Registration Statement of an Open-End Management Investment Company — Form N-1A
Filing Table of Contents
Document/Exhibit Description Pages Size
1: N-1A Initial Registration Statement 109 488K
2: EX-99.1 Agreement and Declaration of Trust 20 77K
3: EX-99.2 By-Laws of the Registrant 8 28K
4: EX-99.3 Form of Distribution Agreement 9 33K
5: EX-99.4 Code of Ethics for the Registrant 9 27K
6: EX-99.5 Code of Ethics for Alliance Capital Management 43 152K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 15, 2004
SECURITIES ACT OF 1933 REGISTRATION NO. 333-
INVESTMENT COMPANY ACT OF 1940 FILE NO. 811-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No.
Post-Effective Amendment No.
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No.
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THE ALLIANCEBERNSTEIN POOLING PORTFOLIOS
(Exact Name Of Registrant As Specified In Charter)
1345 Avenue of the Americas, New York, New York 10105
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 969-1000
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Andrew L. Gangolf
c/o Alliance Capital Management L.P.
1345 Avenue of the Americas
New York, New York 10105
(Name and address of agent for service)
Copies of communications to:
Joseph B. Kittredge, Jr.
Ropes & Gray LLP
One International Place
Boston, Massachusetts 02110
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
Title of Securities Being Registered: Shares of Beneficial Interest of The
AllianceBernstein Pooling Portfolios.
The registrant hereby amends this registration statement on such date or
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 said Section 8(a)
may determine.
[LOGO] AllianceBernstein
The AllianceBernstein Pooling Portfolios
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PROSPECTUS - [date]
Pooling Portfolios
> U.S. Value
> U.S. Large Cap Growth
> Real Estate Investment
> International Value
> International Growth
> Short Duration Bond
> Intermediate Duration Bond
> TIPS
> Small-Mid Cap Value
> Small-Mid Cap Growth
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
Investment Products Offered
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> Are Not FDIC Insured
> May Lose Value
> Are Not Bank Guaranteed
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The Portfolios' investment adviser is Alliance Capital Management L.P.
("Alliance"), a global investment manager providing diversified services to
institutions and individuals through a broad line of investments including more
than 100 mutual funds. The Portfolios are available only to mutual funds advised
by and certain other institutional clients of Alliance.
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TABLE OF CONTENTS
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Page
RISK/RETURN SUMMARY........................................................ 3
AllianceBernstein U.S. Value Portfolio..................................... 4
AllianceBernstein U.S. Large Cap Growth Portfolio.......................... 5
AllianceBernstein Real Estate Investment Portfolio......................... 6
AllianceBernstein International Value Portfolio............................ 7
AllianceBernstein International Growth Portfolio........................... 8
AllianceBernstein Short Duration Bond Portfolio............................ 9
AllianceBernstein Intermediate Duration Bond Portfolio..................... 10
AllianceBernstein TIPS Portfolio........................................... 11
AllianceBernstein Small-Mid Cap Value Portfolio............................ 12
AllianceBernstein Small-Mid Cap Growth Portfolio........................... 13
Summary of Principal Risks................................................. 14
PRINCIPAL RISKS BY Portfolio............................................... 15
FEES AND EXPENSES OF THE PORTFOLIOS........................................ 16
GLOSSARY................................................................... 17
DESCRIPTION OF THE PORTFOLIOS.............................................. 18
Investment Objectives and Principal Policies............................... 18
Description of Additional Investment Practices............................. 26
Additional Risk Considerations ............................................ 31
MANAGEMENT OF THE PORTFOLIOS............................................... 34
Adviser.................................................................... 34
Portfolio Managers......................................................... 34
PURCHASE AND SALE OF SHARES................................................ 35
How The Portfolios Value Their Shares...................................... 35
How To Buy Shares.......................................................... 36
How To Sell Shares......................................................... 36
DIVIDENDS, DISTRIBUTIONS AND TAXES......................................... 36
APPENDIX A: BOND RATINGS .................................................. 37
RISK/RETURN SUMMARY
The following is a summary of certain key information about The
AllianceBernstein Pooling Portfolios. Additional information about each
Portfolio, including a detailed description of the risks of an investment in
each Portfolio, appears after this Summary.
The Risk/Return Summary describes the Portfolios' objectives, principal
investment strategies, principal risks and fees. Each Portfolio's Summary page
includes a short discussion of some of the principal risks of investing in that
Portfolio. A further discussion of these and other risks is on page 14.
More detailed descriptions of the Portfolios, including the risks associated
with investing in the Portfolios, can be found further back in this Prospectus.
Be sure to read this additional information BEFORE investing. Each of the
Portfolios may at times use certain types of investment derivatives such as
options, futures, forwards, and swaps. The use of these techniques involves
special risks that are discussed in this Prospectus.
Past performance of a fund before and after taxes, of course, does not
necessarily indicate how it will perform in the future. As with all investments,
you may lose money by investing in the Portfolios.
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AllianceBernstein U.S. Value Portfolio
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OBJECTIVE: PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
Long-term growth of capital. The Portfolio invests primarily in a diversified The Portfolio may also invest up to 20% of its
portfolio of equity securities of U.S. companies total assets in equity securities issued by
with relatively larger market capitalizations as non-U.S. companies.
compared to the overall U.S. equity market.
Among the principal risks of investing in the
The Portfolio's investment policies emphasize Portfolio is market risk, which is the risk of
investment in companies that Alliance's Bernstein losses from adverse changes in the stock
unit ("Bernstein") determines to be undervalued. market. Depending on the Portfolio's
In selecting securities for the Portfolio, investments at a particular time, the Portfolio
Bernstein uses its fundamental research to may also have industry/sector risk. To the
identify companies whose long-term earnings power extent the Portfolio invests in securities of
and dividend paying capability are not reflected non-U.S. issuers, it may have non-U.S. issuer
in the current market price of their securities. risk and currency risk.
PERFORMANCE INFORMATION
No performance information is available for the
Portfolio because it has not yet been in
operation for a full calendar year.
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AllianceBernstein U.S. Large Cap Growth Portfolio
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OBJECTIVE: PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
Long-term growth of capital. The Portfolio invests primarily in equity The Portfolio may also invest up to 20% of its
securities of U.S. companies with relatively total assets in equity securities issued by
larger market capitalizations as compared to the non-U.S. companies.
overall U.S. equity market. Under normal
circumstances, the Portfolio invests at least 80% Among the principal risks of investing in the
of its net assets in these types of securities. Portfolio is market risk, which is the risk of
Unlike most equity funds, the Portfolio focuses losses from adverse changes in the stock
on a relatively small number of intensively market. Because the Portfolio invests in a
researched companies. smaller number of companies than many other
equity funds, the Portfolio also has focused
The Portfolio's investment policies emphasize portfolio risk, which is the risk that changes
investment in a limited number of large, in the value of a single security may have a
carefully selected, high quality U.S. companies more significant effect, either negative or
that Alliance believes are likely to achieve positive, on the Portfolio's net asset value.
superior earnings growth. Alliance relies heavily To the extent the Portfolio invests in
on the fundamental analysis and research of its securities of non-U.S. issuers, it may have
internal research staff to select the Portfolio's non-U.S. issuer risk and currency risk.
investments.
PERFORMANCE INFORMATION
No performance information is available for the
Portfolio because it has not yet been in
operation for a full calendar year.
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AllianceBernstein Real Estate Investment Portfolio
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OBJECTIVE: PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
Total return from a The Portfolio invests primarily in equity interest rate risk. Market risk is the risk of
combination of income and securities of real estate investment trusts losses from adverse changes in the market.
long-term growth of capital. (called "REITs") and other real estate industry Credit risk is the risk that a security issuer
companies. Under normal circumstances, the will be unable or unwilling to make timely
Portfolio invests at least 80% of its net assets payments of income or principal. Interest rate
in these types of securities. risk is the risk that changes in interest rates
will affect the value of income-producing
The Portfolio's investment policies emphasize securities. Because the Portfolio invests in
investment in real estate companies Bernstein mortgage-backed securities, it is subject to
believes have strong property fundamentals and the risk that mortgage loans will be prepaid
management teams. The Portfolio seeks to invest when interest rates decline, forcing the
in real estate companies whose underlying Portfolio to reinvest in securities with lower
portfolios are diversified globally and by interest rates.
property type.
Because the Portfolio invests a substantial
The Portfolio may invest up to 20% of its total portion of its assets in the real estate
assets in mortgage-backed securities, which are market, it has industry/sector risk. The
securities that directly or indirectly represent Portfolio has many of the same risks as direct
participations in, or are collateralized by and ownership of real estate, including the risk
payable from, mortgage loans secured by real that the value of real estate could decline due
property. to a variety of factors affecting the real
estate market. In addition, REITs are dependent
The Portfolio may from time to time enter into on the capability of their managers, may have
currency futures contracts or currency forward limited diversification, and could be
contracts. significantly affected by changes in tax laws.
Among the principal risks of investing in the Because the Portfolio invests in securities of
Portfolio are market risk, credit risk, and non-U.S. issuers, it also has non-U.S. issuer
risk and currency risk.
PERFORMANCE INFORMATION
No performance information is available for the
Portfolio because it has not yet been in
operation for a full calendar year.
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AllianceBernstein International Value Portfolio
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OBJECTIVE: PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
Long-term growth of capital. The Portfolio invests primarily in a diversified market. To the extent that the Portfolio
portfolio of equity securities of non-U.S. invests a substantial amount of its assets in a
companies. particular country, an investment in the
Portfolio has the risk that market changes or
The Portfolio's investment policies emphasize other events affecting that country may have a
investment in companies that Bernstein determines more significant effect on the Portfolio's net
to be undervalued. In selecting securities for asset value. Because the Portfolio may invest
the Portfolio, Bernstein uses its fundamental in emerging markets, an investment also has the
research to identify companies whose long-term risk that market changes or other factors
earnings power is not reflected in the current affecting emerging markets, including political
market price of their securities. instability and unpredictable economic
conditions, may have a significant effect on
The Portfolio may from time to time enter into the Portfolio's net asset value.
currency futures contracts or currency forward
contracts. The Portfolio is also subject to capitalization
risk, or the risk that investments in smaller
Among the principal risks of investing in the companies may be more volatile than investments
Portfolio are market risk, non-U.S. issuer risk, in larger companies.
and currency risk. Market risk is the risk of
losses from adverse changes in the stock market. Depending on the Portfolio's investments at a
particular time, the Portfolio may also have
Investments in countries other than the United industry/sector risk. The Portfolio may at
States may have more risk because their markets times use certain types of investment
tend to be more volatile than the U.S. stock derivatives, such as options, futures, forwards
and swaps. The use of these techniques involves
PERFORMANCE INFORMATION special risks that are discussed in this
Prospectus.
No performance information is available for the
Portfolio because it has not yet been in
operation for a full calendar year.
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AllianceBernstein International Growth Portfolio
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OBJECTIVE: PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
Long-term growth of capital. The Portfolio invests primarily in equity market. To the extent that the Portfolio
securities of non-U.S. companies. Unlike most invests a substantial amount of its assets in a
equity funds, the Portfolio focuses on a particular country, an investment in the
relatively small number of intensively researched Portfolio has the risk that market changes or
companies. other events affecting that country may have a
more significant effect on the Portfolio's net
The Portfolio's investment policies emphasize asset value. Because the Portfolio may invest
investment in a limited number of large, in emerging markets, an investment also has the
carefully selected, high quality non-U.S. risk that market changes or other factors
companies that Alliance believes are likely to affecting emerging markets, including political
achieve superior earnings growth. Alliance relies instability and unpredictable economic
heavily on the fundamental analysis and research conditions, may have a significant effect on
of its internal research staff to select the the Portfolio's net asset value.
Portfolio's investments.
Because the Portfolio invests in a smaller
The Portfolio may from time to time enter into number of companies than many other equity
currency futures contracts or currency forward funds, the Portfolio also has focused portfolio
contracts. risk, which is the risk that changes in the
value of a single security may have a more
Among the principal risks of investing in the significant effect, either negative or
Portfolio are market risk, non-U.S. issuer risk, positive, on the Portfolio's net asset value.
and currency risk. Market risk is the risk of The Portfolio may at times use certain types of
losses from adverse changes in the stock market. investment derivatives, such as options,
futures, forwards and swaps. The use of these
Investments in countries other than the United techniques involves special risks that are
States may have more risk because their markets discussed in this Prospectus.
tend to be more volatile than the U.S. stock
PERFORMANCE INFORMATION
No performance information is available for the
Portfolio because it has not yet been in
operation for a full calendar year.
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AllianceBernstein Short Duration Bond Portfolio
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OBJECTIVE: PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
A moderate rate of income The Portfolio invests primarily in Among the principal risks of investing in the
that is subject to taxes. investment-grade, U.S. Dollar denominated debt Portfolio are interest rate risk, credit risk,
securities. Under normal circumstances, the and market risk. Interest rate risk is the risk
Portfolio invests at least 80% of its net assets that changes in interest rates will affect the
in fixed-income securities. The Portfolio seeks value of income-producing securities. Credit
to maintain an overall effective duration of one risk is the risk that a security issuer will be
to three years under normal market conditions. unable or unwilling to make timely payments of
income or principal. Market risk is the risk of
The Portfolio may invest in many types of debt losses from adverse changes in the market. The
securities including corporate bonds, notes, U.S. Portfolio may at times use certain types of
Government and agency securities, asset-backed investment derivatives, such as options,
securities, mortgage-related securities, and futures, forwards and swaps. The use of these
inflation-protected securities as well as other techniques involves special risks that are
securities of U.S. and non-U.S. issuers. discussed in this Prospectus. To the extent the
Portfolio invests in securities of non-U.S.
issuers, it may have non-U.S. issuer risk and
PERFORMANCE INFORMATION currency risk.
No performance information is available for the
Portfolio because it has not yet been in
operation for a full calendar year.
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AllianceBernstein Intermediate Duration Bond Portfolio
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OBJECTIVE: PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
A moderate to high rate of The Portfolio invests primarily in has different ratings from two national rating
income that is subject to investment-grade, U.S. Dollar denominated debt agencies ("split rating"), then the Portfolio
taxes. securities. Under normal circumstances, the will use the rating deemed by Alliance to be
Portfolio invests at least 80% of its net assets the most appropriate under the circumstances.
in fixed-income securities. The Portfolio seeks
to maintain an overall effective duration of four Among the principal risks of investing in the
to seven years under normal market conditions. Portfolio are interest rate risk, credit risk,
and market risk. Interest rate risk is the risk
The Portfolio may invest in many types of debt that changes in interest rates will affect the
securities including corporate bonds, notes, U.S. value of income-producing securities. Credit
Government and agency securities, asset-backed risk is the risk that a security issuer will be
securities, mortgage-related securities, and unable or unwilling to make timely payments of
inflation-protected securities as well as other income or principal. Market risk is the risk of
securities of U.S. and non-U.S. issuers. losses from adverse changes in the market. The
Portfolio may at times use certain types of
The Portfolio may invest up to 10% of its total investment derivatives, such as options,
assets in debt securities rated BB by national futures, forwards and swaps. The use of these
rating agencies at the time of purchase. The techniques involves special risks that are
Portfolio will not purchase securities rated discussed in this Prospectus. To the extent the
below BB- at time of purchase. If a security Portfolio invests in securities of non-U.S.
issuers, it may have non-U.S. issuer risk and
PERFORMANCE INFORMATION currency risk.
No performance information is available for the
Portfolio because it has not yet been in
operation for a full calendar year.
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AllianceBernstein TIPS Portfolio
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OBJECTIVE: PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
A total return that exceeds The Portfolio invests primarily in U.S. dollar rating agencies at the time of purchase. The
the rate of inflation over denominated inflation-indexed bonds of varying Portfolio will not purchase securities rated
the long term with income maturities issued by the U.S. and non-U.S. below BB- at time of purchase. If a security
that is subject to taxes. governments, their agencies or instrumentalities, has a split rating, then the Portfolio will use
and corporations. Under normal circumstances, the the rating deemed by Alliance to be the most
Portfolio invests at least 80% of its net assets appropriate under the circumstances.
in these types of securities. The Portfolio seeks
to maintain a duration within three years (plus Among the principal risks of investing in the
or minus) of the real duration of the Lehman Portfolio are interest rate risk, credit risk,
Brothers U.S. TIPS 1-10 year Index, which as of and market risk. Interest rate risk is the risk
September 30, 2004 was 5.7 years. that changes in interest rates will affect the
value of income-producing securities. Credit
Assets not invested in inflation-indexed bonds risk is the risk that a security issuer will be
may be invested in other types of debt securities unable or unwilling to make timely payments of
including corporate bonds, notes, U.S. Government income or principal. Market risk is the risk of
and agency securities, asset-backed securities, losses from adverse changes in the market. The
and mortgage-related securities as well as other Portfolio may at times use certain types of
securities of U.S. and non-U.S. issuers. investment derivatives, such as options,
futures, forwards and swaps. The use of these
The Portfolio may invest up to 10% of its total techniques involves special risks that are
assets in debt securities rated BB by national discussed in this Prospectus. To the extent the
Portfolio invests in securities of non-U.S.
PERFORMANCE INFORMATION issuers, it may have non-U.S. issuer risk and
currency risk.
No performance information is available for the
Portfolio because it has not yet been in
operation for a full calendar year.
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AllianceBernstein Small-Mid Cap Value Portfolio
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OBJECTIVE: PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
Long-term growth of capital. The Portfolio invests primarily in a diversified Among the principal risks of investing in the
portfolio of equity securities of U.S. companies Portfolio is market risk, which is the risk of
with relatively smaller market capitalizations as losses from adverse changes in the stock
compared to the overall U.S. equity market. Under market. The Portfolio is also subject to
normal circumstances, the Portfolio invests at capitalization risk. Investments in mid-cap
least 80% of its net assets in these types of companies may be more volatile than investments
securities. in large-cap companies, and investments in
smaller companies may be more volatile than
The Portfolio's investment policies emphasize investments in large-cap or mid-cap companies.
investment in companies that Bernstein determines Investments in small-cap companies may have
to be undervalued. In selecting securities for additional risks because these companies often
the Portfolio, Bernstein uses its fundamental have limited product lines, markets, or
research to identify companies whose long-term financial resources. Depending on the
earnings power is not reflected in the current Portfolio's investments at a particular time,
market price of their securities. the Portfolio may also have industry/sector
risk. To the extent the Portfolio invests in
The Portfolio may also invest up to 20% of its securities of non-U.S. issuers, it may have
total assets in equity securities issued by non-U.S. issuer risk and currency risk.
non-U.S. companies.
PERFORMANCE INFORMATION
No performance information is available for the
Portfolio because it has not yet been in
operation for a full calendar year.
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AllianceBernstein Small-Mid Cap Growth Portfolio
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OBJECTIVE: PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
Long-term growth of capital. The Portfolio invests primarily in a diversified Among the principal risks of investing in the
portfolio of equity securities of U.S. companies Portfolio is market risk, which is the risk of
with relatively smaller market capitalizations as losses from adverse changes in the stock
compared to the overall U.S. equity market. Under market. The Portfolio is also subject to
normal circumstances, the Portfolio invests at capitalization risk. Investments in mid-cap
least 80% of its net assets in these types of companies may be more volatile than investments
securities. in large-cap companies, and investments in
smaller companies may be more volatile than
The Portfolio's investment policies emphasize investments in large-cap or mid-cap companies.
investments in U.S. companies that Alliance Investments in small-cap companies may have
believes are likely to achieve superior earnings additional risks because these companies often
growth. Alliance relies heavily on the have limited product lines, markets, or
fundamental analysis and research of its internal financial resources. To the extent the
research staff to select the Portfolio's Portfolio invests in securities of non-U.S.
investments. issuers, it may have non-U.S. issuer risk and
currency risk.
The Portfolio may also invest up to 20% of its
total assets in equity securities issued by
non-U.S. companies.
PERFORMANCE INFORMATION
No performance information is available for the
Portfolio because it has not yet been in
operation for a full calendar year.
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SUMMARY OF PRINCIPAL RISKS
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The value of an investment in a Portfolio will change with changes in the values
of that Portfolio's investments. Many factors can affect those values. In this
Summary, we describe the principal risks that may affect a Portfolio as a whole.
All of the Portfolios could be subject to additional principal risks because the
types of investments made by each Portfolio can change over time. This
Prospectus has additional descriptions of the types of investments that appear
in bold type in the discussions under "Description of Additional Investment
Practices" or "Additional Risk Considerations." These sections also include more
information about the Portfolios, their investments, and related risks.
MARKET RISK
This is the risk that the value of a Portfolio's investments will fluctuate as
the stock or bond markets fluctuate and that prices overall will decline over
shorter or longer-term periods. All of the Portfolios are subject to market
risk.
INDUSTRY/SECTOR RISK
This is the risk of investments in a particular industry or industry sector.
Market or economic factors affecting that industry or group of related
industries could have a major effect on the value of a Portfolio's investments.
The Portfolios particularly subject to this risk are AllianceBernstein U.S.
Value Portfolio, AllianceBernstein Real Estate Investment Portfolio,
AllianceBernstein International Value Portfolio and AllianceBernstein Small-Mid
Cap Value Portfolio.
INTEREST RATE RISK
This is the risk that changes in interest rates will affect the value of a
Portfolio's investments in income-producing debt securities, such as bonds,
notes and asset-backed securities, or other income-producing securities.
Increases in interest rates may cause the value of a Portfolio's investments to
decline and this decrease in value may not be offset by higher interest income
from new investments.
Interest rate risk is particularly applicable to Portfolios that invest in
income-producing securities, such as AllianceBernstein Real Estate Investment
Portfolio, and is greater for those Portfolios that invest a substantial portion
of their assets in debt securities, such as AllianceBernstein Short Duration
Bond Portfolio, AllianceBernstein Intermediate Duration Bond Portfolio and
AllianceBernstein TIPS Portfolio.
Interest rate risk is generally greater for Portfolios that invest in debt
securities with longer maturities, and is compounded for Portfolios, such as
AllianceBernstein Real Estate Investment Portfolio that invest a substantial
portion of their assets in mortgage-related or other asset-backed securities
that can be repaid by the issuer. The value of these securities is affected more
by changes in interest rates because when interest rates rise, the pre-payments
decline, lengthening weighted maturity and causing the value of the securities
to decrease more significantly. In addition, these types of securities are
typically subject to more rapid prepayment when interest rates fall, which
generally results in lower returns because the Portfolios are then required to
reinvest their assets in debt securities with lower interest rates.
AllianceBernstein Real Estate Investment Portfolio also has exposure to interest
rate risk because it invests in real estate industry companies.
CREDIT RISK
This 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 degree of risk for a particular security may be reflected in its credit
rating. Credit risk is greater for Portfolios such as AllianceBernstein Short
Duration Bond Portfolio and AllianceBernstein Intermediate Duration Bond
Portfolio that may invest in lower-rated securities. These debt securities and
similar unrated securities (commonly known as "junk bonds") have speculative
elements or are predominantly speculative credit risks. Other Portfolios subject
to this risk are AllianceBernstein Real Estate Investment Portfolio,
AllianceBernstein International Value Portfolio, AllianceBernstein TIPS
Portfolio and AllianceBernstein Small-Mid Cap Value Portfolio.
CAPITALIZATION RISK
This is the risk of investments in small- to mid-capitalization companies.
Investments in small- and mid-cap companies may be more volatile than
investments in large-cap companies. Investments in small-cap companies tend to
be more volatile than investments in mid- or large-cap companies. A Portfolio's
investments in smaller capitalization companies may have additional risks
because these companies often have limited product lines, markets or financial
resources. Portfolios particularly subject to this risk are AllianceBernstein
Small-Mid Cap Value Portfolio, AllianceBernstein Small-Mid Cap Growth Portfolio
and AllianceBernstein International Value Portfolio.
NON-U.S. ISSUER RISK
This is the risk of investments in issuers located in countries other than the
United States. Investments in securities of non-U.S. issuers may experience more
rapid and extreme changes in value than investments in securities of U.S.
issuers. This is because the securities markets of many countries are relatively
small, with a limited number of companies representing a small number of
industries. Additionally, non-U.S. issuers are usually not subject to the same
degree of regulation as U.S. issuers. Reporting, accounting and auditing
standards of countries differ, in some cases significantly, from U.S. standards.
Also, nationalization, expropriation or confiscatory taxation, currency blockage
or political changes or diplomatic developments could adversely affect a
Portfolio's investments in a country other than the United States. In the event
of nationalization, expropriation or other confiscation, a Portfolio could lose
its entire investment. Each of the Portfolios may be subject to this risk, but
the risk is greater for those Portfolios that invest a substantial portion of
their assets in the securities of non-U.S. issuers, such as AllianceBernstein
Real Estate Investment Portfolio, AllianceBernstein
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International Growth Portfolio and AllianceBernstein International Value
Portfolio.
CURRENCY RISK
This is the risk that fluctuations in the exchange rates between the U.S. Dollar
and foreign currencies may negatively affect the value of a Portfolio's
investments. Each of the Portfolios may be subject to this risk, but the risk is
greater for those Portfolios that invest a substantial portion of their assets
in the securities of non-U.S. issuers, such as AllianceBernstein Real Estate
Investment Portfolio, AllianceBernstein International Growth Portfolio and
AllianceBernstein International Value Portfolio.
LEVERAGING RISK
When a Portfolio borrows money or otherwise leverages its portfolio, the value
of an investment in the Portfolio will be more volatile and all other risks will
tend to be compounded. The AllianceBernstein U.S. Value Portfolio,
AllianceBernstein International Value Portfolio, AllianceBernstein Short
Duration Bond Portfolio, AllianceBernstein Intermediate Duration Bond Portfolio,
AllianceBernstein TIPS Portfolio and AllianceBernstein Small-Mid Cap Value
Portfolio may create leverage by using inverse floating rate instruments or
derivatives and are therefore subject to leveraging risk.
DERIVATIVES RISK
Each of the Portfolios may use derivatives, which are financial contracts whose
value depends on, or is derived from, the value of an underlying asset,
reference rate, or index. Alliance will sometimes use derivatives as part of a
strategy designed to reduce other risks. Generally, however, the Portfolios use
derivatives as direct investments to earn income, enhance yield and broaden
Portfolio diversification, which entails greater risk than if used solely for
hedging purposes. In addition to other risks such as the credit risk of the
counterparty, derivatives involve the risk of difficulties in pricing, valuation
and documentation and the risk that changes in the value of the derivative may
not correlate perfectly with relevant underlying assets, rates, or indices. The
Portfolios particularly subject to this risk are AllianceBernstein U.S. Value
Portfolio, AllianceBernstein International Value Portfolio, AllianceBernstein
International Growth Portfolio, AllianceBernstein Short Duration Bond Portfolio,
AllianceBernstein Intermediate Duration Bond Portfolio, AllianceBernstein TIPS
Portfolio and AllianceBernstein Small-Mid Cap Value Portfolio.
FOCUSED PORTFOLIO RISK
Portfolios, such as AllianceBernstein U.S. Growth Portfolio and
AllianceBernstein International Growth Portfolio, that invest in a limited
number of companies, may have more risk because changes in the value of a single
security may have a more significant effect, either negative or positive, on the
Portfolio's net asset value.
MANAGEMENT RISK
Each Portfolio is subject to management risk because it is an actively managed
investment portfolio. Alliance will apply its investment techniques and risk
analyses, including its value approach, in making investment decisions for the
Portfolios, but there is no guarantee that its techniques will produce the
intended result. In some cases, derivative and other investment techniques may
be unavailable or Alliance may determine not to use them, possibly even under
market conditions where their use could benefit a Portfolio.
PRINCIPAL RISKS BY PORTFOLIO
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The following chart summarizes the principal risks of each Portfolio. Risks not
marked for a particular Portfolio may, however, still apply to some extent to
that Portfolio at various times.
[Enlarge/Download Table]
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Industry/ Interest Capital- Non-U.S. Lever-
Market Sector Rate Credit ization Issuer Currency aging
Portfolio Risk Risk Risk Risk Risk Risk Risk Risk
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AllianceBernstein U.S. Value Portfolio o o o o o
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AllianceBernstein U.S. Growth Portfolio o
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AllianceBernstein Real Estate Investment Portfolio o o o o o o
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AllianceBernstein International Value Portfolio o o o o o o o
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AllianceBernstein International Growth Portfolio o o o
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AllianceBernstein Short Duration Bond Portfolio o o o o o o
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AllianceBernstein Intermediate Duration Bond Portfolio o o o o o o
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AllianceBernstein TIPS Portfolio o o o o o o
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AllianceBernstein Small-Mid Cap Value Portfolio o o o o o o o
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AllianceBernstein Small-Mid Cap Growth Portfolio o o
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Focused Manage-
Derivatives Portfolio ment
Portfolio Risk Risk Risk
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AllianceBernstein U.S. Value Portfolio o
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AllianceBernstein U.S. Growth Portfolio o o
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AllianceBernstein Real Estate Investment Portfolio o
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AllianceBernstein International Value Portfolio o o
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AllianceBernstein International Growth Portfolio o o o
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AllianceBernstein Short Duration Bond Portfolio o o
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AllianceBernstein Intermediate Duration Bond Portfolio o o
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AllianceBernstein TIPS Portfolio o o
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AllianceBernstein Small-Mid Cap Value Portfolio o o
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AllianceBernstein Small-Mid Cap Growth Portfolio o
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15
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FEES AND EXPENSES OF THE PORTFOLIOS
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This table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolios.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
(as a percentage of offering price)
Maximum Deferred Sales Charge (Load)
(as a percentage of original purchase price or redemption proceeds,
whichever is lower) None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Portfolio
assets) and EXAMPLES
Annual fund operating expenses percentages are based on payments that will be
made. The Examples are to help you compare the cost of investing in the
Portfolios with the cost of investing in other funds. They assume that you
invest $10,000 in each Portfolio for the time periods indicated and then redeem
all of your shares at the end of those periods. They also assume that your
investment has a 5% return each year, that the Portfolios' operating expenses
stay the same, and that all dividends and distributions are reinvested. Your
actual costs may be higher or lower.
[Enlarge/Download Table]
Operating Expenses
Distribution (12b-1) Total Portfolio
Management Fees and Service Fees Other Expenses(1) Operating Expenses
--------------- ---------------- ----------------- ------------------
AllianceBernstein U.S. Value Portfolio 0% 0% 0.07% 0.07%
AllianceBernstein U.S. Growth Portfolio 0% 0% 0.07% 0.07%
AllianceBernstein Real Estate Investment Portfolio 0% 0% 0.11% 0.11%
AllianceBernstein International Value Portfolio 0% 0% 0.16% 0.16%
AllianceBernstein International Growth Portfolio 0% 0% 0.20% 0.20%
AllianceBernstein Short Duration Bond Portfolio 0% 0% 0.14% 0.14%
AllianceBernstein Intermediate Duration Bond Portfolio 0% 0% 0.11% 0.11%
AllianceBernstein TIPS Portfolio 0% 0% 0.22% 0.22%
AllianceBernstein Small-Mid Cap Value Portfolio 0% 0% 0.14% 0.14%
AllianceBernstein Small-Mid Cap Growth Portfolio 0% 0% 0.12% 0.12%
Example
Year 1 Year 3
------ ------
AllianceBernstein U.S. Value Portfolio $ 7 $ 23
AllianceBernstein U.S. Growth Portfolio $ 7 $ 23
AllianceBernstein Real Estate Investment Portfolio $ 11 $ 35
AllianceBernstein International Value Portfolio $ 16 $ 52
AllianceBernstein International Growth Portfolio $ 20 $ 64
AllianceBernstein Short Duration Bond Portfolio $ 14 $ 45
AllianceBernstein Intermediate Duration Bond Portfolio $ 11 $ 35
AllianceBernstein TIPS Portfolio $ 23 $ 71
AllianceBernstein Small-Mid Cap Value Portfolio $ 14 $ 45
AllianceBernstein Small-Mid Cap Growth Portfolio $ 12 $ 39
----------------
(1) Based on estimated amounts for the current fiscal year.
16
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GLOSSARY
--------------------------------------------------------------------------------
This Prospectus uses the following terms.
TYPES OF SECURITIES
Bonds are fixed, floating, and variable rate debt obligations.
Convertible securities are bonds, debentures, corporate notes, and preferred
stocks that are convertible into common and preferred stock.
Debt securities are bonds, debentures, notes, bills, loans, other direct debt
instruments, and other fixed, floating and variable rate debt obligations, but
do not include convertible securities.
Depositary receipts include American Depositary Receipts ("ADRs"), Global
Depositary Receipts ("GDRs") and other types of depositary receipts.
Equity securities include (i) common stocks, partnership interests, business
trust shares and other equity or ownership interests in business enterprises and
(ii) securities convertible into, and rights and warrants to subscribe for the
purchase of, such stocks, shares and interests.
Fixed-income securities are debt securities, convertible securities, and
preferred stocks, including floating rate and variable rate instruments.
Fixed-income securities may be rated (or, if unrated, for purposes of the
Portfolios' investment policies as may be determined by Alliance to be of
equivalent quality) triple-A (Aaa or AAA), high quality (Aa or AA or above),
high grade (A or above) or investment grade (Baa or BBB or above) by, as the
case may be, Moody's, S&P or Fitch, or may be lower-rated securities. In the
case of "split-rated" fixed-income securities (i.e., securities assigned
non-equivalent credit quality ratings, such as Baa by Moody's but BB by S&P or
Ba by Moody's and BB by S&P but B by Fitch), a Portfolio will use the rating
deemed by Alliance to be the most appropriate under the circumstances.
Foreign government securities are securities issued or guaranteed, as to payment
of principal and interest, by foreign governments, quasi-governmental entities,
governmental agencies or other governmental entities.
Inflation-indexed bonds are fixed-income securities that are structured to
provide protection against inflation. The value of the bond's principal or the
interest income paid on the bond is adjusted to track changes in an official
inflation measure. The U.S. Treasury uses the Consumer Price Index for Urban
Consumers as the inflation measure. Inflation-indexed bonds issued by a foreign
government are generally adjusted to reflect a comparable inflation index,
calculated by that government.
Interest-only or IO securities are debt securities that receive only the
interest payments on an underlying debt that has been structured to have two
classes, one of which is the IO class and the other of which is the
principal-only or PO class, that receives only the principal payments on the
underlying debt obligation. POs are similar to, and are sometimes referred to
as, zero coupon securities, which are debt securities issued without interest
coupons.
Mortgage-related securities are pools of mortgage loans that are assembled for
sale to investors (such as mutual funds) by various governmental,
government-related, and private organizations. These securities include:
o ARMS, which are adjustable-rate mortgage securities;
o SMRS, which are stripped mortgage-related securities;
o CMOs, which are collateralized mortgage obligations;
o GNMA certificates, which are securities issued by the Government
National Mortgage Association or GNMA;
o FNMA certificates, which are securities issued by the Federal
National Mortgage Association or FNMA; and
o FHLMC certificates, which are securities issued by the Federal Home
Loan Mortgage Corporation or FHLMC.
Non-U.S. fixed-income securities consist of foreign government securities and
securities issued by non-U.S. companies.
Qualifying bank deposits are certificates of deposit, bankers' acceptances, and
interest-bearing savings deposits of banks that have total assets of more than
$1 billion and are members of the Federal Deposit Insurance Corporation.
Rule 144A securities are securities that may be resold under Rule 144A under the
Securities Act.
U.S. Government securities are securities issued or guaranteed by the United
States Government, its agencies or instrumentalities.
RATING AGENCIES and RATED SECURITIES
Fitch is Fitch Ratings, the international rating agency formed through the
merger of Fitch IBCA, Inc. and Duff & Phelps Credit Rating Co.
Higher quality commercial paper is commercial paper rated at least Prime-2 by
Moody's, A-2 by S&P, or F2 by Fitch.
Lower-rated securities are fixed-income securities rated Ba or BB or below, or
determined by Alliance to be of equivalent quality, and are commonly referred to
as "junk bonds."
Moody's is Moody's Investors Service, Inc.
NRSRO is a nationally recognized statistical rating organization.
Prime commercial paper is commercial paper rated Prime-1 or higher by Moody's,
A-1 or higher by S&P, or F1 by Fitch.
S&P is Standard & Poor's Ratings Services.
OTHER
1940 Act is the Investment Company Act of 1940, as amended.
Code is the Internal Revenue Code of 1986, as amended.
Commission is the Securities and Exchange Commission.
17
Duration is a measure that relates the price volatility of a security to changes
in interest rates. The duration of a debt security is the weighted average term
to maturity, expressed in years, of the present value of all future cash flows,
including coupon payments and principal repayments. Thus, by definition,
duration is always less than or equal to full maturity.
Exchange is the New York Stock Exchange.
Securities Act is the Securities Act of 1933, as amended.
--------------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS
--------------------------------------------------------------------------------
This section of the Prospectus provides a more complete description of each
Portfolio's investment objectives, principal strategies and risks. Of course,
there can be no assurance that any Portfolio will achieve its investment
objective.
Please note that:
o Additional discussion of the Portfolios' investments, including the risks
of the investments, can be found in the discussion under Description of
Additional Investment Practices following this section.
o The description of the principal risks for a Portfolio may include risks
described in the Summary of Principal Risks above. Additional information
about the risks of investing in a Portfolio can be found in the discussion
under Additional Risk Considerations.
o Additional descriptions of each Portfolio's strategies, investments, and
risks can be found in the Portfolios' Statement of Additional Information
or SAI.
o Except as noted, the Portfolios' investment objectives and investment
policies are not fundamental and thus can be changed without a shareholder
vote. Where an investment policy or restriction has a percentage
limitation, such limitation is applied at the time of investment; changes
in the market value of securities in a Portfolio after they are purchased
by the Portfolio will not cause the Portfolio to be in violation of such
limitations. Also, those limits may in some cases be exceeded to a
non-material extent without this Prospectus being supplemented.
INVESTMENT OBJECTIVES AND PRINCIPAL POLICIES
AllianceBernstein U.S. Value Portfolio
AllianceBernstein U.S. Value Portfolio seeks long-term growth of capital by
investing primarily in a diversified portfolio of equity securities of U.S.
companies, emphasizing investments in companies that Bernstein determines are
undervalued, using a fundamental value approach. This approach to equity
investing generally defines value by reference to the relationship between a
security's current price and its intrinsic economic value, as measured by
earnings power and dividend-paying capability. Bernstein relies heavily on the
fundamental analysis and research of its large internal research staff in making
investment decisions for the Portfolio. These investment decisions are the
result of the multi-step process described below.
Bernstein's fundamental value approach seeks to identify, in the first instance,
a universe of securities that are considered to be undervalued because they are
attractively priced relative to their future earnings power and dividend-paying
capability. Bernstein's research staff of company and industry analysts follows
a research universe of approximately 650 companies. This universe covers
approximately 90% of the capitalization of the Russell 1000(TM) Value Index.
Bernstein's staff of company and industry analysts prepares its own earnings
estimates and financial models for each company analyzed. Bernstein identifies
and quantifies the critical variables that influence a business's performance
and analyzes the results in order to forecast each company's long-term
prospects. As one of the largest multi-national investment firms, Alliance and
its Bernstein unit have access to considerable information concerning all of the
companies followed and the staff meets regularly with the management, suppliers,
clients and competitors of companies in the Portfolio. As a result, analysts
have an in-depth understanding of the products, services, markets and
competition of these companies and a good knowledge of the management of most of
the companies in the research universe. A company's financial performance is
typically projected over a full economic cycle, including a trough and a peak,
within the context of forecasts for real economic growth, inflation and interest
rate changes. As a result, forecasts of near term economic events are generally
not of major consequence.
A committee composed of senior investment professionals (the "Investment Policy
Group" or "IPG") reviews all analyst research performed for the Portfolio. The
IPG makes sure that the analysts have appropriately considered the key issues
facing each company. In addition, it checks to see that forecasts of a company's
future are compatible with its history. Finally, the IPG ensures that all
forecasts use consistent analytic frameworks and economic assumptions.
For each company in the research universe, Bernstein relates the present value
of the company's future cash flow, as forecasted by Bernstein's analysts, to the
current price of the company's stock. Using a dividend discount model and
solving for the internal rate of return, Bernstein thus derives an expected rate
of return. The senior investment professionals involved in the fundamental value
approach then factor into this analysis the risk attributes of each company for
purposes of re-ranking the companies. By evaluating overall sector
concentration, capitalization distribution, leverage, degree of undervaluation
and other factors, Bernstein ranks each security on a risk adjusted basis, in an
effort to minimize overall Portfolio volatility.
The Portfolio does not simply purchase the highest-ranked
18
securities. Rather, Bernstein considers aggregate portfolio characteristics and
risk diversification when deciding how much of each security to purchase for the
Portfolio. The Portfolio will tend to overweight stocks selected in the top half
of the final ranking and will tend to minimize stocks in the bottom half,
subject to overall risk diversification.
The degree to which a security is attractive can change as a result of adverse,
short-term market reactions to recent events or trends. Negative analysts'
earnings-estimate revisions and relative return trends (also called "momentum")
tend to reflect deterioration in a company's operating results and often signal
poor performance to come; positive revisions and return trends tend to reflect
fundamental improvements and positive performance ahead. Bernstein monitors
these factors so as to better time purchases and sales of securities.
A security generally will be sold when it no longer meets appropriate valuation
criteria. Sale of a stock that has reached its target may be delayed, however,
when earnings expectations and/or momentum are favorable.
AllianceBernstein U.S. Large Cap Growth Portfolio
AllianceBernstein U.S. Large Cap Growth Portfolio seeks long-term growth of
capital by investing primarily in the equity securities of a limited number of
large, carefully selected, high-quality U.S. companies that are judged likely to
achieve superior earnings growth. Normally, about 40-60 companies will be
represented in the Portfolio, with the 25 most highly regarded of these
companies usually constituting approximately 70% of the Portfolio's net assets.
The Portfolio thus differs from more typical equity mutual funds by focusing on
a relatively small number of intensively researched companies.
Under normal circumstances, the Portfolio invests in at least 80% of its net
assets in equity securities of large-capitalization companies. For purposes of
this policy, net assets includes any borrowings for investment purposes. This
policy will not be changed without 60 days' prior written notice to
shareholders. For these purposes, "large capitalization companies" are those
that, at the time of investment, have market capitalizations within the range of
market capitalizations of companies appearing in the Russell 1000(R) Growth
Index. While the market capitalizations of companies in the Russell 1000(R)
Growth Index ranged from $525 million to almost $354 billion as of September 30,
2004, the Portfolio normally will invest in common stocks of companies with
market capitalizations of at least $5 billion at the time of purchase.
Within the investment framework of the Portfolio, Alliance's Large Cap Growth
Group has responsibility for managing the Portfolio. In selecting the
Portfolio's investments, this Group will follow a structured, disciplined
research and investment process as described below.
Alliance relies heavily on the fundamental analysis and research of its large
internal research staff, which generally follows a primary research universe of
approximately 500 companies. As one of the largest multinational investment
management firms, Alliance has access to considerable information concerning the
companies in its research universe, an in-depth understanding of the products,
services, markets and competition of these companies, and a good knowledge of
their management. Research emphasis is placed on identifying companies that have
strong management, superior industry positions, excellent balance sheets and
superior earnings growth prospects. Alliance also looks for companies whose
substantially above average prospective earnings growth is not fully reflected
in current market valuations.
In managing the Portfolio, Alliance seeks to utilize market volatility
judiciously (assuming no change in company fundamentals), striving to capitalize
on apparently unwarranted price fluctuations, both to purchase or increase
positions on weakness and to sell or reduce overpriced holdings. Under normal
circumstances, the Portfolio will remain substantially invested in equity
securities and will not take significant cash positions for market timing
purposes. During market declines, while adding to positions in favored stocks,
the Portfolio becomes somewhat more aggressive, gradually reducing the number of
companies represented in its portfolio. Conversely, in rising markets, while
reducing or eliminating fully valued positions, the Portfolio becomes somewhat
more conservative, gradually increasing the number of companies represented in
its portfolio. Through this process, Alliance tends to add to positions on price
weakness and sell into price strength, all else being equal and assuming company
fundamentals are intact. Alliance uses this active management strategy to
attempt to add incremental performance while seeking to mitigate risk by
enforcing a buy low, sell high discipline.
AllianceBernstein Real Estate Investment Portfolio
AllianceBernstein Real Estate Investment Portfolio seeks a total return from a
combination of income and long-term growth of capital by investing primarily in
equity securities of U.S. and non-U.S. issuers that are primarily engaged in or
related to the real estate industry.
The Portfolio normally invests at least 80% of its net assets in equity
securities of real estate investment trusts, or REITs, and other real estate
industry companies. For purposes of this policy, net assets includes any
borrowings for investment purposes. This policy will not be changed without 60
days' prior written notice to shareholders. A "real estate industry company" is
a company that derives at least 50% of its gross revenues or net profits from
the ownership, development, construction, financing, management, or sale of
commercial, industrial, or residential real estate or interests in these
properties. The Portfolio invests in equity securities that include common
stock, shares of beneficial interest of REITs, and securities with common stock
characteristics, such as preferred stock or convertible securities ("Real Estate
Equity Securities").
The Portfolio may invest up to 20% of its net assets in (a) securities that
directly or indirectly represent participations in, or are collateralized by and
payable from, mortgage loans secured by real
19
property ("Mortgage-Backed Securities"), such as mortgage pass-through
certificates, real estate mortgage investment conduit certificates ("REMICs")
and collateralized mortgage obligations ("CMOs") and (b) short-term investments.
These securities are described under "Description of Additional Investment
Practices."
In selecting Real Estate Equity Securities, Bernstein's analysis will focus on
determining the degree to which the company involved can achieve sustainable
growth in cash flow and dividend-paying capability. Bernstein believes that the
primary determinant of this capability is the economic viability of property
markets in which the company operates and that the secondary determinant of this
capability is the ability of management to add value through strategic focus and
operating expertise. The Portfolio will purchase Real Estate Equity Securities
when, in the judgment of Bernstein, their market price does not adequately
reflect this potential. In making this determination, Bernstein will take into
account fundamental trends in underlying property markets as determined by
proprietary models, site visits conducted by individuals knowledgeable in local
real estate markets, price-earnings ratios (as defined for real estate
companies), cash flow growth and stability, the relationship between asset value
and market price of the securities, dividend-payment history, and such other
factors that Bernstein may determine from time to time to be relevant. Bernstein
will attempt to purchase for the Portfolio Real Estate Equity Securities of
companies whose underlying portfolios are diversified globally and by property
type.
The Portfolio may invest without limitation in shares of REITs. REITs are pooled
investment vehicles that invest primarily in income producing real estate or
real estate related loans or interests. REITs are generally classified as equity
REITs, mortgage REITs, or a combination of equity and mortgage REITs. Equity
REITs invest the majority of their assets directly in real property and derive
income primarily from the collection of rents. Equity REITs can also realize
capital gains by selling properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
income from the collection of interest payments. Similar to investment companies
such as the Portfolio, REITs are not taxed on income distributed to shareholders
provided they comply with several requirements of the Code. The Portfolio will
indirectly bear its proportionate share of expenses incurred by REITs in which
the Portfolio invests in addition to the expenses incurred directly by the
Portfolio.
The Portfolio's investment strategy with respect to Real Estate Equity
Securities is based on the premise that property market fundamentals are the
primary determinant of growth underlying the performance of Real Estate Equity
Securities. Value and management further distinguishes the most attractive Real
Estate Equity Securities. The Portfolio's research and investment process is
designed to identify those companies with strong property fundamentals and
strong management teams. This process is comprised of real estate market
research, specific property inspection, and securities analysis. Bernstein
believes that this process will result in a portfolio that will consist of Real
Estate Equity Securities of companies that own assets in the most desirable
markets diversified globally and by property type.
To implement the Portfolio's research and investment process, Bernstein has
retained the consulting services of CB Richard Ellis, Inc. ("CBRE"), a publicly
held company and the largest real estate services company in the United States.
CBRE's business includes real estate brokerage, property and facilities
management, and real estate finance and investment advisory activities. As
consultant to Bernstein, CBRE provides access to its proprietary model,
REIT-Score, which analyzes thousands of properties. Using proprietary databases
and algorithms, CBRE analyzes local market rent, expenses, occupancy trends,
market specific transaction pricing, demographic and economic trends, and
leading indicators of real estate supply such as building permits.
Once the universe of real estate industry companies has been distilled through
the market research process, CBRE's local market presence provides the
capability to perform site specific inspections of key properties. This analysis
examines specific location, condition, and sub-market trends. CBRE's use of
locally based real estate professionals provides Bernstein with a window on the
operations of the portfolio companies as information can immediately be put in
the context of local market events. Only those companies whose specific property
portfolios reflect the promise of their general markets will be considered for
investment by the Portfolio.
Bernstein further screens the universe of real estate industry companies by
using rigorous financial models and by engaging in regular contact with
management of targeted companies. Each management's strategic plan and ability
to execute the plan are determined and analyzed. Bernstein makes extensive use
of CBRE's network of industry analysts in order to assess trends in tenant
industries. This information is then used to further evaluate management's
strategic plans. Financial ratio analysis is used to isolate those companies
with the ability to make value-added acquisitions. This information is combined
with property market trends and used to project future earnings potential.
The Portfolio may invest in short-term investments including: corporate
commercial paper and other short-term commercial obligations, in each case rated
or issued by companies with similar securities outstanding that are rated
Prime-1, Aa or better by Moody's or A-1, AA or better by S&P; obligations
(including certificates of deposit, time deposits, demand deposits and bankers'
acceptances) of banks with securities outstanding that are rated Prime-1, Aa or
better by Moody's or A-1, AA or better by S&P; and obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities with
remaining maturities not exceeding 18 months.
The Portfolio may invest in debt securities rated BBB or higher by S&P or Baa or
higher by Moody's or, if not rated, of equivalent credit quality as determined
by Bernstein. The Portfolio expects that it will not retain a debt security that
is downgraded below BBB
20
or Baa or, if unrated, determined by Bernstein to have undergone similar
credit-quality deterioration, subsequent to purchase by the Portfolio.
Because the Portfolio invests a substantial portion of its assets in the real
estate market, it is subject to many of the same risks involved in direct
ownership of real estate. For example, the value of real estate could decline
due to a variety of factors affecting the real estate market generally, such as
overbuilding, increases in interest rates, or declines in rental rates. In
addition, REITs are dependent on the capability of their managers, may have
limited diversification, and could be significantly affected by changes in tax
laws.
The Portfolio's investments in mortgage-backed securities have prepayment risk,
which is the risk that mortgage loans will be prepaid when interest rates
decline and the Portfolio will have to reinvest in securities with lower
interest rates. This risk causes mortgage-backed securities to have
significantly greater price and yield volatility than traditional fixed-income
securities. The Portfolio's investments in REMICs, CMOs and other types of
mortgage-backed securities may be subject to special risks that are described
under "Description of Additional Investment Practices."
AllianceBernstein International Value Portfolio
AllianceBernstein International Value Portfolio seeks long-term growth of
capital by investing primarily in a diversified portfolio of equity securities
of established companies selected from more than 40 industries and from more
than 40 developed and emerging market countries. The Portfolio normally invests
in companies in at least three countries other than United States. These
countries currently include the developed nations in Europe and the Far East,
Canada, Australia and emerging market countries worldwide. The Portfolio's
investment policies emphasize investment in companies that Bernstein determines
are undervalued, using a fundamental value approach. This approach to equity
investing generally defines value by reference to the relationship between a
security's current price and its intrinsic economic value, as measured by
long-term earnings prospects. Bernstein relies heavily on the fundamental
analysis and research of its large internal research staff in making investment
decisions for the Portfolio. Investment decisions are the result of the
multi-step process described below.
Bernstein's fundamental value approach seeks to identify, in the first instance,
a universe of securities that are considered to be undervalued because they are
attractively priced relative to their future earnings power. The research staff
begins with a global research universe of approximately 4,000 international and
emerging market companies. Teams within the research staff cover a given
industry worldwide, to better understand each company's competitive position in
a global context.
Bernstein's staff of company and industry analysts prepares its own earnings
estimates and financial models for each company analyzed. Bernstein identifies
and quantifies the critical variables that influence a business's performance
and analyzes the results in order to forecast each company's long-term
prospects. As one of the largest multi-national investment firms, Alliance and
its Bernstein unit have access to considerable information concerning all of the
companies followed and the staff meets regularly with the management, suppliers,
clients and competitors of companies in the Portfolio. As a result, analysts
have an in-depth understanding of the products, services, markets and
competition of these companies and a good knowledge of the management of most of
the companies in the research universe. A company's financial performance is
typically projected over a full economic cycle, including a trough and a peak,
within the context of forecasts for real economic growth, inflation and interest
rate changes. As a result, forecasts of near term economic events are generally
not of major consequence.
A group of senior investment professionals, including the Portfolio's portfolio
managers, carefully reviews the research process to be sure that the analysts
have appropriately considered key issues facing each company, that forecasts of
a company's future are compatible with its history, and that all forecasts use
consistent analytic frameworks and economic assumptions.
Once Bernstein has applied its fundamental analysis to determine the intrinsic
economic values of each of the companies in its research universe, each company
is then ranked in the order of disparity between its intrinsic economic value
and its stock price, with companies having the greatest disparities receiving
the highest rankings (i.e., being considered the most undervalued).
The Portfolio does not simply purchase the highest-ranked securities. Rather,
Bernstein considers aggregate portfolio characteristics and risk diversification
when deciding how much of each security to purchase for the Portfolio.
Bernstein's team of quantitative analysts builds valuation and risk models to
ensure that the Portfolio is constructed to obtain an effective balance of risk
and return. By evaluating overall regional, country and currency exposures,
sector concentration, degree of undervaluation and other subtle similarities
among investments, Bernstein seeks to minimize overall Portfolio volatility by
favoring those top ranked securities that also tend to diversify the Portfolio's
risk.
The degree to which a security is attractive can change as a result of adverse,
short-term market reactions to recent events or trends. Negative analysts'
earnings-estimate revisions and relative return trends (also called "momentum")
tend to reflect deterioration in a company's operating results and often signal
poor performance to come; positive revisions and return trends tend to reflect
fundamental improvements and positive performance ahead. Bernstein monitors
these factors so as to better time purchases and sales of securities.
Currencies can have a dramatic impact on equity returns, significantly adding to
returns in some years and greatly diminishing them in others. Investment
decisions concerning currencies are made independently of equity investments,
and may
21
be used to hedge the currency exposure resulting from securities positions.
A security generally will be sold when it no longer meets appropriate valuation
criteria. Sale of a stock that has reached its target may be delayed, however,
when earnings expectations and/or momentum are favorable.
AllianceBernstein International Growth Portfolio
AllianceBernstein International Growth Portfolio seeks long-term growth of
capital by investing primarily in the equity securities of a limited number of
large, carefully selected, high-quality non-U.S. companies that Alliance
believes are likely to achieve superior earnings growth. The Portfolio makes
investments based upon their potential for capital appreciation. Current income
is incidental to that objective.
Normally, about 60 companies will be represented in the Portfolio, with the 35
most highly regarded of these companies usually constituting approximately 70%,
and often more, of the Portfolio's net assets. The Portfolio thus differs from
more typical international equity mutual funds by focusing on a relatively small
number of intensively researched companies. Alliance expects that the market
capitalization of the companies represented in the Portfolio will generally be
in excess of $3 billion.
Within the investment framework of the Portfolio, Alliance's International Large
Cap Growth Group has responsibility for managing the Portfolio. In selecting the
Portfolio's investments, this Group will follow a structured, disciplined
research and investment process as described below.
Alliance relies heavily on the fundamental analysis and research of its large
global equity research team situated in numerous locations around the world. Its
global equity analysts follow a research universe of approximately 1200
companies. As one of the largest multinational investment management firms,
Alliance has access to considerable information concerning the companies in its
research universe, an in-depth understanding of the products, services, markets
and competition of these companies, and a good knowledge of their management.
Research emphasis is placed on identifying companies whose superior prospective
earnings growth is not fully reflected in current market valuations.
Alliance continually adds to and deletes from this universe as fundamentals and
valuations change. Alliance's global equity analysts rate companies in three
categories. The performance of each analyst's ratings is an important
determinant of his or her incentive compensation. The equity securities of
"one-rated" companies are expected to significantly outperform the local market
in local currency terms. The majority of the equity securities purchased for the
Portfolio will be selected from the universe of approximately 100 "one-rated"
companies. As noted above, the Portfolio usually invests approximately 70% of
its net assets in the approximately 35 most highly regarded of these companies.
The Portfolio's emphasis upon particular industries or sectors will be a
by-product of the stock selection process rather than the result of assigned
targets or ranges.
The Portfolio diversifies its investments among at least four, and usually
considerably more, countries. To the extent that the Portfolio concentrates more
than 15% of its total assets within one region or country, the Portfolio may be
subject to any special risks associated with that region or country. During such
times, the Portfolio would be subject to a correspondingly greater risk of loss
due to adverse political or regulatory developments, or an economic downturn,
within that country. While the Portfolio may engage in currency hedging programs
in periods in which Alliance perceives extreme exchange rate risk, the Portfolio
normally will not make significant use of currency hedging strategies.
In managing the Portfolio, Alliance seeks to utilize market volatility
judiciously (assuming no change in company fundamentals) to adjust the
Portfolio's positions. To the extent consistent with local market liquidity
considerations, the Portfolio will strive to capitalize on apparently
unwarranted price fluctuations, both to purchase or increase positions on
weakness and to sell or reduce overpriced holdings. Under normal circumstances,
the Portfolio will remain substantially fully invested in equity securities and
will not take significant cash positions for market timing purposes. During
market declines, while adding to positions in favored stocks, the Portfolio
becomes somewhat more aggressive, gradually reducing the number of companies
represented in its portfolio. Conversely, in rising markets, while reducing or
eliminating fully valued positions, the Portfolio becomes somewhat more
conservative, gradually increasing the number of companies represented in its
portfolio. Through this process, Alliance tends to add to positions on price
weakness and sell into price strength, all else being equal and assuming company
fundamentals are intact. Alliance uses this active management strategy to
attempt to add incremental performance while seeking to mitigate risk by
enforcing a buy low, sell high discipline.
AllianceBernstein Short Duration Bond Portfolio
AllianceBernstein Short Duration Bond Portfolio seeks to provide a moderate rate
of income that is subject to taxes. The Portfolio may invest in many types of
debt securities, including corporate bonds, notes, U.S. Government and agency
securities, asset-backed securities, mortgage-related securities, and
inflation-protected securities as well as other securities of U.S. and non-U.S.
issuers. Under normal circumstances, the Portfolio invests at least 80% of its
net assets in fixed-income securities.
The Portfolio may also invest up to 20% of its total assets in debt securities
denominated in currencies other than the US Dollar. The Portfolio may also
invest up to 20% of its assets in hybrid instruments, which have characteristics
of futures, options, currencies and securities.
The Portfolio may invest in medium-quality securities rated A or Baa by Moody's,
or A or BBB by S&P or Fitch. If a security has a split rating, then the
Portfolio will use the rating deemed by Alliance
22
to be the most appropriate under the circumstances. It is expected that the
Portfolio will not retain a security downgraded below BBB by Moody's, S&P and
Fitch, or if unrated, determined by Alliance to have undergone similar credit
quality deterioration.
Unrated securities may be purchased by the Portfolio when Alliance believes that
the financial condition of the issuers of such obligations and the protection
afforded by their terms limit risk to a level comparable to that of rated
securities that are consistent with the Portfolio's investment policies.
Alliance may use interest-rate forecasting to determine the best level of
interest-rate risk at a given time. Alliance may moderately shorten the average
duration of the Portfolio when they expect interest rates to rise and modestly
lengthen the average duration when they anticipate that rates will fall.
The Portfolio seeks to maintain an overall effective duration of one to three
years under normal market conditions. Duration is a measure that relates the
price volatility of a security to changes in interest rates. The duration of a
debt security is the weighted average term to maturity, expressed in years, of
the present value of all future cash flows, including coupon payments and
principal repayments. Thus, by definition, duration is always less than or equal
to full maturity. For example, if the Portfolio's duration is around five years,
it will lose about 5% in principal should interest rates rise 1% and gain about
5% in principal should interest rates fall 1%.
To identify attractive bonds for the Portfolio, Alliance evaluates securities
and sectors to identify the most attractive securities in the market at a given
time--those offering the highest expected return in relation to their risks. In
addition, Alliance may analyze the yield curve to determine the optimum
combination of duration for given degrees of interest-rate risk.
AllianceBernstein Intermediate Duration Bond Portfolio
AllianceBernstein Intermediate Duration Bond Portfolio seeks to provide a
moderate to high rate of income that is subject to taxes. The Portfolio may
invest in many types of debt securities, including corporate bonds, notes, U.S.
Government and agency securities, asset-backed securities, mortgage-related
securities, and inflation-protected securities, as well as other securities of
U.S. and non-U.S. issuers. Under normal circumstances, the Portfolio invests at
least 80% of its net assets in fixed-income securities.
The Portfolio may also invest up to 20% of its total assets in debt securities
denominated in currencies other than the US Dollar. The Portfolio may also
invest up to 20% of its assets in hybrid instruments, which have characteristics
of futures, options, currencies and securities.
The Portfolio may invest in medium-quality securities rated A or Baa by Moody's,
or A or BBB by S&P or Fitch. The Portfolio also may invest up to 10% of its
total assets in debt securities rated BB by national rating agencies at the time
of purchase. The Portfolio will not purchase securities rated below BB- at time
of purchase. If a security has a split rating, then the Portfolio will use the
rating deemed by Alliance to be the most appropriate under the circumstances. It
is expected that the Portfolio will not retain a security downgraded below BB-
by Moody's, S&P and Fitch, or if unrated, determined by Alliance to have
undergone similar credit quality deterioration.
Unrated securities may be purchased by the Portfolio when Alliance believes that
the financial condition of the issuers of such obligations and the protection
afforded by their terms limit risk to a level comparable to that of rated
securities that are consistent with the Portfolio's investment policies.
Alliance may use interest-rate forecasting to determine the best level of
interest-rate risk at a given time. Alliance may moderately shorten the average
duration of the Portfolio when they expect interest rates to rise and modestly
lengthen the average duration when they anticipate that rates will fall.
The Portfolio seeks to maintain an overall effective duration of four to seven
years under normal market conditions. Duration is a measure that relates the
price volatility of a security to changes in interest rates. The duration of a
debt security is the weighted average term to maturity, expressed in years, of
the present value of all future cash flows, including coupon payments and
principal repayments. Thus, by definition, duration is always less than or equal
to full maturity. For example, if the Portfolio's duration is around five years,
it will lose about 5% in principal should interest rates rise 1% and gain about
5% in principal should interest rates fall 1%.
To identify attractive bonds for the Portfolio, Alliance evaluates securities
and sectors to identify the most attractive securities in the market at a given
time--those offering the highest expected return in relation to their risks. In
addition, Alliance may analyze the yield curve to determine the optimum
combination of duration for given degrees of interest-rate risk.
Because prices of intermediate bonds are more sensitive to interest-rate changes
than those of shorter duration bonds, this Portfolio has greater interest-rate
risk than the AllianceBernstein Short Duration Bond Portfolio.
AllianceBernstein TIPS Portfolio
AllianceBernstein TIPS Portfolio seeks a total return that exceeds the rate of
inflation over the long term with income that is subject to taxes by investing
primarily in inflation-indexed bonds of varying maturities issued by U.S. and
non-U.S. governments, their agencies or instrumentalities, and corporations.
Under normal circumstances, the Portfolio will invest at least 80% of its net
assets in these types of securities. For purposes of this policy, net assets
includes any borrowings for investment purposes. This policy will not be changed
without 60 days' prior written notice to shareholders. Assets not invested in
inflation-indexed bonds may be invested in other types of debt securities
including corporate
23
bonds, notes, U.S. Government and agency securities, asset-backed securities and
mortgage-related securities, as well as other securities of U.S. and non-U.S.
issuers.
The Portfolio may invest in medium-quality securities rated A or Baa by Moody's,
or A or BBB by S&P or Fitch. The Portfolio also may invest up to 10% of its
total assets in debt securities rated BB by national rating agencies at the time
of purchase. The Portfolio will not purchase securities rated below BB- at time
of purchase. If a security has a split rating, then the Portfolio will use the
rating deemed by Alliance to be the most appropriate under the circumstances. It
is expected that the Portfolio will not retain a security downgraded below BB-
by Moody's, S&P and Fitch, or if unrated, determined by Alliance to have
undergone similar credit quality deterioration.
Unrated securities may be purchased by the Portfolio when Alliance believes that
the financial condition of the issuers of such obligations and the protection
afforded by their terms limit risk to a level comparable to that of rated
securities that are consistent with the Portfolio's investment policies.
Alliance manages the Portfolio to have similar overall interest rate risk to the
Lehman Brothers U.S. TIPS 1-10 year Index. As of September 30, 2004, the index's
duration was approximately 5.7 years. To calculate average portfolio duration,
Alliance includes the duration of inflation-indexed portfolio securities with
respect to changes in real interest rates and the duration of
non-inflation-indexed portfolio securities with respect to changes in nominal
interest rates.
To identify attractive bonds for the Portfolio, Alliance evaluates securities
and sectors to identify the most attractive securities in the market at a given
time--those offering the highest expected return in relation to their risks. In
addition, Alliance may analyze the yield curve to determine the optimum
combination of duration for given degrees of interest-rate risk.
Inflation-indexed bonds tend to react to changes in real interest rates. In
general, the price of an inflation-protected debt security can fall when real
interest rates rise, and can rise when real interest rates fall. Interest
payments on inflation-protected debt securities can be unpredictable and will
vary as the principal and/or interest is adjusted for inflation. In response to
market, economic, political, or other conditions, Alliance may temporarily use a
different investment strategy for defensive purposes. If Alliance does so,
different factors could affect the Portfolio's performance and the Portfolio may
not achieve its investment objective.
AllianceBernstein Small-Mid Cap Value Portfolio
AllianceBernstein Small-Mid Cap Value Portfolio seeks long-term growth of
capital by investing primarily in a diversified portfolio of equity securities
with relatively smaller market capitalizations as compared to the overall U.S.
equity market. This means that under normal market conditions the Portfolio will
invest at least 80% of its net assets in the equity securities of small- and
mid-cap U.S. companies. For purposes of this policy, net assets includes any
borrowings for investment purposes. This policy will not be changed without 60
days' prior written notice to shareholders. For these purposes, "small- and
mid-cap companies" are those that, at the time of investment, have market
capitalizations within the range of market capitalizations of companies
appearing in the Russell 2500(TM) Value Index. While the market capitalizations
of companies in the Russell 2500(TM) Value Index ranged from $30 million to
approximately $5.2 billion as of September 30, 2004, the Portfolio normally will
not invest in companies with market capitalizations exceeding $5 billion at the
time of purchase. The Portfolio's investment policies emphasize investments in
companies that are determined by Bernstein to be undervalued, using a
fundamental value approach.
Bernstein's fundamental value approach to equity investing generally defines
value by reference to the relationship between a security's current price and
its intrinsic economic value, as measured by long-term earnings prospects. In
making investment decisions for the Portfolio, Bernstein relies heavily on its
fundamental analysis and research of its large internal research staff. These
investment decisions are the result of the multi-step process described below.
Bernstein's fundamental value approach seeks to identify, in the first instance,
a universe of securities that are considered to be undervalued because they are
attractively priced relative to their future earnings power. Bernstein's
research staff of analysts follows a primary research universe of approximately
2500 largely domestic smaller companies. From this universe, Bernstein, on a
daily basis, applies a quantitative screening process that examines a number of
factors, such as the price to earnings ratio, price to book ratio to target
approximately 500 companies for further analysis by the research staff and the
Portfolio's portfolio managers. Bernstein then prepares its own earnings
estimates and financial models for companies within this targeted group.
Forecasting corporate earnings and dividend-paying capability is the heart of
the fundamental value approach. The research staff identifies and quantifies the
critical variables that influence a business's performance and analyzes the
results in order to forecast each company's long-term prospects and expected
returns. As one of the largest multi-national investment firms, Alliance and its
Bernstein unit have access to considerable information concerning all of the
companies followed. Bernstein's research analysts develop an in-depth
understanding of the products, services, markets and competition of those
companies considered for purchase. Analysts also develop a good knowledge of the
management of those companies. A company's financial performance is typically
projected over a full economic cycle, including a trough and a peak, within the
context of forecasts for real economic growth, inflation and interest rate
changes.
The Portfolio's portfolio managers carefully review the research process to be
sure that the analysts have appropriately considered key issues facing each
company, that forecasts of a company's
24
future are compatible with its history, and that all forecasts use consistent
analytic frameworks and economic assumptions. The Portfolio's portfolio
managers, in consultation with the research analysts, also consider aggregate
portfolio characteristics when deciding whether to purchase a particular
security for the Portfolio. Bernstein seeks to manage overall Portfolio
volatility relative to the Russell 2500 by favoring promising securities that
offer the best balance between return and targeted risk. At times, the Portfolio
may favor or disfavor a particular sector compared to that universe of
companies.
To the extent that companies involved in certain sectors may from time to time
constitute a material portion of the universe of companies that comprise the
lowest 20% of the total U.S. market capitalization, such as financial services
and consumer services, the Portfolio may also invest significantly in these
companies.
The degree to which a security is attractive can change as a result of adverse,
short-term market reactions to recent events or trends. Negative analysts'
earnings-estimate revisions and relative return trends (also called "momentum")
tend to reflect deterioration in a company's operating results and often signal
poor performance to come; positive revisions and return trends tend to reflect
fundamental improvements and positive performance ahead. Bernstein monitors
these factors so as to better time purchases and sales of securities.
A security generally will be sold when it no longer meets appropriate valuation
criteria. Sale of a stock that has reached its target may be delayed, however,
when earnings expectations and/or momentum are favorable. Typically, growth in
the size of a company's market capitalization relative to other domestically
traded companies will not cause the Portfolio to dispose of the security.
AllianceBernstein Small-Mid Cap Growth Portfolio
AllianceBernstein Small-Mid Cap Growth Portfolio seeks long-term growth of
capital by investing primarily in a diversified portfolio of equity securities
with relatively smaller market capitalizations as compared to the overall U.S.
equity market. This means that under normal market conditions the Portfolio will
invest at least 80% of its net assets in the equity securities of small- and
mid-cap U.S. companies. For purposes of this policy, net assets includes any
borrowings for investment purposes. This policy will not be changed without 60
days' prior written notice to shareholders. For these purposes, small- and
mid-cap companies are defined as companies that have, at the time of purchase,
market capitalizations in the greater of the range of companies constituting the
Russell 2500(TM) Growth Index or between $1 and $6 billion. The market caps of
companies in the Russell 2500(TM) Growth Index ranged from $67 million to $6.7
billion as of September 30, 2004. Because the Portfolio's definition of small-
to mid-cap companies is dynamic, the upper limit on market capitalization will
change with the markets. The Portfolio's investment policies emphasize
investments in companies with strong earnings growth potential.
Alliance believes strong and improving company fundamentals, especially
earnings, drive superior small- and mid-cap growth stock returns. While Alliance
believes market inefficiencies can exist in the short-term, ultimately a stock's
price comes to reflect its expected earnings growth. Such inefficiencies exist
across the capitalization spectrum, but are more prevalent in the small- and
mid-cap market where there is a general dearth of in-depth research and a
greater inefficiency of information flow relative to the large cap market.
Therefore, Alliance believes that research-driven stock selection is a critical
driver of returns over the long term.
Alliance's Small Cap Growth Team (the "Team") employs a highly disciplined stock
selection process that combines in-depth fundamental research with quantitative
analysis to identify high quality, rapidly growing companies with strong
earnings growth potential. The Team is comprised of experienced sector portfolio
analyst/managers, including resources devoted to quantitative analysis. The
portfolio analyst/managers each have primary responsibility for research and
stock selection within their particular sectors of expertise, but will also draw
on the broader growth resource efforts of Alliance from time to time.
The Team first uses quantitative screens, growth screens, and industry sources
to narrow the initial small- and mid-cap universe of approximately 1,200 stocks
to a small- and mid-cap working universe of approximately 400 stocks. Stocks
within the working universe are then ranked from both a fundamental and a
quantitative standpoint with the rankings normalized by sector.
The Team intensively researches the stocks in the working universe and also
draws upon Alliance's deep fundamental research resources. Meetings with company
managements serve as one of the most critical aspects of this research process.
Thus, the Team typically conducts over 1,000 research meetings with company
managements each year. The Team summarizes their fundamental research findings
by ranking companies based on expected return for a six- to 18 month time
horizon. This fundamental ranking significantly drives our overall view of a
stock's attractiveness.
Additionally, the Team uses a proprietary earnings momentum model to rank stocks
from a quantitative standpoint using inputs that include earnings revision,
earnings momentum, earnings acceleration, and earnings surprise. These inputs
are used to determine the quantitative ranking of all stocks.
The Team combines the fundamental and quantitative rankings to arrive at a final
overall score for each stock. The combined stock ranks fall into one of three
categories--buy, neutral or sell. Typically, the top 30% of these stocks
represent buy candidates. The final portfolio typically holds approximately
60-90 stocks broadly diversified by sector. The portfolio analyst/managers also
consider various factors, including liquidity, fundamental catalysts, and
broader portfolio objectives, when determining which stocks to purchase. Based
upon additional portfolio construction considerations, the Portfolio may invest
up to 10% of its assets in
25
companies not included in its working universe.
The Team's sell discipline is also focused on fundamentals. Security positions
may be reduced or sold because, among other things, a stock has become fully
valued or there has been a change in the company's growth prospects or other
fundamentals. Any stock that falls into the sell category (bottom 30%) will be
sold subject to risk management and market conditions. Typically, growth in the
size of a company's market capitalization relative to other domestically traded
companies will not cause the Portfolio to dispose of the security. The Portfolio
will seek to control its stock-specific risk related to market cap appreciation
by limiting position sizes to no more than 5% of the Portfolio's assets.
The Portfolio invests principally in equity securities, but may also invest from
time to time in preferred stocks. The Portfolio may also invest from time to
time in exchange-traded mutual funds and stock index futures to help manage cash
flows. The Portfolio also may invest in the securities of non-U.S. issuers
listed on a U.S. exchange.
DESCRIPTION OF ADDITIONAL INVESTMENT PRACTICES
Each of the Portfolios also may:
o Write covered put and call options and purchase and sell put and call
options on U.S. and non-U.S. securities, currencies, market and financial
indices, and other derivatives and financial instruments;
o Enter into forward commitments, futures contracts, and options on futures
contracts with respect to U.S. and non-U.S. securities, currencies, and
market and financial indices;
o Enter into foreign currency exchange contracts;
o Enter into swap transactions;
o Enter into repurchase agreements and reverse repurchase agreements;
o Enter into standby commitment agreements;
o Invest in convertible securities;
o Invest up to 15% of its total assets in illiquid securities;
o Invest in the securities of supranational agencies and other
"semi-governmental" issuers;
o Make short sales of securities or maintain a short position, but only if
at all times when a short position is open not more than 33% of the
Portfolio's net assets is held as collateral for such sales; and
o Make secured loans of portfolio securities of up to 33 1/3% of its total
assets.
The AllianceBernstein U.S. Value Portfolio, AllianceBernstein U.S. Large Cap
Growth Portfolio, AllianceBernstein Real Estate Investment Portfolio,
AllianceBernstein International Value Portfolio, AllianceBernstein International
Growth Portfolio, AllianceBernstein Small-Mid Cap Value Portfolio, and the
AllianceBernstein Small-Mid Cap Growth Portfolio each also may:
o Invest up to 20% of its total assets in rights and warrants; and
o Invest in depositary receipts, Exchange Traded Funds ("ETFs"), and other
derivative instruments representing securities of companies or market
indices.
The AllianceBernstein Short Duration Bond Portfolio, AllianceBernstein
Intermediate Duration Bond Portfolio, and the AllianceBernstein TIPS Portfolio
each also may:
o Invest in variable, floating, and inverse floating rate investments; and
o Invest in zero coupon and interest-only or principal-only securities.
This section describes the Portfolios' investment practices and associated
risks. Unless otherwise noted, a Portfolio's use of any of these practices was
specified in the previous section.
Non-Publicly Traded Securities
Each Portfolio may invest in securities that are not publicly traded, including
securities sold pursuant to Rule 144A under the Securities Act of 1933, as
amended ("Rule 144A Securities"). The sale of these securities is usually
restricted under the Federal securities laws, and market quotations may not be
readily available. As a result, a Portfolio may not be able to sell these
securities (other than Rule 144A Securities) unless they are registered under
applicable Federal and state securities laws, or may be able to sell them only
at less than fair market value. Investment in these securities is restricted to
5% of a Portfolio's total assets (not including for these purposes Rule 144A
Securities, to the extent permitted by applicable law) and is also subject to
the Portfolios' restriction against investing more than 15% of total assets in
"illiquid" securities. To the extent permitted by applicable law, Rule 144A
Securities will not be treated as "illiquid" for purposes of the foregoing
restriction so long as such securities meet liquidity guidelines established by
the Trust's Board of Trustees. For additional information, see the SAI.
Real Estate Investment Trusts (REITs)
REITs are pooled investment vehicles that invest primarily in income producing
real estate or real estate related loans or interests. REITs are generally
classified as equity REITs, mortgage REITs, or a combination of equity and
mortgage REITs. Equity REITs invest the majority of their assets directly in
real property and derive income primarily from the collection of rents. Equity
REITs can also realize capital gains by selling properties that have appreciated
in value. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments. Similar to
investment companies such as the Portfolios, REITs are not taxed on income
distributed to shareholders provided they comply with several requirements of
the Code. A Portfolio will indirectly bear its proportionate share of expenses
incurred by REITs in which the Portfolio invests in addition to the expenses
incurred directly by the Portfolio.
Mortgage-Backed Securities and Related Risks
Interest and principal payments (including prepayments) on the
26
mortgages underlying mortgage-backed securities are passed through to the
holders of the securities. As a result of the 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. Prepayments occur when the mortgagor on a mortgage prepays the
remaining principal before the mortgage's scheduled maturity date. Because the
prepayment characteristics of the underlying mortgages vary, it is impossible to
predict accurately the realized yield or average life of a particular issue of
pass-through certificates. Prepayments are important because of their effect on
the yield and price of the mortgage-backed securities. During periods of
declining interest rates, prepayments can be expected to accelerate and a
Portfolio that invests in these securities would be required to reinvest the
proceeds at the lower interest rates then available. Conversely, during periods
of rising interest rates, a reduction in prepayments may increase the effective
maturity of the securities, subjecting them to a greater risk of decline in
market value in response to rising interest rates. In addition, prepayments of
mortgages underlying securities purchased at a premium could result in capital
losses.
Mortgage-Backed Securities include mortgage pass-through certificates and
multiple-class pass-through securities, such as REMIC pass-through certificates,
CMOs and stripped mortgage-backed securities ("SMBS"), and other types of
Mortgage-Backed Securities that may be available in the future.
Variable, Floating and Inverse Floating Rate Securities
These securities have interest rates that are reset at periodic intervals,
usually by reference to some interest rate index or market interest rate. Some
of these securities are backed by pools of mortgage loans. Although the rate
adjustment feature may act as a buffer to reduce sharp changes in the value of
these securities, they are still subject to changes in value based on changes in
market interest rates or changes in the issuer's creditworthiness. Because the
interest rate is reset only periodically, changes in the interest rate on these
securities may lag behind changes in prevailing market interest rates. Also,
some of these securities (or the underlying mortgages) are subject to caps or
floors that limit the maximum change in the interest rate during a specified
period or over the life of the security.
Asset-Backed Securities
Asset-backed securities (unrelated to first mortgage loans) represent fractional
interests in pools of leases, retail installment loans, revolving credit
receivables, and other payment obligations, both secured and unsecured. These
assets are generally held by a trust and payments of principal and interest or
interest only are passed through monthly or quarterly to certificate holders and
may be guaranteed up to certain amounts by letters of credit issued by a
financial institution affiliated or unaffiliated with the trustee or originator
of the trust.
Like mortgages underlying mortgage-backed securities, underlying automobile
sales contracts or credit card receivables are subject to prepayment, which may
reduce the overall return to certificate holders. Certificate holders may also
experience delays in payment on the certificates if the full amounts due on
underlying sales contracts or receivables are not realized by the trust because
of unanticipated legal or administrative costs of enforcing the contracts or
because of depreciation or damage to the collateral (usually automobiles)
securing certain contracts, or other factors.
Currency Swaps
Currency swaps involve the individually negotiated exchange by a Portfolio with
another party of a series of payments in specified currencies. A currency swap
may involve the delivery at the end of the exchange period of a substantial
amount of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. A Portfolio will not enter into any currency swap unless the credit
quality of the unsecured senior debt or the claims-paying ability of the
counterparty is rated in the highest rating category of at least one nationally
recognized rating organization at the time of entering into the transaction. If
there is a default by the counterparty to the transaction, the Portfolio will
have contractual remedies under the transaction agreements.
Convertible Securities
Prior to conversion, convertible securities have the same general
characteristics as non-convertible debt securities, which generally provide a
stable stream of income with yields that are generally higher than those of
equity securities of the same or similar issuers. The price of a convertible
security will normally vary with changes in the price of the underlying equity
security, although the higher yield tends to make the convertible security less
volatile than the underlying equity security. As with debt securities, the
market value of convertible securities tends to decrease as interest rates rise
and increase as interest rates decline. While convertible securities generally
offer lower interest or dividend yields than non-convertible debt securities of
similar quality, they offer investors the potential to benefit from increases in
the market price of the underlying common stock. Convertible debt securities
that are rated Baa or lower by Moody's or BBB or lower by S&P or Fitch and
comparable unrated securities as determined by Alliance may share some or all of
the risks of non-convertible debt securities with those ratings.
Zero-Coupon and Payment-in-Kind Bonds
Zero-coupon bonds are issued at a significant discount from their principal
amount in lieu of paying interest periodically. Payment-in-kind bonds allow the
issuer to make current interest payments on the bonds in additional bonds.
Because zero-coupon bonds and payment-in-kind bonds do not pay current interest
in cash, their value is generally subject to greater fluctuation in response to
changes in market interest rates than bonds that pay interest in cash currently.
Both zero-coupon and payment-in-kind bonds allow an issuer to avoid the need to
generate cash to meet current interest payments. These bonds may involve greater
credit risks than bonds paying interest currently. Although these bonds do not
27
pay current interest in cash, a Portfolio is nonetheless required to accrue
interest income on such investments and to distribute such amounts at least
annually to shareholders. Thus, a Portfolio could be required at times to
liquidate other investments in order to satisfy its dividend requirements.
Options and Futures
Options on Securities
An option gives the purchaser of the option, upon payment of a premium, the
right to deliver to (in the case of a put) or receive from (in the case of a
call) the writer a specified amount of a security on or before a fixed date at a
predetermined price. A call option written by a Portfolio is "covered" if the
Portfolio owns the underlying security, has an absolute and immediate right to
acquire that security upon conversion or exchange of another security it holds,
or holds a call option on the underlying security with an exercise price equal
to or less than that of the call option it has written. A put option written by
a Portfolio is covered if the Portfolio holds a put option on the underlying
securities with an exercise price equal to or greater than that of the put
option it has written.
A call option is used for cross-hedging purposes if a Portfolio does not own the
underlying security, and is designed to provide a hedge against a decline in
value in another security that the Portfolio owns or has the right to acquire. A
Portfolio 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 an option, a Portfolio would be in a position to realize a gain
if, during the option period, the price of the underlying security increased (in
the case of a call) or decreased (in the case of a put) by an amount in excess
of the premium paid; otherwise the Portfolio would experience a loss equal to
the premium paid for the option.
If an option written by a Portfolio were exercised, the Portfolio would be
obligated to purchase (in the case of a put) or sell (in the case of a call) the
underlying security at the exercise price. The risk involved in writing an
option is that, if the option were exercised, the underlying security would then
be purchased or sold by the Portfolio at a disadvantageous price. Entering into
a closing transaction (i.e., by disposing of the option prior to its exercise)
could reduce these risks. A Portfolio retains the premium received from writing
a put or call option whether or not the option is exercised. The writing of
covered call options could result in increases in a Portfolio's turnover rate,
especially during periods when market prices of the underlying securities
appreciate. Options purchased or written by a Portfolio in negotiated
transactions are illiquid and it may not be possible for the Portfolio to effect
a closing transaction at an advantageous time.
Options on Securities Indices
An option on a securities index is similar to an option on a security except
that, rather than the right to take or make delivery of a security at a
specified price, an option on a securities index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the chosen index is greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option.
Options on Non-U.S. Currencies
As in the case of other kinds of options, the writing of an option on a currency
constitutes only a partial hedge, up to the amount of the premium received, and
a Portfolio could be required to purchase or sell non-U.S. currencies at
disadvantageous exchange rates and incur losses. The purchase of an option on a
currency may constitute an effective hedge against fluctuations in exchange
rates although, in the event of rate movements adverse to a Portfolio's
position, the Portfolio may forfeit the entire amount of the premium plus
related transaction costs. For Portfolios that may invest in options on non-U.S.
currencies, see the Portfolios' SAI for further discussion of the use, risks,
and costs of options on non-U.S. currencies.
Futures Contracts and Options on Futures Contracts
A "sale" of a futures contract means the acquisition of a contractual obligation
to deliver the securities or non-U.S. currencies or other commodity called for
by the contract at a specified price on a specified date. A "purchase" of a
futures contract means the incurring of an obligation to acquire the securities,
non-U.S. currencies or other commodity called for by the contract at a specified
price on a specified date. The purchaser of a futures contract on an index
agrees to take or make delivery of an amount of cash equal to the difference
between a specified dollar multiple of the value of the index on the expiration
date of the contract ("current contract value") and the price at which the
contract was originally struck. No physical delivery of the securities
underlying the index is made.
Options on futures contracts are options that, upon exercise, call for the
delivery of futures contracts (or cash payments based on the value of futures
contracts). Options on futures contracts written or purchased by the Portfolio
will be traded on exchanges worldwide or over the counter. These investment
techniques will be used only to hedge against anticipated future changes in
market conditions and interest or exchange rates which otherwise might either
adversely affect the value of the Portfolio's securities or adversely affect the
prices of securities which the Portfolio intends to purchase at a later date.
A Portfolio will engage in transactions in futures contracts and options on
futures contracts only to the extent the transactions constitute bona fide
hedging or other permissible transactions in accordance with the rules and
regulations of the Commodity Futures Trading Commission. A Portfolio will not
enter into any futures contracts or options on futures contracts if immediately
thereafter the market values of the outstanding futures contracts of the
Portfolio and the currencies and futures contracts subject to
28
outstanding options written by the Portfolio would exceed 50% of its total
assets.
General
The successful use of the investment practices described above draws upon
Alliance's special skills and experience and usually depends on Alliance's
ability to forecast price movements, interest rates, or currency exchange rate
movements correctly. Should interest rates, prices or exchange rates move
unexpectedly, a Portfolio may not achieve the anticipated benefits of the
transactions or may realize losses and thus be in a worse position than if such
strategies had not been used. Unlike many exchange-traded futures contracts and
options on futures contracts, there are no daily price fluctuation limits for
certain options and forward contracts, and adverse market movements could
therefore continue to an unlimited extent over a period of time. In addition,
the correlation between movements in the prices of futures contracts, options
and forward contracts and movements in the prices of the securities and
currencies hedged or used for cover will not be perfect and could produce
unanticipated losses.
A Portfolio's ability to dispose of its position in futures contracts, options,
and forward contracts depends on the availability of liquid markets in such
instruments. Markets in options and futures with respect to a number of types of
securities and currencies are relatively new and still developing, and there is
no public market for forward contracts. It is impossible to predict the amount
of trading interest that may exist in various types of futures contracts,
options, and forward contracts. If a secondary market does not exist for an
option purchased or written by a Portfolio, 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 Portfolio would have to be exercised in
order for the Portfolio to realize any profit and (ii) the Portfolio may not be
able to sell currencies or portfolio securities covering an option written by
the Portfolio until the option expires or it delivers the underlying security,
futures contract or currency upon exercise. Therefore, no assurance can be given
that the Portfolios will be able to utilize these instruments effectively. In
addition, a Portfolio's ability to engage in options, futures and forward
contract transactions may be limited by tax considerations and the use of
certain hedging techniques may adversely impact the characterization of income
to a Portfolio for U.S. federal income tax purposes.
Loans of Portfolio Securities
Each Portfolio may lend portfolio securities amounting to not more than 33 1/3%
of its total assets. A principal risk in lending portfolio securities, as with
other extensions of credit, consists of the possible loss of rights in the
collateral should the borrower fail financially. In addition, the Portfolio may
be exposed to the risk that the sale of any collateral realized upon the
borrower's default will not yield proceeds sufficient to replace the loaned
securities. In determining whether to lend securities to a particular borrower,
Alliance will consider all relevant facts and circumstances, including the
creditworthiness of the borrower. While securities are on loan, the borrower
will pay the Portfolio any income from the securities. The Portfolio may invest
any cash collateral in portfolio securities and earn additional income or
receive an agreed-upon amount of income from a borrower who has delivered
equivalent collateral. Any such investment of cash collateral will be subject to
the Portfolio's investment risks. Each Portfolio will have the right to regain
record ownership of loaned securities or equivalent securities in order to
exercise ownership rights such as voting rights, subscription rights and rights
to dividends, interest, or distributions. A Portfolio may pay reasonable
finders', administrative, and custodial fees in connection with a loan.
Repurchase Agreements
A repurchase agreement arises when a buyer purchases a security and
simultaneously agrees to resell it to the vendor at an agreed-upon future date,
normally a day or a few days later. The resale price is greater than the
purchase price, reflecting an agreed-upon interest rate for the period the
buyer's money is invested in the security. Such agreements permit a Portfolio to
keep all of its assets at work while retaining "overnight" flexibility in
pursuit of investments of a longer-term nature. If a vendor defaults on its
repurchase obligation, a Portfolio would suffer a loss to the extent that the
proceeds from the sale of the collateral were less than the repurchase price. If
a vendor goes bankrupt, a Portfolio might be delayed in, or prevented from,
selling the collateral for its benefit. Alliance monitors the creditworthiness
of the vendors with which the Portfolio enters into repurchase agreements.
Rights and Warrants
A Portfolio will invest in rights or warrants only if Alliance deems the
underlying equity securities themselves appropriate for inclusion in the
Portfolio. Rights and warrants entitle the holder to buy equity securities at a
specific price for a specific period of time. Rights are similar to warrants
except that they have a substantially shorter duration. Rights and warrants may
be considered more speculative than certain other types of investments in that
they do not entitle a holder to dividends or voting rights with respect to the
underlying securities nor do they represent any rights in the assets of the
issuing company. The value of a right or warrant does not necessarily change
with the value of the underlying security, although the value of a right or
warrant may decline because of a decrease in the value of the underlying
security, the passage of time or a change in perception as to the potential of
the underlying security, or any combination of these factors. If the market
price of the underlying security is below the exercise price of the warrant on
the expiration date, the warrant will expire worthless. Moreover, a right or
warrant ceases to have value if it is not exercised prior to the expiration
date.
Forward Commitments
Forward commitments for the purchase or sale of securities may include purchases
on a "when-issued" basis or purchases or sales on a "delayed delivery" basis. In
some cases, a forward commitment may be conditioned upon the occurrence of a
subsequent event, such as approval and consummation of a merger, corporate
reorganization or debt restructuring (i.e., a
29
"when, as and if issued" trade).
When forward commitment transactions are negotiated, the price 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 three months
after the transaction, but a Portfolio may negotiate settlements beyond three
months. Securities purchased or sold under a forward commitment are subject to
market fluctuations and no interest or dividends accrue to the purchaser prior
to the settlement date.
The use of forward commitments enables a Portfolio to protect against
anticipated changes in exchange rates, interest rates and/or prices. If Alliance
were to forecast incorrectly the direction of exchange rate, interest rate, and
price movements, a Portfolio might be required to complete such when-issued or
forward transactions at prices inferior to the then current market values.
When-issued securities and forward commitments may be sold prior to the
settlement date, but a Portfolio enters into when-issued and forward commitments
only with the intention of actually receiving securities or delivering them, as
the case may be. If a Portfolio chooses to dispose of the right to acquire a
when-issued security prior to its acquisition or dispose of its right to deliver
or receive against a forward commitment, it may incur a gain or loss. Any
significant commitment of Portfolio assets to the purchase of securities on a
"when, as and if issued" basis may increase the volatility of the Portfolio's
net asset value.
Forward Non-U.S. Currency Exchange Contracts
A Portfolio may purchase or sell forward non-U.S. currency exchange contracts to
minimize the risk of adverse changes in the relationship between the U.S. Dollar
and other currencies. A forward non-U.S. currency exchange contract is an
obligation to purchase or sell a specific currency for an agreed price at a
future date, and is individually negotiated and privately traded.
A Portfolio may enter into a forward non-U.S. currency exchange contract, for
example, when it enters into a contract for the purchase or sale of a security
denominated in a non-U.S. currency in order to "lock in" the U.S. Dollar price
of the security ("transaction hedge"). A Portfolio will not engage in
transaction hedges with respect to the currency of a particular country to an
extent greater than the aggregate amount of the Portfolio's transactions in that
currency. When Alliance believes that a non-U.S. currency may suffer a
substantial decline against the U.S. Dollar, a Portfolio may enter into a
forward sale contract to sell an amount of that non-U.S. currency approximating
the value of some or all of the Portfolio's securities denominated in such
non-U.S. currency, or when Alliance believes that the U.S. Dollar may suffer a
substantial decline against a non-U.S. currency, a Portfolio may enter into a
forward purchase contract to buy that non-U.S. currency for a fixed dollar
amount ("position hedge"). A Portfolio will not position hedge with respect to a
particular currency to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated or
quoted in that currency. Instead of entering into a position hedge, a Portfolio
may, in the alternative, enter into a forward non-U.S. currency exchange
contract to sell a different non-U.S. currency for a fixed U.S. Dollar amount
where the Portfolio believes that the U.S. Dollar value of the currency to be
sold pursuant to the forward non-U.S. currency exchange contract will fall
whenever there is a decline in the U.S. Dollar value of the currency in which
portfolio securities of the Portfolio are denominated ("cross-hedge").
Unanticipated changes in currency prices may result in poorer overall
performance for the Portfolio than if it had not entered into such forward
non-U.S. currency exchange contracts.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for a Portfolio to hedge against a devaluation that is so
generally anticipated that the Portfolio is not able to contract to sell the
currency at a price above the devaluation level it anticipates.
Illiquid Securities
Illiquid securities generally include: (i) direct placements or other securities
that are subject to legal or contractual restrictions on resale or for which
there is no readily available market (e.g., when trading in the security is
suspended or, in the case of unlisted securities, when market makers do not
exist or will not entertain bids or offers), including many individually
negotiated currency swaps and any assets used to cover currency swaps and most
privately negotiated investments in state enterprises that have not yet
conducted an initial equity offering, (ii) over-the-counter options and assets
used to cover over-the-counter options, and (iii) repurchase agreements not
terminable within seven days.
Because of the absence of a trading market for illiquid securities, a Portfolio
may not be able to realize their full value upon sale. Alliance will monitor the
liquidity of a Portfolio's investments in illiquid securities. Rule 144A
securities will not be treated as "illiquid" for purposes of this limit on
investments if they meet certain liquidity guidelines established by a
Portfolio.
A Portfolio that invests in securities for which there is no ready market may
not be able to readily sell such securities. Such securities are unlike
securities that are traded in the open market and can be expected to be sold
immediately if the market is adequate. The sale price of illiquid securities may
be lower or higher than Alliance's most recent estimate of their fair value.
Generally, less public information is available about the issuers of such
securities than about companies whose securities are traded on an exchange. To
the extent that these securities are the securities of non-U.S. issuers, there
is no law in many of the countries in which a Portfolio may invest similar to
the Securities Act requiring an issuer to register the sale of securities with a
governmental agency or imposing legal restrictions on resales of securities,
either as to length of time the securities may be held or manner of resale.
However, there may be contractual restrictions on resales of non-publicly traded
securities of non-U.S. issuers.
30
Portfolio Turnover
The Portfolios are actively managed and, in some cases in response to market
conditions, a Portfolio's turnover may exceed 100%. A higher rate of portfolio
turnover increases brokerage and other expenses, which must be borne by the
Portfolio and its shareholders.
Future Developments
A Portfolio may, following written notice to its shareholders, take advantage of
other investment practices that are not currently contemplated for use by the
Portfolio, or are not available but may yet be developed, to the extent such
investment practices are consistent with the Portfolio's investment objective
and legally permissible for the Portfolio. Such investment practices, if they
arise, may involve risks that exceed those involved in the activities described
above.
Temporary Defensive Position
For temporary defensive purposes, each Portfolio may reduce its position in
equity securities or intermediate- and long-duration debt securities and invest
in, without limit, certain types of short-term, liquid, high grade or high
quality (depending on the Portfolio) debt securities. These securities may
include U.S. Government securities, qualifying bank deposits, money market
instruments, prime commercial paper and other types of short-term debt
securities including notes and bonds. For Portfolios that may invest in non-U.S.
countries, such securities also may include short-term, non-U.S.-currency
denominated securities of the type mentioned above issued by non-U.S.
governmental entities, companies, and supranational organizations. While the
Portfolios are investing for temporary defensive purposes, they may not meet
their investment objectives.
ADDITIONAL RISK CONSIDERATIONS
Investment in the Portfolios involves the special risk considerations described
below. Certain of these risks may be heightened when investing in emerging
markets.
Portfolio Reallocation Risk
From time to time, the Portfolios may experience relatively large investments or
redemptions due to reallocations or rebalancings by the Portfolios' feeder
funds, as recommended by Alliance. These transactions will affect the Portfolios
since Portfolios that experience redemptions as a result of reallocations or
rebalancings may have to sell portfolio securities and since Portfolios that
receive additional cash will have to invest such cash. While it is impossible to
predict the overall impact of these transactions over time, there could be
adverse effects on Portfolio performance to the extent that the Portfolios may
be required to sell securities or invest cash at times when they would not
otherwise do so. These transactions could also accelerate the realization of
taxable income if sales of securities resulted in gains and could also increase
transaction costs. Alliance will at all times monitor the impact of
reallocations or rebalancings on the Portfolios, but Alliance may nevertheless
face conflicts in fulfilling its dual responsibilities to the Portfolios and the
funds that invest in them.
Currency Considerations
Those Portfolios that invest some portion of their assets in securities
denominated in, and receive revenues in, foreign currencies will be adversely
affected by reductions in the value of those currencies relative to the U.S.
Dollar. These changes will affect a Portfolio's net assets, distributions and
income. If the value of the foreign currencies in which a Portfolio receives
income falls relative to the U.S. Dollar between receipt of the income and the
making of Portfolio distributions, a Portfolio may be required to liquidate
securities in order to make distributions if the Portfolio has insufficient cash
in U.S. Dollars to meet the distribution requirements that the Portfolio must
satisfy to qualify as a regulated investment company for federal income tax
purposes. Similarly, if an exchange rate declines between the time a Portfolio
incurs expenses in U.S. Dollars and the time cash expenses are paid, the amount
of the currency required to be converted into U.S. Dollars in order to pay
expenses in U.S. Dollars could be greater than the equivalent amount of such
expenses in the currency at the time they were incurred. In light of these
risks, a Portfolio may engage in certain currency hedging transactions, as
described above, which involve certain special risks.
Securities of Non-U.S. Issuers
The securities markets of many foreign countries are relatively small, with the
majority of market capitalization and trading volume concentrated in a limited
number of companies representing a small number of industries. Consequently, a
Portfolio whose investments includes securities of non-U.S. issuers may
experience greater price volatility and significantly lower liquidity than a
portfolio invested solely in equity securities of U.S. companies. These markets
may be subject to greater influence by adverse events generally affecting the
market, and by large investors trading significant blocks of securities, than is
usual in the United States. Securities settlements may in some instances be
subject to delays and related administrative uncertainties.
Certain foreign countries require governmental approval prior to investments by
foreign persons or limit investment by foreign persons to only a specified
percentage of an issuer's outstanding securities or a specific class of
securities that may have less advantageous terms (including price) than
securities of the company available for purchase by nationals. These
restrictions or controls may at times limit or preclude investment in certain
securities and may increase the costs and expenses of a Portfolio. In addition,
the repatriation of investment income, capital, or the proceeds of sales of
securities from certain countries is controlled under regulations, including in
some cases the need for certain advance government notification or authority. If
a deterioration occurs in a country's balance of payments, the country could
impose temporary or indefinite restrictions on foreign capital remittances.
A Portfolio also could be adversely affected by delays in, or a refusal to
grant, any required governmental approval for repatriation, as well as by the
application of other restrictions on
31
investment. Investing in local markets may require a Portfolio to adopt special
procedures that may involve additional costs to a Portfolio These factors may
affect the liquidity of a Portfolio's investments in any country and Alliance
will monitor the effect of any such factor or factors on a Portfolio's
investments. Furthermore, transaction costs including brokerage commissions for
transactions both on and off the securities exchanges in many foreign countries
are generally higher than in the United States.
Issuers of securities in foreign jurisdictions are generally not subject to the
same degree of regulation as are U.S. issuers with respect to such matters as
insider trading rules, restrictions on market manipulation, shareholder proxy
requirements, and timely disclosure of information. The reporting, accounting
and auditing standards of foreign countries may differ, in some cases
significantly, from U.S. standards in important respects and less information
may be available to investors in securities of non-U.S. issuers than to
investors in U.S. securities. Substantially less information is publicly
available about certain non-U.S. issuers than is available about U.S. issuers.
The economies of individual non-U.S. countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product or gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency, and balance of payments position. Nationalization,
expropriation or confiscatory taxation, currency blockage, political changes,
government regulation, political or social instability, revolutions, wars or
diplomatic developments could affect adversely the economy of a non-U.S. country
and the Portfolio's investments. In such events, a Portfolio could lose its
entire investment in the country involved. In addition, laws in non-U.S.
countries governing business organizations, bankruptcy and insolvency may
provide less protection to security holders such as the Portfolio than that
provided by U.S. laws.
Non-U.S. Fixed-Income Obligations
To the extent that they invest in non-U.S. fixed-income obligations, certain of
the Portfolios are subject to increased credit risk because of the difficulties
of requiring non-U.S. entities, including issuers of sovereign debt, to honor
their contractual commitments, and because a number of non-U.S. governments and
other issuers are already in default. In certain countries, legal remedies
available to investors may be more limited than those available with respect to
investments in the United States. As a result, a Portfolio may be unable to
obtain or enforce judgments against non-U.S. entities.
Fixed-Income Securities
The value of each Portfolio's shares will fluctuate with the value of its
investments. The value of each Portfolio's investments in fixed-income
securities will change as the general level of interest rates fluctuates. During
periods of falling interest rates, the values of fixed-income securities
generally rise. Conversely, during periods of rising interest rates, the values
of fixed-income securities generally decline.
In periods of increasing interest rates, each of the Portfolios may, to the
extent it holds mortgage-backed securities, be subject to the risk that the
average dollar-weighted maturity of the Portfolio of debt or other fixed-income
securities may be extended as a result of lower than anticipated prepayment
rates.
Inflation-Indexed Bonds
Inflation-indexed bonds are fixed income securities whose principal value is
periodically adjusted according to the rate of inflation. If the index measuring
inflation falls, the principal value of inflation-indexed bonds will be adjusted
downward, and consequently the interest payable on these securities (calculated
with respect to a smaller principal amount) will be reduced. Repayment of the
original bond principal upon maturity (as adjusted for inflation) is guaranteed
in the case of U.S. Treasury inflation-indexed bonds. For bonds that do not
provide a similar guarantee, the adjusted principal value of the bond repaid at
maturity may be less than the original principal. The value of inflation-indexed
bonds is expected to change in response to changes in real interest rates. Real
interest rates are tied to the relationship between nominal interest rates and
the rate of inflation. If nominal interest rates increase at a faster rate than
inflation, real interest rates may rise, leading to a decrease in value of
inflation-indexed bonds. Short-term increases in inflation may lead to a decline
in value. Any increase in the principal amount of an inflation-indexed bond will
be considered taxable ordinary income, even though investors do not receive
their principal until maturity.
Investment in Fixed-Income Securities Rated Baa and BBB
Securities rated Baa or BBB or below are considered to have speculative
characteristics and are subject to greater risk of loss of principal and
interest than higher-rated securities. Sustained periods of deteriorating
economic conditions or of rising interest rates are more likely to lead to a
weakening in the issuer's capacity to pay interest and repay principal than in
the case of higher-rated securities.
Investment in Lower-Rated Fixed-Income Securities
Lower-rated securities are subject to greater risk of loss of principal and
interest than higher-rated securities. They are also generally considered to be
subject to greater market risk than higher-rated securities, and the capacity of
issuers of lower-rated securities to pay interest and repay principal is more
likely to weaken than is that of issuers of higher-rated securities in times of
deteriorating economic conditions or rising interest rates. In addition,
lower-rated securities may be more susceptible to real or perceived adverse
economic conditions than investment grade securities. Securities rated Ba or BB
are judged to have speculative elements or to be predominantly speculative with
respect to the issuer's ability to pay interest and repay principal. Such
securities may have small assurance of interest and principal payments.
Unrated Securities
Unrated securities will also be considered for investment by the
AllianceBernstein Short Duration Bond Portfolio,
32
AllianceBernstein Intermediate Duration Bond Portfolio and AllianceBernstein
TIPS Portfolio when Alliance believes that the financial condition of the
issuers of such securities, or the protection afforded by the terms of the
securities themselves, limits the risk to a particular Portfolio to a degree
comparable to that of rated securities which are consistent with the Portfolio's
objective and policies.
The Real Estate Industry
Although AllianceBernstein Real Estate Investment Portfolio does not invest
directly in real estate, it invests primarily in Real Estate Equity Securities
and has a policy of concentration of its investments in the real estate
industry. Therefore, an investment in the Portfolio is subject to certain risks
associated with the direct ownership of real estate and with the real estate
industry in general. These risks include, among others: possible declines in the
value of real estate; risks related to global and local economic conditions;
possible lack of availability of mortgage funds; overbuilding; extended
vacancies of properties; increases in competition, property taxes and operating
expenses; changes in zoning laws; costs resulting from the clean-up of, and
liability to third parties for damages resulting from, environmental problems;
casualty or condemnation losses; uninsured damages from floods, earthquakes or
other natural disasters; limitations on and variations in rents; and changes in
interest rates. To the extent that assets underlying the Portfolio's investments
are concentrated geographically, by property type or in certain other respects,
the Portfolio may be subject to certain of the foregoing risks to a greater
extent.
In addition, if AllianceBernstein Real Estate Investment Portfolio receives
rental income or income from the disposition of real property acquired as a
result of a default on securities the Portfolio owns, the receipt of such income
may adversely affect the Portfolio's ability to retain its tax status as a
regulated investment company. Investments by the Portfolio in securities of
companies providing mortgage servicing will be subject to the risks associated
with refinancings and their impact on servicing rights.
REITs. Investing in REITs involves certain unique risks in addition to those
risks associated with investing in the real estate industry in general. Equity
REITs may be affected by changes in the value of the underlying property owned
by the REITs, while mortgage REITs may be affected by the quality of any credit
extended. REITs are dependent upon management skills, are not diversified, and
are subject to heavy cash flow dependency, default by borrowers and
self-liquidation. REITs are also subject to the possibilities of failing to
qualify for tax-free pass-through of income under the Code and failing to
maintain their exemptions from registration under the 1940 Act.
REITs (especially mortgage REITs) also are subject to interest rate risks. When
interest rates decline, the value of a REIT's investment in fixed-rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT's investment in fixed-rate obligations can be expected to
decline. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REIT's investments in such loans will gradually
align themselves to reflect changes in market interest rates, causing the value
of such investments to fluctuate less dramatically in response to interest rate
fluctuations than would investments in fixed rate obligations.
Investing in REITs involves risks similar to those associated with investing in
small capitalization companies. REITs may have limited financial resources, may
trade less frequently and in a limited volume and may be subject to more abrupt
or erratic price movements than larger company securities. Historically, small
capitalization stocks, such as REITs, have been more volatile in price than
larger capitalization stocks.
To the extent that the portfolio invests in global REITs, the portfolio will
also be subject to non-U.S. issuer risk and currency risk.
Mortgage-Backed Securities. Investing in Mortgage-Backed Securities involves
certain unique risks in addition to those risks associated with investment in
the real estate industry in general. These risks include the failure of a
counterparty to meet its commitments, adverse interest rate changes and the
effects of prepayments on mortgage cash flows. When interest rates decline, the
value of an investment in fixed rate obligations can be expected to rise.
Conversely, when interest rates rise, the value of an investment in fixed rate
obligations can be expected to decline. In contrast, as interest rates on
adjustable rate mortgage loans are reset periodically, yields on investments in
such loans will gradually align themselves to reflect changes in market interest
rates, causing the value of such investments to fluctuate less dramatically in
response to interest rate fluctuations than would investments in fixed rate
obligations.
Further, the yield characteristics of Mortgage-Backed Securities differ from
those of traditional fixed-income securities. The major differences typically
include more frequent interest and principal payments (usually monthly), the
adjustability of interest rates, and the possibility that prepayments of
principal may be made substantially earlier than their final distribution dates.
Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social, and other factors, and cannot be
predicted with certainty. Both adjustable rate mortgage loans and fixed rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment and to a lesser rate of principal
prepayments in an increasing interest rate environment. Early payment associated
with Mortgage-Backed Securities causes these securities to experience
significantly greater price and yield volatility than that experienced by
traditional fixed-income securities. Under certain interest rate and prepayment
rate scenarios, the Portfolio may fail to recoup fully its investment in
Mortgage-Backed Securities notwithstanding any direct or indirect governmental
or agency guarantee. When the Portfolio reinvests amounts representing payments
and unscheduled prepayments of principal, it may
33
receive a rate of interest that is lower than the rate on existing adjustable
rate mortgage pass-through securities. Thus, Mortgage-Backed Securities, and
adjustable rate mortgage pass-through securities in particular, may be less
effective than other types of U.S. Government securities as a means of "locking
in" interest rates.
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MANAGEMENT OF THE PORTFOLIOS
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INVESTMENT ADVISER
Each Portfolio's Adviser is Alliance Capital Management L.P. (the "Adviser"),
1345 Avenue of the Americas, New York, NY 10105. Alliance is a leading
international investment adviser supervising client accounts with assets as of
September 30, 2004 totaling approximately $487 billion (of which approximately
$162 billion represented assets of investment companies). As of September 30,
2004, Alliance managed retirement assets for many of the largest public and
private employee benefit plans (including 39 of the nation's FORTUNE 100
companies), for public employee retirement funds in 40 states, for investment
companies, and for foundations, endowments, banks and insurance companies
worldwide. The 50 registered investment companies managed by Alliance,
comprising 125 separate investment portfolios, currently have approximately 6.8
million shareholder accounts.
Alliance provides investment advisory services and order placement facilities
for the Portfolio. The Portfolio pays no advisory or other fees for these
services.
Alliance may act as an investment adviser to other persons, firms or
corporations, including investment companies, hedge funds, pension funds and
other institutional investors, for which it may receive management fees. Certain
other clients of Alliance may have investment objectives and policies similar to
those of the Portfolios. Alliance may, from time to time, make recommendations
which result in the purchase or sale of a particular security by its other
clients simultaneously with the Portfolios. 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 Alliance to allocate advisory
recommendations and the placing of orders in a manner which is deemed equitable
by Alliance to the accounts involved, including the Portfolios. When two or more
of the clients of Alliance (including the Portfolios) are purchasing or selling
the same security on a given day from the same broker-dealer, such transactions
may be averaged as to price. Although the Portfolios may use brokers who sell
shares of the Portfolios to effect portfolio transactions, the Portfolios do not
consider the sale of AllianceBernstein Mutual Fund shares as a factor when
selecting brokers to effect portfolio transactions
PORTFOLIO MANAGERS
The day-to-day management of and investment decisions for the AllianceBernstein
U.S. Value Portfolio are made by the U.S. Value Investment Policy Group, which
is comprised of senior U.S. Value Investment Team members. The U.S. Value
Investment Policy Group relies heavily on the fundamental analysis and research
of the Adviser's large internal research staff. No one person is principally
responsible for making investment recommendations for the AllianceBernstein U.S.
Value Portfolio.
The day-to-day management of and investment decisions for the AllianceBernstein
U.S. Large Cap Growth Portfolio are made by the Large Cap Growth Investment
Team, which is comprised of senior Large Cap Growth Investment Team members. The
Large Cap Growth Investment Team relies heavily on the fundamental analysis and
research of the Adviser's large internal research staff. No one person is
principally responsible for making investment recommendations for the
AllianceBernstein U.S. Large Cap Growth Portfolio.
The day-to-day management of and investment decisions for the AllianceBernstein
Real Estate Investment Portfolio are made by the REIT Investment Policy Group,
which is comprised of senior REIT Investment Team members. The REIT Investment
Policy Group relies heavily on the fundamental analysis and research of the
Adviser's large internal research staff. No one person is principally
responsible for making investment recommendations for the AllianceBernstein Real
Estate Investment Portfolio.
The day-to-day management of and investment decisions for the AllianceBernstein
International Value Portfolio are made by the International Value Investment
Policy Group, which is comprised of senior International Value Team members. The
International Value Investment Policy Group relies heavily on the fundamental
analysis and research of the Adviser's large internal research staff. No one
person is principally responsible for making investment recommendations for the
AllianceBernstein International Value Portfolio.
The day-to-day management of and investment decisions for the AllianceBernstein
International Growth Portfolio are made by the International Large Cap Growth
Portfolio Oversight Group, which is comprised of senior International Large Cap
Growth Group members. The International Large Cap Growth Portfolio Oversight
Group relies heavily on the fundamental analysis and research of the Adviser's
large internal research staff. No one person is principally responsible for
making investment recommendations for the AllianceBernstein International Growth
Portfolio.
The day-to-day management of and investment decisions for the AllianceBernstein
Short Duration Bond Portfolio are made by the Low Duration Team, which is
comprised of senior Low Duration Team members. The Low Duration Team relies
heavily on the fundamental analysis and research of the Adviser's large internal
research staff. No one person is principally responsible for making investment
recommendations for the AllianceBernstein Short Duration Bond Portfolio.
The day-to-day management of and investment decisions for the AllianceBernstein
Intermediate Duration Bond Portfolio are made
34
by the U.S. Investment Grade Core Fixed Income Team, which is comprised of
senior Core Fixed Income Team members. The Core Fixed Income Team relies heavily
on the fundamental analysis and research of the Adviser's large internal
research staff. No one person is principally responsible for making investment
recommendations for the AllianceBernstein Intermediate Duration Portfolio.
The day-to-day management of and investment decisions for the AllianceBernstein
TIPS Portfolio are made by the Liquid Markets Team within the U.S. Investment
Grade Core Fixed Income Team, which is comprised of senior Core Fixed Income
Team members. The Core Fixed Income Team relies heavily on the economic and
quantitative analysis and research of the Adviser's internal research staff.
Greg J. Wilensky is principally responsible for making investment
recommendations for the AllianceBernstein TIPS Portfolio. Mr. Wilensky, a Vice
President of Alliance Capital Management Corporation ("ACMC"), has been
responsible for the Portfolio since its inception, and has been employed at ACMC
for the past five years.
The day-to-day management of and investment decisions for the AllianceBernstein
Small-Mid Cap Value Portfolio are made by the Small Cap Value Investment Policy
Group, which is comprised of senior Small Cap Value Team members. The Small Cap
Value Investment Policy Group relies heavily on the fundamental analysis and
research of the Adviser's large internal research staff. No one person is
principally responsible for making investment recommendations for the
AllianceBernstein Small-Mid Cap Value Portfolio.
The day-to-day management of and investment decisions for the AllianceBernstein
Small-Mid Cap Growth Portfolio are made by the Small Cap Growth Investment Team,
which is comprised of senior Small Cap Growth Team members. The Small Cap Growth
Investment Team relies heavily on the fundamental analysis and research of the
Adviser's large internal research staff. No one person is principally
responsible for making recommendations for the AllianceBernstein Small-Mid Cap
Growth Portfolio.
LEGAL PROCEEDINGS
As has been previously reported in the press, the Staff of the New York State
Attorney General ("NYAG") and the Commission have been investigating practices
in the mutual fund industry identified as "market timing" and "late trading" of
mutual fund shares. Certain other regulatory authorities are also conducting
investigations into these practices within the industry and have requested that
Alliance provide information to them. Alliance has been cooperating and will
continue to cooperate with these authorities.
On December 18, 2003, Alliance confirmed that it had reached terms with the
Commission and the NYAG for the resolution of regulatory claims relating to the
practice of "market timing" mutual fund shares in some of the AllianceBernstein
Mutual Funds. The agreement with the Commission is reflected in an Order of the
Commission ("Order"). The agreement with the NYAG is subject to final,
definitive documentation. Among the key provisions of these agreements are the
following:
(i) Alliance agreed to establish a $250 million fund (the "Reimbursement
Fund") to compensate mutual fund shareholders for the adverse effects of
market timing attributable to market timing relationships described in the
Order. According to the Order, the Reimbursement Fund is to be paid, in
order of priority, to fund investors based on (a) their aliquot share of
losses suffered by the fund due to market timing, and (b) a proportionate
share of advisory fees paid by such fund during the period of such market
timing;
(ii) Alliance agreed to reduce the advisory fees it receives from some of the
AllianceBernstein long-term, open-end retail funds, commencing January 1,
2004, for a period of at least five years. The determination of which
funds will have their fees reduced and to what degree is subject to the
terms of the definitive agreement with the NYAG; however, it is not
expected that the Portfolios will have their advisory fees reduced
pursuant to a final, definitive agreement with the NYAG; and
(iii) Alliance agreed to implement changes to its governance and compliance
procedures. Additionally, the Order contemplates that Alliance's
registered investment company clients will introduce governance and
compliance changes.
A special committee of Alliance's Board of Directors, comprised of the members
of Alliance's Audit Committee and the other independent member of the Board, is
continuing to direct and oversee an internal investigation and a comprehensive
review of the facts and circumstances relevant to the Commission's and the
NYAG's investigations.
In addition, the Independent Directors of the AllianceBernstein Mutual Funds
(the "Independent Directors") have initiated an investigation of the
above-mentioned matters with the advice of an independent economic consultant
and independent counsel. The Independent Directors have formed a special
committee to supervise the investigation.
On October 2, 2003, a putative class action complaint entitled Hindo et al. v.
AllianceBernstein Growth & Income Portfolio et al. (the "Hindo Complaint"), was
filed against Alliance; Alliance Capital Management Holding, L.P.; Alliance
Capital Management Corporation; AXA Financial, Inc.; certain of the
AllianceBernstein Mutual Funds; Gerald Malone; Charles Schaffran (collectively,
the "Alliance Capital defendants"); and certain other defendants not affiliated
with Alliance. The Hindo Complaint was filed in the United States District Court
for the Southern District of New York by alleged shareholders of two of the
AllianceBernstein Mutual Funds. The Hindo Complaint alleges that certain of the
Alliance Capital defendants failed to disclose that they improperly allowed
certain hedge funds and other unidentified parties to engage in late trading and
market timing of AllianceBernstein Mutual Funds shares, violating Sections 11
and 15 of the Securities Act, Sections 10(b)
35
and 20(a) of the Exchange Act, and Sections 206 and 215 of the Advisers Act.
Plaintiffs seek an unspecified amount of compensatory damages and rescission of
their contracts with Alliance, including recovery of all fees paid to Alliance
pursuant to such contracts.
Since October 2, 2003, numerous additional lawsuits making factual allegations
similar to those in the Hindo Complaint were filed against Alliance and certain
other defendants. All of these lawsuits seek an unspecified amount of damages.
As a result of the matters described above, investors in the AllianceBernstein
Mutual Funds may choose to redeem their investments. This may require the
AllianceBernstein Mutual Funds to sell investments held in the Portfolios to
proved for sufficient liquidity and could also have an adverse effect on the
investment performance of the Portfolios.
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PURCHASE AND SALE OF SHARES
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HOW THE PORTFOLIOS VALUE THEIR SHARES
Each Portfolio's net asset value or NAV is calculated at the close of regular
trading on the Exchange (ordinarily, 4:00 p.m., Eastern time), only on days when
the Exchange is open for business. To calculate NAV, a Portfolio's assets are
valued and totaled, liabilities are subtracted, and the balance, called net
assets, is divided by the number of shares outstanding. If a Portfolio invests
in securities that are primarily traded on foreign exchanges that trade on
weekends or other days when the Portfolio does not price its shares, the NAV of
the Portfolio's shares may change on days when shareholders will not be able to
purchase or redeem their shares in the Portfolio.
The Portfolios value their securities at their current market value determined
on the basis of market quotations or, if market quotations are not readily
available or are unreliable, at "fair value" as determined in accordance with
procedures established by and under the general supervision of the Portfolio's
Board of Trustees. When a Portfolio uses fair value pricing, it may take into
account any factors it deems appropriate. A Portfolio may determine fair value
based upon developments related to a specific security, current valuations of
foreign stock indices (as reflected in U.S. futures markets) and/or U.S. sector
or broader stock market indices. The prices of securities used by the Portfolio
to calculate its NAV may differ from quoted or published prices for the same
securities. Fair value pricing involves subjective judgments and it is possible
that the fair value determined for a security is materially different than the
value that could be realized upon the sale of that security.
Portfolios expect to use fair value pricing for securities primarily traded on
U.S. exchanges only under very limited circumstances, such as the early closing
of the exchange on which a security is traded or suspension of trading in the
security. Portfolios may use fair value pricing more frequently for securities
primarily traded in non-U.S. markets because, among other things, most foreign
markets close well before the Portfolio values its securities at 4 p.m., Eastern
Time. The earlier close of these foreign markets gives rise to the possibility
that significant events, including broad market moves, may have occurred in the
interim. For example, the Portfolios believe that non-U.S. security values may
be affected by events that occur after the close of foreign securities markets.
To account for this, the Portfolios may frequently value many of their non-U.S.
equity securities using fair value prices based on third party vendor modeling
tools to the extent available.
Subject to the Board's oversight, Alliance has the responsibility for valuing
each Portfolio's assets. Alliance has established a Valuation Committee, which
operates under the policies and procedures approved by the Board, to value each
Portfolio's assets on behalf of the Portfolio. The Valuation Committee values
Portfolio assets as described above.
Orders for purchase or sale of shares are priced at the next NAV calculated
after the order is received and confirmed in proper form by the Portfolio.
HOW TO BUY SHARES
Shares of the Portfolios are offered exclusively to mutual funds advised by and
certain other institutional clients of Alliance. A Portfolio's shares may be
purchased at the relevant net asset value without a sales charge or other fee.
Other Purchase Information
Purchases of a Portfolio's shares will be made only in full shares. Certificates
for shares will not be issued.
The Portfolios may refuse any order to purchase shares. Each Portfolio reserves
the right to suspend the sale of its shares in response to conditions in the
securities markets or for other reasons.
HOW TO SELL SHARES
Investors may "redeem" shares on any day the Exchange is open. Redemption
requests for Portfolio shares are effected at the next-determined NAV, after the
Portfolio receives your sales request in proper form. A redemption request
received by the Portfolio prior to 4:00 p.m., Eastern time, on a day the
Portfolio is open for business is effected on that day. A redemption request
received after that time is effected on the next business day.
Each Portfolio may suspend the right of redemption or postpone the payment date
at times when the Exchange is closed, or during certain other periods as
permitted under the federal securities laws.
Shares of the Portfolios will be held only by mutual funds advised by and
certain other institutional clients of Alliance. Each Portfolio reserves the
right to redeem shares of any investor at the then-current value of such shares
(which will be paid promptly to the investor) if the investor ceases to be a
qualified investor, as determined by Alliance. Affected investors will receive
advance
36
notice of any such mandatory redemption.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
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Income dividends and capital gains distributions, if any, declared by a
Portfolio on its outstanding shares will, at the election of each shareholder,
be paid in cash or in additional shares of the Portfolio. If paid in additional
shares, the shares will have an aggregate net asset value as of the close of
business on the declaration date of the dividend or distribution equal to the
cash amount of the dividend or distribution. Shareholders may make an election
to receive dividends and distributions in cash at the time of purchase. This
election can be changed at any time prior to a record date for a dividend. There
is no sales or other charge in connection with the reinvestment of dividends or
capital gains distributions.
While it is the intention of each Portfolio to distribute to its shareholders
substantially all of each fiscal year's net income and net realized capital
gains, if any, the amount and timing of any such dividend or distribution must
necessarily depend upon the realization by the Portfolio of income and capital
gains from investments. There is no fixed dividend rate and there can be no
assurance that the Portfolio will pay any dividends or realize any capital
gains. The final determination of the amount of a Portfolio's return of capital
distributions for the period will be made after the end of each calendar year.
For federal income tax purposes, each Portfolio's distributions of net income
(or short-term capital gains) will be taxable as ordinary income. Distributions
of long-term capital gains generally will be taxable as long-term capital gains.
The Portfolios' distributions also may be subject to certain state and local
taxes. Whether distributions of gains are taxable to a shareholder at long-term
capital gains rates or short-term capital gains rates will not depend on the
shareholder's holding period in shares of the Portfolio, but rather on the
Portfolio's holding period in assets giving rise to the gains.
Under certain circumstances, if a Portfolio realizes losses (e.g., from
fluctuations in currency exchange rates) after paying a dividend, all or a
portion of the dividend may subsequently be characterized as a return of
capital. Returns of capital are generally nontaxable, but will reduce a
shareholder's basis in shares of a Portfolio. If that basis is reduced to zero
(which could happen if the shareholder does not reinvest distributions and
returns of capital are significant), any further returns of capital will be
taxable as capital gain. See the Portfolios' SAI for a further explanation of
these tax issues.
Investment income received by a Portfolio from sources within non-U.S. countries
may be subject to non-U.S. income taxes withheld at the source.
The Portfolios' investments in certain debt obligations may cause them to
recognize taxable income in excess of the cash generated by such obligations.
Thus, the Portfolios could be required to sell other investments in order to
satisfy their distribution requirements.
If an investor buys shares just before a Portfolio deducts a distribution from
its NAV, the investor will pay the full price for the shares and then receive a
portion of the price back as a taxable distribution.
The sale or exchange of Portfolio shares is a taxable transaction for federal
income tax purposes.
Each year shortly after December 31, each Portfolio will send its shareholders
tax information stating the amount and type of all its distributions for the
year. Shareholders should consult their tax adviser about the federal, state,
and local tax consequences in their particular circumstances.
37
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APPENDIX A
BOND RATINGS
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MOODY'S INVESTORS SERVICE, INC.
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
the Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa--Bonds which are rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest 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.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Absence of Rating--When no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that are
unrated 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
AAA--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB--Debt rated BBB 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.
38
BB, B, CCC, CC, C--Debt rated BB, B, CCC, CC or 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, there 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.
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.
FITCH RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable
events.
AA--Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the
AAA and AA categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated
F1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to
be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and
therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor.
DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
Plus (+) Minus (-)--Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the AAA, DDD, DD or D categories.
NR--Indicates that Fitch does not rate the specific issue.
39
For more information about the Portfolios, the following documents are available
upon request:
Statement of Additional Information (SAI)
The Portfolios' SAI contains more detailed information about the Portfolios,
including their operations and investment policies. The Portfolios' SAI is
incorporated by reference into (and is legally part of) this Prospectus.
You may request a free copy of the SAI, or make inquiries concerning the
Portfolios, by contacting your broker or other financial intermediary, or by
contacting Alliance:
By mail: Alliance Global Investor Services
P.O. Box 786003
San Antonio, TX 78278-6003
By phone: For Information: (800) 221-5672
For Literature: (800) 227-4618
Or you may view or obtain these documents from the Commission:
o Call the Commission at 1-202-942-8090 for information on the operation of
the Public Reference Room.
o Reports and other information about the Portfolio are available on the
EDGAR Database on the Commission's Internet site at http://www.sec.gov.
o Copies of the information may be obtained, after paying a fee, by
electronic request at publicinfo@sec.gov, or by writing the Commission's
Public Reference Section, Wash. DC 20549-0102.
You also may find more information about Alliance on the Internet at:
www.Alliancecapital.com.
Investment Company Act File No.
40
THE ALLIANCEBERNSTEIN POOLING PORTFOLIOS:
ALLIANCEBERNSTEIN U.S. VALUE PORTFOLIO
ALLIANCEBERNSTEIN U.S. LARGE CAP GROWTH PORTFOLIO
ALLIANCEBERNSTEIN REAL ESTATE INVESTMENT PORTFOLIO
ALLIANCEBERNSTEIN INTERNATIONAL VALUE PORTFOLIO
ALLIANCEBERNSTEIN INTERNATIONAL GROWTH PORTFOLIO
ALLIANCEBERNSTEIN SHORT DURATION BOND PORTFOLIO
ALLIANCEBERNSTEIN INTERMEDIATE DURATION BOND PORTFOLIO
ALLIANCEBERNSTEIN TIPS PORTFOLIO
ALLIANCEBERNSTEIN SMALL-MID CAP VALUE PORTFOLIO
ALLIANCEBERNSTEIN SMALL-MID CAP GROWTH PORTFOLIO
(each a "Portfolio" and collectively, the "Portfolios")
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Alliance Global Investor Services, Inc.
P.O. Box 786003, San Antonio, Texas 78278-6003
Toll Free (800) 221-5672
For Literature: Toll Free (800) 227-4618
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STATEMENT OF ADDITIONAL INFORMATION
[date]
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SUBJECT TO COMPLETION
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Statement of Additional Information shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be any sale
of these securities in any state in which such offer, solicitation, or sale
would be unlawful prior to registration or qualification under the securities
laws of any such state.
This Statement of Additional Information ("SAI") is not a prospectus and
should be read in conjunction with the Portfolios' current prospectus (the
"Prospectus") dated [ ], as revised or supplemented from time to time.
Copies of the Prospectus may be obtained by contacting Alliance Global Investor
Services, Inc. ("AGIS") at the address or the "For Literature" telephone number
shown above.
TABLE OF CONTENTS
INVESTMENT POLICIES AND PRACTICES 3
INVESTMENT RESTRICTIONS 22
MANAGEMENT OF THE PORTFOLIOS 24
PORTFOLIO TRANSACTIONS 30
EXPENSES OF THE PORTFOLIOS 31
PURCHASE OF SHARES 33
REDEMPTION OF SHARES 33
NET ASSET VALUE 34
DIVIDENDS, DISTRIBUTIONS AND TAXES 36
GENERAL INFORMATION 42
FINANCIAL STATEMENTS 46
APPENDIX A - Corporate Bond Ratings A-1
APPENDIX B - Policies and Procedures for Voting Proxies B-1
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INVESTMENT POLICIES AND PRACTICES
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The following investment policies and restrictions supplement and should
be read in conjunction with the information set forth in the Prospectus. The
AllianceBernstein U.S. Value Portfolio, AllianceBernstein U.S. Large Cap Growth
Portfolio, AllianceBernstein Real Estate Investment Portfolio, AllianceBernstein
International Value Portfolio, AllianceBernstein International Growth Portfolio,
AllianceBernstein Short Duration Bond Portfolio, AllianceBernstein Intermediate
Duration Bond Portfolio, AllianceBernstein TIPS Portfolio, AllianceBernstein
Small-Mid Cap Value Portfolio and AllianceBernstein Small-Mid Cap Growth
Portfolio are each a series of The AllianceBernstein Pooling Portfolios (the
"Trust").
Stripped Mortgage-Related Securities
Each Portfolio may invest in stripped mortgage-related securities
("SMRS"). SMRS are derivative multi-class mortgage-related securities. SMRS may
be issued by the U.S. Government, its agencies or instrumentalities, or by
private originators of, or investors in, mortgage loans, including savings and
loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing.
SMRS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of GNMA, FNMA
or FHLMC certificates, whole loans or private pass-through mortgage-related
securities ("Mortgage Assets"). A common type of SMRS will have one class
receiving some of the interest and most of the principal from the Mortgage
Assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The yield to
maturity on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying Mortgage Assets, and a rapid
rate of principal prepayments may have a material adverse effect on the yield to
maturity of the IO class. The rate of principal prepayment will change as the
general level of interest rates fluctuates. If the underlying Mortgage Assets
experience greater than anticipated principal prepayments, the Portfolio may
fail to fully recoup its initial investment in these securities. Due to their
structure and underlying cash flows, SMRS may be more volatile than
mortgage-related securities that are not stripped.
Although SMRS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed for these securities and, accordingly, they may be illiquid.
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Foreign Currency Exchange Transactions
Each Portfolio may engage in foreign currency exchange transactions to
protect against uncertainty in the level of future currency exchange rates.
Alliance Capital Management L.P. (the "Adviser") expects to engage in foreign
currency exchange transactions in connection with the purchase and sale of
portfolio securities ("transaction hedging") and to protect against changes in
the value of specific portfolio positions ("position hedging").
The Portfolios may engage in transaction hedging to protect against a
change in foreign currency exchange rates between the date on which the
Portfolio contracted to purchase or sell a security and the settlement date, or
to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. The Portfolios may purchase or sell a foreign currency on a
spot (or cash) basis at the prevailing spot rate in connection with the
settlement of transactions in portfolio securities denominated in that foreign
currency.
If conditions warrant, the Portfolios may also enter into contracts to
purchase or sell foreign currencies at a future date ("forward contracts") and
may purchase and sell foreign currency futures contracts as hedges against
changes in foreign currency exchange rates between the trade and settlement
dates on particular transactions and not for speculation. A foreign currency
forward contract is a negotiated agreement to exchange currency at a future time
at a rate or rates that may be higher or lower than the spot rate. Foreign
currency futures contracts are standardized exchange-traded contracts and have
margin requirements.
For transaction hedging purposes, the Portfolios may also purchase and
sell call and put options on foreign currency futures contracts and on foreign
currencies.
Each Portfolio may engage in position hedging to protect against a decline
in value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in value of a currency in
which securities the Portfolio intends to buy are denominated, when the
Portfolio holds cash or short-term investments). For position hedging purposes,
each Portfolio may purchase or sell foreign currency futures contracts, foreign
currency forward contracts, and options on foreign currency futures contracts
and on foreign currencies. In connection with position hedging, the Portfolios
may also purchase or sell foreign currency on a spot basis.
A Portfolio's currency hedging transactions may call for the delivery of
one foreign currency in exchange for another foreign currency and may at times
not involve currencies in which its portfolio securities are then denominated.
The Adviser will engage in such "cross hedging" activities when it believes that
such transactions provide significant hedging opportunities for a Portfolio.
Repurchase Agreements
The repurchase agreements referred to in the Portfolios' Prospectus are
agreements by which a Portfolio purchases a security and obtains a simultaneous
commitment from the seller to
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repurchase the security at an agreed upon price and date. The resale price is in
excess of the purchase price and reflects an agreed upon market rate unrelated
to the coupon rate on the purchased security. The purchased security serves as
collateral for the obligation of the seller to repurchase the security and the
value of the purchased security is initially greater than or equal to the amount
of the repurchase obligation and the seller is required to furnish additional
collateral on a daily basis in order to maintain with the purchaser securities
with a value greater than or equal to the amount of the repurchase obligation.
Such transactions afford the Portfolios the opportunity to earn a return on
temporarily available cash. While at times the underlying security may be a
bill, certificate of indebtedness, note, or bond issued by an agency, authority
or instrumentality of the U.S. Government, the obligation of the seller is not
guaranteed by the U.S. Government and there is a risk that the seller may fail
to repurchase the underlying security, whether because of the seller's
bankruptcy or otherwise. In such event, the Portfolios would attempt to exercise
their rights with respect to the underlying security, including possible
disposition in the market. However, the Portfolios may incur various expenses in
the attempted enforcement and may be subject to various delays and risks of
loss, including (a) possible declines in the value of the underlying security,
(b) possible reductions in levels of income and (c) lack of access to and
possible inability to enforce rights.
Non-Publicly Traded Securities
The Portfolios may invest in securities that are not publicly traded,
including securities sold pursuant to Rule 144A under the Securities Act of
1933, as amended ("Rule 144A Securities"). The sale of these securities is
usually restricted under federal securities laws, and market quotations may not
be readily available. As a result, a Portfolio may not be able to sell these
securities (other than Rule 144A Securities) unless they are registered under
applicable federal and state securities laws, or may have to sell such
securities at less than fair market value. Investment in these securities is
subject to the restriction against investing more than 15% of total assets in
"illiquid" securities. To the extent permitted by applicable law, Rule 144A
Securities will not be treated as "illiquid" for purposes of the foregoing
restriction so long as such securities meet the liquidity guidelines established
by the Trustees. Pursuant to these guidelines, the Adviser will monitor the
liquidity of a Portfolio's investment in Rule 144A Securities.
Descriptions of Certain Money Market Securities in Which the Portfolios May
Invest
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND BANK TIME DEPOSITS.
Certificates of deposit are receipts issued by a bank in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by another bank that, in effect,
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unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most maturities are six months or less.
Bank time deposits are funds kept on deposit with a bank for a stated
period of time in an interest bearing account. At present, bank time deposits
maturing in more than seven days are not considered by the Adviser to be readily
marketable.
COMMERCIAL PAPER. Commercial paper consists of short-term (usually from 1
to 270 days) unsecured promissory notes issued by entities in order to finance
their current operations.
VARIABLE NOTES. Variable amount master demand notes and variable amount
floating rate notes are obligations that permit the investment of fluctuating
amounts by a Portfolio at varying rates of interest pursuant to direct
arrangements between a Portfolio, as lender, and the borrower. Master demand
notes permit daily fluctuations in the interest rate while the interest rate
under variable amount floating rate notes fluctuates on a weekly basis. These
notes permit daily changes in the amounts borrowed. The Portfolios have the
right to increase the amount under these notes at any time up to the full amount
provided by the note agreement, or to decrease the amount, and the borrower may
repay up to the full amount of the note without penalty. Because these types of
notes are direct lending arrangements between the lender and the borrower, it is
not generally contemplated that such instruments will be traded and there is no
secondary market for these notes. Master demand notes are redeemable (and, thus,
immediately repayable by the borrower) at face value, plus accrued interest, at
any time. Variable amount floating rate notes are subject to next-day redemption
14 days after the initial investment therein. With both types of notes,
therefore, the Portfolios' right to redeem depends on the ability of the
borrower to pay principal and interest on demand. In connection with both types
of note arrangements, the Portfolios consider earning power, cash flow and other
liquidity ratios of the issuer. These notes, as such, are not typically rated by
credit rating agencies. Unless they are so rated, a Portfolio may invest in them
only if at the time of an investment the issuer has an outstanding issue of
unsecured debt rated Aa or better by Moody's or AA or better by S&P, Fitch, or
Duff & Phelps.
Asset-Backed Securities
The Portfolios may invest in asset-backed securities (unrelated to first
mortgage loans), which represent fractional interests in pools of retail
installment loans, leases or revolving credit receivables, both secured (such as
Certificates for Automobile Receivables or "CARS") and unsecured (such as Credit
Card Receivable Securities or "CARDS").
The staff of the Securities and Exchange Commission (the "SEC") is of the
view that certain asset-backed securities may constitute investment companies
under the Investment Company Act of 1940 (the "1940 Act"). The Portfolios intend
to conduct their operations in a
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manner consistent with this view; therefore, the Portfolios generally may not
invest more than 10% of their total assets in such securities without obtaining
appropriate regulatory relief.
Lending of Securities
The Portfolios may seek to increase income by lending portfolio
securities. Under present regulatory policies, including those of the Board of
Governors of the Federal Reserve System and the SEC, such loans may be made only
to member firms of the New York Stock Exchange (the "Exchange") and would be
required to be secured continuously by collateral in cash, cash equivalents, or
U.S. Treasury Bills maintained on a current basis at an amount at least equal to
the market value of the securities loaned. A Portfolio would have the right to
call a loan and obtain the securities loaned at any time on five days' notice.
During the existence of a loan, a Portfolio would continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned and would also receive compensation based on investment of the
collateral. A Portfolio would not, however, have the right to vote any
securities having voting rights during the existence of the loan but would call
the loan in anticipation of an important vote to be taken among holders of the
securities or of the giving or withholding of their consent on a material matter
affecting the investment. As with other extensions of credit there are risks of
delay in recovery or even loss of rights in the collateral should the borrower
of the securities fail financially. However, the loans would be made only to
firms deemed by the Adviser to be of good standing, and when, in the judgment of
the Adviser, the consideration that can be earned currently from securities
loans of this type justifies the attendant risk. At the time any such loan is
made, the value of the securities loaned will not exceed 33 1/3% of a
Portfolio's total assets.
Forward Commitments and When-Issued and Delayed Delivery Securities
Each Portfolio may enter into forward commitments for the purchase of
securities and may purchase securities on a "when-issued" or "delayed delivery"
basis. Agreements for such purchases might be entered into, for example, when a
Portfolio anticipates a decline in interest rates and is able to obtain a more
advantageous yield by committing currently to purchase securities to be issued
later. When a Portfolio purchases securities in this manner (i.e., on a forward
commitment, "when-issued" or "delayed delivery" basis), it does not pay for the
securities until they are received, and the Portfolio is required to create a
segregated account with the Trust's custodian and to maintain in that account
liquid assets in an amount equal to or greater than, on a daily basis, the
amount of the Portfolio's forward commitments and "when-issued" or "delayed
delivery" commitments. At the time a Portfolio intends to enter into a forward
commitment, it will record the transaction and thereafter reflect the value of
the security purchased or, if a sale, the proceeds to be received, in
determining its net asset value. Any unrealized appreciation or depreciation
reflected in such valuation of a "when, as and if issued" security would be
canceled in the event that the required conditions did not occur and the trade
was canceled.
A Portfolio will enter into forward commitments and make commitments to
purchase securities on a "when-issued" or "delayed delivery" basis only with the
intention of actually
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acquiring the securities. However, a Portfolio may sell these securities before
the settlement date if, in the opinion of the Adviser, it is deemed advisable as
a matter of investment strategy.
Although neither of the Portfolios intends to make such purchases for
speculative purposes and each Portfolio intends to adhere to the provisions of
SEC policies, purchases of securities on such bases may involve more risk than
other types of purchases. For example, by committing to purchase securities in
the future, a Portfolio subjects itself to a risk of loss on such commitments as
well as on its portfolio securities. Also, a Portfolio may have to sell assets
which have been set aside in order to meet redemptions. In addition, if a
Portfolio determines it is advisable as a matter of investment strategy to sell
the forward commitment or "when-issued" or "delayed delivery" securities before
delivery, that Portfolio may incur a gain or loss because of market fluctuations
since the time the commitment to purchase such securities was made. Any such
gain or loss would be treated as a capital gain or loss for tax purposes. When
the time comes to pay for the securities to be purchased under a forward
commitment or on a "when-issued" or "delayed delivery" basis, a Portfolio will
meet its obligations from the then available cash flow or the sale of
securities, or, although it would not normally expect to do so, from the sale of
the forward commitment or "when-issued" or "delayed delivery" securities
themselves (which may have a value greater or less than a Portfolio's payment
obligation).
Options
OPTIONS ON SECURITIES. Each Portfolio may write and purchase call and put
options on securities. Each Portfolio intends to write only covered options.
This means that so long as a Portfolio is obligated as the writer of a call
option, it will own the underlying securities subject to the option or
securities convertible into such securities without additional consideration (or
for additional cash consideration held in a segregated account by the
custodian). In the case of call options on U.S. Treasury Bills, a Portfolio
might own U.S. Treasury Bills of a different series from those underlying the
call option, but with a principal amount and value corresponding to the option
contract amount and a maturity date no later than that of the securities
deliverable under the call option. A Portfolio will be considered "covered" with
respect to a put option it writes, if, so long as it is obligated as the writer
of the put option, it deposits and maintains with its custodian in a segregated
account liquid assets having a value equal to or greater than the exercise price
of the option.
Effecting a closing transaction in the case of a written call option will
permit a Portfolio to write another call option on the underlying security with
a different exercise price or expiration date or both, or in the case of a
written put option will permit a Portfolio to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Such transactions permit a Portfolio to generate
additional premium income, which may partially offset declines in the value of
portfolio securities or increases in the cost of securities to be acquired.
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
investments by a Portfolio, provided that another option on such securities is
not written. If a Portfolio desires to sell a particular security from its
portfolio on which it has written a call
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option, it will effect a closing transaction in connection with the option prior
to or concurrent with the sale of the security.
A Portfolio will realize a profit from a closing transaction if the
premium paid in connection with the closing of an option written by the
Portfolio is less than the premium received from writing the option, or if the
premium received in connection with the closing of an option purchased by the
Portfolio is more than the premium paid for the original purchase. Conversely, a
Portfolio will suffer a loss if the premium paid or received in connection with
a closing transaction is more or less, respectively, than the premium received
or paid in establishing the option position.
A Portfolio may purchase a security and then write a call option against
that security or may purchase a security and concurrently write an option on it.
The exercise price of the call a Portfolio determines to write will depend upon
the expected price movement of the underlying security. The exercise price of a
call option may be below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the-money") the current value of the underlying security at the time
the option is written. In-the-money call options may be used when it is expected
that the price of the underlying security will decline moderately during the
option period. Out-of-the-money call options may be written 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, a Portfolio's maximum gain
will be the premium received by it for writing the option, adjusted by the
difference between the Portfolio'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 a Portfolio'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, a Portfolio may elect to close the
position or retain the option until it is exercised, at which time the Portfolio
will be required to take delivery of the security at the exercise price; the
Portfolio'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,
which could result in a loss. Out-of-the-money put options may be written when
it is expected that the price of the underlying security will decline moderately
during the option period. In-the-money put options may be used when it is
expected that the premiums received from writing the put 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.
Each of the Portfolios may also write combinations of put and call options
on the same security, known as "straddles," with the same exercise and
expiration date. By writing a straddle, a Portfolio undertakes a simultaneous
obligation to sell and purchase the same security in the event that one of the
options is exercised. If the price of the security subsequently rises above the
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exercise price, the call will likely be exercised and the Portfolio will be
required to sell the underlying security at or below market price. This loss may
be offset, however, in whole or part, by the premiums received on the writing of
the two options. Conversely, if the price of the security declines by a
sufficient amount, the put will likely be exercised. The writing of straddles
will likely be effective, therefore, only where the price of the security
remains stable and neither the call nor the put is exercised. In those instances
where one of the options is exercised, the loss on the purchase or sale of the
underlying security may exceed the amount of the premiums received.
By writing a call option, a Portfolio limits its opportunity to profit
from any increase in the market value of the underlying security above the
exercise price of the option. By writing a put option, a Portfolio assumes the
risk that it may be required to purchase the underlying security for an exercise
price above its then current market value, resulting in a capital loss unless
the security subsequently appreciates in value. Where options are written for
hedging purposes, such transactions constitute only a partial hedge against
declines in the value of portfolio securities or against increases in the value
of securities to be acquired, up to the amount of the premium.
Each of the Portfolios may purchase put options to hedge against a decline
in the value of portfolio securities. If such decline occurs, the put options
will permit the Portfolio to sell the securities at the exercise price or to
close out the options at a profit. By using put options in this way, a Portfolio
will reduce any profit it might otherwise have realized on the underlying
security by the amount of the premium paid for the put option and by transaction
costs.
A Portfolio may purchase call options to hedge against an increase in the
price of securities that the Portfolio anticipates purchasing in the future. If
such increase occurs, the call option will permit the Portfolio to purchase the
securities at the exercise price, or to close out the options at a profit. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by a Portfolio upon exercise of the option, and,
unless the price of the underlying security rises sufficiently, the option may
expire worthless to the Portfolio and the Portfolio will suffer a loss on the
transaction to the extent of the premium paid.
Each Portfolio may purchase or write options on securities of the types in
which it is permitted to invest in privately negotiated (i.e., over-the-counter)
transactions. Each Portfolio 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 ON SECURITIES INDEXES. Each Portfolio may write (sell) covered
call and put options and purchase call and put options on securities indexes. A
call option on a securities index is considered covered if, so long as a
Portfolio is obligated as the writer of the call option, the Portfolio holds
securities the price changes of which are expected by the Adviser to replicate
substantially the movement of the index or indexes upon which the options
written by the Portfolio are based. A put option on a securities index written
by a Portfolio will be considered covered if, so long as it is obligated as the
writer of the put option, the Portfolio maintains with
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its custodian in a segregated account liquid assets having a value equal to or
greater than the exercise price of the option.
A Portfolio may also purchase put options on securities indexes to hedge
its investments against a decline in the value of portfolio securities. By
purchasing a put option on a securities index, a Portfolio will seek to offset a
decline in the value of securities it owns through appreciation of the put
option. If the value of a Portfolio's investments does not decline as
anticipated, or if the value of the option does not increase, the Portfolio's
loss will be limited to the premium paid for the option. The success of this
strategy will largely depend on the accuracy of the correlation between the
changes in value of the index and the changes in value of a Portfolio's security
holdings.
The purchase of call options on securities indexes may be used by a
Portfolio to attempt to reduce the risk of missing a broad market advance, or an
advance in an industry or market segment, at a time when the Portfolio holds
uninvested cash or short-term debt securities awaiting investment. When
purchasing call options for this purpose, a Portfolio will also bear the risk of
losing all or a portion of the premium paid if the value of the index does not
rise. The purchase of call options on stock indexes when a Portfolio is
substantially fully invested is a form of leverage, up to the amount of the
premium and related transaction costs, and involves risks of loss and of
increased volatility similar to those involved in purchasing call options on
securities the Portfolio owns.
Futures Contracts and Options on Futures Contracts
FUTURES CONTRACTS. Each Portfolio may enter into interest rate futures
contracts, index futures contracts and foreign currency futures contracts.
(Unless otherwise specified, interest rate futures contracts, index futures
contracts and foreign currency futures contracts are collectively referred to as
"Futures Contracts.") Such investment strategies will be used as a hedge and not
for speculation.
Purchases or sales of stock or bond index futures contracts are used for
hedging purposes to attempt to protect a Portfolio's current or intended
investments from broad fluctuations in stock or bond prices. For example, a
Portfolio may sell stock or bond index futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of the
Portfolio's portfolio securities that might otherwise result. If such decline
occurs, the loss in value of portfolio securities may be offset, in whole or
part, by gains on the futures position. When a Portfolio is not fully invested
in the securities market and anticipates a significant market advance, it may
purchase stock or bond index futures contracts in order to gain rapid market
exposure that may, in whole or in part, offset increases in the cost of
securities that the Portfolio intends to purchase. As such purchases are made,
the corresponding positions in stock or bond index futures contracts will be
closed out.
Interest rate futures contracts are purchased or sold for hedging purposes
to attempt to protect against the effects of interest rate changes on a
Portfolio's current or intended investments in fixed-income securities. For
example, if a Portfolio owned long-term bonds and
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interest rates were expected to increase, that Portfolio might sell interest
rate futures contracts. Such a sale would have much the same effect as selling
some of the long-term bonds in that Portfolio's portfolio. However, since the
futures market is more liquid than the cash market, the use of interest rate
futures contracts as a hedging technique allows a Portfolio to hedge its
interest rate risk without having to sell its portfolio securities. If interest
rates were to increase, the value of the debt securities in the portfolio would
decline, but the value of that Portfolio's interest rate futures contracts would
be expected to increase at approximately the same rate, thereby keeping the net
asset value of that Portfolio from declining as much as it otherwise would have.
On the other hand, if interest rates were expected to decline, interest rate
futures contracts could be purchased to hedge in anticipation of subsequent
purchases of long-term bonds at higher prices. Because the fluctuations in the
value of the interest rate futures contracts should be similar to those of
long-term bonds, a Portfolio could protect itself against the effects of the
anticipated rise in the value of long-term bonds without actually buying them
until the necessary cash becomes available or the market has stabilized. At that
time, the interest rate futures contracts could be liquidated and that
Portfolio's cash reserves could then be used to buy long-term bonds on the cash
market.
Each Portfolio may purchase and sell foreign currency futures contracts
for hedging purposes in order to protect against fluctuations in currency
exchange rates. Such fluctuations could reduce the dollar value of portfolio
securities denominated in foreign currencies, or increase the cost of
foreign-denominated securities to be acquired, even if the value of such
securities in the currencies in which they are denominated remains constant.
Each Portfolio may sell futures contracts on a foreign currency, for example,
when it holds securities denominated in such currency and it anticipates a
decline in the value of such currency relative to the dollar. If such a decline
were to occur, the resulting adverse effect on the value of foreign-denominated
securities may be offset, in whole or in part, by gains on the futures
contracts. However, if the value of the foreign currency increases relative to
the dollar, the Portfolio's loss on the foreign currency futures contract may or
may not be offset by an increase in the value of the securities because a
decline in the price of the security stated in terms of the foreign currency may
be greater than the increase in value as a result of the change in exchange
rates.
Conversely, the Portfolios could protect against a rise in the dollar cost
of foreign-denominated securities to be acquired by purchasing futures contracts
on the relevant currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value of the
underlying currencies. When a Portfolio purchases futures contracts under such
circumstances, however, and the price in dollars of securities to be acquired
instead declines as a result of appreciation of the dollar, the Portfolio will
sustain losses on its futures position which could reduce or eliminate the
benefits of the reduced cost of portfolio securities to be acquired.
The Portfolios may also engage in currency "cross hedging" when, in the
opinion of the Adviser, the historical relationship among foreign currencies
suggests that a Portfolio may achieve protection against fluctuations in
currency exchange rates similar to that described above at a reduced cost
through the use of a futures contract relating to a currency other than the U.S.
dollar or the currency in which the foreign security is denominated. Such "cross
hedging" is
-12-
subject to the same risks as those described above with respect to an
unanticipated increase or decline in the value of the subject currency relative
to the dollar.
OPTIONS ON FUTURES CONTRACTS. The writing of a call option on a Futures
Contract constitutes a partial hedge against declining prices of the securities
in the Portfolio's portfolio. If the futures price at expiration of the option
is below the exercise price, a Portfolio will retain the full amount of the
option premium, which provides a partial hedge against any decline that may have
occurred in the Portfolio's portfolio holdings. The writing of a put option on a
Futures Contract constitutes a partial hedge against increasing prices of the
securities or other instruments required to be delivered under the terms of the
Futures Contract. If the futures price at expiration of the put option is higher
than the exercise price, a Portfolio will retain the full amount of the option
premium, which provides a partial hedge against any increase in the price of
securities which the Portfolio intends to purchase. If a put or call option a
Portfolio has written is exercised, the Portfolio 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 options on futures positions, a Portfolio's losses from
exercised options on futures may to some extent be reduced or increased by
changes in the value of portfolio securities.
The Portfolios may purchase options on Futures Contracts for hedging
purposes instead of purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline or changes in interest or exchange
rates, a Portfolio could, in lieu of selling Futures Contracts, purchase put
options thereon. In the event that such decrease were to occur, it may be
offset, in whole or part, by a profit on the option. If the anticipated market
decline were not to occur, the Portfolio will suffer a loss equal to the price
of the put. Where it is projected that the value of securities to be acquired by
a Portfolio will increase prior to acquisition due to a market advance or
changes in interest or exchange rates, a Portfolio could purchase call options
on Futures Contracts, rather than purchasing the underlying Futures Contracts.
If the market advances, the increased cost of securities to be purchased may be
offset by a profit on the call. However, if the market declines, the Portfolio
will suffer a loss equal to the price of the call, but the securities which the
Portfolio intends to purchase may be less expensive.
Forward Foreign Currency Exchange Contracts
Each Portfolio may enter into forward foreign currency exchange contracts
("Forward Contracts") to attempt to minimize the risk to the Portfolio from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. The Portfolios intend to enter into Forward Contracts for hedging
purposes similar to those described above in connection with its transactions in
foreign currency futures contracts. In particular, a Forward Contract to sell a
currency may be entered into in lieu of the sale of a foreign currency futures
contract where a Portfolio seeks to protect against an anticipated increase in
the exchange rate for a specific currency which could reduce the dollar value of
portfolio securities denominated in such currency. Conversely, a Portfolio may
enter into a Forward Contract to purchase a given currency to protect against a
projected increase in the dollar value of securities denominated in such
-13-
currency which the Portfolio intends to acquire. A Portfolio also may enter into
a Forward Contract in order to assure itself of a predetermined exchange rate in
connection with a security denominated in a foreign currency. The Portfolios may
engage in currency "cross hedging" when, in the opinion of the Adviser, the
historical relationship among foreign currencies suggests that a Portfolio may
achieve the same protection for a foreign security at a reduced cost through the
use of a Forward Contract relating to a currency other than the U.S. dollar or
the foreign currency in which the security is denominated.
If a hedging transaction in Forward Contracts is successful, the decline
in the value of portfolio securities or the increase in the cost of securities
to be acquired may be offset, at least in part, by profits on the Forward
Contract. Nevertheless, by entering into such Forward Contracts, a Portfolio may
be required to forego all or a portion of the benefits which otherwise could
have been obtained from favorable movements in exchange rates.
Each Portfolio has established procedures consistent with SEC policies
concerning purchases of foreign currency through Forward Contracts. Accordingly,
a Portfolio will segregate and mark to market liquid assets in an amount at
least equal to the Portfolio's obligations under any Forward Contracts.
Options on Foreign Currencies
Each Portfolio may purchase and write options on foreign currencies for
hedging purposes. 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 Portfolios may purchase put options on the foreign currency. If
the value of the currency does decline, the Portfolio will have the right to
sell such currency for a fixed amount in dollars and could 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 Portfolios 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 a Portfolio 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, a Portfolio 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.
Each Portfolio may write options on foreign currencies for the same types
of hedging purposes or to increase return. For example, where a Portfolio
anticipates a decline in the dollar value of foreign-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
-14-
decline occurs, the option will most likely not be exercised, and the diminution
in value of portfolio securities could 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, a
Portfolio could write a put option on the relevant currency, which, if rates
move in the manner projected, will expire unexercised and allow the Portfolio 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 Portfolio will 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, a Portfolio also may be required
to forego all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates.
Risk Factors in Options, Futures and Forward Transactions
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH A PORTFOLIO'S
INVESTMENTS. The Portfolios' abilities to hedge all or a portion of their
portfolios effectively through transactions in options, Futures Contracts,
options on Futures Contracts, Forward Contracts and options on foreign
currencies depend on the degree to which price movements in the underlying index
or instrument correlate with price movements in the securities that are the
subject of the hedge. In the case of futures and options based on an index, the
portfolio will not duplicate the components of the index, and in the case of
futures and options on fixed-income securities, the portfolio securities which
are being hedged may not be the same type of obligation underlying such
contract. As a result, the correlation, to the extent it exists, probably will
not be exact.
It should be noted that stock index futures contracts or options based
upon a narrower index of securities, such as those of a particular industry
group, may present greater risk than options or futures based on a broad market
index. This is because a narrower index is more susceptible to rapid and extreme
fluctuations as a result of changes in the value of a small number of
securities.
The trading of futures and options entails the additional risk of
imperfect correlation between movements in the futures or option price and the
price of the underlying index or instrument. The anticipated spread between the
prices may be distorted due to the differences in the nature of the markets,
such as differences in margin requirements, the liquidity of such markets and
the participation of speculators in the futures market. In this regard, trading
by speculators in futures and options has in the past occasionally resulted in
market distortions, which may be difficult or impossible to predict,
particularly near the expiration of such contracts.
The trading of options on Futures Contracts 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.
-15-
Further, with respect to options on securities, options on foreign
currencies, options on stock indexes and options on Futures Contracts, the
Portfolios are subject to the risk of market movements between the time that the
option is exercised and the time of performance thereunder. This could increase
the extent of any loss suffered by a Portfolio in connection with such
transactions.
If a Portfolio purchases futures or options in order to hedge against a
possible increase in the price of securities before the Portfolio is able to
invest its cash in such securities, the Portfolio faces the risk that the market
may instead decline. If the Portfolio does not then invest in such securities
because of concern as to possible further market declines or for other reasons,
the Portfolio may realize a loss on the futures or option contract that is not
offset by a reduction in the price of securities purchased.
In writing a call option on a security, foreign currency, index or Futures
Contract, a Portfolio also incurs the risk that changes in the value of the
assets used to cover the position will not correlate closely with changes in the
value of the option or underlying index or instrument. For example, when a
Portfolio writes a call option on a stock index, the securities used as "cover"
may not match the composition of the index, and the Portfolio may not be fully
covered. As a result, the Portfolio could suffer a loss on the call which is not
entirely offset, or not offset at all, by an increase in the value of the
Portfolio's portfolio securities.
The writing of options on securities, options on stock indexes or options
on Futures Contracts constitutes only a partial hedge against fluctuations in
the value of a Portfolio's portfolio. When a Portfolio writes an option, it will
receive premium income in return for the holder's purchase of the right to
acquire or dispose of the underlying security or future or, in the case of index
options, cash. In the event that the price of such an obligation does not rise
sufficiently above the exercise price of the option, in the case of a call, or
fall below the exercise price, in the case of a put, the option will not be
exercised and the Portfolio will retain the amount of the premium, which will
constitute a partial hedge against any decline that may have occurred in the
Portfolio's portfolio holdings, or against the increase in the cost of the
instruments to be acquired.
When the price of the underlying obligation moves sufficiently in favor of
the holder to warrant exercise of the option, however, and the option is
exercised, the Portfolio will incur a loss which may only be partially offset by
the amount of the premium the Portfolio receives. Moreover, by writing an
option, a Portfolio may be required to forego the benefits which might otherwise
have been obtained from an increase in the value of portfolio securities or a
decline in the value of securities to be acquired.
In the event of the occurrence of any of the foregoing adverse market
events, a Portfolio's overall return may be lower than if it had not engaged in
the transactions described above.
With respect to the writing of straddles on securities, a Portfolio incurs
the risk that the price of the underlying security will not remain stable, that
one of the options written will be exercised and that the resulting loss will
not be offset by the amount of the premiums received.
-16-
Such transactions, therefore, while creating an opportunity for increased return
by providing a Portfolio with two simultaneous premiums on the same security,
nonetheless involve additional risk, because the Portfolio may have an option
exercised against it regardless of whether the price of the security increases
or decreases.
If any of the foregoing adverse market events occurs, a Portfolio's
overall return may be lower than if it had not engaged in the transactions
described above.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET. Prior to exercise or
expiration, a futures or option position can be terminated only by entering into
a closing transaction. This requires a liquid secondary market for such
instruments on the exchange, if any, on which the initial transaction was
entered into. There can be no assurance that a liquid secondary market will
exist for any particular contracts at any specific time. In the absence of a
liquid secondary market, it may not be possible to close out a position held by
a Portfolio, and the Portfolio could be required to purchase or sell the
instrument underlying an option, make or receive a cash settlement or meet
ongoing variation margin requirements. Under such circumstances, if the
Portfolio has insufficient cash available to meet margin requirements, it may be
necessary to liquidate portfolio securities at a time when, in the opinion of
the Adviser, it is otherwise disadvantageous to do so. The inability to close
out options and futures positions, therefore, could have an adverse impact on
the Portfolios' ability to hedge their portfolios effectively, and could result
in trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the price of
a contract during a single trading day. Once the daily limit has been reached in
the contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures or option positions and requiring
traders to make additional margin deposits. Prices of some Futures Contracts
have in the past moved to the daily limit on a number of consecutive trading
days.
The trading of Futures Contracts and options (including options on Futures
Contracts) is also subject to the risk of trading halts, suspensions, exchange
or clearing house equipment failures, government intervention, insolvency of a
brokerage firm or clearing house and other disruptions of normal trading
activity, which could at times make it difficult or impossible to liquidate
existing positions or to recover excess variation margin payments.
The staff of the SEC has taken the position that over-the-counter options
and the assets used as cover for over-the-counter options are illiquid
securities, unless certain arrangements are made with the other party to the
option contract permitting the prompt liquidation of the option position. The
Portfolios will enter into those special arrangements only with primary U.S.
Government securities dealers recognized by the Federal Reserve Bank of New York
("primary dealers"). Under these special arrangements, the Trust will enter into
contracts with primary dealers which provide that each Portfolio has the
absolute right to repurchase an option it writes at any time at a repurchase
price which represents fair market value, as determined in good faith through
negotiation between the parties, but which in no event will exceed a price
determined
-17-
pursuant to a formula contained in the contract. Although the specific details
of the formula may vary between contracts with different primary dealers, the
formula will generally be based on a multiple of the premium received by the
Portfolio for writing the option, plus the amount, if any, by which the option
is "in-the-money." The formula will also include a factor to account for the
difference between the price of the security and the strike price of the option
if the option is written "out-of-the-money." Under such circumstances, the
Portfolio only needs to treat as illiquid that amount of the "cover" assets
equal to the amount by which (i) the formula price exceeds (ii) any amount by
which the market value of the security subject to the option exceeds the
exercise price of the option (the amount by which the option is "in-the-money").
Although each agreement will provide that the Portfolio's repurchase price shall
be determined in good faith (and that it shall not exceed the maximum determined
pursuant to the formula), the formula price will not necessarily reflect the
market value of the option written; therefore, the Portfolio might pay more to
repurchase the option contract than the Portfolio would pay to close out a
similar exchange-traded option.
MARGIN. Because of low initial margin deposits made upon the opening of a
futures position and the writing of an option, such transactions involve
substantial leverage. As a result, relatively small movements in the price of
the contract can result in substantial unrealized gains or losses. However, to
the extent the Portfolios purchase or sell Futures Contracts and options on
Futures Contracts and purchase and write options on securities and securities
indexes for hedging purposes, any losses incurred in connection therewith
should, if the hedging strategy is successful, be offset, in whole or in part,
by increases in the value of securities held by the Portfolio or decreases in
the prices of securities the Portfolio intends to acquire. When a Portfolio
writes options on securities or options on stock indexes for other than hedging
purposes, the margin requirements associated with such transactions could expose
the Portfolio to greater risk.
TRADING AND POSITION LIMITS. The exchanges on which futures and options
are traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument which
may be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). In addition, the Commodity Futures Trading Commission (the "CFTC") and
the various contract markets have established limits referred to as "speculative
position limits" on the maximum net long or net short position which any person
may hold or control in a particular futures or option contract. An exchange may
order the liquidation of positions found to be in violation of these limits and
may impose other sanctions or restrictions.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The amount of risk a Portfolio
assumes when it purchases an option on a Futures Contract is the premium paid
for the option, plus related transaction costs. In order to profit from an
option purchased, however, it may be necessary to exercise the option and to
liquidate the underlying Futures Contract, subject to the risks of the
availability of a liquid offset market described herein. The writer of an option
on a Futures Contract is subject to the risks of commodity futures trading,
including the requirement of initial and variation margin payments, as well as
the additional risk that movements in the
-18-
price of the option may not correlate with movements in the price of the
underlying security, index, currency or Futures Contract.
RISKS OF FORWARD CONTRACTS, FOREIGN CURRENCY FUTURES CONTRACTS AND OPTIONS
THEREON, OPTIONS ON FOREIGN CURRENCIES AND OVER-THE-COUNTER OPTIONS ON
SECURITIES. Each Portfolio is operated by a person who has claimed an exclusion
from the definition of the term "commodity pool operator" under the Commodity
Exchange Act and, therefore, who is not subject to registration or regulation as
a pool operator under such Act. Transactions in Forward Contracts, as well as
futures and options on foreign currencies, are subject to all of the
correlation, liquidity and other risks outlined above. In addition, however,
such transactions are subject to the risk of governmental actions affecting
trading in or the prices of currencies underlying such contracts, which could
restrict or eliminate trading and could have a substantial adverse effect on the
value of positions held by a Portfolio. In addition, the value of such positions
could be adversely affected by a number of other complex political and economic
factors applicable to the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available information
on which trading decisions will be based may not be as complete as the
comparable data on which a Portfolio makes investment and trading decisions in
connection with other transactions. Moreover, because the foreign currency
market is a global, twenty-four hour market, events could occur on that market
but will not be reflected in the forward, futures or options markets until the
following day, thereby preventing the Portfolios from responding to such events
in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the underlying
currency, which in turn requires traders to accept or make delivery of such
currencies in conformity with any U.S. or foreign restrictions and regulations
regarding the maintenance of foreign banking relationships and fees, taxes or
other charges.
Unlike transactions entered into by the Portfolios in Futures Contracts
and exchange-traded options, options on foreign currencies, Forward Contracts
and over-the-counter options on securities and securities indexes are not traded
on contract markets regulated by the CFTC or (with the exception of certain
foreign currency options) the SEC. Such instruments are instead 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, that are
subject to SEC regulation. In an over-the-counter trading environment, many of
the protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer could lose amounts
-19-
substantially in excess of the initial investment due to the margin and
collateral requirements associated with such positions.
In addition, over-the-counter transactions can be entered into only with a
financial institution willing to take the opposite side, as principal, of a
Portfolio's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Portfolio.
Where no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the trading
of over-the-counter contracts, and a Portfolio could be required to retain
options purchased or written, or Forward Contracts entered into, until exercise,
expiration or maturity. This in turn could limit the Portfolio's ability to
profit from open positions or to reduce losses experienced, and could result in
greater losses.
Further, over-the-counter transactions are not subject to the guarantee of
an exchange clearing house, and a Portfolio will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving as
its counterparty. A Portfolio will enter into an over-the-counter transaction
only with parties whose creditworthiness has been reviewed and found to be
satisfactory by the Adviser.
Transactions in over-the-counter options on foreign currencies are subject
to a number of conditions regarding the commercial purpose of the purchaser of
such option. The Portfolios are not able to determine at this time whether or to
what extent additional restrictions on the trading of over-the-counter options
on foreign currencies may be imposed at some point in the future, or the effect
that any such restrictions may have on the hedging strategies to be implemented
by them.
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 a
Portfolio 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,
the 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, if the OCC determines that
foreign governmental restrictions or taxes would prevent the orderly settlement
of foreign
-20-
currency option exercises, or would result in undue burdens on the OCC or its
clearing member, the OCC may 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.
Restrictions on the Use of Futures and Option Contracts
Under applicable regulations, when a Portfolio enters into transactions in
Futures Contracts and options on Futures Contracts, that Portfolio is required
to segregate liquid assets with its custodian which, together with any initial
margin deposits, are equal to the aggregate market value of the Futures
Contracts and options on Futures Contracts that it purchases. In addition, a
Portfolio may not purchase or sell such instruments for other than bona fide
hedging purposes if, immediately thereafter, the sum of the amount of initial
margin deposits on such futures and options positions and premiums paid for
options purchased would exceed 5% of the market value of the Portfolio's total
assets. Each Portfolio has adopted the additional restriction that it will not
enter into a Futures Contract if, immediately thereafter, the value of
securities and other obligations underlying all such Futures Contracts would
exceed 50% of the value of such Portfolio's total assets. Moreover, a Portfolio
will not purchase put and call options if as a result more than 10% of its total
assets would be invested in such options.
Economic Effects and Limitations
Income earned by a Portfolio from its hedging activities will be treated
as capital gains and, if not offset by net realized capital losses incurred by a
Portfolio, will be distributed to shareholders in taxable distributions.
Although a gain from such transactions may hedge against a decline in the value
of a Portfolio's portfolio securities, that gain, to the extent not offset by
losses, will be distributed in light of certain tax considerations and will
constitute a distribution of that portion of the value preserved against
decline.
No Portfolio will "over-hedge," that is, a Portfolio will not maintain
open short positions in futures or options contracts if, in the aggregate, the
market value of its open positions exceeds the current market value of its
securities portfolio plus or minus the unrealized gain or loss on such open
positions, adjusted for the historical volatility relationship between the
portfolio and futures and options contracts.
Each Portfolio's ability to employ the options and futures strategies
described above will depend in part on the availability of liquid markets in
such instruments. Markets in financial futures and related options are still
developing. It is impossible to predict the amount of trading interest that may
hereafter exist in various types of options or futures. Therefore no assurance
can be given that a Portfolio will be able to use these instruments effectively
for the purposes set forth above.
The Portfolios' ability to use options, futures and forward contracts may
be limited by tax considerations. In particular, tax rules might accelerate or
adversely affect the character of the income earned on such contracts. In
addition, differences between each Portfolio's book income
-21-
(upon the basis of which distributions are generally made) and taxable income
arising from its hedging activities may result in returns of capital
distributions, and in some circumstances, distributions in excess of a
Portfolio's book income may be required to be made in order to meet tax
requirements.
Future Developments
The foregoing discussion relates to each Portfolio's proposed use of
Futures Contracts, Forward Contracts, options, and options on Futures Contracts
currently available. As noted above, the relevant markets and related
regulations are evolving. In the event of future regulatory or market
developments, each Portfolio may also use additional types of futures contracts
or options and other investment techniques for the purposes set forth above.
--------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
--------------------------------------------------------------------------------
Except as described below and except as otherwise specifically stated in
the Prospectus or this SAI, the investment policies of each Portfolio set forth
in the Prospectus and in this SAI are not fundamental and may be changed without
shareholder approval.
Each Portfolio has adopted the following investment restrictions, which
may not be changed without the approval of the holders of a majority of the
Portfolio's outstanding voting securities. The approval of a majority of a
Portfolio's outstanding voting securities means the affirmative vote of (i) 67%
or more of the shares represented at a meeting at which more than 50% of the
outstanding shares are present in person or by proxy, or (ii) more than 50% of
the outstanding shares, whichever is less.
The Portfolios may not:
(1) Make loans except through (a) the purchase of debt obligations in
accordance with its investment objective and policies; (b) the lending of
portfolio securities representing not more than 33 1/3% of its total assets; or
(c) the use of repurchase agreements;
(2) Borrow money or issue senior securities except to the extent permitted
by the 1940 Act;
(3) Pledge, hypothecate, mortgage or otherwise encumber its assets, except
to secure permitted borrowings;
(4) Invest in companies for the purpose of exercising control;
(5) (a) Purchase or sell real estate, except that it may purchase and sell
securities of companies which deal in real estate or interests therein and
securities that are secured by real estate, provided such securities are
securities of the type in which a Portfolio may invest; or (b)
-22-
purchase or sell commodities or commodity contracts, including futures contracts
(except foreign currencies, futures on securities, currencies and securities
indices and forward contracts or contracts for the future acquisition or
delivery of securities and foreign currencies and other similar contracts and
options on the foregoing);
(6) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, a
Portfolio may be deemed to be an underwriter under certain Federal securities
laws; or
(7) Invest more than 5% of its total assets in the securities of any one
issuer (other than U.S. Government securities and repurchase agreements relating
thereto), although up to 25% of a Portfolio's total assets may be invested
without regard to this restriction.
Except for the AllianceBernstein Real Estate Investment Portfolio, the
Portfolios may not invest more than 25% of its total assets in the securities of
any one industry.
Whenever any investment restriction states a maximum percentage of a
Portfolio's assets which may be invested in any security or other asset, it is
intended that such maximum percentage limitation be determined immediately after
and as a result of such Portfolio's acquisition of such securities or other
assets. Accordingly, any later increase or decrease beyond the specified
limitation resulting from a change in value or net asset value will not be
considered a violation of such percentage limitation.
In addition, the following is a description of policies which certain
Portfolios have adopted that are not fundamental and may be changed by the
Portfolio upon 60 days' prior notice to the shareholders. As indicated in the
Prospectus, certain Portfolios have investment policies that, under normal
circumstances, subject them to additional investment restrictions. For purposes
of these policies, net assets includes any borrowings for investment purposes.
AllianceBernstein U.S. Large Cap Growth Portfolio must invest at least 80%
of its net assets in equity securities of large-capitalization companies. For
these purposes, "large capitalization companies" are those that, at the time of
investment, have market capitalizations within the range of market
capitalizations of companies appearing in the Russell 1000(R) Growth Index,
which ranged from $525 million to almost $354 billion as of September 30, 2004.
AllianceBernstein Real Estate Investment Portfolio must invest at least
80% of its net assets in the equity securities of real estate investment trusts,
or REITs, and other real estate industry companies. A "real estate industry
company" is a company that derives at least 50% of its gross revenues or net
profits from the ownership, development, construction, financing, management, or
sale of commercial, industrial, or residential real estate or interests in these
properties.
AllianceBernstein Short Duration Bond Portfolio and AllianceBernstein
Intermediate Duration Bond Portfolio each must invest at least 80% of their net
assets in fixed-income securities.
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AllianceBernstein TIPS Portfolio must invest at least 80% of its net
assets in inflation-indexed bonds of varying maturities issued by U.S. and
non-U.S. governments, their agencies or instrumentalities, and corporations.
AllianceBernstein Small-Mid Cap Value Portfolio must invest at least 80%
of its net assets in the equity securities of small- and mid-cap U.S. companies.
For these purposes, "small- and mid-cap companies" are those that, at the time
of investment, have market capitalizations within the range of market
capitalizations of companies appearing in the Russell 2500(TM) Value Index,
which as of September 30, 2004 ranged from $30 million to approximately $5.2
billion.
AllianceBernstein Small-Mid Cap Growth Portfolio must invest at least 80%
of its net assets in the equity securities of small- and mid-cap U.S. companies.
For these purposes, small- and mid-cap companies are defined as companies that
have, at the time of purchase, market capitalizations in the greater of the
range of companies constituting the Russell 2500(TM) Growth Index or between $1
and $6 billion. The market caps of companies in the Russell 2500(TM) Growth
Index ranged from $67 million to $6.7 billion as of September 30, 2004
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MANAGEMENT OF THE PORTFOLIOS
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The Adviser
Alliance, a Delaware limited partnership with principal offices at 1345
Avenue of the Americas, New York, New York 10105, has been retained under an
investment advisory agreement (the "Advisory Agreement") to provide investment
advice and, in general, to conduct the management and investment program of the
Portfolios under the supervision of the Trust's Board of Trustees (see
"Management of the Fund" in the Prospectus).
Alliance is a registered investment adviser under the Investment Advisers
Act of 1940, as amended. As of March 31, 2004, Alliance Capital Management
Holding, L.P. ("Holding"), a Delaware limited partnership, owned approximately
31.5% of the issued and outstanding units of limited partnership interest in
Alliance ("Alliance Units"). Units representing assignments of beneficial
ownership of limited partnership interests in Holding ("Holding Units") trade
publicly on the New York Stock Exchange ("Exchange") under the ticker symbol
"AC." Alliance Units do not trade publicly and are subject to significant
restrictions on transfer. Alliance Capital Management Corporation ("ACMC") is
the general partner of both Alliance and Holding. ACMC owns 100,000 general
partnership units in Holding and a 1% general partnership interest in Alliance.
ACMC is an indirect wholly-owned subsidiary of AXA Financial, Inc. ("AXA
Financial"), a Delaware corporation.
As of March 31, 2004, AXA, AXA Financial, AXA Equitable Life Insurance
Company of the United States ("AXA Equitable") and certain subsidiaries of AXA
Equitable beneficially owned approximately 57.3% of the issued and outstanding
Alliance Units and approximately
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1.8% of the issued and outstanding Holding Units that, including the general
partnership interests in Alliance and Holding, represent an economic interest of
approximately 58.4% in Alliance. As of March 31, 2004, SCB Partners, Inc., a
wholly-owned subsidiary of SCB, Inc., beneficially owned approximately 9.7% of
the issued and outstanding Alliance Units.
AXA, a French company, is the holding company for an international group
of companies and a worldwide leader in financial protection and wealth
management. AXA operates primarily in Western Europe, North America and the
Asia/Pacific region and, to a lesser extent, in other regions including the
Middle East, Africa and South America. AXA has five operating business segments:
life and savings, property and casualty insurance, international insurance
(including reinsurance), asset management and other financial services. AXA
Financial is a wholly-owned subsidiary of AXA. Equitable is an indirect
wholly-owned subsidiary of AXA Financial.
Based on information provided by AXA, as of February 1, 2004,
approximately 16.89% of the issued ordinary shares (representing 27.55% of the
voting power) of AXA were owned directly and indirectly by Finaxa, a French
holding company. As of February 1, 2004, 71.11% of the shares (representing
80.36% of the voting power) of Finaxa were owned by three French mutual
insurance companies (the "Mutuelles AXA") and 21.32% of the shares of Finaxa
(representing 12.80% of the voting power) were owned by BNP Paribas, a French
bank. As of February 1, 2004, the Mutuelles AXA owned directly or indirectly
through intermediate holding companies (including Finaxa) approximately 20.17%
of the issued ordinary shares (representing 32.94% of the voting power) of AXA.
Investment Advisory Agreement and Expenses
The Adviser serves as investment manager and adviser of each of the
Portfolios and continuously furnishes an investment program for each Portfolio
and manages, supervises and conducts the affairs of each Portfolio, subject to
the supervisions of the Trust's Board of Trustees. The Investment Advisory
Agreement provides that the Adviser or an affiliate will furnish, or pay the
expenses of the Trust for, office space, facilities and equipment, services of
executive and other personnel of the Trust and certain administrative services.
Under the terms of the Investment Advisory Agreement, the Portfolios pay
no advisory fees to the Investment Adviser.
The Investment Advisory Agreement was approved by the unanimous vote, cast
in person, of the Trust's Trustees, including the Trustees who are not parties
to the Investment Advisory Agreement or "interested persons" as defined in the
1940 Act of any such party, at a meeting called for such purpose and held on
[date]. The Investment Advisory Agreement became effective with respect to the
Trust on [date]. The Investment Advisory Agreement continues in effect for
successive twelve-month periods computed from each [date], provided that such
continuance is specifically approved at least annually by a vote of a majority
of the Trust's outstanding voting securities or by the Trust's Board of
Trustees, and in either case, by a majority of the Trustees who are not parties
to the Investment Advisory Agreement or interested persons of any such party.
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Any amendment to the Investment Advisory Agreement must be approved by
vote of a majority of the outstanding voting securities of the relevant
Portfolio and by vote of a majority of the Trustees who are not such interested
persons, cast in person at a meeting called for the purpose of voting on such
approval. The Investment Advisory Agreement may be terminated without penalty by
the Adviser, by vote of the Trustees, or by vote of a majority of the
outstanding voting securities of the relevant Portfolio upon 60 days' written
notice, and it terminates automatically in the event of its assignment. The
Adviser controls the word "Alliance" in the names of the Trust and each
Portfolio, and if Alliance should cease to be the investment manager of any
Portfolio, the Trust and such Portfolio may be required to change their names to
delete the word "Alliance" from their names.
The Investment Advisory Agreement provides that the Adviser shall not be
subject to any liability in connection with the performance of its services
thereunder in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations and duties.
Certain other clients of the Adviser may have investment objectives and
policies similar to those of the Portfolios. The Adviser may, from time to time,
make recommendations which result in the purchase or sale of the particular
security by its other clients simultaneously with a purchase or sale thereof by
one or more Portfolios. 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. It is the
policy of the Adviser to allocate advisory recommendations and the placing of
orders in a manner that is deemed equitable by the Adviser to the accounts
involved, including the Portfolios. When two or more of the Adviser's clients
(including a Portfolio) are purchasing or selling the same security on a given
day from the same broker or dealer, such transactions may be averaged as to
price.
The Adviser may act as an investment adviser to other persons, firms or
corporations, including investment companies, and is investment adviser to the
following: AllianceBernstein All-Asia Investment Fund, Inc., AllianceBernstein
Americas Government Income Trust, Inc., AllianceBernstein Balanced Shares, Inc.,
AllianceBernstein Blended Style Series, Inc., AllianceBernstein Bond Fund, Inc.,
AllianceBernstein Cap Fund, Inc., AllianceBernstein Capital Reserves,
AllianceBernstein Emerging Market Debt Fund, Inc., AllianceBernstein Exchange
Reserves, AllianceBernstein Focused Growth & Income Fund, Inc.,
AllianceBernstein Global Health Care Fund, Inc., AllianceBernstein Global
Research Growth Fund, Inc., AllianceBernstein Global Small Cap Fund, Inc.,
AllianceBernstein Global Strategic Income Trust, Inc., AllianceBernstein Global
Technology Fund, Inc., AllianceBernstein Government Reserves, AllianceBernstein
Greater China '97 Fund, Inc., AllianceBernstein Growth and Income Fund, Inc.,
AllianceBernstein High Yield Fund, Inc., AllianceBernstein Institutional Funds,
Inc., AllianceBernstein Institutional Reserves, Inc., AllianceBernstein
International Premier Growth Fund, Inc., AllianceBernstein Large Cap Growth
Fund, Inc., AllianceBernstein Mid-Cap Growth Fund, Inc., AllianceBernstein
Multi-Market Strategy Trust, Inc., AllianceBernstein Municipal Income Fund,
Inc., AllianceBernstein Municipal Income Fund II, AllianceBernstein Municipal
Trust, AllianceBernstein New Europe Fund, Inc., AllianceBernstein Real Estate
Investment Fund, Inc., AllianceBernstein Select Investor Series, Inc.,
AllianceBernstein Trust,
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AllianceBernstein Utility Income Fund, Inc., AllianceBernstein Variable Products
Series Fund, Inc., AllianceBernstein Worldwide Privatization Fund, Inc., Sanford
C. Bernstein Fund, Inc. and Sanford C. Bernstein Fund II, Inc., all registered
open-end investment companies; and to ACM Government Opportunity Fund, Inc., ACM
Income Fund, Inc., ACM Managed Dollar Income Fund, Inc., ACM Managed Income
Fund, Inc., ACM Municipal Securities Income Fund, Inc., Alliance All-Market
Advantage Fund, Inc., Alliance California Municipal Income Fund, Inc., Alliance
National Municipal Income Fund, Inc., Alliance New York Municipal Income Fund,
Inc., Alliance World Dollar Government Fund, Inc., Alliance World Dollar
Government Fund II, Inc., and The Spain Fund, Inc., all registered closed-end
investment companies.
Trustee Information
The business and affairs of the Portfolios are managed under the direction
of the Trustees. Certain information concerning the Trustees of the Trust is set
forth below.
[Enlarge/Download Table]
Name, Address, Date of Other Trusteeships and
Birth of Trustee Principal Occupation(s) Portfolios in Fund Complex Directorships Held by
(Held Position Since*) During Past 5 Years Overseen by Trustee Trustee
Interested Trustee
------------------
Marc O. Mayer** Executive Vice President of 76 None
1345 Avenue of the Americas ACMC since 2001; prior
New York, NY 10105 thereto, Chief Executive
10/2/1957 Officer of Sanford C.
(2004) Bernstein & Co., LLC ("SCB
& Co.") and its predecessor
since prior to 1999.
Disinterested Trustees
----------------------
Chairman of the Board Investment Adviser and an 123 None
independent consultant. He
William H. Foulk, Jr. #+ was formerly Senior Manager
Suite 100, 2 Sound View Dr. of Barrett Associates, Inc., a
Greenwich, CT 06830 registered investment adviser,
9/7/1932 with which he had been
(2004) associated since prior to 1999.
He was formerly Deputy
Comptroller and Chief Investment
Officer of the State of New York
and, prior thereto, Chief
Investment Officer of the New
York Bank for Savings.
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[Enlarge/Download Table]
Name, Address, Date of Other Trusteeships and
Birth of Trustee Principal Occupation(s) Portfolios in Fund Complex Directorships Held by
(Held Position Since*) During Past 5 Years Overseen by Trustee Trustee
Ruth Block #+ Formerly Executive Vice 104 None
500 SE Mizner Blvd. President and Chief Insurance
Boca Raton, FL 33432 Officer of The Equitable Life
11/7/1930 Assurance Society of the
(2004) United States; Chairman and
Chief Executive Officer of
Evlico; a Director of Avon, BP
(oil and gas), Ecolab
Incorporated (specialty
chemicals), Tandem Financial
Group and Donaldson, Lufkin &
Jenrette Securities Corporation;
former Governor at Large,
National Association of
Securities Dealers, Inc.
David H. Dievler #+ Independent Consultant. 108 None
P.O. Box 167 Until December 1994 he was
Spring Lake, NJ 07762 Senior Vice President of
10/23/1929 ACMC responsible for mutual
(2004) fund administration. Prior to
joining ACMC in 1984, 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 #+ Consultant. He was formerly 106 None
P.O. Box 12 President of Save Venice, Inc.
Annandale, NY 12504 (preservation organization)
2/19/1942 from 2001 - 2002; Senior
(2004) Advisor from June 1999 - June
2000 and President of Historic
Hudson Valley from December 1989
- May 1999 (historic preservation).
Previously, Director of the
National Academy of Design and
during 1988-1992, he was
Director and Chairman of the
Audit Committee of ACMC.
* There is no stated term of office for the Trustees.
** Mr. Mayer is an "interested person", as defined in the 1940 Act, due to
his position as an Executive Vice President of ACMC.
# Member of the Audit Committee.
+ Member of the Governance and Nominating Committee.
The Trustees of the Trust have two standing committees - an Audit
Committee and a Governance and Nominating Committee. The members of the Audit
and Governance and
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Nominating Committees are identified above. The function of the Audit Committee
is to assist the Trustees in their oversight of the Portfolios' financial
reporting process. Because the Trust is new, the Audit Committee has not met.
The function of the Governance and Nominating Committee is to nominate persons
to fill any vacancies or newly created positions on the Board of Trustees. The
Governance and Nominating Committee does not currently consider for nomination
candidates proposed by shareholders for election as Trustees. Because the Trust
is new, the Governance and Nominating Committee has not met.
The dollar range of the Portfolios' securities owned by each Trustee and
the aggregate dollar range of securities owned in the AllianceBernstein Fund
Complex are set forth below.
[Enlarge/Download Table]
Aggregate Dollar Range of Equity
Dollar Range of Equity Securities in the Securities in the AllianceBernstein
Name of Trustee Portfolios as of December 31, 2003 Fund Complex as of December 31, 2003
Marc O. Mayer None over $100,000
Ruth Block None over $100,000
David H. Dievler None over $100,000
John H. Dobkin None over $100,000
William H. Foulk, Jr. None over $100,000
The Trust undertakes to provide assistance to shareholders in
communications concerning the removal of any Trustee of the Trust in accordance
with Section 16 of the 1940 Act.
Officer Information
Certain information concerning the Portfolios' officers is set forth
below.
[Enlarge/Download Table]
Name, Address* and Age Positions Held with Trust Principal Occupation During Past 5 Years
[To Come]
* The address for each of the Trust's officers is 1345 Avenue of the
Americas, New York, NY 10105.
** ACMC, ABIRM, AGIS and Bernstein are affiliates of the Trust.
The Trust does not pay any fees to, or reimburse expenses of, its Trustees
who are considered "interested persons" of the Trust. The aggregate compensation
paid to each of the Trustees by the Portfolios for the period [ ],
the aggregate compensation paid to each of the Trustees [during calendar year
2003] by all of the registered investment companies to which the Adviser
provides investment advisory services (collectively, the "AllianceBernstein Fund
Complex") and the total number of registered investment companies (and separate
portfolios within the companies) in the AllianceBernstein Fund Complex with
respect to which each Trustee serves as a director or trustee, are set forth
below. None of the Portfolios nor any other registered investment company in the
AllianceBernstein Fund Complex provides compensation in the form of pension or
retirement benefits to any of its directors or trustees. Each of the Trustees is
a director or trustee of one or more other registered investment companies in
the AllianceBernstein Fund Complex.
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[Enlarge/Download Table]
Total Number of
Investment Total Number of
Companies in the Investment Portfolios
Alliance Bernstein within the Alliance
Total Compensation Fund Complex, Bernstein Fund
from the Alliance Including the Complex, Including
Aggregate Bernstein Fund Portfolios, as to the Portfolios, as to
Compensation From Complex, Including Which the Trustee is Which the Trustee is
Name of Trustee the Portfolios the Trust a Director or Trustee a Director or Trustee
Marc O. Mayer $[ ] $ 0 38 [76]
Ruth Block $[ ] $205,550 41 [104]
David H. Dievler $[ ] $264,400 45 [108]
John H. Dobkin $[ ] $234,550 43 [106]
William H. Foulk, Jr. $[ ] $248,650 49 [123]
As of June 30, 2004, the Trustees and officers of the Portfolios as a
group owned less than 1% of the shares of each Portfolio.
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PORTFOLIO TRANSACTIONS
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Under the general supervision of the Trustees, the Adviser makes each
Portfolio's investment decisions and determines the broker to be used in each
specific transaction with the objective of negotiating a combination of the most
favorable commission and the best price obtainable on each transaction
(generally defined as "best execution"). When consistent with the objective of
obtaining best execution, brokerage may be directed to persons or firms
supplying investment information to the Adviser. Neither the Portfolios nor the
Adviser has entered into agreements or understandings with any brokers regarding
the placement of securities transactions because of research services they
provide. To the extent that such persons or firms supply investment information
to the Adviser for use in rendering investment advice to the Portfolios, such
information may be supplied at no cost to the Adviser and, therefore, may have
the effect of reducing the expenses of the Adviser in rendering advice to the
Portfolios. While it is impossible to place an actual dollar value on such
investment information, the Adviser believes that its receipt probably does not
reduce the overall expenses of the Adviser to any material extent.
The investment information provided to the Adviser is of the type
described in Section 28(e) of the Securities Exchange Act of 1934, as amended,
and is designed to augment the Adviser's own internal research and investment
strategy capabilities. Research services furnished by brokers through which the
Portfolios effect securities transactions are used by the Adviser in carrying
out its investment management responsibilities with respect to all its clients'
accounts. There may be occasions where the fee charged by a broker may be
greater than that which another broker may charge if it is determined in good
faith that the amount of such fee is reasonable in relation to the value of
brokerage and research services provided by the executing broker.
The Portfolios may deal in some instances in securities that are not
listed on a national securities exchange but are traded in the over-the-counter
market. They may also purchase listed securities through the third market. Where
transactions are executed in the over-the-counter
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market or third market, the Portfolios will seek to deal with the primary market
makers; but when necessary in order to obtain best execution, they will utilize
the services of others.
The extent to which commissions that will be charged by broker-dealers
selected by the Portfolios may reflect an element of value for research cannot
presently be determined. To the extent that research services of value are
provided by broker-dealers with or through whom the Portfolios place portfolio
transactions, the Adviser may be relieved of expenses which it might otherwise
bear. Research services furnished by broker-dealers could be useful and of value
to the Adviser in servicing its other clients as well as the Portfolios; on the
other hand, certain research services obtained by the Adviser as a result of the
placement of portfolio brokerage of other clients could be useful and of value
to it in servicing the Portfolios. In connection with seeking best price and
execution, the Portfolios do not consider sales of shares of the Portfolios or
other investment companies managed by the Adviser as a factor in the selection
of broker-dealers to effect portfolio transactions.
The Portfolios may from time to time place orders for the purchase or sale
of securities (including listed call options) with brokers affiliated with the
Adviser. In such instances, the placement of orders with such broker would be
consistent with the Portfolios' objective of obtaining best execution and would
not be dependent upon the fact that the broker is an affiliate of the Adviser.
With respect to orders placed affiliated brokers for execution on a national
securities exchange, commissions received must conform to Section 17(e)(2)(A) of
the 1940 Act and Rule 17e-1 thereunder, which permit an affiliated person of a
registered investment company (such as the Trust), or any affiliated person of
such person, to receive a brokerage commission from such registered investment
company provided that such commission is reasonable and fair compared to the
commissions received by other brokers in connection with comparable transactions
involving similar securities during a comparable period of time.
Because the Portfolios are new, there were no brokerage transactions
between the Portfolios and its affiliated brokers in the most recent fiscal
year.
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EXPENSES OF THE PORTFOLIOS
--------------------------------------------------------------------------------
Distribution Arrangements
The Trust has entered into a distribution services agreement (the
"Distribution Services Agreement") on behalf of each Portfolio with ABIRM, the
Portfolios' principal underwriter (the "Principal Underwriter"), to permit the
Principal Underwriter to distribute the Portfolios' shares, which are sold at
the net asset value without any sales charge. The Distribution Services
Agreement does not obligate the Distributor to sell a specific number of shares.
The Principal Underwriter is, under the Distribution Services Agreement,
responsible for certain expenses incurred by the Portfolios, including, for
example, certain administrative
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services, costs of printing Portfolio prospectuses and other reports to
shareholders, and any expenses incurred in promoting the sale of the Portfolios'
shares.
The Portfolios have, under the Distribution Services Agreement, assumed
the obligation for payment of certain of its other expenses, including any taxes
levied against the Portfolios, brokerage fees and commissions in connection with
the purchase and sale of portfolio securities, and other extraordinary expenses.
The Trust may employ its own personnel to perform services other than those
specifically provided to the Trust by the Principal Underwriter. For such
services it may also utilize or employ personnel employed by the Investment
Adviser.
The Distribution Services Agreement will continue in effect for successive
twelve-month periods (computed from each [date]), provided, however, that such
continuance is specifically approved at least annually by the Trustees or by
vote of the holders of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Portfolios, and in either case, by a majority of
the Trustees who are not parties to the Distribution Services Agreement or
interested persons, as defined in the 1940 Act, of any such party (other than as
Trustees of the Trust) and who have no direct or indirect financial interest in
the operation of the Distribution Services Agreement or any agreement related
thereto.
All material amendments to the Distribution Services Agreement will become
effective only upon approval as provided in the preceding paragraph. The
Distribution Services Agreement may be terminated (a) by the Portfolios without
penalty at any time by a majority vote of the holders of the Portfolio's
outstanding voting securities, voting separately by class, or by a majority vote
of the disinterested Trustees or (b) by the Principal Underwriter. To terminate
the Distribution Services Agreement, any party must give the other parties 60
days' written notice. The Distribution Services Agreement will terminate
automatically in the event of its assignment.
Transfer Agency Arrangements
Alliance Global Investor Services, Inc. ("AGIS"), an indirect wholly-owned
subsidiary of the Adviser located at 500 Plaza Drive, Secaucus, New Jersey
07094, acts as the Portfolios' registrar, transfer agent and dividend-disbursing
agent.
Codes of Ethics and Proxy Voting Policies and Procedures
The Portfolios, the Adviser and the Principal Underwriter have each
adopted codes 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 Portfolios. The Portfolios have
adopted the Adviser's proxy voting policies and procedures. The Adviser's proxy
voting policies and procedures are attached as Appendix B.
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PURCHASE OF SHARES
--------------------------------------------------------------------------------
The following information supplements that set forth in the Prospectus
under the heading "Purchase and Sale of Shares - How To Buy Shares."
General
Shares of the Portfolios are sold directly through the Principal
Underwriter exclusively to mutual funds advised by and certain other
institutional clients of Alliance. The shares are offered on a continuous basis
at a price equal to their net asset value.
Right To Restrict, Reject Or Cancel Purchase And Exchange Orders. The
AllianceBernstein Mutual Funds reserve the right to restrict, reject or cancel,
without any prior notice, any purchase or exchange order for any reason. Each
Portfolio reserves the right to suspend the sale of its shares to the public in
response to conditions in the securities markets or for other reasons. If a
Portfolio suspends the sale of its shares, shareholders will not be able to
acquire its shares.
The public offering price of shares of the Portfolios is their net asset
value. On each Portfolio business day on which a purchase or redemption order is
received by a Portfolio and trading in the types of securities in which the
Portfolio invests might materially affect the value of Portfolio shares, the per
share net asset value is computed as of the next close of regular trading on the
Exchange (currently 4:00 p.m. Eastern time) by dividing the value of the total
assets attributable to a class, less its liabilities, by the total number of its
shares then outstanding. A Portfolio business day is any day on which the
Exchange is open for trading. Orders received by the Principal Underwriter prior
to the close of regular trading on the Exchange on each day the Exchange is open
for trading are priced at the net asset value computed as of the close of
regular trading on the Exchange on that day.
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REDEMPTION OF SHARES
--------------------------------------------------------------------------------
The following information supplements that set forth in the Portfolios'
Prospectus under the heading "Purchase and Sale of Shares - How to Sell Shares."
Subject only to the limitations described below, the Portfolios will
redeem shares tendered to them, as described below, at a redemption price equal
to their net asset value as next computed following the receipt of shares
tendered in proper form. There is no redemption charge.
The right of redemption may not be suspended and the date of payment upon
redemption may not be postponed for more than seven days after shares are
tendered for redemption, except
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for any period during which the Exchange is closed (other than customary weekend
and holiday closings) or during which the SEC determines that trading thereon is
restricted, or for any period during which an emergency (as determined by the
SEC) exists as a result of which disposal by a Portfolio of securities owned by
it is not reasonably practicable or as a result of which it is not reasonably
practicable for a Portfolio fairly to determine the value of its net assets, or
for such other periods as the SEC may by order permit for the protection of
security holders of a Portfolio.
Redemption proceeds will be sent by wire only. Payment of the redemption
price will ordinarily be wired within one business day of the redemption
request, but may take up to three business days. The value of a shareholder's
shares on redemption or repurchase may be more or less than the cost of such
shares to the shareholder, depending upon the market value of the Portfolio's
portfolio securities at the time of such redemption or repurchase. Payment
received by a shareholder upon redemption or repurchase of his or her shares,
assuming the shares constitute capital assets in his or her hands, will result
in long-term or short-term capital gains (or loss) depending upon the
shareholder's holding period and basis in respect of the shares redeemed.
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NET ASSET VALUE
--------------------------------------------------------------------------------
The Alliance Capital Pricing & Valuation Group (the "Pricing Group") is
responsible for implementing Alliance's Statement of Pricing Policy (the "Policy
Statement"), as approved by the Board of Trustees.
The per share net asset value is computed in accordance with the Trust's
Declaration of Trust and By-Laws at the next close of regular trading on the
Exchange (ordinarily 4:00 p.m. Eastern time) following receipt of a purchase or
redemption order by a Portfolio on each Portfolio business day on which such an
order is received and on such other days as the Board of Trustees deems
appropriate or necessary in order to comply with Rule 22c-1 under the 1940 Act.
Each Portfolio's per share net asset value is calculated by dividing the value
of that Portfolio's total assets, less its liabilities, by the total number of
its shares then outstanding. A Portfolio business day is any weekday on which
the Exchange is open for trading.
In accordance with applicable rules under the 1940 Act and the Portfolios'
pricing policies and procedures adopted by the Board of Trustees (the "Pricing
Policies"), portfolio securities are valued at current market value or at fair
value. The Board of Trustees has delegated to the Adviser certain of the Board's
duties with respect to the Pricing Policies. Readily marketable securities
listed on the Exchange or on a foreign securities exchange (other than foreign
securities exchanges whose operations are similar to those of the United States
over-the-counter market) are valued, except as indicated below, at the last sale
price reflected on the consolidated tape at the close of the Exchange or, in the
case of a foreign securities exchange, at the last quoted sale price, in each
case on the business day as of which such value is being determined. If there
has been no sale on such day, the securities are valued at the mean of the
closing bid and asked prices on such day. If no bid or asked prices are quoted
on such day, then
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the security is valued in good faith at fair value by, or pursuant to procedures
established by, the Board of Trustees. Securities for which no bid and asked
price quotations are readily available are valued in good faith at fair value
by, or in accordance with procedures established by, the Board of Trustees.
Readily marketable securities not listed on the Exchange or on a foreign
securities exchange but listed on other national securities exchanges are valued
in like manner, and securities traded on The Nasdaq Stock Market, Inc.
("NASDAQ") are valued in accordance with the NASDAQ Official Closing Price.
Portfolio securities traded on the Exchange or on a foreign securities exchange
and on one or more other national or foreign securities exchanges, and portfolio
securities not traded on the Exchange but traded on one or more other national
or foreign securities exchanges are valued in accordance with these procedures
by reference to the principal exchange on which the securities are traded.
Readily marketable securities traded in the over-the-counter market,
including securities listed on a national securities exchange whose primary
market is believed to be over-the-counter (but excluding securities traded on
NASDAQ), are valued at the mean of the current bid and asked prices as reported
by the National Quotation Bureau or other comparable sources.
Listed put or call options purchased by a Portfolio are valued at the last
sale price. If there has been no sale on that day, such securities will be
valued at the closing bid prices on that day.
Open futures contracts and options thereon will be valued using the
closing settlement price or, in the absence of such a price, the most recent
quoted bid price. If there are no quotations available for the day of
valuations, the last available closing settlement price will be used.
U.S. Government securities and other debt instruments having 60 days or
less remaining until maturity are valued at amortized cost if their original
maturity was 60 days or less, or by amortizing their fair value as of the 61st
day prior to maturity if their original term to maturity exceeded 60 days
(unless in either case the Board of Trustees determines that this method does
not represent fair value).
Debt securities may be valued on the basis of prices provided by a pricing
service when such prices are believed to reflect the fair market value of such
securities. The prices provided by a pricing service take into account many
factors, including institutional size trading in similar groups of securities
and any developments related to specific securities. For securities where the
Pricing Group has determined that an appropriate pricing service does not exist,
such securities may be valued on the basis of a quoted bid price or spread from
a major broker/dealer in such security.
All other securities will be valued in accordance with readily available
market quotations as determined in accordance with procedures established by a
Portfolio or the Board of Trustees.
With respect to securities for which market quotations are not readily
available, the market value of a security will be determined in accordance with
the Policy Statement.
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Trading in securities on Far Eastern and European securities exchanges and
over-the-counter markets is normally completed well before the close of business
of each Portfolio business day. In addition, trading in foreign markets may not
take place on all Portfolio business days. Furthermore, trading may take place
in various foreign markets on days that are not Portfolio business days. Each
Portfolio's calculation of the net asset value per share, therefore, does not
always take place contemporaneously with the most recent determination of the
prices of portfolio securities in these markets. Events affecting the values of
these portfolio securities that occur between the time their prices are
determined in accordance with the above procedures and the close of the Exchange
will not be reflected in a Portfolio's calculation of net asset value unless
these prices do not reflect current market value, in which case the securities
will be valued in good faith at fair value by, or in accordance with procedures
established by, the Board of Trustees.
The Board of Trustees may suspend the determination of a Portfolio's net
asset value (and the offering and sales of shares), subject to the rules of the
Commission and other governmental rules and regulations, at a time when: (1) the
Exchange is closed, other than customary weekend and holiday closings, (2) an
emergency exists as a result of which it is not reasonably practicable for a
Portfolio to dispose of securities owned by it or to determine fairly the value
of its net assets, or (3) for the protection of shareholders, the Commission by
order permits a suspension of the right of redemption or a postponement of the
date of payment on redemption.
For purposes of determining each Portfolio's net asset value per share,
all assets and liabilities initially expressed in a foreign currency will be
converted into U.S. dollars at the mean of the current bid and asked prices of
such currency against the U.S. dollar last quoted by a major bank that is a
regular participant in the relevant foreign exchange market or on the basis of a
pricing service that takes into account the quotes provided by a number of such
major banks. If such quotations are not available as of the close of the
Exchange, the rate of exchange will be determined in good faith by, or under the
direction of, the Board of Trustees.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
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SCOPE OF DISCUSSION. The following discussion addresses certain U.S.
federal income tax issues concerning the Portfolios and the purchase, ownership,
and disposition of Portfolio shares. This discussion does not purport to be
complete or to address all aspects of federal income taxation that may be
relevant to shareholders in light of their particular circumstances, nor to
certain types of shareholders subject to special treatment under the federal
income tax laws (for example, banks and life insurance companies). The following
discussion also provides only limited information about the U.S. federal income
tax treatment of shareholders that are not U.S. shareholders. This discussion is
based upon present provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), the regulations promulgated thereunder, and judicial and
administrative rulings, all of which are subject to change, which change may be
retroactive. Prospective investors should consult their own tax advisors with
-36-
regard to the federal tax consequences of the purchase, ownership, or
disposition of Portfolio shares, as well as the tax consequences arising under
the laws of any state, foreign country, or other taxing jurisdiction.
United States Federal Income Taxation of Dividends and Distributions
TAXATION OF EACH PORTFOLIO. Each Portfolio is treated as a separate
taxable entity for U.S. federal income tax purposes. Each Portfolio intends to
qualify for tax treatment as a "regulated investment company" under Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code"), for each taxable
year.
If a Portfolio qualifies as a regulated investment company that is
accorded special tax treatment, it will not be subject to federal income tax on
the part of its income distributed in a timely manner to shareholders in the
form of dividends (including capital gain dividends). In order to qualify for
the special tax treatment accorded regulated investment companies and their
shareholders, each Portfolio must, among other things:
(a) derive at least 90% of its gross income from dividends, interest,
payments with respect to certain securities loans, and gains from the sale of
stock, securities and foreign currencies, or other income (including but not
limited to gains from options, futures, or forward contracts) derived with
respect to its business of investing in such stock, securities, or currencies;
(b) distribute with respect to each taxable year at least 90% of the sum
of its taxable net investment income, its net tax-exempt income, and the excess,
if any, of net short-term capital gains over net long-term capital losses for
such year; and
(c) diversify its holdings so that, at the end of each quarter of its
taxable year, (i) at least 50% of the market value of the Portfolio's assets is
represented by cash and cash items, U.S. government securities, securities of
other regulated investment companies, and other securities limited in respect of
any one issuer to a value not greater than 5% of the value of the Portfolio's
total assets and to not more than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its assets is invested
in the securities (other than those of the U.S. Government or other regulated
investment companies) of any one issuer or of two or more issuers which the
Portfolio controls and which are engaged in the same, similar, or related trades
or businesses. Each Portfolio intends to make sufficient distributions to
shareholders to meet this requirement. Investors should consult their own
counsel for a complete understanding of the requirements the Portfolios must
meet to qualify for such treatment.
If it were to fail to qualify as a regulated investment company accorded
special tax treatment in any taxable year, each Portfolio would be subject to
tax on its taxable income at corporate rates, and all distributions from
earnings and profits, including any distributions of net tax-exempt income and
net long-term capital gains, would be taxable to U.S. shareholders as ordinary
income. (Some portions of such distributions generally would be eligible (i) to
be treated as qualified dividend income in the case of U.S. shareholders taxed
as individuals and (ii) for the dividends received deduction in the case of
corporate U.S. shareholders.) In addition, each
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Portfolio could be required to recognize unrealized gains, pay substantial taxes
and interest and make substantial distributions before requalifying as a
regulated investment company that is accorded special tax treatment.
In addition, if a Portfolio fails to distribute in a calendar year an
amount equal to the sum of 98% of its ordinary income for such year and 98% of
its capital gain net income for the one-year period ending October 31 (or later
if the Portfolio is permitted so to elect and so elects), plus any retained
amount from the prior year, the Portfolio will be subject to a 4% excise tax on
the underdistributed amounts. For these purposes, a strategy will be treated as
having distributed any amount for which it is subject to income tax. A dividend
paid to shareholders by a Portfolio in January of a year generally is deemed to
have been paid by the Portfolio on December 31 of the preceding year, if the
dividend was declared and payable to shareholders of record on a date in
October, November or December of that preceding year. The Portfolios intend
generally to make distributions sufficient to avoid imposition of the 4% excise
tax.
PORTFOLIO DISTRIBUTIONS. Generally, a regulated investment company
qualifying under Subchapter M of the Code that invests in a Portfolio (a "Fund
Shareholder") will be treated in the same manner as Portfolio shareholders who
are natural persons would be, and, as such, the Fund Shareholder will have
ordinary income from the receipt of dividends from the underlying Portfolios'
investment income and short-term gains and capital gain income from the receipt
of capital gain dividends from underlying Portfolios. As for most other types of
shareholders of an underlying Portfolio, a Fund Shareholder will not be able to
use losses realized within one underlying Portfolio against gains or income
realized within another underlying Portfolio. This could cause the Fund
Shareholder to receive, and in turn be required to make, higher current
distributions, and such distributions may consist to a greater degree of
ordinary income than they would have had if the Fund Shareholder had held
directly the assets of the underlying Portfolios. The Fund Shareholder will,
however, be able to net gains or losses from the redemptions of shares in
multiple underlying funds against each other.
Taxes on distributions of capital gains are determined by how long the
Portfolio owned the investments that generated them, rather than how long a Fund
Shareholder has owned his or her shares in the Portfolio. Distributions of net
capital gains from the sale of investments that the Portfolio owned for more
than one year and that are properly designated by the Portfolio as capital gain
dividends ("Capital Gain Dividends") will be taxable to Fund Shareholders as
long-term capital gains. Distributions from capital gains are generally made
after applying any available capital loss carryovers. Distributions of gains
from the sale of investments that the Portfolio owned for one year or less will
be taxable to Fund Shareholders as ordinary income.
QUALIFIED DIVIDEND INCOME. For taxable years beginning on or before
December 31, 2008, "qualified dividend income" received by an individual will be
taxed at the rates applicable to long-term capital gain. If a Fund Shareholder
receives dividends from an underlying fund that qualifies as a regulated
investment company, and the underlying Portfolio designates such dividends as
"qualified dividend income," then the Fund Shareholder will receive "qualified
dividend income" and is permitted in turn to designate a portion of its
distributions as "qualified dividend income" as well, provided the Fund
Shareholder meets
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holding period and other requirements with respect to shares of the underlying
Portfolio. A dividend will not be treated as qualified dividend income (at any
level) (1) if the dividend is received with respect to any share of stock held
for fewer than 61 days during the 120-day period beginning on the date which is
60 days before the date on which such share becomes ex-dividend with respect to
such dividend (or, in the case of certain preferred stock, 91 days during the
180-day period beginning 90 days before such date), (2) to the extent that the
recipient is under an obligation (whether pursuant to a short sale or otherwise)
to make related payments with respect to positions in substantially similar or
related property, (3) if the recipient elects to have the dividend income
treated as investment income for purposes of the limitation on deductibility of
investment interest, or (4) if the dividend is received from a foreign
corporation that is (a) not eligible for the benefits of a comprehensive income
tax treaty with the United States (with the exception of dividends paid on stock
of such a foreign corporation readily tradable on an established securities
market in the United States) or (b) treated as a foreign personal holding
company, foreign investment company, or passive foreign investment company.
Technical corrections legislation is pending that would change the
preceding rule by substituting "121-day" for "120-day" and "181-day" for
"180-day". The Treasury Department and the Internal Revenue Service have
indicated that taxpayers may apply the qualified dividend income rules as if
these technical correction have already been enacted.
Only qualified dividend income received by a Fund Shareholder after
December 31, 2002 is eligible for pass-through treatment. If the aggregate
qualified dividends received by a Fund Shareholder during any taxable year are
95% or more of its gross income, then 100% of the Fund Shareholder's dividends
(other than properly designated capital gain dividends) will be eligible to be
treated as qualified dividend income. For this purpose, the only gain included
in the term "gross income" is the excess of net short-term capital gain over net
long-term capital loss.
Long-term capital gain rates applicable to individuals have been
temporarily reduced--in general, to 15% with lower rates applying to taxpayers
in the 10% and 15% rate brackets-- for taxable years beginning on or before
December 31, 2008.
Although each Portfolio may distribute amounts designated as qualified
dividend income if certain conditions (described below) are satisfied, those
Portfolios emphasizing equity investments - for example, the U.S. Large Cap
Growth Portfolio and the Small-Mid Cap Value Portfolio - are generally likely to
be able to distribute larger proportionate amounts designated as qualified
dividend income. However, the equity component of each Portfolio's portfolio is
normally diversified among a broad range of stocks paying dividends at different
rates or perhaps even not at all. As a result, it is not possible to predict
what portions of distributions made by any of the Portfolios are likely to be
designated as qualified dividend income.
Any dividend or distribution received by a U.S. shareholder on shares of
one of the Portfolios (even if received shortly after the purchase of such
shares by such shareholder) will have the effect of reducing the net asset value
of such shares by the amount of such dividend or distribution.
-39-
DIVIDENDS RECEIVED DEDUCTION. U.S. Corporate shareholders of Fund
Shareholders, if any, may be able to take a dividends-received deduction with
respect to the portion of any Portfolio distribution representing certain
dividends received by the Portfolio from domestic corporations during the
taxable year. The ability to take a dividends-received deduction is subject to
particular requirements and limitations in the Code.
RETURN OF CAPITAL DISTRIBUTIONS. If a Portfolio makes a distribution in
excess of its current and accumulated "earning and profits" in any taxable year,
the excess distribution will be treated as a return of capital to the extent of
a U.S. shareholder's tax basis in its shares, and thereafter as capital gain. A
return of capital is not taxable, but it reduces a U.S. shareholder's tax basis
in its shares, thus reducing any loss or increasing any gain on a subsequent
taxable disposition of those shares.
Dividends and distributions on a Portfolio's shares are generally subject
to federal income tax as described herein to the extent they do not exceed the
Portfolio's realized income and gains, even though such dividends and
distributions may economically represent a return of a particular U.S.
shareholder's investment. Such distributions are likely to occur in respect of
shares purchased at a time when the Portfolio's net asset value reflects gains
that are either unrealized, or realized but not distributed. Such realized gains
may be required to be distributed, even when a Portfolio's net asset value also
reflects unrealized losses.
REDEMPTIONS AND SALES OF SHARES. Redemptions and sales of shares in any of
the Portfolios are generally taxable transactions for U.S. federal income tax
purposes, generally giving rise to gain or loss recognition by U.S. shareholders
at rates applicable to long-term or short-term capital gains depending on
whether the shares were held for more than one year or for one year or less,
respectively. However, if a U.S. shareholder sells shares at a loss within six
months of purchase, any loss will be disallowed for U.S. federal income tax
purposes to the extent of any exempt-interest dividends received on such shares.
In addition, any loss (not already disallowed as provided in the preceding
sentence) realized upon a taxable disposition of shares held for six months or
less will be treated as long-term, rather than short-term, to the extent of any
long-term capital gain distributions received by the shareholder with respect to
the shares. All or a portion of any loss realized upon a taxable disposition of
Portfolio shares will be disallowed if other shares of the same Portfolio are
purchased within 30 days before or after the disposition. In such a case, the
basis of the newly purchased shares will be adjusted to reflect the disallowed
loss.
REDEMPTIONS AND SALES OF SHARES BY FUND SHAREHOLDERS. Depending on a Fund
Shareholder's percentage ownership in an underlying Portfolio both before and
after a redemption of underlying fund shares, there is a remote risk that the
Fund Shareholder's redemption of shares of such underlying Portfolio may cause
the Fund Shareholder to be treated as receiving a dividend taxable as ordinary
income on the full amount of the distribution instead of receiving capital gain
income on the shares of the underlying Portfolio. This would be the case where
the Fund Shareholder holds a significant interest in an underlying Portfolio and
redeems only a small portion of such interest.
-40-
OPTIONS, FUTURES, FORWARD CONTRACTS, AND SWAP AGREEMENTS. Each Portfolio
may enter hedging transactions and other transactions in options, futures
contracts, forward contracts, swap agreements, straddles, foreign currencies,
and other instruments, all of which are subject to special tax rules (including
constructive sale, mark-to-market, straddle, wash sale, and short sale rules),
the effect of which may be to accelerate income to the Portfolio, defer losses
to the Portfolio, cause adjustments in the holding periods of the Portfolio's
securities, convert long-term capital gains into short-term capital gains or
convert short-term capital losses into long-term capital losses. These rules
could therefore affect the amount, timing, and character of distributions to
shareholders. Each Portfolio will endeavor to make any available elections
pertaining to such transactions in a manner believed to be in the best interests
of the Portfolio.
Certain of each Portfolio's hedging activities (including its
transactions, if any, in foreign currencies or foreign currency-denominated
instruments) are likely to produce a difference between its book income and the
sum of its taxable income and net tax-exempt income (if any). If a Portfolio's
book income exceeds the sum of its taxable income and net tax-exempt income (if
any), the distribution (if any) of such excess will be treated as (i) a dividend
to the extent of the Portfolio's remaining earnings and profits (including
earnings and profits arising from tax-exempt income), (ii) thereafter as a
return of capital to the extent of the recipient's basis in the shares, and
(iii) thereafter as gain from the sale or exchange of a capital asset. If its
book income is less than sum of its taxable income and net tax-exempt income (if
any), a Portfolio could be required to make distributions exceeding book income
to qualify as a regulated investment company that is accorded special tax
treatment.
SECURITIES ISSUED OR PURCHASED AT A DISCOUNT. An investment made in
securities issued at a discount and certain other obligations will (and
investments in securities purchased at a discount may) require the Portfolio
making the investment to accrue and distribute income not yet received. In order
to generate sufficient cash to make the requisite distributions, the Portfolio
may be required to sell securities in its portfolio that it otherwise would have
continued to hold.
FOREIGN CURRENCY-DENOMINATED SECURITIES AND RELATED HEDGING TRANSACTIONS.
Each Portfolio may enter transactions in foreign currencies, foreign currency-
denominated debt securities, and certain foreign currency options, futures
contracts, and forward contracts (and other similar instruments), which may give
rise to ordinary income or loss to the extent such income or loss results from
fluctuations in the value of the foreign currency concerned.
With respect to each of the Portfolios, investments in foreign securities
may be subject to foreign withholding taxes, effectively decreasing the yield on
those securities, and may increase or accelerate the Portfolio's recognition of
ordinary income and affect the timing or amount of the Portfolio's
distributions. None of the Portfolios expects that U.S. shareholders will be
able to claim a credit or deduction with respect to foreign taxes paid by the
Portfolio.
Investment by any of the Portfolios in "passive foreign investment
companies" could subject the Portfolio to a U.S. federal income tax or other
charge on the proceeds from the sale of
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its investment in such a company; however, this tax can be avoided by making an
election to mark such investments to market annually or to treat the passive
foreign investment company as a "qualified electing fund."
A "passive foreign investment company" is any foreign corporation: (i) 75
percent or more of the income of which for the taxable year is passive income,
or (ii) the average percentage of the assets of which (generally by value, but
by adjusted tax basis in certain cases) that produce or are held for the
production of passive income is at least 50 percent. Generally, passive income
for this purpose means dividends, interest (including income equivalent to
interest), royalties, rents, annuities, the excess of gain over losses from
certain property transactions and commodities transactions, and foreign currency
gains. Passive income for this purpose does not include rents and royalties
received by the foreign corporation from active business and certain income
received from related persons. Dividends paid by a passive foreign investment
company will not be eligible to be treated as "qualified dividend income."
BACKUP WITHHOLDING. Each Portfolio generally is required to withhold and
remit to the U.S. Treasury a percentage of the taxable dividends and other
distributions paid to and proceeds of share sales, exchanges, or redemptions
made by any individual shareholder who fails to furnish the Portfolio with a
correct taxpayer identification number (TIN), who has under-reported dividends
or interest income, or who fails to certify to the Portfolio that he or she is a
United States person and is not subject to such withholding. Pursuant to
recently enacted tax legislation, the backup withholding tax rate is 28% for
amounts paid through 2010. The backup withholding tax rate will be 31% for
amounts paid after December 31, 2010.
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GENERAL INFORMATION
--------------------------------------------------------------------------------
Description of the Trust
The Trust is organized as a Massachusetts business trust under the laws of
The Commonwealth of Massachusetts by an Agreement and Declaration of Trust
("Declaration of Trust") dated [DATE], a copy of which is on file with the
Secretary of State of The Commonwealth of Massachusetts. The Trust is a "series"
company as described in Rule 18f-2 under the 1940 Act, having ten separate
portfolios, each of which is represented by a separate series of shares.
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of each series and of each class of shares
thereof. The shares of each Portfolio do not have any preemptive rights. Upon
termination of any Portfolio, whether pursuant to liquidation of the Trust or
otherwise, shareholders of that Portfolio are entitled to share pro rata in the
net assets of that Portfolio then available for distribution to such
shareholders. The Trust or any Portfolio may be terminated at any time by vote
of at least a majority of the outstanding shares of each Portfolio affected. The
Declaration of Trust further provides that the Trustees may also terminate the
Trust upon written notice to the shareholders.
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It is anticipated that annual shareholder meetings will not be held;
shareholder meetings will be held only when required by federal or state law.
Shareholders have available certain procedures for the removal of Trustees.
Capitalization
The Trust has an unlimited number of authorized shares of beneficial
interest. The Trustees are authorized to reclassify any unissued shares to any
number of additional series and classes without shareholder approval.
Accordingly, the Trustees in the future, for reasons such as the desire to
establish one or more additional portfolios with different investment
objectives, policies or restrictions, may create additional classes or series of
shares. Any issuance of shares of another class or series would be governed by
the 1940 Act and the laws of The Commonwealth of Massachusetts. If shares of
another series were issued in connection with the creation of one or more
additional portfolios, each share of any portfolio would normally be entitled to
one vote for all purposes. Generally, shares of all portfolios would vote as a
single series on matters, such as the election of Trustees, that affected all
portfolios in substantially the same manner. As to matters affecting each
portfolio differently, such as approval of the Investment Advisory Agreement and
changes in investment policy, shares of each portfolio would vote as a separate
series. Procedures for calling a shareholders' meeting for the removal of
Trustees of the Portfolio, similar to those set forth in Section 16(c) of the
1940 Act, will be available to shareholders of the Portfolios. The rights of the
holders of shares of a series may not be modified except by the vote of a
majority of the outstanding shares of such series. Except as noted below under
"Shareholder and Trustee Liability," all shares of the Portfolios when duly
issued will be fully paid and non-assessable.
As of the close of business on [date], there were [ ] shares of
beneficial interest outstanding. To the knowledge of the Portfolios, the
following persons owned of record or beneficially 5% or more of the outstanding
shares of each Portfolio as of [date].
Name and Address No. of Shares % of Class
---------------- ------------- ----------
Voting Rights
As summarized in the Prospectus, shareholders are entitled to one vote for
each full share held (with fractional votes for fractional shares held) and will
vote (to the extent provided herein) in the election of Trustees and the
termination of the Trust or a Portfolio and on other matters submitted to the
vote of shareholders.
The By-Laws of the Trust provide that the shareholders of any particular
series or class shall not be entitled to vote on any matters as to which such
series or class is not affected. Except with respect to matters as to which the
Trustees have determined that only the interests of one or more particular
series or classes are affected or as required by law, all of the shares of each
series or class shall, on matters as to which such series or class is entitled
to vote, vote with other series
-43-
or classes so entitled as a single class. Notwithstanding the foregoing, with
respect to matters which would otherwise be voted on by two or more series or
classes as a single class, the Trustees may, in their sole discretion, submit
such matters to the shareholders of any or all such series or classes
separately. Rule 18f-2 under the 1940 Act provides in effect that a series shall
be deemed to be affected by a matter unless it is clear that the interests of
each series in the matter are substantially identical or that the matter does
not affect any interest of such series. Although not governed by Rule 18f-2,
shares of each class of a Portfolio will vote separately with respect to matters
pertaining to the respective Distribution Plans applicable to each class.
The terms "shareholder approval" and "majority of the outstanding voting
securities" as used in the Prospectus and this SAI mean the lesser of (i) 67% or
more of the shares of the applicable Portfolio or applicable class thereof
represented at a meeting at which more than 50% of the outstanding shares of
such Portfolio or such class are represented or (ii) more than 50% of the
outstanding shares of such Portfolio or such class.
There will normally be no meetings of shareholders for the purpose of
electing Trustees except that in accordance with the 1940 Act (i) the Trust will
hold a shareholders' meeting for the election of Trustees at such time as less
than a majority of the Trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy on the Board of Trustees,
less than two-thirds of the Trustees holding office have been elected by the
shareholders, that vacancy may only be filled by a vote of the shareholders. The
Portfolios' shares have non-cumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of Trustees can
elect 100% of the Trustees if they choose to do so, and in such event the
holders of the remaining less than 50% of the shares voting for such election of
Trustees will not be able to elect any person or persons to the Board of
Trustees. A special meeting of shareholders for any purpose may be called by 10%
of the Trust's outstanding shareholders.
Except as set forth above, the Trustees shall continue to hold office and
may appoint successor Trustees.
No amendment may be made to the Agreement and Declaration of Trust without
the affirmative vote of a majority of the outstanding shares of the Trust except
(i) to change the Trust's name, (ii) to establish, change or eliminate the par
value of shares or (iii) to supply any omission, cure any ambiguity or cure,
correct or supplement any defective or inconsistent provision contained in the
Declaration of Trust.
Shareholder and Trustee Liability
Under Massachusetts law shareholders could, under certain circumstances,
be held personally liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Agreement and Declaration of Trust provides for
indemnification out of a Portfolio's property for all loss and expense of any
shareholder of that Portfolio held liable on account of being or having been a
shareholder. Thus, the risk of a shareholder incurring
-44-
financial loss on account of shareholder liability is limited to circumstances
in which the Portfolio of which he or she was a shareholder would be unable to
meet its obligations.
The Agreement and Declaration of Trust further provides that the Trustees
will not be liable for errors of judgment or mistakes of fact or law. However,
nothing in the Agreement and Declaration of Trust protects a Trustee against any
liability to which the Trustee 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 or her office. The By-Laws of the Trust provide
for indemnification by the Trust of the Trustees and the officers of the Trust
but no such person may be indemnified against any liability to the Trust or the
Trust's shareholders to which he or she 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 or her office.
Custodial Arrangements
State Street Bank and Trust Company, 225 Franklin Street, Boston, MA,
02110 ("State Street") acts as the Trust's custodian, but plays no part in
deciding the purchase or sale of portfolio securities. Subject to the
supervision of the Portfolios' Trustees, State Street may enter into
subcustodial agreements for the holding of the Portfolios' securities outside of
the United States.
Principal Underwriter
ABIRM, an indirect wholly-owned subsidiary of the Investment Adviser,
located at 1345 Avenue of the Americas, New York, New York 10105, is the
principal underwriter of shares of the Portfolios, and as such may solicit
orders from the public to purchase shares of the Portfolios. Under the
Distribution Services Agreement, the Portfolios have agreed to indemnify the
Principal Underwriter, in the absence of its willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations thereunder, against
certain civil liabilities, including liabilities under the Securities Act.
Counsel
Legal matters in connection with the issuance of the shares of the
Portfolios offered hereby are passed upon by Ropes & Gray LLP, One International
Place, Boston, Massachusetts 02110.
Independent Registered Public Accounting Firm
[ ] has been appointed as independent registered
public accounting firm for the Portfolios.
-45-
Additional Information
This SAI does not contain all the information set forth in the
Registration Statement filed by the Trust with the SEC under the Securities Act
of 1933. Copies of the Registration Statement may be obtained at a reasonable
charge from the SEC or may be examined, without charge, at the offices of the
SEC in Washington, D.C.
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The financial statements and the report of [ ], the
independent registered public accounting firm of the Portfolios, are set forth
below.
[Financial Statements].
[Report of Independent Accountants.]
-46-
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
Description of the bond ratings of Moody's Investors Service, Inc. are as
follows:
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 bond because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat greater than the Aaa
securities.
A-- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium- grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa-- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest 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.
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 to a high degree. Such issues are often in default or have other
marked shortcomings.
A-1
C-- Bonds which are rated C are the lowest class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies modifiers to each rating classification from Aa
through B to indicate relative ranking within its rating categories. The
modifier "1" indicates that a security ranks in the higher end of its 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 rating category.
Descriptions of the bond ratings of Standard & Poor's are as
follows:
AAA-- Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA-- Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A-- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB-- Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than for debt in higher rated categories.
BB, B, CCC, CC, or C -- Debt rated BB, B, CCC, CC or C is regarded,
on balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse debt conditions.
C1-- The rating C1 is reserved for income bonds on which no interest
is being paid.
D-- Debt rated D is in default and payment of interest and/or
repayment of principal is in arrears.
The ratings from AAA to CC may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within the major rating
categories.
A-2
APPENDIX B
STATEMENT OF POLICIES AND PROCEDURES FOR
VOTING PROXIES
Introduction
As a registered investment adviser, Alliance Capital Management L.P.
("Alliance Capital", "we" or "us") has a fiduciary duty to act solely in the
best interests of our clients. As part of this duty, we recognize that we must
vote client securities in a timely manner and make voting decisions that are in
the best interests of our clients.
This statement is intended to comply with Rule 206(4)-6 of the Investment
Advisers Act of 1940. It sets forth our policies and procedures for voting
proxies for our discretionary investment advisory clients, including investment
companies registered under the Investment Company Act of 1940. This statement is
applicable to Alliance Capital's growth and value investment groups investing on
behalf of clients in both US and global securities.
Proxy Policies
This statement is designed to be responsive to the wide range of subjects
that can have a significant effect on the investment value of the securities
held in our clients' accounts. These policies are not exhaustive due to the
variety of proxy voting issues that we may be required to consider. Alliance
Capital reserves the right to depart from these guidelines in order to avoid
voting decisions that we believe may be contrary to our clients' best interests.
In reviewing proxy issues, we will apply the following general policies:
Elections of Directors: Unless there is a proxy fight for seats on the
Board or we determine that there are other compelling reasons for withholding
votes for directors, we will vote in favor of the management proposed slate of
directors. That said, we believe that directors have a duty to respond to
shareholder actions that have received significant shareholder support. We may
withhold votes for directors that fail to act on key issues such as failure to
implement proposals to declassify boards, failure to implement a majority vote
requirement, failure to submit a rights plan to a shareholder vote and failure
to act on tender offers where a majority of shareholders have tendered their
shares. In addition, we will withhold votes for directors who fail to attend at
least seventy-five percent of board meetings within a given year without a
reasonable excuse. Finally, we may withhold votes for directors of non-U.S.
issuers where there is insufficient information about the nominees disclosed in
the proxy statement.
Appointment of Independent Registered Public Accounting Firm: Alliance
Capital believes that the company remains in the best position to choose the
independent registered public accounting firm and will generally support
management's recommendation. However, we recognize that there may be inherent
conflicts when a company's independent registered public accounting firm
performs substantial non-audit related services for the company. Therefore, we
B-1
may vote against the appointment of an independent registered public accounting
firm if the fees for non-audit related services are disproportionate to the
total audit fees paid by the company or there are other reasons to question the
independence of the independent registered public accounting firm.
Changes in Capital Structure: Changes in a company's charter, articles of
incorporation or by-laws are often technical and administrative in nature.
Absent a compelling reason to the contrary, Alliance Capital will cast its votes
in accordance with the company's management on such proposals. However, we will
review and analyze on a case-by-case basis any non-routine proposals that are
likely to affect the structure and operation of the company or have a material
economic effect on the company. For example, we will generally support proposals
to increase authorized common stock when it is necessary to implement a stock
split, aid in a restructuring or acquisition or provide a sufficient number of
shares for an employee savings plan, stock option or executive compensation
plan. However, a satisfactory explanation of a company's intentions must be
disclosed in the proxy statement for proposals requesting an increase of greater
than one hundred percent of the shares outstanding. We will oppose increases in
authorized common stock where there is evidence that the shares will be used to
implement a poison pill or another form of anti-takeover device, or if the
issuance of new shares could excessively dilute the value of the outstanding
shares upon issuance.
Corporate Restructurings, Mergers and Acquisitions: Alliance Capital
believes proxy votes dealing with corporate reorganizations are an extension of
the investment decision. Accordingly, we will analyze such proposals on a case-
by-case basis, weighing heavily the views of the research analysts that cover
the company and the investment professionals managing the portfolios in which
the stock is held.
Proposals Affecting Shareholder Rights: Alliance Capital believes that
certain fundamental rights of shareholders must be protected. We will generally
vote in favor of proposals that give shareholders a greater voice in the affairs
of the company and oppose any measure that seeks to limit those rights. However,
when analyzing such proposals we will weigh the financial impact of the proposal
against the impairment of shareholder rights.
Corporate Governance: Alliance Capital recognizes the importance of good
corporate governance in ensuring that management and the board of directors
fulfill their obligations to the shareholders. We favor proposals promoting
transparency and accountability within a company. For example, we will vote for
proposals providing for equal access to proxies, a majority of independent
directors on key committees, and separating the positions of chairman and chief
executive officer.
Anti-Takeover Measures: Alliance Capital believes that measures that
impede takeovers or entrench management not only infringe on the rights of
shareholders but may also have a detrimental effect on the value of the company.
We will generally oppose proposals, regardless of whether they are advanced by
management or shareholders, the purpose or effect of which is to entrench
management or dilute shareholder ownership. Conversely, we support proposals
that would restrict or otherwise eliminate anti-takeover measures that have
already been adopted by
B-2
corporate issuers. For example, we will support shareholder proposals that seek
to require the company to submit a shareholder rights plan to a shareholder
vote. We will evaluate, on a case-by-case basis, proposals to completely redeem
or eliminate such plans. Furthermore, we will generally oppose proposals put
forward by management (including blank check preferred stock, classified boards
and supermajority vote requirements) that appear to be intended as management
entrenchment mechanisms.
Executive Compensation: Alliance Capital believes that company management and
the compensation committee of the board of directors should, within reason, be
given latitude to determine the types and mix of compensation and benefit awards
offered. Whether proposed by a shareholder or management, we will review
proposals relating to executive compensation plans on a case-by-case basis to
ensure that the long-term interests of management and shareholders are properly
aligned. We will analyze the proposed plans to ensure that shareholder equity
will not be excessively diluted, the option exercise price is not below market
price on the date of grant and an acceptable number of employees are eligible to
participate in such programs. We will generally oppose plans that permit
repricing of underwater stock options without shareholder approval. Other
factors such as the company's performance and industry practice will generally
be factored into our analysis. We will support proposals to submit severance
packages triggered by a change in control to a shareholder vote and proposals
that seek additional disclosure of executive compensation. Finally, we will
support shareholder proposals requiring companies to expense stock options
because we view them as a large corporate expense.
Social and Corporate Responsibility: Alliance Capital will review and
analyze on a case-by-case basis proposals relating to social, political and
environmental issues to determine whether they will have a financial impact on
shareholder value. We will vote against proposals that are unduly burdensome or
result in unnecessary and excessive costs to the company. We may abstain from
voting on social proposals that do not have a readily determinable financial
impact on shareholder value.
PROXY VOTING COMMITTEES
Our growth and value investment groups have formed separate proxy voting
committees to establish general proxy policies for Alliance Capital and consider
specific proxy voting matters as necessary. These committees periodically review
new types of corporate governance issues, evaluate proposals not covered by
these policies and recommend how we should generally vote on such issues. In
addition, the committees, in conjunction with the analyst that covers the
company, contact management and interested shareholder groups as necessary to
discuss proxy issues. Members of the committees include senior investment
personnel and representatives of the Corporate Legal Department. The committees
may also evaluate proxies where we face a potential conflict of interest (as
discussed below). Finally, the committees monitor adherence to guidelines,
industry trends and review the policies contained in this statement from time to
time.
B-3
CONFLICTS OF INTEREST
Alliance Capital recognizes that there may be a potential conflict of interest
when we vote a proxy solicited by an issuer whose retirement plan we manage,
whose retirement plan we administer, or with whom we have another business or
personal relationship that may affect how we vote on the issuer's proxy. We
believe that centralized management of proxy voting, oversight by the proxy
voting committees and adherence to these policies ensures that proxies are voted
with only our clients' best interests in mind. That said, we have implemented
additional procedures to ensure that our votes are not the product of a conflict
of interests, including: (i) requiring anyone involved in the decision making
process to disclose to the chairman of the appropriate proxy committee any
potential conflict that they are aware of and any contact that they have had
with any interested party regarding a proxy vote; (ii) prohibiting employees
involved in the decision making process or vote administration from revealing
how we intend to vote on a proposal in order to reduce any attempted influence
from interested parties; and (iii) where a material conflict of interests
exists, reviewing our proposed vote by applying a series of objective tests and,
where necessary, considering the views of a third party research service to
ensure that our voting decision is consistent with our clients' best interests.
For example, if our proposed vote is consistent with our stated proxy voting
policy, no further review is necessary. If our proposed vote is contrary to our
stated proxy voting policy but is also contrary to management's recommendation,
no further review is necessary. If our proposed vote is contrary to our stated
proxy voting policy or is not covered by our policy, is consistent with
management's recommendation, and is also consistent with the views of an
independent source, no further review is necessary. If our proposed vote is
contrary to our stated proxy voting policy or is not covered by our policy, is
consistent with management's recommendation and is contrary to the views of an
independent source, the proposal is reviewed by the appropriate proxy committee
for final determination.
PROXIES OF CERTAIN NON-US ISSUERS
Proxy voting in certain countries requires "share blocking." Shareholders
wishing to vote their proxies must deposit their shares shortly before the date
of the meeting (usually one-week) with a designated depositary. During this
blocking period, shares that will be voted at the meeting cannot be sold until
the meeting has taken place and the shares are returned to the clients'
custodian banks. Alliance Capital may determine that the value of exercising the
vote does not outweigh the detriment of not being able to transact in the shares
during this period. Accordingly, if share blocking is required we may abstain
from voting those shares. In such a situation we would have determined that the
cost of voting exceeds the expected benefit to the client.
PROXY VOTING RECORDS
Clients may obtain information about how we voted proxies on their behalf
by contacting their Alliance Capital administrative representative.
Alternatively, clients may make a written request for proxy voting information
to: Mark R. Manley, Senior Vice President & Assistant General Counsel, Alliance
Capital Management L.P., 1345 Avenue of the Americas, New York, NY 10105.
B-4
PART C
OTHER INFORMATION
ITEM 23. Exhibits
(a) Agreement and Declaration of Trust - filed herewith.
(b) By-Laws of the Registrant - filed herewith.
(c) Not applicable.
(d) Advisory Agreement between the Registrant and Alliance Capital
Management L.P. - to be filed by amendment.
(e) Form of Distribution Services Agreement between the Registrant and
AllianceBernstein Investment Research and Management, Inc. - filed
herewith.
(f) Not applicable.
(g) Custodian Agreement between the Registrant and [ ] - to be
filed by amendment.
(h) Transfer Agency Agreement between the Registrant and Alliance Global
Investor Services, Inc. - to be filed by amendment.
(i) Opinion and Consent of Ropes & Gray LLP - to be filed by amendment.
(j) Consent of Independent Auditors - to be filed by amendment.
(k) Not applicable.
(l) Investment representation letter of Alliance Capital Management L.P.
- to be filed by amendment.
(m) Not applicable.
(n) Not applicable.
(o) Reserved.
(p) Codes of Ethics
(1) Code of Ethics for the Registrant - filed herewith.
(2) Code of Ethics for the Alliance Capital Management L.P. and
AllianceBernstein Investment Research and Management, Inc. -
filed herewith.
ITEM 24. Persons Controlled by or under Common Control with Registrant.
None.
ITEM 25. Indemnification.
Paragraph (l) of Section 3, Article IV of the Registrant's Agreement and
Declaration of Trust provides in relevant part that the Trustees of the Trust
have the power: "(l) To purchase and pay for entirely out of Trust property such
insurance as they may deem necessary or appropriate for the conduct of the
business of the Trust, including, without limitation, insurance policies
insuring the assets of the Trust and payment of distributions and principal on
its portfolio investments, and insurance policies insuring the Shareholders,
Trustees, officers, employees, agents, investment advisers, principal
underwriters or independent contractors of the Trust individually against all
claims and liabilities of every nature arising by reason of holding, being or
having held any such office or position, or by reason of any action alleged to
have been taken or omitted by any such person as Trustee, officer, employee,
agent, investment adviser, principal underwriter or independent contractor,
including any action taken or omitted that may be determined to constitute
negligence, whether or not the Trust would have the power to indemnify such
person against liability;"
Section 2 of Article VII of the Registrant's Agreement and Declaration of
Trust provides in relevant part:
"Limitation of Liability. The Trustees shall not be responsible or liable
in any event for any neglect or wrong-doing of any officer, agent, employee,
Manager or principal underwriter of the Trust, nor shall any Trustee be
responsible for the act or omission of any other Trustee, but nothing herein
contained shall protect any Trustee against any liability to which he or she
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 or
her office.
Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever issued, executed or done by or on behalf of
the Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been issued, executed or done only in or with
respect to their or his or her capacity as Trustees or Trustee, and such
Trustees or Trustee shall not be personally liable thereon."
Section 2 of Article VIII of the Registrant's Agreement and Declaration of
Trust provides in relevant part: "Trustee's Good Faith Action, Expert Advice, No
Bond or Surety. The exercise by the Trustees of their powers and discretions
hereunder shall be binding upon everyone interested. A Trustee shall be liable
for his or her own willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustee, and
for nothing else, and shall not be liable for errors of judgment or mistakes of
fact or law. The Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Declaration of Trust, and shall be
under no liability for any act or omission in accordance with such advice or for
failing to follow such advice. The Trustees shall not be required to give any
bond as such, nor any surety if a bond is required."
Article 10 of the Registrant's Bylaws provides in relevant part:
"Indemnification
10.1 Trustees, Officers, etc. The Trust shall indemnify each of its Trustees and
officers (including persons who serve at the Trust's request as directors,
officers or trustees of another organization in which the Trust has any interest
as a shareholder, creditor or otherwise) (hereinafter referred to as a "Covered
Person") against all liabilities and expenses, including but not limited to
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees reasonably incurred by any Covered Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such Covered Person may be or may have
been threatened,
while in office or thereafter, by reason of any alleged act or omission as a
Trustee or officer or by reason of his or her being or having been such a
Trustee or officer, except with respect to any matter as to which such Covered
Person shall have been finally adjudicated in any such action, suit or other
proceeding not to have acted in good faith in the reasonable belief that such
Covered Person's action was in the best interest of the Trust and except that no
Covered Person shall be indemnified against any liability to the Trust or its
shareholders to which such Covered Person would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office. Expenses,
including counsel fees so incurred by any such Covered Person, may be paid from
time to time by the Trust in advance of the final disposition of any such
action, suit or proceeding on the condition that the amounts so paid shall be
repaid to the Trust if it is ultimately determined that indemnification of such
expenses is not authorized under this Article; provided, however, that (1) such
Covered Person shall provide a security for his undertaking to repay the advance
if it is ultimately determined that indemnification is not authorized under this
Article, (2) the Trust shall be insured against losses arising by reason of any
lawful advances, or (3) a majority of a quorum of disinterested, non-party
directors of the Trust, or an independent legal counsel in a written opinion,
shall determine, based on a review of readily available facts, that there is
reason to believe that such Covered Person ultimately will be found entitled to
indemnification under this Article. In the case of such a determination or
opinion, the relevant disinterested, non-party directors or independent legal
counsel, as the case may be, shall afford the Covered Person a rebuttable
presumption that he has not engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
Covered Person's office.
10.2 Compromise Payment. As to any matter disposed of by a compromise payment by
any such Covered Person referred to in Section 4.1 above, pursuant to a consent
decree or otherwise, no such indemnification either for said payment or for any
other expenses shall be provided unless such compromise shall be approved as in
the best interests of the Trust, after notice that it involved such
indemnification, (a) by a disinterested majority of the Trustees then in office;
or (b) by a majority of the disinterested Trustees then in office; or (c) by any
disinterested person or persons to whom the question may be referred by the
Trustees, provided that in the case of approval pursuant to clause (b) or (c)
there has been obtained an opinion in writing of independent legal counsel to
the effect that such Covered Person appears to have acted in good faith in the
reasonable belief that his or her action was in the best interests of the Trust
and that such indemnification would not protect such person against any
liability to the Trust or its shareholders to which such person would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of office; or (d) by
vote of shareholders holding a majority of the Shares entitled to vote thereon,
exclusive of any Shares beneficially owned by any interested Covered Person.
Approval by the Trustees pursuant to clause (a) or (b) or by any disinterested
person or persons pursuant to clause (c) of this Section shall not prevent the
recovery from any Covered Person of any amount paid to such Covered Person in
accordance with any of such clauses as indemnification if such Covered Person is
subsequently adjudicated by a court of competent jurisdiction not to have acted
in good faith in the reasonable belief that such Covered Person's action was in
the best interests of the Trust or to have been liable to the Trust or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such Covered
Person's office.
10.3 Indemnification Not Exclusive. The right of indemnification hereby provided
shall not be exclusive of or affect any other rights to which any such Covered
Person may be entitled. As used in this Article 4, the term "Covered Person"
shall include such person's heirs, executors and administrators; an "interested
Covered Person" is one against whom the action, suit or
other proceeding in question or another action, suit or other proceeding on the
same or similar grounds is then or has been pending; and a "disinterested
Trustee" or "disinterested person" is a Trustee or a person against whom none of
such actions, suits or other proceedings or another action, suit or other
proceeding on the same or similar grounds is then or has been pending. Nothing
contained in this Article shall affect any rights to indemnification to which
personnel of the Trust, other than Trustees and officers, and other persons may
be entitled by contract or otherwise under law, nor the power of the Trust to
purchase and maintain liability insurance on behalf of any such person."
The foregoing summaries are qualified by the entire text of Registrant's
Agreement and Declaration of Trust and Bylaws. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 (the "Act") may be
permitted to Trustees, Officers and controlling persons of the Trust pursuant to
the foregoing provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act, and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Trust of expenses incurred or paid by a Trustee, Officer
or controlling person of the Trust in the successful defense of any action, suit
or proceeding) is asserted by such Trustee, Officer or controlling person in
connection with the securities being registered, the Trust will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 26. Business and Other Connections of Adviser.
The descriptions of Alliance Capital Management L.P. under the captions
"Management of the Fund" in the Prospectus and in the Statement of Additional
Information constituting Parts A and B, respectively, of this Registration
Statement are incorporated by reference herein. The information as to the
directors and executive officers of Alliance Capital Management Corporation, the
general partner of Alliance Capital Management L.P., set forth in Alliance
Capital Management L.P.'s Form ADV filed with the Securities and Exchange
Commission on April 21, 1988 (File No. 801-32361) and amended through the date
hereof, is incorporated by reference.
ITEM 27. Principal Underwriters
(a) AllianceBernstein Investment Research and Management, Inc., the
Registrant's Principal Underwriter in connection with the sale of shares of the
Registrant. AllianceBernstein Investment Research and Management, Inc. also acts
as Principal Underwriter or Distributor for the following investment companies:
AllianceBernstein Exchange Reserves
AllianceBernstein All-Asia Investment Fund, Inc.
AllianceBernstein Americas Government Income Trust, Inc.
AllianceBernstein Balanced Shares, Inc.*
AllianceBernstein Blended Style Series, Inc.*
AllianceBernstein Bond Fund, Inc.*
AllianceBernstein Capital Reserves
AllianceBernstein Disciplined Value Fund, Inc.*
AllianceBernstein Emerging Market Debt Fund, Inc.
AllianceBernstein Global Research Growth Fund, Inc.
AllianceBernstein Global Small Cap Fund, Inc.
AllianceBernstein Global Strategic Income Trust, Inc.
AllianceBernstein Government Reserves
AllianceBernstein Greater China `97 Fund, Inc.
AllianceBernstein Growth and Income Fund, Inc.*
AllianceBernstein Health Care Fund, Inc.
AllianceBernstein High Yield Fund, Inc.
AllianceBernstein Institutional Funds, Inc.
Alliance Institutional Reserves, Inc.
AllianceBernstein Intermediate California Municipal Portfolio(1)
AllianceBernstein Intermediate Diversified Municipal Portfolio(1)
AllianceBernstein Intermediate New York Municipal Portfolio(1)
AllianceBernstein International Portfolio(1)*
AllianceBernstein International Premier Growth Fund, Inc.
AllianceBernstein Mid-Cap Growth Fund, Inc.
AllianceBernstein Multi-Market Strategy Trust, Inc.
AllianceBernstein Municipal Income Fund, Inc.
AllianceBernstein Municipal Income Fund II
AllianceBernstein Municipal Trust
AllianceBernstein New Europe Fund, Inc.
AllianceBernstein Premier Growth Fund, Inc.*
AllianceBernstein Real Estate Investment Fund, Inc.
AllianceBernstein Select Investor Series, Inc.
AllianceBernstein Short Duration Portfolio(1)*
AllianceBernstein Small Cap Growth Fund, Inc.
AllianceBernstein Tax-Managed International Portfolio(1)
AllianceBernstein Technology Fund, Inc.*
AllianceBernstein Trust**
AllianceBernstein Utility Income Fund, Inc.
AllianceBernstein Variable Products Series Fund, Inc.
AllianceBernstein Worldwide Privatization Fund, Inc.
Sanford C. Bernstein Fund II, Inc.
The AllianceBernstein Portfolios***
(1) This is a retail Portfolio of Sanford C. Bernstein Fund, Inc. which
consists of Classes A, B and C Shares.
* This Fund also offers Class R Shares.
** AllianceBernstein Trust -The Funds that offer Class R Shares are:
AllianceBernstein International Value Fund; AllianceBernstein Small
Cap Value Fund and AllianceBernstein Value Fund.
*** The AllianceBernstein Portfolios that offer Class R Shares are
AllianceBernstein Balanced Wealth Strategy; AllianceBernstein Wealth
Appreciation Strategy; and AllianceBernstein Wealth Preservation
Strategy.
(b) The following are the Directors and Officers of AllianceBernstein
Investment Research and Management, Inc., the principal place of business of
which is 1345 Avenue of the Americas, New York, New York, 10105.
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME UNDERWRITER REGISTRANT
Directors
Marc O. Mayer Chairman of the Board
and Director
Mark R. Manley Director
Officers
Marc O. Mayer Chairman of the Board President and Chief
Executive Officer
Ranjani Nagaswami Vice Chairman
Frederic L. Bloch Executive Vice President
Richard A. Davies Executive Vice President
and Managing Director
Kurt H. Schoknecht Executive Vice President
Andrew L. Gangolf Senior Vice President and Trustee/
Assistant General Counsel Assistant Secretary
Emilie D. Wrapp Senior Vice President and
Assistant General Counsel
Daniel A. Notto Senior Vice President,
Counsel and Assistant
Secretary
Frank Speno Executive Vice President
Audie G. Apple Senior Vice President
Colin C. Aymond Senior Vice President
Adam J. Beaudry Senior Vice President
Matthew F. Beaudry Senior Vice President
Amy I. Belew Senior Vice President
Susan H. Burton Senior Vice President
Russell R. Corby Senior Vice President
John W. Cronin Senior Vice President
John C. Endahl Senior Vice President
John Edward English Senior Vice President
Donald N. Fritts Senior Vice President
John A. Gagliano Senior Vice President
Bradley F. Hanson Senior Vice President
Scott Hutton Senior Vice President
Geoffrey L. Hyde Senior Vice President
Robert H. Joseph, Jr. Senior Vice President
Victor Kopelakis Senior Vice President
Joseph R. LaSpina Senior Vice President
Henry Michael Lesmeister Senior Vice President
James F. Lyons Senior Vice President
Susan L. Matteson-King Senior Vice President
Daniel D. McGinley Senior Vice President
Thomas F. Monnerat Senior Vice President
Joanna D. Murray Senior Vice President
Jeffrey A. Nye Senior Vice President
Peter J. O'Brien Senior Vice President
John J. O'Connor Senior Vice President
Danielle Pagano Senior Vice President
Catherine N. Peterson Senior Vice President
Mark A. Pletts Senior Vice President
Robert E. Powers Senior Vice President
Stephen C. Scanlon Senior Vice President
John P. Schmidt Senior Vice President
Raymond S. Sclafani Senior Vice President
Eileen B. Sebold Senior Vice President
Gregory K. Shannahan Senior Vice President
Richard J. Sidell Senior Vice President
Scott C. Sipple Senior Vice President
Peter J. Szabo Senior Vice President
Joseph T. Tocyloski Senior Vice President
David R. Turnbough Senior Vice President
Craig E. Welch Senior Vice President
Keith A. Yoho Senior Vice President
Mark D. Gersten Vice President and Treasurer and
Treasurer Chief Financial
Officer
Patrick E. Ryan Vice President and
Chief Financial Officer
Margaret M. Bagley Vice President
Peter J. Barber Vice President
Kenneth F. Barkoff Vice President
Troy E. Barton Vice President
Laura J. Beedy Vice President
David A. Bedrick Vice President
Andrew Berger Vice President
Joseph J. Bertini Vice President and Counsel
Gregory P. Best Vice President
John C. Bianchi Vice President
Michael J. Bodmar Vice President
Robert F. Brendli Vice President
Alan T. Brum Vice President
Brian Buehring Vice President
Thomas E. Callahan Vice President
Kevin T. Cannon Vice President
Michael F. Connell Vice President
Jean A. Coomber Vice President
Dwight P. Cornell Vice President
Michael R. Crimmins Vice President
Robert J. Cruz Vice President
Brett E. Dearing Vice President
Jennifer M. DeLong Vice President
Daniel J. Deckman Vice President
Sherry V. Delaney Vice President
Janet B. DiBrita Vice President
Joseph T. Dominguez Vice President
William J. Dorough Vice President
Adam E. Engelhardt Vice President
Michele C. Eschert Johnson Vice President
John J. Fennessy Vice President
Joao P. Flor Vice President
Eric W. Frasier Vice President
Mark A. Gessner Vice President
Thomas R. Graffeo Vice President
Tiffini J. Haley Vice President
Alan Halfenger Vice President
Michael S. Hart Vice President
George R. Hrabovsky Vice President
David A. Hunt Vice President
Dinah J. Huntoon Vice President
Anthony D. Ialeggio Vice President
Theresa Iosca Vice President
Oscar J. Isoba Vice President
Kumar Jagdeo II Vice President
Danielle M. Klaskow Vice President
Robert I. Kurzweil Vice President
James D. Lathrop Vice President
Eric L. Levinson Vice President
Laurel E. Lindner Vice President
James M. Liptrot Vice President
Armando C. Llanes Vice President
James P. Luisi Vice President
Silvia Manz Vice President
Kathryn Austin Masters Vice President
David W. Monroe Vice President
Paul S. Moyer Vice President
Doris T. Ciliberti Muller Vice President
John F. Multhauf Vice President
Michael F. Nash, Jr. Vice President
Jamie A. Nieradka Vice President
David L. Nitz Vice President
Nicole Nolan-Koester Vice President
Timothy J. O'Connell Vice President
Albert Orokos Vice President
David D. Paich Vice President
Todd P. Patton Vice President
James J. Posch Vice President
Carol H. Rappa Vice President
Bruce W. Reitz Vice President
James A. Rie Vice President
Miguel A. Rozensztroch Vice President
Matthew J. Scarlata Vice President
Stuart L. Shaw Vice President
Karen Sirett Vice President
Rayandra E. Slonina Vice President
Bryant B. Smith Vice President
Elizabeth M. Smith Vice President
Jeffrey C. Smith Vice President
Eileen Stauber Vice President
Elizabeth K. Tramo Vice President
Benjamin H. Travers Vice President
James R. Van Deventer Vice President
Marie R. Vogel Vice President
Wayne W. Wagner Vice President
William K. Weese Vice President
Mark E. Westmoreland Vice President
Paul C. Wharf Vice President
Scott Whitehouse Vice President
Peter H. Whitlock Vice President
Matthew Witschel Vice President
Omar J. Aridi Assistant Vice
President
Joseph D. Asselta Assistant Vice
President
Jire J. Baran Assistant Vice
President
Gian D. Bernardi Assistant Vice
President
Susan J. Bieber Assistant Vice
President
Heath A. Black Assistant Vice
President
Richard A. Brink Assistant Vice
President
Mark S. Burns Assistant Vice
President
Alice L. Chan Assistant Vice
President
Judith A. Chin Assistant Vice
President
David Chung Assistant Vice
President
Lynne K. Civita Assistant Vice
President
Kenneth J. Connors Assistant Vice
President
Michael C. Conrath Assistant Vice
President
Shawn Conroy Assistant Vice
President
Robert A. Craft Assistant Vice
President
Stephen J. Dedyo Assistant Vice
President
Marc DiFilippo Assistant Vice
President
Ralph A. DiMeglio Assistant Vice
President
Bernard J. Eng Assistant Vice
President
Michael J. Eustic Assistant Vice
President
Efrain Fernandez Assistant Vice
President
Robert A. Fiorentino Assistant Vice
President
Michael F. Greco Assistant Vice
President
Kelly P. Guter Assistant Vice
President
Junko Hisamatsu Assistant Vice
President
Luis Martin Hoyos Assistant Vice
President
Arthur F. Hoyt, Jr. Assistant Vice
President
Dwayne A. Javier Assistant Vice
President
Elizabeth E. Keefe Assistant Vice
President
Edward W. Kelly Assistant Vice
President
Thomas J. Khoury Assistant Vice
President
Jung M. Kim Assistant Vice
President
Junko Kimura Assistant Vice
President
Ted R. Kosinski Assistant Vice
President
Stephen J. Laffey Assistant Vice
President
Gary M. Lang Assistant Vice
President
Christopher J. Larkin Assistant Vice
President
Evamarie C. Lombardo Assistant Vice
President
Andrew J. Magnus Assistant Vice
President
Christopher J. Markos Assistant Vice
President
Osama Mari Assistant Vice
President
Daniel K. McGouran Assistant Vice
President
Christine M. McQuinlan Assistant Vice
President
Steven M. Miller Assistant Vice
President
Christina A. Morse Assistant Vice
President and Counsel
Troy E. Mosconi Assistant Vice
President
Alex E. Pady Assistant Vice
President
Wandra M. Perry-Hartsfield Assistant Vice
President
Matthew V. Peterson Assistant Vice
President
Irfan A. Raja Assistant Vice
President
Rizwan A. Raja Assistant Vice
President
David J. Riley Assistant Vice
President
Peter V. Romeo Assistant Vice
President
Jessica M. Rozman Assistant Vice
President
Orlando Soler Assistant Vice
President
Nancy D. Testa Assistant Vice
President
Richard L. Tocyloski Assistant Vice
President
Kari-Anna Towle Assistant Vice
President
Kayoko Umino Assistant Vice
President
Elsia M. Vasquez Assistant Vice
President
Nina C. Wilkinson Assistant Vice
President
Joanna Wong Assistant Vice
President
Eric J. Wright Assistant Vice
President
Maureen E. Yurcisin Assistant Vice
President
Thomas M. Zottner Assistant Vice
President
Mark R. Manley Secretary
Colin T. Burke Assistant Secretary
Adam R. Spilka Assistant Secretary
(c) Not Applicable.
ITEM 28. Location of Accounts and Records.
The majority of the accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 and the rules
thereunder are maintained as follows: journals, ledgers, securities records and
other original records are maintained principally at the offices of Alliance
Fund Services, Inc., 500 Plaza Drive, Secaucus, New Jersey, 07094 and at the
offices of [State Street Bank and Trust Company, the Registrant's custodian, 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 29. Management Services.
Not applicable.
ITEM 30. Undertakings.
Not applicable.
********************
A copy of the Agreement and Declaration of Trust of The AllianceBernstein
Pooling Portfolios (the "Trust") is on file with the Secretary of The
Commonwealth of Massachusetts and notice is hereby given that this Registration
Statement has been executed on behalf of the Trust by an officer of the Trust as
an officer and by its Trustees as trustees and not individually and the
obligations of or arising out of this Registration Statement are not binding
upon any of the Trustees, officers and shareholders individually but are binding
only upon the assets and property of the Trust.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, 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 15th day of
November, 2004.
THE ALLIANCEBERNSTEIN POOLING PORTFOLIOS
By: /s/ Marc O. Mayer
-------------------------------------------
Marc O. Mayer
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
PRINCIPAL EXECUTIVE OFFICER:
/s/ Marc O. Mayer
-----------------
Marc O. Mayer,
President and Chief Executive Officer
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ Mark D. Gersten
-------------------
Mark D. Gersten,
Treasurer and Chief Financial Officer
TRUSTEES:
/s/ Andrew L. Gangolf
----------------------
Andrew L. Gangolf
Trustee
Date: November 15, 2004
Index To Exhibits
1. Agreement and Declaration of Trust (Exhibit 23(a)).
2. By-Laws of the Registrant (Exhibit 23(b)).
3. Form of Distribution Services Agreement between the Registrant and
AllianceBernstein Investment Research and Management, Inc. (Exhibit
23(e)).
4. Code of Ethics for the Registrant (Exhibit 23(p)(1)).
5. Code of Ethics for the Alliance Capital Management L.P. and
AllianceBernstein Investment Research and Management, Inc. (Exhibit
23(p)(2)).
Dates Referenced Herein and Documents Incorporated by Reference
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