<PAGE>
This Prospectus is filed pursuant to Rule 497(e).
File Nos. 33-18647 and 811-05398.
<PAGE>
ALLIANCE CAPITAL LOGO ALLIANCE VARIABLE PRODUCTS
SERIES FUND, INC.
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P.O. BOX 1520, SECAUCUS, NEW JERSEY 07096-1520
TOLL FREE (800) 221-5672
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Alliance Variable Products Series Fund, Inc. (the "Fund") is an open-end se-
ries investment company designed to fund variable annuity contracts and vari-
able life insurance policies to be offered by the separate accounts of certain
life insurance companies. The Fund currently offers an opportunity to choose
among the separately managed pools of assets (the "Portfolios"), one of which
is described below. The Portfolios have differing investment objectives and
policies.
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A DIVERSIFIED SELECTION OF INVESTMENT ALTERNATIVES
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INTERNATIONAL PORTFOLIO -- seeks to obtain a total return on its assets from
long-term growth of capital and from income principally through a broad port-
folio of marketable securities of established non-United States companies (or
United States companies having their principal activities and interests out-
side the United States), companies participating in foreign economies with
prospects for growth, and foreign government securities.
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PURCHASE INFORMATION
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The Fund will offer and sell its shares only to separate accounts of certain
life insurance companies, for the purpose of funding variable annuity con-
tracts and variable life insurance policies. Sales will be made without sales
charge at the Portfolio's per share net asset value. Further information can
be obtained from Alliance Fund Services, Inc. at the address or telephone num-
ber shown above.
An investment in the Fund is not a deposit or obligation of, or guaranteed or
endorsed by, any bank and is not federally insured by the Federal Deposit In-
surance Corporation, the Federal Reserve Board or any other agency.
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ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
This Prospectus sets forth concisely the information which a prospective in-
vestor should know about the Fund and the Portfolio before applying for cer-
tain 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 Prospec-
tus and other matters which may be of interest to some investors, has been
filed with the Securities and Exchange Commission and is incorporated herein
by reference. For a free copy, call or write Alliance Fund Services, Inc. at
the address or telephone number shown above.
(R) :This is a registered mark used under license from the owner, Alliance
Capital Management L.P.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTUS/May 1, 1998
Investors are advised to carefully read this Prospectus and to retain it for
future reference.
<PAGE>
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>
INTER-
NATIONAL
PORTFOLIO+
----------
<S> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees.................................................. .53%
Other Expenses................................................... .42%
---
Total Portfolio Operating Expenses............................... .95%
===
</TABLE>
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+ 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>
International Portfolio......................... $10 $30 $53 $117
</TABLE>
The purpose of the foregoing table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
and indirectly. The expenses listed in the table are net of voluntary expense
reimbursements, which are not required to be continued indefinitely; however,
the Adviser intends to continue such reimbursements for the foreseeable future.
The expenses (as a percentage of average net assets) of the International Port-
folio, before expense reimbursements, would be: Management Fees -- 1.00%, Other
Expenses -- .42% and Total Portfolio Operating Expenses -- 1.42%. 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 fi-
nancial 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>
INTERNATIONAL PORTFOLIO
-----------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.. $ 14.89 $ 14.07 $ 12.88 $12.16 $10.00
------- ------- ------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a)(b)........ .13 .19 .18 .10 .03
Net realized and unrealized gain on
investments and foreign currency
transactions...................... .39 .83 1.08 .72 2.13
------- ------- ------- ------ ------
Net increase in net asset value
from operations................... .52 1.02 1.26 .82 2.16
------- ------- ------- ------ ------
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment
income............................ (.15) (.08) (.03) (.02) -0-
Distributions from net realized
gains............................. (.24) (.12) (.04) (.08) -0-
------- ------- ------- ------ ------
Total dividends and distributions.. (.39) (.20) (.07) (.10) -0-
------- ------- ------- ------ ------
Net asset value, end of year....... $ 15.02 $ 14.89 $ 14.07 $12.88 $12.16
======= ======= ======= ====== ======
TOTAL RETURN
Total investment return based on
net asset value(c)................ 3.33% 7.25% 9.86% 6.70% 21.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's
omitted).......................... $60,710 $44,324 $16,542 $7,276 $ 688
Ratio of average net assets of:
Expenses, net of waivers and reim-
bursements........................ .95% .95% .95% .95% 1.20%
Expenses, before waivers and reim-
bursements........................ 1.42% 1.91% 2.99% 7.26% 39.28%
Net investment income(a)........... .87% 1.29% 1.41% .90% .26%
Portfolio turnover rate............ 134% 60% 87% 95% 85%
Average commission rate paid(d).... $.0272 $.0431 -0- -0- -0-
</TABLE>
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(a) Net of expenses reimbursed or waived by the Adviser.
(b) Based on average shares outstanding.
(c) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and re-
demption on the last day of the period. Total investment return calculated
for a period of less than one year is not annualized.
(d) For fiscal years beginning on or after September 1, 1995, a fund is re-
quired to disclose its average commission rate per share for trades on
which commissions are charged.
3
<PAGE>
DESCRIPTION OF THE PORTFOLIO
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, one of which, the International Portfo-
lio, is offered by this Prospectus.
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 the Portfolio are set forth below.
There can be, of course, no assurance that the Portfolio will achieve its in-
vestment objectives.
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The investment objectives and policies determine the types of portfolio secu-
rities in which the Portfolio invests, and can be expected to affect the de-
gree of risk to which the Portfolio is subject and the Portfolio's yield or
return. The Portfolio's investment objectives cannot be changed without ap-
proval by the holders of a majority of the Portfolio's outstanding voting se-
curities, as defined in the Investment Company Act of 1940, as amended (the
"Act"). The Fund may change the Portfolio's investment policies that are not
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 the Portfolio may invest are described in greater
detail below.
4
<PAGE>
INTERNATIONAL PORTFOLIO
The International Portfolio's primary investment objective is to seek to ob-
tain a total return on its assets from long-term growth of capital principally
through a broad portfolio of marketable securities of established non-United
States companies (e.g., companies incorporated outside the United States),
companies participating in foreign economies with prospects for growth, and
foreign government securities. As a secondary objective, the Portfolio at-
tempts to increase its current income without assuming undue risk. Alliance
Capital Management L.P. (the "Adviser") considers it consistent with these ob-
jectives to acquire securities of companies incorporated in the United States
and having their principal activities and interests outside of the United
States. The International Portfolio intends to be invested primarily in such
issuers and under normal circumstances more than 80% of its assets will be so
invested.
In seeking its objective, the International Portfolio invests its assets
primarily in common stocks of established non-United States companies which in
the opinion of the Adviser have potential for growth of capital or income or
both. There is no requirement, however, that the Portfolio invest exclusively
in common stocks or other equity securities, and, if deemed advisable, the In-
ternational Portfolio may invest in any other type of security including, but
not limited to, convertible securities preferred stocks, bonds, notes and
other debt securities of foreign issuers (Euro-dollar securities), as well as
warrants, or obligations of the United States or foreign governments and their
political subdivisions. When the Adviser believes that the total return on
debt securities will equal or exceed the return on common stocks, the Interna-
tional Portfolio may, in seeking its objective of total return, substantially
increase its holdings in such debt securities. The International Portfolio may
establish and maintain temporary balances for defensive purposes or to enable
it to take advantage of buying opportunities. The International Portfolio's
temporary cash balances may be invested in United States as well as foreign
short-term money-market instruments, including, but not limited to, government
obligations, certificates of deposit, bankers' acceptances, commercial paper,
short-term corporate debt securities and repurchase agreements.
The International Portfolio diversifies investments broadly among countries
and normally has represented in its portfolio, business activities of not less
than three different countries excluding the United States. The Portfolio may
invest all or a substantial portion of its assets in one or more of such coun-
tries. The Portfolio may purchase securities of companies, wherever organized,
which, in the judgment of the Adviser, have their principal activities and in-
terests outside the United States determined on the basis of such factors as
location of the company's assets, or personnel, or sales and earnings. See
"Other Investment Policies and Techniques -- Foreign Securities."
The Portfolio may purchase or sell forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk to the Portfolio from
adverse changes in the relationship between the U.S. Dollar and other curren-
cies. A forward contract is an obligation to purchase or sell a specific cur-
rency for an agreed price at a future date which is individually negotiated
and privately traded by currency traders and their
5
<PAGE>
customers. The Portfolio's dealings in forward contracts will be limited to
hedging involving either specific transactions or portfolio positions. Trans-
action hedging is the purchase or sale of forward contracts with respect to
specific receivables or payables of the Portfolio accruing in connection with
the purchase and sale of its portfolio securities or the payment of dividends
and distributions by the Portfolio. Position hedging is the sale of forward
contracts with respect to portfolio security positions denominated or quoted
in such foreign currency. The Portfolio does not speculate in forward con-
tracts and, therefore, the Adviser believes that the Portfolio is not subject
to the risks frequently associated with the speculative use of such transac-
tions. The Portfolio may not position hedge with respect to the currency of a
particular country to an extent greater than the aggregate market value (at
the time of making such sale) of the securities held in its portfolio denomi-
nated or quoted in that particular foreign currency. If the Portfolio enters
into a position hedging transaction, its custodian bank will place liquid as-
sets in a separate account of the Portfolio in an amount equal to the value of
the Portfolio's total assets committed to the consummation of such forward
contract. If the value of the securities placed in the separate account de-
clines, additional cash or securities will be placed in the account so that
the value of the account will equal the amount of the Portfolio's commitment
with respect to such contracts. Hedging against a decline in the value of a
currency does not eliminate fluctuations in the prices of portfolio securities
or prevent losses if the prices of such securities decline. Such transactions
also preclude the opportunity for gain if the value of the hedge currency
should rise. Moreover, it may not be possible for the Portfolio to hedge
against a devaluation that is so generally anticipated that the Portfolio is
not able to contract to sell the currency at a price above the devaluation
level it anticipates. The Portfolio will not enter into a forward contract
with a term of more than one year or if, as a result thereof, more than 50% of
the Portfolio's total assets would be committed to such contracts.
The Portfolio may also invest in warrants which entitle the holder to buy eq-
uity securities at a specific price for a specific period of time.
It is the present intention of the Adviser to invest the Portfolio's assets in
companies based in (or governments of or within) East Asia (Japan, Hong Kong,
Singapore and Malaysia), Western Europe (the United Kingdom, Germany, The
Netherlands, France and Switzerland), Australia, Canada, and such other areas
and countries as the Adviser may determine from time to time. However, invest-
ments may be made from time to time in companies in, or governments of, devel-
oping countries as well as developed countries. Shareholders should be aware
that investing in the equity and fixed-income markets of developing countries
involves exposure to economic structures that are generally less diverse and
mature, and to political systems which can be expected to have less stability
than those of developed countries. The Adviser at present does not intend to
invest more than 10% of the International Portfolio's total assets in compa-
nies in, or governments of, developing countries. For a description of certain
risks associated with investing in foreign securities, see "Other Investment
Policies and Techniques -- Foreign Securities."
6
<PAGE>
OTHER INVESTMENT POLICIES AND TECHNIQUES
REPURCHASE AGREEMENTS
The Portfolio may enter into agreements pertaining to U.S. Government Securi-
ties. A repurchase agreement arises when a buyer purchases a security and si-
multaneously agrees to resell it to the vendor at an agreed-upon future date,
normally one day or a few days later. The resale price is greater than the
purchase price, reflecting an agreed-upon interest rate. Such agreements per-
mit the Portfolio to keep all of its assets at work while retaining "over-
night" flexibility in pursuit of investment of a longer-term nature. If a ven-
dor defaults on its repurchase obligation, the Portfolio would suffer a loss
to the extent that the proceeds from the sale of the collateral were less than
the repurchase price. If a vendor goes bankrupt, the Portfolio might be de-
layed 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 creditwor-
thiness of the vendors with which the Portfolio enters into repurchase agree-
ment transactions.
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 the Portfolio is "covered" if the Portfolio (i) owns
the underlying security covered by the call (ii) has an absolute and immediate
right to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by the Fund's Cus-
todian) upon conversion or exchange of other portfolio securities, or (iii)
holds a call on the same security in the same principal amount as the call
written where the exercise price of the call held (i) is equal to or less than
the exercise price of the call written or (ii) is greater than the exercise
price of the call written if the difference is maintained by the Portfolio in
cash and liquid high-grade debt securities in a segregated account with the
Fund's Custodian. A put option written by the Portfolio is "covered" if the
Portfolio maintains liquid assets with a value equal to the exercise price in
a segregated account with the Fund's Custodian, or else holds a put on the
same security in the same principal amount as the put written where the exer-
cise price of the put held is equal to or greater than the exercise price of
the put written. The premium paid by the purchaser of an option will reflect,
among other things, the relationship of the exercise price to the market price
and volatility of the underlying security, the remaining term of the option,
supply and demand and interest rates.
A call option is written for cross-hedging purposes if the Portfolio does not
own the underlying security, but seeks to provide a hedge against a decline in
value in another security which the Portfolio owns or has the right to ac-
quire. In such circumstances, the Portfolio collateralizes its obligation un-
der the option (which is not covered) by maintaining in a segregated account
with the Fund's Custodian liquid assets in an amount not less than the market
value of the underlying security, marked to market daily.
7
<PAGE>
In purchasing a call option, the Portfolio would be in a position to realize a
gain if, during the option period, the price of the underlying security in-
creased 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, the 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 the 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. The Portfolio retains the premium received from
writing a put or call option whether or not the option is exercised.
The Portfolio may purchase or write options on securities of the types in
which it is permitted to invest in privately negotiated transactions. The
Portfolio will effect such transactions only with investment dealers and other
financial institutions (such as commercial banks or savings and loan institu-
tions) deemed creditworthy by the Adviser, and the Adviser has adopted proce-
dures for monitoring the creditworthiness of such entities. Options purchased
or written by the Portfolio in negotiated transactions are illiquid and it may
not be possible for the Portfolio to effect a closing transaction at a time
when the Adviser believes it would be advantageous to do so. See "Illiquid Se-
curities." See Appendix C to the Statement of Additional Information for a
further discussion of the use, risks and costs of option trading.
LOANS OF PORTFOLIO SECURITIES
The Portfolio may make secured loans of its portfolio securities to brokers,
dealers and financial institutions provided that cash, U.S. Government securi-
ties, 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 depos-
ited 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 determining whether to lend securities to a particular
borrower, the Adviser will consider all relevant facts and circumstances, in-
cluding the creditworthiness of the borrower. While securities are on loan,
the borrower will pay the Portfolio any income earned thereon and the Portfo-
lio may invest any cash collat-
8
<PAGE>
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. The 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. The
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 the
Portfolio may be loaned at any time, nor will the Portfolio lend its portfolio
securities to any officer, director, employee or affiliate of either the Fund
or the Adviser.
FOREIGN SECURITIES
The Portfolio may invest only in the securities of foreign issuers or U.S.
companies having their principal activities and interests outside the United
States. The Portfolio 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. The Portfolio may enter into forward for-
eign currency exchange contracts in order to protect against uncertainty in
the level of future foreign exchange rates.
To the extent the Portfolio invests in foreign securities, consideration is
given to certain factors comprising both risk and opportunity. The values of
foreign securities investments are affected by changes in currency rates or
exchange 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 the 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 the Portfolio will invest require, for both tax
and accounting purposes, that certain assets and liabilities be restated on
the issuer's balance sheet in order to express items in terms of currency of
constant purchasing power. Inflation accounting may indirectly generate losses
or profits. Consequently, financial data may be materially affected by re-
statements for inflation and may not accurately reflect the real condition of
those issuers and securities markets. Securities of some foreign issuers are
less liquid and more volatile than securities of comparable domestic issuers,
and foreign brokerage
9
<PAGE>
commissions are generally higher than in the United States. Foreign securities
markets may also be less liquid, more volatile, and less subject to governmen-
tal supervision than in the United States. Investments in foreign countries
could be affected by other factors not present in the United States, including
expropriation, confiscatory taxation, lack of uniform accounting and auditing
standards and potential difficulties in enforcing contractual obligations and
could be subject to extended settlement periods.
Investment in Japanese Issuers. Investment in securities of Japanese issuers
involves certain considerations not present with investment in securities of
U.S. issuers. As with any investment not denominated in the U.S. Dollar, the
U.S. Dollar value of the Portfolio's investments denominated in the Japanese
Yen will fluctuate with Yen-Dollar exchange rate movements. Between 1985 and
1995, the Japanese Yen generally appreciated against the U.S. Dollar but has
since fallen from its post-World War II high (in 1995). Since its peak of
April 19, 1995, the Japanese Yen has decreased in value against the U.S. Dol-
lar. On December 31, 1997, the exchange rate was 130.57 Yen per Dollar.
Japan's largest stock exchange is the Tokyo Stock Exchange, the First Section
of which is reserved for larger, established companies. As measured by the
TOPIX, a capitalization-weighted composite index of all common stocks listed
in the First Section, the performance of the First Section reached a peak in
1989. Thereafter, the TOPIX declined approximately 50% through the end of
1993. In 1994, the TOPIX closed at 1,559.09, up approximately 8% from the end
of 1993; in 1995, the TOPIX closed at 1,577.70, up approximately 1% from the
end of 1994; and in 1996, the TOPIX closed at 1,470.94, down approximately 7%
from the end of 1995. On December 31, 1997, the TOPIX closed at 1,175.03, down
approximately 20% from the end of 1996. Certain valuation measures, such as
price-to-book value and price-to-cash flow ratios, indicate that the Japanese
stock market is near its lowest level in the last twenty years relative to
other world markets.
In recent years, Japan has consistently recorded large current account trade
surpluses with the U.S. that have caused difficulties in the relations between
the two countries. On October 1, 1994, the U.S. and Japan reached an agreement
that may lead to more open Japanese markets with respect to trade in certain
goods and services. In June, 1995, the two countries agreed in principle to
increase Japanese imports of American automobiles and automotive parts. Never-
theless, it is expected that the continuing friction between the U.S. and Ja-
pan with respect to trade issues will thus continue for the foreseeable fu-
ture.
The Portfolio's investments in Japanese issuers also will be subject to uncer-
tainty resulting from the instability of recent Japanese ruling coalitions.
From 1955 to 1993, Japan's government was controlled by a single political
party. Between August 1993, and October 1996 Japan was ruled by a series of
four coalition governments. As a result of a general election on October 20,
1996, however, Japan returned to a single party government led by Prime Minis-
ter Ryutaro Hashimoto. While Mr. Hashimoto's party does not control a majority
of the seats in the parliament, it is only three seats short of the 251 seats
required to attain a majority in the House of Representatives
10
<PAGE>
(down from a 12-seat shortfall just after the October 1996 election). For the
past several years, Japan's banking industry has been weakened by a significant
amount of problem loans. Japan's banks also have significant exposure to the
current financial turmoil in other Asian markets. On December 17, 1997 the Jap-
anese government proposed to strengthen Japan's banks by means of an infusion
of public funds and other measures. It is unclear whether these proposals,
which are under consideration by Japan's parliament, would, if implemented,
achieve their intended effect. For further information regarding Japan, see the
Fund's Statement of Additional Information.
ILLIQUID SECURITIES
Subject to any more restrictive applicable investment policies, the Portfolio
does not maintain more than 15% of its net assets in illiquid securities. For
purposes of the Portfolio's investment objectives and policies and investment
restrictions, illiquid securities include, among others, (a) direct placements
or other securities which are subject to legal or contractual restrictions on
resale or for which there is no readily available market (e.g., trading in the
security is suspended or, in the case of unlisted securities, market makers do
not exist or will not entertain bids or offers), (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 fixed-income securities will fluctuate as the general level of in-
terest rates fluctuates. During periods of falling interest rates, the values
of these securities generally rise. Conversely, during periods of rising inter-
est rates, the values of these securities generally decline.
In seeking to achieve the Portfolio's investment objective, there will be
times, such as during periods of rising interest rates, when depreciation and
realization of capital losses on securities in the Portfolio's portfolio will
be unavoidable. Moreover, medium- and lower-rated securities and non-rated se-
curities 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 the
Portfolio.
SECURITIES RATINGS
The ratings of fixed-income securities by Standard & Poor's Corporation
("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Rat-
ing Co. ("Duff & Phelps") and Fitch IBCA, Inc. ("Fitch") are a generally ac-
cepted barometer of credit risk. They are, however, subject to certain limita-
tions from an investor's
11
<PAGE>
standpoint. The rating of an issuer is heavily weighted by past developments
and does not necessarily reflect probable future conditions. There is fre-
quently a lag between the time a rating is assigned and the time it is updat-
ed. 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.
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 the
Portfolio and its shareholders. High portfolio turnover also may result in the
realization 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
International Portfolio which may not be changed with respect to the Portfolio
without the approval of the shareholders of the Portfolio. Certain of those
fundamental investment policies are set forth below. For a complete listing of
such fundamental investment policies, see the Statement of Additional Informa-
tion.
These fundamental investment policies provide that the Portfolio may not: (i)
invest in
12
<PAGE>
securities of any one issuer (including repurchase agreements with any one en-
tity) other than securities issued or guaranteed by the United States Govern-
ment, if immediately after such purchases more than 5% of the value of its to-
tal assets would be invested 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 securi-
ties 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 activities in any one industry, except that there is no
such limitation with respect to U.S. Government securities or certificates of
deposit, bankers' acceptances and interest-bearing deposits (for purposes of
this investment restriction, the electric, gas, telephone and water business
shall each be considered as a separate industry); (iv) borrow money, except
that the Portfolio may borrow money only for extraordinary or emergency pur-
poses and then only in amounts not exceeding 15% of its total assets at the
time of borrowing; (v) mortgage, pledge or hypothecate any of its assets, ex-
cept as may be necessary in connection with permissible borrowings described
in paragraph (iv) above (in an aggregate amount not to exceed 15% of total as-
sets of the Portfolio), (vi) invest in illiquid securities if immediately af-
ter 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.
In addition, the Fund has adopted an investment policy, which is not desig-
nated a "fundamental policy" within the meaning of the Act, of intending to
have the Portfolio comply at all times with the diversification requirements
prescribed in Section 817(h) of the Internal Revenue Code or any successor
thereto and the applicable Treasury Regulations thereunder. This policy may be
changed upon notice to shareholders of the Fund, but without their approval.
- --------------------------------------------------------------------------------
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.
13
<PAGE>
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 "Investment
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.
The employee of the Adviser principally responsible for the International Port-
folio's investment program since 1996 is Steve Beinhacker, who is Vice Presi-
dent of ACMC, with which he has been associated since prior to 1993.
The Adviser is a leading international investment manager supervising client
accounts with assets as of December 31, 1997 totaling more than $218 billion
(of which approximately $85 billion represented the assets of investment compa-
nies). The Adviser's clients are primarily major corporate employee benefit
funds, public employee retirement systems, investment companies, foundations
and endowment funds. The 58 registered investment companies managed by the Ad-
viser comprising 122 separate investment portfolios currently have over three
million shareholder accounts. As of December 31, 1997, the Adviser was retained
as an investment manager for employee benefit plan assets of 31 of the Fortune
100 companies.
ACMC, the sole general partner of, and the owner of a 1% general partnership
interest in, the Adviser, is an indirect wholly-owned subsidiary of The Equita-
ble Life Assurance Society of the United States ("Equitable"), one of the larg-
est life insurance companies in the United States and a wholly owned subsidiary
of the Equitable Companies Incorporated, a holding company which is controlled
by AXA-UAP, a French insurance holding company. Certain information concerning
the ownership and control of Equitable by AXA-UAP is set forth in the Statement
of Additional Information under "Management of the Fund."
The Adviser provides investment advisory services and order placement facili-
ties for each of the Fund's Portfolios and pays all compensation of Directors
and officers of
14
<PAGE>
the Fund who are affiliated persons of the Adviser. The Adviser or its affili-
ates also furnish the Fund, without charge, management supervision and assis-
tance and office facilities and provide persons satisfactory to the Fund's
Board of Directors to serve as the Fund's officers.
EXPENSES OF THE FUND
In addition to the payments to the Adviser under the Investment Advisory
Agreement described above, the Fund pays certain other costs including (a)
custody, transfer and dividend disbursing expenses, (b) fees of Directors who
are not affiliated with the Adviser, (c) legal and auditing expenses, (d)
clerical, accounting and other office costs, (e) costs of printing the Fund's
prospectuses and shareholder reports, (f) cost of maintaining the Fund's ex-
istence, (g) interest charges, taxes, brokerage fees and commissions, (h)
costs of stationery and supplies, (i) expenses and fees related to registra-
tion and filing with the Commission and with state regulatory authorities, and
(j) cost of certain personnel of the Adviser or its affiliates rendering cler-
ical, accounting and other services to the Fund.
As to the obtaining of clerical and accounting services not required to be
provided to the Fund by the Adviser under the Investment Advisory Agreement,
the Fund may employ its own personnel. For such services, it may also utilize
personnel employed by the Adviser or by its affiliates; in such event, the
services are provided to the Fund at cost and the payments specifically ap-
proved in advance by the Fund's Board of Directors.
- --------------------------------------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
PURCHASE OF SHARES
Shares of the International Portfolio 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 the Portfolio's net asset value, as de-
scribed below. The separate accounts of insurance companies place orders to
purchase shares of the 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 Portfolio. 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 the Portfolio's shares is their net asset value.
The per share net asset value of the Portfolio is computed in accordance with
the Fund's Articles of Incorporation and By-Laws, at the next close of regular
trading on the New York Stock Exchange (the "Exchange") (currently 4:00 p.m.
Eastern time), following receipt of a purchase or redemption 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
15
<PAGE>
shares. The Fund's per share net asset value is computed by dividing the value
of the Fund's total assets, less its liabilities, by the total number of its
shares then outstanding. A Fund business day is any weekday exclusive of days
on which the Exchange is closed (most national holidays and Good Friday). For
purposes of this computation, the securities in the Portfolio are valued at
their current market value determined on the basis of market quotations or, if
such quotations are not readily available, such other methods as the Directors
believe would accurately reflect fair market value. Portfolio securities may
also be valued on the basis of prices provided by a pricing service when such
prices are believed by the Adviser to reflect the fair market value of such se-
curities.
REDEMPTION OF SHARES
An insurance company separate account may redeem all or any portion of the
shares of the Portfolio in its account at any time at the net asset value per
share of the 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 the Portfolio is not reasonably practicable or as a re-
sult of which it is not reasonably practicable for the Fund fairly to determine
the value of the Portfolio's net assets, or for such other periods as the Com-
mission 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 in-
surance company separate account prospectus.
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The International Portfolio will declare and distribute dividends from net in-
vestment income and will distribute its net capital gains, if any, at least an-
nually. Such income and capital gains distributions will be made in shares of
the Portfolio.
The Portfolio 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, the Portfolio will not be subject to Federal in-
come or excise 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 the
Portfolio are
16
<PAGE>
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 distribu-
tions 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 the 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, the 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
ac-count of an insurance company be "adequately diversified," in accordance
with Treasury Regulations promulgated thereunder, in order for the holders of
the variable annuity contracts or variable life insurance policies underlying
the account to receive the tax-deferred or tax-free treatment generally af-
forded holders of annuities or life insurance policies under the Code. The De-
partment of the Treasury has issued Regulations under section 817(h) which,
among other things, provide the manner in which a segregated asset account
will treat investments in a regulated investment company for purposes of the
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. The Portfolio plans to satisfy these conditions at all times
so that the shares of the 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
International Portfolio are normally effected by brokers.
The Fund has no obligation to enter into transactions in portfolio securities
with any broker, dealer, issuer, underwriter or other entity. In placing or-
ders, it is the policy of the Fund to obtain the best price and execution for
its transactions. Consistent with the objective of obtaining best execution,
the Fund may use brokers and dealers who provide research, statistical and
other information to the Adviser.
There may be occasions where the transaction cost charged by a broker may be
17
<PAGE>
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 10105, an indirect wholly-owned subsidiary of the Adviser, is the Princi-
pal Underwriter of shares of the Fund.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachu-
setts 02110, acts as Custodian for the securities and cash of the Fund and as
its dividend dis-
18
<PAGE>
bursing agent, but plays no part in deciding on the purchase or sale of port-
folio 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 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.
19
<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
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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
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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.
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<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
