<PAGE>
This Prospectus is filed pursuant to Rule 497(e).
File Nos. 33-18647 and 811-05398.
<PAGE>
LOGO
AllianceCapital(R) ALLIANCE VARIABLE PRODUCTS
SERIES FUND, INC.
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P.O. BOX 1520, SECAUCUS, NEW JERSEY 07096-1520
TOLL FREE (800) 221-5672
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Alliance Variable Products Series Fund, Inc. (the "Fund") is an open-end se-
ries investment company designed to fund variable annuity contracts and vari-
able life insurance policies to be offered by the separate accounts of certain
life insurance companies. The Fund currently offers an opportunity to choose
among the separately managed pools of assets (the "Portfolios") described be-
low which have differing investment objectives and policies.
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A DIVERSIFIED SELECTION OF INVESTMENT ALTERNATIVES
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PREMIER GROWTH PORTFOLIO -- seeks growth of capital rather than current in-
come. In pursuing its investment objective, the Premier Growth Portfolio will
employ aggressive investment policies. Since investments will be made based
upon their potential for capital appreciation, current income will be inciden-
tal to the objective of capital growth. The Portfolio is not intended for in-
vestors whose principal objective is assured income or preservation of capi-
tal.
GROWTH AND INCOME PORTFOLIO -- seeks to balance the objectives of reasonable
current income and reasonable opportunities for appreciation through invest-
ments primarily in dividend-paying common stocks of good quality.
QUASAR PORTFOLIO -- seeks growth of capital by pursuing aggressive investment
policies. The Portfolio invests principally in a diversified portfolio of eq-
uity securities of any company and industry and in any type of security which
is believed to offer possibilities for capital appreciation.
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PURCHASE INFORMATION
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The Fund will offer and sell its shares only to separate accounts of certain
life insurance companies, for the purpose of funding variable annuity con-
tracts and variable life insurance policies. Sales will be made without sales
charge at each Portfolio's per share net asset value. Further information can
be obtained from Alliance Fund Services, Inc. at the address or telephone num-
ber shown above.
An investment in the Fund is not a deposit or obligation of, or guaranteed or
endorsed by, any bank and is not federally insured by the Federal Deposit In-
surance Corporation, the Federal Reserve Board or any other agency.
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ADDITIONAL INFORMATION
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This Prospectus sets forth concisely the information which a prospective in-
vestor should know about the Fund and each of the Portfolios before applying
for certain variable annuity contracts and variable life insurance policies
offered by participating insurance companies. It should be read in conjunction
with the Prospectus of the separate account of the specific insurance product
which accompanies this Prospectus. A "Statement of Additional Information"
dated May 1, 1998, which provides a further discussion of certain areas in
this Prospectus and other matters which may be of interest to some investors,
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. For a free copy, call or write Alliance Fund Services,
Inc. at the address or telephone number shown above.
(R) :This is a registered mark used under license from the owner, Alliance
Capital Management L.P.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTUS/May 1, 1998
Investors are advised to carefully read this Prospectus and to retain it for
future reference.
<PAGE>
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EXPENSE INFORMATION
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SHAREHOLDER TRANSACTION EXPENSES
The Fund has no sales load on purchases or reinvested dividends, deferred
sales load, redemption fee or exchange fee.
<TABLE>
<CAPTION>
GROWTH
PREMIER AND
GROWTH INCOME QUASAR
PORTFOLIO* PORTFOLIO PORTFOLIO+
---------- --------- ----------
<S> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees........................... 1.00% .63% .58%
Other Expenses............................ .08% .09% .37%
---- --- ---
Total Portfolio Operating Expenses........ 1.08% .72% .95%
==== === ===
</TABLE>
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+ Shareholder transaction expenses shown are net of expense reimbursement.
* Alliance Capital Management L.P. (the "Adviser") discontinued the expense re-
imbursement with respect to Premier Growth Portfolio effective May 1, 1998.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return (cumulatively through the end of each time period).
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Premier Growth Portfolio........................ $11 $34 $60 $132
Growth and Income Portfolio..................... $ 7 $23 $40 $ 89
Quasar Portfolio................................ $10 $30 $53 $117
</TABLE>
The purpose of the foregoing table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
and indirectly. The expenses listed in the table for the Quasar Portfolio are
net of voluntary expense reimbursements, which are not required to be continued
indefinitely; however, the Adviser intends to continue such reimbursements for
the foreseeable future. The Adviser discontinued the expense reimbursement with
respect to the Premier Growth Portfolio effective May 1, 1998. The expenses (as
a percentage of average net assets) of the Quasar Portfolio, before expense re-
imbursements, would be: Management Fees -- 1.00%, Other Expenses -- .37% and
Total Operating Expenses -- 1.37%. The example should not be considered repre-
sentative of future expenses; actual expenses may be greater or less than those
shown.
2
<PAGE>
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FINANCIAL HIGHLIGHTS
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The following information as to net asset value, ratios and certain supple-
mental data for each of the periods shown below has been audited by Ernst &
Young LLP, the Fund's independent auditors, whose unqualified report thereon
(referring to Financial Highlights) appears in the Statement of Additional In-
formation. The following information should be read in conjunction with the
financial statements and related notes included in the Statement of Additional
Information. Further information about the Fund's performance is contained in
the Fund's annual report, which is available without charge upon request.
<TABLE>
<CAPTION>
PREMIER GROWTH PORTFOLIO
---------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year........................... $ 15.70 $ 17.80 $ 12.37 $ 12.79 $ 11.38
-------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERA-
TIONS
Net investment income(a)(b).... .04 .08 .09 .03 -0-
Net realized and unrealized
gain (loss) on investments.... 5.27 3.29 5.44 (.41) 1.43
-------- ------- ------- ------- -------
Net increase (decrease) in net
asset value from operations... 5.31 3.37 5.53 (.38) 1.43
-------- ------- ------- ------- -------
LESS: DIVIDENDS AND DISTRIBU-
TIONS
Dividends from net investment
income........................ (.02) (.10) (.03) (.01) (.01)
Distributions from net realized
gains......................... -0- (5.37) (.07) (.03) (.01)
-------- ------- ------- ------- -------
Total dividends and distribu-
tions......................... (.02) (5.47) (.10) (.04) (.02)
-------- ------- ------- ------- -------
Net asset value, end of year... $ 20.99 $ 15.70 $ 17.80 $ 12.37 $ 12.79
======== ======= ======= ======= =======
TOTAL RETURN
Total investment return based
on net asset value(c)......... 33.86% 22.70% 44.85% (2.96)% 12.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's
omitted)...................... $472,326 $96,434 $29,278 $37,669 $13,659
Ratio to average net assets of:
Expenses, net of waivers and
reimbursements................ .95% .95% .95% .95% 1.18%
Expenses, before waivers and
reimbursements................ 1.10% 1.23% 1.19% 1.40% 2.05%
Net investment income(a)....... .21% .52% .55% .42% .22%
Portfolio turnover rate........ 27% 32% 97% 38% 42%
Average commission rate
paid(d)....................... $ .0541 $ .0609 -0- -0- -0-
</TABLE>
- -------
(a) Net of expenses reimbursed or waived by the Adviser.
(b) Based on average shares outstanding.
(c) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and re-
demption on the last day of the period. Total investment return calculated
for a period of less than one year is not annualized.
(d) For fiscal years beginning on or after September 1, 1995, a fund is re-
quired to disclose its average commission rate per share for trades on
which commissions are charged.
3
<PAGE>
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FINANCIAL HIGHLIGHTS
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<TABLE>
<CAPTION>
GROWTH AND INCOME PORTFOLIO
----------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year.......................... $ 16.40 $ 15.79 $ 11.85 $ 12.18 $ 10.99
-------- -------- ------- ------- -------
INCOME FROM INVESTMENT OPERA-
TIONS
Net investment income(a)(b)... .21 .24 .27 .10 .01
Net realized and unrealized
gain (loss) on investments... 4.39 3.18 3.94 (.16) 1.27
-------- -------- ------- ------- -------
Net increase (decrease) in net
asset value from operations.. 4.60 3.42 4.21 (.06) 1.28
-------- -------- ------- ------- -------
LESS: DIVIDENDS AND DISTRIBU-
TIONS
Dividends from net investment
income....................... (.13) (.25) (.13) (.10) (.06)
Distributions from net real-
ized gains................... (.94) (2.56) (.14) (.17) (.03)
-------- -------- ------- ------- -------
Total dividends and distribu-
tions........................ (1.07) (2.81) (.27) (.27) (.09)
-------- -------- ------- ------- -------
Net asset value, end of year.. $ 19.93 $ 16.40 $ 15.79 $ 11.85 $ 12.18
======== ======== ======= ======= =======
TOTAL RETURN
Total investment return based
on net asset value(c)........ 28.80% 24.09% 35.76% (.35)% 11.69%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's
omitted)..................... $250,202 $126,729 $41,993 $41,702 $22,756
Ratio to average net assets
of:
Expenses, net of waivers and
reimbursements............... .72% .82% .79% .90% 1.18%
Expenses, before waivers and
reimbursements............... .72% .82% .79% .91% 1.28%
Net investment income(a)...... 1.16% 1.58% 1.95% 1.71% 1.76%
Portfolio turnover rate....... 86% 87% 150% 95% 69%
Average commission rate
paid(d)...................... $ .0581 $ .0602 -0- -0- -0-
</TABLE>
<TABLE>
<CAPTION>
QUASAR PORTFOLIO
-------------------------
AUGUST 5,
1996(E)
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Net asset value, beginning of period................ $ 10.64 $10.00
------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a)(b)........................ .02 .04
Net realized and unrealized gain (loss) on
investments and foreign currency transactions..... 1.96 .60
------- ------
Net increase (decrease) in net asset value from
operations........................................ 1.98 .64
------- ------
LESS: DISTRIBUTIONS
Dividends from net investment income............... (.01) -0-
------- ------
Net asset value, end of period..................... $ 12.61 $10.64
======= ======
TOTAL RETURN
Total investment return based on net asset
value(c).......................................... 18.60% 6.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted).......... $59,277 $8,842
Ratio to average net assets of:
Expenses, net of waivers and reimbursements........ .95% .95%(f)
Expenses, before waivers and reimbursements........ 1.37% 4.44%(f)
Net investment income(a)........................... .17% .93%(f)
Portfolio turnover rate............................ 210% 40%
Average commission rate paid(d).................... $.0521 $.0511
</TABLE>
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(a) Net of expenses reimbursed or waived by the Adviser.
(b) Based on average shares outstanding.
(c) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and re-
demption on the last day of the period. Total investment return calculated
for a period of less than one year is not annualized.
(d) For fiscal years beginning on or after September 1, 1995, a fund is re-
quired to disclose its average commission rate per share for trades on
which commissions are charged.
(e) Commencement of operations.
(f) Annualized.
4
<PAGE>
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DESCRIPTION OF THE PORTFOLIOS
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INTRODUCTION TO THE FUND
The Fund was established as a corporation in Maryland. The Fund is an open-end
management investment company commonly known as a "mutual fund" whose shares
are offered in separate series each referred to as a "Portfolio." Because the
Fund offers multiple Portfolios, it is known as a "series fund." Each Portfo-
lio is a separate pool of assets constituting, in effect, a separate fund with
its own investment objectives and policies.
A shareholder in a Portfolio will be entitled to his or her pro rata share of
all dividends and distributions arising from that Portfolio's assets and, upon
redeeming shares of that Portfolio, the shareholder will receive the then cur-
rent net asset value of that Portfolio represented by the redeemed shares.
(See "Purchase and Redemption of Shares"). While the Fund has no present in-
tention of doing so, the Fund is empowered to establish, without shareholder
approval, additional portfolios which may have different investment objec-
tives.
The Fund currently has 19 Portfolios, three of which are offered by this Pro-
spectus: the Premier Growth Portfolio, the Growth and Income Portfolio and the
Quasar Portfolio.
The Fund is intended to serve as the investment medium for variable annuity
contracts and variable life insurance policies to be offered by the separate
accounts of certain life insurance companies.
It is conceivable that in the future it may be disadvantageous for variable
annuity and variable life insurance separate accounts to invest simultaneously
in the Fund. Currently, however, the Fund does not foresee any disadvantage to
the holders of variable annuity contracts and variable life insurance policies
arising from the fact that the interests of the holders of such contracts and
policies may differ. Nevertheless, the Fund's Directors intend to monitor
events in order to identify any material irreconcilable conflicts which may
possibly arise and to determine what action, if any, should be taken in re-
sponse thereto.
The investment objectives and policies of each Portfolio are set forth below.
There can be, of course, no assurance that any of the Portfolios will achieve
its respective investment objectives.
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
Each Portfolio has different investment objectives which it pursues through
separate investment policies as described herein. The differences in objec-
tives and policies among the Portfolios determine the types of portfolio secu-
rities in which each Portfolio invests, and can be expected to affect the de-
gree of risk to which each Portfolio is subject and each Portfolio's yield or
return. Each Portfolio's investment objectives cannot be changed without ap-
proval by the holders of a majority of such Portfolio's outstanding voting se-
curities, as defined in the Investment Company Act of 1940, as amended (the
"Act"). The Fund may change each Portfolio's investment policies that are not
5
<PAGE>
designated "fundamental policies" within the meaning of the Act upon notice to
shareholders of the Portfolio, but without their approval. The types of portfo-
lio securities in which each Portfolio may invest are described in greater de-
tail below.
PREMIER GROWTH PORTFOLIO
General. The investment objective of the Premier Growth Portfolio is growth of
capital by pursuing aggressive investment policies. Since investments are made
based upon their potential for capital appreciation, current income is inciden-
tal to the objective of capital growth. Because of the market risks inherent in
any investment, the selection of securities on the basis of their appreciation
possibilities cannot ensure against possible loss in value, and there is, of
course, no assurance that the Portfolio's investment objective will be met. The
Portfolio is therefore not intended for investors whose principal objective is
assured income and conservation of capital.
The Portfolio invests predominantly in the equity securities (common stocks,
securities convertible into common stocks and rights and warrants to subscribe
for or purchase common stocks) of a limited number of large, carefully select-
ed, high-quality U.S. companies that, in the judgment of Alliance Capital Man-
agement L.P. (the "Adviser"), are likely to achieve superior earnings growth.
Normally, about 40 companies are represented in the Portfolio's investment
portfolio, with the 25 most highly regarded of these companies usually consti-
tuting approximately 70% of the Portfolio's net assets. The Portfolio thus dif-
fers from more typical equity mutual funds by investing most of its assets in a
relatively small number of intensively researched companies and is designed for
those seeking to accumulate capital over time with less volatility than
that associated with investment in smaller companies.
The Portfolio, under normal circumstances, invests at least 85% of the value of
its total assets in the equity securities of U.S. companies. The Portfolio de-
fines U.S. companies to be entities (i) that are organized under the laws of
the United States and have their principal office in the United States, and
(ii) the equity securities of which are traded principally in the United States
securities markets.
Within the investment framework described herein, Alfred Harrison, who heads
the Adviser's "Large Cap Growth Group," is ultimately responsible for the in-
vestment decisions for the Portfolio. In managing the Portfolio's assets, the
Adviser's investment strategy emphasizes stock selection and investment in the
securities of a limited number of issuers. As one of the largest multinational
investment firms, the Adviser has access to considerable information concerning
all of the companies followed, an in-depth understanding of the products,
services, markets and competition of these companies and a good knowledge of
the managements of most of the companies in its research universe.
The Adviser's analysts prepare their own earnings estimates and financial mod-
els for each company followed. While each analyst has responsibility for fol-
lowing companies in one or more identified sectors and/or industries, the lat-
eral structure of the Adviser's research organization and constant
communication among the analysts result in
6
<PAGE>
decision-making based on the relative attractiveness of stocks among industry
sectors. The focus during this process is on the early recognition of change
on the premise that value is created through the dynamics of changing company,
industry and economic fundamentals. Research emphasis is placed on the identi-
fication of companies whose substantially above average prospective earnings
growth is not fully reflected in current market valuations.
The Adviser's investment strategy for the Fund emphasizes stock selection and
investment in the securities of a limited number of issuers. The Adviser re-
lies heavily upon the fundamental analysis and research of its large internal
research staff, which generally follows a primary research universe of more
than 600 companies that have strong management, superior industry positions,
excellent balance sheets and superior earnings growth prospects. An emphasis
is placed on identifying companies whose substantially above average prospec-
tive earnings growth is not fully reflected in current market valuations.
In the managing of the Portfolio's investment portfolio, the Adviser seeks to
utilize market volatility judiciously (assuming no change in company fundamen-
tals) to adjust the Portfolio's positions. The Portfolio strives to capitalize
on apparently unwarranted price fluctuations, both to purchase or increase po-
sitions on weaknesses and to sell or reduce overpriced holdings. Under normal
circumstances, the Portfolio will remain substantially fully invested in eq-
uity securities and will not take significant cash positions for market timing
purposes. Rather, during a market decline, while adding to positions in fa-
vored stocks, the Portfolio will tend to become somewhat more aggressive,
gradually reducing somewhat the number of companies represented in the Portfo-
lio's portfolio. Conversely, in rising markets, while reducing or eliminating
fully valued positions, the Portfolio will tend to become somewhat more con-
servative, gradually increasing the number of companies represented in the
Portfolio's portfolio. Through this "buying into declines" and "selling into
strength," the Adviser seeks to gain positive returns in good markets while
providing some measure of protection in poor markets.
The Adviser expects the average weighted market capitalization of companies
represented in the Portfolio's portfolio (i.e., the number of a company's
shares outstanding multiplied by the price per share) to normally be in the
range of or exceed the average weighted market capitalization of companies
comprising the "S&P 500" (Standard & Poor's 500 Composite Stock Price Index, a
widely recognized unmanaged index of market activity) based upon the aggregate
performance of a selected portfolio of publicly traded stocks, including
monthly adjustments to reflect the reinvestment of dividends and distribu-
tions.
The Portfolio intends to invest in special situations from time to time. A
special situation arises when, in the opinion of the Portfolio's management,
the securities of a particular company will, within a reasonably estimable pe-
riod of time, be accorded market recognition at an appreciated value solely by
reason of a development particularly or uniquely applicable to that company
and regardless of general business condi-
7
<PAGE>
tions or movements of the market as a whole.
Short Sales. The Premier Growth Portfolio may not sell securities short, ex-
cept that it may make short sales "against the box." A short sale is effected
by selling a security which the Portfolio does not own, or if the Portfolio
does own such security, it is not to be delivered upon consummation of the
sale. A short sale is "against the box" to the extent that the Portfolio con-
temporaneously owns or has the right to obtain securities identical to those
sold short without payment. Not more than 15% of the value of the Portfolio's
net assets will be in deposits on short sales "against the box."
Puts and Calls. The Premier Growth Portfolio may write call options and may
purchase and sell put and call options written by others, combinations thereof
or similar options. The Portfolio may not write put options. The buyer of an
option, upon payment of a premium obtains, in the case of a put option, the
right to deliver to the writer of the option and, in the case of a call op-
tion, the right to call upon the writer to deliver, a specified number of
shares of a specified stock on or before a fixed date at a predetermined
price.
Writing, purchasing and selling call options are highly specialized activities
and entail greater than ordinary investment risks. When calls written by the
Portfolio are exercised, the Portfolio will be obligated to sell stocks below
the current market price. A call written by the Portfolio will not be sold un-
less the Portfolio at all times during the option period owns either (a) the
optioned securities, or securities convertible into or carrying rights to ac-
quire the optioned securities, or (b) an offsetting call option on the same
securities.
The Premier Growth Portfolio will not sell a call option written or guaranteed
by it if, as a result of such sale, the aggregate of the Portfolio's securi-
ties subject to outstanding call options (valued at the lower of the option
price or market value of such securities) would exceed 15% of the Portfolio's
total assets. The Portfolio will not sell any call option if such sale would
result in more than 10% of the Portfolio's assets being committed to call op-
tions written by the Portfolio, which, at the time of sale by the Portfolio,
have a remaining term of more than 100 days.
As noted, the Portfolio may also purchase and sell put and call options writ-
ten by others, combinations thereof, or similar options, but the aggregate
cost of all outstanding options purchased and held by the Portfolio shall at
no time exceed 10% of the Portfolio's total assets. If an option is not so
sold and is permitted to expire without being exercised, the Portfolio would
suffer a loss in the amount of the premium paid by the Portfolio for the op-
tion.
Options on Market Indices. The Portfolio may purchase and sell exchange-traded
index options. 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 se-
curity 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.
8
<PAGE>
GROWTH AND INCOME PORTFOLIO
The Growth and Income Portfolio's investment objective is to seek reasonable
cur-rent income and reasonable opportunity for appreciation through invest-
ments primarily in dividend-paying common stocks of good quality. Whenever the
economic outlook is unfavorable for investment in common stock, investments in
other types of securities, such as bonds, convertible bonds, preferred stock
and convertible preferred stocks may be made by the Portfolio. Purchases and
sales of portfolio securities are made at such times and in such amounts as
are deemed advisable in light of market, economic and other conditions.
QUASAR PORTFOLIO
The Quasar Portfolio is a diversified investment company that seeks growth of
capital by pursuing aggressive investment policies. It invests for capital ap-
preciation and only incidentally for current income. The selection of securi-
ties based on the possibility of appreciation cannot prevent loss in value.
Moreover, because the Portfolio's investment policies are aggressive, an in-
vestment in the Portfolio is risky and investors who want assured income or
preservation of capital should not invest in the Portfolio.
The Portfolio invests in any company and industry and in any type of security
with potential for capital appreciation. It invests in well-known and estab-
lished companies and in new and unseasoned companies. When selecting securi-
ties, the Adviser considers economic and political outlook, the values of spe-
cific securities relative to other investments, trends in the determinants of
corporate profits and management capability and practices.
The Portfolio invests principally in equity securities, but it also invests to
a limited degree in non-convertible bonds and preferred stock. The Portfolio
invests in listed and unlisted U.S. and foreign securities. The Portfolio pe-
riodically invests in special situations, which occur when the securities of a
company are expected to appreciate due to a development particularly or
uniquely applicable to that company and regardless of general business condi-
tions or movements of the market as a whole.
The Portfolio may also: (i) invest up to 15% of its total assets in securities
for which there is no ready market; (ii) make short sales of securities
"against the box," but not more than 15% of its net assets may be deposited on
short sales; and (iii) write call options and purchase and sell put and call
options written by others. For additional information on the use, risks and
costs of the Policies and practices, see "Other Investment Policies and Tech-
niques," below.
The Portfolio's investment objective cannot be changed without approval by the
holders of a majority of the Portfolio's outstanding voting securities, as de-
fined in the Act. Except as otherwise indicated, the investment policies of
the Portfolio are not "fundamental policies" and may, therefore, be changed by
the Board of Directors without shareholder approval.
Options. The Portfolio may write call options and purchase and sell put and
call options written by others. 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 secu-
rity on or before a fixed date at a predeter-
9
<PAGE>
mined price. A call option written by the Portfolio is "covered" if the Port-
folio owns the underlying security, has an absolute and immediate right to ac-
quire 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 the Portfolio is "covered" if the Portfolio holds a put option on the un-
derlying securities with an exercise price equal to or greater than that of
the put option it has written.
In purchasing an option, the Portfolio would be in a position to realize a
gain, if, during the option period, the price of the underlying security in-
creased (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 the 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. These
risks could be reduced by entering into a closing transaction (i.e., by dis-
posing of the option prior to its exercise). The Portfolio retains the premium
received from writing a call option whether or not the option is exercised.
The writing of covered call options could result in increases in the Portfo-
lio's portfolio turnover rate, especially during periods when market prices of
the underlying securities appreciate.
The Portfolio will not write a call option if, as a result, the aggregate of
the Portfolio's securities subject to outstanding call options (valued at the
lower of the option price or market value of such securities) would exceed 15%
of the Portfolio's total assets or more than 10% of the Portfolio's assets
would be committed to all options that at time of sale have a remaining term
of more than 100 days. The aggregate cost of all outstanding options purchased
and held by the Portfolio will at no time exceed 10% of the Portfolio's total
assets.
Short Sales. The Portfolio may only make short sales of securities "against
the box". A short sale is effected by selling a security that the Portfolio
does not own, or if the Portfolio does own such security, it is not to be de-
livered upon consummation of the sale. A short sale is "against the box" to
the extent that the Portfolio contemporaneously owns or has the right to ob-
tain securities identical to those sold short without payment. If the price of
the security sold short increases between the time of the short sale and the
time the Portfolio replaces the borrowed security, the Portfolio will incur a
loss; conversely, if the price declines, the Portfolio will realize a capital
gain. Certain special federal income tax considerations may apply to short
sales entered into by the Portfolio. See "Dividends, Distributions and Taxes"
in the Statement of Additional Information.
Foreign Securities. The Portfolio may invest in foreign securities. To the ex-
tent the Portfolio invests in foreign securities, consideration is given to
certain factors comprising both risk and opportunity. The values of foreign
securities investments are affected by changes in currency rates or exchange
con-
10
<PAGE>
trol regulations, application of foreign tax laws, including withholding taxes,
changes in governmental administration or economic, taxation or monetary policy
(in the United States and abroad) or changed circumstances in dealings between
nations. Foreign securities markets may also be less liquid, more volatile, and
less subject to governmental supervision than in the United States. Investments
in foreign countries could be affected by other factors not present in the
United States, including expropriation, confiscatory taxation, lack of uniform
accounting and auditing standards and potential difficulties in enforcing con-
tractual obligations and could be subject to extended settlement periods.
OTHER INVESTMENT POLICIES AND TECHNIQUES
Except as otherwise noted below, the following description of other investment
policies is applicable to all of the Fund's Portfolios:
REPURCHASE AGREEMENTS
Any Portfolio, except the Quasar Portfolio may enter into agreements pertaining
to U.S. Government Securities.
A repurchase agreement arises when a buyer purchases a security and simultane-
ously agrees to resell it to the vendor at an agreed-upon future date, normally
one day or a few days later. The resale price is greater than the purchase
price, reflecting an agreed-upon interest rate. Such agreements permit the
Portfolio to keep all of its assets at work while retaining "overnight" flexi-
bility in pursuit of investment of a longer-term nature. If a vendor defaults
on its repurchase obligation, the 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, the Portfolio might be delayed in, or pre-
vented from, selling the collateral for its benefit. The Fund's Board of Direc-
tors has established procedures, which are periodically reviewed by the Board,
pursuant to which the Adviser monitors the creditworthiness of the vendors with
which the Portfolios enter into repurchase agreement transactions.
WRITING COVERED CALL OPTIONS
The Premier Growth Portfolio and the Growth and Income Portfolio may each write
covered call options listed on one or more national securities exchanges. A
call option gives the purchaser of the option, upon payment of a premium to the
writer of the option, the right to purchase from the writer of the option a
specified number of shares of a specified security on or before a fixed date,
at a predetermined price. A Portfolio permitted to write call options may not
do so unless the Portfolio at all times during the option period owns the op-
tioned securities, or securities convertible or carrying rights to acquire the
optioned securities at no additional cost. Neither of the above listed Portfo-
lios may write covered call options in excess of 25% of such Portfolio's
assets.
A Portfolio may terminate its obligation to the holder of an option written by
the Portfolio through a "closing purchase transaction." The Portfolio may not,
however, effect a closing purchase transaction with respect to such an option
after it has been notified of the exercise of such option. The Portfolio real-
izes a profit or loss from a closing purchase transaction if the cost of the
11
<PAGE>
transaction is more or less than the premium received by the Portfolio from
writing the option. Although the writing of covered call options only on na-
tional securities exchanges increases the likelihood of a Portfolio being able
to make closing purchase transactions, there is no assurance that a Portfolio
will be able to effect closing purchase transactions at any particular time or
at an acceptable price. The writing of covered call options could result in
increases in the portfolio turnover of a Portfolio, especially during periods
when market prices of the underlying securities appreciate.
OPTIONS
The purchaser of an option, upon payment of a premium, obtains, in the case of
a put option the right to deliver to the writer of the option, and in the case
of a call option, the right to call upon the writer to deliver, a specified
amount of a security on or before a fixed date at a predetermined price. A
call option written by a Portfolio is "covered" if the Portfolio (i) owns the
underlying security covered by the call (ii) has an absolute and immediate
right to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by the Fund's Cus-
todian) upon conversion or exchange of other portfolio securities, or (iii)
holds a call on the same security in the same principal amount as the call
written where the exercise price of the call held (i) is equal to or less than
the exercise price of the call written or (ii) is greater than the exercise
price of the call written if the difference is maintained by the Portfolio in
cash and liquid high-grade debt securities in a segregated account with the
Fund's Custodian. A put option written by a Portfolio is "covered" if the
Portfolio maintains liquid assets with a value equal to the exercise price in
a segregated account with the Fund's Custodian, or else holds a put on the
same security in the same principal amount as the put written where the exer-
cise price of the put held is equal to or greater than the exercise price of
the put written. The premium paid by the purchaser of an option will reflect,
among other things, the relationship of the exercise price to the market price
and volatility of the underlying security, the remaining term of the option,
supply and demand and interest rates.
A call option is written for cross-hedging purposes if a Portfolio does not
own the underlying security, but seeks to provide a hedge against a decline in
value in another security which the Portfolio owns or has the right to ac-
quire. In such circumstances, the Portfolio collateralizes its obligation un-
der the option (which is not covered) by maintaining in a segregated account
with the Fund's Custodian liquid assets in an amount not less than the market
value of the underlying security, marked to market daily.
In purchasing a call option, a Portfolio would be in a position to realize a
gain if, during the option period, the price of the underlying security in-
creased by an amount in excess of the premium paid. It would realize a loss if
the price of the underlying security declined or remained the same or did not
increase during the period by more than the amount of the premium. In purchas-
ing a put option, a Portfolio would be in a position to realize a gain if,
during the option period, the price of the underlying security declined by an
amount in excess of the premium paid. It would realize a loss if the price of
the underlying security increased or remained
12
<PAGE>
the same or did not decrease during that period by more than the amount of the
premium. If a put or call option purchased by a Portfolio were permitted to
expire without being sold or exercised, its premium would be lost by the
Portfolio.
The risk involved in writing a put option is that there could be a decrease in
the market value of the underlying security. If this occurred, the option
could be exercised and the underlying security would then be sold by the op-
tion holder to the Portfolio at a higher price than its current market value.
The risk involved in writing a call option is that there could be an increase
in the market value of the underlying security. If this occurred, the option
could be exercised and the underlying security would then be sold by the Port-
folio at a lower price than its current market value. These risks could be re-
duced by entering into a closing transaction. See Appendix C to the Statement
of Additional Information. A Portfolio retains the premium received from writ-
ing a put or call option whether or not the option is exercised.
A Portfolio may purchase or write options on securities of the types in which
it is permitted to invest in privately negotiated transactions. A 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 purchased or written
by a Portfolio in negotiated transactions are illiquid and it may not be pos-
sible for the Portfolio to effect a closing transaction at a time when the Ad-
viser believes it would be advantageous to do so. See "Illiquid Securities."
See Appendix C to the Statement of Additional Information for a further dis-
cussion of the use, risks and costs of option trading.
LOANS OF PORTFOLIO SECURITIES
Each Portfolio of the Fund, except the Quasar Portfolio, may make secured
loans of its portfolio securities to brokers, dealers and financial institu-
tions provided that cash, U.S. Government securities, other liquid high-qual-
ity debt securities or bank letters of credit equal to at least 100% of the
market value of the securities loaned is deposited and maintained by the bor-
rower with the Portfolio.
The 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 determining whether to lend securities to a particular
borrower, the Adviser will consider all relevant facts and circumstances, in-
cluding the creditworthiness of the borrower. While securities are on loan,
the borrower will pay the Portfolio any income earned thereon and the Portfo-
lio may invest any cash collateral in portfolio securities, thereby earning
additional income, or receive an agreed upon amount of income from a borrower
who has delivered equivalent collateral. Each Portfolio will have the right to
regain record ownership of loaned securities to exercise beneficial rights
such as voting rights, subscription rights and rights to dividends, interest
or other distributions. Each Portfolio may pay reasonable finders', adminis-
trative and custodial fees in connection with a loan. No more than 30% of the
value of the assets of each Portfolio may be loaned at any time, nor will a
Portfolio lend its portfo-
13
<PAGE>
lio securities to any officer, director, employee or affiliate of either the
Fund or the Adviser.
FOREIGN SECURITIES
For a description of the investment policies of the Quasar Portfolio with re-
spect to foreign securities, see above. Each of the other Portfolios, may in-
vest in listed and unlisted foreign securities without limitation, although
the Premier Growth Portfolio intends to invest at least 85% of the value of
its total assets in the equity securities of American companies and the Growth
and Income Portfolio intends to restrict its investment in foreign securities
to issues of high quality. The Portfolios may convert U.S. Dollars into for-
eign currency, but only to effect securities transactions on a foreign securi-
ties exchange and not to hold such currency as an investment. Each Portfolio
may enter into forward foreign currency exchange contracts in order to protect
against uncertainty in the level of future foreign exchange rates.
To the extent a Portfolio invests in foreign securities, consideration is
given to certain factors comprising both risk and opportunity. The values of
foreign securities investments are affected by changes in currency rates or
exchange control regulations, application of foreign tax laws, including with-
holding taxes, changes in governmental administration or economic, taxation or
monetary policy (in the United States and abroad) or changed circumstances in
dealings between nations. Currency exchange rate movements will increase or
reduce the U.S. dollar value of the Portfolio's net assets and income attrib-
utable to foreign securities. Costs are incurred in connection with conver-
sions between various currencies held by a Portfolio. In addition, there may
be substantially less publicly available information about foreign issuers
than about domestic issuers, and foreign issuers may not be subject to ac-
counting, auditing and financial reporting standards and requirements compara-
ble to those of domestic issuers. Foreign issuers are subject to accounting,
auditing and financial standards and requirements that differ, in some cases
significantly, from those applicable to U.S. issuers. In particular, the as-
sets and profits appearing on the financial statements of a foreign issuer may
not reflect its financial position or results of operations in the way they
would be reflected had the financial statements been prepared in accordance
with U.S. generally accepted accounting principles. In addition, for an issuer
that keeps accounting records in local currency, inflation accounting rules in
some of the countries in which a Portfolio will invest require, for both tax
and accounting purposes, that certain assets and liabilities be restated on
the issuer's balance sheet in order to express items in terms of currency of
constant purchasing power. Inflation accounting may indirectly generate losses
or profits. Consequently, financial data may be materially affected by re-
statements for inflation and may not accurately reflect the real condition of
those issuers and securities markets. Securities of some foreign issuers are
less liquid and more volatile than securities of comparable domestic issuers,
and foreign brokerage commissions are generally higher than in the United
States. Foreign securities markets may also be less liquid, more volatile, and
less subject to governmental supervision than in the United States. Invest-
ments in foreign countries could be affected by other factors not
14
<PAGE>
present in the United States, including expropriation, confiscatory taxation,
lack of uniform accounting and auditing standards and potential difficulties
in enforcing contractual obligations and could be subject to extended settle-
ment periods.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Forward commitments for the purchase or sale of securities may include pur-
chases 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 occur-
rence of a subsequent event, such as approval and consummation of a debt re-
structuring (i.e., a "when, as and if issued" trade).
When forward commitment transactions are negotiated, the price, which gener-
ally is expressed in yield terms, is fixed at the time the commitment is made,
but delivery and payment for the securities take place at a later date, nor-
mally within two months after the transaction, delayed settlements beyond two
months may be negotiated. Securities purchased or sold under a forward commit-
ment are subject to market fluctuation, and no interest accrues to the pur-
chaser prior to the settlement date. At the time a Portfolio enters into a
forward commitment, it will record the transaction and thereafter reflect the
value of the security purchased or, if a sale, the proceeds to be received, in
determining its net asset value. Any unrealized appreciation or depreciation
reflected in such valuation of a "when, as and if issued" security would be
cancelled in the event that the required condition did not occur and the trade
was cancelled.
The use of forward commitments enables a Portfolio to protect against antici-
pated changes in interest rates and prices. How-ever, if the Adviser were to
forecast incorrectly the direction of interest rate movements, the Portfolio
might be required to complete such when-issued or forward transactions at
prices less favorable than current market values.
A Portfolio's right to receive or deliver a security under a forward commit-
ment may be sold prior to the settlement date, but the Portfolio will enter
into forward commitments only with the intention of actually receiving or de-
livering the securities, as the case may be. If the Portfolio, however,
chooses to dispose of the right to receive or deliver a security subject to a
forward commitment prior to the settlement date of the transaction, it may in-
cur a gain or loss. In the event the other party to a forward commitment
transaction were to default, the Portfolio might lose the opportunity to in-
vest money at favorable rates or to dispose of securities at favorable prices.
ILLIQUID SECURITIES
Subject to any more restrictive applicable investment policies, none of the
Portfolios maintains more than 15% of its net assets in illiquid securities.
For purposes of each Portfolio's investment objectives and policies and in-
vestment restrictions, illiquid securities include, among others, (a) direct
placements or other securities which are subject to legal or contractual re-
strictions on resale or for which there is no readily available market (e.g.,
trading in the security is suspended or, in the case of unlisted securities,
market makers do not exist or will not entertain bids or offers), (b) options
purchased
15
<PAGE>
by the Portfolio over-the-counter and the cover for options written by the
Portfolio over-the-counter, and (c) repurchase agreements not terminable within
seven days. Securities eligible for resale under Rule 144A under the Securities
Act of 1933, as amended, that have legal or contractual restrictions on resale
but have a readily available market are not deemed illiquid for purposes of
this limitation. The Adviser monitors the liquidity of such securities under
the supervision of the Board of Directors. See "Certain Fundamental Investment
Policies." See the Statement of Additional Information for further discussion
of illiquid securities.
FIXED-INCOME SECURITIES
The value of the shares of each Portfolio that invests in fixed-income securi-
ties will fluctuate with the value of such investments. The value of each Port-
folio's investments will change as the general level of interest rates fluctu-
ates. During periods of falling interest rates, the values of a Portfolio's se-
curities generally rise. Conversely, during periods of rising interest rates,
the values of a Portfolio's securities generally decline.
In seeking to achieve a Portfolio's investment objective, there will be times,
such as during periods of rising interest rates, when depreciation and realiza-
tion of capital losses on securities in a Portfolio's portfolio will be un-
avoidable. Moreover, medium- and lower-rated securities and non-rated securi-
ties of comparable quality may be subject to wider fluctuations in yield and
market values than higher-rated securities under certain market conditions.
Such fluctuations after a security is acquired do not affect the cash income
received from that security but are reflected in the net asset value of a
Portfolio.
SECURITIES RATINGS
The ratings of fixed-income securities by S&P, Moody's, Duff & Phelps and Fitch
are a generally accepted barometer of credit risk. They are, however, subject
to certain limitations from an investor's standpoint. The rating of an issuer
is heavily weighted by past developments and does not necessarily reflect prob-
able future conditions. There is frequently a lag between the time a rating is
assigned and the time it is updated. In addition, there may be varying degrees
of difference in credit risk of securities within each rating category.
INVESTMENT IN FIXED-INCOME SECURITIES RATED BAA AND BBB
Securities rated Baa or BBB are considered to have speculative characteristics
and share some of the same characteristics as lower-rated securities, as de-
scribed below. 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 in-
terest 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
16
<PAGE>
likely to weaken than is that of issuers of higher-rated securities in times
of deteriorating economic conditions or rising interest rates. In addition,
lower-rated securities may be more susceptible to real or perceived adverse
economic conditions than investment grade securities, although the market val-
ues of securities rated below investment grade and comparable unrated securi-
ties tend to react less to fluctuations in interest rate levels than do those
of higher-rated securities. Securities rated Ba or BB are judged to have spec-
ulative elements or to be predominantly speculative with respect to the is-
suer's ability to pay interest and repay principal. Securities rated B are
judged to have highly speculative elements or to be predominantly speculative.
Such securities may have small assurance of interest and principal payments.
Securities rated Baa by Moody's are also judged to have speculative
characteristics.
The market for lower-rated securities may be thinner and less active than that
for higher-rated securities, which can adversely affect the prices at which
these securities can be sold. To the extent that there is no established sec-
ondary market for lower-rated securities, a Portfolio's may experience diffi-
culty in valuing such securities and, in turn, the Portfolio's assets.
The Adviser will try to reduce the risk inherent in investment in lower-rated
securities through credit analysis, diversification and attention to current
developments and trends in interest rates and economic and political condi-
tions. However, there can be no assurance that losses will not occur. Since
the risk of default is higher for lower-rated securities, the Adviser's re-
search and credit analysis are a correspondingly more important aspect of its
program for managing a Portfolio's securities than would be the case if a
Portfolio did not invest in lower-rated securities. In considering investments
for the Portfolio, the Adviser will attempt to identify those high-yielding
securities whose financial condition is adequate to meet future obligations,
has improved, or is expected to improve in the future. The Adviser's analysis
focuses on relative values based on such factors as interest or dividend cov-
erage, asset coverage, earnings prospects, and the experience and managerial
strength of the issuer.
NON-RATED SECURITIES
Non-rated securities will also be considered for investment by a Portfolio
when the Adviser believes that the financial condition of the issuers of such
securities, or the protection afforded by the terms of the securities them-
selves, limits the risk to the Portfolio to a degree comparable to that of
rated securities which are consistent with the Portfolio's objective and poli-
cies.
DEFENSIVE POSITION
When business or financial conditions warrant, the Premier Growth Portfolio
and the Growth and Income Portfolio may assume a temporary defensive position
and invest without limit in high grade fixed income securities or hold their
assets in cash equivalents, including (i) short-term obligations of the U.S.
Government and its agencies or instrumentalities, (ii) certificates of depos-
it, bankers' acceptances and interest-bearing savings deposits of banks having
total assets of more than $1 billion and which are members of the Federal De-
posit Insurance
17
<PAGE>
Corporation, and (iii) commercial paper of prime quality rated A-1 or higher by
S&P, D-1 or higher by Duff & Phelps, F1 or higher by Fitch or Prime-1 by
Moody's or, if not rated, issued by companies which have an outstanding debt
issue rated AA or higher by S&P, Duff & Phelps or Fitch or Aa or higher by
Moody's.
PORTFOLIO TURNOVER
Portfolio turnover rates are set forth under "Financial Highlights." These
portfolio turnover rates are greater than those of most other investment compa-
nies. A high rate of portfolio turnover involves correspondingly greater bro-
kerage and other expenses than a lower rate, which must be borne by a Portfolio
and its shareholders. High portfolio turnover also may result in the realiza-
tion of substantial net short-term capital gains.
YEAR 2000
Many computer software systems in use today cannot properly process date-re-
lated information from and after January 1, 2000. Should any of the computer
systems employed by the Fund's major service providers fail to process this
type of information properly, that could have a negative impact on the Fund's
operations and the services that are provided to the Fund's shareholders. The
Adviser, as well as Alliance Fund Distributors, Inc., the principal underwriter
of the Fund's shares, and Alliance Fund Services, Inc., the Fund's registrar,
dividend disbursing agent, and transfer agent, have advised the Fund that they
are reviewing all of their computer systems with the goal of modifying or re-
placing such systems prior to January 1, 2000, to the extent necessary to fore-
close any such negative impact. In addition, the Adviser has been advised by
the Fund's custodian that it is also in the process of reviewing its systems
with the same goal. As of the date of this Prospectus, the Fund and the Adviser
have no reason to believe that these goals will not be achieved. Similarly, the
values of certain of the portfolio securities held by the Fund may be adversely
affected by the inability of the securities' issuers or of third parties to
process this type of information properly.
CERTAIN FUNDAMENTAL INVESTMENT POLICIES
The Fund has adopted certain fundamental investment policies applicable to the
Portfolios which may not be changed with respect to a Portfolio without the ap-
proval of the shareholders of a Portfolio. Certain of those fundamental invest-
ment policies are set forth below. For a complete listing of such fundamental
investment policies, see the Statement of Additional Information.
Briefly, with respect to the Premier Growth Portfolio and the Growth and Income
Portfolio, these fundamental investment policies provide that a Portfolio may
not: (i) invest in securities of any one issuer (including repurchase agree-
ments with any one entity) other than securities issued or guaranteed by the
United States Government, if immediately after such purchases more than 5% of
the value of its total assets would be invested in such issuer, except that 25%
of the value of the total assets of a Portfolio may be invested without regard
to such 5% limitation; (ii) acquire more than 10% of any class of the outstand-
ing securities of any issuer (for this purpose, all preferred stock of an is-
suer shall be deemed a single class, and all indebtedness of an issuer shall be
deemed a
18
<PAGE>
single class); (iii) invest more than 25% of the value of its total assets at
the time an investment is made in the securities of issuers conducting their
principal business activities in any one industry, except that there is no
such limitation with respect to U.S. Government securities or certificates of
deposit, bankers' acceptances and interest-bearing deposits (for purposes of
this investment restriction, the electric, gas, telephone and water business
shall each be considered as a separate industry); (iv) borrow money, except
that a Portfolio may borrow money only for extraordinary or emergency purposes
and then only in amounts not exceeding 15% of its total assets at the time of
borrowing; (v) mortgage, pledge or hypothecate any of its assets, except as
may be necessary in connection with permissible borrowings described in para-
graph (iv) above (in an aggregate amount not to exceed 15% of total assets of
a Portfolio); (vi) invest in illiquid securities if immediately after such in-
vestment more than 10% of the Portfolio's total assets (taken at market value)
would be invested in such securities; or (vii) invest more than 10% of the
value of its total assets in repurchase agreements not terminable within seven
days.
With respect to the Quasar Portfolio these fundamental policies provide that
the Portfolio may not: (i) purchase the securities of any one issuer, other
than the U.S. Government or any of its agencies or instrumentalities, if as a
result more than 5% of its total assets would be invested in such issuer or
the Portfolio would own more than 10% of the outstanding voting securities of
such issuer, except that up to 25% of its total asset may be invested without
regard to these 5% and 10% limitations; (ii) invest more than 25% of its total
assets in any particular industry; and (iii) borrow money except for temporary
or emergency purposes in an amount not exceeding 5% of its total assets at the
time the borrowing is made.
In addition, the Fund has adopted an investment policy, which is not desig-
nated a "fundamental policy" within the meaning of the Act, of intending to
have each Portfolio comply at all times with the diversification requirements
prescribed in Section 817(h) of the Internal Revenue Code or any successor
thereto and the applicable Treasury Regulations thereunder. This policy may be
changed upon notice to shareholders of the Fund, but without their approval.
19
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
DIRECTORS
John D. Carifa, Chairman and President, is President and Chief Operating Offi-
cer and a Director of Alliance Capital Management Corporation ("ACMC"), the
sole general partner of the Adviser, with which he has been associated since
prior to 1993.
Ruth Block was formerly an Executive Vice President and the Chief Insurance
Officer of The Equitable Life Assurance Society of the United States since
prior to 1993. She is a Director of Ecolab Incorporated (specialty chemicals)
and Amoco Corporation (oil and gas).
David H. Dievler was formerly a Senior Vice President of ACMC, with which he
had been associated since prior to 1993. He is currently an independent con-
sultant.
John H. Dobkin has been the President of Historic Hudson Valley (historic
preservation) since prior to 1993. Previously, he was Director of the National
Academy of Design.
William H. Foulk, Jr. is an investment advisor and an independent consultant.
He was formerly Senior Manager of Barrett Associates, Inc., a registered in-
vestment adviser, with which he had been associated since prior to 1993.
Dr. James M. Hester is President of the Harry Frank Guggenheim Foundation. He
was formerly President of New York University, The New York Botanical Garden
and Rector of the United Nations University.
Clifford L. Michel is a partner in the law firm of Cahill Gordon & Reindel,
with which he has been associated since prior to 1993. He is President, Chief
Executive Officer and a Director of Wenonah Development Company (investments)
and a Director of Placer Dome, Inc. (mining).
Donald J. Robinson was formerly a senior partner and a member of the Executive
Committee in the law firm of Orrick, Herrington & Sutcliffe and is currently
Senior Counsel to that firm.
ADVISER
Alliance Capital Management L.P. (the "Adviser"), a Delaware limited partner-
ship with principal offices at 1345 Avenue of the Americas, New York, New York
10105 has been retained under an investment advisory agreement (the "Invest-
ment Advisory Agreement") to provide investment advice and, in general, to
conduct the management and investment program of each of the Fund's Portfolios
subject to the general supervision and control of the Board of Directors of
the Fund.
20
<PAGE>
The following table lists the person or persons who are primarily responsible
for the day-to-day management of each Portfolio's investment portfolio, the
length of time that each person has been primarily responsible, and each per-
son's principal occupation during the past five years.
<TABLE>
<CAPTION>
FUND EMPLOYEE; YEAR; TITLE PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
---- --------------------- -----------------------------------------------
<S> <C> <C>
Premier Growth Portfolio Alfred Harrison since Associated with the Adviser
inception- since prior to 1993
Vice Chairman of Alliance
Capital Management
Corporation (ACMC)*
Growth and Income Paul C. Rissman since Associated with the Adviser
Portfolio inception- since prior to 1993
Senior Vice President of
ACMC
Quasar Portfolio Alden M. Stewart since Associated with the Adviser
inception-Executive Vice since prior to July, 1993**
President of ACMC
Randall E. Hasse since Associated with the Adviser
inception- since prior to 1993
Senior Vice President of
ACMC
</TABLE>
* The sole general partner of the Adviser.
** Prior to July 22, 1993, with Equitable Capital Management Corporation (Eq-
uitable Capital). On that date, the Adviser acquired the business and sub-
stantially all of the assets of Equitable Capital.
The Adviser is a leading international investment manager supervising client
accounts with assets as of December 31, 1997 totaling more than $218 billion
(of which approximately $85 billion represented the assets of investment compa-
nies). The Adviser's clients are primarily major corporate employee benefit
funds, public employee retirement systems, investment companies, foundations
and endowment funds. The 58 registered investment companies managed by the Ad-
viser comprising 122 separate investment portfolios currently have over three
million shareholder accounts. As of December 31, 1997, the Adviser was retained
as an investment manager for employee benefit plan assets of 31 of the Fortune
100 companies.
ACMC, the sole general partner of, and the owner of a 1% general partnership
interest in, the Adviser, is an indirect wholly-owned subsidiary of The Equita-
ble Life Assurance Society of the United States ("Equitable"), one of the larg-
est life insurance companies in the United States and a wholly owned subsidiary
of the Equitable Companies Incorporated, a holding company which is controlled
by AXA-UAP, a French insurance holding company. Certain information concerning
the ownership and control of Equitable by AXA-UAP is set forth in the Statement
of Additional Information under "Management of the Fund."
The Adviser provides investment advisory services and order placement facili-
ties for
21
<PAGE>
each of the Fund's Portfolios and pays all compensation of Directors and offi-
cers of the Fund who are affiliated persons of the Adviser. The Adviser or its
affiliates also furnish the Fund, without charge, management supervision and
assistance and office facilities and provide persons satisfactory to the
Fund's Board of Directors to serve as the Fund's officers.
EXPENSES OF THE FUND
In addition to the payments to the Adviser under the Investment Advisory
Agreement described above, the Fund pays certain other costs including (a)
custody, transfer and dividend disbursing expenses, (b) fees of Directors who
are not affiliated with the Adviser, (c) legal and auditing expenses, (d)
clerical, accounting and other office costs, (e) costs of printing the Fund's
prospectuses and shareholder reports, (f) cost of maintaining the Fund's ex-
istence, (g) interest charges, taxes, brokerage fees and commissions, (h)
costs of stationery and supplies, (i) expenses and fees related to registra-
tion and filing with the Commission and with state regulatory authorities, and
(j) cost of certain personnel of the Adviser or its affiliates rendering cler-
ical, accounting and other services to the Fund.
As to the obtaining of clerical and accounting services not required to be
provided to the Fund by the Adviser under the Investment Advisory Agreement,
the Fund may employ its own personnel. For such services, it may also utilize
personnel employed by the Adviser or by its affiliates; in such event, the
services are provided to the Fund at cost and the payments specifically ap-
proved in advance by the Fund's Board of Directors.
- --------------------------------------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
PURCHASE OF SHARES
Shares of each Portfolio of the Fund are offered on a continuous basis di-
rectly by the Fund and by Alliance Fund Distributors, Inc., the Fund's Princi-
pal Underwriter, to the separate accounts of certain life insurance companies
without any sales or other charge, at each Portfolio's net asset value, as de-
scribed below. The separate accounts of insurance companies place orders to
purchase shares of each Portfolio based on, among other things, the amount of
premium payments to be invested and surrendered and transfer requests to be
effected on that day pursuant to variable annuity contracts and variable life
insurance policies which are funded by shares of the Portfolios. The Fund re-
serves the right to suspend the sale of the Fund's shares in response to con-
ditions in the securities markets or for other reasons. Individuals may not
place orders directly with the Fund. See the Prospectus of the separate ac-
count of the participating insurance company for more information on the pur-
chase of Portfolio shares.
The public offering price of each Portfolio's shares is their net asset value.
The per share net asset value of each Portfolio is computed in accordance with
the Fund's Articles of Incorporation and By-Laws, at the next close of regular
trading on the New York Stock Exchange (the "Exchange") (currently 4:00 p.m.
Eastern time), follow-
22
<PAGE>
ing receipt of a purchase or redemption order by the Fund, on each Fund busi-
ness day on which such an order is received and trading in the types of secu-
rities in which the Fund invests might materially affect the value of Fund
shares. The Fund's per share net asset value is computed by dividing the value
of the Fund's total assets, less its liabilities, by the total number of its
shares then outstanding. A Fund business day is any weekday exclusive of days
on which the Exchange is closed (most national holidays and Good Friday). For
purposes of this computation, the securities in each Portfolio are valued at
their current market value determined on the basis of market quotations or, if
such quotations are not readily available, such other methods as the Directors
believe would accurately reflect fair market value. Portfolio securities may
also be valued on the basis of prices provided by a pricing service when such
prices are believed by the Adviser to reflect the fair market value of such
securities.
REDEMPTION OF SHARES
An insurance company separate account may redeem all or any portion of the
shares of any Portfolio in its account at any time at the net asset value per
share of that Portfolio next determined after a redemption request in proper
form is furnished to the Fund or the Principal Underwriter. Any certificates
representing shares being redeemed must be submitted with the redemption re-
quest. Shares redeemed are entitled to earn dividends, if any, up to and in-
cluding the day redemption is effected. There is no redemption charge. Payment
of the redemption price will normally be made within seven days after receipt
of such tender for redemption.
The right of redemption may be suspended or the date of payment may be post-
poned for any period during which the Exchange is closed (other than customary
weekend and holiday closings) or during which the Commission determines that
trading thereon is restricted, or for any period during which an emergency (as
determined by the Commission) exists as a result of which disposal by the Fund
of securities owned by a Portfolio is not reasonably practicable or as a re-
sult of which it is not reasonably practicable for the Fund fairly to deter-
mine the value of a Portfolio's net assets, or for such other periods as the
Commission may by order permit for the protection of security holders of the
Fund. For information regarding how to redeem shares in the Fund please see
your insurance company separate account prospectus.
23
<PAGE>
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
Each of the Portfolios will declare and distribute dividends from net invest-
ment income and will distribute its net capital gains, if any, at least annual-
ly. Such income and capital gains distributions will be made in shares of such
Portfolios.
Each Portfolio of the Fund qualified and intends to continue to qualify to be
taxed as a regulated investment company under Subchapter M of the Internal Rev-
enue Code (the "Code"). If so qualified, each Portfolio will not be subject to
Federal income or excise taxes on its investment company taxable income and net
capital gains to the extent such investment company taxable income and net cap-
ital gains are distributed to the separate accounts of insurance companies
which hold its shares. Under current tax law, capital gains or dividends from
any Portfolio are not currently taxable when left to accumulate within a vari-
able annuity (other than an annuity interest owned by a person who is not a
natural person) or variable life insurance contract. Distributions of net in-
vestment income and net short-term capital gain will be treated as ordinary in-
come and distributions of net long-term capital gain will be treated as long-
term capital gain in the hands of the insurance companies.
Investment income received by a Portfolio from sources within foreign countries
may be subject to foreign income taxes withheld at the source. Provided that
certain Code requirements are met, a Portfolio may "pass through" to its share-
holders credits or deductions for foreign income taxes paid.
Section 817(h) of the Code requires that the investments of a segregated asset
ac-count of an insurance company be "adequately diversified," in accordance
with Treasury Regulations promulgated thereunder, in order for the holders of
the variable annuity contracts or variable life insurance policies underlying
the account to receive the tax-deferred or tax-free treatment generally af-
forded holders of annuities or life insurance policies under the Code. The De-
partment of the Treasury has issued Regulations under section 817(h) which,
among other things, provide the manner in which a segregated asset account will
treat investments in a regulated investment company for purposes of the appli-
cable diversification requirements. Under the Regulations, if a regulated in-
vestment company satisfies certain conditions, a segregated asset account own-
ing shares of the regulated investment company will not be treated as a single
investment for these purposes, but rather the account will be treated as owning
its proportionate share of each of the assets of the regulated investment com-
pany. Each Portfolio plans to satisfy these conditions at all times so that the
shares of each Portfolio owned by a segregated asset account of a life insur-
ance company will be subject to this treatment under the Code.
For information concerning federal income tax consequences for the holders of
variable annuity contracts and variable rate insurance policies, such holders
should consult the prospectus used in connection with the issuance of their
particular contracts or policies.
24
<PAGE>
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Directors of the Fund, the
Adviser is responsible for the investment decisions and the placing of the or-
ders for portfolio transactions for the Fund. Portfolio transactions for the
Premier Growth Portfolio, the Growth and Income Portfolio and the Quasar Port-
folio are normally effected by brokers.
The Fund has no obligation to enter into transactions in portfolio securities
with any broker, dealer, issuer, underwriter or other entity. In placing or-
ders, it is the policy of the Fund to obtain the best price and execution for
its transactions. Consistent with the objective of obtaining best execution,
the Fund may use brokers and dealers who provide research, statistical and
other information to the Adviser.
There may be occasions where the transaction cost charged by a broker may be
greater than that which another broker may charge if the Fund determines in
good faith that the amount of such transaction cost is reasonable in relation
to the value of the brokerage and research and statistical services provided by
the executing broker. Consistent with the Conduct Rules of the National Associ-
ation of Securities Dealers, Inc., and subject to seeking best price and execu-
tion, the Fund may consider sales of shares of the Fund as a factor in the se-
lection of brokers and dealers to enter into portfolio transactions with the
Fund.
The Fund may from time to time place orders for the purchase or sale of securi-
ties on an agency basis with Donaldson, Lufkin & Jenrette Securities Corpora-
tion, an affiliate of the Adviser, and with brokers which may have their trans-
actions cleared or settled, or both, by the Pershing Division of Donaldson,
Lufkin and Jenrette Securities Corporation, for which Donaldson, Lufkin and
Jenrette Securities Corporation may receive a portion of the brokerage commis-
sion. In such instances, the placement of orders with such brokers would be
consistent with the Fund's objective of obtaining best execution and would not
be dependent upon the fact that Donaldson, Lufkin & Jenrette Securities Corpo-
ration is an affiliate of the Adviser.
ORGANIZATION
The Fund is a Maryland corporation organized on November 17, 1987. The autho-
rized capital stock of the Fund consists solely of 10,000,000,000 shares of
Common Stock having a par value of $.001 per share, which may, without share-
holder approval, be divided into an unlimited number of series. Such shares are
currently divided into 19 series, one underlying each Portfolio. Shares of each
Portfolio are normally entitled to one vote for all purposes. Generally, shares
of all Portfolios vote as a single series on matters, such as the election of
Directors, that affect all Portfolios in substantially the same manner. Mary-
land law does not require a registered investment company to hold annual meet-
ings of shareholders and it is anticipated that shareholder meetings will be
held only when specifically required by federal or state law. Shareholders have
available certain procedures for the removal of
25
<PAGE>
Directors. Shares of each Portfolio are freely transferable, are entitled to
dividends as determined by the Board of Directors and, in liquidation of the
Fund, are entitled to receive the net assets of that Portfolio. Shareholders
have no preference, pre-emptive or conversion rights. In accordance with cur-
rent law, it is anticipated that an insurance company issuing a variable annu-
ity contract or variable life insurance policy that participates in the Fund
will request voting instructions from contract or policyholders and will vote
shares in the separate account in accordance with the voting instructions
received.
PRINCIPAL UNDERWRITER
Alliance Fund Distributors, Inc., 1345 Avenue of the Americas, New York, New
York 10105, an indirect wholly-owned subsidiary of the Adviser, is the Princi-
pal Underwriter of shares of the Fund.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachu-
setts 02110, acts as Custodian for the securities and cash of the Fund and as
its dividend disbursing agent, but plays no part in deciding on the purchase
or sale of portfolio securities.
REGISTRAR, DIVIDEND-DISBURSING AGENT AND TRANSFER AGENT
Alliance Fund Services, Inc., an indirect wholly-owned subsidiary of the Ad-
viser, located at 500 Plaza Drive, Secaucus, New Jersey, 07094, acts as the
Fund's registrar, dividend-disbursing agent and transfer agent.
PERFORMANCE INFORMATION
From time to time the Fund advertises its "total return." The Fund's "total
return" is its average annual compounded total return for its most recently
completed one, five, and ten-year periods (or the period since the Fund's in-
ception). The Fund's total return for such a period is computed by finding,
through the use of a formula prescribed by the Commission, the average annual
compounded rate of return over the period that would equate an assumed initial
amount invested to the value of such investment at the end of the period. For
purposes of computing total return, income dividends and capital gains distri-
butions paid on shares of the Fund are assumed to have been reinvested when
paid and the maximum sales charge applicable to purchases of Fund shares is
assumed to have been paid.
The Fund's total return is not fixed and will fluctuate in response to pre-
vailing market conditions or as a function of the type and quality of the se-
curities in the Fund's portfolio and the Fund's expenses. Total return infor-
mation is useful in reviewing the Fund's performance but such information may
not provide a basis for comparison with bank deposits or other investments
which pay a fixed yield for a stated period of time. An investor's principal
invested in the Fund is not fixed and will fluctuate in response to prevailing
market conditions.
Advertisements quoting performance rankings of the Fund as measured by finan-
cial publications or by independent organizations such as Lipper Analytical
Services, Inc. and Morningstar, Inc., and advertisements presenting the his-
torical record of
26
<PAGE>
payments of income dividends by the Fund may also from time to time be sent to
investors or placed in newspapers, magazines such as the Wall Street Journal,
The New York Times, Barrons, Investor's Daily, Money Magazine, Changing Times,
Business Week and Forbes or other media on behalf of the Fund.
ADDITIONAL INFORMATION
Any shareholder inquiries may be directed to Alliance Fund Services, Inc. at
the address or telephone number shown on the front cover of this Prospectus.
This Prospectus and the Statement of Additional Information which has been in-
corporated by reference herein, does not contain all the information set forth
in the Registration Statement filed by the Fund with the Commission under the
Securities Act of 1933, as amended. Copies of the Registration Statement may
be obtained at a reasonable charge from the Commission or may be examined,
without charge, at the offices of the Commission in Washington, D.C.
This Prospectus does not constitute an offering in any state in which such of-
fering may not lawfully be made.
27
<PAGE>
APPENDIX A
BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt 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 stan-
dards. 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 protec-
tive elements may be of greater amplitude or there may be other elements pres-
ent which make the long-term risks appear somewhat larger than the Aaa securi-
ties.
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 payment
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 charac-
terizes 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 shortcom-
ings.
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.
A-1
<PAGE>
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
not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The modi-
fier 1 indicates that the security ranks in the higher end of its generic rat-
ing 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 CORPORATION
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 prin-
cipal 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 al-
though 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. Howev-
er, adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal for debt in
this category than in higher rated categories.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC or C is regarded as having sig-
nificant speculative characteristics. BB indicates the lowest degree of specu-
lation and C the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or ma-
jor exposures to adverse conditions.
A-2
<PAGE>
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, finan-
cial 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 condi-
tions, 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 contin-
ued.
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 ad-
dition of a plus or minus sign to show relative standing within the major rat-
ing categories.
NR: Not rated.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. Risk factors are negligible, being only slightly
more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest, but may vary slightly from time to time because of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below average protection factors but still considered suffi-
cient for prudent investment. Considerable variability in risk during economic
cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate accord-
ing to industry conditions or company fortunes. Overall quality may move up or
down frequently within this category.
A-3
<PAGE>
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely ac-
cording to economic cycles, industry conditions and/or company fortunes. Po-
tential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
FITCH IBCA, INC.
AAA: Bonds considered to be investment grade and of the highest credit qual-
ity. 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, al-
though not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future de-
velopments, short-term debt of these issuers is generally rated F- 1+.
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 consid-
ered 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 as-
sist 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 through-
out the life of the issue.
A-4
<PAGE>
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default.
The ability to meet obligations requires an advantageous business and eco-
nomic 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 ul-
timate recovery value in liquidation or reorganization of the obligor. DDD rep-
resents 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 in-
dicate 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.
COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
Leading market positions in well-established industries;
High rates of return on funds employed;
Conservative capitalization structure with moderate reliance on debt
and ample asset protection;
Broad margins in earnings coverage of fixed financial changes and high
internal cash generation; and
Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to varia-
tion. Capitalization characteristics, while still appropriate, may be more af-
fected by external conditions. Ample alternate liquidity is maintained.
A-5
<PAGE>
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an accept-
able ability for repayment of senior short-term obligations. The effect of in-
dustry characteristics and market compositions may be more pronounced. Vari-
ability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial lever-
age. Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S CORPORATION
A-1+, A-1: Commercial paper rated A-1 is rated in the highest category by
S&P. The obligor's capacity to meet its financial commitment on the obligations
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial com-
mitment on these obligations is extremely strong.
A-2: Commercial paper rated A-2 is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligations is satisfactory.
A-3: Commercial paper rated A-3 exhibits adequate protections parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
B: Commercial paper rated B is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
C: Commercial paper rated C is currently vulnerable to nonpayment and is de-
pendent upon favorable business, financial and economic conditions for the ob-
ligor to meet its financial commitment on the obligation.
D: Commercial paper rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments
on an obligation are jeopardized.
DUFF & PHELPS CREDIT RATING CO.
High Grade
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term obli-
gations.
A-6
<PAGE>
D-1: Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Good Grade
D-2: Good certainty of timely payment. Liquidity factors and company funda-
mentals are sound. Although ongoing funding needs may enlarge total financing
requirements, access to capital markets is good. Risk factors are small.
Satisfactory Grade
D-3: Satisfactory liquidity and other protection factors qualify issues as
to investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
Non-Investment Grade
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
Default
D-5: Issuer failed to meet scheduled principal and/or interest payments.
FITCH IBCA, INC.
F1: HIGHEST CREDIT QUALITY. Indicates the strongest capacity for timely pay-
ment of financial commitments; may have an added "+" to denote any exception-
ally strong credit feature.
F2: GOOD CREDIT QUALITY. A satisfactory capacity for timely payment of fi-
nancial commitments, but the margin of safety is not as great as in the case
of the higher ratings.
F3: FAIR CREDIT QUALITY. The capacity for timely payment of financial com-
mitments is adequate; however, near-term adverse changes could result in a re-
duction to non-investment grade.
B: SPECULATIVE. Minimal capacity for timely payment of financial commit-
ments, plus vulnerability to near-term adverse changes in financial and eco-
nomic conditions.
C: HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting
financial commitments is sole reliant upon a sustained, favorable business and
economic environment.
D: DEFAULT. Denotes actual or imminent payment default.
A-7
