900 151,238
------------
1,846,524
TAIWAN-4.7%
Hon Hai Precision Industry (a) 45,000 244,954
Sunplus Technology Co., Ltd. (a) 60,000 200,917
Taiwan Semiconductor Manufacturing
Co. (a) 220,000 743,425
------------
1,189,296
THAILAND-0.2%
Siam Common Bank CV pfd. (a) 85,000 59,603
Total Common Stocks & Other Investments
(cost $19,232,279) 23,425,058
TIME DEPOSIT-2.0%
UNITED STATES-2.0%
West Deutsche Landesbank Girozentrale
4.88%, 5/03/99 (cost $500,000) $500 500,000
TOTAL INVESTMENTS-94.3%
(cost $19,732,279) 23,925,058
Other assets less liabilities-5.7% 1,457,131
NET ASSETS-100% $ 25,382,189
(a) Non-income producing security.
Glossary:
ADR - American Depositary Receipt
See notes to financial statements.
7
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1999 (UNAUDITED) ALLIANCE ALL-ASIA INVESTMENT FUND
_______________________________________________________________________________
ASSETS
Investments in securities, at value (cost $19,732,279) $ 23,925,058
Cash, at value (cost $2,339,144) 2,347,396
Receivable for investment securities sold 999,780
Receivable for capital stock sold 472,357
Dividends and interest receivable 23,141
Deferred organization expense 21,000
Receivable from Adviser 16,268
Total assets 27,805,000
LIABILITIES
Payable for investment securities purchased 2,214,249
Payable for capital stock redeemed 26,980
Distribution fee payable 14,795
Organizational expense payable 311
Accrued expenses 166,476
Total liabilities 2,422,811
NET ASSETS $ 25,382,189
COMPOSITION OF NET ASSETS
Capital stock, at par $ 3,371
Additional paid-in capital 34,230,370
Distributions in excess of net investment income (185,823)
Accumulated net realized loss on investments and
foreign currency transactions (12,846,407)
Net unrealized appreciation of investments and foreign
currency denominated assets and liabilities 4,180,678
$ 25,382,189
CALCULATION OF MAXIMUM OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share
($6,878,306 / 896,721 shares of capital stock
issued and outstanding) $7.67
Sales Charge--4.25% of public offering price 0.34
Maximum offering price $8.01
CLASS B SHARES
Net asset value and offering price per share
($13,041,779 / 1,751,893 shares of capital stock
issued and outstanding) $7.44
CLASS C SHARES
Net asset value and offering price per share
($3,262,493 / 437,449 shares of capital stock
issued and outstanding) $7.46
ADVISOR CLASS SHARES
Net asset value, redemption and offering price
per share ($2,199,611 / 284,454 shares of
capital stock issued and outstanding) $7.73
See notes to financial statements.
8
STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1999 (UNAUDITED)
ALLIANCE ALL-ASIA INVESTMENT FUND
_______________________________________________________________________________
INVESTMENT INCOME
Dividends (net of foreign taxes
withheld of $5,860) $ 59,255
Interest 15,165 $ 74,420
EXPENSES
Advisory fee 93,396
Distribution fee - Class A 6,998
Distribution fee - Class B 50,340
Distribution fee - Class C 10,698
Custodian 97,497
Transfer agency 60,351
Audit and legal 49,833
Registration 25,737
Amortization of organization expenses 21,790
Printing 19,758
Directors' fees 17,053
Administrative 14,009
Miscellaneous 12,241
Total expenses 479,701
Less: expenses waived and reimbursed
by the Adviser (see Note B) (156,232)
Less: expense offset arrangement
(see Note B) (3,264)
Net expenses 320,205
Net investment loss (245,785)
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain on investment transactions 28,041
Net realized loss on foreign currency
transactions (418,206)
Net change in unrealized appreciation of:
Investments 5,398,552
Foreign currency denominated assets and
liabilities 371,167
Net gain on investments and foreign
currency transactions 5,379,554
NET INCREASE IN NET ASSETS FROM OPERATIONS $5,133,769
See notes to financial statements.
9
STATEMENT OF CHANGES IN NET ASSETS ALLIANCE ALL-ASIA INVESTMENT FUND
_______________________________________________________________________________
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 1999 OCTOBER 31,
(UNAUDITED) 1998
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment loss $ (245,785) $ (347,926)
Net realized loss on investments
and foreign currency transactions (390,165) (7,043,756)
Net change in unrealized
appreciation of investments
and foreign currency denominated
assets and liabilities 5,769,719 3,310,053
Net increase (decrease) in net
assets from operations 5,133,769 (4,081,629)
CAPITAL STOCK TRANSACTIONS
Net increase (decrease) 3,897,005 (119,649)
Total increase (decrease) 9,030,774 (4,201,278)
NET ASSETS
Beginning of year 16,351,415 20,552,693
End of period $25,382,189 $16,351,415
See notes to financial statements.
10
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999 (UNAUDITED) ALLIANCE ALL-ASIA INVESTMENT FUND
_______________________________________________________________________________
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
Alliance All-Asia Investment Fund, Inc. (the "Fund") was organized as a
Maryland corporation on September 21, 1994 and is registered under the
Investment Company Act of 1940 as an open-end management investment company.
The Fund offers Class A, Class B, Class C and Advisor Class shares. Class A
shares are sold with an initial sales charge of up to 4.25%. With respect to
purchases of $1,000,000 or more, Class A shares redeemed within one year of
purchase may be subject to a contingent deferred sales charge of 1%. Class B
shares are sold with a contingent deferred sales charge which declines from
4.00% to zero depending on the period of time the shares are held. Class B
shares will automatically convert to Class A shares eight years after the end
of the calendar month of purchase. Class C shares are subject to a contingent
deferred sales charge of 1.00% on redemptions made within the first year after
purchase. Advisor Class shares are sold without an initial or contingent
deferred sales charge and are not subject to ongoing distribution expenses.
Advisor Class shares are offered to investors participating in fee-based
programs and to certain retirement plan accounts. All four classes of shares
have identical voting, dividend, liquidation and other rights, except that each
class bears different distribution expenses and has exclusive voting rights
with respect to its distribution plan. The financial statements have been
prepared in conformity with generally accepted accounting principles which
require management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities in the financial statements and
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates. The following is a summary of significant
accounting policies followed by the Fund.
1. SECURITY VALUATION
Portfolio securities traded on a national securities exchange or on a foreign
securities exchange (other than foreign securities exchanges whose operations
are similar to those of the United States over-the-counter market) are
generally valued at the last reported sale price or if no sale occurred, at the
mean of the closing bid and asked price on that day. Readily marketable
securities traded in the over-the-counter market, securities listed on a
foreign securities exchange whose operations are similar to the U.S.
over-the-counter market, and securities listed on a national securities
exchange whose primary market is believed to be over-the-counter, are valued at
the mean of the current bid and asked prices. U.S. government and fixed income
securities which mature in 60 days or less are valued at amortized cost, unless
this method does not represent fair value. Securities for which current market
quotations are not readily available are valued at their fair value as
determined in good faith by, or in accordance with procedures adopted by, the
Board of Directors. Fixed income securities may be valued on the basis of
prices obtained from a pricing service when such prices are believed to reflect
the fair market value of such securities.
2. ORGANIZATION EXPENSES
Organization expenses of approximately $201,500 have been deferred and are
being amortized on a straight-line basis through October, 1999.
3. CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies and commitments under
forward exchange currency contracts are translated into U.S. dollars at the
mean of the quoted bid and asked price of such currencies against the U.S.
dollar. Purchases and sales of portfolio securities are translated at the rates
of exchange prevailing when such securities were acquired or sold. Income and
expenses are translated at rates of exchange prevailing when accrued.
Net realized gain or loss on foreign currency transactions represents foreign
exchange gains and losses from sales of investments and forward exchange
currency contracts, the holding of foreign currencies, currency gains or losses
realized between the trade and settlement dates on foreign security
transactions, and the difference between the amounts of dividends, interest and
foreign taxes receivable recorded on the Fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized currency gains and
losses from valuing foreign currency denominated assets and liabilities at
period end exchange rates are reflected as a component of net change in
unrealized appreciation (depreciation) of investments and foreign currency
denominated assets and liabilities.
11
NOTES TO FINANCIAL STATEMENTS (CONTINUED) ALLIANCE ALL-ASIA INVESTMENT FUND
_______________________________________________________________________________
4. TAXES
It is the Fund's policy to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
investment company taxable income and net realized gains, if any, to
shareholders. Therefore, no provisions for federal income or excise taxes are
required.
5. INCOME AND EXPENSES
All income earned and expenses incurred by the Fund are borne on a pro-rata
basis by each outstanding class of shares, based on the proportionate interest
in the Fund represented by the shares of such class, except that the Fund's
Class B and Class C shares bear higher distribution and transfer agent fees
than Class A shares and the Advisor Class shares have no distribution fees.
6. INVESTMENT INCOME AND INVESTMENT TRANSACTIONS
Dividend income is recorded on the ex-dividend date. Interest income is accrued
daily. Investment transactions are accounted for on the date securities are
purchased or sold. Investment gains and losses are determined on the identified
cost basis. The Fund accretes discounts on short-term securities as adjustments
to interest income.
7. DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Income and capital gains distributions are determined in accordance with
federal tax regulations and may differ from those determined in accordance with
generally accepted accounting principles. To the extent these differences are
permanent, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require such
reclassification.
NOTE B: ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under an investment advisory agreement, the Fund pays Alliance Capital
Management L.P. ("the Adviser") an advisory fee at an annual rate of 1% of the
Fund's average daily net assets. Such fee is accrued daily and paid monthly.
Effective July 1, 1998 the Adviser has agreed to waive its fees and bear
certain expenses to the extent necessary to limit total operating expenses on
an annual basis to 3.00%, 3.70%, 3.70% and 2.70% of the daily average net
assets for the Class A, Class B, Class C and Advisor Class shares,
respectively. For the six months ended April 30, 1999, such waivers and
reimbursement amounted to $142,223. The Adviser may terminate the waiver at any
time.
Under the terms of an Administrative Agreement, the Fund pays Alliance Capital
Management L.P. (the "Administrator") a monthly fee equal to the annualized
rate of .15 of 1% of the Fund's average daily net assets. For the six months
ended April 30, 1999, the Adviser agreed to waive its fees. Such waiver
amounted to $14,009.
The Administrator provides administrative functions to the Fund as well as
other clerical services. The Administrator also prepares financial and
regulatory reports for the Fund.
The Fund compensates Alliance Fund Services, Inc. (a wholly-owned subsidiary of
the Adviser) under a Transfer Agency Agreement for providing personnel and
facilities to perform transfer agency services for the Fund. Such compensation
amounted to $42,731 for the six months ended April 30, 1999.
For the six months ended April 30, 1999, the Fund's expenses were reduced by
$3,264 under an expense offset arrangement with Alliance Fund Services.
Alliance Fund Distributors, Inc. (a wholly-owned subsidiary of the Adviser)
serves as the Distributor of the Fund's shares. The Distributor received
front-end sales charges of $3,117 from the sales of Class A shares, $14,249 and
$2,746 in contingent deferred sales charges imposed upon redemptions by
shareholders of Class B and Class C shares, respectively, for the six months
ended April 30, 1999.
Brokerage commissions paid on investment transactions for the six months ended
April 30, 1999 amounted to $141,509, none of which was paid to brokers
utilizing the services of the Pershing Division of Donaldson, Lufkin & Jenrette
Securities Corp. ("DLJ"), an affiliate of the Adviser, nor to DLJ directly.
12
ALLIANCE ALL-ASIA INVESTMENT FUND
_______________________________________________________________________________
NOTE C: DISTRIBUTION SERVICES AGREEMENT
The Fund has adopted a Distribution Services Agreement (the "Agreement")
pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the
Agreement, the Fund pays a distribution fee to the Distributor at an annual
rate of up to .30 of 1% of the Fund's average daily net assets attributable to
Class A shares and 1% of the average daily net assets attributable to both
Class B and Class C shares. There is no distribution fee on the Advisor Class
shares. The fees are accrued daily and paid monthly. The Agreement provides
that the Distributor will use such payments in their entirety for distribution
assistance and promotional activities. The Distributor has incurred expenses in
excess of the distribution costs reimbursed by the Fund in the amounts of
$2,150,638 and $320,747 for Class B and Class C shares respectively. Such costs
may be recovered from the Fund in future periods so long as the Agreement is in
effect. In accordance with the Agreement, there is no provision for recovery of
unreimbursed distribution costs incurred by the Distributor beyond the current
fiscal year for Class A shares. The Agreement also provides that the Adviser
may use its own resources to finance the distribution of the Fund's shares.
NOTE D: INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding short-term and U.S.
government obligations) aggregated $20,680,869 and $18,953,483, respectively,
for the six months ended April 30, 1999. There were no purchases or sales of
U.S. government or government agency obligations for the six months ended April
30, 1999.
At April 30, 1999, the cost of investments for federal income tax purposes was
substantially the same as the cost for finanical reporting purposes.
Accordingly, gross unrealized appreciation of investments was $4,248,355 and
gross unrealized depreciation of investments was $55,576 resulting in net
unrealized appreciation of $4,192,779, (excluding foreign currency
transactions).
The Fund had a net capital loss carryover of $12,456,151, of which $5,008,025
expires October 31, 2005, and $7,448,126, expires October 31, 2006. To the
extent that any net capital loss carryover or post-October loss is used to
offset future capital gains, it is probable that these gains will not be
distributed to shareholders.
FORWARD EXCHANGE CURRENCY CONTRACTS
The Fund enters into forward exchange currency contracts to hedge its exposure
to changes in foreign currency exchange rates on its foreign portfolio
holdings, to hedge certain firm purchase and sale commitments denominated in
foreign currencies and for investment purposes. A forward exchange currency
contract is a commitment to purchase or sell a foreign currency at a future
date at a negotiated forward rate. The gain or loss arising from the difference
between the original contracts and the closing of such contracts is included in
net realized gains or losses on foreign currency transactions.
Fluctuations in the value of forward exchange currency contracts are recorded
for financial reporting purposes as unrealized gains or losses by the Fund.
The Fund's custodian will place and maintain cash not available for investment
or other liquid assets in a separate account of the Fund having a value equal
to the aggregate amount of the Fund's commitments under forward exchange
currency contracts entered into with respect to position hedges. Risks may
arise from the potential inability of a counterparty to meet the terms of a
contract and from unanticipated movements in the value of foreign currencies
relative to the U.S. dollar. There were no forward currency contracts
outstanding at April 30, 1999.
13
NOTES TO FINANCIAL STATEMENTS (CONTINUED) ALLIANCE ALL-ASIA INVESTMENT FUND
_______________________________________________________________________________
NOTE E: CAPITAL STOCK
There are 12,000,000,000 shares of $0.001 par value capital stock authorized,
divided into four classes, designated Class A, Class B, Class C and Advisor
Class. Each class consists of 3,000,000,000 authorized shares.
Transactions in capital stock were as follows:
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
APRIL 30, 1999 OCTOBER 31, APRIL 30, 1999 OCTOBER 31,
(UNAUDITED) 1998 (UNAUDITED) 1998
------------ ------------ -------------- --------------
CLASS A
Shares sold 885,929 2,992,159 $ 6,118,957 $ 18,903,363
Shares converted
from Class B 10,217 11,757 65,689 78,666
Shares redeemed (643,706) (3,144,145) (4,391,489) (20,297,907)
Net increase
(decrease) 252,440 (140,229) $ 1,793,157 $ (1,315,878)
CLASS B
Shares sold 1,147,110 1,784,537 $ 7,532,643 $ 11,105,833
Shares converted
to Class A (10,502) (12,033) (65,689) (78,666)
Shares redeemed (933,483) (1,770,993) (6,000,887) (11,089,438)
Net increase
(decrease) 203,125 1,511 $ 1,466,067 $ (62,271)
CLASS C
Shares sold 400,519 419,389 $ 2,727,022 $ 2,891,821
Shares redeemed (263,120) (370,637) (1,765,233) (2,560,420)
Net increase 137,399 48,752 $ 961,789 $ 331,401
ADVISOR CLASS
Shares sold 195,704 385,020 $ 1,236,429 $ 2,330,830
Shares redeemed (252,169) (221,111) (1,560,437) (1,403,731)
Net increase
(decrease) (56,465) 163,909 $ (324,008) $ 927,099
NOTE F: CONCENTRATION OF RISK
Investing in securities of foreign companies involves special risks which
include the possibility of future political and economic developments which
could adversely affect the value of such securities. Moreover, securities of
many foreign companies and their markets may be less liquid and their prices
more volatile than those of United States companies. The securities markets of
many Asian countries are relatively small, with the majority of market
capitalization and trading volume concentrated in a limited number of companies
representing a small number of industries. Consequently, the Fund's investment
portfolio may experience greater price volatility and significantly lower
liquidity than a portfolio invested in equity securities of U.S. companies.
These markets may be subject to greater influence by adverse events generally
affecting the market, and by large investors trading significant blocks of
securities, than is usual in the United States.
NOTE G: BANK BORROWING
A number of open-end mutual funds managed by the Adviser, including the Fund,
participate in a $750 million revolving credit facility (the "Facility")
intended to provide for short-term financing if necessary, subject to certain
restrictions, in connection with abnormal redemption activity. Commitment fees
related to the Facility are paid by the participating funds and are included in
miscellaneous expenses in the statement of operations. The Fund did not utilize
the Facility during the six months ended April 30, 1999.
14
FINANCIAL HIGHLIGHTS ALLIANCE ALL-ASIA INVESTMENT FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------
NOVEMBER 28,
SIX MONTHS 1994(A)
ENDED YEAR ENDED OCTOBER 31, TO
APRIL 30, 1999 ------------------------------------- OCTOBER 31,
(UNAUDITED) 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $5.86 $7.54 $11.04 $10.45 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (b)(c) (.07) (.10) (.21) (.21) (.19)
Net realized and unrealized gain (loss)
on investments and foreign
currency transactions 1.88 (1.58) (2.95) .88 .64
Net increase (decrease) in net asset
value from operations 1.81 (1.68) (3.16) .67 .45
LESS: DISTRIBUTIONS
Distributions from net realized
gains on investments and foreign
currency transactions -0- -0- (.34) (.08) -0-
Net asset value, end of period $7.67 $5.86 $7.54 $11.04 $10.45
TOTAL RETURN
Total investment return based on net
asset value (d) 30.89% (22.28)% (29.61)% 6.43% 4.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $6,878 $3,778 $5,916 $12,284 $2,870
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 3.03%(e)(f) 3.74%(f) 3.45% 3.37% 4.42%(e)
Expenses, before waivers/reimbursements 4.65%(e) 4.63% 3.57% 3.61% 10.57%(e)
Net investment loss, net of waivers/
reimbursements (2.24)%(e) (1.50)% (1.97)% (1.75)% (1.87)%(e)
Portfolio turnover rate 210% 93% 70% 66% 90%
</TABLE>
See footnote summary on page 18.
15
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE ALL-ASIA INVESTMENT FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------
NOVEMBER 28,
SIX MONTHS 1994(A)
ENDED YEAR ENDED OCTOBER 31, TO
APRIL 30, 1999 ------------------------------------ OCTOBER 31,
(UNAUDITED) 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $5.71 $7.39 $10.90 $10.41 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (b)(c) (.09) (.14) (.28) (.28) (.25)
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 1.82 (1.54) (2.89) .85 .66
Net increase (decrease) in net
asset value from operations 1.73 (1.68) (3.17) .57 .41
LESS: DISTRIBUTIONS
Distributions from net realized gains
on investments and foreign currency
transactions -0- -0- (.34) (.08) -0-
Net asset value, end of period $7.44 $5.71 $7.39 $10.90 $10.41
TOTAL RETURN
Total investment return based on net
asset value (d) 30.30% (22.73)% (30.09)% 5.49% 4.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $13,042 $8,844 $11,439 $23,784 $5,170
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 3.73%(e)(f) 4.49%(f) 4.15% 4.07% 5.20%(e)
Expenses, before waivers/reimbursements 5.44%(e) 5.39% 4.27% 4.33% 11.32%(e)
Net investment loss, net of waivers/
reimbursements (2.94)%(e) (2.22)% (2.67)% (2.44)% (2.64)%(e)
Portfolio turnover rate 210% 93% 70% 66% 90%
</TABLE>
See footnote summary on page 18.
16
ALLIANCE ALL-ASIA INVESTMENT FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------------
NOVEMBER 28,
SIX MONTHS 1994(A)
ENDED YEAR ENDED OCTOBER 31, TO
APRIL 30, 1999 ------------------------------------ OCTOBER 31,
(UNAUDITED) 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $5.72 $7.40 $10.91 $10.41 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (b)(c) (.09) (.14) (.27) (.28) (.35)
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 1.83 (1.54) (2.90) .86 .76
Net increase (decrease) in net
asset value from operations 1.74 (1.68) (3.17) .58 .41
LESS: DISTRIBUTIONS
Distributions from net realized
gains on investments and
foreign currency transactions -0- -0- (.34) (.08) -0-
Net asset value, end of period $7.46 $5.72 $7.40 $10.91 $10.41
TOTAL RETURN
Total investment return based on
net asset value (d) 30.42% (22.70)% (30.06)% 5.59% 4.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $3,262 $1,717 $1,859 $4,228 $597
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 3.73%(e)(f) 4.48%(f) 4.15% 4.07% 5.84%(e)
Expenses, before waivers/reimbursements 5.49%(e) 5.42% 4.27% 4.30% 11.38%(e)
Net investment loss, net of waivers/
reimbursements (2.95)%(e) (2.20)% (2.66)% (2.42)% (3.41)%(e)
Portfolio turnover rate 210% 93% 70% 66% 90%
</TABLE>
See footnote summary on page 18.
17
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE ALL-ASIA INVESTMENT FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
ADVISOR CLASS
----------------------------------------------------
OCTOBER 2,
SIX MONTHS 1996(G)
ENDED YEAR ENDED OCTOBER 31, TO
APRIL 30, 1999 ----------------------- OCTOBER 31,
(UNAUDITED) 1998 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $5.90 $7.56 $11.04 $11.65
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (b)(c) (.06) (.08) (.15) -0-
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 1.89 (1.58) (2.99) (.61)
Net increase (decrease) in net asset
value from operations 1.83 (1.66) (3.14) (.61)
LESS: DISTRIBUTIONS
Distributions from net realized gains
on investments and foreign
currency transactions -0- -0- (.34) -0-
Net asset value, end of period $7.73 $5.90 $7.56 $11.04
TOTAL RETURN
Total investment return based on net
asset value (d) 31.02% (21.96)% (29.42)% (5.24)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $2,200 $2,012 $1,338 $27
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 2.74%(e)(f) 3.46%(f) 3.21% 4.97%(e)
Expenses, before waivers/reimbursements 4.31%(e) 4.39% 3.43% 5.54%(e)
Net investment loss, net of waivers/
reimbursements (1.93)%(e) 1.22% (1.51)% 1.63%(e)
Portfolio turnover rate 210% 93% 70% 66%
</TABLE>
(a) Commencement of operations.
(b) Based on average shares outstanding.
(c) Net of expenses waived by the Adviser.
(d) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period. Initial sales charges or contingent
deferred sales charges are not reflected in the calculation deferred sales
charges are not reflected in the calculation of total investment return. Total
investment return calculated for a period of less than one year is not
annualized.
(e) Annualized
(f) Ratios reflect expenses grossed up for expense offset arrangement with the
Transfer Agent. For the six months ended April 30, 1999 and the year ended
October 31, 1998, the ratios of expenses to average net assets were 3.00% and
3.70% for Class A, 3.70% and 4.44% for Class B, 3.70% and 4.44% for Class C and
2.70% and 3.41% for Advisor Class shares, respectively.
(g) Commencement of distribution.
18
<PAGE>
ALLIANCE ALL-ASIA INVESTMENT FUND
Annual Report
October 31, 1998
Alliance Capital [LOGO](R)
<PAGE>
PORTFOLIO OF INVESTMENTS
October 31, 1998 Alliance All-Asia Investment Fund
================================================================================
Company Shares U.S. $ Value
- --------------------------------------------------------------------------------
COMMON STOCKS-99.0%
AUSTRALIA-7.0%
Hoyts Cinemas Group ............................. 250,000 $ 223,527
Normandy Mining, Ltd. ........................... 306,979 274,472
Tabcorp Holdings, Ltd. .......................... 43,750 291,163
Woolworths, Ltd. ................................ 103,680 364,970
-----------
1,154,132
-----------
CHINA-1.6%
Yanzhou Coal Mining Co., Ltd. Cl. H ............. 912,000 178,985
Zhejiang Southeast Electric Power Co., Ltd.
(GDR) (a)(b) .................................. 8,000 84,000
-----------
262,985
-----------
HONG KONG-4.6%
Cheung Kong Holdings, Ltd. ...................... 24,000 164,235
Dao Heng Bank Group, Ltd. ....................... 20,000 41,575
Dickson Concepts, Ltd. .......................... 140,000 135,571
HSBC Holdings, Plc .............................. 3,300 75,629
Hutchison Whampoa, Ltd. ......................... 12,000 85,991
NG Fung Hong, Ltd. .............................. 100,000 88,444
Smartone Telecom Holdings, Ltd. ................. 42,000 119,303
Sun Hung Kai Properties, Ltd. ................... 7,000 48,580
-----------
759,328
-----------
INDIA-13.8%
BFL Software, Ltd. (a) .......................... 18,000 223,115
Hindustan Petroleum Corp. ....................... 55,300 347,395
Indian Hotels Co., Ltd. (GDR) ................... 30,000 275,250
Industrial Credit & Inv. Corp. (GDR) (b) ........ 15,600 87,360
(GDR) ......................................... 15,000 84,000
Infosys Technologies, Ltd. ...................... 6,000 345,480
Leading Edge Systems, Ltd. ...................... 20,000 205,310
Mahanagar Telephone Nigam, Ltd. (GDR) ........... 4,500 49,388
NIIT, Ltd. ...................................... 10,000 300,885
Videsh Sanchar Nigam, Ltd. (GDR) (b) ............ 1,700 17,808
Zee Telefilms, Ltd. ............................. 20,000 317,640
-----------
2,253,631
-----------
INDONESIA-0.7%
PT Tambang Timah ................................ 200,000 109,868
-----------
JAPAN-61.7%
Acom Co., Ltd. .................................. 5,000 279,279
Advantest Corp. (c) ............................. 3,000 189,189
Alps Electric Co., Ltd. ......................... 14,000 192,673
Bank Of Tokyo-Mitsubishi ........................ 200 1,855
Bridgestone Corp. (c) ........................... 21,000 462,162
Canon, Inc. ..................................... 28,000 529,730
Daito Trust Construction Co., Ltd. .............. 29,300 250,137
Familymart Co., Ltd. ............................ 3,000 152,124
Fuji Photo Film Co. (c) ......................... 14,000 512,913
Honda Motor Co., Ltd. (c) ....................... 19,000 570,571
Hoya Corp. (c) .................................. 6,000 256,885
Japan Tobacco, Inc. ............................. 45 377,220
Kao Corp. ....................................... 10,000 202,488
Kokuyo .......................................... 11,000 146,289
Mabuchi Motor Co., Ltd. ......................... 3,000 195,624
Nintendo Co., Ltd. (c) .......................... 6,400 541,433
Nippon Electric Glass Co., Ltd. ................. 15,000 156,371
NTT Mobile Comm Network Inc. .................... 21 758,559
Promise Co., Ltd. ............................... 5,000 226,083
Rohm Co. (c) .................................... 6,000 530,245
Santen Pharmaceutical Co. (c) ................... 24,000 411,634
Shin-Etsu Chemical Co., Ltd. .................... 10,000 199,056
Shohkoh Fund & Co., Ltd. ........................ 1,300 395,410
Sony Corp. (c) .................................. 9,100 577,778
Takeda Chemical Industries ...................... 18,000 585,328
7
<PAGE>
PORTFOLIO OF INVESTMENTS (continued) Alliance All-Asia Investment Fund
================================================================================
Company Shares U.S. $ Value
- --------------------------------------------------------------------------------
TDK Corp. ....................................... 10,000 $ 658,945
Uni-Charm Corp. ................................. 4,000 181,896
Yamanouchi Pharmaceutical........................ 19,000 544,487
-----------
10,086,364
-----------
NEW ZEALAND-0.9%
Lion Nathan, Ltd. ............................... 53,700 140,762
-----------
PHILIPPINES-4.4%
Manila Electric Co. Series B..................... 121,400 358,032
Philippine Long Distance Telephone .............. 15,000 358,736
-----------
716,768
-----------
SOUTH KOREA-4.3%
Pohang Iron & Steel Co., Ltd. (ADR) ............. 17,000 306,000
S.K. Telecom Co., Ltd. .......................... 570 404,037
-----------
710,037
-----------
Total Common Stocks (cost $17,399,648) .......... 16,193,875
-----------
Principal
Amount
Company (000) U.S. $ Value
- --------------------------------------------------------------------------------
TIME DEPOSIT-5.5%
UNITED STATES-5.5%
Dresdner 5.56%, 11/02/98 (cost $900,000) ........ $900 $ 900,000
-----------
TOTAL INVESTMENTS-104.5% (cost $18,299,648) ..... 17,093,875
Other assets less liabilities-(4.5%) ............ (742,460)
-----------
NET ASSETS-100% ................................. $16,351,415
===========
- --------------------------------------------------------------------------------
(a) Non-income producing security
(b) Securities are exempt from registration under rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At October 31,
1998, these securities amounted to $189,168 or 1.16% of net assets.
(c) Securities, or a portion thereof, with an aggregate market value of
$3,248,581 have been segregated to collateralize forward exchange currency
contracts.
Glossary of Terms:
ADR - American Depositary Receipt
GDR - Global Depositary Receipt
See notes to financial statements.
8
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1998 Alliance All-Asia Investment Fund
================================================================================
ASSETS
Investments in securities, at value (cost $18,299,648) ....... $ 17,093,875
Cash, at value (cost $62,650) ................................ 62,680
Receivable for capital stock sold ............................ 761,880
Dividends and interest receivable ............................ 52,980
Deferred organization expenses ............................... 42,790
Receivable from Adviser ...................................... 32,412
------------
Total assets ................................................. 18,046,617
------------
LIABILITIES
Payable for investment securities purchased .................. 1,088,940
Unrealized depreciation of forward exchange currency contracts 388,774
Payable for capital stock redeemed ........................... 13,599
Distribution fee payable ..................................... 9,217
Accrued expenses ............................................. 194,672
------------
Total liabilities ............................................ 1,695,202
------------
NET ASSETS ..................................................... $ 16,351,415
============
COMPOSITION OF NET ASSETS
Captial stock, at par ........................................ $ 2,834
Additional paid-in capital ................................... 30,333,902
Undistributed net investment income .......................... 59,962
Accumulated net realized loss on investments and foreign
currency transactions ...................................... (12,456,242)
Net unrealized depreciation of investments and foreign
currency denominated assets and liabilities ................ (1,589,041)
------------
$ 16,351,415
============
CALCULATION OF MAXIMUM OFFERING PRICE
Class A Shares
Net asset value and redemption price per share
($3,777,878 / 644,281 shares of capital stock issued and
outstanding) ............................................... $5.86
Sales charge--4.25% of public offering price ................. .25
-----
Maximum offering price ....................................... $6.11
=====
Class B Shares
Net asset value and offering price per share
($8,844,303 / 1,548,768 shares of capital stock issued
and outstanding) ........................................... $5.71
=====
Class C Shares
Net asset value and offering price per share
($1,717,049 / 300,050 shares of capital stock issued
and outstanding) ........................................... $5.72
=====
Advisor Class Shares
Net asset value, redemption, and offering per share
($2,012,185 / 340,919 shares of capital stock issued
and outstanding) ........................................... $5.90
=====
- --------------------------------------------------------------------------------
See notes to financial statements.
9
<PAGE>
STATEMENT OF OPERATIONS
October 31, 1998 Alliance All-Asia Investment Fund
================================================================================
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $21,375) .... $ 337,684
Interest ................................................ 57,155 $ 394,839
-----------
EXPENSES
Advisory fee ............................................ 178,047
Distribution fee - Class A .............................. 13,958
Distribution fee - Class B .............................. 100,279
Distribution fee - Class C .............................. 18,084
Custodian ............................................... 150,535
Transfer agency ...................................... 125,660
Audit and legal ......................................... 82,145
Registration ............................................ 55,496
Amortization of organization expenses ................... 40,057
Taxes ................................................... 39,043
Printing ................................................ 36,637
Administrative .......................................... 26,707
Directors' fees ......................................... 24,000
Miscellaneous ........................................... 21,527
-----------
Total expenses .......................................... 912,175
Less expenses waived and reimbursed by the Adviser ...... (169,410) 742,765
----------- -----------
Net investment loss ..................................... (347,926)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized loss on investment transactions ............ (7,442,593)
Net realized gain on foreign currency transactions ...... 398,837
Net change in unrealized depreciation of:
Investments ........................................... 3,685,890
Foreign currency denominated assets and liabilities ... (375,837)
-----------
Net loss on investments and foreign currency transactions (3,733,703)
-----------
NET DECREASE IN NET ASSETS FROM OPERATIONS ................ $(4,081,629)
===========
</TABLE>
- --------------------------------------------------------------------------------
See notes to financial statements.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS Alliance All-Asia Investment Fund
================================================================================
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, October 31,
1998 1997
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment loss ..................................................... $ (347,926) $ (830,892)
Net realized loss on investments and foreign currency transactions ...... 7,043,756) (5,174,455)
Net change in unrealized depreciation of investments and foreign currency
denominated assets and liabilities .................................... 3,310,053 (3,031,796)
------------ ------------
Net decrease in net assets from operations ... (4,081,629) (9,037,143)
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gain on investments
Class A ............................................................... -0- (362,976)
Class B ............................................................... -0- (710,027)
Class C ............................................................... -0- (103,481)
Advisor Class ......................................................... -0- (5,766)
CAPITAL STOCK TRANSACTIONS
Net decrease ............................................................ (119,649) (9,550,773)
------------ ------------
Total decrease .......................................................... (4,201,278) (19,770,166)
NET ASSETS
Beginning of year ....................................................... 20,552,693 40,322,859
------------ ------------
End of year (including undistributed net investment income of $9,051
at October 31, 1997) .................................................. $ 16,351,415 $ 20,552,693
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See notes to financial statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
October 31, 1998 Alliance All-Asia Investment Fund
================================================================================
NOTE A: Significant Accounting Policies
Alliance All-Asia Investment Fund, Inc. (the "Fund") was organized as a Maryland
corporation on September 21, 1994 and is registered under the Investment Company
Act of 1940 as a open-end management investment company. The Fund offers
Class A, Class B, Class C and Advisor Class shares. Class A shares are sold with
an initial sales charge of up to 4.25%. 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 of 1%. Class B shares are sold with a
contingent deferred sales charge which declines from 4.00% to zero depending on
the period of time the shares are held. Class B shares will automatically
convert to Class A shares eight years after the end of the calendar month of
purchase. Class C shares are subject to a contingent deferred sales charge of
1.00% on redemptions made within the first year after purchase. Advisor Class
shares are sold without an initial or contingent deferred sales charge and are
not subject to ongoing distribution expenses. Advisor Class shares are offered
to investors participating in fee-based programs and to certain retirement plan
accounts. All four classes of shares have identical voting, dividend,
liquidation and other rights, except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan. The financial statements have been prepared in conformity
with generally accepted accounting principles which require management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities in the financial statements and amounts of income and expenses
during the reporting period. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the
Fund.
1. Security Valuation
Portfolio securities traded on a national securities exchange or on a foreign
securities exchange (other than foreign securities exchanges whose operations
are similar to those of the United States over-the-counter market) are generally
valued at the last reported sale price or if no sale occurred, at the mean of
the closing bid and asked price on that day. Readily marketable securities
traded in the over-the-counter market, securities listed on a foreign securities
exchange whose operations are similar to the U.S. over-the-counter market, and
securities listed on a national securities exchange whose primary market is
believed to be over-the-counter, are valued at the mean of the current bid and
asked prices. U.S. government and fixed income securities which mature in 60
days or less are valued at amortized cost, unless this method does not represent
fair value. Securities for which current market quotations are not readily
available are valued at their fair value as determined in good faith by, or in
accordance with procedures adopted by, the Board of Directors. Fixed income
securities may be valued on the basis of prices obtained from a pricing service
when such prices are believed to reflect the fair market value of such
securities.
2. Organization Expenses
Organization expenses of approximately $201,500 have been deferred and are being
amortized on a straight-line basis through October, 1999.
3. Currency Translation
Assets and liabilities denominated in foreign currencies and commitments under
forward exchange currency contracts are translated into U.S. dollars at the mean
of the quoted bid and asked price of such currencies against the U.S. dollar.
Purchases and sales of portfolio securities are translated at the rates of
exchange prevailing when such securities were acquired or sold. Income and
expenses are translated at rates of exchange prevailing when accrued.
Net realized gain or loss on foreign currency transactions represents foreign
exchange gains and losses from sales of investments and forward exchange
currency contracts, the holding of foreign currencies, currency gains or losses
realized between the trade and settlement dates on foreign security
transactions, and the difference between the amounts of dividends, interest and
foreign taxes receivable recorded on the Fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized currency gains and
losses from valuing foreign currency denominated assets and liabilities at
period end exchange rates are reflected as a component of net change in
unrealized appreciation (depreciation) of investments and foreign currency
denominated assets and liabilities.
12
<PAGE>
Alliance All-Asia Investment Fund
================================================================================
4. Taxes
It is the Fund's policy to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
investment company taxable income and net realized gains, if any, to
shareholders. Therefore, no provisions for federal income or excise taxes are
required.
5. Income and Expenses
All income earned and expenses incurred by the Fund are borne on a pro-rata
basis by each outstanding class of shares, based on the proportionate interest
in the Fund represented by the shares of such class, except that the Fund's
Class B and Class C shares bear higher distribution and transfer agent fees than
Class A shares and the Advisor Class shares have no distribution fees.
6. Investment Income and Investment Transactions
Dividend income is recorded on the ex-dividend date. Interest income is accrued
daily. Investment transactions are accounted for on the date securities are
purchased or sold. Investment gains and losses are determined on the identified
cost basis. The Fund accretes discounts on short-term securities as adjustments
to interest income.
7. Dividends and Distributions
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Income and capital gains distributions are determined in accordance with
federal tax regulations and may differ from those determined in accordance with
generally accepted accounting principles. To the extent these differences are
permanent, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require such
reclassification. During the current fiscal year, permanent differences,
primarily due to foreign currency losses, resulted in a net decrease in
accumulated net realized loss on investments and foreign currency transactions
and a corresponding increase in undistributed net investment income. This
reclassification had no effect on net assets.
- --------------------------------------------------------------------------------
NOTE B: Advisory Fee and Other Transactions with Affiliates
Under an investment advisory agreement, the Fund pays Alliance Capital
Management L.P. ("the Adviser") an advisory fee at an annual rate of 1% of the
Fund's average daily net assets. Such fee is accrued daily and paid monthly.
Effective July 1, 1998 the Adviser has agreed to voluntarily waive its fees and
bear certain expenses so that total expenses do not exceed an annual basis of
3.00%, 3.70%, 3.70% and 2.70% of the daily average net assets for the Class A,
Class B, Class C and Advisor Class shares, respectively. For the year ended
October 31, 1998, such waivers and reimbursement amounted to $134,448. The
Adviser may terminate the voluntary waiver at any time.
Under the terms of an Administrative Agreement, the Fund pays Alliance Capital
Management L.P. (the "Administrator") a monthly fee equal to the annualized rate
of .15 of 1% of the Fund's average daily net assets. For the year ended October
31, 1998, the Adviser agreed to waive its fees. Such waiver amounted to $26,707.
The Administrator provides administrative functions to the Fund as well as other
clerical services. The Administrator also prepares financial and regulatory
reports for the Fund.
The Fund compensates Alliance Fund Services, Inc. (a wholly-owned subsidiary of
the Adviser) under a Transfer Agency Agreement for providing personnel and
facilities to perform transfer agency services for the Fund. Such compensation
amounted to $80,098 for the year ended October 31, 1998.
In addition, for the year ended October 31, 1998, the Fund's expenses were
reduced by $8,255 under an expense offset arrangement with Alliance Fund
Services. Transfer Agency fees reported in the statement of operations exclude
these credits.
Alliance Fund Distributors, Inc. (a wholly-owned subsidiary of the Adviser)
serves as the Distributor of the Fund's shares. The Distributor received
front-end sales charges of $9,560 from the sales of Class A shares and $437,
$69,438 and $1,601 in contingent deferred sales charges imposed upon redemptions
by shareholders of Class A, Class B, and Class C shares, respectively, for the
year ended October 31, 1998.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued) Alliance All-Asia Investment Fund
================================================================================
Brokerage commissions paid on investment transactions for the year ended October
31, 1998 amounted to $121,751, none of which was paid to brokers utilizing the
services of the Pershing Division of Donaldson, Lufkin & Jenrette Securities
Corp. ("DLJ"), an affiliate of the Adviser, nor to DLJ directly.
- --------------------------------------------------------------------------------
NOTE C: Distribution Services Agreement
The Fund has adopted a Distribution Services Agreement (the "Agreement")
pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the
Agreement, the Fund pays a distribution fee to the Distributor at an annual rate
of up to .30 of 1% of the Fund's average daily net assets attributable to Class
A shares and 1% of the average daily net assets attributable to both Class B and
Class C shares. There is no distribution fee on the Advisor Class shares. The
fees are accrued daily and paid monthly. The Agreement provides that the
Distributor will use such payments in their entirety for distribution assistance
and promotional activities. The Distributor has incurred expenses in excess of
the distribution costs reimbursed by the Fund in the amounts of $2,011,503 and
$240,465 for Class B and Class C shares respectively. Such costs may be
recovered from the Fund in future periods so long as the Agreement is in effect.
In accordance with the Agreement, there is no provision for recovery of
unreimbursed distribution costs incurred by the Distributor beyond the current
fiscal year for Class A shares. The Agreement also provides that the Adviser may
use its own resources to finance the distribution of the Fund's shares.
- --------------------------------------------------------------------------------
NOTE D: Investment Transactions
Purchases and sales of investment securities (excluding short-term and U.S.
government obligations) aggregated $18,324,364 and $15,414,943, respectively,
for the year ended October 31, 1998. There were no purchases or sales of U.S.
government or government agency obligations for the year ended October 31, 1998.
At October 31, 1998, the cost of investments for federal income tax purposes was
substantially the same. Accordingly, gross unrealized appreciation of
investments was $1,201,054 and gross unrealized depreciation of investments was
$2,406,827 resulting in net unrealized depreciation of $1,205,773 (excluding
foreign currency transactions).
The Fund had a net capital loss carryover of $12,456,151, of which $5,008,025
expires October 31, 2005, and $7,448,126 expires October 31, 2006. To the extent
that any net capital loss carryover or post-October loss is used to offset
future capital gains, it is probable that these gains will not be distributed to
shareholders.
Forward Exchange Currency Contracts
The Fund enters into forward exchange currency contracts to hedge its exposure
to changes in foreign currency exchange rates on its foreign portfolio holdings,
to hedge certain firm purchase and sale commitments denominated in foreign
currencies and for investment purposes. A forward exchange currency contract is
a commitment to purchase or sell a foreign currency at a future date at a
negotiated forward rate. The gain or loss arising from the difference between
the original contracts and the closing of such contracts is included in net
realized gains or losses on foreign currency transactions.
Fluctuations in the value of forward exchange currency contracts are recorded
for financial reporting purposes as unrealized gains or losses by the Fund.
The Fund's custodian will place and maintain cash not available for investment
or other liquid assets in a separate account of the Fund having a value equal to
the aggregate amount of the Fund's commitments under forward exchange currency
contracts entered into with respect to position hedges. Risks may arise from the
potential inability of a counterparty to meet the terms of a contract and from
unanticipated movements in the value of foreign currencies relative to the U.S.
dollar. The face or contract amount, in U.S. dollars, as reflected in the
following table, reflects the total exposure the Fund has in that particular
currency contract.
14
<PAGE>
Alliance All-Asia Investment Fund
================================================================================
At October 31, 1998, the Fund had outstanding forward exchange currency
contracts, as follows:
<TABLE>
<CAPTION>
U.S. $
Contract U.S. $ Value on
Amount Current Origination Unrealized
(000) Value Date Depreciation
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Forward Exchange
Currency Sale Contracts
Japanese Yen,
settling 12/17/98............. 339,681 $2,933,774 $ 2,545,000 $ (388,774)
</TABLE>
- --------------------------------------------------------------------------------
NOTE E: Capital Stock
There are 12,000,000,000 shares of $0.001 par value capital stock authorized,
divided into four classes, designated Class A, Class B, Class C and Advisor
Class. Each class consists of 3,000,000,000 authorized shares.
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
------------------------------ ----------------------------------
SHARES AMOUNT
------------------------------ ----------------------------------
Year Ended Year Ended Year Ended Year Ended
October 31, October 31, October 31, October 31,
1998 1997 1998 1997
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Class A
Shares sold .................... 2,992,159 774,765 $ 18,903,363 $ 7,493,418
Shares issued in reinvestment of
distributions ................ -0- 29,448 -0- 321,278
Shares converted from Class B .. 11,757 12,185 78,666 128,940
Shares redeemed ................ (3,144,145) (1,145,077) (20,297,907) (11,393,804)
---------- ---------- ------------ ------------
Net decrease ................... (140,229) (328,679) $ (1,315,878) $ (3,450,168)
========== ========== ============ ============
Class B
Shares sold .................... 1,784,537 1,070,451 $ 11,105,833 $ 10,641,169
Shares issued in reinvestment of
distributions ................ -0- 42,591 -0- 458,704
Shares converted to Class A .... (12,033) (12,388) (78,666) (128,940)
Shares redeemed ................ (1,770,993) (1,735,240) (11,089,438) (17,475,408)
---------- ---------- ------------ ------------
Net increase (decrease) ........ 1,511 (634,586) $ (62,271) $ (6,504,475)
========== ========== ============ ============
Class C
Shares sold .................... 419,389 182,241 $ 2,891,821 $ 1,850,152
Shares issued in reinvestment of
distributions ................ -0- 8,253 -0- 88,889
Shares redeemed ................ (370,637) (326,841) (2,560,420) (3,438,732)
---------- ---------- ------------ ------------
Net increase (decrease) ........ 48,752 (136,347) $ 331,401 $ (1,499,691)
========== ========== ============ ============
</TABLE>
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued) Alliance All-Asia Investment Fund
================================================================================
<TABLE>
<CAPTION>
------------------------------ ----------------------------------
SHARES AMOUNT
------------------------------ ----------------------------------
Year Ended Year Ended Year Ended Year Ended
October 31, October 31, October 31, October 31,
1998 1997 1998 1997
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Advisor Class
Shares sold .................... 385,020 265,011 $ 2,330,830 $ 2,733,346
Shares issued in reinvestment of
distributions ................ -0- 529 -0- 5,766
Shares redeemed ................ (221,111) (91,004) (1,403,731) (835,551)
---------- ---------- ------------ ------------
Net increase ................... 163,909 174,536 $ 927,099 $ 1,903,561
========== ========== ============ ============
</TABLE>
- --------------------------------------------------------------------------------
NOTE F: Concentration of Risk
Investing in securities of foreign companies involves special risks which
include the possibility of future political and economic developments which
could adversely affect the value of such securities. Moreover, securities of
many foreign companies and their markets may be less liquid and their prices
more volatile than those of United States companies. The securities markets of
many Asian countries are relatively small, with the majority of market
capitalization and trading volume concentrated in a limited number of companies
representing a small number of industries. Consequently, the Fund's investment
portfolio may experience greater price volatility and significantly lower
liquidity than a portfolio invested in equity securities of U.S. companies.
These markets may be subject to greater influence by adverse events generally
affecting the market, and by large investors trading significant blocks of
securities, than is usual in the United States.
- --------------------------------------------------------------------------------
NOTE G: Bank Borrowing
A number of open-end mutual funds managed by the Adviser, including the Fund,
participate in a $750 million revolving credit facility (the "Facility") to
provide for short-term financing if necessary, subject to certain restrictions,
in connection with abnormal redemption activity. Commitment fees related to the
Facility are paid by the participating funds and are included in miscellaneous
expenses in the statement of operations. The Fund did not utilize the Facility
during the year ended October 31, 1998.
16
<PAGE>
FINANCIAL HIGHLIGHTS Alliance All-Asia Investment Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
---------------------------------------------------------
CLASS A
---------------------------------------------------------
November 28,
Year Ended October 31, 1994(a)
-------------------------------------- to
1998 1997 1996 October 31, 1995
------- ------- ------- ----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ..... $ 7.54 $ 11.04 $ 10.45 $10.00
------- ------- ------- ------
Income From Investment Operations
Net investment loss (b)(c) ............... (.10) (.21) (.21) (.19)
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions ........................... (1.58) (2.95) .88 .64
------- ------- ------- ------
Net increase (decrease) in net asset value
from operations ........................ (1.68) (3.16) .67 .45
------- ------- ------- ------
Less: Distributions
Distributions from net realized gains on
investments and foreign currency
transactions ........................... -0- (.34) (.08) -0-
------- ------- ------- ------
Net asset value, end of period ........... $ 5.86 $ 7.54 $ 11.04 $10.45
======= ======= ======= ======
Total Return
Total investment return based on net asset
value (d) .............................. (22.28)% (29.61)% 6.43% 4.50%
Ratios/Supplemental Data
Net assets, end of period (000's omitted) $ 3,778 $ 5,916 $12,284 $2,870
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 3.74%(e) 3.45% 3.37% 4.42%(f)
Expenses, before waivers/reimbursements 4.63% 3.57% 3.61% 10.57%(f)
Net investment loss, net of waivers/
reimbursements ....................... (1.50)% (1.97)% (1.75)% (1.87)%(f)
Portfolio turnover rate .................. 93% 70% 66% 90%
</TABLE>
- --------------------------------------------------------------------------------
See footnote summary on page 20.
17
<PAGE>
FINANCIAL HIGHLIGHTS (continued) Alliance All-Asia Investment Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
---------------------------------------------------------
CLASS B
---------------------------------------------------------
November 28,
Year Ended October 31, 1994(a)
-------------------------------------- to
1998 1997 1996 October 31, 1995
------- ------- ------- ----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ..... $ 7.39 $ 10.90 $ 10.41 $10.00
------- ------- ------- ------
Income From Investment Operations
Net investment loss (b)(c) ............... (.14) (.28) (.28) (.25)
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions ........................... (1.54) (2.89) .85 .66
------- ------- ------- ------
Net increase (decrease) in net asset value
from operations ........................ (1.68) (3.17) .57 .41
------- ------- ------- ------
Less: Distributions
Distributions from net realized gains on
investments and foreign currency
transactions ........................... -0- (.34) (.08) -0-
------- ------- ------- ------
Net asset value, end of period ........... $ 5.71 $ 7.39 $ 10.90 $10.41
======= ======= ======= ======
Total Return
Total investment return based on net asset
value (d) .............................. (22.73)% (30.09)% 5.49% 4.10%
Ratios/Supplemental Data
Net assets, end of period (000's omitted) $ 8,844 $11,439 $23,784 $5,170
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 4.49%(e) 4.15% 4.07% 5.20%(f)
Expenses, before waivers/reimbursements 5.39% 4.27% 4.33% 11.32%(f)
Net investment loss, net of waivers/
reimbursements ....................... (2.22)% (2.67)% (2.44)% (2.64)%(f)
Portfolio turnover rate .................. 93% 70% 66% 90%
</TABLE>
- --------------------------------------------------------------------------------
See footnote summary on page 20.
18
<PAGE>
Alliance All-Asia Investment Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
---------------------------------------------------------
CLASS C
---------------------------------------------------------
November 28,
Year Ended October 31, 1994(a)
-------------------------------------- to
1998 1997 1996 October 31, 1995
------- ------- ------- ----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ..... $ 7.40 $ 10.91 $ 10.41 $10.00
------- ------- ------- ------
Income From Investment Operations
Net investment loss (b)(c) ............... (.14) (.27) (.28) (.35)
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions ........................... (1.54) (2.90) .86 .76
------- ------- ------- ------
Net increase (decrease) in net asset value
from operations ........................ (1.68) (3.17) .58 .41
------- ------- ------- ------
Less: Distributions
Distributions from net realized gains on
investments and foreign currency
transactions ........................... -0- (.34) (.08) -0-
------- ------- ------- ------
Net asset value, end of period ........... $ 5.72 $ 7.40 $ 10.91 $10.41
======= ======= ======= ======
Total Return
Total investment return based on net asset
value (d) .............................. (22.70)% (30.06)% 5.59% 4.10%
Ratios/Supplemental Data
Net assets, end of period (000's omitted) $ 1,717 $ 1,859 $ 4,228 $ 597
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 4.48%(e) 4.15 % 4.07% 5.84%(f)
Expenses, before waivers/reimbursements 5.42% 4.27% 4.30% 11.38%(f)
Net investment loss, net of waivers/
reimbursements ....................... (2.20)% (2.66)% (2.42)% (3.41)%(f)
Portfolio turnover rate .................. 93% 70% 66% 90%
</TABLE>
- --------------------------------------------------------------------------------
See footnote summary on page 20.
19
<PAGE>
FINANCIAL HIGHLIGHTS (continued) Alliance All-Asia Investment Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
--------------------------------------------
ADVISOR CLASS
--------------------------------------------
Year Ended October 31, October 2, 1996(g)
------------------------ to
1998 1997 October 31, 1996
------- ------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of period ..... $ 7.56 $ 11.04 $ 11.65
------- ------- -------
Income From Investment Operations
Net investment loss (b)(c) ............... (.08) (.15) -0-
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions ........................... (1.58) (2.99) (.61)
------- ------- -------
Net decrease in net asset value
from operations ........................ (1.66) (3.14 (.61)
------- ------- -------
Less: Distributions
Distributions from net realized gains on
investments and foreign currency
transactions ........................... -0- (.34) -0-
------- ------- -------
Net asset value, end of period ........... $ 5.90 $ 7.56 $ 11.04
======= ======= =======
Total Return
Total investment return based on net asset
value (d) .............................. (21.96)% (29.42)% (5.24)%
Ratios/Supplemental Data
Net assets, end of period (000's omitted) $ 2,012 $ 1,338 $ 27
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 3.46%(e) 3.21% 4.97%(f)
Expenses, before waivers/reimbursements 4.39% 3.43% 5.54%(f)
Net investment loss, net of waivers/
reimbursements ....................... 1.22% (1.51)% 1.63%(f)
Portfolio turnover rate .................. 93% 70% 66%
</TABLE>
- --------------------------------------------------------------------------------
(a) Commencement of operations.
(b) Based on average shares outstanding.
(c) Net of expenses waived by the Adviser.
(d) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
of all dividends and distributions at net asset value during the period,
and redemption on the last day of the period. Initial sales charges or
contingent deferred sales charges are not reflected in the calculation
deferred sales charges are not reflected in the calculation of total
investment return. Total investment return calculated for a period of less
than one year is not annualized.
(e) Ratios reflect expenses grossed up for expense offset arrangement with the
Transfer Agent. For the year ended October 31, 1998, the ratios of
expenses to average net assets were 3.70%, 4.44%, 4.44% and 3.41% for
Class A, B, C and Advisor Class shares, respectively.
(f) Annualized.
(g) Commencement of distribution.
20
<PAGE>
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS Alliance All-Asia Investment Fund
================================================================================
To the Shareholders and Board of Directors
Alliance All-Asia Investment Fund, Inc.
We have audited the accompanying statement of assets and liabilities of Alliance
All-Asia Investment Fund, Inc. (the "Fund"), including the portfolio of
investments, as of October 31, 1998, and the related statement of operations for
the year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
periods indicated therein. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Alliance All-Asia Investment Fund, Inc. at October 31, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the indicated periods, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
New York, New York
December 2, 1998
21
<PAGE>
<PAGE>
_______________________________________________________________
APPENDIX A: 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 in any particular situation.
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
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investments. If the Fund desires to sell a particular security
from its portfolio on which it has written a call option, it will
effect a closing transaction prior to or concurrent with the sale
of the security.
The Fund will realize a profit from a closing
transaction if the price of the 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 ("National 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 National Exchange, (v) the facilities of an
National Exchange or the Options Clearing Corporation may not at
all times be adequate to handle current trading volume, or
(vi) one or more National 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
National Exchange (or in that class or series of options) would
cease to exist, although outstanding options on that National
Exchange that had been issued by the Options Clearing Corporation
as a result of trades on that National 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
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<PAGE>
price of the call the Fund determines to write will depend upon
the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"),
equal to ("at-the-money") or above ("out-of-the-money") the
current value of the underlying security at the time the option
is written. Buy-and-write transactions using in-the-money call
options may be used when it is expected that the price of the
underlying security will remain flat or decline moderately during
the option period. Buy-and-write transactions using at-the-money
call options may be used when it is expected that the price of
the underlying security will remain fixed or advance moderately
during the option period. Buy-and-write transactions using out-
of-the-money call options may be used when it is expected that
the premiums received from writing the call option plus the
appreciation in the market price of the underlying security up to
the exercise price will be greater than the appreciation in the
price of the underlying security alone. If the call options are
exercised in such transactions, the Fund's maximum gain will be
the premium received by it for writing the option, adjusted
upwards or downwards by the difference between the Fund's
purchase price of the security and the exercise price. If the
options are not exercised and the price of the underlying
security declines, the amount of such decline will be offset in
part, or entirely, by the premium received.
The writing of covered put options is similar in terms
of risk/return characteristics to buy-and-write transactions. If
the market price of the underlying security rises or otherwise is
above the exercise price, the put option will expire worthless
and the Fund's gain will be limited to the premium received. If
the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the
position or take delivery of the security at the exercise price
and the Fund's return will be the premium received from the put
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
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security rises sufficiently, the option may expire worthless to
the Fund.
A-4
<PAGE>
_______________________________________________________________
APPENDIX B: 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 indices including any
index of U.S. Government Securities, securities issued by foreign
government entities 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
B-1
<PAGE>
contracts are traded, the Fund will incur brokerage fees when it
purchases or sells futures contracts.
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
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, when 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
B-2
<PAGE>
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 to 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
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.
B-3
<PAGE>
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
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
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.
B-4
<PAGE>
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
adverse effect on its portfolio which otherwise would have
resulted. 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.
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 rates do not move in the
direction or to the extent anticipated, the Fund could sustain
losses on transactions in foreign currency options which would
require it to forego a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write options on foreign currencies for the
same types of hedging purposes. For example, where the Fund
anticipates a decline in the 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,
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<PAGE>
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
segregated account by its Custodian) upon conversion or exchange
of other foreign currency held in its portfolio. A call option
is also covered if the Fund has a call on the same foreign
currency and in the same principal amount as the call written
where the exercise price of the call held (a) is equal to or less
than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is
maintained by the Fund in cash, 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 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.
B-6
<PAGE>
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. 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
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
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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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________________________________________________________________
APPENDIX C: BOND RATINGS
________________________________________________________________
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the
best quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edged." Interest payments
are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat
larger than the Aaa securities.
A: Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper-medium-
grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present
which suggest a susceptibility to impair some time in the future.
Baa: Bonds which are rated Baa are considered as medium-
grade obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba: Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well-
assured. Often the protection of interest and principal payments
may be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack
characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
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Caa: Bonds which are rated Caa are of poor standing.
Such issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca: Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
Unrated: When no rating has been assigned or when a
rating has been suspended or withdrawn, it may be for reasons
unrelated to the quality of the issue.
Should no rating be assigned, the reason may be one of
the following:
1. An application for rating was not received or
accepted.
2. The issue or issuer belongs to a group of securities
or companies that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the
issue or issuer.
4. The issue was privately placed, in which case the
rating is not published in Moody's publications.
Suspension or withdrawal may occur if new and material
circumstances arise, the effects of which preclude satisfactory
analysis; if there is no longer available reasonable up-to-date
data to permit a judgment to be formed; if a bond is called for
redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups
which Moody's believe possess the strongest investment attributes
are designated by the symbols Aa 1, A-1, Baa 1, Ba 1 and B 1.
Standard & Poor's Ratings Services
AAA: Bonds rated AAA have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal
is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated
issues only in small degree.
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A: Bonds rated A have a strong capacity to pay interest
and repay principal although they are somewhat more susceptible
to the adverse effects of changes in circumstances and economic
conditions than bonds in higher rated categories.
BBB: Bonds rated BBB are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they
normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds
in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds rated BB, B, CCC, CC and C are
regarded as having predominantly speculative characteristics with
respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest.
While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
C1: The rating C1 is reserved for income bonds on which
no interest is being paid.
D: Debt rated D is in payment default. The D rating
category is used when interest payments or principal payments are
not made on the date due even if the applicable grace period has
not expired, unless S&P believes that such payments will be made
during such grace period. The D rating also will be used upon
the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
NR: Indicates that no rating has been requested, that
there is insufficient information on which to base a rating, or
that S&P does not rate a particular type of obligation as a
matter of policy.
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.
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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.
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
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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
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 is 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 three years will be assigned
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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.
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.
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________________________________________________________________
APPENDIX D: ADDITIONAL INFORMATION ABOUT JAPAN
________________________________________________________________
The information in this section is based on material
obtained by the Fund from various Japanese governmental and other
sources believed to be accurate but has not been independently
verified by the Fund or the Adviser. It is not intended to be a
complete description of Japan, its economy or the consequences of
investing in Japanese securities.
Japan, located in eastern Asia, consists of four main
islands: Hokkaido, Honshu, Kyushu and Shikoku, and many small
islands. Its population is approximately 126 million.
GOVERNMENT
The government of Japan is a representative democracy
whose principal executive is the Prime Minister. Japan's
legislature (known as the Diet) consists of two houses, the House
of Representatives (the lower house) and the House of Councillors
(the upper house).
POLITICS
From 1955 to 1993, Japan's government was controlled by
the Liberal Democratic Party (the "LDP"), the major conservative
party. In August 1993, after a main faction left the LDP over
the issue of political reform, a non-LDP coalition government was
formed consisting of centrist and leftist parties and was headed
by Prime Minister Morihiro Hosokawa. In April 1994, Mr. Hosokawa
resigned due to allegations of personal financial irregularities.
The coalition members thereafter agreed to choose as prime
minister the foreign minister, Tsutomu Hata. As a result of the
formation of a center-right voting bloc, however, the Japan
Socialist Party (the "JSP"), a leftist party, withdrew from the
coalition. Consequently, Mr. Hata's government was a minority
coalition, the first since 1955, and was therefore unstable. In
June 1994, Mr. Hata and his coalition were replaced by a new
coalition made up of the JSP (since renamed the "Social
Democratic Party (the "SDP")), the LDP and the small New Party
Sakigake (the "Sakigake"). This coalition, which surprised many
because of the historic rivalries between the LDP and the SDP,
was led by Tomiichi Murayama, the first Socialist prime minister
in 47 years. Mr. Murayama stepped down in January 1996 and was
succeeded as Prime Minister by Liberal Democrat Ryutaro
Hashimoto. By September 1996, when Prime Minister Hashimoto
called for a general election on October 20, 1996, the stability
of the SDP-LDP-Sakigake coalition had become threatened. Both
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the SDP and the Sakigake had lost more than half their seats in
the lower house of the Diet when a faction of the Sakigake split
off to form the Democratic Party of Japan. Their strength was
further diminished as a result of the October 20, 1996 House of
Representatives election. Although the LDP was 12 seats short of
winning a majority in that election, it was able to reduce the
margin to three seats and to achieve enough support from its two
former coalition parties, the SDP and the Sakigake, as well as
independents and other conservatives, to return Japan to a
single-party government for the first time since 1993. Mr.
Hashimoto was reappointed as Prime Minister on November 7, 1996.
Subsequent to the 1996 elections, the LDP established and is
maintaining a majority in the House of Representatives as
individual members have joined the ruling party. By 1998 the
popularity of the LDP had declined, due to dissatisfaction with
Mr. Hashimoto's leadership, and in the July 12, 1998 House of
Councillors election, the LDP's representation fell to 103 seats
from 120 seats. As a result of the LDP's defeat, on July 13,
1998, Mr. Hashimoto announced his resignation as Prime Minister
and was replaced by Keizo Obuchi on July 24, 1998. On January
14, 1999, the LDP formed a coalition government with a major
opposition party. As a result, Mr. Obuchi's administration
strengthened its position in the Diet, where it increased its
majority in the House of Representatives and reduced its
shortfall in the House of Councillors. A new three-party
coalition government was formed on October 5, 1999 that further
strengthens the position of Mr. Obuchi's administration in the
Diet. The new coalition holds 357 of 500 seats in the House of
Representatives and 141 of 252 seats in the House of Councillors.
The opposition is dominated by the new Minshuto (Democratic Party
of Japan), which was established in April 1998 by various
opposition groups and parties. The next general election (House
of Representatives) is scheduled to occur in October 2000.
ECONOMY
The Japanese economy maintained an average annual growth
rate of 2.1% in real GDP terms from 1990 through 1994, compared
with 2.4% for the United States during the same period. In 1995
and 1996, Japan's real GDP growth was 1.4% and 5.2%,
respectively. In 1997 and 1998, Japan's real GDP growth rate fell
to 1.4% and -2.9%, respectively. Following five consecutive
quarters in which Japan experienced a negative real GDP growth
rate, resulting in the longest contraction of the economy since
the Japanese government began compiling such data in 1955, real
GDP growth was flat in the first quarter of 1999 compared to the
first quarter of 1998, but grew by 1.9% over the last quarter of
1998. Inflation has remained low, 1.3% in 1993, 0.7% in 1994,
- -0.1% in 1995, 0.1% in 1996, 1.7% in 1997 and 0.7% in 1998.
Between January and June 1999, the inflation rate fell from 0.2%
to -0.3%. Private consumer demand showed a modest increase in
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the first quarter of 1999, after slowing down for several years
due to uncertainty about the economy and higher consumer taxes
that went into effect in April 1997. Unemployment is at its
highest level since the end of World War II, rising to 4.9% in
June 1999, and is not expected to fall appreciably in the
foreseeable future.
Japan's post World War II reliance on heavy industries
has shifted to higher technology products assembly and, most
recently, to automobile, electrical and electronic production.
Japan's success in exporting its products has generated sizable
trade surpluses. Since the early 1980's, Japan's relations with
its trading partners have been difficult, partly due to the
concentration of Japanese exports in products such as
automobiles, machine tools and semiconductors and the large trade
surpluses resulting therefrom, and an overall trade imbalance as
indicated by Japan's balance of payments. Japan's overall trade
surplus for 1994 was the largest in its history, amounting to
almost $145 billion. Exports totaled $386 billion, up 9.3% from
1993, and imports were $242 billion, up 13.6% from 1993. The
current account surplus in 1994 was $130 billion, down 1.5% from
a record high in 1993. By 1996, Japan's overall trade surplus
had decreased to $83 billion. Exports had increased to a total
of $400 billion, up 3.6% from 1994, and imports had increased to
a total of $317 billion, up 31.0% from 1994. During 1997, the
overall trade surplus increased approximately 22% from 1996.
Exports increased to a total of $409 billion, up 2% from 1996,
and imports decreased to $308 billion, down 3% from 1996. During
1998, the overall trade surplus increased approximately 20% from
1997. Exports decreased to a total of $374.0 billion, down 8.6%
from 1997, and imports decreased to $251.7 billion, down 18.2%
from 1997. Japan remains the largest creditor nation and a
significant donor of foreign aid.
On October 1, 1994, the U.S. and Japan reached an
agreement with respect to trade in insurance, glass and medical
and telecommunications equipment. In June 1995, the two
countries agreed in principal to increase Japanese imports of
American automobiles and automotive parts. These and other
agreements, however, have not been successful in addressing
Japan's trade surplus with the U.S. Other current sources of
tension between the two countries are disputes in connection with
trade in steel, semiconductors and photographic supplies,
deregulation of the Japanese insurance market, a dispute over
aviation rights and access to Japanese ports. It is expected
that the friction between the United States and Japan with
respect to trade issues will continue for the foreseeable future.
In response to pressures caused by the slumping Japanese
economy, the fragile financial markets and the appreciating Yen,
the Japanese government, in April and June 1995, announced
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emergency economic packages that focused on higher and
accelerated public works spending and increased aid for post-
earthquake reconstruction in the Kobe area. These measures
helped to increase public investment and lead to faster GDP
growth, but failed to produce fundamental changes. In 1997 and
again in 1998, the government announced additional stimulus
packages that included increased public works spending and tax
cuts. These measures have also been unsuccessful in stimulating
Japan's economy. In October 1998, Prime Minister Obuchi
instructed his cabinet to prepare another emergency economic
stimulus plan calling for even more public spending and further
tax cuts. The plan was finalized in November 1998.
In addition to the government's emergency economic
packages announced in 1995, the Bank of Japan attempted to assist
the financial markets by lowering its official discount rate to a
record low in 1995. However, large amounts of bad debt have
prevented banks from expanding their loan portfolios despite low
discount rates. Japanese banks have suffered several years of
declining profits and many banks have required public funds to
avert insolvency. In June 1995, the Finance Ministry announced
an expansion of deposit insurance and restrictions on rescuing
insolvent banks. In June 1996, six bills designed to address the
large amount of bad debt in the banking system were passed by the
Diet, but the difficulties worsened. By the end of the 1997/98
fiscal year, the government estimated that the banking system's
bad loans totaled 87.5 trillion Yen (approximately $600 billion),
or 11% of outstanding bank loans.
On December 17, 1997, in the wake of the collapse in the
previous month of one of Japan's 20 largest banks, the government
announced a proposal to strengthen the banks by means of an
infusion of public funds and other measures. In addition, the
imposition of stricter capital requirements and other supervisory
reforms scheduled to go into effect in April 1998 were postponed.
Subsequent to the December 1997 proposals, the government
proposed a series of additional proposals, culminating, after
vigorous political debate, in a set of laws that was approved by
the Diet in October 1998. The new laws made $508 billion in
public funds available to increase the capital of Japan's banks,
to guarantee depositors'' accounts and to nationalize the weakest
banks. On October 23, 1998, the Long-Term Credit Bank of Japan,
Ltd., one of Japan's 19 largest banks, became the first Japanese
bank to be nationalized pursuant to the new laws. On December
11, 1998, the Nippon Credit Bank, Ltd. became the second Japanese
bank to be nationalized pursuant to the new laws. Since then,
four additional banks have been nationalized. It is unclear
whether these laws will achieve their intended effect. While the
risk of collapse among Japan's largest banks has diminished as a
result of the infusion of public funds there remains a high level
of bad debt throughout Japan's banks. In this regard, the
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government has established the Resolution and Collection Bank to
purchase bad loans from insolvent and solvent banks and also has
established a legal framework for the securitization of bad
loans. In addition to bad domestic loans, Japanese banks also
have had significant exposure to the current financial turmoil in
other Asian markets. The financial system's fragility is
expected to continue for the foreseeable future.
In November 1996, then Prime Minister Hashimoto
announced a set of initiatives to deregulate the financial sector
by the year 2001. Known as "Tokyo's Big Bang," the reforms
include changes in tax laws to favor investors, the lowering of
barriers between banking, securities and insurance, abolition of
foreign exchange restrictions and other measures designed to
revive Tokyo's status in the international capital markets and to
stimulate the economy. The Big Bang was formally launched in
April 1998. Some of the measures that have already been
implemented include a liberalization of foreign exchange
restrictions, a repeal of the ban on holding companies, allowing
banks to sell mutual funds and the elimination of fixed brokerage
commissions on all stock trades. Other reforms are scheduled to
be implemented over the coming years. While in the long term the
Big Bang is viewed as a positive step for Japan, in the current
economic climate it is viewed as putting additional stress on
weaker institutions.
For the past several years, a growing budget deficit and
the threat of a budget crisis have resulted in a tightening of
fiscal policy. In March 1997, Prime Minister Hashimoto announced
the first detailed plan for fiscal reform. The plan called for
the lowering of the budget deficit to below 3% of GDP by Fiscal
Year 2003/2004. In June 1997, specific proposals for spending
cuts were approved by the cabinet and a Fiscal Reform Law,
incorporating the proposals into binding targets, were to have
been presented to the Diet late in 1997. In November 1997,
however, Prime Minister Hashimoto, facing growing pressure to
take steps to revitalize Japan's stagnant economy, announced a
new economic plan, the "Urgent Economic Policy Package Reforming
Japan for the 21st Century," which includes tax cuts and public
spending. Thereafter, in April 1998, Japan announced its largest
ever package of public spending and tax cuts.
After becoming Prime Minister in July 1998 Mr. Obuchi
established several advisory bodies to devise a plan to improve
Japan's economy. One of these, the Economic Strategy Council,
which was comprised mostly of private experts, issued a report in
February 1999 that contained 234 recommendations. Less than 40
of these recommendations, those least likely to produce
fundamental changes, were accepted by Japan's various government
ministries. Subsequently, Mr. Obuchi formed another advisory
group, the Competitiveness Commission, which resulted in the
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passage of the "industrial revitalization law," which became
effective in October 1999. The objective of the new law is to
encourage new enterprises and technologies and to write off
excess capacity in the industrial sector.
Between 1985 and 1995, the Japanese Yen generally
appreciated against the U.S. Dollar. Between 1990 and 1994 the
Yen's real effective exchange rate appreciated by approximately
36%. On April 19, 1995, the Japanese Yen reached an all time
high of 79.75 against the U.S. Dollar. Since its peak of April
19, 1995, the Yen has generally decreased in value against the
U.S. Dollar. The average Yen-Dollar exchange rates in 1996, 1997
and 1998 were 108.8, 121.0 and 130.99, respectively. In mid-
1998, however, the Japanese yen began to appreciate against the
U.S. dollar, reaching a 43-month high against the U.S. Dollar in
September 1999. On October 13, 1999 the Bank of Japan,
responding to growing political pressures, took steps to loosen
monetary policy in order to lower the value of the yen.
JAPANESE STOCK EXCHANGES. Currently, there are eight
stock exchanges in Japan. The Tokyo Stock Exchange (the "TSE"),
the Osaka Securities Exchange and the Nagoya Stock Exchange are
the largest, together accounting for approximately 99.8% of the
share trading volume and for about 98.0% of the overall trading
value of all shares traded on Japanese stock exchanges during the
year ended December 31, 1998. The other stock exchanges are
located in Kyoto, Hiroshima, Fukuoka, Niigata and Sapporo. The
chart below presents annual share trading volume (in millions of
shares) and annual trading value (in billions of yen) information
with respect to each of the three major Japanese stock exchanges
for the years 1989 through 1998. Trading volume and the value of
foreign stocks are not included.
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<TABLE>
<CAPTION>
All Exchanges TOKYO OSAKA NAGOYA
VOLUME VALUE VOLUME VALUE VOLUME VALUE VOLUME VALUE
_______ ______ ______ _____ _______ ______ _______ _____
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 139,757 124,102 123,198 97,392 12,836 20,532 3,367 5,986
1997 130,657 151,445 107,566 108,500 15,407 27,024 6,098 12,758
1996 126,496 136,170 101,170 101,893 20,783 27,280 4,104 5,391
1995 120,149 115,840 92,034 83,564 21,094 24,719 5,060 5,462
1994 105,937 114,622 84,514 87,356 14,904 19,349 4,720 5,780
1993 101,173 106,123 86,935 86,889 10,440 14,635 2,780 3,459
1992 82,563 80,456 66,408 60,110 12,069 15,575 3,300 3,876
1991 107,844 134,160 93,606 110,897 10,998 18,723 2,479 3,586
1990 145,837 231,837 123,099 186,667 17,187 35,813 4,323 7,301
1989 256,296 386,395 222,599 332,617 25,096 41,679 7,263 10,395
Source: The Tokyo Stock Exchange 1994-1998, Fact Books.
</TABLE>
THE TOKYO STOCK EXCHANGE
OVERVIEW OF THE TOKYO STOCK EXCHANGE. The TSE is the largest
of the Japanese stock exchanges and as such is widely regarded as
the principal securities exchange for all of Japan. In 1998, the
TSE accounted for 97.7% of the market value and 88.2% of the
share trading volume on all Japanese stock exchanges. A foreign
stock section on the TSE, consisting of shares of non-Japanese
companies, listed 52 (out of 1,890 total companies listed on the
TSE) non-Japanese companies at the end of 1998. The market for
stock of Japanese issuers on the TSE is divided into a First
Section and a Second Section. The First Section is generally for
larger, established companies (in existence for five years or
more) that meet listing criteria relating to the size and
business condition of the issuing company, the liquidity of its
securities and other factors pertinent to investor protection.
The TSE's Second Section is for smaller companies and newly
listed issuers.
SECTOR ANALYSIS OF THE FIRST AND SECOND SECTIONS. The TSE's
domestic stocks include a broad cross-section of companies
involved in many different areas of the Japanese economy. At the
end of 1998, the three largest industry sectors, based on market
value, listed on the first section of the TSE were electric
appliances, with 186 companies representing 14.06% of all
domestic stocks so listed; banking, with 99 companies
representing 12.0% of all domestic stocks listed on the TSE; and
transportation equipment with 87 companies representing 8.7% of
all domestic stocks so listed.
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MARKET GROWTH OF THE TSE. The First and Second Sections of
the TSE grew in terms of both average daily trading value and
aggregate year-end market value from 1982, when they were l28,320
million yen and 98,090 billion yen, respectively, through the end
of 1989, when they were 1,335,810 million yen and 611,152 billion
yen, respectively. Following the peak in 1989, both average
daily trading value and aggregate year-end market value declined
through 1992 when they were 243,362 million yen and 289,483
billion yen, respectively. In 1993 and 1994, both average daily
trading value and aggregate year-end market value increased and
were 353,208 and 353,666 million yen, respectively, and 324,357
and 358,392 billion yen, respectively. In 1995, average daily
trading value decreased to 335,598 million yen and aggregate
year-end market value increased to 365,716 billion yen. In 1996,
average daily trading value increased to 412,521 million yen and
aggregate year-end market value decreased to 347,578 billion yen.
In 1997, average daily trading value increased to 442,858 million
Yen and aggregate year-end market value decreased to 280,930
billion Yen. In 1998, average daily trading value decreased to
394,297 million yen and aggregate year-end market value decreased
to 275,181 billion yen.
MARKET PERFORMANCE OF THE FIRST SECTION. As measured by the
TOPIX, a capitalization-weighted composite index of all common
stocks listed in the First Section, the performance of the First
Section reached a peak of 2,884.80 on December 18, 1989.
Thereafter, the TOPIX declined approximately 45% through
December 29, 1995. On December 30, 1996 the TOPIX closed at
1,470.94, down approximately 7% from the end of 1995. On
December 30, 1997, the TOPIX closed at 1,175.03, down
approximately 20% from the end of 1996. On December 30, 1998 the
TOPIX closed at 1086.99, down approximately 7% from the end of
1997.
JAPANESE FOREIGN EXCHANGE CONTROLS
Under Japan's Foreign Exchange and Foreign Trade Control Law
and cabinet orders and ministerial ordinances thereunder (the
"Foreign Exchange Controls"), prior notification to the Minister
of Finance of Japan (the "Minister of Finance") of the
acquisition of shares in a Japanese company from a resident of
Japan (including a corporation) by a non-resident of Japan
(including a corporation) is required unless the acquisition is
made from or through a securities company designated by the
Minister of Finance or if the yen equivalent of the aggregate
purchase price of shares is not more than 100 million Yen. Even
in these situations, if a foreign investor intends to acquire
shares of a Japanese corporation listed on a Japanese stock
exchange or traded on a Japanese over-the-counter market
(regardless of the person from or through whom the foreign
investor acquires such shares) and as a result of the acquisition
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the foreign investor would directly or indirectly hold 10% or
more of the total outstanding shares of that corporation, the
foreign investor must file a report within 15 days from the day
of such acquisition with the Minister of Finance and any other
minister with proper jurisdiction. In instances where the
acquisition concerns national security or meets certain other
conditions specified in the Foreign Exchange Controls, the
foreign investor must file a prior notification with respect to
the proposed acquisition with the Minister of Finance and any
other minister with proper jurisdiction. The ministers may make
a recommendation to modify or prohibit the proposed acquisition
if they consider that the acquisition would impair the safety and
maintenance of public order in Japan or harmfully influence the
smooth operation of the Japanese economy. If the foreign
investor does not accept the recommendation, the ministers may
issue an order modifying or prohibiting the acquisition. In
certain limited and exceptional circumstances, the Foreign
Exchange Controls give the Minister of Finance the power to
require prior approval for any acquisition of shares in a
Japanese company by a non-resident of Japan.
In general, the acquisition of shares by non-resident
shareholders by way of stock splits, as well as the acquisition
of shares of a Japanese company listed on a Japanese stock
exchange by non-residents upon exercise of warrants or conversion
of convertible bonds, are not subject to any of the foregoing
notification or reporting requirements. Under the Foreign
Exchange Controls, dividends paid on shares, held by non-
residents of Japan and the proceeds of any sales of shares within
Japan may, in general, be converted into any foreign currency and
remitted abroad.
Certain provisions of the Foreign Exchange Controls were
repealed or liberalized beginning in April 1998, pursuant to the
revised Foreign Exchange and Foreign Trade Law, which was
approved in May 1997 as part of the plan to implement the Big
Bang. Under the new law, Japanese citizens are permitted to open
bank accounts abroad and companies are now permitted to trade
foreign currencies without prior government approval.
Additionally, the foreign exchange bank system, which required
that all foreign exchange transactions be conducted through
specially designated institutions, has been eliminated.
REGULATION OF THE JAPANESE EQUITIES MARKETS
The principal securities law in Japan is the Securities and
Exchange Law ("SEL") which provides overall regulation for the
issuance of securities in public offerings and private placements
and for secondary market trading. The SEL was amended in 1988 in
order to liberalize the securities market; to regulate the
securities futures, index, and option trade; to add disclosure
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regulations; and to reinforce the prevention of insider trading.
Insider trading provisions are applicable to debt and equity
securities listed on a Japanese stock exchange and to unlisted
debt and equity securities issued by a Japanese corporation that
has securities listed on a Japanese stock exchange or registered
with the Securities Dealers Association (the "SDA"). In
addition, each of the eight stock exchanges in Japan has its own
constitution, regulations governing the sale and purchase of
securities and standing rules for exchange contracts for the
purchase and sale of securities on the exchange, as well as
detailed rules and regulations covering a variety of matters,
including rules and standards for listing and delisting of
securities.
The loss compensation incidents involving preferential
treatment of certain customers by certain Japanese securities
companies, which came to light in 1991, provided the impetus for
amendments to the SEL, which took effect in 1992, as well as two
reform bills passed by the Diet in 1992. The amended SEL now
prohibits securities companies from operating discretionary
accounts, compensating losses or providing artificial gains in
securities transactions, directly or indirectly, to their
customers and making offers or agreements with respect thereto.
Despite these amendments, there have been certain incidents
involving loss compensation. To ensure that securities are
traded at their fair value, the SDA and the TSE have promulgated
certain rules, effective in 1992, which, among other things,
explicitly prohibit any transaction undertaken with the intent to
provide loss compensation of illegal gains regardless of whether
the transaction otherwise technically complies with the rules.
The reform bill passed by the Diet, which took effect in 1992 and
1993, provides for the establishment of a new Japanese securities
regulator and for a variety of reforms designed to revitalize the
Japanese financial and capital markets by permitting banks and
securities companies to compete in each other's field of
business, subject to various regulations and restrictions.
Further reforms in the regulation of the securities markets
are anticipated over the next several years as the Big Bang is
implemented.
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____________________________________________________________
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
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<PAGE>
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
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."
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00250203.AX0
