<PAGE>
This Prospectus is filed pursuant to Rule 497(e).
File Nos. 33-18647 and 811-05398.
<PAGE>
[LOGO OF ALLIANCE CAPITAL
APPEARS HERE] ALLIANCE VARIABLE PRODUCTS
SERIES FUND, INC.
- -------------------------------------------------------------------------------
P.O. BOX 1520, SECAUCUS, NEW JERSEY 07096-1520
TOLL FREE (800) 221-5672
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
A DIVERSIFIED SELECTION OF INVESTMENT ALTERNATIVES
- -------------------------------------------------------------------------------
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.
CONSERVATIVE INVESTORS PORTFOLIO -- seeks the highest total return without, in
the view of the Fund's Adviser, undue risk to principal by investing in a di-
versified mix of publicly traded equity and fixed-income securities.
GROWTH INVESTORS PORTFOLIO -- seeks the highest total return consistent with
what the Fund's Adviser considers to be reasonable risk by investing in a di-
versified mix of publicly traded equity and fixed-income securities.
GROWTH PORTFOLIO -- seeks long-term growth of capital by investing primarily
in common stocks and other equity securities.
- -------------------------------------------------------------------------------
PURCHASE INFORMATION
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
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>
EXPENSE INFORMATION
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
AND CONSERVATIVE GROWTH
INCOME INVESTORS INVESTORS GROWTH
PORTFOLIO PORTFOLIO+ PORTFOLIO+ PORTFOLIO
--------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)
Management Fees................. .63% .37% 0%+ .75%
Other Expenses.................. .09% .58% .95%+ .09%
--- --- --- ---
Total Portfolio Operating
Expenses....................... .72% .95% .95%+ .84%
=== === === ===
</TABLE>
- --------
+Shareholder transaction expenses shown are net of expense reimbursement.
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>
Growth and Income Portfolio..................... $ 7 $23 $40 $ 89
Conservative Investors Portfolio................ $10 $30 $53 $117
Growth Investors Portfolio...................... $10 $30 $53 $117
Growth Portfolio................................ $ 9 $27 $47 $104
</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 Conservative Investors
Portfolio and Growth Investors Portfolio are net of voluntary expense reim-
bursements, which are not required to be continued indefinitely; however, the
Adviser intends to continue such reimbursements for the foreseeable future. The
expenses (as a percentage of average net assets) of the following Portfolios,
before expense reimbursements, would be: Conservative Investors Portfolio: Man-
agement Fees -- .75%, Other Expenses -- .58% and Total Portfolio Operating Ex-
pense -- 1.33%; Growth Investors Portfolio: Management Fees -- .75%, Other Ex-
penses -- .95% and Total Portfolio Operating Expenses --1.70%. The example
should not be considered representative of future expenses; actual expenses may
be greater or less than those shown.
2
<PAGE>
FINANCIAL HIGHLIGHTS
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>
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>
GROWTH INVESTORS PORTFOLIO
---------------------------------------------------
OCTOBER 28,
1994(E)
YEAR ENDED YEAR ENDED YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net asset value, beginning
of period................ $ 12.74 $ 11.87 $ 9.86 $10.00
------- ------- ------ ------
INCOME FROM INVESTMENT OP-
ERATIONS
Net investment
income(a)(b)............ .23 .24 .35 .04
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions............ 1.83 .72 1.67 (.18)
------- ------- ------ ------
Net increase (decrease)
in net asset value from
operations.............. 2.06 .96 2.02 (.14)
------- ------- ------ ------
LESS: DISTRIBUTIONS
Dividends from net
investment income....... (.20) (.07) (.01) -0-
Distributions from net
realized gains.......... (.22) (.02) -0- -0-
------- ------- ------ ------
Total dividends and dis-
tributions.............. (.42) (.09) (.01) -0-
------- ------- ------ ------
Net asset value, end of
period.................. $ 14.38 $ 12.74 $11.87 $ 9.86
======= ======= ====== ======
TOTAL RETURN
Total investment return
based on net asset
value(c)................ 16.34% 8.18% 20.48% (1.40)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted)......... $16,600 $10,709 $4,978 $ 321
Ratio to average net as-
sets of:
Expenses, net of waivers
and reimbursements...... .95% .95% .95% .95%(f)
Expenses, before waivers
and reimbursements...... 1.70% 1.85% 6.17% 41.62%(f)
Net investment income(a). 1.72% 2.01% 3.21% 2.29%(f)
Portfolio turnover rate.. 164% 160% 50% 3%
Average commission rate
paid(d)................. $.0379 $.0562 -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.
(e) Commencement of operations.
(f) Annualized.
3
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
GROWTH
PORTFOLIO
--------------------------------------------------
YEAR ENDED SEPTEMBER 15, 1994(E)
DECEMBER 31, TO
--------------------------- DECEMBER 31,
1997 1996 1995 1994
-------- -------- ------- ---------------------
<S> <C> <C> <C> <C>
Net asset value, beginning
of period.................. $ 17.92 $ 14.23 $ 10.53 $10.00
-------- -------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(a)(b).............. .07 .06 .17 .03
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions.............. 5.18 3.95 3.54 .50
-------- -------- ------- ------
Net increase (decrease) in
net asset value from
operations................ 5.25 4.01 3.71 .53
-------- -------- ------- ------
LESS: DIVIDENDS AND
DISTRIBUTIONS
Dividends from net
investment income......... (.03) (.04) (.01) -0-
Distributions from net
realized gains ........... (.72) (.28) -0- -0-
-------- -------- ------- ------
Total dividends and
distributions ............ (.75) (.32) (.01) -0-
-------- -------- ------- ------
Net asset value, end of
period.................... $ 22.42 $ 17.92 $ 14.23 $10.53
======== ======== ======= ======
TOTAL RETURN
Total investment return
based on net asset
value(c).................. 30.02% 28.49% 35.23% 5.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted)........... $235,875 $138,688 $45,220 $5,492
Ratio to average net assets
of:
Expenses, net of waivers
and reimbursements........ .84% .93% .95% .95%(f)
Expenses, before waivers
and reimbursements........ .84% .93% 1.27% 4.19%(f)
Net investment income(a)... .37% .35% 1.31% 1.17%(f)
Portfolio turnover rate.... 62% 98% 86% 25%
Average commission rate
paid (d).................. $ .0548 $.0578 -0- -0-
</TABLE>
<TABLE>
<CAPTION>
CONSERVATIVE INVESTORS PORTFOLIO
---------------------------------------------------
OCTOBER 28,
1994(E)
YEAR ENDED YEAR ENDED YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net asset value, beginning
of period................ $ 12.07 $ 11.76 $10.07 $10.00
------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(a)(b)............ .48 .45 .51 .06
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions............ .86 (.01) 1.20 .01
------- ------- ------ ------
Net increase in net asset
value from operations... 1.34 .44 1.71 .07
------- ------- ------ ------
LESS: DISTRIBUTIONS
Dividends from net
investment income....... (.31) (.09) (.02) -0-
Distributions from net
realized gains.......... -0- (.04) 0 -0-
------- ------- ------ ------
Total dividends and dis-
tributions.............. (.31) (.13) (.02) -0-
------- ------- ------ ------
Net asset value, end of
period.................. $ 13.10 $ 12.07 $11.76 $10.07
======= ======= ====== ======
TOTAL RETURN
Total investment return
based on net asset
value(c)................ 11.22% 3.79% 16.99% 0.70%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted)......... $30,196 $21,729 $7,420 $ 701
Ratio to average net as-
sets of:
Expenses, net of waivers
and reimbursements...... .95% .95% .95% .95%(f)
Expenses, before waivers
and reimbursements...... 1.33% 1.40% 4.25% 20.35%(f)
Net investment income(a). 3.85% 3.93% 4.65% 3.55%(f)
Portfolio turnover rate.. 209% 211% 61% 2%
Average commission rate
paid(d)................. $.0360 $.0578 -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.
(e) Commencement of operations.
(f) Annualized.
4
<PAGE>
DESCRIPTION OF THE PORTFOLIOS
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, four of which are offered by this Pro-
spectus: the Growth and Income Portfolio, the Conservative Investors Portfo-
lio, the Growth Investors Portfolio and the Growth 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 port-
folio securities in which each Portfolio may invest are described in greater
detail below.
GROWTH AND INCOME PORTFOLIO
The Growth and Income Portfolio's investment objective is to seek reasonable
current 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.
GROWTH INVESTORS PORTFOLIO AND CONSERVATIVE INVESTORS PORTFOLIO
The Conservative Investors Portfolio and Growth Investors Portfolio invest in
a variety of fixed-income securities, money market instruments and equity se-
curities, each pursuant to a different asset allocation strategy, as described
below. The term "asset allocation" is used to describe the process of shifting
assets among discrete categories of investments in an effort to adjust risk
while producing desired return objectives. Portfolio management, therefore,
will consist not only of specific securities selection but also of setting,
monitoring and changing, when necessary, the asset mix.
Each Portfolio has been designed with a view toward a particular "investor
profile." The "conservative investor" has a relatively short-term investment
bias, either because of a limited tolerance for market volatility or a short
investment horizon. This investor is adverse to taking risks that may result
in principal loss, even though such aversion may reduce the potential for
higher long-term gains and result in lower performance during periods of eq-
uity market strength. Consequently, the asset mix for the Conservative Invest-
ors Portfolio attempts to reduce volatility while providing modest upside po-
tential. The "growth investor" has a longer-term investment horizon and is
therefore willing to take more risks in an attempt to achieve long-term growth
of principal. This investor wishes, in effect, to be risk conscious without
being risk averse. The asset mix for the Growth Investors Portfolio should
therefore provide for upside potential without excessive volatility.
Alliance Capital Management L.P. (the "Adviser") has established an asset al-
location committee (the "Committee"), all the members of which are employees
of the Adviser, which is responsible for setting and continually reviewing the
asset mix ranges of each Portfolio. Under normal market conditions, the Ad-
viser expects to change allocation ranges approximately three to five times
per year. However, the Adviser has broad latitude to establish the frequency,
as well as the magnitude, of allocation changes within the guidelines estab-
lished for each Portfolio. During periods of severe market disruption, alloca-
tion ranges may change frequently. It is also possible that in periods of sta-
ble and consistent outlook no change will be made. The Adviser's decisions are
based on and may be limited by a variety of factors, including liquidity,
portfolio size, tax consequences and general market conditions, al-
6
<PAGE>
ways within the context of the appropriate investor profile for each Portfo-
lio. Consequently, asset mix decisions for the Conservative Investors Portfo-
lio particularly emphasize risk assessment of each asset class viewed over the
shorter term, while decisions for the Growth Investors Portfolio are princi-
pally based on the longer term total return potential for each asset class.
The Portfolios are permitted to use a variety of hedging techniques to attempt
to reduce market interest rate and currency risks.
INVESTMENT POLICIES
Conservative Investors Portfolio. The investment objective of the Conservative
Investors Portfolio is to achieve a high total return without, in the view of
the Adviser, undue risk of principal. The Conservative Investors Portfolio at-
tempts to achieve its investment objective by allocating varying portions of
its assets among investment grade, publicly traded fixed-income securities,
money market instruments and publicly traded common stocks and other equity
securities of United States and non-United States issuers. The average
weighted maturity of the Portfolio's portfolio of fixed-income securities is
expected to vary between less than one year to 30 years. See "Other Investment
Policies and Techniques -- Fixed Income Securities."
All fixed-income securities owned by the Portfolio will be investment grade at
the time of purchase. This means that they will be in one of the top four rat-
ing categories assigned by Standard & Poor's Corporation ("S&P"), Moody's In-
vestors Service, Inc. ("Moody's"), Duff & Phelps Credit Rating Co. ("Duff &
Phelps") or Fitch IBCA, Inc. ("Fitch") or will be unrated securities of compa-
rable quality as determined by the Adviser. Securities in the fourth such rat-
ing category (rated Baa by Moody's or BBB by S&P, Duff & Phelps or Fitch) have
speculative characteristics, and changes in economic conditions or other cir-
cumstances are more likely to lead to a weakened capacity to make principal
and interest payments on such obligations than in the case of higher-rated se-
curities. See "Other Investment Policies and Techniques -- Securities Rat-
ings," "-- Investment in Fixed-Income Securities Rated Baa and BBB" and Appen-
dix A. In the event that the rating of any security held by the Conservative
Investors Portfolio falls below investment grade (or, in the case of an
unrated security, the Adviser determines that it is no longer of investment
grade), the Portfolio will not be obligated to dispose of such security and
may continue to hold the obligation if, in the opinion of the Adviser, such
investment is considered appropriate in the circumstances.
Equity securities invested in by the Conservative Investors Portfolio consists
of common stocks and securities convertible into common stocks, such as con-
vertible bonds, convertible preferred stocks and warrants, issued by companies
with a favorable outlook for earnings and whose rate of growth is expected to
exceed that of the United States' economy over time.
The Conservative Investors Portfolio holds at all times at least 40% of its
total assets in investment grade fixed-income securities, each having a dura-
tion less than that of a 10-year Treasury bond (the "Fixed Income Core"). The
duration of a fixed-income security is the weighted average maturity, ex-
pressed in years, of the present value of all
7
<PAGE>
future cash flows, including coupon payments and principal repayments.
The Conservative Investors Portfolio is generally expected to hold approxi-
mately 70% of its total assets in fixed-income securities (including the Fixed
Income Core cash and money market instruments) and 30% in equity securities.
Actual asset mixes will be adjusted in response to economic and credit market
cycles. The fixed-income asset class always comprises at least 50%, but never
more than 90%, of the Portfolio's total assets. The equity class always com-
prises at least 10%, but never more than 50%, of the Portfolio's total assets.
For temporary defensive purposes, the Portfolio may invest in money market in-
struments.
Growth Investors Portfolio. The investment objective of the Growth Investors
Portfolio is to achieve the highest total return consistent with the Adviser's
determination of reasonable risk. The Portfolio attempts to achieve its in-
vestment objective by allocating varying portions of its assets among a number
of asset classes. Equity investments will include publicly traded common
stocks and other equity securities of the type in which the Conservative In-
vestors Portfolio may invest but may also include equity securities issued by
intermediate- and small-sized companies with favorable growth prospects, com-
panies in cyclical industries, companies whose securities are temporarily un-
dervalued, companies in special situations and less widely known companies.
Fixed-income investments will include investment grade fixed-income securities
(including cash and money market instruments) and may include securities that
are rated in the lower rating categories by recognized ratings agencies (i.e.,
Ba or lower by Moody's or BB or lower by S&P, Duff & Phelps or Fitch) or that
are unrated but determined by the Adviser to be of comparable quality. Lower-
rated fixed-income securities generally provide greater current income than
higher rated fixed-income securities, but are subject to greater credit and
market risk. The Portfolio will not invest more than 25% of its total assets
in securities rated below investment grade, that is, securities rated Ba or
lower by Moody's or BB or lower by S&P, Duff & Phelps or Fitch, or unrated se-
curities deemed to be of comparable quality by the Adviser. See "Other Invest-
ment Policies and Techniques -- Securities Ratings," "-- Investment in Lower-
Rated Fixed-Income Securities" and Appendix A.
The Growth Investors Portfolio holds at all times at least 40% of its total
assets in publicly traded common stocks and other equity securities of the
type purchased by the Conservative Investors Portfolio (the "Equity Core").
The Growth Investors Portfolio is generally expected to hold approximately 70%
of its total assets in equity securities (including the Equity Core) and 30%
in fixed-income securities (including cash and money market instruments). Ac-
tual asset mixes will be adjusted in response to economic and credit market
cycles. The fixed-income asset class will always comprise at least 10%, but
never more than 60%, of the Portfolio's total assets. The equity class will
always comprise at least 40%, but never more than 90%, of the Portfolio's to-
tal assets. The average weighted maturity of the Portfolio's portfolio of
fixed-income securities is expected to vary between less than one year to 30
years. See "Other Investment Policies and Techniques -- Fixed Income
8
<PAGE>
Securities." For temporary defensive purposes, the Portfolio may invest in
money market instruments.
ADDITIONAL INVESTMENT POLICIES AND TECHNIQUES
Foreign Securities. Each of the Conservative Investors Portfolio and Growth In-
vestors Portfolio may invest without limit in securities which are not publicly
traded in the United States, although the Conservative Investors Portfolio gen-
erally will not invest more than 15% of its total assets, and the Growth In-
vestors Portfolio generally will not invest more than 30% of its total assets,
in such securities.
The Growth Investors Portfolio may invest a portion of its assets in developing
countries or in countries with new or developing capital markets. The risks as-
sociated with investment in foreign securities are generally intensified for
these investments. These countries may have relatively unstable governments,
economies based on only a few industries or securities markets that trade a
small number of securities. Securities of issuers located in these countries
tend to have volatile prices and may offer significant potential for loss.
The value of foreign investments measured in U.S. dollars will rise or fall be-
cause of decreases or increases, respectively, in the value of the U.S. dollar
in comparison to the value of the currency in which the foreign investment is
denominated. The Portfolios may buy or sell foreign currencies, options on for-
eign currencies, foreign currency futures contracts (and related options) and
deal in forward foreign currency exchange contracts in connection with the pur-
chase and sale of foreign investments.
For a description of certain risks associated with investing in foreign securi-
ties, see "Other Investment Policies and Techniques--Foreign Securities," be-
low.
Non-Publicly Traded Securities. Each Portfolio may invest in securities which
are not publicly traded, including securities sold pursuant to Rule 144A under
the Securities Act of 1933 ("Rule 144A Securities"). The sale of these securi-
ties is usually restricted under Federal securities laws, and market quotations
may not be readily available. As a result, a Portfolio may not be able to sell
these securities (other than Rule 144A Securities) unless they are registered
under applicable Federal and state securities laws, or may have to sell them at
less than fair market value. Investment in these securities is restricted to 5%
of a Portfolio's total assets (not including for these purposes Rule 144A Secu-
rities, to the extent permitted by applicable law) and is also subject to the
Portfolio's restriction against investing more than 15% of total assets in il-
liquid securities. To the extent permitted by applicable law, Rule 144A Securi-
ties are not treated as "illiquid" for purposes of the foregoing restriction so
long as such securities meet liquidity guidelines established by the Board of
Directors. See "Other Investment Policies and Techniques -- Illiquid Securi-
ties," below.
Mortgage-Backed Securities. Each Portfolio may invest in mortgage-backed secu-
rities, including collateralized mortgage obligations or "CMOs." Interest and
principal payments (including prepayments) on the mortgages underlying mort-
gage-backed securities are passed through to the holders of the mortgage-backed
security. Prepayments occur when the mortgagor on an individual
9
<PAGE>
mortgage prepays the remaining principal before the mortgage's scheduled matu-
rity date. As a result of the pass-through of prepayments of principal on the
underlying securities, mortgage-backed securities are often subject to more
rapid prepayment of principal than their stated maturity would indicate. Be-
cause the prepayment characteristics of the underlying mortgages vary, it is
not possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. During periods of declining in-
terest rates, such prepayments can be expected to accelerate and the Portfo-
lios would be required to reinvest the proceeds at the lower interest rates
then available. Conversely, during periods of rising interest rates, a reduc-
tion in prepayments may increase the effective maturities of the securities,
subjecting them to a greater risk of decline in market value in response to
rising interest rates. In addition, prepayments of mortgages which underlie
securities purchased at a premium could result in capital losses.
The Portfolios may also invest in derivative instruments, including certifi-
cates representing rights to receive payments of the interest only or princi-
pal only of mortgage-backed securities ("IO/PO Strips"). These securities may
be more volatile than other types of securities. IO Strips involve the addi-
tional risk of loss of the entire remaining value of the investment if the un-
derlying mortgages were prepaid.
Although the market for mortgage-related securities is becoming increasingly
liquid, those issued by certain private organizations may not be readily mar-
ketable. In particular, the secondary markets for CMOs and IO/PO Strips may be
more volatile and less liquid than those for other mortgage-related securi-
ties, thereby potentially limiting a Fund's ability to buy or sell those secu-
rities at any particular time.
Adjustable Rate Securities. Each Portfolio may invest in adjustable rate secu-
rities. Adjustable rate securities are securities that have interest rates
that are reset at periodic intervals, usually by reference to some interest
rate index or market interest rate. Some adjustable rate securities are backed
by pools of mortgage loans. Although the rate adjustment feature may act as a
buffer to reduce sharp changes in the value of adjustable rate securities,
these securities are still subject to changes in value based on changes in
market interest rates or changes in the issuer's creditworthiness. Because the
interest rate is reset only periodically, changes in the interest rate on ad-
justable rate securities may lag behind changes in prevailing market interest
rates. Also, some adjustable rate securities (or the underlying mortgages) are
subject to caps or floors that limit the maximum change in interest rate dur-
ing a specified period or over the life of the security.
Asset-Backed Securities. Each Portfolio may invest in asset-backed securities
which represent fractional interests in pools of leases, retail installment
loans or revolving credit receivables, both secured and unsecured. These as-
sets are generally held by a trust and payments of principal and interest or
interest only are passed through monthly or quarterly to certificate holders
and may be guaranteed up to certain amounts by letters of credit issued by a
financial institution affiliated or unaffiliated with the trustee or origina-
tor of the trust.
10
<PAGE>
Underlying automobile sales contracts or credit card receivables are subject
to prepayment, which may reduce the overall return to certificate holders.
Certificate holders may also experience delays in payment on the certificates
if the full amounts due on underlying sales contracts or receivables are not
realized by the trust because of unanticipated legal or administrative costs
of enforcing the contracts or because of depreciation or damage to the
collateral (usually automobiles) securing certain contracts, or other factors.
If consistent with its investment objective and policies, the Portfolio may
invest in other asset-backed securities that may be developed in the future.
Investments in High-Yield Securities. The Growth Investors Portfolio may in-
vest in high-yield, high-risk, fixed-income and convertible securities rated
at the time of purchase Ba or lower by Moody's or BB or lower by S&P, Duff &
Phelps or Fitch, or, if unrated, judged by the Adviser to be of comparable
quality ("high-yield securities"). The Growth Investors Portfolio generally
invests in securities with a minimum rating of Caa-- by Moody's or CCC-- by
S&P, Duff & Phelps or Fitch or in unrated securities judged by the Adviser to
be of comparable quality at the time of purchase. However, from time to time,
the Portfolio may invest in securities rated in the lowest grades of Moody's,
S&P and Fitch (C) or Duff & Phelps (CC) or in unrated securities judged by the
Adviser to be of comparable quality, if the Portfolio's management determines
that there are prospects for an upgrade or a favorable conversion into equity
securities (in the case of convertible securities). Securities rated Ba or BB
or lower (and comparable unrated securities) are commonly referred to as "junk
bonds." Securities rated D by S&P and Fitch or DD by Duff & Phelps are in de-
fault. As of December 31, 1997, 1.11% of the Portfolio's assets were invested
in fixed-income securities rated (or considered by the Adviser to be of equiv-
alent quality to securities rated) in the category A and above, 1.72% of the
Portfolio's assets were invested in securities rated B and 25.10% were in non-
rated securities. See "Other Investment Policies and Techniques -- Securities
Ratings," "-- Investment in Lower-Rated Fixed-Income Securities" and Appendix
A.
In the event that the credit rating of a high-yield security held by the Port-
folio falls below its rating at the time of purchase (or, in the case of
unrated securities, the Adviser determines that the quality of such security
has deteriorated since purchased by the Portfolio), the Portfolio will not be
obligated to dispose of such security and may continue to hold the obligation
if, in the opinion of the Adviser, such investment is considered appropriate
in the circumstances.
Convertible Securities. Each Portfolio may invest in convertible securities.
These securities normally provide a higher yield than the underlying stock but
lower than a fixed-income security without the conversion feature. Also, the
price of the convertible security normally varies to some degree with changes
in the price of the underlying stock although in some market conditions the
higher yield tends to make the convertible security less volatile than the un-
derlying common stock. In addition, the price of the convertible security also
varies to some degree inversely with interest rates. Convertible debt securi-
ties that are rated below BBB (S&P, Duff & Phelps or Fitch) or Baa
11
<PAGE>
(Moody's) or comparable unrated securities as determined by the Adviser may
share some or all of the risks of high-yield securities. For a description of
these risks, see "Investments in High-Yield Securities" above.
Zero-Coupon and Payment-in-Kind Bonds. The Portfolios may at times invest in
so-called "zero-coupon" bonds and "payment-in-kind" bonds. Zero-coupon bonds
are issued at a significant discount from their principal amount in lieu of
paying interest periodically. Payment-in-kind bonds allow the issuer, at its
option, to make current interest payments on the bonds either in cash or in
additional bonds. Because zero-coupon bonds do not pay current interest in
cash, their value is generally subject to greater fluctuation in response to
changes in market interest rates than bonds which pay interest currently. Both
zero-coupon and payment-in-kind bonds allow an issuer to avoid the need to
generate cash to meet current interest payments. Accordingly, such bonds may
involve greater credit risks than bonds paying interest in cash currently.
Even though such bonds do not pay current interest in cash, a Portfolio is
nonetheless required to accrue interest income on such investments and to dis-
tribute such amounts at least annually to shareholders. Thus, a Portfolio
could be required at times to liquidate other investments in order to satisfy
its dividend requirements at times when the Adviser would not otherwise deem
it advisable to do so.
Futures and Related Options. Each Portfolio may buy and sell stock index
futures contracts ("index futures") and may buy options on index futures and
on stock indices for hedging purposes. A Portfolio may buy and sell call and
put options on index futures or on stock indices in addition to, or as an
alternative to, purchasing or selling index futures or, to the extent permit-
ted by applicable law, to earn additional income. The Portfolios may also, for
hedging purposes, purchase and sell futures contracts, options thereon and op-
tions with respect to U.S. Treasury securities, including U.S. Treasury bills,
notes and bonds. Each Portfolio may also seek to increase its current return
by writing covered call and put options on securities it owns or in which it
may invest.
The use of futures and options involves certain special risks. Futures and op-
tions transactions involve costs and may result in losses. Certain risks arise
because of the possibility of imperfect correlations between movements in the
prices of futures and options and movements in the prices of the underlying
stock index or security or of the securities in a Portfolio's portfolio that
are the subject of a hedge. The successful use of the strategies described
above further depends on the Portfolio's Adviser's ability to forecast market
movements correctly. Other risks arise from a Portfolio's potential inability
to close out its futures or options positions. In addition there can be no as-
surance that a liquid secondary market will exist for any future or option at
any particular time. Certain provisions of the Internal Revenue Code and cer-
tain regulatory requirements may limit the Portfolios' ability to engage in
futures and options transactions. A more detailed explanation of futures and
options transactions, including the risks associated with them, is included in
the Statement of Additional Information.
Options. Each Portfolio may seek to increase current return by writing covered
call and put options on securities it owns or in which it may invest. A Port-
folio receives a premium from writing a call or put option,
12
<PAGE>
which increases the Portfolio's return if the option expires unexercised or is
closed out at a net profit. When the Portfolio writes a call option, it gives
up the opportunity to profit from any increase in the price of a security
above the exercise price of the option; when it writes a put option, the Port-
folio takes the risk that it will be required to purchase a security from the
option holder at a price above the current market price of the security. A
Portfolio may terminate an option that it has written prior to its expiration
by entering into a closing purchase transaction in which it purchases an op-
tion having the same terms as the option written. A Portfolio may also buy and
sell put and call options for hedging purposes. A Portfolio may also from time
to time buy and sell combinations of put and call options on the same under-
lying security to earn additional income. A Portfolio's use of these strate-
gies may be limited by applicable law.
Securities Loans, Repurchase Agreements and Forward Commitments. Each Portfo-
lio may lend portfolio securities amounting to not more than 25% of its total
assets and may enter into repurchase agreements on up to 25% of its total as-
sets. These transactions must be fully collateralized at all times, but in-
volve some risk to a Fund if the other party should default on its obligation
and the Portfolio is delayed or prevented from recovering the collateral. Each
Portfolio may also purchase securities for future delivery, which may increase
its overall investment exposure and involves a risk of loss if the value of
the securities declines prior to the settlement date.
GROWTH PORTFOLIO
General. The Growth Portfolio's investment objective is to provide long-term
growth of capital. Current income is only an incidental consideration. The
Portfolio seeks to achieve its objective by investing primarily in equity se-
curities of companies with a favorable outlook for earnings and whose rate of
growth is expected to exceed that of the United States economy over time.
The Portfolio invests primarily in common stocks and securities convertible
into common stocks such as convertible bonds, convertible preferred stocks and
warrants convertible into common stocks. Because the values of fixed-income
securities are expected to vary inversely with changes in interest rates gen-
erally, when the Adviser expects a general decline in interest rates, the
Portfolio may also invest for capital growth in fixed-income securities. The
Portfolio may invest up to 25% of its total assets in fixed-income securities
rated at the time of purchase below investment grade, that is, securities
rated Ba or lower by Moody's or BB or lower by S&P, Duff & Phelps or Fitch, or
in unrated fixed income securities determined by the Adviser to be of compara-
ble quality. For a description of the ratings referred to above, see Appendix
A. For temporary defensive purposes, the Portfolio may invest in money market
instruments and repurchase agreements.
Foreign Securities. The Portfolio may invest without limit in securities which
are not publicly traded in the United States, although the Portfolio generally
will not invest more than 15% of its total assets in such securities.
The value of foreign investments measured in U.S. dollars will rise or fall
because of decreases or increases, respectively, in the value of the U.S. dol-
lar in comparison to
13
<PAGE>
the value of the currency in which the foreign investment is denominated. The
Fund may buy or sell foreign currencies, options on foreign currencies, for-
eign currency futures contracts (and related options) and deal in forward for-
eign currency exchange contracts in connection with the purchase and sale of
foreign investments. For a description of certain risks associated with in-
vesting in foreign securities, see "Other Investment Policies and Tech-
niques -- Foreign Securities," below.
Non-Publicly Traded Securities. The Portfolio may invest in securities which
are not publicly traded, including securities sold pursuant to Rule 144A under
the Securities Act of 1933 ("Rule 144A Securities"). The sale of these securi-
ties is usually restricted under Federal securities laws, and market quota-
tions may not be readily available. As a result, the Portfolio may not be able
to sell these securities (other than Rule 144A Securities) unless they are
registered under applicable Federal and state securities laws, or may have to
sell them at less than fair market value. Investment in these securities is
restricted to 5% of the Portfolio's total assets (not including for these pur-
poses Rule 144A Securities, to the extent permitted by applicable law) and is
also subject to the Portfolio's restriction against investing more than 15% of
total assets in illiquid securities. To the extent permitted by applicable
law, Rule 144A Securities will not be treated as "illiquid" for purposes of
the foregoing restriction so long as such securities meet liquidity guidelines
established by the Board of Directors. See "Other Investment Policies and
Techniques -- Illiquid Securities," below.
Investments in High-Yield Securities. The Growth Portfolio may invest in high-
yield, high-risk, fixed-income and convertible securities rated at the time of
purchase Ba or lower by Moody's BB or lower by S&P, Duff & Phelps or Fitch,
or, if unrated, judged by the Adviser to be of comparable quality ("high-yield
securities"). The Portfolio generally invests in securities with a minimum
rating of Caa- by Moody's or CCC- by S&P, Duff & Phelps or Fitch or in unrated
securities judged by the Adviser to be of comparable quality. However, from
time to time, the Portfolio may invest in securities rated in the lowest
grades of Moody's, S&P or Fitch (C) or Duff & Phelps (CC) or in unrated secu-
rities judged by the Adviser to be of comparable quality, if the Portfolio's
management determines that there are prospects for an upgrade or a favorable
conversion into equity securities (in the case of convertible securities). Se-
curities rated Ba or BB or lower (and comparable unrated securities) are com-
monly referred to as "junk bonds." Securities rated D by S&P and Fitch or DD
by Duff & Phelps are in default. See "Other Investment Policies and Tech-
niques -- Securities Ratings," "Investment in Lower-Rated Fixed-Income Securi-
ties" and Appendix A. As of December 31, 1997, the percentages of the Portfo-
lio's assets invested in securities rated (or considered by the Adviser to be
of equivalent quality to securities rated) in particular rating categories
were 0% in A and above, 0% in Ba or BB, .53% in B, 0% in CCC or Caa and .30%
in unrated securities. The Fund did not invest in securities rated below Caa by
Moody's or CCC by each of S&P, Duff & Phelps and Fitch or, if not rated,
considered by the Adviser to be of equivalent quality to securities so rated.
In the event that the credit rating of a high-yield security held by the Port-
folio falls below its rating at the time of purchase (or, in
14
<PAGE>
the case of unrated securities, the Adviser determines that the quality of
such security has deteriorated since purchased by the Portfolio), the Portfo-
lio will not be obligated to dispose of such security and may continue to hold
the obligation if, in the opinion of the Adviser, such investment is consid-
ered appropriate in the circumstances.
Convertible Securities. The Growth Portfolio may invest in convertible securi-
ties. These securities normally provide a higher yield than the underlying
stock but lower than a fixed-income security without the conversion feature.
Also, the price of the convertible security will normally vary to some degree
with changes in the price of the underlying stock although in some market con-
ditions the higher yield tends to make the convertible security less volatile
than the underlying common stock. In addition, the price of the convertible
security will also vary to some degree inversely with interest rates. Convert-
ible debt securities that are rated below BBB (S&P, Duff & Phelps or Fitch) or
Baa (Moody's) or comparable unrated securities as determined by the Adviser
may share some or all of the risks of high-yield securities. For a description
of these risks, see "Investments in High-Yield Securities" above.
Zero-Coupon and Payment-in-Kind Bonds. The Portfolio may at times invest in
so-called "zero-coupon" bonds and "payment-in-kind" bonds. Zero-coupon bonds
are issued at a significant discount from their principal amount in lieu of
paying interest periodically. Payment-in-kind bonds allow the issuer, at its
option, to make current interest payments on the bonds either in cash or in
additional bonds. Because zero-coupon bonds do not pay current interest in
cash, their value is generally subject to greater fluctuation in response to
changes in market interest rates than bonds which pay interest in cash cur-
rently. Both zero-coupon and payment-in-kind bonds allow an issuer to avoid
the need to generate cash to meet current interest payments. Accordingly, such
bonds may involve greater credit risks than bonds paying interest currently.
Even though such bonds do not pay current interest in cash, the Fund is none-
theless required to accrue interest income on such investments and to distrib-
ute such amounts at least annually to shareholders. Thus, the Fund could be
required at times to liquidate other investments in order to satisfy its divi-
dend requirements.
Futures and Options. The Portfolio may buy and sell stock index futures con-
tracts ("index futures") and may buy options on index futures and on stock in-
dices for hedging purposes. The Portfolio may buy and sell call and put op-
tions on index futures or on stock indices in addition to, or as an alterna-
tive to, purchasing or selling index futures or, to the extent permitted by
applicable law, to earn additional income. The Portfolio may also, for hedging
purposes, purchase and sell futures contracts, options thereon and options
with respect to the U.S. Treasury securities, including U.S. Treasury bills,
notes and bonds. The Portfolio may also seek to increase its current return by
writing covered call and put options on securities its owns or in which it may
invest.
The use of futures and options involves certain special risks. Futures and op-
tions transactions involve costs and may result in losses. Certain risks arise
because of the possibility of imperfect correlations between movements in the
prices of futures and op-
15
<PAGE>
tions and movements in the prices of the underlying stock index or security or
of the securities in the Portfolio's investment portfolio that are the subject
of the hedge. The successful use of the strategies described above further de-
pends on the Adviser's ability to forecast market movements correctly. Other
risks arise from the Portfolio's potential inability to close out its futures
or options positions. In addition there can be no assurance that a liquid sec-
ondary market will exist for any future option at any particular time. Certain
provisions of the Internal Revenue Code and certain regulatory requirements
may limit the Portfolio's ability to engage in futures and options transac-
tions.
Securities Loans, Repurchase Agreements and Forward Commitments. The Portfolio
may lend portfolio securities amounting to not more than 25% of its total as-
sets and may enter into repurchase agreements on up to 25% of its total as-
sets. These transactions must be fully collateralized at all times but involve
some risk to the Portfolio if the other party should default on its obligation
and the Portfolio is delayed or prevented from recovering the collateral. The
Portfolio may also purchase securities for future delivery, which may increase
its overall investment exposure and involve a risk of loss if the value of the
securities declines prior to the settlement date.
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 may enter into agreements pertaining to U.S. Government Securi-
ties or, in the case of the Conservative Investors Portfolio, the Growth In-
vestors Portfolio and the Growth Portfolio, pertaining to the types of securi-
ties in which it invests, with member banks of the Federal Reserve System or
"primary dealers" (as designated by the Federal Reserve Bank of New York).
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, nor-
mally one day or a few days later. The resale price is greater than the pur-
chase price, reflecting an agreed-upon interest rate. Such agreements permit
the Portfolio to keep all of its assets at work while retaining "overnight"
flexibility in pursuit of investment of a longer-term nature. If a vendor de-
faults 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 prevented from, selling the collateral for its benefit. The Fund's
Board of Directors has established procedures, which are periodically reviewed
by the Board, pursuant to which the Adviser monitors the creditworthiness of
the vendors with which the Portfolios enter into repurchase agreement transac-
tions.
WRITING COVERED CALL OPTIONS
The Growth and Income Portfolio may 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
16
<PAGE>
a fixed date, at a predetermined price. The Portfolio may not write call op-
tions 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. The Portfolio may not write covered
call options in excess of 25% of the 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
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 the Portfolio being
able to make closing purchase transactions, there is no assurance that the
Portfolio will be able to effect closing purchase transactions at any particu-
lar time or at an acceptable price. The writing of covered call options could
result in increases in the portfolio turnover of the Portfolio, especially dur-
ing 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 under-
lying 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 Custodian) 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 liq-
uid 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 exercise price of the put held is
equal to or greater than the exercise price of the put written. The premium
paid by the purchaser of an option will reflect, among other things, the rela-
tionship of the exercise price to the market price and volatility of the under-
lying security, the remaining term of the option, supply and demand and inter-
est 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 acquire.
In such circumstances, the Portfolio collateralizes its obligation under the
option (which is not covered) by main-
17
<PAGE>
taining 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 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 may make secured loans of its portfolio securities
to brokers, dealers and financial institutions provided that cash, U.S. Gov-
ernment securities, other liquid high-quality 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 borrower 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 deter-
18
<PAGE>
mining whether to lend securities to a particular borrower, the Adviser will
consider all relevant facts and circumstances, including the creditworthiness
of the borrower. While securities are on loan, the borrower will pay the Port-
folio any income earned thereon and the Portfolio may invest any cash collat-
eral in portfolio securities, thereby earning additional income, or receive an
agreed upon amount of income from a borrower who has delivered equivalent col-
lateral. Each Portfolio will have the right to regain record ownership of
loaned securities to exercise beneficial rights such as voting rights, sub-
scription rights and rights to dividends, interest or other distributions.
Each Portfolio may pay reasonable finders', administrative 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 portfolio
securities to any officer, director, employee or affiliate of either the Fund
or the Adviser.
FOREIGN SECURITIES
Each of the Portfolios may invest in listed and unlisted foreign securities
without limitation, although the Growth and Income Portfolio intends to re-
strict its investment in foreign securities to issues of high quality. The
Portfolios may convert U.S. Dollars into foreign currency, but only to effect
securities transactions on a foreign securities exchange and not to hold such
currency as an investment. Each Portfolio may enter into forward foreign cur-
rency 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
19
<PAGE>
losses or profits. Consequently, financial data may be materially affected by
restatements for inflation and may not accurately reflect the real condition of
those issuers and securities markets. 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. 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.
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 generally
is expressed in yield terms, is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date, normally
within two months after the transaction, delayed settlements beyond two months
may be negotiated. Securities purchased or sold under a forward commitment are
subject to market fluctuation, and no interest accrues to the purchaser prior
to the settlement date. At the time a Portfolio enters into a forward commit-
ment, 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 commitment
may be sold prior to the settlement date, but the Portfolio will enter into
forward commitments only with the intention of actually receiving or delivering
the securities, as the case may be. If the Portfolio, however, chooses to dis-
pose of the right to receive or deliver a security subject to a forward commit-
ment prior to the settlement date of the transaction, it may incur a gain or
loss. In the event the other party to a forward commitment transaction were to
default, the Portfolio might lose the opportunity to invest 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
20
<PAGE>
maintains more than 15% of its net assets in illiquid securities. For purposes
of each Portfolio's investment objectives and policies and investment restric-
tions, illiquid securities include, among others, (a) direct placements or
other securities which are subject to legal or contractual restrictions on re-
sale 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 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 su-
pervision of the Board of Directors. See "Certain Fundamental Investment Poli-
cies." 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.
21
<PAGE>
INVESTMENT IN LOWER-RATED FIXED-INCOME SECURITIES
Lower-rated securities are subject to greater risk of loss of principal and
interest than higher-rated securities. They are also generally considered to
be subject to greater market risk than higher-rated securities, and the capac-
ity of issuers of lower-rated securities to pay interest and repay principal
is more likely to weaken than is that of issuers of higher-rated securities in
times of deteriorating economic conditions or rising interest rates. In addi-
tion, lower-rated securities may be more susceptible to real or perceived ad-
verse economic conditions than investment grade securities, although the mar-
ket values of securities rated below investment grade and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities. Securities rated Ba or BB are judged to have
speculative elements or to be predominantly speculative with respect to the
issuer's ability to pay interest and repay principal. 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.
Certain lower-rated securities in which the Growth Investors Portfolio, the
Conservative Investors Portfolio and the Growth Portfolio may invest, contain
call or buy-back features which permit the issuer of the security to call or
repurchase it. Such securities may present risks based on payment
expectations. If an issuer exercises such a provision and redeems the securi-
ty, the Portfolio may have to replace the called security with a lower yield-
ing security, resulting in a decreased rate of return for the Portfolio.
DEFENSIVE POSITION
When business or financial conditions warrant, the Growth and Income Portfolio
may assume a temporary defensive position and
22
<PAGE>
invest without limit in high grade fixed income securities or hold their as-
sets 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 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 out-
standing debt issue rated AA or higher by S&P, Duff & Phelps or Fitch or Aa or
higher by Moody's.
For temporary defensive purposes, the Conservative Investors Portfolio, the
Growth Investors Portfolio and the Growth Portfolio may invest in money market
instruments. The Growth Portfolio may also invest in repurchase agreements.
PORTFOLIO TURNOVER
Portfolio turnover rates are set forth under "Financial Highlights." These
portfolio turnover rates are greater than those of most other investment com-
panies. A high rate of portfolio turnover involves correspondingly greater
brokerage and other expenses than a lower rate, which must be borne by a Port-
folio and its shareholders. High portfolio turnover also may result in the re-
alization 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 under-
writer of the Fund's shares, and Alliance Fund Services, Inc., the Fund's reg-
istrar, dividend disbursing agent, and transfer agent, have advised the Fund
that they are reviewing all of their computer systems with the goal of modify-
ing or replacing such systems prior to January 1, 2000, to the extent neces-
sary to foreclose 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
approval of the shareholders of a Portfolio. Certain of those fundamental in-
vestment policies are set forth below. For a complete listing of such funda-
mental investment policies, see the Statement of Additional Information.
Briefly, with respect to the Growth and Income Portfolio, the fundamental in-
vestment
23
<PAGE>
policies provide that the Portfolio may not: (i) invest in securities of any
one issuer (including repurchase agreements with any one entity) other than se-
curities 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 in-
vested in such issuer, except that 25% of the value of the total assets of the
Portfolio may be invested without regard to such 5% limitation; (ii) acquire
more than 10% of any class of the outstanding securities of any issuer (for
this purpose, all preferred stock of an issuer shall be deemed a single class,
and all indebtedness of an issuer shall be deemed a 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 activi-
ties 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 sepa-
rate industry); (iv) borrow money, except that the Portfolio may borrow money
only for extraordinary or emergency purposes and then only in amounts not ex-
ceeding 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 paragraph (iv) above (in an aggregate
amount not to exceed 15% of total assets of the Portfolio), or as permitted in
connection with short sales of securities "against the box" by the Growth Port-
folio, as described above; (vi) invest in illiquid securities if immediately
after such investment 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 Conservative Investors Portfolio, the Growth Investors
Portfolio and the Growth Portfolio, these fundamental investment policies pro-
vide that a Portfolio may not: (i) invest more than 5% of its total assets in
the securities of any one issuer (other than U.S. Government securities and re-
purchase agreements relating thereto), although up to 25% of the Portfolio's
total assets may be invested without regard to this restriction; or (ii) invest
25% or more of its total assets in the securities of any one industry. (Obliga-
tions of a foreign government and its agencies or instrumentalities constitute
a separate "industry" from those of another foreign government.)
In addition, the Fund has adopted an investment policy, which is not designated
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 no-
tice to shareholders of the Fund, but without their approval.
24
<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.
25
<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 PRINCIPAL OCCUPATION
---- EMPLOYEE; YEAR; TITLE DURING THE PAST FIVE YEARS
--------------------- --------------------------
<S> <C> <C>
Growth and Income Paul C. Rissman since Associated with the Adviser
Portfolio inception- since prior to 1993
Senior Vice President of
Alliance Capital Management
Corporation (ACMC)*
Conservative Investors Nicholas D.P. Carn since Associated with the Adviser
Portfolio 1997- since 1997; prior thereto, Chief
Vice President of ACMC Investment Officer and Portfolio
Manager of Draycott Partners
since prior to 1993
Growth Investors Nicholas D.P. Carn since (see above)
Portfolio 1997-
(see above)
Growth Portfolio Tyler J. Smith since Associated with the Adviser
inception- since July, 1993; prior thereto,
Senior Vice President of associated with Equitable
ACMC Capital Management Corporation**
</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 com-
panies). 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 re-
tained 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 Equi-
table Life Assurance Society of the United States ("Equitable"), one of the
largest life insurance companies in the United States and a wholly owned sub-
sidiary 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 State-
26
<PAGE>
ment of Additional Information under "Management of the Fund."
The Adviser provides investment advisory services and order placement facili-
ties for each of the Fund's Portfolios and pays all compensation of Directors
and officers of the Fund who are affiliated persons of the Adviser. The Ad-
viser or its affiliates also furnish the Fund, without charge, management su-
pervision and assistance and office facilities and provide persons satisfac-
tory 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
27
<PAGE>
next close of regular trading on the New York Stock Exchange (the "Exchange")
(currently 4:00 p.m. Eastern time), following receipt of a purchase or redemp-
tion order by the Fund, on each Fund business day on which such an order is
received and trading in the types of securities in which the Fund invests
might materially affect the value of Fund shares. The Fund's per share net as-
set 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 de-
termined on the basis of market quotations or, if such quotations are not
readily available, such other methods as the Directors believe would accu-
rately reflect fair market value. Portfolio securities may also be valued on
the basis of prices provided by a pricing service when such prices are be-
lieved 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.
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 annu-
ally. 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
Revenue Code (the "Code"). If so qualified, each Portfolio will not be subject
to Federal income or ex-
28
<PAGE>
cise taxes on its investment company taxable income and net capital gains to
the extent such investment company taxable income and net capital 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 variable annuity
(other than an annuity interest owned by a person who is not a natural person)
or variable life insurance contract. Distributions of net investment income
and net short-term capital gain will be treated as ordinary income and distri-
butions 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 coun-
tries 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
shareholders credits or deductions for foreign income taxes paid.
Section 817(h) of the Code requires that the investments of a segregated asset
account 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
applicable diversification requirements. Under the Regulations, if a regulated
investment company satisfies certain conditions, a segregated asset account
owning 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 in-
vestment company. 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 insurance 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.
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
Growth and Income Portfolio and the Growth Portfolio are normally effected by
brokers, and transactions for the Conservative Investors and the Growth In-
vestors are normally effected through issuers, underwriters, major dealers
acting as principals and brokers.
29
<PAGE>
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 As-
sociation of Securities Dealers, Inc., and subject to seeking best price and
execution, the Fund may consider sales of shares of the Fund as a factor in
the selection of 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 secu-
rities on an agency basis with Donaldson, Lufkin & Jenrette Securities Corpo-
ration, an affiliate of the Adviser, and with brokers which may have their
transactions cleared or settled, or both, by the Pershing Division of Donald-
son, Lufkin and Jenrette Securities Corporation, for which Donaldson, Lufkin
and Jenrette Securities Corporation may receive a portion of the brokerage
commission. 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
Corporation 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 elec-
tion of Directors, that affect all Portfolios in substantially the same man-
ner. Maryland law does not require a registered investment company to hold an-
nual meetings of shareholders and it is anticipated that shareholder meetings
will be held only when specifically required by federal or state law. Share-
holders have available certain procedures for the removal of Directors. Shares
of each Portfolio are freely transferable, are entitled to dividends as deter-
mined 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 current law, it is antic-
ipated that an insurance company issuing a variable annuity contract or vari-
able life insurance policy that participates in the Fund will request voting
instructions from contract or policyholders and will vote shares in the sepa-
rate account in accordance with the voting instructions received.
PRINCIPAL UNDERWRITER
Alliance Fund Distributors, Inc., 1345 Avenue of the Americas, New York, New
York
30
<PAGE>
10105, an indirect wholly-owned subsidiary of the Adviser, is the Principal
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 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 Mag-
azine, 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
31
<PAGE>
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.
32
<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
