As filed with the Securities and Exchange Commission on
October 5, 2001
File Nos. 333-______
811-05207
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
X REGISTRATION STATEMENT UNDER THE
____ SECURITIES ACT OF 1933
____ Pre-Effective Amendment No. ________
____ Post-Effective Amendment No. ________
and/or
REGISTRATION STATEMENT UNDER THE
____ INVESTMENT COMPANY ACT OF 1940
X Amendment No. 9
____
ACM Income Fund, Inc.
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(Exact Name of Registrant as Specified in Charter)
1345 Avenue of the Americas, New York, New York 10105
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(Address of Principal Executive Offices)
(212) 969-2232
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(Registrant's Telephone Number)
EDMUND P. BERGAN, JR.
Alliance Capital Management L.P.
1345 Avenue of the Americas
New York, New York 10105
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(Name and Address of Agent for Service)
Copies of Communications to:
Patricia A. Poglinco
Seward & Kissel LLP
One Battery Park Plaza
New York, New York 10004
Approximate date of proposed public offering: As soon as
practicable after the effective date of this Registration
Statement
If any securities being registered on this form will be offered
on a delayed or continuous basis in reliance on Rule 415 under
the Securities Act of 1933, other than securities offered in
connection with a dividend reinvestment plan, check the following
box. ____
It is proposed that this filing will become effective (check
appropriate box):
X when declared effective pursuant to section 8(c)
__ immediately upon filing pursuant to paragraph (b)
__ on (date) pursuant to paragraph (b)
__ 60 days after filing pursuant to paragraph (a)
__ on (date) pursuant to paragraph (a)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF SECURITIES BEING PRICE PER OFFERING REGISTRATION
BEING REGISTERED REGISTERED(1) UNIT(2) PRICE(2) FEE
Common Stock, 68,685,305 $8.775 $602,713,551.38 $150,678.39
$.01 par value
(1) Includes 13,737,061 shares subject to oversubscription
privilege.
(2) Estimated solely for purposes of calculating the
registration fee in accordance with Rule 457(c) under the
Securities Act of 1933, as amended, on the basis of a market
price per share on October 3, 2001.
The Registrant hereby amends this Registration Statement under
the Securities Act of 1933 on such dates as may be necessary to
delay its effective date until the Registrant shall file a
further amendment which specifically states that this
Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or
until the Registration Statement shall become effective on such
date as the Commission, acting pursuant to Section 8(a), may
determine.
PROSPECTUS
ACM INCOME FUND, INC.
54,948,244 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF RIGHTS
TO SUBSCRIBE FOR SHARES
_______________
ACM Income Fund, Inc., a Maryland corporation (the
"Fund"), is issuing to its stockholders rights to purchase
additional shares. You will receive one right for each share of
common stock you own on the record date, which is November ,
2001. You need three rights to purchase one share at the
subscription price per share. Record date stockholders who
receive less than three rights, however, will be entitled to
purchase one share. If you exercise all your rights you will be
entitled to subscribe for additional shares not acquired by other
stockholders. The Fund may increase the number of shares subject
to subscription by up to 25% of the shares available pursuant to
the offer, or 13,737,061 shares, for an aggregate total of
68,685,305 shares. The rights are not transferable; you may not
purchase or sell them and they will not trade on the New York
Stock Exchange (the "NYSE") or any other exchange. The shares to
be issued pursuant to the rights will trade on the NYSE under the
symbol "ACG."
The subscription price per share will be [____]% of the
lower of:
(1) the average of the last reported sales price of a
share on the NYSE on the expiration date of the offer and on the
previous four business days, and
(2) the net asset value ("NAV") per share as of the
close of business on the expiration date of the offer.
You will not know the actual subscription price at the
time you exercise your rights. Once you subscribe for shares and
the Fund receives payment or a guarantee of payment, you will not
be able to change your decision.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON DECEMBER , 2001, UNLESS EXTENDED TO NOT LATER THAN
DECEMBER , 2001.
The Fund is a diversified, closed-end management
investment company whose investment objective is high current
income consistent with preservation of capital. In seeking to
achieve this objective, the Fund invests principally in
obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and repurchase agreements
1
pertaining to U.S. Government Securities and utilizes certain
other investment techniques, including options and futures
contracts. SEE "INVESTMENT OBJECTIVE AND POLICIES" BEGINNING ON
PAGE ___ OF THIS PROSPECTUS. FOR A DESCRIPTION OF THE FUND'S
AUTHORITY TO BORROW MONEY, SEE "RISK FACTORS AND SPECIAL
CONSIDERATIONS" BEGINNING ON PAGE ___ OF THIS PROSPECTUS. There
can be no assurance that the Fund will achieve its investment
objective.
If you do not exercise your rights, you will, upon the
completion of the offer, own a smaller proportional interest in
the Fund than you do now. Because the subscription price per
share will be less than the NAV on the expiration date and
because the Fund will incur expenses related to the offering,
record date stockholders will also experience an immediate
dilution, which could be substantial, of the aggregate NAV of
their shares. This dilution will disproportionately affect
record date stockholders who do not exercise their rights in
full. In addition, there also may be substantial additional
dilution to the extent that the Fund increases the number of
shares subject to subscription by up to 25% in order to satisfy
over-subscription requests. The Fund cannot state precisely the
extent of this dilution because the Fund does not know what the
NAV will be when the offer expires, how many rights will be
exercised or the exact expenses of the offer.
_______________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Estimated Estimated
Subscription Estimated Proceeds to
Price (1) Sales Load(2) the Fund (3)(4)
----------- ------------ ---------------
Per Share $[ ] $[ ] $[ ]
Total Maximum(5) $[ ] $[ ] $[ ]
This Prospectus sets forth concisely the information
about the Fund that a prospective investor should know before
investing and should be retained for future reference. A
statement of additional information dated November , 2001
(the "SAI") containing additional information about the Fund has
been filed with the Securities and Exchange Commission (the
"SEC") and legally forms a part of this Prospectus. The table of
contents of the SAI appears on page [ ] of this Prospectus.
You may obtain a copy of the SAI without charge by contacting
2
Georgeson Shareholder Communications, Inc., the Fund's
information agent for the offer. You can also view the
Prospectus and SAI as filed on the SEC's World Wide Web site on
the Internet at http://www.sec.gov.
If you have questions or need further information about
the offer, please call the information agent collect at
[ ] (for banks and brokers) and toll free at
____________ (for all others).
[DEALER MANAGER]
The date of this Prospectus is November , 2001.
(1) Estimated on the basis of [____]% of the lower of the
average of the last reported sales price of a share on the
NYSE on _____________, 2001 and on the previous four
business days and the NAV per share as of _________, 2001.
Actual amounts may vary due to rounding.
(2) In connection with the offer, the Fund will pay [ ],
the dealer manager for the offer, a fee for its financial
advisory services and marketing assistance equal to [____]%
of the subscription price per share. The Fund will also pay
broker-dealers, including [ ], fees
for their soliciting efforts equal to [____]% of the
subscription price per share. The Fund has agreed to
indemnify [ ] against certain
liabilities, including liabilities under the Securities Act.
(3) Before deduction of offering expenses incurred by the Fund,
estimated at $[__________], including an aggregate of up to
$[__________] to be paid to [ ] as partial reimbursement
for its expenses.
(4) Funds received by check prior to the final due date of this
offer will be deposited into a segregated interest-bearing
account pending allocation and distribution of shares.
Interest on subscription moneys will be paid to the Fund
regardless of whether shares are issued by the Fund.
(5) Assumes all rights are exercised at the estimated
subscription price. The Fund may increase the number of
shares subject to subscription by up to 25% of the shares
offered. If the Fund increases the number of shares subject
to subscription by 25%, the aggregate maximum estimated
subscription price, estimated sales load and estimated
proceeds will be $[__________], $[__________] and
$[__________], respectively.
______________
3
PROSPECTUS SUMMARY
You should read the entire Prospectus, including the SAI
which legally forms part of this Prospectus, before you decide
whether to exercise your rights.
PURPOSES OF THE OFFER
The Board of Directors of the Fund has determined that
it is in the best interests of the Fund and its existing
stockholders to increase the assets of the Fund available for
investment, thereby allowing the Fund to take advantage of
investment opportunities. In reaching its decision, the Board of
Directors was advised by Alliance Capital Management L.P., the
Fund's investment adviser, referred to in this Prospectus as the
Adviser, that the availability of new capital would permit the
Fund to take advantage of investment opportunities without being
required to sell current portfolio positions that it desires to
retain. The Board of Directors also took into account that a
well-subscribed rights offering could result in an improvement in
the liquidity of the trading market for the Fund's shares on the
NYSE. The Board also considered that this rights offering would
give record date stockholders the opportunity to purchase shares
at a price below the then current market price per share and NAV,
and might increase the level of market interest in the Fund. The
Board also considered, among other things, the proposed terms of
the offer, the expenses of the offer, and its dilutive effect on
exercising and non-exercising record date stockholders.
There can be no assurance that the offer will be
successful.
The Adviser and the Administrator will benefit from the
offer because they receive fees based on the net assets of the
Fund and, in the case of the Adviser, also on the income of the
Fund, both of which will increase as a result of the offer. In
addition, [________________] will receive a dealer manager fee
and soliciting dealer fees as described below, and other brokers
and dealers will also receive soliciting dealer fees.
The Fund may choose to make additional rights offerings
in the future for a number of shares and on terms which may or
may not be similar to this offer.
IMPORTANT TERMS OF THE OFFER
Total number of shares available for
primary subscription:........................54,948,244
Total number of shares available to
cover over-subscription requests:............13,737,061
4
Number of rights you will receive for
each outstanding share you own on the
record date:.................................One right for every
one share
Number of shares you may purchase with
your rights at the subscription price
per share:...................................One share for every
three rights
Record date
stockholders who
receive less than
three rights will be
entitled to purchase
one share
Subscription price:..........................[___%] of the lower
of (1) the average
of the last reported
sales price per
share on the NYSE on
the expiration date
and on the preceding
four business days
and (2) the NAV per
share on the
expiration date
HOW TO EXERCISE RIGHTS
To exercise your rights, please follow the following
instructions:
- If you do not own your shares through a broker,
bank or other nominee, you should have received a
subscription certificate. The subscription
certificate elicits the necessary information to
enable you to exercise your rights. Please
complete and sign the subscription certificate.
Mail it in the envelope provided or deliver the
completed and signed subscription certificate with
payment in full to [ ], the
subscription agent for the offer, at the address
indicated on the subscription certificate. Your
completed and signed subscription certificate and
payment must be received by the expiration date,
which is December , 2001 (unless extended).
You should calculate the total payment on the basis
of an estimated subscription price of $[ ]
per share. If you do not own your shares through a
broker, bank or other nominee and have not received
5
a subscription certificate, please contact
Georgeson Shareholder Communications, the
information agent for the offer, collect at
____________________ (for banks and brokers) and
toll free at ________________ (for all others).
- If you own your shares through a broker or other
nominee, please contact your broker, banker or
trust company. It can arrange to exercise rights
on your behalf and to guarantee payment and
delivery of a properly completed and executed
subscription certificate pursuant to a notice of
guaranteed delivery by the close of business on the
expiration date. A fee may be charged for this
service. The notice of guaranteed delivery must be
received on or before the expiration date, which is
December , 2001 (unless extended).
IMPORTANT DATES TO REMEMBER
Please note that the dates in the table below may change
if the offer is extended.
EVENT DATE
_______________________________________________________________
Record date................................ [ ]
Subscription period........................ [ ]
Payment for shares or notice of
guaranteed delivery due.................... [ ]
Expiration and pricing date................ [ ]
Payment for guarantees of delivery due..... [ ]
Confirmation to participants............... [ ]
Final payment for shares................... [ ]
OVER-SUBSCRIPTION PRIVILEGE
If you exercise all your rights, you may subscribe for
shares which were not subscribed for by other stockholders. If
sufficient shares are not available to honor all requests for
over-subscriptions, the Fund may increase the number of shares
available for subscription by up to 25% of the shares available
pursuant to the offer, or 13,737,061 shares, in order to satisfy
these over-subscription requests. Available shares will be
allocated ratably among those who over-subscribe based on the
number of rights originally issued to them.
6
RIGHTS MAY NOT BE PURCHASED OR SOLD
You may not purchase or sell the rights and they will
not trade on any exchange. If you do not exercise your rights
before the conclusion of the rights offer, your rights will
expire without value.
RESTRICTIONS ON FOREIGN STOCKHOLDERS
The Fund will not mail subscription certificates to
stockholders whose record addresses are outside the United
States. [_______] will hold the rights to which subscription
certificates relate for foreign stockholder accounts until
instructions are received to exercise the rights. If no
instructions are received prior to the expiration date, these
rights will expire.
FURTHER INFORMATION
If you have any questions or inquiries relating to the
offer, please contact the information agent at:
GEORGESON SHAREHOLDER COMMUNICATIONS, INC.
Wall Street Plaza
New York, New York 10005
Banks and Brokers Call Collect:_____________
All Others Call Toll Free:__________________
OFFERING FEES AND EXPENSES
[__________] will act as the dealer manager for the
offer. The Fund will pay [____________] a fee for its financial
advisory services and marketing assistance equal to [_____%] of
the subscription price per share. The Fund will also pay broker-
dealers, including [____________], fees for their soliciting
efforts equal to [_____%] of the subscription price per share.
Other offering expenses incurred by the Fund are estimated at
$[ ], which includes up to $[_______________] that may
be paid to [____________] as partial reimbursement for its
expenses relating to the offer.
USE OF PROCEEDS
We estimate the net proceeds of the offer to be
approximately $[ ]. If the Fund increases the number of
shares subject to subscription by up to 25% in order to satisfy
oversubscription requests, the additional net proceeds will be
approximately $[ ].
The Fund's investment adviser anticipates that it will
take up to three months for the Fund to invest these proceeds in
7
accordance with its investment objective and policies under
current market conditions.
INFORMATION REGARDING THE FUND
The Fund has been engaged in business as a diversified,
closed-end management investment company since August 21, 1987.
Its investment objective is high current income consistent with
preservation of capital. In seeking to achieve this objective,
the Fund invests principally in obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities and
repurchase agreements pertaining to U.S. Government Securities
and utilizes certain other investment techniques, including
options and futures contracts.
There can be no assurance that the Fund will achieve its
investment objective. The shares are listed and traded on the
NYSE under the symbol "ACG." As of September 30, 2001, the net
assets were approximately $[ ] million.
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund's investment adviser is Alliance Capital
Management, L.P. (the "Adviser"), located at 1345 Avenue of the
Americas, New York, New York 10105.
The Fund's administrator is Brinson Advisors, Inc.
(formerly Mitchell Hutchins Asset Management, Inc.), 51 West 52nd
Street, New York, New York 10019.
INVESTMENT ADVISORY AND ADMINISTRATION FEES
The Fund pays the Adviser a monthly management fee in an
amount equal to the sum of (x) 1/12th of .30% of the average
weekly net assets of the Fund up to $250 million plus 1/12th of
.25% of the Fund's average weekly net assets in excess of $250
million and (y) 5.25% of the Fund's daily gross income (i.e.,
income other than gains from the sale of securities and foreign
currency transactions or gains realized from options and futures
contracts less interest on money borrowed by the Fund) accrued by
the Fund during the month. The Advisory Agreement provides that
the monthly management fee shall not exceed in the aggregate
1/12th of 1% of the Fund's average weekly net assets during the
month (approximately 1% on an annual basis).
The Fund also pays the Administrator aggregate annual
fees for administrative services equal to .18 of 1% of the Fund's
average weekly net assets up to $100 million, .16 of 1% of the
Fund's next $200 million of average weekly net assets and .15 of
1% if the Fund's average weekly net assets in excess of $300
million.
8
The Administrator and the Adviser will benefit from the
offer because they receive fees based on the Fund's net assets
and, in the case of the Adviser, also on the income of the Fund,
both of which will increase as a result of the offer.
DISTRIBUTIONS
The Fund intends to distribute monthly its net
investment income. Net short-term capital gains, if any, will
normally be distributed quarterly and net long-term capital
gains, if any, will normally be distributed annually.
RISK FACTORS AND SPECIAL CONSIDERATIONS
YOU WILL INCUR IMMEDIATE DILUTION IN THIS OFFER, WHICH
DILUTION COULD BE SUBSTANTIAL. If you do not exercise all your
rights, after the offer you will own a smaller proportional
interest in the Fund. If the Fund increases the number of shares
subject to subscription in order to satisfy oversubscriptions,
you will own a smaller proportional interest in the Fund even if
you exercise all of your rights. In addition, whether or not you
exercise your rights, the NAV per share of your shares will be
reduced as a result of the offer because:
- the shares offered will be sold at less than their
then current NAV
- you will indirectly bear the expenses of the offer
- the number of shares outstanding after the offer
will have increased proportionately more than the
increase in the size of the net assets
You will incur a greater dilution in NAV per share if
you do not exercise your rights than if you do.
PRINCIPAL INVESTMENT RISKS. In this summary, we
describe the principal risks that may affect the Fund's portfolio
as a whole. The Fund could be subject to additional principal
risks because the types of investments made by the Fund can
change over time. This Prospectus has additional descriptions of
investments that appear in bold types in the discussions under
"Investment Objective and Policies" or "Risk Factors and Special
Considerations." These sections also include more information
about the Fund, its investments and related risks.
Other important things for you to note:
- You may lose money by investing in the Fund.
9
- An investment in the Fund is not a deposit in a
bank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other
government agency.
Among the principal risks of investing in the Fund are
interest rate risk, credit risk, market risk, leveraging risk,
derivatives risk, foreign risk, emerging market risk, currency
risk, liquidity risk and management risk. Interest rate risk is
the risk that changes in interest rates will affect the value of
the Fund's investments in fixed income securities. Increases in
interest rates may cause the value of the Fund's investments to
decline. Credit risk is the risk that the issuer or the
guarantor of a debt security or the counterparty to a derivatives
contract will be unable or unwilling to make timely payments of
interest or principal or to otherwise honor its obligations. The
Fund is also subject to market risk which is the risk that the
value of the Fund's investments will fluctuate as the bond
markets fluctuate and that prices overall will decline over
shorter or longer-term periods. Because the Fund uses derivative
strategies and other leveraging techniques, including bank
leverage, speculatively to enhance returns, it is subject to
greater risk and its returns may be more volatile than other
funds, particularly in periods of market declines.
The Fund's investments in foreign securities have
foreign risk, which is the risk that investments in issuers
located in foreign countries may have greater price volatility
and less liquidity. Foreign risk includes currency risk, which
is the risk that fluctuations in the exchange rates between the
U.S. dollar and foreign currencies could negatively affect the
value of the Fund's investments. Because the Fund may invest in
emerging markets and in developing countries, the Fund's returns
may be significantly more volatile and may differ substantially
from returns in the U.S. bond markets generally. Your investment
also has the risk that market changes or other factors affecting
emerging markets or developing countries, including political
instability and unpredictable economic conditions, may have an
effect on the Fund's NAV.
Liquidity risk exists when particular investments are
difficult to purchase or sell, possibly preventing the Fund from
selling out of these illiquid securities at an advantageous
price. The Fund is subject to liquidity risk because derivatives
and securities involving substantial interest rate and credit
risk tend to involve greater liquidity risk.
The Fund is subject to management risk because it is an
actively managed investment Fund. There can be no guarantee that
the Adviser's investment decisions will produce desired results.
10
The Fund's shares may trade at a discount to NAV.
Shares of closed-end management investment companies frequently
trade at a discount from their NAV (the market price per share is
less than the NAV per share). This characteristic is a risk
separate and distinct from the risk that the Fund's NAV will
decrease as a result of its investment activities and may be
greater for investors expecting to sell their shares relatively
soon after completion of this offering. The Fund cannot predict
whether its shares will trade at, above or below NAV in the
future.
There is no guarantee that the Fund will be able to
maintain its current level of dividends and distributions.
EXPENSE INFORMATION
The following table sets forth certain fees and expenses
of the Fund.
STOCKHOLDER TRANSACTION EXPENSES
Sales load (as a percentage of the
subscription price per share (1)...............[ ]%
ANNUAL EXPENSES (as a percentage of net assets
attributable to common shares)
Management fees(2)..............................[ ]%
Interest Payments on Borrowed Funds.............[ ]%
Other expenses..................................[ ]%
Administration fees...........................[ ]%
Other operating expenses......................[ ]%
TOTAL ANNUAL EXPENSES (3)........................[ ]%
EXAMPLE 1 Year 3 Years 5 Years 10 Years
_____________________________________________________________
You would pay the
following expenses on
a $1,000 investment
assuming a 5% annual
return (4)..............$[ ]$[ ]$[ ]$[ ]
_______________
(1) The Fund will pay [ ] a fee for financial
advisory services and marketing assistance equal to [_____%]
of the subscription price per share. The Fund will also pay
broker-dealers, including [ ], fees for their
soliciting efforts equal to [_____%] of the subscription
price per share. Since these fees will be paid by the Fund,
you will indirectly bear this fee as a stockholder of the
Fund, even if you do not exercise your rights.
11
(2) The Fund pays the Adviser a monthly management fee in an
amount equal to the sum of (x) 1/12th of .30% of the average
weekly net assets of the Fund up to $250 million plus 1/12th
of .25% of the Fund's average weekly net assets in excess of
$250 million and (y) 5.25% of the Fund's daily gross income
(i.e., income other than gains from the sale of securities
and foreign currency transactions or gains realized from
options and futures contracts less interest on money
borrowed by the Fund) accrued by the Fund during the month.
The Advisory Agreement provides that the monthly management
fee shall not exceed in the aggregate 1/12th of 1% of the
Fund's average weekly net assets during the month
(approximately 1% on an annual basis).
(3) Based upon estimated amounts for the current fiscal year and
on the net assets of the Fund after giving effect to the
anticipated net proceeds of the offer, including proceeds
from the issuance of up to 25% of the shares under the over-
subscription privilege. This figure includes expenses of
the Fund incurred in connection with the offer, estimated at
[$_______].
(4) The Example reflects the sales load and other expenses of
the Fund incurred in connection with the offer and assumes
that all of the rights are exercised and that all dividends
and distributions are reinvested.
The purpose of the table set forth above is to assist
the investor in understanding the various costs and expenses that
an investor in the Fund will bear directly or indirectly. The
Example set forth above assumes reinvestment of all dividends and
other distributions at NAV, payment of a [___]% sales load and
annual expense ratio of [___]%. The table above and the
assumption in the Example of a 5% annual return are required by
SEC regulations applicable to all management investment
companies. Your annual return may be more or less than the 5%
used in this Example. In addition, while the Example assumes
reinvestment of all dividends and other distributions at NAV,
participants in the Dividend Reinvestment Plan may receive shares
purchased or issued at a price or value different from NAV.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
FUTURE EXPENSES, AND THE FUND'S ACTUAL EXPENSES MAY BE MORE OR
LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The following table describes selected financial data
for a share of common stock outstanding throughout each period
presented. The per share operating performance and ratios for
each of the periods, other than the six-month period ended June
12
30, 2001, have been derived from financial statements audited by
Ernst & Young LLP, the Fund's independent auditors, as stated in
their report, which legally forms a part of the statement of
additional information. The following information should be read
in conjunction with the financial statements and notes, which
legally forms a part of the Prospectus and are included in the
Fund's December 31, 2000 Annual Report and the Fund's June 30,
2001 Semi-Annual Report which are available without charge by
calling the Fund at (212) 969-2232 or by contacting the Fund at
1345 Avenue of the Americas, New York, New York 10105.
[To be filed by subsequent amendment]
CAPITALIZATION AT OCTOBER 31, 2001
_______________________________________________________________
(1) (2) (3) (4)
AMOUNT
OUTSTANDING
AMOUNT HELD BY EXCLUSIVE OF
TITLE OF AMOUNT FUND OR FOR ITS AMOUNT SHOWN
CLASS AUTHORIZED ACCOUNT UNDER (3)
________________________________________________________________
Common Stock,
$0.01 par
value 300,000,000
Shares 0 Shares 164,844,732 Shares
TRADING AND NAV INFORMATION
In the past, the Fund's shares have traded both at a
premium and at a discount in relation to NAV. Although the
Fund's shares have recently been trading at a small premium to
NAV, there can be no assurance that this premium will continue
after the offer or that the shares will not again trade at a
discount. As discussed below, shares of closed-end investment
companies frequently trade at a discount from NAV.
The outstanding shares are listed and traded on the
NYSE. The following table sets forth for the quarters indicated
the high and low sales prices on the NYSE per share of common
stock and the NAV and the premium or discount from NAV at which
the common stock was trading, expressed as a percentage of NAV,
at each of the high and low sales prices provided.
13
Premium/Discount
Market Price(1) NAV as % of NAV(2)
______________ ___ ________________
Quarter Ended High Low High Low High Low
_____________________________________________________________________________
March 31, 1999 ............9.4375 8.4375 8.90 7.96 6.04% 6.00%
June 30, 1999..............8.625 8.1875 8.54 7.77 1.00% 5.37%
September 30, 1999.........8.75 8.0625 8.05 7.51 8.70% 7.36%
December 31, 1999..........8.1875 6.375 7.88 7.41 3.90% -13.97%
March 31, 2000.............7.875 6.625 8.17 7.41 -3.61% -10.59%
June 30, 2000..............7.375 6.5625 8.21 7.47 -10.17% -12.15%
September 30, 2000.........7.8125 7.1875 8.26 7.91 -5.42% -9.13%
December 31, 2000..........7.6875 7.125 8.51 7.93 -9.67% -10.15%
March 31, 2001.............8.35 7.50 8.70 8.42 -4.02% -10.93%
June 30, 2001..............8.85 7.86 8.56 8.08 3.39% -2.72%
September 30, 2001........[ ] [ ] [ ] [ ] [ ] [ ]
Through
October __, 2001..........[ ] [ ] [ ] [ ] [ ] [ ]
_______________
(1) As reported by the NYSE.
(2) Based on the Fund's computations.
The Fund's NAV at the close of business on
___________ __, 2001 (the last trading date on which the Fund
publicly reported its NAV prior to the announcement of the offer)
and on November __, 2001 (the last trading date on which the Fund
publicly reported its NAV prior to the date of this Prospectus)
was $[_____] and $[_____], respectively. The last reported sales
price of the Fund's shares on the NYSE on those dates was
$[_____] and $[_____], respectively.
THE FUND
The Fund is a diversified, closed-end management
investment company. Its shares are traded on the NYSE under the
symbol "ACG."
The Fund was incorporated under the laws of the State of
Maryland on June 15, 1987 and is registered under the 1940 Act.
It commenced investment operations on August 21, 1987 after an
initial public offering of 46,000,000 shares of Common Stock. The
net proceeds of the offering were approximately $510,000,000.
There are currently 164,844,732 shares of Common Stock
outstanding. The Fund's principal office is located at 1345
Avenue of the Americas, New York, New York 10105. The Adviser is
registered with the SEC under the Investment Advisers Act of
1940, as amended. In 1993 the Fund conducted a rights offering
allowing stockholders to subscribe for an aggregate of 16,211,704
14
shares. The proceeds from the 1993 rights offering equaled
$71,244,719. In December 2000, the Fund acquired the assets and
liabilities of ACM Government Securities Fund, Inc. and ACM
Government Spectrum Fund, Inc. The aggregate net assets of the
Fund immediately after the acquisition the combined net assets of
the Fund amounted to $1,384,338,763.
THE OFFER
PURPOSES OF THE OFFER
The Board of Directors of the Fund has determined that
it is in the best interests of the Fund and its existing
stockholders to increase the assets of the Fund available for
investment, thereby allowing the Fund to take advantage of
investment opportunities. In reaching its decision, the Board of
Directors was advised by the Adviser that the availability of new
capital would permit the Fund to take advantage of investment
opportunities without being required to sell current portfolio
positions that it desires to retain. The Board of Directors also
took into account that a well-subscribed rights offering could
result in an improvement in the liquidity of the trading market
for the Fund's shares on the NYSE. The Board also considered
that this rights offering would give record date stockholders the
opportunity to purchase shares at a price below the then current
market price per share and NAV, and might increase the level of
market interest in the Fund. The Board also considered, among
other things, the proposed terms of the offer, the expenses of
the offer, and its dilutive effect on exercising and non-
exercising record date stockholders.
There can be no assurance that the offer will be
successful.
The Fund may choose to make additional rights offerings
from time to time for a number of shares and on terms which may
or may not be similar to the offer. Any such future offering
will be made in accordance with the 1940 Act.
TERMS OF THE OFFER
The Fund is issuing to its stockholders rights to
purchase additional shares. You will receive one right for each
share you own on the record date, which is November ___, 2001.
You need three rights to purchase one share at the subscription
price per share. Record date stockholders who receive less than
three rights, however, will be entitled to purchase one share.
You may exercise your rights to acquire shares at any time during
the subscription period, which begins on November ___, 2001 and
ends at 5:00 p.m., New York City time, on December ___, 2001,
unless extended by the Fund to 5:00 p.m., New York City time, on
15
a date which will be no later than December ___, 2001. The right
of a stockholder of record to acquire one share for every three
rights during the subscription period at the subscription price
is called the "primary subscription."
Rights are evidenced by subscription certificates. The
Fund will send subscription certificates to all persons whose
names appear on the list of stockholders of the Fund on November
___, 2001, the record date of the offer.
If you exercise all your rights, you may subscribe for
additional shares. Shares available for purchase pursuant to
this over-subscription privilege are subject to allotment and
increase. The over-subscription privilege is more fully
described below. For purposes of determining the maximum number
of shares you may acquire pursuant to the offer, if your shares
are held of record by Cede, as nominee for The Depository Trust
Company, or by any other depository or nominee, you will be
deemed to be the holder of the rights that are issued to Cede or
such other depository or nominee on your behalf.
Fractional shares will not be issued. After the
exercise of rights, record date stockholders who have remaining
less than three rights will not be able to purchase a share upon
exercise of these remaining rights, which will expire without any
residual value. Record date stockholders who receive less than
three rights, however, may purchase one share at the subscription
price. Record date stockholders may request additional shares
under the over-subscription privilege described below.
IMPORTANT DATES TO REMEMBER
Please note that the dates in the table below may change
if the offer is extended.
EVENT DATE
_________________________________________________________________
Record date........................................
Subscription period................................
Payment for shares or notice of guaranteed ........
delivery due.......................................
Expiration and pricing date........................
Payment for guarantees of delivery date............
Confirmation to participants.......................
Final payment for shares...........................
16
OVER-SUBSCRIPTION PRIVILEGE
If shares remain available for purchase after all
stockholders have had a chance to exercise their rights pursuant
to the primary subscription, the Fund will offer such shares to
stockholders who have exercised all their rights and who desire
to acquire additional shares. You may subscribe for those
additional shares pursuant to the over-subscription privilege
only if you exercise all your rights pursuant to the primary
subscription. If you exercise all your rights and wish to
subscribe for additional shares, please indicate on the
subscription certificate the number of additional shares desired
through the over-subscription privilege.
If sufficient shares remain from unexercised rights, all
over-subscriptions may be honored in full.
If sufficient shares are not available to honor all
over-subscription requests, the Fund may issue up to an
additional 13,737,061 shares, representing 25% of the shares
available pursuant to the primary subscription, to satisfy over-
subscription requests. Whether or not the Fund issues these
additional shares, if there are not enough shares available to
honor all over-subscriptions, the available shares will be
allocated among you and all the other stockholders who subscribe
for additional shares pursuant to the over-subscription privilege
in proportion to the number of rights issued to you and such
stockholders. The allocation process may involve a series of
allocations in order to assure that the total number of shares
available for over-subscriptions is distributed on a pro rata
basis.
The Fund will not sell any shares that are not
subscribed for under the primary subscription or the over-
subscription privilege.
SUBSCRIPTION PRICE
You may purchase one share for every three rights at the
subscription price. The subscription price is [___%] of the
lower of:
(1) the average of the last reported sales price of a
share on the NYSE on the expiration date of the offer and on the
four preceding business days; and
(2) the NAV per share as of the close of business on
the expiration date of the offer.
For example, if the average of the last reported sales
price on the NYSE on December [____], 2001 and on the four
17
preceding business days of a share of the Fund's common stock is
$[____], and the NAV as of the close of business on the pricing
date is $[____], the subscription price will be $[____]. If,
however, the average of the last reported sales price of a share
on that exchange on December ___, 2001 and on the four preceding
business days thereof is $[____], and the NAV as of the close of
business on December [___], 2001 is $[____], the subscription
price will be $[____].
The Fund announced the offer on October 5, 2001. The
last reported NAV per share of common stock at the close of
business on ___________ __, 2001 (the last trading date on which
the Fund publicly reported its NAV prior to the announcement of
the offer) and November ___, 2001 (the last trading date on which
the Fund publicly reported its NAV prior to the date of this
Prospectus) was $[____] and $[____], respectively, and the last
reported sales price of a share on the NYSE on those dates was
$[____] and $[____], respectively. The Fund paid a dividend of
$[_______] per share on ___________, __________, 2001.
RIGHTS MAY NOT BE PURCHASED OR SOLD
The rights are non-transferable. You may not purchase
or sell them. The rights will not trade on the NYSE or any other
exchange. The shares to be issued upon exercise of the rights,
however, will trade on the NYSE under the symbol "ACG." If you do
not exercise your rights before the conclusion of the rights
offer, your rights will expire without value.
EXPIRATION OF THE OFFER AND RIGHTS
The offer will expire at 5:00 p.m., New York City time,
on December ___, 2001 unless the Fund extends it until 5:00 p.m.,
New York City time, to a date not later than December ___, 2001.
Rights will expire at that time and thereafter you will no longer
be able to exercise them. Since the expiration date for exercise
of the rights and the pricing date of the shares subscribed will
be the same date, you will not know the purchase price when you
decide to acquire shares.
If the Fund decides to extend the offer, it will make an
announcement to that effect as promptly as practicable. The Fund
may elect to extend the offer, for example, if it determines that
stockholders require extra time to exercise their rights in a
timely fashion. The Fund will not, unless otherwise required by
law, have any obligation to publish, advertise or otherwise
communicate any such announcement other than by making a release
to the Dow Jones News Service or such other means of announcement
as the Fund deems appropriate.
18
SUBSCRIPTION AGENT
The subscription agent, EquiServe Trust Company, N.A.,
will receive for its administrative, processing, invoicing and
other services as subscription agent, a fee estimated to be
approximately $190,000 plus reimbursement for its out-of-pocket
expenses related to the offer. The subscription agent is also
the Fund's transfer agent, dividend-paying agent and registrar
with respect to the common stock. If you have any questions
regarding subscription certificates, please contact Georgeson
Shareholder Communications, the information agent for the offer,
at ____________________. You must send completed subscription
certificates together with payment of the estimated subscription
price to [_________] by one of the methods described below.
(1) By First Class Mail:
____________________
EquiServe Trust Company, N.A.
Corporate Reorganization
P.O. Box 9573
Boston, MA 02205-9573
By Overnight, Certified or Express Mail:
________________________________________
EquiServe Trust Company, N.A.
Corporate Reorganization
40 Campanelli Drive
Braintree, MA 02184
By Hand:
_______
Securities Transfer & Reporting Services, Inc.
c/o EquiServe Trust Company, N.A.
100 William Street
Galleria
New York, NY 10038
(2) By Facsimile (Telecopy):
_______________________
For Notice Of Guaranteed Delivery Only
(___) ___-____ with the original Subscription
Certificate to be sent by method (1) above. Confirm
facsimile by telephone at (___) ___-____.
The Fund will accept only subscription certificates
actually received on a timely basis. DELIVERY TO AN ADDRESS
OTHER THAN THOSE SET FORTH ABOVE DOES NOT CONSTITUTE GOOD
DELIVERY.
19
HOW TO EXERCISE RIGHTS
Rights will be evidenced by subscription certificates.
Except as described below under "Restrictions on Foreign
Stockholders," the Fund will mail subscription certificates
directly to you if your shares are registered in your name or, if
you own your shares through a broker, depository or nominee, to
Cede or such other depository or nominee. You may exercise your
rights by either:
- completing and signing a subscription certificate
and mailing it in the envelope provided, together
with payment for the shares to the subscription
agent, or
- contacting your broker, banker or trust company,
which can guarantee payment and delivery of a
properly completed and executed subscription
certificate before December __, 2001. A fee may be
charged for this service.
Fractional shares will not be issued. After the
exercise of rights, record date stockholders who have remaining
less than three rights will not be able to purchase a share upon
exercise of these remaining rights, which will expire without any
residual value. Record date stockholders who receive less than
three rights, however, may purchase one share at the subscription
price. Record date stockholders may request additional shares
under the over-subscription privilege.
The subscription agent must have received at its office
indicated above completed subscription certificates or notices of
guaranteed delivery prior to 5:00 p.m., New York City time, on
December __, 2001.
IF YOU DO NOT OWN YOUR SHARES THROUGH A BROKER OR OTHER
NOMINEE. As a record holder, you can choose between two options
set forth under "Payment for Shares" below. If time is of the
essence, option (2) will permit delivery of the completed
subscription certificate and payment after December ___, 2001.
IF YOU OWN YOUR SHARES THROUGH A BROKER OR OTHER
NOMINEE. You must contact that broker or nominee to exercise
your rights. In that case, the nominee will complete the
subscription certificate on your behalf and arrange for proper
payment by one of the methods set forth under "Payment for
Shares".
IF YOU ARE A NOMINEE. If you hold shares for the
account of others, you should notify the beneficial owners of
such shares as soon as possible to obtain instructions. If the
20
beneficial owner so instructs, you should complete the
subscription certificate and submit it to the subscription agent
with proper payment.
RESTRICTIONS ON FOREIGN STOCKHOLDERS
The Fund will not mail subscription certificates to
stockholders whose record addresses are outside the United
States. For these purposes, the United States includes its
territories and possessions and the District of Columbia. The
rights to which those subscription certificates relate will be
held by [____________________] for foreign stockholders' accounts
until instructions are received to exercise the rights. If no
instructions are received prior to December __, 2001, such rights
will expire.
INFORMATION AGENT
If you have any questions or inquiries relating to the
offer, please contact the information agent at:
GEORGESON SHAREHOLDER COMMUNICATIONS, INC.
Wall Street Plaza
New York, New York 10005
Banks and Brokers Call Collect: (____) ___-_____
All Others Call Toll Free: (____) ___-_____
You may also contact your broker or nominee for
information with respect to the offer.
The Fund will pay the information agent for its services
in connection with the offer a fee estimated to be approximately
$38,500 including reimbursement for its out-of-pocket expenses.
PAYMENT FOR SHARES
You may choose between the following methods of payment
to exercise your rights:
(1)You can send the completed subscription certificate
together with payment for shares to the subscription agent. You
should calculate the total payment on the basis of an estimated
subscription price of $[_____] per share. To be accepted, your
payment accompanied by a properly executed and completed
subscription certificate must be received by the subscription
agent prior to 5:00 p.m., New York City time, on December ___,
2001.
If you pay using this method, please make sure that your
payment:
21
- is made in United States dollars by money order or
check drawn on a bank located in the United States
- is made to "ACM Income Fund, Inc."
- accompanies an executed subscription certificate.
(2) Alternatively, you may contact your broker, bank or
trust company and request that it sends on your behalf a notice
of guaranteed delivery by facsimile or otherwise to the
subscription agent. The subscription agent will accept all
notices of guaranteed delivery received from brokers, banks,
trust companies or NYSE members prior to 5:00 p.m., New York City
time, on December __, 2001. The notice must guarantee delivery
to the subscription agent of (a) payment of the full subscription
price for the shares subscribed for pursuant to the primary
subscription and any additional shares subscribed for pursuant to
the over-subscription privilege, and (b) a properly completed and
executed subscription certificate. The subscription agent will
not honor a notice of guaranteed delivery if a properly completed
and executed subscription certificate, together with payment, is
not received by the close of business on December __, 2001.
No later than December __, 2001, the subscription agent
will send a confirmation to each stockholder or, if the
stockholder's shares are held by Cede or any other depository or
nominee, to Cede or such depository or nominee. This
confirmation will show:
- the number of shares you acquired pursuant to the
primary subscription;
- the number of shares, if any, you acquired pursuant
to the over-subscription privilege;
- the per share and total purchase price for the
shares; and
- any additional amount that you must pay to the Fund
or any excess to be refunded by the Fund to you.
You will not receive any other evidence of title unless
you have requested a stock certificate. You must ensure that the
subscription agent receives any additional payment required from
you before December __, 2001. The subscription agent will mail
any excess payment owed to you within a reasonable time after the
expiration date. The Fund will not pay interest on any excess
payment. All your payments to the Fund must be in U.S. Dollars
by money order or check drawn on a bank located in the United
States of America and payable to ACM Income Fund, Inc.
22
The subscription agent will deposit all checks received
by it prior to the final due date into a segregated interest-
bearing account pending distribution of the shares. Interest
will accrue to the benefit of the Fund regardless of whether
shares are issued or not by the Fund.
Issuance and delivery of evidence of title for the
shares purchased are subject to collection of checks and actual
payment pursuant to any notice of guaranteed delivery.
YOU WILL HAVE NO RIGHT TO RESCIND YOUR SUBSCRIPTION
AFTER RECEIPT OF YOUR PAYMENT FOR SHARES BY THE SUBSCRIPTION
AGENT.
If you subscribe for shares and do not pay any
additional amounts due, the Fund may:
(1) sell these shares to other stockholders;
(2) sell you only the number of shares your payment
covers; and/or
(3) exercise any and all other rights or remedies to
which it may be entitled to collect the additional amount due,
including enforcing any guaranty of payment.
You may choose the method of delivery of subscription
certificates and payment of the subscription price from those
indicated above. Whichever method you choose, you will make
delivery and payment at your own risk. If you use mail,
subscription certificates and payment should be sent by
registered mail and properly insured, with return receipt
requested. Please allow a sufficient number of days to ensure
delivery to the Fund and clearance of payment prior to 5:00 p.m.,
New York City time, on the last applicable payment date. Because
uncertified personal checks may take at least five business days
to clear, you are strongly urged to pay, or arrange for payment,
by means of certified or cashier's check or money order.
The Fund will determine all questions concerning the
timeliness, validity, form and eligibility of any exercise of
rights. The Fund's determinations will be final and binding.
The Fund may waive any defect or irregularity, or permit a defect
or irregularity to be corrected within such time as it may
determine. The Fund may also reject the purported exercise of
any right. Subscriptions will not be deemed to have been
received or accepted until all irregularities have been waived or
cured within such time as the Fund determines. The Fund will not
be under any duty to give notification of any defect or
irregularity related to the submission of subscription
23
certificates. The Fund will not incur any liability for failure
to give any such notification.
DELIVERY OF STOCK CERTIFICATES
The Fund will issue certificates for shares acquired
through subscription only upon request. If a request is made,
stock certificates will be mailed promptly after
____________________, 2001 and after payment for the shares
subscribed for has cleared. If you are a participant in the
Fund's dividend reinvestment and cash purchase plan, your shares
will be credited to your account in the plan. The Fund will not
issue certificates for subscription shares credited to plan
accounts. If your shares are held of record by Cede or by any
other depository or nominee on your behalf or your broker-
dealer's behalf, the shares that you acquire will be credited to
the account of Cede or such other depository or nominee.
OFFERING FEES AND EXPENSES
[ ] will act as the dealer manager for
the offer pursuant to a dealer manager agreement with the Fund.
[ ] will provide financial advisory services
and marketing assistance in connection with the offer. Together
with its associated broker-dealers, [ ]. will also
solicit the exercise of rights and participation in the over-
subscription privilege. The Fund will pay [ ] a
fee for its financial advisory services and marketing assistance
equal to [______]% of the subscription price for each share
issued. The Fund will also pay broker-dealers, including [
], fees for their soliciting efforts equal to [_____]% of the
subscription price for each share issued.
The Fund has agreed to indemnify [ ]
or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act. [
] will not be liable to the Fund in rendering the services
described above except for any act of bad faith, willful
misconduct or gross negligence on its part or reckless disregard
of its obligations and duties.
Other offering expenses incurred by the Fund are
estimated at $[__________] which includes up to $[__________]
that may be paid to [ ] as partial reimbursement
for its expenses related to the offer.
NOTICE OF NAV DECLINE
The Fund has undertaken to suspend the offer until it
amends this Prospectus if, subsequent to ________, 2001 (the
effective date of the Fund's registration statement), the Fund's
24
NAV declines more than 10% from its NAV as of that date. In such
event, the Fund would extend the expiration date and notify
record date stockholders that the NAV has declined more than 10%,
that the offer is suspended and that exercising rights holders
may cancel their exercise of rights.
EMPLOYEE BENEFIT PLAN CONSIDERATIONS
Stockholders who are employee benefit plans subject to
the Employee Retirement Income Security Act of 1974, as amended,
(including corporate savings and 401(k) plans), Keogh or H.R. 10
plans of self-employed individuals and individual retirement
accounts (collectively, "Retirement Plans"), should be aware that
additions to the Retirement Plan (other than rollovers or
trustee-to-trustee transfers from other Retirement Plans) in
order to exercise rights would be treated as contributions to the
Retirement Plan and, when taken together with contributions
previously made, may result in, among other things, excise taxes
for excess or nondeductible contributions. In the case of
Retirement Plans qualified under section 401(a) of the U.S.
Internal Revenue Code of 1986, as amended (the "Code"), and
certain other Retirement Plans, additional cash contributions
could cause the maximum contribution limitations of section 415
of the Code or other qualification rules to be violated. They
may also be a reportable distribution and there may be other
adverse tax and ERISA consequences if rights are sold or
transferred by a Retirement Plan.
Retirement Plans and other tax exempt entities should
also be aware that, if they borrow in order to finance their
exercise of rights, they may become subject to the tax on
unrelated taxable income under section 511 of the Code with
respect to any income they subsequently derive with respect to
the shares acquired pursuant to such exercise.
ERISA contains fiduciary responsibility requirements,
and ERISA and the Code contain prohibited transaction rules, that
may bear upon the exercise of rights. Due to the complexity of
these rules and the penalties for noncompliance, Retirement Plans
should consult with their counsel and other advisors regarding
the consequences under ERISA and the Code of their exercise of
rights.
FEDERAL INCOME TAX CONSEQUENCES
For United States federal income tax purposes, neither
the receipt nor the exercise of the rights will result in taxable
income to you. Moreover, you will not realize a loss if you do
not exercise the rights. The holding period for a share acquired
upon exercise of a right begins with the date of exercise. The
basis for determining gain or loss upon the sale of a share
25
acquired upon the exercise of a right will be equal to the sum
of:
- the subscription price per share,
- any servicing fee charged to you by your broker,
bank or trust company, and
- the basis, if any, in the rights that you
exercised.
A gain or loss recognized upon a sale of a share
acquired upon the exercise of a right will be a capital gain or
loss assuming the share is held as a capital asset at the time of
sale. This gain or loss will be a long-term capital gain or loss
if the share has been held at the time of sale for more than one
year.
As noted above, your basis in shares issued under the
offer includes your basis in the rights underlying those shares.
The basis of the rights will be zero unless you elect to allocate
your basis of previously owned shares to the rights issued in the
offer. This allocation is based upon the relative fair market
value of such shares and the rights as of the date of
distribution of the rights. Thus, if you make such an election
and the rights are later exercised or sold, the basis in the
shares you originally owned will be reduced by an amount equal to
the basis you allocated to the rights. This election must be
made in a statement attached to your federal income tax return
for the year in which the offer occurs. If you do not exercise
or sell the rights, however, you will not be able to recognize a
loss or to allocate a portion of your basis in the shares to the
unexercised rights.
The foregoing is a general summary of the material
United States federal income tax consequences of the receipt and
exercise of rights. The discussion is based upon applicable
provisions of the Code, U.S. Treasury regulations and other
authorities currently in effect, and does not cover state, local
or foreign taxes. The Code and regulations are subject to change
by legislative or administrative action. You should consult your
tax advisors regarding specific questions as to federal, state,
local or foreign taxes. You should also review the discussion of
certain tax considerations affecting yourself and the Fund set
forth under "Taxation."
INVESTMENT ADVISORY AND ADMINISTRATION FEES
The Adviser and the Administrator will each benefit from
the offer because a portion of the investment advisory fees and
all of the administrative fees are based on the net assets of the
Fund. Assuming all rights are exercised at the estimated
26
subscription price, including up to an additional 25% of the
shares which may be issued to satisfy over-subscriptions, the
annual compensation to be received by the Adviser would be
increased by approximately $[__________] and the annual
compensation to be received by the Administrator would be
increased by approximately $[__________]. Actual compensation
paid may vary depending on the number of shares purchased and
investment return.
DIVIDENDS
The Fund does not expect to pay dividends or other
distributions with respect to the shares acquired pursuant to
rights until _______________ 2001.
USE OF PROCEEDS
Assuming the Fund sells all shares offered pursuant to
the primary subscription at the estimated subscription price, the
net proceeds of the offer are estimated to be $[_______________],
after payment of the dealer manager's fees, the soliciting fees
and the estimated offering expenses. The Fund will pay these
expenses, which will reduce the NAV per share. If the Fund
increases the number of shares subject to the offer by 25%, or
[__________] shares, in order to satisfy over-subscription
requests, the additional net proceeds will be approximately
$[__________]. The Adviser expects that, under current market
conditions, the Fund will invest substantially all of the net
proceeds of the offer in accordance with its investment objective
and policies approximately within three months from the date of
receipt. Pending such investment, the proceeds will be invested
in certain short-term debt instruments.
INVESTMENT OBJECTIVE AND POLICIES
GENERAL
The investment objective of the Fund is high current
income consistent with preservation of capital. In seeking to
achieve this objective, the Fund invests principally in U.S.
Government Securities and utilizes certain other investment
techniques, including options and futures, intended to enhance
income and reduce market risk. The Fund may also invest in other
debt securities, including those of foreign governmental issuers.
The Fund is designed primarily for long-term investment and
investors should not consider it a trading vehicle. As with all
investment companies, there can be no assurance that the Fund's
objective will be achieved.
The Fund has adopted a fundamental policy that it will
invest at least 65% of its total assets in U.S. Government
27
Securities and repurchase agreements pertaining to U.S.
Government Securities. The Fund's investment objective and this
fundamental policy may be changed only with the approval of the
holders of a "majority of the Fund's outstanding voting
securities," which, as used in this Prospectus, means the lesser
of (i) 67% of the shares of the Fund represented at a meeting at
which more than 50 of the outstanding shares are present in
person or represented by proxy, or (ii) more than 50% of the
outstanding shares. The Fund's other investment policies
described below are not fundamental and may be changed by the
Fund without stockholder approval, but the Fund will not change
its investment policies without contemporaneous notice to its
stockholders.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the United States
Government, its agencies or instrumentalities include: (i) U.S.
Treasury obligations, which differ only in their interest rates,
maturities and times of issuance: U.S. Treasury bills (maturity
of one year or less), U.S. Treasury notes (maturities of one to
10 years), and U.S. Treasury bonds (generally maturities of
greater than 10 years), all of which are backed by the full faith
and credit of the United States, and (ii) obligations issued or
guaranteed by U.S. Government agencies or instrumentalities,
including government guaranteed mortgage-related securities, some
of which are backed by the full faith and credit of the U.S.
Treasury, e.g., direct pass-through certificates of the
Government National Mortgage Association; some of which are
supported by the right of the issuer to borrow from the U.S.
Government, e.g., obligations of Federal Home Loan Banks; and
some of which are backed only by the credit of the issuer itself,
e.g., obligations the Student Loan Marketing Association. U.S.
Government securities in which the Fund may invest are discussed
briefly below and in greater detail in the SAI, including
Appendix A to the SAI which describes obligations issued or
guaranteed by U.S. Government agencies and instrumentalities.
Government Guaranteed Mortgage-Related Securities-
-General. Mortgages backing the securities purchased by the Fund
include, among others, conventional thirty-year fixed rate
mortgages, graduated payment mortgages, fifteen-year mortgages
and adjustable rate mortgages. All of these mortgages can be used
to create pass-through securities. A pass-through security is
formed when mortgages are pooled together and undivided interests
in the pool or pools are sold. The cash flow from the mortgages
is passed through to the holders of the securities in the form of
periodic payments of interest, principal and prepayments (net of
a service fee). Prepayments occur when the holder of an
individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the
28
pass-through of prepayments of principal on the underlying
securities, mortgage-backed securities are often subject to more
rapid prepayment of principal than their stated maturity would
indicate. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict
accurately the realized yield or average life of a particular
issue of pass-through certificates. Prepayment rates are
important because of their effect on the yield and price of the
securities. Accelerated prepayments adversely impact yields for
pass-throughs purchased at a premium (i.e., a price in excess of
principal amount) and may involve additional risk of loss of
principal because the premium may not have been fully amortized
at the time the obligation is repaid. The opposite is true for
pass-throughs purchased at a discount. The Fund may purchase
mortgage-related securities at a premium or at a discount.
Principal and interest payments on the mortgage-related
securities are government guaranteed to the extent described
below. Such guarantees do not extend to the value or yield of the
mortgage-related securities themselves or of the Fund's shares of
Common Stock.
GNMA Certificates. Certificates of the Government
National Mortgage Association ("GNMA Certificates") are
mortgage-backed securities, which evidence an undivided interest
in a pool or pools of mortgages. GNMA Certificates that the Fund
purchases are the "modified pass-through" type, which entitle the
holder to receive timely payment of all interest and principal
payments due on the mortgage pool, net of fees paid to the
"issuer" and GNMA, regardless of whether or not the mortgagor
actually makes the payment. GNMA guarantees the timely payment of
principal and interest in the GNMA Certificates purchased by the
Fund.
FHLMC Securities. The Federal Home Loan Mortgage
Corporation ("FHLMC") issues two types of mortgage pass-through
securities ("FHLMC Certificates"), mortgage participation
certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). PCs resemble GNMA Certificates in that each PC
represents a pro rata share of all interest and principal
payments made and owed on the underlying pool. The FHMLC
guarantees timely monthly payment of interest on PCs and the
ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of
mortgages. However, these instruments pay interest semi-annually
and return principal once a year in guaranteed minimum payments.
The expected average life of these securities is approximately
ten years. The FHLMC guarantee is not backed by the full faith
and credit of the United States.
29
FNMA Securities. The Federal National Mortgage
Association ("FNMA") issues guaranteed mortgage pass-through
certificates ("FNMA Certificates"). FNMA Certificates resemble
GNMA Certificates in that each FNMA Certificate represents a pro
rata share of all interest and principal payments made and owed
on the underlying pool. FNMA guarantees timely payment of
interest and principal on FNMA Certificates. The FNMA guarantee
is not backed by the full faith and credit of the United States.
Zero Coupon Treasury Securities. The Fund may invest in
zero coupon Treasury securities. Currently the only U.S. Treasury
security issued without coupons is the Treasury bill. Although
the U.S. Treasury does not itself issue Treasury notes and bonds
without coupons, under the U.S. Treasury STRIPS program interest
and principal payments on certain long term Treasury securities
may be maintained separately in the Federal Reserve book entry
system and may be separately traded and owned. In addition, the
last few years a number of banks and brokerage firms have
separated ("stripped") the principal portions ("corpus") from the
coupon portions of U.S. Treasury bonds and notes and sold them
separately in the form of receipts or certificates representing
undivided interests in these instruments (which instruments are
generally held by a bank in a custodial or trust account). The
staff of the Securities and Exchange Commission (the "SEC") has
indicated that, in its view, these receipts or certificates
should be considered as securities issued by the bank or
brokerage firm involved and, therefore, should not be included in
the Fund's categorization of U.S. Government Securities. The
Fund disagrees with the staff's interpretation but has undertaken
that it will not invest in such securities until final resolution
of the issue. However, if such securities are deemed to be U.S.
Government Securities the Fund will not be subject to any
limitations on their purchase.
Zero coupon securities do not entitle the holder to any
periodic payments of interest prior to maturity. Accordingly,
such securities usually trade at a deep discount from their face
or par value and will be subject to greater fluctuations of
market value in response to changing interest rates than debt
obligations of comparable maturities which make current
distributions of interest. The Fund may invest a maximum of 35%
of its total assets in zero coupon securities.
Current federal tax law requires that a holder (such as
the Fund) of a zero coupon security accrue a portion of the
discount at which the security was purchased as income each year
even though the holder receives no interest payment in cash on
the security during the year. As a result, in order to make the
distributions necessary for the Fund not to be subject to federal
income or excise taxes, the Fund might be required to pay out as
an income distribution each year an amount, obtained by
30
liquidation of portfolio securities or borrowings if necessary,
greater than the total amount of cash that the Fund has actually
received as interest during the year. The Fund believes, however,
that it is highly unlikely that it would be necessary to
liquidate portfolio securities or borrow money in order to make
such required distributions or to meet its investment objective.
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. A repurchase
agreement arises when a buyer such as the Fund purchases a
security and simultaneously agrees to resell it to the vendor at
an agreed-upon future date, normally one day or a few days later,
and at a resale price greater than the purchase price, reflecting
an agreed-upon interest rate.
General. U.S. Government Securities do not generally
involve the credit risks associated with other types of
interest-bearing securities, although, as a result, the yields
available from U.S. Government Securities are generally lower
than the yields available from other interest-bearing securities.
Like other fixed-income securities, however, the values of U.S.
Government Securities change as interest rates fluctuate. When
interest rates decline, the values of U.S. Government Securities
can be expected to increase and when interest rates rise, the
values of U.S. Government Securities can be expected to decrease.
OTHER SECURITIES
While the Fund's investment strategy normally emphasizes
U.S. Government Securities, the Fund may, where consistent with
its investment objective, invest up to 35% of its total assets in
securities other than U.S. Government Securities, including (i)
Foreign Government Securities (as described below), (ii)
corporate debt securities (including collateralized in mortgage
obligations), (iii) certificates of deposit, bankers' acceptances
and interest-bearing savings deposits of banks having total
assets of more than $1 billion and which are members of the
Federal Deposit Insurance Corporation, (iv) commercial paper of
prime quality rated Prime-1 or higher by Moody's or A-1 or higher
by S&P or, if not rated, issued by companies which have an
outstanding debt issue rated Aa or higher by Moody's or AA or
higher by S&P, and (v) put and call options, futures contracts
and options on futures contracts, options on foreign currencies,
and forward foreign currency exchange contracts, as discussed
below and in the SAI. Investment grade debt securities are those
rated Baa or higher by Moody's or BBB or higher by S&P or, if not
rated, of equivalent investment quality in the opinion of the
31
Adviser. Securities rated Baa by Moody's normally provide higher
yields than higher-rated securities but may be considered to have
speculative characteristics. Sustained periods of deteriorating
economic conditions or rising interest rates are more likely to
lead to a weakening in the issuer's capacity to pay interest and
repay principal than in the case of higher-rated securities. The
Fund may maintain up to 35% of its net assets in securities rated
below Baa by Moody's or below BBB by S&P or, if not rated, of
comparable investment quality as determined by the Adviser. Such
high-yield, high-risk securities are considered to have
speculative or, in the case of relatively low ratings,
predominantly speculative characteristics. See "Risk Factors and
Special Considerations--Investments in Lower-Rated Securities."
See Appendix B to the SAI for a description of Moody's and S&P's
bond ratings.
Foreign Government Securities. The Fund may invest up to
35% of its total assets in Foreign Government Securities of
issuers considered stable by the Adviser, although the Fund will
not invest 25% or more of its total assets in the Foreign
Government Securities of any one country. Foreign Government
Securities are obligations issued or guaranteed by a foreign
government or any of its political subdivisions, authorities,
agencies, or instrumentalities. The Adviser's determination that
a particular country, should be considered stable depends on the
Adviser's evaluation of political and economic developments
affecting the country as well as recent experience in the markets
for Foreign Government Securities of the country. Examples of
foreign governments which the Adviser currently considers to be
stable, among others, are the governments of Canada, Japan,
Sweden, Germany, the United Kingdom and Mexico. The percentage
of the Fund's assets invested in Foreign Government Securities
will vary depending on the relative yields of such securities,
the economies, financial markets, and interest rate climates of
the countries in which the investments are made and the
relationship of such countries' currencies to the U.S. dollar.
Currency is judged on the basis of fundamental economic criteria
(e.g., relative inflation levels and trends, growth rate
forecasts, balance of payments status, and economic policies) as
well as technical and political data. The Fund's portfolio of
Foreign Government Securities may include those of a number of
foreign countries or, depending upon market conditions, those of
a single country. The Fund may also hold foreign currency for
hedging purposes.
Investing in Foreign Government Securities involves
considerations and possible risks not typically associated with
investing in U.S. Government Securities. The value of Foreign
currency rates or exchange control regulations, application of
foreign tax laws, including withholding taxes, changes in
governmental administration or economic or monetary policy (in
32
this country or abroad) or changed circumstances in dealings
between nations. Costs will be incurred in connection with
conversions between currencies. Foreign brokerage commissions
are generally higher than in the United States, and foreign
securities markets may be less liquid, more volatile and less
subject to governmental supervision than in the United States.
Investments in foreign countries could be affected by other
factors not present in the United States, including
expropriation, confiscatory taxation, lack of uniform accounting
and auditing standards and potential difficulties in enforcing
contractual obligations and could be subject to settlement
periods.
Collateralized Mortgage Obligations. Collateralized
mortgage obligations are debt obligations issued generally by
finance subsidiaries or trusts that are secured by
mortgage-backed certificates, including in many cases, GNMA
Certificates, FHLMC Certificates and FNMA Certificates, together
with certain funds and other collateral.
Scheduled distributions on the mortgage-backed
certificates pledged to secure the collateralized mortgage
obligations, together with certain funds and other collateral are
sufficient to make timely payments of interest on the
collateralized mortgage obligations, and to retire the
collateralized mortgage obligations not later than their stated
maturity. Since the rate of payment of principal of the
collateralized mortgage obligations depends on the rate of
payment (including prepayments) of the principal of the
underlying mortgage-backed certificates, the actual maturity of
the collateralized mortgage obligations can occur significantly
earlier than their stated maturity. The collateralized mortgage
obligations may be subject to redemption under certain
circumstances. Collateralized mortgage obligations bought at a
premium (i.e., a price in excess of principal amount) may involve
additional risk of loss of principal in the event of
unanticipated prepayments of the underlying mortgages because the
premium may not have been fully amortized at the time the
obligation is repaid.
Although payment of the principal of and interest on the
mortgage-backed certificates pledged to secure the collateralized
mortgage obligations may be guaranteed by GNMA, FHLMC or FNMA,
the collateralized mortgage obligations represent obligations
solely of the issuer and are not insured or guaranteed by GNMA,
FHLMC, FNMA or any other governmental agency, or by any other
person or entity. The issuers of collateralized mortgage
obligations typically have no significant assets other than those
pledged as collateral for the obligations.
33
Illiquid Securities. The Fund may invest up to 20% of
its total assets in illiquid securities. These securities
include, among others, (i) direct placements or other securities
which are subject to legal or contractual restrictions on resale
or for which there is no readily available market (e.g., trading
in the security is suspended or, in the case of unlisted
securities, market makers do not exist or will not entertain bids
or offers), including any currency swaps and any assets used to
cover currency swaps, (ii) over-the-counter options and assets
used to cover over-the-counter options, and (iii) repurchase
agreements not terminable within seven days. Securities eligible
for resale under Rule 144A under the Securities Act of 1933, as
amended, that have legal or contractual restrictions on resale
but have a readily available market are not deemed securities not
readily marketable for purposes of this limitation. The Adviser
will monitor such securities and in reaching decisions concerning
their marketability will consider, among other things, the
following factors: (i) the frequency of trades and quotes for the
security; (ii) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (iii)
dealer undertakings to make a market in the security; (iv) the
nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer); and (v) any
applicable SEC interpretation or position with respect to such
type of securities.
INVESTMENT PRACTICES
In connection with the investment objective and policies
described above, the Fund may, but is not required to, utilize
various other investment strategies to earn income, facilitate
portfolio management and mitigate risk. Such strategies are
generally accepted by portfolio managers and are regularly
utilized by many investment companies and other institutional
investors. These investment strategies entail risks. Although the
Adviser believes that these investment strategies may further the
Fund's investment objective, no assurance can be given that they
will achieve this result.
Options on U.S. and Foreign Government Securities. In
an effort to increase current income and to reduce fluctuations
in NAV, the Fund may write covered put and call options and
purchase put and call options on U.S. and Foreign Government
Securities that are traded on United States and foreign exchanges
and over-the-counter. The Fund may also write call options 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
34
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 in the same principal amount as
the call written and the exercise price of the call held (a) is
equal to or less than the exercise price of the call or (b) is
greater than the exercise price of the call written and 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 cash not available for investment or liquid high-grade
debt securities with a value equal to the exercise price in a
segregated account with its Custodian, or else holds a put on the
same security in the same principal amount as the put written and
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 reflects, 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.
A call option is written for cross-hedging purposes if
the Fund does not own the underlying security but seeks to
provide a hedge against a decline in value in another security
which the Fund owns or has the right to acquire. In such
circumstances, the Fund collateralizes the option by maintaining
in a segregated account with its Custodian cash or U.S.
Government Securities 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 at least 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
35
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 at least the amount of the
premium. If a put or call option purchased by the Fund were
permitted to expire without being sold or exercised, its premium
would be lost by the Fund.
If a put option written by the Fund were exercised the
Fund would be obligated to purchase the underlying security at
the exercise price. If a call option written by the Fund were
exercised the Fund would be obligated to sell the underlying
security at the exercise price. The risk involved in writing a
put option is that there could be a decrease in the market value
of the underlying security. If this occurred, the option could be
exercised and the underlying security would then be sold by the
option holder to the Fund at a higher price than its current
market value. The risk involved in writing a call option is that
there could be an increase in the market value of the underlying
security. If this occurred, the option could be exercised and the
underlying security would then be sold by the Fund at a lower
price than its current market value. These risks could be reduced
by entering into a closing transaction as described in Appendix C
to the SAI.
The Fund may purchase or write options on securities of
the types in which it is permitted to invest in privately
negotiated transactions. The Fund will effect such transactions
only with investment dealers and other financial institutions
(such as commercial banks or savings and loan institutions)
deemed creditworthy by the Adviser, and the Adviser has adopted
procedures for monitoring the creditworthiness of such entities.
Options purchased or written by the Fund in negotiated
transactions are illiquid and it may not be possible for the Fund
to effect a closing transaction at a time when the Adviser
believes it would be advantageous to do so. The Fund retains the
premium received from writing a put or call option whether or not
the option is exercised. See Appendix C to the SAI for a further
discussion of the use, risks and costs of option trading.
Futures Contracts and 0ptions on Futures Contracts. The
Fund may enter into contracts for the purchase or sale for future
delivery of U.S. and Foreign Government Securities, or contracts
based on financial indices including any index of U.S. and
Foreign Government Securities ("futures contracts") and may
purchase and write put and call options to buy or sell futures
contracts ("options on futures contracts"). A "sale" of a futures
contract means the acquisition of a contractual obligation to
deliver the securities 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
36
securities called for by the contract at a specified price on a
specified date. The purchaser of a futures contract on an index
agrees to take or make delivery of an amount of cash equal to the
difference between a specified dollar multiple of the value of
the index on the expiration date of the contract ("current
contract value") and the price at which the contract was
originally struck. No physical delivery of the fixed-income
securities underlying the index is made. Options on futures
contracts to be written or purchased by the Fund will be traded
on U.S. exchanges or over-the-counter. These investment
techniques are used only to hedge against anticipated future
changes in market conditions and interest 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. See Appendix C to the
SAI for further discussion of the use, risks and costs of futures
contracts and options on futures contracts.
The Fund's Board of Directors has adopted the
requirement that futures contracts and options on futures
contracts only be used as a hedge and not for speculation. In
addition to this requirement, the Board of Directors has also
adopted two percentage restrictions on the use of futures
contracts. The first restriction is that the Fund will not enter
into any futures contracts or options on futures contracts if
immediately thereafter the aggregate amount of initial margin
deposits on all the futures contracts of the Fund and premiums
paid on options on futures contracts would exceed 5% of the
market value of the total assets of the Fund. The second
restriction is that the aggregate market value of the futures
contracts purchased by the Fund not exceed 50% of the market
value of the total assets of the Fund. Neither of these
restrictions will be changed by the Board of Directors without
considering the policies and concerns of the various applicable
federal and state regulatory agencies.
Options On Foreign Currencies. The Fund may purchase
and write put and call options on foreign currencies for the
purpose of protecting against declines in the U.S. dollar value
of foreign currency denominated portfolio securities and against
increases in the U.S. dollar cost of such securities to be
acquired. As in the case of other kinds of options, however, the
writing of an option on a foreign currency will constitute only a
partial hedge, up to the amount of the premium received, and the
Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on a foreign currency may constitute an
effective hedge against fluctuations in exchange rates although,
in the event of rate movements adverse to the Fund's position, it
may forfeit the entire amount of the premium plus related
transaction costs. Options on foreign currencies to be written or
37
purchased by the Fund will be traded on U.S. and foreign
exchanges or over the counter. There is no specific percentage
limitation on the Fund's investments in options on foreign
currencies. See Appendix C to the SAI for further discussion of
the use, risks and costs of options on foreign currencies.
Forward Foreign Currency Exchange Contracts. The Fund
may purchase or sell forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk to the Fund
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 which is individually negotiated and privately traded
by currency traders and their customers. The Fund may enter into
a forward contract, for example, when it enters into a contract
for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of the
security ("transaction hedge"). Additionally, for example, when
the Fund believes that a foreign currency may suffer a
substantial decline against the U.S. dollar, it may enter into a
forward sale contract to sell an amount of that foreign currency
approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency, or when the Fund
believes that the U.S. dollar may suffer a substantial decline
against a foreign currency, it may enter into a forward purchase
contract to buy that foreign currency for a fixed dollar amount
("position hedge"). The Fund's Custodian will place cash not
available for investment or U.S. Government Securities 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. If the
value of the securities placed in the segregated account
declines, additional cash or U.S. Government Securities will be
placed in the account on a daily basis so that the value of the
account will equal the amount of the Fund's commitments with
respect to such contracts. As an alternative to maintaining all
or part of the segregated account, the Fund may purchase a call
option permitting the Fund to purchase the amount of foreign
currency being hedged by a forward sale contract at a price no
higher than the forward contract price or the Fund may purchase a
put option permitting the Fund to sell the amount of foreign
currency subject to a forward purchase contract at a price as
high or higher than the forward contract price. 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 above may be restricted. Forward contracts reduce the
potential gain from a positive change in the relationship between
the U.S. dollar and foreign currencies. Unanticipated changes in
38
currency prices may result in poorer overall performance for the
Fund than if it had not entered into such contracts.
Lending of Portfolio Securities. In order to increase
income, the Fund may from time to time lend securities from its
portfolio to brokers, dealers and financial institutions and
receive collateral in the form of cash or U.S. Government
Securities. Under the Fund's procedures, collateral for such
loans must be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities
(including interest accrued on the loaned securities). The
interest accruing on the loaned securities will be paid to the
Fund and the Fund will have the right, on demand, to call back
the loaned securities. 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 Fund's Adviser (subject to review by the Board of Directors)
will consider all relevant facts and circumstances, including the
creditworthiness of the borrower. While securities are on loan,
the borrower will pay the Fund any income earned thereon and the
Fund may invest any cash collateral in portfolio securities,
thereby earning additional income, or receive an agreed upon
amount of income from a borrower who has delivered equivalent
collateral. The Fund may pay fees to arrange the loans. The Fund
will not lend portfolio securities in excess of 30% of the value
of its total assets nor lend its portfolio securities to any
officer, director, employee or affiliate of the Fund or the
Adviser.
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 of a proposed financing by
appropriate municipal authorities, i.e., a "when, as and if
issued" trade.
When forward commitment transactions are negotiated, the
price, which is generally expressed in yield terms, is fixed at
the time the commitment is made, but delivery and payment for the
securities take place at a later date. Normally, the settlement
date occurs within two months after the transaction, but delayed
settlements beyond two months may be negotiated. Securities
purchased or sold under a forward commitment are subject to
market fluctuation, and no interest accrues to the purchaser
prior to the settlement date. At the time the Fund enters into a
forward commitment, it will record the transaction and thereafter
reflect the value of the security purchased or, if a sale, the
proceeds to be received, in determining its NAV. Any unrealized
39
appreciation or depreciation reflected in such valuation of a
"when, as and if issued" security would be cancelled in the event
that the required condition did not occur and the trade was
cancelled.
The use of forward commitments enables the Fund to
protect against anticipated changes in interest rates and prices.
For instance, in periods of rising interest rates and falling
bond prices, the Fund might sell securities in its portfolio on a
forward commitment basis to limit its exposure to falling prices.
In periods of falling interest rates and rising bond prices, the
Fund might sell a security in its portfolio and purchase the same
or a similar security on a when-issued or forward commitment
basis, thereby obtaining the benefit of currently higher cash
yields. However, if the Fund's Adviser were to forecast
incorrectly the direction of interest rate movements, the Fund
might be required to complete such when-issued or forward
transactions at prices inferior to then current market values. No
forward commitments will be made by the Fund if, as a result, the
Fund's aggregate commitments under such transactions would be
more than 30% of the then current value of the Fund's total
assets.
The Fund's right to receive or deliver a security under
a forward commitment may be sold prior to the settlement date,
but the Fund enters 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,
cash or liquid high-grade debt securities having value equal to,
or greater than, any commitments to purchase securities on a
forward commitment basis and, with respect to forward commitments
to sell portfolio securities of the Fund, the portfolio
securities themselves. If the Fund, however, chooses to dispose
of the right to receive or deliver a security subject to a
forward commitment prior to the settlement date of the
transaction, it can incur a gain or loss. In the event the other
party to a forward commitment transaction were to default, the
Fund might lose the opportunity to invest money at favorable
rates or to dispose of securities at favorable prices.
General Information Regarding Futures, Options and
Forward Contracts. The successful use of the foregoing investment
practices draws upon the Adviser's special skill and experience
with respect to such instruments and usually depends on the
Adviser's ability to forecast interest and exchange rate
movements correctly. Should interest or exchange rates move in an
unexpected manner, the Fund may not achieve the anticipated
benefits of futures contracts, options or forward commitment
contracts or may realize losses and thus be in a worse position
than if such strategies had not been used. Unlike many exchange-
40
traded futures contracts and options on futures contracts, there
are no daily price fluctuation limits with respect to forward
contracts, and adverse market movements could therefore continue
to an unlimited extent over a period of time. In addition, the
correlation between movements in the prices of such instruments
and movements in the price of the securities hedged or used for
cover will not be perfect and could produce unanticipated losses.
The Fund's ability to dispose of its positions in
futures contracts, options and forward contracts will depend on
the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may
exist in various types of futures contracts, options and forward
contracts. If a secondary market does not exist with respect to
an option purchased or written by the Fund over-the-counter, it
might not be possible to effect a closing transaction in the
option (i.e., dispose of the option) with the result that (i) an
option purchased by the Fund would have to be exercised in order
for the Fund to realize any profit and (ii) the Fund may not be
able to sell portfolio securities covering an option written by
the Fund until the option expires or it delivers the underlying
security or futures contract 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.
Furthermore, the Fund's ability to engage in options and futures
transactions may be limited by tax considerations. See
"Taxation" in the SAI.
Short Sales. The Fund may make short sales of securities
or maintain a short position, provided that at all times when a
short position is open the Fund owns an equal amount of such
securities of the same issue as, and equal in amount to, the
securities sold short. In addition, the Fund may not make a short
sale if more than 10% of the Fund's net assets (taken at market
value) is held as collateral for short sales at any one time. If
the price of the security sold short increases between the time
of the short sale and the time the Fund replaces the borrowed
security, the Fund will incur a loss; conversely, if the price
declines, the Fund will realize a capital gain. Although the
Fund's gain is limited to the price at which it sold the security
short, its potential loss is unlimited. See "Investment
Restrictions" in the SAI. 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. Certain special
federal income tax considerations may apply to short sales which
are entered into by the Fund. See "Taxation" in the SAI.
Future Developments. The Fund may, following written
notice to its stockholders, 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
41
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 that exceed those involved in the
activities described above.
PORTFOLIO TURNOVER
The portfolio turnover rate for the Fund is included in
the Financial Highlights section. The Fund is actively managed
and, in some cases in response to market conditions, the Fund's
portfolio turnover may exceed 500%. A higher rate of portfolio
turnover increases brokerage and other expenses, which must be
borne by the Fund and its stockholders. High portfolio turnover
also may result in realization of substantial net short-term
capital gains, which, when distributed, are taxable to
stockholders.
The Fund's portfolio turnover rates for the years ended
2000 and 1999 were 538% and 368%, respectively. The increase in
the portfolio turnover rate was due to ________________________.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Please consider carefully the matters set forth below.
You should read the entire Prospectus and the SAI before you
decide whether to exercise your rights.
DILUTION AND THE EFFECT OF NON-PARTICIPATION IN THE OFFER
If you do not exercise all your rights, when the offer
is over you will own a smaller proportional interest in the Fund.
In addition, whether or not you exercise your rights, the per
share NAV of your shares will be diluted (reduced) immediately as
a result of the offer because:
- the shares offered will be sold at less than their then
current NAV
- you will indirectly bear the expenses of the offer
- the number of shares outstanding after the offer will have
increased proportionately more than the increase in the size
of the net assets.
This dilution may be substantial and will increase if
the share price declines in relation to the NAV as shown by the
following examples:
Scenario 1: Shares trade above per share NAV (premium) (1)
42
Share Price........................................... $
NAV................................................... $
Subscription Price ([__________]% of NAV)............. $
Reduction in NAV ($) (2).............................. $
Reduction in NAV (%).................................. %
Scenario 2: Shares trade below per share NAV at the time the
offer expires (discount) (1)
Share Price........................................... $
NAV................................................... $
5-day average share price (3)......................... $
Subscription Price ([______]% of 5-day
average share price)................................ $
Reduction in NAV ($) (4).............................. $
Reduction in NAV (%).................................. %
_______________
(1) Both examples assume full primary and over-subscription
privilege exercised. Actual amounts may vary due to
rounding.
(2) Assumes $[_______________] in estimated offering expenses
(including sales load).
(3) The expiration date and the four preceding business days.
(4) Assumes $[_______________] in estimated offering expenses
(including sales load).
You will incur a greater dilution in NAV per share if
you do not exercise your rights than if you do.
BORROWING
The Fund may, if and when market conditions dictate,
borrow, including on a secured basis, from banks or other
entities in privately arranged transactions to increase the money
available to the Fund to invest in securities when the Fund
believes that the income from the securities financed will be
greater than the interest expense paid on the borrowing.
Currently, the Fund has an outstanding credit facility in the
amount of $300,000,000. The Advisor anticipates that the amount
of the credit facility would be increased upon one completion of
the offer. See "Financial Statements--Notes to Financial
Statements--Bank Borrowing." Such borrowings involve additional
risk to the Fund, since the interest expense may be greater than
the income from or appreciation of the securities carried by the
borrowings and since the value of the securities carried may
decline below the amount borrowed. The Fund may also borrow to
finance repurchases of or tender offers for its shares when the
43
Fund deems it desirable in order to avoid the untimely
disposition of portfolio securities. The Fund reserves the right
to issue commercial paper, bonds, debentures or notes, in series
or otherwise, with such interest rates, conversion rights and
other terms and provisions as are determined by the Fund's Board
of Directors.
The Fund may borrow to the maximum extent permitted
under the 1940 Act. The 1940 Act requires the Fund to maintain
"asset coverage" of not less than 300% of its "senior securities
representing indebtedness," as those terms are defined and used
in the 1940 Act. In addition, the Fund may not make any cash
distributions to its stockholders if, after the distribution,
there would be less than 300% asset coverage of a senior security
representing indebtedness for borrowings (excluding for this
purpose certain evidences of indebtedness made by a bank or other
entity and privately arranged, and not intended to be publicly
distributed). See "Investment Restrictions" in the SAI. This
limitation on the Fund's ability to make distributions could
under certain circumstances impair the Fund's ability to maintain
its qualification as a registered investment company for federal
income tax purposes and could subject the Fund to a corporate
federal income tax for the year or years in which it fails to
qualify. See "Taxation" in the SAI.
The Fund may also borrow for temporary purposes in an
amount not exceeding 5% of the value of the total assets of the
Fund. Such borrowings are not subject to the asset coverage
restrictions set forth in the preceding paragraph. See
"Investment Restrictions" in the SAI.
Any investment gains made with the proceeds obtained
from borrowings in excess of interest paid on the borrowings will
cause the net income per share or the NAV per share of the Fund's
Common Stock to be greater than would otherwise be the case. On
the other hand, if the investment performance of the additional
securities purchased fails to cover their cost (including any
interest paid on the money borrowed) to the Fund, then the net
income per share or NAV per share of the Fund's Common Stock will
be less than would otherwise be the case. This is the
speculative factor known as "leverage."
EFFECTS OF LEVERAGE
As of August 31, 2001, the Fund had an outstanding
credit facility in the amount of $300,000,000, which represented
21.22% of the Fund's total assets, for the purpose of utilizing
investment leverage. Utilization of leverage, which is usually
considered speculative, involves certain risks to stockholders.
These include a higher volatility of the NAV of the Common Stock,
potentially more volatility in the market value of the Common
44
Stock and the relatively greater effect on the NAV of the Common
Stock caused by favorable or adverse changes in currency exchange
rates. In addition, fluctuations in the interest rates on the
Fund's indebtedness will affect the return to stockholders, with
increases in such rates decreasing such return. So long as the
Fund is able to realize a higher net return on the leveraged
portion of its investment portfolio than the then current
interest rate on the indebtedness, the effect of leverage will be
to cause stockholders to realize higher current net investment
income than if the Fund were not leveraged. Currently, the Fund's
portfolio must experience an annual return of ___% in order to
cover the current average annual rate of interest on the
indebtedness of ___%. The following table may assist the
investor in understanding the effects of leverage by illustrating
the effect of leverage on return to a stockholder. The figures
appearing in the table are hypothetical and actual returns may be
greater or less than those appearing in the table.
Assumed Return on
Portfolio
(Net of Expenses) -10% -5% 0% 5% 10%
Corresponding Return
to Common Stockholder
To the extent that the current interest rate on the
Fund's indebtedness approaches the net return on the leveraged
portion of the Fund's investment portfolio, the benefit of
leverage to stockholders will be reduced, and if the current
interest rate on the indebtedness were to exceed the net return
on such portion of the Fund's portfolio, the Fund's leveraged
capital structure would result in a lower rate of return to
stockholders and in a lower NAV than if the Fund were not
leveraged. Similarly, the effect of leverage in a declining
market would be a greater decrease in the Fund's NAV than if the
Fund were not leveraged, which would likely be reflected in a
greater decline in the market price for shares of Common Stock
than if the Fund were not leveraged. In an extreme case, if the
Fund's current investment income were not sufficient to meet
interest requirements on the indebtedness or if the Fund failed
to maintain the asset coverage required by the 1940 Act, it could
be necessary for the Fund to liquidate certain of its investments
at a time when it may be disadvantageous to do so, thereby
reducing its NAV.
INVESTMENTS IN FOREIGN GOVERNMENT SECURITIES
Investing in Foreign Government Securities involves
considerations and possible risks not typically associated with
investing in U.S. Government Securities. The value of Foreign
Government Securities investments will be affected by changes in
45
currency rates or exchange control regulations, application of
foreign tax laws, including withholding taxes, changes in
governmental administration or economic or monetary policy (in
this country or abroad) or changed circumstances in dealings
between nations. Costs will be incurred in connection with
conversions between various currencies. Foreign brokerage
commissions are generally higher than in the United States, and
foreign securities markets may be less liquid, more volatile and
less subject to governmental supervision than in the United
States. Investments in foreign countries could be affected by
other factors not present in the United States, including
expropriation, confiscatory taxation, lack of uniform accounting
and auditing standards, and potential difficulties in enforcing
contractual obligations, and could be subject to extended
settlement periods.
INVESTMENTS IN LOWER-RATED SECURITIES
Securities rated below investment grade ("lower-rated
securities"), i.e., Ba and lower by Moody's Investor Service,
Inc. ("Moody's") or BB and lower by Standard and Poor's Ratings
Services ("S&P"), 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 conditions than
investment grade securities, although the market values of
securities rated below investment grade and comparable unrated
securities tend to react less to fluctuations in interest rate
levels than do those of higher-rated securities. Securities rated
Ba by Moody's or BB by S&P are judged to have speculative
characteristics or to be predominantly speculative with respect
to the issuer's ability to pay interest and repay principal.
Securities rated B by Moody's and S&P are judged to have highly
speculative characteristics or to be predominantly speculative.
Such securities may have small assurance of interest and
principal payments.
The market for lower-rated securities may be thinner and
less active than that for higher-rated securities, which can
adversely affect the prices at which these securities can be
sold. To the extent that there is no established secondary market
for lower-rated securities, the Fund may experience difficulty in
valuing such securities and, in turn, the Fund's assets.
46
The Adviser will try to reduce the risk inherent in
investment in lower-rated securities through credit analysis,
diversification and attention to current developments and trends
in interest rates and economic and political conditions. However,
there can be no assurance that losses will not occur. Since the
risk of default is higher for lower-rated securities, the
Adviser's research and credit analysis are a correspondingly more
important aspect of its program for managing the Fund's
securities than would be the case if the Fund did not invest in
lower-rated securities.
In seeking to achieve the Fund's investment objective,
there will be times, such as during periods of rising interest
rates, when depreciation and realization of capital losses on
securities in the Fund's portfolio will be unavoidable.
Moreover, medium- and lower-rated securities and non-rated
securities of comparable quality may be subject to wider
fluctuations in yield and market values than higher-rated
securities under certain market conditions. Such fluctuations
after a security is acquired do not affect the cash income
received from that security but are reflected in the NAV of the
Fund.
Ratings of securities by Moody's and S&P are a generally
accepted barometer of credit risk. They are, however, subject to
certain limitations from an investor's standpoint. The rating of
a security is heavily weighted by past developments and does not
necessarily reflect probable future conditions. There is
frequently a lag between the time a rating is assigned and the
time it is updated. In addition, there may be varying degrees of
difference in the credit risk of securities within each rating
category. See Appendix B to the SAI for a description of Moody's
and S&P's ratings.
Certain lower-rated securities in which the Fund may
invest may contain call or buy-back features that permit the
issuers thereof to call or repurchase such securities. Such
securities may present risks based on prepayment expectations. If
an issuer exercises such a provision, the Fund may have to
replace the call security with a lower yielding security,
resulting in a decreased rate of return to the Fund.
DEBT SECURITIES
The net-asset value of the Fund's shares will change as
the general levels of interest rates fluctuate. When interest
rates decline, the value of a portfolio primarily invested in
debt securities can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio primarily invested
in debt securities can be expected to decline. Certain debt
securities in which the Fund may invest are floating-rate debt
47
securities. To the extent that the Fund does not enter into
interest rate swaps with respect to such floating-rate debt
securities, the Fund may be subject to greater risk during
periods of declining interest rates.
FUND SHARES MAY TRADE AT A DISCOUNT TO NAV
Shares of closed-end investment companies frequently
trade at a discount to NAV. This characteristic of shares of a
closed-end fund is a risk separate and distinct from the risk
that its NAV may decrease. Since the commencement of operations,
the shares have traded in the market both at a premium and at a
discount to NAV. See "Common Stock." The risk of purchasing
shares of a closed-end fund that might trade at a discount is
more pronounced for investors who wish to sell their shares in a
relatively short period of time. For those investors,
realization of a gain or loss on their investments is likely to
be more dependent upon the existence of a premium or discount
than upon portfolio performance.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER
The Fund's investment adviser is Alliance Capital
Management L.P., 1345 Avenue of the Americas, New York, New York
10105. The Adviser is a leading global investment management
firm supervising client accounts with assets as of June 30, 2001
totaling approximately $465 billion (of which more than $176
billion represented the assets of investment companies). The
Adviser provides diversified investment management and related
services globally to a broad range of clients including
institutional investors such as corporate and public employee
pension funds, endowment funds, domestic and foreign institutions
and governments and affiliates, private clients, consisting of
high net worth individuals, trusts and estates, charitable
foundations, partnerships, private and family corporations and
other entities, individual investors by means of retail mutual
funds sponsored by the Adviser, and institutional investors by
means of in-depth research, portfolio strategy, trading and
brokerage-related services.
Alliance Capital Management Corporation is the general
partner of the Adviser and an indirect wholly-owned subsidiary of
AXA Financial, Inc. ("AXA Financial"). As of June 30, 2001,
AXA, its wholly-owned subsidiaries, AXA Financial and The
Equitable Life Assurance Society of the United States
("Equitable") and some subsidiaries of Equitable (other than the
Adviser and its subsidiaries) were the beneficial owners of
128,476,020 units of the Adviser or approximately 51.8% of the
issued and outstanding units of the Adviser and 1,544,356 units
48
of Alliance Capital Management Holding L.P. ("Alliance Holding")
or approximately 2.1% of the issued and outstanding Alliance
Holding units. Alliance Holding is an entity the business of
which consists of holding units of the Adviser and engaging in
related activities. As of June 30, 2001, SCB Partners Inc., a
wholly-owned subsidiary of SCB Inc., was the owner of 40.8
million units of the Adviser or approximately 16.5% of the issued
and outstanding units of the Adviser. The business and assets of
SCB Inc., formerly known as Sanford C. Bernstein, Inc., were
acquired by the Adviser on October 2, 2000.
As of June 30, 2001 AXA and its subsidiaries owned all
of the issued and outstanding shares of the common stock of AXA
Financial. AXA Financial owns all of the issued and outstanding
shares of Equitable. For insurance regulatory purposes all
shares of common stock of AXA Financial beneficially owned by AXA
and its affiliates have been deposited into a voting trust.
AXA, a French company, is the holding company for an
international group of insurance and related financial services
companies. AXA's insurance operations include activities in life
insurance, property and casualty insurance and reinsurance. The
insurance operations are diverse geographically with activities
principally in Western Europe, North America, the Asia/Pacific
area, and, to a lesser extent, in Africa and South America. AXA
is also engaged in asset management, real estate and other
financial services activities principally in the United States,
as well as in Western Europe and the Asia/Pacific area.
DIRECTORS AND OFFICERS
The business and affairs of the Fund are managed under
the direction of its Board of Directors, and day to day
operations are conducted through or under the direction of its
officers. For information regarding the directors and officers,
see "Management--Directors and Officers" in the Statement of
Additional Information.
PORTFOLIO MANAGEMENT
Wayne D. Lyski is primarily responsible for the day-to-
day management of the Fund's portfolio. He is Executive Vice
President of ACMC with which he has been associated since 1983.
LEGAL PROCEEDINGS
On April 25, 2001, an amended class action complaint
entitled Miller et al. v. Mitchell Hutchins Asset Management,
Inc. et al. (the "amended Miller complaint"), was filed in
federal district court in the Southern District of Illinois
against the Adviser, Alliance Fund Distributors, Inc. ("AFD") and
49
other defendants alleging violations of the 1940 Act and breaches
of common law fiduciary duty.
The allegations in the amended Miller complaint concern
six mutual funds with which the Adviser has investment advisory
agreements, including the Alliance Premier Growth Fund, Alliance
Health Care Fund, Alliance Growth Fund, Alliance Quasar Fund,
Alliance Fund and Alliance Disciplined Value Fund. The principal
allegations of the amended complaint are that (i) certain
advisory agreements concerning these funds were negotiated,
approved and executed in violation of the 1940 Act, in particular
because certain directors of these funds should be deemed
interested under the 1940 Act, (ii) the distribution plans for
these funds were negotiated, approved and executed in violation
of the 1940 Act, and (iii) the advisory fees and distribution
fees paid to the Adviser and AFD, respectively, are excessive
and, therefore, constitute a breach of fiduciary duty.
The Adviser and AFD believe that the plaintiffs'
allegations are without merit and intend to vigorously defend
against these allegations. At the present time, management of
the Adviser and AFD are unable to estimate the impact, if any,
that the outcome of this action may have on the Adviser's results
of operations or financial condition.
On June 22, 2001, an amended class action complaint
entitled Nelson et al. v. AIM Advisors et al. (the "amended
Nelson complaint"), was filed in federal district court in the
Southern District of Illinois against the Adviser, AFD and
numerous other defendants in the mutual fund industry alleging
violations of the 1940 Act and breaches of common law fiduciary
duty.
The allegations in the amended Nelson complaint concern
three mutual funds with which the Adviser has investment advisory
agreements, including Alliance Premier Growth Fund, Alliance
Growth Fund and Alliance Quasar Fund. The principal allegations
of the amended complaint are that (i) certain advisory agreements
concerning these funds were negotiated, approved and executed in
violation of the 1940 Act, in particular because certain
directors of these funds should be deemed interested under the
1940 Act, (ii) the distribution plans for these funds were
negotiated, approved and executed in violation of the 1940 Act,
and (iii) the advisory and distribution fees paid to the Adviser
and AFD, respectively, are excessive and, therefore, constitute a
breach of fiduciary duty.
The Adviser and AFD believe that the plaintiffs'
allegations are without merit and intend to vigorously defend
against these allegations. At the present time, management of
the Adviser and AFD are unable to estimate the impact, if any,
50
that the outcome of this action may have on the Adviser's results
of operations or financial condition.
ADMINISTRATOR
The Administrator for the Fund is Brinson Advisors, Inc.
(formerly Mitchell Hutchins Asset Management Inc.), a [Delaware]
corporation with principal offices at 51 West 52nd Street, New
York, New York 10019. In connection with its responsibilities as
Administrator and in consideration of its administrative fee, the
Administrator performs standard administrative services for the
Fund. For a description of such services, see "Management of the
Fund--Administrator" in the SAI. Because of the services
rendered the Fund by the Administrator and the Adviser, the Fund
itself requires no employees other than its officers, none of
whom receives compensation from the Fund, and all of whom are
employed by the Adviser or the Administrator.
For the services rendered to the Fund and related
expenses borne by the Administrator, the Fund pays the
Administrator a fee, calculated and paid monthly, at the
annualized rate of .18 of 1% of the Fund's average weekly net
assets up to $100 million, .16 of 1% of the Fund's next $200
million of average weekly net assets and .15 of 1% if the Fund's
average weekly net assets in excess of $300 million, determined
in the same manner as the fee payable by the Fund under the
Advisory Agreement between the Fund and the Adviser. See
"Adviser."
TAXATION
The Fund intends to continue to qualify, and elect to be
treated, as a regulated investment company under the Code. The
Fund therefore intends to distribute all of its net investment
income and net capital gains each year (thereby avoiding all
federal income and excise taxes). Such distributions will be
taxable as ordinary income and long-term capital gains,
respectively, to stockholders of the Fund who are subject to tax.
After the end of each taxable year, the Fund will notify
stockholders of the federal income tax status of any
distributions made by the Fund during such year.
DISTRIBUTIONS
The Fund intends to distribute monthly its net
investment income. Net short-term capital gains, if any, will
normally be distributed quarterly and net long-term capital
gains, if any, will normally be distributed annually. For
information concerning the tax treatment of such distributions to
the Fund and to stockholders, see "Taxation" in the SAI.
51
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Stockholders whose shares are registered in their own
names may elect to be participants in the Dividend Reinvestment
and Cash Purchase Plan (the "Plan"), pursuant to which dividends
and capital gain distributions to stockholders will be paid or
reinvested in additional shares of the Fund (the "Dividend
Shares"). State Street Bank and Trust Company (the "Agent") will
act as Agent for participants under the Plan. Stockholders whose
shares are held in the name of a broker or nominee should contact
such broker or nominee to determine whether or how they may
participate in the Plan.
Stockholders who do not elect to participate in the Plan
will receive all distributions in cash paid by check mailed
directly to the stockholder of record (or, if the shares are held
in street or other nominee name, then to the nominee) by State
Street Bank and Trust Company, as dividend disbursing agent.
The automatic reinvestment of dividends and
distributions will not relieve participants of any income taxes
that may be payable (or required to be withheld) on dividends and
distributions. The federal income tax treatment of reinvestment
is described in the SAI under "Taxation."
A stockholder who has elected to participate in the Plan
may withdraw from the Plan at any time. There will be no penalty
for withdrawal from the Plan and stockholders who have previously
withdrawn from the Plan may rejoin it at any time. Changes in
elections must be in writing and should include the stockholder's
name and address as they appear on the stock certificate. An
election to withdraw from the Plan will, until such election is
changed, be deemed to be an election by a stockholder to take all
subsequent distributions in cash. An election will be effective
only for a distribution declared and having a record date of at
least 10 days after the date on which the election is received. A
stockholder whose shares are held in the name of a broker or
nominee should contact such broker or nominee concerning changes
in that stockholder's election.
Commencing not more than five business days before the
dividend payment date, purchases of the Fund's shares, may be
made by the Agent, on behalf of the participants in the Plan,
from time to time to satisfy dividend reinvestments under the
Plan. Such purchases by the Agent on or before the dividend
payment date may be made on the NYSE or elsewhere at any time
when the price plus estimated commissions of the Fund's Common
Stock on the NYSE is lower than the Fund's most recently
calculated NAV per share.
52
If the Agent determines on the dividend payment date
that the shares purchased as of such date are insufficient to
satisfy the dividend reinvestment requirements, the Agent, on
behalf of the participants in the Plan, will obtain the necessary
additional shares as follows. To the extent that outstanding
shares are not available at a cost of less than per share NAV,
the Agent, on behalf of the participants in the Plan, will accept
payment of the dividend, or the remaining portion thereof, in
authorized but unissued shares of the Fund on the dividend
payment date. Such shares will be issued at a per share price
equal to the higher of (i) the NAV per share on the payment date,
or (ii) 95% of the closing market price per share on the payment
date. If the closing sale or offer price, plus estimated
commissions, of the Common Stock on the NYSE on the payment date
is less than the Fund's NAV per share on such day, then the Agent
will purchase additional outstanding shares on the NYSE or
elsewhere. If before the Agent has completed such purchases, the
market price plus commissions exceeds the NAV of a Fund share,
the average per share purchase price paid by the Agent may exceed
the NAV of the Fund's shares, resulting in the acquisition of
fewer shares than if shares had been issued by the Fund.
Participants in the Plan have the option of making
additional cash payments to the Agent, semi-annually, in any
amount of $100 or more for investment in the Fund's shares. The
Agent uses all funds received from participants to purchase Fund
shares in the open market on or about each January 15 and July
15. Participants' cash payments are also used to acquire Fund
shares under the same procedure as that used for reinvestment of
dividends and distributions. To allow ample time for receipt and
processing by the Agent, participants should send in voluntary
cash payments to be received by the Agent not later than five
business days before each January 15 and July 15. To avoid
unnecessary cash accumulations, cash payments received after that
time and cash payments received more than 30 days prior to these
dates will be returned by the Agent and interest will not be paid
on any uninvested cash payments. A participant may withdraw a
voluntary cash payment by written notice, if the notice is
received by the Agent not less than 48 hours before such payment
is to be invested.
The Agent will maintain all stockholders' accounts in
the Plan and furnish written confirmation of all transactions in
the account, including information needed by stockholders for tax
records. Shares in the account of each Plan participant will be
held by the Agent in non-certificated form in the name of the
participant, and each stockholder's proxy will include those
shares purchased or received pursuant to the Plan.
In the case of stockholders such as banks, brokers or
nominees which hold shares for others who are the beneficial
53
owners, the Agent will administer the Plan on the basis of the
number of shares certified from time to time by the record
stockholders as representing the total amount registered in the
record stockholders' name and held for the account of beneficial
owners who are to participate in the Plan.
There will be no brokerage charges with respect to
shares issued directly by the fund to satisfy the dividend
reinvestment requirements. However, each participant will pay a
pro rata share of brokerage commissions incurred with respect to
the Agent's open market purchases of shares. In each case, the
cost per share of shares purchased for each stockholder's account
will be the average cost, including brokerage commissions, of any
shares purchased in the open market plus the cost of any shares
issued by the Fund. A participant also will pay brokerage
commissions incurred in purchases from voluntary cash payments
made by the participant. Shares will be purchased through brokers
or dealers, which may (but need not) include the Dealer Manager.
Stockholders participating in the Plan may receive
benefits not available to stockholders not participating in the
Plan. If the market price plus commissions of the Fund's shares
is above the NAV, participants in the Plan will receive shares of
the Fund at a discount of up to 5% from the current market value.
However, if the market price plus commissions is below the NAV,
participants will receive distributions in shares with a NAV
greater than the value of any cash distribution they would have
received on their shares. There may be insufficient shares
available in the market to make distributions in shares at prices
below the NAV. Also, since the Fund does not redeem its shares,
the price on resale may be more or less than the NAV.
In the case of foreign participants whose dividends are
subject to U.S. income tax withholding and in the case of any
participants subject to federal backup withholding, the Agent
will reinvest dividends after deduction of the amount required to
be withheld.
Experience under the Plan may indicate that changes are
desirable. Accordingly, the Fund reserves the right to amend or
terminate the Plan as applied to any voluntary cash payments made
and any dividend or distribution paid subsequent to written
notice of the change sent to participants in the Plan at least 90
days before the record date for such dividend or distribution.
The Plan may also be amended or terminated by the Agent on at
least 90 days' written notice to participants in the Plan. There
is no service charge to participants in the Plan; however, the
Fund reserves the right to amend the Plan to include a service
charge payable to the Agent by the participants. All
correspondence concerning the Plan should be directed to the
54
Agent at State Street Bank and Trust Company, P.O. Box 366,
Boston, Massachusetts 02101.
COMMON STOCK
The Fund is authorized to issue 300,000,000 shares of
Common Stock, $.01 par value per share. The Fund's Shares have
no preemptive, conversion, exchange, appraisal or redemption
rights. Each share has equal voting, dividend, distribution and
liquidation rights. The shares outstanding are, and the Shares
when issued upon the exercise of the Rights will be, fully paid
and nonassessable. Stockholders are entitled to one vote per
share. All voting rights for the election of Directors are
noncumulative, which means that the holders of more than 50% of
the shares of Common Stock of the Fund can elect 100% of the
Directors then nominated for election if they choose to do so
and, in such event, the holders of the remaining shares of Common
Stock will not be able to elect any Directors. Under the rules of
the NYSE applicable to listed companies, the Fund is required to
hold an annual meeting of stockholders each year. The foregoing
description and the description under "Common Stock--Certain
Anti-Takeover Provisions of the Charter and By-Laws" are subject
to the provisions contained in the Fund's Charter and By-Laws.
The Fund has no present intention of offering additional
shares of Common Stock, except under the Dividend Reinvestment
and Cash Purchase Plan and in connection with the offer. See
"Dividend Reinvestment and Cash Purchase Plan." Other offerings
of the Fund's shares of Common Stock, if made, will require
approval of its Board of Directors. Any additional offering will
be subject to the requirement of the 1940 Act that such shares
may not be sold at a price below the then current NAV, exclusive
of sales load, except in connection with an offering to existing
stockholders or with the consent of the holders of a majority of
the Fund's outstanding shares of Common Stock. In addition, the
Fund expects that it would commence a continuous offering of its
shares in the event it converted to open-end status.
REPURCHASE OF SHARES
Shares of closed-end investment companies frequently
trade at a discount from NAV, but may trade at a premium. The
Fund cannot predict whether the shares will trade at, below or
above NAV. In recognition of the possibility that the Fund's
shares might trade at a discount to NAV, the Fund's Board of
Directors has determined that it would be in the interest of
stockholders for the Fund to attempt to reduce or eliminate such
a market value discount should it exist. To that end, the Board
presently contemplates that the Fund would from time to time take
action either to repurchase in the open market or to make a
tender offer for its own shares at NAV. The Board presently
55
intends each quarter to consider the making of a tender offer.
The Board may at any time, however, decide that the Fund should
not make a tender offer.
Subject to the Fund's fundamental policy with respect to
borrowings, the Fund may incur debt to finance repurchases and/or
tender offers. See "Investment Objective and Policies--Borrowing"
above and "Investment Restrictions" in the SAI. Interest on any
such borrowing will reduce the Fund's net income.
Any tender offer made by the Fund will be at a price
equal to the NAV of the shares on a date subsequent to the Fund's
receipt of all tenders. Each offer will be made and stockholders
notified in accordance with the requirements of the Securities
Exchange Act of 1934 and the 1940 Act, either by publication or
mailing or both. Each offering document will contain such
information as is prescribed by such laws and the rules and
regulations promulgated thereunder. When a tender offer is
authorized to be made by the Fund's Board of Directors, a
stockholder wishing to accept the offer will be required to
tender all (but not less than all) of the shares owned by such
stockholder (or attributed to the stockholder for federal income
tax purposes under Section 318 of the Code). The Fund will
purchase all shares tendered in accordance with the terms of the
offer unless it determines to accept none of them (based upon one
of the conditions set forth above). Each person tendering shares
will be required to submit a check in the amount of $25.00,
payable to the Fund, which will be used to help defray the costs
associated with effecting the tender offer. This $25.00 fee will
be imposed upon each tendering stockholder any of whose tendered
shares are purchased in the offer, and will be imposed regardless
of the number of shares purchased. The Fund expects the cost to
the Fund of effecting a tender offer will exceed the aggregate of
all such fees received from those who tender offer their shares.
Costs associated with the tender offer will be charged against
capital. During the period of the tender offer, the Fund's
stockholders will be able to obtain the Fund's current NAV by use
of a toll-free telephone number.
CERTAIN ANTI-TAKEOVER PROVISIONS OF THE CHARTER AND BY-LAWS
The Fund presently has provisions in its Charter, as
amended, and By-Laws (together, the "Charter Documents") that are
intended to limit (i) the ability of other entities or persons to
acquire control of the Fund, (ii) the Fund's freedom to engage in
certain transactions, or (iii) the ability of the Fund's
Directors or stockholders to amend the Charter Documents or
effect changes in the Fund's management. These provisions of the
Charter Documents may be regarded as "anti-takeover" provisions.
Commencing with the first annual meeting of the Fund's
stockholders, the Board of Directors was divided into three
56
classes, each having a term of three years. At each annual
meeting of stockholders, the term of one class of Directors
expires. Accordingly, only those Directors in one class may be
changed in any one year, and it would require two years to change
a majority of the Board of Directors (although under Maryland law
procedures are available for the removal of Directors even if
they are not then standing for re-election and under SEC
regulations procedures are available for including stockholder
proposals in management's annual proxy statement). The
classification of the Board of Directors may have the effect of
maintaining the continuity of management and, thus, make it more
difficult for the Fund's stockholders to change the majority of
Directors. Under Maryland law and the Fund's Charter, the
affirmative vote of the holders of a majority of the votes
entitled to be cast is required for the consolidation of the Fund
with another corporation, a merger of the Fund with or into
another corporation (except for certain mergers in which the Fund
is the successor), a statutory share exchange in which the Fund
is not the successor, a sale or transfer of all or substantially
all of the Fund's assets, the dissolution of the Fund and any
amendment to the Fund's Charter. In addition, the affirmative
vote of 75% (which is higher than that required under Maryland
law or the 1940 Act) of the outstanding shares of Common Stock of
the Fund is required generally to authorize any of the following
transactions or to amend the provisions of the Charter relating
to such transactions:
(i) merger, consolidation or statutory share exchange
of the Fund with or into any other corporation;
(ii) issuance of any securities of the Fund to any
person or entity for cash;
(iii)sale, lease or exchange of all or any substantial
part of the assets of the Fund to any entity or person (except
assets having an aggregate fair market value of less than
$1,000,000); or
(iv)sale, lease or exchange to the Fund or any
subsidiary of the Fund, in exchange for securities of the Fund,
of any assets of any entity or person (except assets having an
aggregate fair market value of less than $1,000,000);
if such corporation, person or entity is directly, or indirectly
through affiliates, the beneficial owner of more than 5% of the
outstanding shares of the Fund (a "principal stockholder").
However, such vote would not be required when, under certain
conditions, the Board of Directors approves the transaction,
although in certain cases involving merger, consolidation or
statutory share exchange or sale of all or substantially all of
the Fund's assets the affirmative vote of a majority of the
57
outstanding shares of the Fund would nevertheless be required.
Reference is made to the Charter and By-Laws of the Fund, on file
with the SEC, for the full text of these provisions. See
"Available Information."
The provisions of the Charter Documents described above
and the Fund's right to repurchase or make a tender offer for its
Common Stock could have the effect of depriving the owners of
shares of opportunities to sell their shares at a premium over
prevailing market prices, by discouraging a third party from
seeking to obtain control of the Fund in a tender offer or
similar transaction. See "Risk Factors and Special
Considerations--Repurchase of Shares" in the SAI. The overall
effect of these provisions is to render more difficult the
accomplishment of a merger or the assumption of control by a
principal stockholder. However, they provide the advantage of
potentially requiring persons seeking control of the Fund to
negotiate with its management regarding the price to be paid and
facilitating the continuity of the Fund's management and
investment objective and policies. The Board of Directors of the
Fund has considered the foregoing anti-takeover provisions and
concluded that they are in the best interests of the Fund and its
stockholders.
DISTRIBUTION ARRANGEMENTS
[TO BE ADDED]
CUSTODIAN, DIVIDEND PAYING AGENT, TRANSFER AGENT
AND REGISTRAR
State Street Bank and Trust Company ("State Street"),
225 Franklin Street, Boston, Massachusetts 02110-1520, acts as
the Fund's Custodian for assets of the Fund held in the United
States and the Fund's dividend paying agent, transfer agent and
registrar. State Street also acts as the accounting agent for
the Fund and as agent for participants in the Fund's Dividend
Reinvestment and Cash Purchase Plan.
EXPERTS
The financial statements of the Fund, which are included
in the Fund's December 31, 2000 Annual Report, have been
incorporated by reference into the SAI in reliance on the report
of Ernst & Young LLP, independent auditors, 787 Seventh Avenue,
New York, New York 10019, given on authority of said firm as
experts in auditing and accounting.
58
LEGAL OPINIONS
The validity of the Shares offered hereby will be passed
on for the Fund by Seward & Kissel LLP, New York, New York.
Counsel for the Fund and the dealer manager will rely upon the
opinion of Ballard Spahr Andrews & Ingersoll, LLP, Baltimore,
Maryland, for certain matters relating to Maryland law.
FURTHER INFORMATION
Further information concerning these securities and
their issuer may be found in the Registration Statement of which
this Prospectus constitutes a part on file with the SEC. The SEC
maintains a World Wide Web site on the Internet at
http://www.sec.gov. that contains the Prospectus, material
incorporated by reference and other information regarding
registrants, such as the Fund, that file electronically with the
SEC. The Registration Statement may also be inspected without
charge at the SEC's office in Washington, D.C., and copies of all
or any part thereof may be obtained from such office after
payment of the fees prescribed by the SEC.
The Fund is subject to the informational requirements of
the Securities Exchange Act of 1934 and the 1940 Act, and in
accordance therewith files reports and other information with the
SEC. Such reports and other information can be inspected and
copied at the public reference facilities maintained by the SEC
at 450 Fifth Street, NW, Washington, D.C. 20549 and the SEC's
regional office at _____________________________________. Copies
of such materials can be obtained from the Public Reference
Section of the SEC at 450 Fifth Street, NW, Washington, D.C.
20549 at prescribed rates. Such reports and other information
concerning the Fund also may be inspected at the offices of the
NYSE and are available on the SEC's World Wide Web site on the
Internet at http://www.sec.gov.
A copy of the Fund's semi-annual report for the six
months ended June 30, 2001 was mailed to stockholders in August
2001.
59
TABLE OF CONTENTS
STATEMENT OF ADDITIONAL INFORMATION
PAGE
General Information..........................................2
Certain Investment Practices.................................2
Investment Restrictions......................................3
Risk Factors and Special Considerations......................4
Management of the Fund.......................................7
Net Asset Value..............................................13
Portfolio Transactions.......................................14
Taxation ....................................................15
Common Stock.................................................20
Financial Statements.........................................21
U.S. Government Securities (Appendix A)......................A-1
Bond Ratings (Appendix B)....................................B-1
Options and Futures (Appendix C).............................C-1
60
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN
THIS DOCUMENT OR THAT THE FUND HAS REFERRED YOU TO. THE FUND HAS
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER, SOLICITATION OR SALE IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUND SINCE SUCH
DATE.
_______________
TABLE OF CONTENTS
PAGE
ACM INCOME FUND, INC.
54,948,244 SHARES OF
COMMON STOCK ($.01 PAR VALUE)
ISSUABLE UPON EXERCISE OF RIGHTS TO SUBSCRIBE FOR SHARES
_______________
PROSPECTUS
_______________
[Dealer Manager]
61
ACM INCOME FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
ACM Income Fund, Inc., a Maryland corporation (the
"Fund"), is a diversified, closed-end management investment
company seeking high current income consistent with preservation
of capital. In seeking to achieve this objective, the Fund
invests principally in obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities and repurchase
agreements pertaining to U.S. Government Securities and utilizes
certain other investment techniques, including options and
futures contracts.
This Statement of Additional Information is not a
prospectus, but you should read it in conjunction with the
prospectus for the Fund dated November ___, 2001 (the
"Prospectus"). This Statement of Additional Information does not
include all information that you should consider before
purchasing shares, and you should obtain and read the Prospectus
prior to purchasing shares. You may obtain a copy of the
Prospectus without charge by calling [_______________], and from
outside the United States by calling [_______________], or by
contacting the Fund at 1345 Avenue of the Americas, New York, New
York 10105. This Statement of Additional Information
incorporates by reference the entire Prospectus.
TABLE OF CONTENTS
PAGE
General Information..........................................2
Certain Investment Practices.................................2
Investment Restrictions......................................3
Risk Factors and Special Considerations......................4
Management of the Fund.......................................7
Net Asset Value..............................................13
Portfolio Transactions.......................................14
Taxation.....................................................15
Common Stock.................................................20
Financial Statements.........................................21
U.S. Government Securities (Appendix A)......................A-1
Bond Ratings (Appendix B)....................................B-1
Options and Futures (Appendix C).............................C-1
The Prospectus and this Statement of Additional
Information omit certain of the information contained in the
registration statement filed with the Securities and Exchange
Commission ("SEC"), Washington, D.C. You may obtain the
registration statement from the SEC upon payment of the fee
prescribed, or inspect it at the SEC's office at no charge.
_______________
This Statement of Additional Information is dated
November ___, 2001
GENERAL INFORMATION
As of August 31, 2001, the Fund changed its name from
ACM Government Income Fund, Inc. to ACM Income Fund, Inc.
CERTAIN INVESTMENT PRACTICES
U.S. Government Securities
GNMA Certificates. The National Housing Act authorizes
GNMA to guarantee the timely payment of principal and interest in
securities backed by a pool of mortgages insured by the Federal
Housing Administration or guaranteed by the Veterans
Administration. The GNMA guarantee is backed by the full faith
and credit of the United States. The GNMA is also empowered to
borrow without limitation from the U.S. Treasury if necessary to
make any payments required under its guarantee.
The average life of a GNMA Certificate is likely to be
substantially shorter than the original maturity of the mortgages
underlying the securities. Prepayments of principal by
mortgagors and mortgage foreclosures will usually result in the
return of the greater part of principal investment long before
the maturity of the mortgages in the pool. Foreclosures impose
no risk to principal investment because of the GNMA guarantee,
except to the extent that the Fund has purchased the certificates
above par in the secondary market.
FHLMC Securities. The Federal Home Loan Mortgage
Corporation ("FHLMC") was created in 1970 through enactment of
Title III of the Emergency Home Finance Act of 1970. Its purpose
is to promote development of a nationwide secondary market in
conventional residential mortgages.
FNMA Securities. The Federal National Mortgage
Association ("FNMA") was established in 1938 to create a
secondary market in mortgages insured by the FHA.
Repurchase Agreements
The Fund may enter into repurchase agreements pertaining
to the types of securities in which it invests with member banks
of the Federal Reserve System or "primary dealers" (as designated
by the Federal Reserve Bank of New York) in securities in which
the Fund may invest. The Fund may enter into repurchase
agreements with respect to up to 35% of its total assets.
Currently the Fund plans to enter into repurchase agreements only
with its Custodian and such primary dealers. A repurchase
agreement arises when a buyer such as the Fund purchases a
security and simultaneously agrees to resell it to the vendor at
an agreed-upon future date, normally one day or a few days later.
2
The resale price is greater than the purchase price, reflecting
an agreed-upon interest rate which is effective for the period of
time the buyer's money is invested in the security and which is
related to the current market rate rather than the coupon rate on
the purchased security. Such agreements permit the Fund to keep
all of its assets at work while retaining "overnight" flexibility
in pursuit of investments of a longer-term nature. The Fund
requires continual maintenance by its 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 the Fund's benefit.
Pursuant to procedures established and periodically reviewed by
the Fund's Board of Directors, the Fund's adviser Alliance
Capital Management L.P. (the "Adviser") monitors the
creditworthiness of the dealers with which the Fund enters into
repurchase agreement transactions.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment
restrictions, which may not be changed without the approval of
the holders of a majority of the Fund's outstanding voting
securities as defined above. The percentage limitations set
forth below, as well as those described in the Prospectus and
elsewhere in this Statement of Additional Information, apply only
at the time an investment is made or other relevant action is
taken by the Fund.
The Fund will not:
1. Invest 25% or more of its total assets in securities
of issuers conducting their principal business activities in the
same industry, provided that this limitation shall not apply with
respect to investments in U.S. Government Securities;
2. Make loans except through (a) the purchase of debt
obligations in accordance with its investment objective and
policies; (b) the lending of portfolio securities; or (c) the use
of repurchase agreements;
3. Borrow money, except (a) the Fund may borrow from a
bank or other entity in a privately arranged transaction and
issue commercial paper, bonds, debentures or notes, in series or
otherwise, with such interest rates, conversion rights and other
terms and provisions as are determined by the Fund's Board of
Directors, if after such borrowing or issuance there is asset
coverage of at least 300% as defined in the Investment Company
3
Act of 1940, as amended (the "1940 Act"), and (b) the Fund may
borrow for temporary purposes in an amount not exceeding 5% of
the value of the total assets of the Fund;
4. Pledge, hypothecate, mortgage or otherwise encumber
its assets, except to secure permitted borrowings;
5. Participate on a joint or joint and several basis in
any securities trading account;
6. Invest in companies for the purpose of exercising
control;
7. Invest in illiquid securities, including direct
placements or other securities which are subject to legal or
contractual restrictions on resale or for which there is no
readily available market (e.g., trading in the security is
suspended or, in the case of unlisted securities, market makers
do not exist or will not entertain bids or offers), if more than
20% of the Fund's net assets (taken at market value) would be
invested in such securities. For purposes of this restriction,
repurchase agreements not terminable within seven days will be
deemed illiquid. Options purchased by the Fund in privately
negotiated transactions and the securities covering options
written by the Fund in privately negotiated transactions are not
subject to this limitation;
8. Make short sales of securities or maintain a short
position, unless at all times when a short position is open it
owns an equal amount of such securities or securities convertible
into or exchangeable for, without payment of any further
consideration, securities of the same issue as, and equal in
amount to, the securities sold short ("short sales against the
box"), and unless not more than 10% of the Fund's net assets
(taken at market value) is held as collateral for such sales at
any one time (it is the Fund's present intention to make such
sales only for the purpose of deferring realization of gain or
loss for federal income tax purposes); or
9. (a) Purchase or sell real estate, except that it may
purchase and sell securities of companies which deal in real
estate or interests therein; (b) purchase or sell commodities or
commodity contracts (except currencies, currency futures, forward
contracts or contracts for the future acquisition or delivery of
fixed income securities and related options and other similar
contracts); (c) invest in interests in oil, gas, or other mineral
exploration or development programs; (d) purchase securities on
margin, except for such short-term credits as may be necessary
for the clearance of transactions; and (e) act as an underwriter
of securities, except that the Fund may acquire restricted
securities under circumstances in which, if such securities were
4
sold, the Fund might be deemed to be an underwriter for purposes
of the Securities Act of 1933, as amended (the "1933 Act").
RISK FACTORS AND SPECIAL CONSIDERATIONS
General
The value of shares of the Fund varies as the aggregate
value of the Fund's portfolio securities increases or decreases.
The NAV of the Fund changes as the general levels of interest
rates fluctuate. When interest rates decline, the value of a
portfolio invested in fixed-income securities can be expected to
rise. Conversely, when interest rates rise, the value of a
portfolio invested in fixed-income securities can be expected to
decline. If the Adviser's expectation of changes in interest
rates or its evaluation of the normal yield relationships in the
fixed-income markets proves to be incorrect, the Fund's income,
NAV and potential capital gain may be decreased or its potential
capital loss may be increased.
Although changes in the value of the Fund's portfolio
securities subsequent to their acquisition are reflected in the
NAV of shares of the Fund, such changes will not affect the
income received by the Fund from such securities. The dividends
paid by the Fund increase or decrease in relation to the income
received by the Fund from its investments, which is reduced by
the Fund's expenses before being distributed to the Fund's
stockholders.
The Fund's use of options, futures contracts, options on
futures contracts, forward contracts and options on foreign
currencies may result in the loss of principal under certain
market conditions. See "Investment Objective and Policies-
-Investment Practices" in the Prospectus and Appendix C.
For these reasons, an investment in shares of the Fund
should not constitute a complete investment program and may not
be appropriate for investors who cannot assume the greater risk
of capital depreciation inherent in seeking higher income.
Repurchase of Shares
There can be no assurance that repurchases and/or tender
offers will result in the Fund's shares trading at a price equal
to their NAV. The Fund anticipates that the market price of its
shares will from time to time vary from NAV. The market price of
the Fund's shares will, among other things, be affected by the
relative demand for and supply of such shares in the market, the
Fund's investment performance, the Fund's dividends and yield and
investor perception of the Fund's overall attractiveness as an
investment as compared with other investment alternatives.
5
Nevertheless, the fact that the Fund's shares may be the subject
of tender offers at NAV from time to time may reduce the spread
that might otherwise exist between market price and NAV. In the
opinion of the Adviser, sellers may be less inclined to accept a
significant discount if they have a reasonable expectation of
being able to recover NAV in conjunction with a possible tender
offer.
Although the Board of Directors believes that share
repurchases and tender offers generally would have a favorable
effect on the market price of the Fund's shares, it should be
recognized that the acquisition of shares by the Fund would
decrease the total assets of the Fund and therefore have the
effect of increasing the Fund's expense ratio. Because of the
nature of the Fund's investment objective, policies and
portfolio, the Fund's Adviser does not anticipate that
repurchases and tenders should have an adverse effect on the
Fund's investment performance and does not anticipate any
material difficulty in disposing of portfolio securities in order
to consummate stock repurchases and tenders.
Even if a tender offer has been made, it is the Board's
announced policy, which may be changed by the Board, not to
accept tenders or effect repurchases if (1) such transactions, if
consummated, would (a) result in the delisting of the Fund's
shares from the New York Stock Exchange ("NYSE") (the NYSE having
advised the Fund that it would consider delisting if the
aggregate market value of the Fund's outstanding shares is less
than $5,000,000, the number of publicly held shares falls below
600,000 or the number of round-lot holders falls below 1,200), or
(b) impair the Fund's status as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the "Code")
(which would make the Fund a taxable entity, causing the Fund's
income to be taxed at the corporate level in addition to the
taxation of stockholders who receive dividends from the Fund);
(2) the Fund would not be able to liquidate portfolio securities
in an orderly manner and consistent with the Fund's investment
policies and objective in order to repurchase shares; or (3)
there is, in the Board's judgment, any material (a) legal action
or proceeding instituted or threatened challenging such
transactions or otherwise materially adversely affecting the
Fund, (b) suspension of or limitation on prices for trading
securities generally on the NYSE or any foreign exchange on which
portfolio securities of the Fund are traded, (c) declaration of a
banking moratorium by federal, state or foreign authorities or
any suspension of payment by banks in the United States, New York
State or foreign countries in which the Fund invests, (d)
limitation affecting the Fund or the issuers of its portfolio
securities imposed by federal, state or foreign authorities on
the extension of credit by lending institutions or on the
exchange of foreign currency, (e) commencement of war, armed
6
hostilities or other international or national calamity directly
or indirectly involving the United States or other countries in
which the Fund invests, or (f) other event or condition which
would have a material adverse effect on the Fund or its
stockholders if shares were repurchased. The Board of Directors
may modify these conditions in light of experience.
If the Fund must liquidate portfolio securities in order
to purchase Fund shares tendered, the Fund may realize gains and
losses. If the portfolio securities sold are "Section 988"
items, the Fund's distributable net investment income could be
positively or adversely affected. See "Taxation--Options,
Futures Contracts and Foreign Currency Contracts." The portfolio
turnover rate of the Fund may or may not be affected by the
Fund's repurchases of shares pursuant to a tender offer.
Possible Future Conversion to Open-End Investment Company
If, during any fiscal year of the Fund, (i) shares of
the Fund's Common Stock have traded on the principal securities
exchange where listed at an average discount from NAV of more
than 10%, determined on the basis of the discount as of the end
of the last trading day in each week during the period of 12
calendar weeks preceding December 31 in such year, and (ii)
during such year the Fund receives written requests from the
holders of 10% or more of the Fund's outstanding shares of Common
Stock that such a proposal be submitted to the Fund's
stockholders, the Fund will submit to its stockholders at the
next succeeding annual meeting of stockholders a proposal, to the
extent consistent with the 1940 Act, to amend the Fund's Charter
to convert the Fund from a closed-end to an open-end investment
company. To be approved, the holders of 66 2/3% of the Fund's
outstanding shares of Common Stock must vote in favor of the
amendment. The 66 2/3% vote requirement is higher than the
minimum vote required under the 1940 Act. If the Fund converted
to an open-end investment company, it would be able to
continuously issue and offer for sale shares of its Common Stock
and each outstanding share of the Fund's Common Stock could be
presented to the Fund at the option of the holder thereof for
redemption at NAV per share. In such event, the Fund might be
required to liquidate portfolio securities to meet requests for
redemption, and its shares would no longer be listed on the NYSE.
The Fund cannot predict whether any repurchase of shares
made while the Fund is a closed-end investment company (as
described under "Repurchase of Shares" above) would increase or
decrease the discount from NAV. To the extent that any such
repurchase decreased the discount from NAV to below 10% during
the measurement period described in (i) above, the Fund would not
be required to submit to stockholders a proposal to convert the
7
Fund to an open-end investment company at the next annual meeting
of stockholders.
8
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 names of the
directors and principal officers of the Fund are set forth below,
together with their positions and their principal occupations
during the past five years.
The officers manage day to day operations. The officers
are directly responsible to the Board of Directors.
Principal Occupations
During the Past Five Years
Name, Address and Age Office And Other Affiliations
____________________ _____ __________________________
John D. Carifa* (56)
1345 Avenue of the
Americas
New York, NY 10105 Chairman President, Chief
Operating Officer and a
Director of Alliance
Capital Management
Corporation ("ACMC"), the
general partner of the
Adviser, with which he
has been associated since
prior to 1996.
Ruth Block**+ (70)
Box 4623
Stamford, CT 06903 Director Formerly an Executive
Vice President and Chief
Insurance Officer of The
Equitable Life Assurance
Society of the United
States ("Equitable");
Chairman and Chief
Executive Officer of
Evlico; a Director of
Avon, Tandem Financial
Group and Donaldson,
Lufkin & Jenrette
Securities Corporation.
She is a Director of
Ecolab Incorporated
(specialty chemicals) and
BP Amoco Corporation (oil
and gas).
9
David H. Dievler (71)
P.O. Box 167
Spring Lake, NJ 07762 Director Independent Consultant.
Until December 1994 he
was Senior Vice President
of ACMC responsible for
mutual fund
administration. Prior to
joining ACMC in 1984 he
was Chief Financial
Officer of Eberstadt
Asset Management since
1968. Prior to that he
was a Senior Manager at
Price Waterhouse & Co.,
member of the American
Institute of Certified
Public Accountants since
1953.
John H. Dobkin**+ (59)
150 White Plains Road
Tarrytown, NY 10591 Director Consultant. Formerly he
was a Senior Adviser
(June 1999-June 2000) and
President (December 1989-
May 1999) of Historic
Hudson Valley (historic
preservation) since prior
to 1996. Previously he
was Director of the
National Academy of
Design.
William H. Foulk, Jr.**+(68)
Suite 100
2 Greenwich Plaza
Greenwich, CT 06830 Director Investment Adviser and
Independent Consultant.
He was formerly Senior
Manager of Barrett
Associates, Inc., a
registered investment
adviser, with which he
had been associated since
prior to 1996. He is a
former Deputy Comptroller
of the State of New York
and, prior thereto, Chief
Investment Officer of the
10
New York Bank for
Savings.
Dr. James M. Hester**+(77)
25 Cleveland Lane
Princeton, NJ 08540 Director President of the Harry
Frank Guggenheim
Foundation, with which he
has been associated since
prior to 1996. He was
formerly President of New
York University and The
New York Botanical
Garden, Rector of the
United Nations University
and Vice Chairman of the
Board of the Federal
Reserve Bank of New York.
Clifford L. Michel**+ (62)
St. Bernard's Road
Gladstone, NJ 07934 Director Member of the law firm of
Cahill Gordon & Reindel,
with which he has been
associated since prior to
1996. He is President,
Chief Executive Officer
and Director of Wenonah
Development Company
(investments) and a
Director of Placer Dome,
Inc. (mining).
Donald J. Robinson**+ (67)
98 Hell's Peak Road
Weston, VT 05161 Director Senior Counsel of the law
firm of Orrick,
Herrington & Sutcliffe
LLP since prior to 1996.
He was formerly a senior
partner and a member of
the Executive Committee
of that firm. He was
also a member of the
Municipal Securities
Rulemaking Board and a
Trustee of the Museum of
the City of New York.
Wayne D. Lyski (59)
1345 Avenue of the Americas
11
New York, NY 10105
President Executive Vice President
of ACMC, with which he
has been associated since
prior to 1996.
Kathleen A. Corbet (41)
1345 Avenue of the
Americas
New York, NY 10105
Senior Vice
President Executive Vice President
of ACMC, with which she
has been associated since
prior to 1996.
Paul J. DeNoon (39)
1345 Avenue of the
Americas
New York, NY 10105
Vice
President Senior Vice President of
ACMC, with which he has
been associated since
prior to 1996.
Christian G. Wilson (33)
1345 Avenue of the
Americas
New York, NY 10105
Senior Vice
President Vice President of ACMC,
with which he has been
associated since prior to
1996.
Edmund P. Bergan, Jr. (51)
1345 Avenue of the
Americas
New York, NY 10105 Secretary Senior Vice President and
General Counsel of
Alliance Fund
Distributors, Inc. and
Alliance Global Investor
Service, Inc. ("AGIS"),
with which he has been
associated since prior to
1996.
Mark D. Gersten (50)
500 Plaza Drive
Secaucus, NJ 07094
Treasurer
12
and Chief
Financial
Officer Senior Vice President of
AGIS with which he has
been associated since
prior to 1996.
Vincent S. Noto (36)
500 Plaza Drive
Secaucus, NJ 07094 Controller Vice President of AGIS,
with which he has been
associated since prior to
1996.
* "Interested Person," as defined in the 1940 Act, of each
Fund because of an affiliation with the Fund's Adviser.
** Member of the Audit Committee.
+ Member of the Nominating Committee.
The Board of Directors is divided into three classes,
each class having a term of three years. Each year the term of
one class expires. See "Common Stock--Certain Anti-Takeover
Provisions of the Charter and By-Laws" in the Prospectus.
The Fund does not pay any fees to, or reimburse expenses
of, its Directors who are considered "interested persons" of the
Fund. The aggregate compensation paid by the Fund to each of the
Directors during its fiscal year ended December 31, 2000, the
aggregate compensation paid to each of the Directors during
calendar year 2000 by all of the funds to which the Adviser
provides investment advisory services (collectively, the
"Alliance Fund Complex") and the total number of registered
investment 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 fund 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.
13
Total Number
Total Number of of Investment
Total Investment Portfolios
Compensation Companies in Within
from the the Alliance Alliance
Aggregate Alliance Fund Fund Complex, Complex,
Compensation Complex, Including the Including the
from the Including Fund, as to Fund, as to
Fund during the Fund, which the which the
its Fiscal during Director is a Director is
Year Ended Calendar Year Director or a Director
Name of Director In 2000 2000 a Trustee or a Trustee
_________________ ____________ _____________ _____________ _____________
John D. Carifa $ -0- $ -0- 35 103
Ruth Block $3,980 $155,737 34 80
David H. Dievler $4,088 $223,025 40 86
John H. Dobkin $4,089 $187,175 37 83
William H. Foulk, Jr. $4,086 $220,737 41 99
Dr. James M. Hester $4,090 $171,137 35 81
Clifford L. Michel $4,090 $171,137 35 83
Donald J. Robinson $4,087 $160,776 37 93
As of September 30, 2001, the Directors and officers of
the Fund as a group owned less than 1% of the outstanding shares
of Common Stock of the Fund.
Investment Adviser
Alliance Capital Management L.P., a NYSE listed company
with principal offices at 1345 Avenue of the Americas, New York,
New York 10105, has been retained under an investment advisory
agreement (the "Advisory Agreement") to provide investment advice
and, in general, to conduct the management and investment program
of the Fund under the supervision and control of the Fund's Board
of Directors.
The Adviser provides office space, 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. Under the Advisory Agreement,
the Fund pays the Adviser a monthly management fee in an amount
equal to the sum of (x) 1/12th of .30% of the average weekly net
assets of the Fund up to $250 million plus 1/12th of .25% of the
Fund's average weekly net assets in excess of $250 million and
(y) 5.25% of the Fund's daily gross income (i.e., income other
than gains from the sale of securities and foreign currency
transactions or gains realized from options and futures contracts
less interest on money borrowed by the Fund) accrued by the Fund
during the month. The Advisory Agreement provides that the
14
monthly management fee shall not exceed in the aggregate 1/12th
of 1% of the Fund's average weekly net assets during the month
(approximately 1% on an annual basis). This advisory fee may be
greater than that paid by most funds. In addition to payments to
the Adviser under the Advisory Agreement, the Fund pays certain
other costs described below under "Advisory Agreement".
The Adviser or any of its affiliates may have certain
other clients whose investment objectives and policies are
similar to those of the Fund. The Adviser and any of its
affiliates may, from time to time, make recommendations that
result in the purchase or sale of a particular security by their
other clients simultaneously with the Fund. If transactions on
behalf of more than one client during the same period increase
the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price or
quantity. It is the policy of the Adviser and its affiliates to
allocate advisory recommendations and the placing of orders in a
manner that is deemed equitable by the Adviser and its affiliates
to the accounts involved, including the Fund. When two or more
clients of the Adviser and its affiliates (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.
Advisory Agreement
In addition to the payments to the Adviser under the
Advisory Agreement, the Fund pays certain other costs including
(i) brokerage and commission expenses, (ii) federal, state, local
(if any) and foreign taxes, including issue and transfer taxes,
incurred by or levied on the Fund, (iii) interest charges on
borrowings, (iv) the organizational and offering expenses of the
Fund, whether or not advanced by the Adviser, (v) fees and
expenses of registering the shares of the Fund under the
appropriate federal securities laws and of qualifying the shares
of the Fund under applicable state securities laws, (vi) fees and
expenses of listing and maintaining the listing of the Fund's
shares on any securities exchange, (vii) expenses of printing and
distributing reports to stockholders, (viii) costs of proxy
solicitation, (ix) charges and expenses of the Fund's
administrator, custodian and registrar and transfer and dividend
paying agent, (x) compensation of the Fund's officers, Directors
and employees who do not devote any part of their time to the
affairs of the Adviser or any of its affiliates other than the
Fund, (xi) legal and auditing expenses, (xii) the cost of stock
certificates representing shares of the Fund's Common Stock and
(xiii) costs of stationery and supplies. For the fiscal years
ended December 31, 2000, 1999 and 1998, the Fund paid advisory
fees to the Adviser that amounted to $4,142,943, $4,005,012 and
$4,517,809, respectively.
15
For purposes of the calculation of the fee payable to
the Adviser, average weekly net assets are determined on the
basis of the average net assets of the Fund for each weekly
period (ending on Fridays) ending during the month. The net
assets for each weekly period are determined by averaging the net
assets on Friday of such weekly period with the net assets on
Friday of the immediately preceding weekly period. When a Friday
is not a Fund business day, then the calculation will be based on
the net assets of the Fund on the Fund business day immediately
preceding such Friday.
The Advisory Agreement by its terms continues in effect
from year to year if such continuance is specifically approved,
at least annually, by a majority vote of the Directors who
neither are interested persons of the Fund nor have any direct or
indirect financial interest in the Advisory Agreement, cast in
person at a meeting called for the purpose of voting on such
approval.
Administrator
The Administrator for the Fund is Brinson Advisors, Inc.
(formerly Mitchell Hutchins Asset Management Inc.), with
principal offices at 51 West 52nd Street, New York, New York
10019.
Because of the services rendered the Fund by the
Administrator and the Adviser, the Fund itself requires no
employees other than its officers, none of whom receives
compensation from the Fund and all of whom are employed by the
Adviser or the Administrator. In connection with its
responsibilities as Administrator and in consideration of its
administrative fee, the Administrator (i) prepares all quarterly,
semi-annual and annual reports required to be sent to Fund
stockholders, and arranges for the printing and dissemination of
such reports to stockholders; (ii) assembles all reports required
to be filed with the SEC on Form N-SAR, or such other form as the
SEC may substitute for Form NSAR, and files such completed form
with the SEC; (iii) reviews the provision of services by the
Fund's independent accountants, including but not limited to the
preparation by such accountants of audited financial statements
of the Fund and the Fund's federal, state and local tax returns,
and makes such reports and recommendations to the Board of
Directors of the Fund (the "Board") concerning the performance of
the independent accountants as the Board reasonably requests or
as it deems appropriate; (iv) files with the appropriate
authorities all required federal, state and local tax returns;
(v) arranges for the dissemination to stockholders of the Fund's
proxy materials, and oversees the tabulation of proxies by the
Fund's transfer agent; (vi) negotiates the terms and conditions
under which custodian services are provided to the Fund and the
16
fees to be paid by the Fund in connection therewith; (vii)
recommends an accounting agent (which may or may not be the same
party as the Fund's custodian or an affiliate of the Fund's
custodian) to the Board, which agent would be responsible for
computing the Fund's NAV in accordance with the Fund's
registration statement under the 1940 Act and the 1933 Act;
negotiates the terms and conditions under which such accounting
agent computes the Fund's NAV, and the fees to be paid by the
Fund in connection therewith; reviews the provision of such
accounting services to the Fund; and makes such reports and
recommendations to the Board concerning the provision of such
services as the Board reasonably requests or it deems
appropriate; (viii) negotiates the terms and conditions under
which transfer agency and dividend disbursing services are
provided to the Fund, and the fees to be paid by the Fund in
connection therewith; reviews the provision of transfer agency
and dividend disbursing services to the Fund; and makes such
reports and recommendations to the Board concerning the
performance of the Fund's transfer and dividend disbursing agent
as the Board reasonably requests or it deems appropriate; (ix)
establishes the accounting policies of the Fund; reconciles
accounting issues which may arise with respect to the Fund's
operations; and consults with the Fund's independent accountants,
legal counsel, custodian, accounting agent and transfer and
dividend disbursing agent as necessary in connection therewith;
(x) recommends the amount of all dividends and distributions to
be paid by the Fund to its stockholders; prepares and arranges
for the printing of dividend notices to stockholders; and
provides the Fund's transfer and dividend disbursing agent and
custodian with such information as is required for such parties
to effect the payment of dividends and distributions and to
implement the Fund's dividend reinvestment plan; (xi) reviews the
Fund's bills and authorizes payments of such bills by the Fund's
custodian; and (xii) if requested by the Board, will designate
one of its employees to serve as treasurer of the Fund, and such
person will not be compensated by the Fund for so serving.
For the fiscal years ended December 31, 2000, 1999 and
1998, the Fund paid administrative fees to the Administrator
that, in the aggregate, amounted to $869,106, $833,756 and
$982,489, respectively.
Shareholder Service Agent
The Fund has entered into a Shareholder Inquiry Agency
Agreement with Alliance Global Investor Services, Inc., formerly
known as Alliance Fund Services, Inc. ("AGIS"), an affiliate of
the Adviser, whereby the Fund reimburses AGIS for costs relating
to servicing phone inquiries for the Fund. For the year ended
December 31, 2000, the Fund reimbursed AGIS $6,602 relating to
shareholder servicing costs.
17
Code of Ethics
The Fund and the Adviser have each adopted codes of
ethics pursuant to Rule 17j-1 of the 1940 Act. These codes of
ethics permit personnel subject to the codes to invest in
securities, including securities that may be purchased or held by
the Fund.
NET ASSET VALUE
The Fund calculates and makes available for weekly
publication the NAV of its shares of Common Stock. The NAV per
share of the Fund's Common Stock is determined as of the close of
trading on the NYSE each Friday or, when Friday is not a Fund
business day, on the immediately preceding Fund business day, by
adding the market value of all securities in the Fund's portfolio
and other assets, subtracting liabilities incurred or accrued and
dividing by the total number of the Fund's shares of Common Stock
then outstanding.
For purposes of this computation, portfolio securities
that are actively traded in the over-the-counter market,
including listed securities for which the primary market is
believed to be over-the-counter, are valued at the mean between
the most recently quoted bid and asked prices provided by the
principal market makers. Any security for which the primary
market is on an exchange is valued at the last sale price on such
exchange on the day of valuation or, if there was no sale on such
day, the last bid price quoted on such day. Options are valued
at market value or fair value if no market exists. Futures
contracts are valued in a like manner, except that open futures
contracts sales are valued using the closing settlement price or,
in the absence of such a price, the most recent quoted asked
price. Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good
faith by or under the direction of the Board of Directors of the
Fund. However, readily marketable fixed-income securities may be
valued on the basis of prices provided by a pricing service when
such prices are believed by the Administrator to reflect the fair
market value of such securities. The prices provided by a
pricing service take into account institutional size trading in
similar groups of securities and any developments related to
specific securities. U.S. Government Securities and other debt
instruments having sixty days or less remaining until maturity
are stated 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 Fund's Board of Directors
determines that this method does not represent fair value).
18
For purposes of determining the Fund's NAV per share,
all assets and liabilities initially expressed in foreign
currencies will be converted into U.S. dollars at the mean of the
bid and asked prices of such currencies against the U.S. dollar
last quoted by a major bank which is a regular participant in the
institutional foreign exchange markets or on the basis of a
pricing service which takes into account the quotes provided by a
number of such major banks.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of
Directors of the Fund, the Adviser is responsible for the
investment decisions and the placing of orders for portfolio
transactions for the Fund. The Fund's portfolio transactions
occur primarily with issuers, underwriters or major dealers
acting as principals. Such transactions are normally on a net
basis, which does not involve payment of brokerage commissions.
The cost of securities purchased from an underwriter usually
includes a commission paid by the issuer to the underwriters;
transactions with dealers normally reflect the spread between bid
and asked prices. Premiums are paid with respect to options
purchased by the Fund and brokerage commissions are payable with
respect to transactions in exchange-traded futures contracts.
The Fund has no obligation to enter into transactions in
portfolio securities with any dealer, issuer, underwriter or
other entity. In placing orders, it is the policy of the Fund to
obtain the best price and execution for its transactions. Where
best price and execution may be obtained from more than one
dealer, the Adviser may, in its discretion, purchase and sell
securities through dealers who provide research, statistical and
other information to the Adviser. Such services may be used by
the Adviser for all of its investment advisory accounts and,
accordingly, not all such services may be used by the Adviser in
connection with the Fund. The supplemental information received
from a dealer is in addition to the services required to be
performed by the Adviser under the Advisory Agreement, and the
expenses of the Adviser will not necessarily be reduced as a
result of the receipt of such information. Consistent with the
Conduct Rules of the National Association of Securities Dealers,
Inc., and subject to seeking best price and execution, the Fund
may consider sales of shares of the Fund as a factor in the
selection of dealers to enter into portfolio transactions with
the Fund.
19
TAXATION
General
The Fund intends for each taxable year to qualify as a
"regulated investment company" under the Code. To so qualify,
the Fund must, among other things, (i) derive at least 90% of its
gross income in each taxable year from dividends, interest,
payments with respect to securities loans, gains from the sale or
other disposition of stock or securities or foreign currency, or
certain other income (including but not limited to, gains from
options, futures and forward contracts) derived with respect to
its business of investing in stock, securities or currency; and
(ii) diversify its holdings so that, at the end of each quarter
of its taxable year, the following two conditions are met: (a) at
least 50% of the value of the Fund's assets is represented by
cash, U.S. Government Securities, securities of other regulated
investment companies and other securities with respect to which
the Fund's investment is limited, in respect of any one issuer,
to an amount not greater than 5% of the Fund's total assets and
10% of the outstanding voting securities of such issuer and (b)
not more than 25% of the value of the Fund's assets is invested
in securities of any one issuer (other than U.S. Government
Securities or securities of other regulated investment
companies).
The Treasury Department is authorized to issue
regulations to provide that foreign currency gains that are "not
directly related" to the Fund's principal business of investing
in stock or securities may be excluded from the income which
qualifies for purposes of the 90% gross income requirement
described above with respect to the Fund's qualification as a
"regulated investment company." No such regulations have yet been
issued.
If the Fund qualifies as a regulated investment company
for any taxable year and makes timely distributions to its
stockholders 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 stockholders.
Investors should consult their own counsel for a complete
understanding of the requirements the Fund must meet to qualify
to be taxed as a "regulated investment company."
The information set forth in the following discussion
relates solely to the significant United States federal income
tax consequences of dividends and distributions by the Fund and
of sales or redemptions of Fund shares, and assumes that the Fund
20
qualifies to be taxed as a regulated investment company.
Investors should consult their own tax counsel with respect to
the specific tax consequences of their being stockholders of the
Fund, including the effect and applicability of federal, state
and local tax laws to their own particular situation and the
possible effects of changes therein.
Dividends and Distributions
The Fund intends to make timely distributions of the
Fund's taxable income (including any net capital gain) so that
the Fund will not be subject to federal income taxes. The Fund
also intends to declare and distribute dividends in the amounts
and at the times necessary to avoid the application of the 4%
Federal excise tax imposed on certain undistributed income of
regulated investment companies. The Fund will be required to pay
the 4% excise tax to the extent it does not distribute to its
stockholders during any calendar year an amount equal to the sum
of (i) 98% of its ordinary taxable income for the calendar year,
(ii) 98% of its capital gain net income and foreign currency
gains for the twelve months ended October 31 of such year (or
December 31 if elected by the Fund), and (iii) any ordinary
income or capital gain net income from the preceding calendar
year that was not distributed during such year. For this
purpose, income or gain retained by the Fund that is subject to
corporate income tax will be considered to have been distributed
by the Fund by year-end. For federal income and excise tax
purposes, dividends declared and payable to stockholders of
record as of a date in October, November or December but actually
paid during the following January will be taxable to these
stockholders for the year declared, and not for the subsequent
calendar year in which the stockholders actually receive the
dividend.
Dividends of the Fund's net ordinary income and
distributions of any net realized short-term capital gain are
taxable to stockholders as ordinary income. Since the Fund
expects to derive substantially all of its gross income from
sources other than dividends, it is expected that none of the
Fund's dividends or distributions will qualify for the
dividends-received deduction for corporations.
The excess of net long-term capital gains over the net
short-term capital losses realized and distributed by the Fund to
its stockholders will be taxable to the stockholders as long-term
capital gains, irrespective of the length of time a stockholder
may have held his Fund shares at the date of the distribution.
Any dividend or distribution received by a stockholder on shares
of the Fund will have the effect of reducing the NAV of such
shares by the amount of such dividend or distribution.
Furthermore, a dividend or distribution made shortly after the
21
purchase of such shares by a stockholder, although in effect a
return of capital to that particular stockholder, would be
taxable to him as described above. Dividends are taxable in the
manner discussed regardless of whether they are paid to the
stockholder in cash or are reinvested in additional shares of the
Fund.
After the end of the taxable year, the Fund will notify
stockholders of the federal income tax state any distributions
made by the Fund to stockholders during such year.
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 such stockholder 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.
However, if a stockholder has held shares in the Fund for six
months or less and during that period has received a distribution
taxable to the stockholder as a long-term capital gain, any loss
recognized by the stockholder 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 dividend. In determining the holding period
of such shares for this purpose, any period during which a
stockholder's risk of loss is offset by means of options, short
sales or similar transactions is not counted.
Any loss realized by a stockholder on a sale, redemption
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.
Backup Withholding
The Fund generally will be required to withhold tax on
reportable payments (which may include dividends and
distributions of net capital gains) payable to a noncorporate
stockholder unless the stockholder certifies on his subscription
application that the social security or taxpayer identification
number provided is correct and that the stockholder has not been
notified by the Internal Revenue Service that he is subject to
backup withholding. Any such backup withholding tax would be
imposed at the rate equal to the fourth lowest rate of federal
22
income tax imposed on unmarried individuals other than surviving
spouses and heads of households.
United States Federal Income Taxation of the Fund
The following discussion relates to certain significant
United States federal income tax consequences to the Fund with
respect to the determination of its "investment company taxable
income" each year. This discussion assumes that the Fund will be
taxed as a regulated investment company for each of its taxable
years.
Currency Fluctuations--"Section 988" Gains or Losses
Under the Code, gains or losses attributable to
fluctuations in exchange rates which occur between the time the
Fund accrues interest or other receivables or accrues expenses or
other liabilities denominated in a foreign currency and the time
the Fund actually collects such receivables or pays such
liabilities are treated as ordinary income or ordinary loss.
Similarly, gains or losses from the disposition of foreign
currencies, from the disposition of debt securities denominated
in a foreign currency, or from the disposition of a forward
contract denominated in a foreign currency which are attributable
to fluctuations in the value of the foreign currency between the
date of acquisition of the asset and the date of disposition also
are treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "section 988" gains or losses,
increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to its stockholders 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 stockholders, rather than as an ordinary dividend,
reducing each stockholder's basis in his Fund shares. To the
extent that such distributions exceed such stockholder's basis,
each will be treated as a gain from the sale of shares.
Options, Futures Contracts and Forward Foreign Currency Contracts
Certain listed options, regulated futures contracts, and
forward foreign currency contracts are considered "section 1256
contracts" for Federal income tax purposes. Section 1256
contracts held by the Fund at the end of each taxable year will
be "marked to market" and treated for Federal income tax purposes
as though sold for fair market value on the last business day of
such taxable year. Gain or loss realized by the Fund on section
1256 contracts other than forward foreign currency contracts will
23
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 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 stockholders 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. Treasury
regulations issued under this authority generally should not
apply to the type of hedging transactions in which the Fund
intends to engage.
With respect to over-the-counter put and call options or
options traded 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 if an option that the Fund has
written is exercised, gain or loss on the option will not be
separately recognized but the premium received or paid will be
included in the calculation of gain or loss upon disposition of
the property underlying the option.
Gain or loss realized by the Fund on the lapse or sale
of put and call options on foreign currencies which are traded
over-the-counter or on certain foreign exchanges will be treated
as section 988 gain or loss and will therefore be characterized
as ordinary income or loss and will increase or decrease the
amount of the Fund's net investment income available to be
distributed to stockholders 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
24
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, other forward contract, or other position entered into
or held by the Fund in conjunction with any other position held
by the Fund may constitute a "straddle" for federal income tax
purposes. 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 nonsection 1256 positions be treated as
60% long-term and 40% short-term capital loss; (iv) losses
recognized with respect to certain straddle positions which would
otherwise constitute short-term capital losses be treated as
long-term capital losses; and (v) the deduction of interest and
carrying charges attributable to certain straddle positions may
be deferred. The Treasury Department is authorized to issue
regulations providing for the proper treatment of a mixed
straddle where at least one position is ordinary and at least one
position is capital. No such regulations have yet been issued.
Various elections are available to the Fund which may mitigate
the effects of the straddle rules, particularly with respect to
mixed straddles. In general, the straddle rules described above
do not apply to any straddles held by the Fund all of the
offsetting positions of which consist of section 1256 contracts.
Zero Coupon Treasury Securities
Under current federal tax law, the Fund will receive net
investment income in the form of interest by virtue of holding
Treasury bills, notes and bonds, and will recognize interest
attributable to it under the original issue discount rules of the
25
Code from holding zero coupon Treasury securities. Current
federal tax law requires that a holder (such as the Fund) of a
zero coupon security accrue a portion of the discount at which
the security was purchased as income each year even though the
Fund receives no interest payment in cash on the security during
the year. Accordingly, the Fund may be required to pay out as an
income distribution each year an amount which is greater than the
total amount of cash interest the Fund actually received. Such
distributions will be made from the cash assets of the Fund or by
liquidation of portfolio securities, if necessary. The Fund may
realize a gain or loss from such sales. In the event the Fund
realizes net capital gains from such transactions, its
stockholders may receive a larger capital gain distribution, if
any, than they would have in the absence of such transactions.
Government Guaranteed Mortgage Pass-Through Securities
Mortgage pass-through securities such as GNMA
Certificates, FNMA Certificates, and FHLMC Certificates generally
are taxable as trusts for Federal income tax purposes, with the
certificate holders treated as the owners of the trust involved.
As a result, payments of interest, principal and prepayments made
on the underlying mortgage pool are taxed directly to certificate
holders such as the Fund. Payments of interest, principal and
prepayments made on the underlying mortgage pool will therefore
generally maintain their character when received by the Fund.
Foreign Taxes
Investment income received by the Fund from Foreign
Government Securities may be subject to foreign income taxes,
including taxes withheld at the source. The United States has
entered into tax treaties with many foreign countries which
entitle the Fund to a reduced rate of such taxes or exemption
from taxes on such income. It is impossible to determine the
effective rate of foreign tax in advance since the amount of the
Fund's assets to be invested within various countries is not
known. To the extent that investment income of the Fund is
subject to foreign income taxes, the Fund will be entitled to
claim a deduction or credit for the amount of such taxes for
United States federal income tax purposes. However, any such
taxes will reduce the income available for distribution to the
Fund's stockholders.
Other Taxation
The foregoing is a brief summary of the federal tax laws
applicable to investors in the Fund. Investors may also be
subject to state and local taxes, although distributions of the
Fund that are derived from interest on certain obligations of the
U.S. Government and agencies thereof may be exempt from state and
26
local taxes in certain states. The Fund has qualified to do
business in the Commonwealth of Pennsylvania and, accordingly,
expects to be subject to the Pennsylvania foreign franchise and
corporate net income tax in respect of its business activities in
Pennsylvania. Accordingly, it is expected that shares of the
Fund will be exempt from Pennsylvania personal property taxes.
The Fund anticipates that it will continue such business
activities but reserves the right to suspend them at any time,
resulting in the termination of the exemption.
COMMON STOCK
The Fund is authorized to issue 300,000,000 shares of
Common Stock, $.01 par value per share. The Fund has no present
intention of offering additional shares other than pursuant to
the offer. Other offerings of shares, if made, will require
approval of the Board of Directors. Any additional offering will
be subject to the requirement of the 1940 Act that shares not be
sold at a price below the then current NAV (exclusive of
underwriting discounts and commissions) except in connection
with an offering to existing stockholders or with the consent of
the holders of a majority of the outstanding voting securities,
as such term is defined under the 1940 Act.
Beneficial Ownership
The Fund does not know of any persons who may be deemed
beneficial owners of 5% or more of the shares because they
possessed or shared voting or investment power with respect to
them.
FINANCIAL STATEMENTS
The annual report for the fiscal year ended December 31,
2001 and the unaudited semi-annual report for the fiscal period
ended June 30, 2001, which either accompany this Statement of
Additional Information or have previously been provided to you,
are incorporated herein by reference with respect to all
information other than the information set forth in the letter to
stockholders included therein. The Fund will furnish, without
charge, a copy of these reports upon request to
[________________].
27
APPENDIX A
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY U.S.
GOVERNMENT AGENCIES OR INSTRUMENTALITIES
Federal Farm Credit System Notes and Bonds--are bonds
issued by a cooperatively-owned nationwide system of banks and
associations supervised by the Farm Credit Administration, an
independent agency of the U.S. Government. These bonds are not
guaranteed by the U.S. Government.
Maritime Administration Bonds--are bonds issued and
provided by the Department of Transportation of the U.S.
Government and are guaranteed by the U.S. Government.
FHA Debentures--are debentures issued by the Federal
Housing Administration of the U.S. Government and are guaranteed
by the U.S. Government.
GNMA Certificates--are mortgage-backed securities which
represent a partial ownership interest in a pool of mortgage
loans issued by lenders such as mortgage bankers, commercial
banks and savings and loan associations. Each mortgage loan
included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration.
FHLMC Bonds--are bonds issued and guaranteed by the
Federal Home Loan Mortgage Corporation.
FNMA Bonds--are bonds issued and guaranteed by the
Federal National Mortgage Association.
Federal Home Loan Bank Notes and Bonds--are notes and
bonds issued by the Federal Home Loan Bank System and are not
guaranteed by the U.S. Government.
Student Loan Marketing Association ("Sallie Mae") Notes
and Bonds--are notes and bonds issued by the Student Loan
Marketing Association.
Although this list includes a description of the primary
types of U.S. Government agency or instrumentality obligations in
which the Fund intends to invest the Fund may invest in
obligations of U.S. Government agencies or instrumentalities
other than those listed above.
A-1
APPENDIX B
BOND RATINGS
Moody's Investors Service, Inc. ("Moody's")
Aaa: Bonds which are rated Aaa are judged to be of the
best quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edge." Interest payments
are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuations 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 in Aaa securities.
A: Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime 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.
B-1
Caa: Bonds which are rated Caa are of poor standing.
Such issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca: Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
Absence of Rating: When no rating has been assigned or
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
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the
issue or issuer.
4. The issue was privately placed, in which case the
rating is not published in Moody's publications.
Suspension or withdrawal may occur if new and material
circumstances arise, the effects of which preclude satisfactory
analysis; if there is no longer available reasonable up-to-date
data to permit a judgment to be formed; if a bond is called for
redemption; or for other reasons.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each
generic rating classification from Aa through B in its corporate
bond rating system. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic
rating category.
Standard & Poor's Ratings Services ("S&P")
AAA: Debt rated AAA has the highest rating assigned by
S&P. Capacity to pay interest and repay principal is extremely
strong.
B-2
AA: Debt rated AA has a very strong capacity to pay
interest and repay principal and differs from the highest rated
issues only in small degree.
A: Debt rated A has a strong capacity to pay interest
and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB: Debt rated BBB normally exhibits adequate
protection parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is
regarded as having significant speculative characteristics. BB
indicates the lowest degree of speculation and C the highest.
While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
BB: Debt rated BB is less vulnerable to nonpayment than
other speculative debt. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or
economic conditions which could lead to an inadequate capacity to
pay interest and repay principal.
B: Debt rated B is more vulnerable to nonpayment than
debt rated BB, but there is capacity to pay interest and repay
principal. Adverse business, financial or economic conditions
will likely impair the capacity or willingness to pay principal
or repay interest.
CCC: Debt rated CCC is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial
and economic conditions to pay interest and repay principal. In
the event of adverse business, financial or economic conditions,
it is not likely to be capacity to pay interest or repay
principal.
CC: Debt rated CC is currently highly vulnerable to
nonpayment.
C: The C rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been
taken, but payments are being continued.
D: The D rating, unlike other ratings, is not
prospective; rather, it is used only where a default has actually
occurred.
B-3
Plus (+) or Minus(-): The ratings from "AA" to "CCC"'
may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
NR: Not rated.
B-4
APPENDIX C
OPTIONS AND FUTURES
Options on U.S. and Foreign Government Securities
The Fund writes covered put and call options and
purchases put and call options on U.S. Government Securities and
Foreign Government Securities that are traded on United States
and foreign securities exchanges and over-the-counter. The Fund
also writes call options that are not covered for cross-hedging
purposes.
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 an option that wishes to terminate its
obligation may effect a "closing purchase transaction." This is
accomplished by buying an option of the same series as the option
previously written. The effect of the purchase is that the
writer's position will be cancelled by the clearing corporation.
However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an
investor who is the holder of an option may liquidate its
position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the
option previously purchased. There is no guarantee that either a
closing purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written
call option will permit the Fund to write another call option on
the underlying security with either a different exercise price or
expiration date or both, or in the case of a written put option
will permit the Fund to write another put option to the extent
that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction
will permit the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other Fund
investments. If the Fund desires to sell a particular security
C-1
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 ("Exchange") on opening transactions or closing
transactions or both, (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or
series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an
Exchange, (v) the facilities of an Exchange or the Options
Clearing Corporation may not at all times be adequate to handle
current trading volume, or (vi) one or more Exchanges could, for
economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or a particular class
or series of options), in which event the secondary market on
that Exchange (or in that class or series of options) would cease
to exist, although outstanding options on that Exchange that had
been issued by the Options Clearing Corporation as a result of
trades on that Exchange would continue to be exercisable in
accordance with their terms.
The Fund may write options in connection with
buy-and-write transactions; that is, the Fund may purchase a
security and then write a call option against that security. The
exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying
C-2
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
C-3
price of the underlying security rises sufficiently, the option
may expire worthless to the Fund.
Futures Contracts
The Fund may enter into contracts for the purchase or
sale for future delivery of fixed-income securities or foreign
currencies, or contracts based on bonds or financial indices
including any index of U.S. Government Securities or Foreign
Government Securities. U.S. Futures contracts have been designed
by exchanges which have been designated "contracts markets" by
the Commodity Futures Trading Commission ("CFTC"), and must be
executed through a futures commission merchant, or brokerage
firm, which is a member of the relevant contract market. Futures
contracts trade on a number of exchange markets, and, through
their clearing corporations, the exchanges guarantee performance
of the contracts as between the clearing members of the exchange.
The Fund will enter into futures contracts which are based on
debt securities that are backed by the full faith and credit of
the U.S. Government, such as long-term U.S. Treasury Bonds,
Treasury Notes, Government National Mortgage Association modified
pass-through mortgage-backed securities and three-month U.S.
Treasury Bills. The Fund may also enter into futures contracts
which are based on non-U.S. Government bonds.
At the same time a futures contract is purchased or
sold, the Fund must allocate cash or securities as a deposit
payment ("initial deposit"). It is expected that the initial
deposit would be approximately 1 1/2%-5% of a contract's face
value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the
Fund would provide or receive cash that reflects any decline or
increase in the contract's value.
At the time of delivery of securities pursuant to such a
contract, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest
rate from that specified in the contract. In some (but not many)
cases, securities called for by a futures contract may not have
been issued when the contract was written.
Although futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the
contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the
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
C-4
transactions in the futures market are made, offset or fulfilled
through a clearinghouse associated with the exchange on which the
contracts are traded, the Fund will incur brokerage fees when it
purchases or sells futures contracts.
The purpose of the acquisition or sale of a futures
contract, in the case of a portfolio, such as the portfolio of
the Fund, which holds or intends to acquire long-term
fixed-income securities, is to attempt to protect the Fund from
fluctuations in interest or foreign exchange rates without
actually buying or selling long-term fixed-income securities or
foreign currency. For example, if the Fund owns long-term bonds,
and interest rates are expected to increase, the Fund may enter
into futures contracts for the sale of debt securities. Such a
sale would have much the same effect as selling an equivalent
value of the long-term bonds owned by the Fund. If interest
rates did increase, the value of the debt securities in the
portfolio would decline, but the value of the futures contracts
to the Fund would increase at approximately the same rate,
thereby keeping the NAV of the Fund from declining as much as it
otherwise would have. The Fund could accomplish similar results
by selling bonds with long maturities and investing in bonds with
short maturities when interest rates are expected to increase.
However, since the futures market is more liquid than the cash
market, the use of futures contracts as an investment technique
allows the Fund to maintain a defensive position without having
to sell its portfolio securities.
Similarly, when it is expected that interest rates may
decline, futures contracts may be purchased to attempt to hedge
against anticipated purchases of long-term bonds at higher
prices. Since fluctuations in the value of futures contracts
should be similar to those of long-term bonds, the Fund could
take advantage of the anticipated rise in the value of long-term
bonds without actually buying them until the market had
stabilized. At that time, the futures contracts could be
liquidated and the Fund could then buy long-term bonds on the
cash market. To the extent the Fund enters into futures
contracts for this purpose, the assets in the segregated asset
account maintained to cover the Fund's obligations with respect
to such futures contracts will consist of cash, cash equivalents
or high quality debt securities from its portfolio in an amount
equal to the difference between the fluctuating market value of
such futures contracts and the aggregate value of the initial and
variation margin payments made by the Fund with respect to such
futures contracts.
The ordinary spreads between prices in the cash and
futures markets, due to differences in the nature of those
markets, are subject to distortions. First, all participants in
the futures market are subject to initial deposit and variation
C-5
margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts
through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the
liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of
speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the
securities market. Therefore, increased participation by
speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct
forecast of general interest rate trends by the Adviser may still
not result in a successful transaction.
In addition, futures contracts entail risks. Although
the Fund believes that use of such contracts will benefit the
Fund, if the Adviser's investment judgment about the general
direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any
such contract. For example, if the Fund has hedged against the
possibility of an increase in interest rates which would
adversely affect the price of bonds held in its portfolio and
interest rates decrease instead, the Fund will lose part or all
of the benefit of the increased value of its bonds which it has
hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell bonds from its portfolio
to meet daily variation margin requirements. Such sales of bonds
may be, but will not necessarily be, at increased prices which
reflect the rising market. The Fund may have to sell securities
at a time when it may be disadvantageous to do so.
Options on Futures Contracts
The Fund purchases and writes options on futures
contracts for hedging purposes. The purchase of a call option on
a futures contract is similar in some respects to the purchase of
a call option on an individual security. Depending on the
pricing of the option compared to either the price of the futures
contract upon which it is based or the price of the underlying
debt securities, it may or may not be less risky than ownership
of the futures contract or underlying debt securities. As with
the purchase of futures contracts, when the Fund is not fully
invested it may purchase a call option on a futures contract to
hedge against a market advance due to declining interest rates.
The writing of a call option on a futures contract
constitutes a partial hedge against declining prices of the
C-6
security or foreign currency which is deliverable upon exercise
of the futures contract. If the futures price at expiration of
the option is below the exercise price, the Fund will retain the
full amount of the option premium which provides a partial hedge
against any decline that may have occurred in the Fund's
portfolio holdings. The writing of a put option on a futures
contract constitutes a partial hedge against increasing prices of
the security or foreign currency which is deliverable upon
exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of
securities which the Fund intends to purchase. If a put or call
option the Fund has written is exercised, the Fund will incur a
loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes
in the value of its portfolio securities and changes in the value
of its futures positions, the Fund's losses from existing options
on futures may to some extent be reduced or increased by changes
in the value of portfolio securities.
The purchase of a put option on a futures contract is
similar in some respects to the purchase of protective put
options on portfolio securities. For example, the Fund may
purchase a put option on a futures contract to hedge the Fund's
portfolio against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an
option on a futures contract is the premium paid for the option
plus related transaction costs. In addition to the correlation
risks discussed above, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract
will not be fully reflected in the value of the option purchased.
The Fund's ability to engage in the options and futures
strategies described above will depend on the availability of
liquid markets in such instruments. Markets in options and
futures with respect to U.S. government Securities are relatively
new and still developing. It is impossible to predict the amount
of trading interest that may exist in various types of options or
futures. Therefore no assurance can be given that the Fund will
be able to utilize these instruments effectively for the purposes
set forth above. Furthermore, the Fund's ability to engage in
options and futures transactions may be limited by tax
considerations.
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
C-7
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.
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,
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
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which might otherwise have been obtained from favorable movements
in exchange rates.
The Fund writes 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 and high grade U.S. Government
Securities in a segregated account with its Custodian.
The Fund also writes call options on foreign currencies
that are not covered for cross-hedging purposes. A call option
on a foreign currency is for cross-hedging purposes if it is not
covered, but is designed to provide a hedge against a decline,
due to an adverse change in the exchange rate, 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. In such circumstances, the Fund collateralizes the
option by maintaining in a segregated account with the Fund's
Custodian, cash or U.S. Government Securities in an amount not
less than the value of the underlying foreign currency in U.S.
dollars marked to market daily.
Additional Risks of Options on U.S. and Foreign Government
Securities, Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies
Unlike transactions entered into by the Fund in futures
contracts, options on foreign currencies and forward contracts
are not traded on contract markets regulated by the CFTC or (with
the exception of certain foreign currency options) by the SEC.
To the contrary, such instruments are traded through financial
institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges,
such as the Philadelphia Stock Exchange and the Chicago Board
Options Exchange, subject to SEC regulation. Similarly, options
on securities may be traded over-the-counter. In an over-the-
counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there
are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose
C-9
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
option exercises, or would result in undue burdens on the OCC or
its clearing member, impose special procedures on exercise and
settlement, such as technical changes in the mechanics of
delivery of currency, the fixing of dollar settlement prices or
prohibitions, on exercise.
In addition, options on U.S. Government Securities and
Foreign Government Securities, futures contracts, options on
futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges. Such transactions
are subject to the risk of governmental actions affecting trading
in or the prices of foreign currencies or securities. The value
of such positions also could be adversely affected by (i) other
complex foreign political and economic factors, (ii) lesser
availability than in the United States of data on which to make
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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.
Future Developments
The Fund may, following written notice thereof to its
stockholders, take advantage of opportunities in the area of
options and futures contracts and options on futures contracts
which are not presently contemplated for use by the Fund or which
are not currently available but which may be developed, to the
extent such opportunities are both consistent with the Fund's
investment objective and legally permissible for the Fund. Such
opportunities, if they arise, may involve risks which exceed
those involved in the options and futures activities described
above.
C-11
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
1. Financial Statements
Included in Part A:
Financial Highlights for the six-month period ended June 30,
2001 and the fiscal years ended December 31, 2000, December 31,
1999, December 31, 1998, December 31, 1997, and December 31,1996.
Included in Part B:
Incorporated by reference to Registrant's June 30, 2001
Semi-Annual Report and December 31, 2000 Annual Report:
1. Portfolio of Investments for the six-month period ended
June 30, 2001 and the year ended December 31, 2000.
2. Statement of Assets and Liabilities for the six-month
period ended June 30, 2001 and the year ended December
31, 2000.
3. Statement of Operations for the six-month period ended
June 30, 2001 and the year ended December 31, 2000.
4. Statement of Changes in Net Assets for the six-month
period ended June 30, 2001 and the year ended December
31, 2000.
5. Notes to Financial Statements, the December 31, 2000.
6. Financial Highlights.
7. Report of Ernst & Young LLP, Independent Auditors dated
February 12, 2001.
2. Exhibits
(a)(1) Articles of Incorporation of the Registrant (1)
(a)(2) Articles of Amendment to the Articles of Incorporation
dated August 14, 1987 (2)
(a)(3) Articles of Amendment to the Articles of Incorporation
dated April 14, 1989 (3)
(b)(1) By-Laws (4)
(b)(2) Amendment to By-Laws (5)
(c) Not Applicable
(d)(1) Form of Subscription Certificate (To be filed by
subsequent amendment.)
(d)(2) Form of Notice of Guaranteed Delivery (To be filed by
subsequent amendment.)
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(d)(3) DTC Participant Over-Subscription Certificate (To be
filed by subsequent amendment.)
(e) Dividend Reinvestment and Cash Purchase Plan (6)
(f) Not Applicable
(g) Investment Advisory Agreement between the Registrant and
Alliance Capital Management L.P. (7)
(h)(1) Dealer Manager Agreement (To be filed by subsequent
amendment.)
(h)(2) Master Dealer Manager/Dealer Agreement (To be filed by
subsequent amendment.)
(i) Not Applicable
(j)(1) Custodian Agreement between the Registrant and State
Street Bank and Trust Company (8)
(j)(2) Amendment to Custodian Agreement (9)
(j)(3) Amendment to Custodian Agreement (10)
(j)(4) Amendment to Custodian Agreement (11)
(k)(1) Administration Agreement between the Registrant and
Mitchell Hutchins Asset Management, Inc. (12)
(k)(2) Transfer Agency Agreement between the Registrant and
State Street Bank & Trust Company (13)
(k)(3) Shareholder Inquiry Agency Agreement
(l)(1) Opinion and Consent of Seward & Kissel LLP. (To be
filed by subsequent amendment.)
(l)(2) Opinion of Ballard, Spahr Andrew & Ingersoll LLP,
special Maryland counsel for the Company (To be filed
by subsequent amendment.)
(m) Not Applicable
(n) Consent of Ernst & Young LLP, Independent Auditors
(o) Not Applicable
(p) Not Applicable
(q) Not Applicable
(r)(1) Code of Ethics for the Fund (14)
(r)(2) Code of Ethics for Alliance Capital Management L.P. (15)
(s) Other Exhibits: Powers of Attorney
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1. Incorporated by reference to Exhibit 1(a) to the
Registrant's Registration Statement on Form N-14 (File No.
811-5207) filed electronically on August 11, 2000.
2. Incorporated by reference to Exhibit 1(b) to the
Registrant's Registration Statement on Form N-14 (File No.
811-5207) filed electronically on August 11, 2000.
3. Incorporated by reference to Exhibit 1(c) to the
Registrant's Registration Statement on Form N-14 (File No.
811-5207) filed electronically on August 11, 2000.
4. Incorporated by reference to Exhibit 2(a) to the
Registrant's Registration Statement on Form N-14 (File No.
811-5207) filed electronically on August 11, 2000.
5. Incorporated by reference to Exhibit 2(b) to the
Registrant's Registration Statement on Form N-14 (File No.
811-5207) filed electronically on August 11, 2000.
6. Incorporated by reference to Exhibit 13(d) to the
Registrant's Registration Statement on Form N-14 (File No.
811-5207) filed electronically on August 11, 2000.
7. Incorporated by reference to Exhibit 6(a) to the
Registrant's Registration Statement on Form N-14 (File No.
811-5207) filed electronically on August 11, 2000.
8. Incorporated by reference to Exhibit 9(a) to the
Registrant's Registration Statement on Form N-14 (File No.
811-5207) filed electronically on August 11, 2000.
9. Incorporated by reference to Exhibit 9(b) to the
Registrant's Registration Statement on Form N-14 (File No.
811-5207) filed electronically on August 11, 2000.
10. Incorporated by reference to Exhibit 9(c) to the
Registrant's Registration Statement on Form N-14 (File No.
811-5207) filed electronically on August 11, 2000.
11. Incorporated by reference to Exhibit 9(d) to the
Registrant's Registration Statement on Form N-14 (File No.
811-5207) filed electronically on August 11, 2000.
12. Incorporated by reference to Exhibit 6(b) to the
Registrant's Registration Statement on Form N-14 (File No.
811-5207) filed electronically on August 11, 2000.
13. Incorporated by reference to Exhibit 13(a) to the
Registrant's Registration Statement on Form N-14 (File No.
811-5207) filed electronically on August 11, 2000.
C-3
14. Incorporated by reference to Exhibit (p)(1) to Post-
Effective Amendment No. 74 of the Registration Statement on
Form N-1A of Alliance Bond Fund, Inc. (File Nos. 2-48227 and
811-2383), filed with the Securities and Exchange Commission
on October 6, 2000, which is substantially identical in all
material respects except as to the party, which is the
Registrant.
15. Incorporated by reference to Exhibit (p)(2) to Post-
Effective Amendment No. 74 of the Registration Statement on
Form N-1A of Alliance Bond Fund, Inc. (File Nos. 2-48227 and
811-2383), filed with the Securities and Exchange Commission
on October 6, 2000, which is substantially identical in all
material respects.
Item 25. Marketing Arrangements
See Dealer Manager Agreement to be filed as Exhibit (h)(1).
Item 26. Other Expenses of Issuance and Distribution
Registration fees $[__]
National Association of Securities Dealers, Inc. fees $[__]
Fees and expenses of qualifications under state securities laws
(including fees of counsel) $[__]
Printing $[__]
Legal fees and expenses $[__]
Auditing fees and expenses $[__]
New York Stock Exchange listing fees $[__]
Subscription Agent fees and expenses $[__]
Information Agent fees and expenses $[__]
Reimbursement of Dealer Manager expenses $[__]
Miscellaneous $[__]
Item 27. Persons Controlled by or Under Common Control
Not applicable
Item 28. Number of Holders of Securities (as of October 3, 2001)
Title of Class Number of Record Holders
Common Stock ($0.01 par
value per share) 13,591
Item 29. Indemnification
It is the Registrant's policy to indemnify its directors and
officers, employees and other agents to the maximum extent
permitted by Section 2-418 of the Corporations and Associations
Law of the State of Maryland and as set forth in Article EIGHTH
C-4
of Registrant's Articles of Incorporation to be filed as Exhibit
(a)(1). The liability of the Registrant's directors and officers
is dealt with in Article EIGHTH of Registrant's Articles of
Incorporation as set forth below. The Adviser's liability for
any loss suffered by the Registrant or its stockholders is set
forth in Section 4 of the Advisory Agreement to be filed as
Exhibit (g) to this Registration Statement, as set forth below.
The Administrator's liability for any loss suffered by the
Registrant or its shareholders is set forth in Section 7 of the
Administration Agreement to be filed as Exhibit (k)(1) to this
Registration Statement, as set forth below.
Section 2-418 of the Maryland Corporations and Associations Law
reads as follows:
Section 2-418. Indemnification of directors, officers,
employees, and agents.
(a) Definitions. -- In this section the following words
have the meanings indicated.
(1) "Director" means any person who is or was a
director of a corporation and any person who, while
a director of a corporation, is or was serving at
the request of the corporation as a director,
officer, partner, trustee, employee, or agent of
another foreign or domestic corporation,
partnership, joint venture, trust, other
enterprise, or employee benefit plan.
(2) "Corporation" includes any domestic or foreign
predecessor entity of a corporation in a merger,
consolidation, or other transaction in which the
predecessor's existence ceased upon consummation of
the transaction.
(3) "Expenses" include attorney's fees.
(4) "Official capacity" means the following:
(i) When used with respect to a director,
the office of director in the corporation; and
(ii) When used with respect to a person
other than a director as contemplated in
subsection (j), the elective or appointive
office in the corporation held by the officer,
or the employment or agency relationship
undertaken by the employee or agent in behalf
of the corporation.
C-5
(iii) "Official capacity" does not include
service for any other foreign or domestic
corporation or any partnership, joint venture,
trust, other enterprise, or employee benefit
plan.
(5) "Party" includes a person who was, is, or is
threatened to be made a named defendant or
respondent in a proceeding.
(6) "Proceeding" means any threatened, pending or
completed action, suit or proceeding, whether
civil, criminal, administrative, or investigative.
(b) Permitted indemnification of director. -- (1) A
corporation may indemnify any director made a party to
any proceeding by reason of service in that capacity
unless it is established that:
(i) The act or omission of the director was
material to the matter giving rise to the
proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and
deliberate dishonesty; or
(ii) The director actually received an
improper personal benefit in money, property,
or services; or
(iii) In the case of any criminal proceeding,
the director had reasonable cause to believe
that the act or omission was unlawful.
(2) (i) Indemnification may be against judgments,
penalties, fines, settlements, and reasonable
expenses actually incurred by the director in
connection with the proceeding.
(ii) However, if the proceeding was one by or in
the right of the corporation, indemnification may
not be made in respect of any proceeding in which
the director shall have been adjudged to be liable
to the corporation.
(3) (i) The termination of any proceeding by judgment,
order, or settlement does not create a presumption
that the director did not meet the requisite
standard of conduct set forth in this subsection.
C-6
(ii) The termination of any proceeding by
conviction, or a plea of nolo contendere or its
equivalent, or an entry of an order of probation
prior to judgment, creates a rebuttable presumption
that the director did not meet that standard of
conduct.
(4) A corporation may not indemnify a director or
advance expenses under this section for a proceeding
brought by that director against the corporation,
except:
(i) For a proceeding brought to enforce
indemnification under this section; or
(ii) If the charter or bylaws of the corporation, a
resolution of the board of directors of the
corporation, or an agreement approved by the board
of directors of the corporation to which the
corporation is a party expressly provide otherwise.
(c) No indemnification of director liable for improper
personal benefit. -- A director may not be indemnified
under subsection (b) of this section in respect of any
proceeding charging improper personal benefit to the
director, whether or not involving action in the
director's official capacity, in which the director was
adjudged to be liable on the basis that personal benefit
was improperly received.
(d) Unless limited by the charter:
(1) A director who has been successful, on the
merits or otherwise, in the defense of any
proceeding referred to in subsection (b) of this
section shall be indemnified against reasonable
expenses incurred by the director in connection
with the proceeding.
(2) A court of appropriate jurisdiction, upon
application of a director and such notice as the
court shall require, may order indemnification in
the following circumstances:
(i) If it determines a director is entitled
to reimbursement under paragraph (1) of this
subsection, the court shall order
indemnification, in which case the director
shall be entitled to recover the expenses of
securing such reimbursement; or
C-7
(ii) If it determines that the director is
fairly and reasonably entitled to
indemnification in view of all the relevant
circumstances, whether or not the director has
met the standards of conduct set forth in
subsection (b) of this section or has been
adjudged liable under the circumstances
described in subsection (c) of this section,
the court may order such indemnification as
the court shall deem proper. However,
indemnification with respect to any proceeding
by or in the right of the corporation or in
which liability shall have been adjudged in
the circumstances described in subsection (c)
shall be limited to expenses.
(3) A court of appropriate jurisdiction may be the
same court in which the proceeding involving
the director's liability took place.
(e) Determination that indemnification is proper. --
(1) Indemnification under subsection (b) of this
section may not be made by the corporation unless
authorized for a specific proceeding after a
determination has been made that indemnification of
the director is permissible in the circumstances
because the director has met the standard of
conduct set forth in subsection (b) of this
section.
(2) Such determination shall be made:
(i) By the board of directors by a majority
vote of a quorum consisting of directors not,
at the time, parties to the proceeding, or, if
such a quorum cannot be obtained, then by a
majority vote of a committee of the board
consisting solely of two or more directors
not, at the time, parties to such proceeding
and who were duly designated to act in the
matter by a majority vote of the full board in
which the designated directors who are parties
may participate;
(ii) By special legal counsel selected by
the board of directors or a committee of the
board by vote as set forth in subparagraph (i)
of this paragraph, or, if the requisite quorum
of the full board cannot be obtained therefor
and the committee cannot be established, by a
C-8
majority vote of the full board in which
directors who are parties may participate; or
(iii) By the stockholders.
(3) Authorization of indemnification and
determination as to reasonableness of expenses
shall be made in the same manner as the
determination that indemnification is permissible.
However, if the determination that indemnification
is permissible is made by special legal counsel,
authorization of indemnification and determination
as to reasonableness of expenses shall be made in
the manner specified in subparagraph (ii) of
paragraph (2) of this subsection for selection of
such counsel.
(4) Shares held by directors who are parties to
the proceeding may not be voted on the subject
matter under this subsection.
(f) Payment of expenses in advance of final disposition
of action. --
(1) Reasonable expenses incurred by a director who
is a party to a proceeding may be paid or
reimbursed by the corporation in advance of the
final disposition of the proceeding upon receipt by
the corporation of:
(i) A written affirmation by the director of
the director's good faith belief that the
standard of conduct necessary for
indemnification by the corporation as
authorized in this section has been met; and
(ii) A written undertaking by or on behalf of
the director to repay the amount if it shall
ultimately be determined that the standard of
conduct has not been met.
(2) The undertaking required by subparagraph (ii)
of paragraph (1) of this subsection shall be
an unlimited general obligation of the
director but need not be secured and may be
accepted without reference to financial
ability to make the repayment.
(3) Payments under this subsection shall be made
as provided by the charter, bylaws, or
contract or as specified in subsection (e) of
this section.
C-9
(g) Validity of indemnification provision. -- The
indemnification and advancement of expenses provided or
authorized by this section may not be deemed exclusive
of any other rights, by indemnification or otherwise, to
which a director may be entitled under the charter, the
bylaws, a resolution of stockholders or directors, an
agreement or otherwise, both as to action in an official
capacity and as to action in another capacity while
holding such office.
(h) Reimbursement of director's expenses incurred while
appearing as witness. -- This section does not limit the
corporation's power to pay or reimburse expenses
incurred by a director in connection with an appearance
as a witness in a proceeding at a time when the director
has not been made a named defendant or respondent in the
proceeding.
(i) Director's service to employee benefit plan. -- For
purposes of this section:
(1) The corporation shall be deemed to have
requested a director to serve an employee benefit
plan where the performance of the director's duties
to the corporation also imposes duties on, or
otherwise involves services by, the director to the
plan or participants or beneficiaries of the plan;
(2) Excise taxes assessed on a director with
respect to an employee benefit plan pursuant to
applicable law shall be deemed fines; and
(3) Action taken or omitted by the director with
respect to an employee benefit plan in the
performance of the director's duties for a purpose
reasonably believed by the director to be in the
interest of the participants and beneficiaries of
the plan shall be deemed to be for a purpose which
is not opposed to the best interests of the
corporation.
(j) Officer, employee or agent. -- Unless limited by the
charter:
(1) An officer of the corporation shall be
indemnified as and to the extent provided in
subsection (d) of this section for a director and
shall be entitled, to the same extent as a
director, to seek indemnification pursuant to the
provisions of subsection (d);
C-10
(2) A corporation may indemnify and advance
expenses to an officer, employee, or agent of the
corporation to the same extent that it may
indemnify directors under this section; and
(3) A corporation, in addition, may indemnify and
advance expenses to an officer, employee, or agent
who is not a director to such further extent,
consistent with law, as may be provided by its
charter, bylaws, general or specific action of its
board of directors, or contract.
(k) Insurance or similar protection. --
(1) A corporation may purchase and maintain
insurance on behalf of any person who is or was a
director, officer, employee, or agent of the
corporation, or who, while a director, officer,
employee, or agent of the corporation, is or was
serving at the request of the corporation as a
director, officer, partner, trustee, employee, or
agent of another foreign or domestic corporation,
partnership, joint venture, trust, other
enterprise, or employee benefit plan against any
liability asserted against and incurred by such
person in any such capacity or arising out of such
person's position, whether or not the corporation
would have the power to indemnify against liability
under the provisions of this section.
(2) A corporation may provide similar protection,
including a trust fund, letter of credit, or surety
bond, not inconsistent with this section.
(3) The insurance or similar protection may be
provided by a subsidiary or an affiliate of the
corporation.
(l) Report of indemnification to stockholders. -- Any
indemnification of, or advance of expenses to, a
director in accordance with this section, if arising out
of a proceeding by or in the right of the corporation,
shall be reported in writing to the stockholders with
the notice of the next stockholders' meeting or prior to
the meeting.
Article EIGHTH of the Registrant's Articles of Incorporation
reads as follows:
EIGHTH: To the maximum extent permitted by the Maryland
Corporations and Associations Law as from time to time amended,
the Corporation shall indemnify its currently acting and its
former directors and officers and those persons who, at the
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request of the Corporation, serve or have served another
corporation, partnership, joint venture, trust or other
enterprise in one or more of such capacities.
Section 4 of the Advisory Agreement reads as follows:
4. [ACM Income Fund, Inc. (the "Fund")] shall expect of
[Alliance Capital Management L.P. (the "Adviser")], and [the
Adviser] will give the [Fund] the benefit or, [its] best judgment
and efforts in rendering these services to [the Fund], and [the
Fund] agree[s] as an inducement to [the Adviser] undertaking
these services that [it] shall not be liable hereunder for any
mistake of judgment or in any event whatsoever, except for lack
of good faith, provided that nothing herein shall be deemed to
protect, or purport to protect, [the Adviser] against any
liability to [the Fund] or to [its] security holders to which
[the Adviser] would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of
[the Adviser's] duties hereunder, or by reason of [the Adviser's]
reckless disregard of [the Adviser's] obligations and duties
hereunder.
Section 7 of the Administration Agreement reads as follows:
7. Limitation of Liability.PaineWebber will not be liable
for any error of judgment or mistake of law or for any loss
suffered by the Fund or its shareholders in connection with the
performance of its duties under this Agreement, except a loss
resulting from willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or from reckless
disregard by it of its duties under this Agreement.
Article VIII, Section 7 of Registrant's Bylaws reads as follows:
Section 7. Insurance Against Certain Liabilities.The
Corporation shall not bear the cost of insurance that protects or
purports to protect directors and officers of the Corporation
against any liabilities to the Corporation or its security
holders to which any such director or officer would otherwise be
subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office.
Certain provisions of the Dealer Management Agreement to be
provided by pre-effective amendment
Item 30. Business and Other Connections of Alliance
The description of Alliance Capital Management L.P. under the
caption "Management of the Fund - Investment Adviser" in the
Prospectus is incorporated by reference herein.
The information as to the directors and executive officers of
Alliance Capital Management Corporation, the general partner of
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Alliance, set forth in Alliance Capital Management L.P.'s current
Form ADV, filed with the Securities and Exchange Commission
electronically (IARD/CRD #108477), is incorporated by reference
herein.
Item 31. Location of Accounts and Records
The accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940
and the Rules thereunder are maintained as follows: journals,
ledgers, securities records and other original records are
maintained principally at the offices of Alliance Capital
Management L.P., 500 Plaza Drive, Secaucus, New Jersey 07094, and
at the offices of State Street Bank and Trust Company, the
Registrant's Dividend Paying Agent, Transfer Agent and Registrar,
225 Franklin Street, Boston, Massachusetts 02110. All other
records so required to be maintained are maintained at the
offices of Alliance Capital Management L.P., 1345 Avenue of the
Americas, New York, New York 10105.
Item 32. Management Services
Not Applicable
Item 33. Undertakings
1. Registrant undertakes to suspend offering of the shares
covered hereby until it amends its Prospectus contained
herein if, subsequent to the effective date of this
Registration Statement, its net asset value per share
declines more than 10 percent from its net asset value
per share as of the effective date of this Registration
Statement.
2. Not Applicable
3. Not Applicable
4. Not Applicable
5. Not Applicable
6. Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two
business days of receipt of a written or oral request, any
Statement of Additional Information.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
as amended, and the Investment Company Act of 1940, as amended,
the Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York and the State of New York, on
the 5th day of October, 2001.
ACM Income Fund, Inc.
By /s/ John D. Carifa
-----------------------------
John D. Carifa
Chairman
Pursuant to the requirements of the Securities Act of 1933,
as amended, this Registration Statement has been signed below by
the following persons in the capacities and on the date
indicated.
Signature Title Date
--------- ----- ----
(1) Principal Executive
Officer:
/s/ John D. Carifa
-------------------------
John D. Carifa Chairman October 5, 2001
(2) Principal Financial and
Accounting Officer:
/s/ Mark D. Gersten
------------------------- Treasurer and Chief
Mark.D. Gersten Financial Officer October 5, 2001
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(3) All of the Directors:
John D. Carifa*
Ruth Block*
David H Dievler*
John H. Dobkin*
William H. Foulk, Jr.*
Dr. James M. Hester*
Clifford L. Michel*
Donald J. Robinson*
*By: /s/ Edmund P. Bergan, Jr.
--------------------------
Edmund P. Bergan, Jr.
Attorney-in-fact October 5, 2001
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EXHIBIT INDEX
Exhibit Description of Exhibit
(n) Consent of Ernst & Young LLP,
Independent Auditors
(s) Powers of Attorney
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00250262.AA0