<PAGE>
This Prospectus is filed pursuant to Rule 497(e).
File Nos. 33-18647 and 811-05398.
<PAGE>
[LOGO OF ALLIANCE ALLIANCE VARIABLE PRODUCTS
CAPITAL APPEARS HERE] 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.
SHORT-TERM MULTI-MARKET PORTFOLIO -- seeks the highest level of current in-
come, consistent with what the Fund's Adviser considers to be prudent invest-
ment risk, that is available from a portfolio of high-quality debt securities
having remaining maturities of not more than three years.
- -------------------------------------------------------------------------------
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>
SHORT-
GROWTH TERM
AND MULTI-
INCOME MARKET
PORTFOLIO PORTFOLIO+
--------- ----------
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees........................................ .63% .07%
Other Expenses......................................... .09% .87%
--- ---
Total Portfolio Operating Expenses..................... .72% .94%
=== ===
</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
Short-Term Multi-Market Portfolio............... $10 $30 $52 $115
</TABLE>
The purpose of the foregoing table is to assist the investor in understand-
ing the various costs and expenses that an investor in the Fund will bear di-
rectly and indirectly. The expenses listed in the table for the Growth and In-
come Portfolio and the Short-Term Multi- Market Portfolio are net of voluntary
expense reimbursements, which are not required to be continued indefinitely;
however, the Adviser intends to continue such reimbursements for the foresee-
able future. The expenses (as a percentage of average net assets) of the
Short-Term Multi-Market Portfolio, before expense reimbursements, would be:
Management Fees -- .55%, Other Expenses -- .87% and Total Portfolio Operating
Expenses -- 1.42%. The example should not be considered representative of fu-
ture 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-
<CAPTION>
SHORT-TERM MULTI-MARKET PORTFOLIO
----------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year.......................... $ 10.73 $ 10.58 $ 9.91 $ 11.07 $ 10.77
-------- -------- ------- ------- -------
INCOME FROM INVESTMENT OPERA-
TIONS
Net investment income(a)(b)... .59 .64 .82 .47 .28
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions................. (.11) .33 (.15) (1.16) .43
-------- -------- ------- ------- -------
Net increase (decrease) in net
asset value from operations.. .48 .97 .67 (.69) .71
-------- -------- ------- ------- -------
LESS: DIVIDENDS AND DISTRIBU-
TIONS
Dividends from net investment
income....................... (.64) (.82) -0- (.46) (.41)
Return of capital............. -0- -0- -0- (.01) -0-
-------- -------- ------- ------- -------
Total dividends and distribu-
tions........................ (.64) (.82) -0- (.47) (.41)
-------- -------- ------- ------- -------
Net asset value, end of year.. $ 10.57 $ 10.73 $10.58 $ 9.91 $ 11.07
======== ======== ======= ======= =======
TOTAL RETURN
Total investment return based
on net asset value(c)........ 4.59% 9.57% 6.76% (6.51)% 6.62%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's
omitted)..................... $ 6,489 $ 7,112 $3,152 $20,921 $23,560
Ratio to average net assets
of:
Expenses, net of waivers and
reimbursements............... .94% .95% .95% .94% 1.17%
Expenses, before waivers and
reimbursements............... 1.42% 2.09% 1.30% .99% 1.24%
Net investment income(a)...... 5.50% 6.03% 8.22% 6.52% 6.39%
Portfolio turnover rate....... 222% 159% 379% 134% 210%
</TABLE>
- -------
(a) Net of expenses reimbursed or waived by the Adviser.
(b) Based on average shares outstanding.
(c) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and re-
demption on the last day of the period. Total investment return calculated
for a period of less than one year is not annualized.
(d) For fiscal years beginning on or after September 1, 1995, a fund is re-
quired to disclose its average commission rate per share for trades on
which commissions are charged.
3
<PAGE>
- --------------------------------------------------------------------------------
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, 2 of which are offered by this Prospec-
tus: the Growth and Income Portfolio and the Short-Term Multi-Market Portfo-
lio.
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 both Portfolios 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
4
<PAGE>
designated "fundamental policies" within the meaning of the Act upon notice to
shareholders of the Portfolio, but without their approval. The types of portfo-
lio securities in which each Portfolio may invest are described in greater de-
tail below.
GROWTH AND INCOME PORTFOLIO
The Growth and Income Portfolio's investment objective is to seek reasonable
cur-rent income and reasonable opportunity for appreciation through investments
primarily in dividend-paying common stocks of good quality. Whenever the eco-
nomic 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.
SHORT-TERM MULTI-MARKET PORTFOLIO
The investment objective of the Short-Term Multi-Market Portfolio is to seek
the highest level of current income, consistent with what Alliance Capital Man-
agement L.P. (the "Adviser") considers to be prudent investment risk, that is
available from a portfolio of high-quality debt securities having remaining ma-
turities of not more than three years. The Portfolio seeks high current yields
by investing in a portfolio of debt securities denominated in the U.S. Dollar
and selected foreign currencies. Accordingly, the Portfolio seeks investment
opportunities in foreign, as well as domestic, securities markets. While the
Portfolio normally maintains a substantial portion of its assets in debt secu-
rities denominated in foreign currencies, the Portfolio invests at least 25% of
its net assets in U.S. Dollar-denominated securities. The Portfolio is designed
for the investor who seeks a higher yield than a money market fund or certifi-
cate of deposit and less fluctuation in net asset value than a longer-term bond
fund.
In pursuing its investment objective, the Portfolio seeks to minimize credit
risk and fluctuations in net asset value by investing only in shorter-term debt
securities. Normally, a high proportion of the Portfolio's investments consist
of money market instruments. The Adviser actively manages the Portfolio in ac-
cordance with a multi-market investment strategy, allocating the Portfolio's
investments among securities denominated in the U.S. Dollar and the currencies
of a number of foreign countries and, within each such country, among different
types of debt securities. The Adviser adjusts the Portfolio's exposure to each
currency based on its perception of the most favorable markets and issuers. In
this regard, the percentage of assets invested in securities of a particular
country or denominated in a particular currency varies in accordance with the
Adviser's assessment of the relative yield and appreciation potential of such
securities and the relationship of a country's currency to the U.S. Dollar.
Fundamental economic strength, credit quality and interest rate trends are the
principal factors considered by the Adviser in determining whether to increase
or decrease the emphasis placed upon a particular type of security or industry
sector within the Portfolio's investment portfolio. The Portfolio does not in-
vest more than 25% of its net assets in debt securities denominated in a single
currency other than the U.S. Dollar.
5
<PAGE>
The Portfolio invests in debt securities denominated in the currencies of coun-
tries whose governments are considered stable by the Adviser. In addition to
the U.S. Dollar, such currencies include, among others, the Australian Dollar,
Austrian Schilling, British Pound Sterling, Canadian Dollar, Danish Krone,
Dutch Guilder, European Currency Unit ("ECU"), French Franc, German Mark, Irish
Pound, Italian Lira, Japanese Yen, Mexican Peso, New Zealand Dollar, Norwegian
Krone, Spanish Peseta, Swedish Krona and Swiss Franc. An issuer of debt securi-
ties purchased by the Portfolio may be domiciled in a country other than the
country in whose currency the instrument is denominated.
The Portfolio seeks to minimize investment risk by limiting its portfolio in-
vestments to high-quality debt securities having remaining maturities of not
more than three years. Accordingly, the Portfolio's investments consist only
of: (i) debt securities issued or guaranteed by the U.S. government, its agen-
cies or instrumentalities; (ii) obligations issued or guaranteed by a foreign
government or any of its political subdivisions, authorities, agencies, or in-
strumentalities, or by supranational entities, all of which are rated AAA or AA
by Standard & Poor's Corporation ("S&P"), Duff & Phelps Credit Rating Co.
("Duff & Phelps") or Fitch IBCA, Inc. ("Fitch") or Aaa or Aa by Moody's Invest-
ors Service, Inc. ("Moody's") ("High Quality Ratings") or, if unrated, deter-
mined by the Adviser to be of equivalent quality; (iii) corporate debt securi-
ties having at least one High Quality Rating or, if unrated, determined by the
Adviser to be of equivalent quality; (iv) certificates of deposit and bankers'
acceptances issued or guaranteed by, or time deposits maintained at, banks (in-
cluding foreign branches of U.S. banks or U.S. or foreign branches of foreign
banks) having total assets of more than $500 million and determined by the Ad-
viser to be of high quality; and (v) commercial paper rated A-1 by S&P, Prime-1
by Moody's, F1 by Fitch, or D-1 by Duff & Phelps or, if not rated, issued by
U.S. or foreign companies having outstanding debt securities rated AAA, AA or A
by S&P, Duff & Phelps or Fitch, or Aaa, Aa or A by Moody's and determined by
the Adviser to be of high quality.
The Portfolio may invest in debt securities issued by supranational organiza-
tions such as: the International Bank for Reconstruction and Development (com-
monly referred to as the "World Bank"), which was chartered to finance develop-
ment projects in developing member countries; the European Union, which is a
fifteen-nation organization engaged in cooperative economic activities; the Eu-
ropean Coal and Steel Community, which is an economic cooperative whose members
are various European nations' steel and coal industries; and the Asian Develop-
ment Bank, which is an international development bank established to lend
funds, promote investment and provide technical assistance to member nations in
the Asian and Pacific regions.
The Portfolio may invest in debt securities denominated in the ECU, which is a
"basket" consisting of specified amounts of the currencies of certain of the
member states of the European Union. The specific amounts of currencies com-
prising the ECU may be adjusted by the Council of Ministers of the European
Union to reflect changes in relative values of the underlying currencies. The
Adviser does not believe that such adjustments will adversely affect holders of
ECU-denominated obligations or the mar-
6
<PAGE>
ketability of such securities. European governments and supranationals, in
particular, issue ECU-denominated obligations.
Under normal circumstances, and as a matter of fundamental policy, the Portfo-
lio "concentrates" at least 25% of its total assets in debt instruments issued
by domestic and foreign companies engaged in the banking industry, including
bank holding companies. Such investments may include certificates of deposit,
time deposits, bankers' acceptances, and obligations issued by bank holding
companies, as well as repurchase agreements entered into with banks (as dis-
tinct from non-bank dealers) in accordance with the policies set forth in
"Other Investment Policies and Techniques -- Repurchase Agreements" below.
However, when business or financial conditions warrant, the Portfolio may, for
temporary defensive purposes, vary from its policy of investing at least 25%
of its total assets in the banking industry. For example, the Portfolio may
reduce its position in debt instruments issued by domestic and foreign banks
and bank holding companies and increase its position in U.S. Government Secu-
rities or cash equivalents.
Due to the Portfolio's investment policy with respect to investments in the
banking industry, the Portfolio will have greater exposure to the risk factors
which are characteristic of such investments. In particular, the value of and
investment return on the Portfolio's shares will be affected by economic or
regulatory developments in or related to the banking industry. Sustained in-
creases in interest rates can adversely affect the availability and cost of
funds for a bank's lending activities, and a deterioration in general economic
conditions could increase the exposure to credit losses. The banking industry
is also subject to the effects of: the concentration of loan portfolios in
particular businesses such as real estate, energy, agriculture or high tech-
nology-related companies; national and local regulation; and competition
within those industries as well as with other types of financial institutions.
In addition, the Portfolio's investments in commercial banks located in sev-
eral foreign countries are subject to additional risks due to the combination
in such banks of commercial banking and diversified securities activities. As
discussed above, however, the Portfolio seeks to minimize its exposure to such
risks by investing only in debt securities which are determined to be of high
quality.
The net asset value of the Portfolio's shares changes as the general levels of
interest rates fluctuate. When interest rates decline, the value of a portfo-
lio primarily invested in debt securities can be expected to rise. Conversely,
when interest rates rise, the value of a portfolio primarily invested in debt
securities can be expected to decline. However, a shorter average maturity is
generally associated with a lower level of market value volatility and, ac-
cordingly, it is expected that the net asset value of the Portfolio's shares
normally will fluctuate less than that of a long-term bond fund.
In order to reduce the Portfolio's exposure to foreign currency fluctuations
versus the U.S. Dollar, the Portfolio utilizes certain investment strategies,
including the purchase and sale of forward foreign currency exchange contracts
and other currency hedging techniques. For a discussion of these investment
policies of the Portfolio, see
7
<PAGE>
"Other Investment Policies and Techniques -- Hedging Techniques," below. For a
description of certain risks associated with investing in foreign securities,
see "Other Investment Policies and Techniques -- Foreign Securities," below.
OTHER INVESTMENT POLICIES AND TECHNIQUES
Except as otherwise noted below, the following description of other investment
policies is applicable to both of the Fund's Portfolios:
REPURCHASE AGREEMENTS
Each Portfolio may enter into agreements pertaining to U.S. Government Securi-
ties 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, normally
one day or a few days later. The resale price is greater than the purchase
price, reflecting an agreed-upon interest rate. Such agreements permit the
Portfolio to keep all of its assets at work while retaining "overnight" flexi-
bility in pursuit of investment of a longer-term nature. If a vendor defaults
on its repurchase obligation, the Portfolio would suffer a loss to the extent
that the proceeds from the sale of the collateral were less than the repurchase
price. If a vendor goes bankrupt, the Portfolio might be delayed in, or pre-
vented from, selling the collateral for its benefit. The Fund's Board of Direc-
tors has established procedures, which are periodically reviewed by the Board,
pursuant to which the Adviser monitors the creditworthiness of the vendors with
which the Portfolios enter into repurchase agreement transactions.
WRITING COVERED CALL OPTIONS
The 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 speci-
fied security on or before a fixed date, at a predetermined price. This Portfo-
lio is permitted to write call options but may not do so unless the Portfolio
at all times during the option period owns the optioned securities, or securi-
ties convertible or carrying rights to acquire the optioned securities at no
additional cost. This Portfolio may not write covered call options in excess of
25% of the Portfolio's assets.
The 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 op-
tion after it has been notified of the exercise of such option. The Portfolio
realizes 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 a Portfolio being able
to make closing purchase transactions, there is no assurance that a Portfolio
will be able to effect closing purchase transactions at any particular time or
at an acceptable price. The writing of covered call options could result in in-
creases in
8
<PAGE>
the portfolio turnover of a Portfolio, especially during periods when market
prices of the underlying securities appreciate.
LOANS OF PORTFOLIO SECURITIES
Each 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 collateral in portfolio securities, thereby earning
additional income, or receive an agreed upon amount of income from a borrower
who has delivered equivalent collateral. Each Portfolio will have the right to
regain record ownership of loaned securities to exercise beneficial rights
such as voting rights, subscription rights and rights to dividends, interest
or other distributions. Each Portfolio may pay reasonable finders', adminis-
trative and custodial fees in connection with a loan. No more than 30% of the
value of the assets of the Growth and Income Portfolio and 20% of the value of
the assets of the Short-Term Multi-Market Portfolio may be loaned at any time,
nor will either Portfolio lend its portfolio securities to any officer, direc-
tor, employee or affiliate of either the Fund or the Adviser.
FOREIGN SECURITIES
For a description of the investment policies of the Short-Term Multi-Market
Portfolio with respect to foreign securities, see above. The Growth and Income
Portfolio may invest in listed and unlisted foreign securities although the
Growth and Income Portfolio intends to restrict its investment in foreign se-
curities to issues of high quality. 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 Port-
folio may enter into forward foreign currency exchange contracts in order to
protect against uncertainty in the level of future foreign exchange rates.
To the extent a Portfolio invests in foreign securities, consideration is
given to certain factors comprising both risk and opportunity. The values of
foreign securities investments are affected by changes in currency rates or
exchange control regulations, application of foreign tax laws, including with-
holding taxes, changes in governmental administration or economic, taxation or
monetary policy (in the United States and abroad) or changed circumstances in
dealings between nations. Currency exchange rate movements will increase or
reduce the U.S. dollar value of the Portfolio's net assets and income attrib-
utable to foreign securities. Costs are incurred in connection with conver-
sions between various currencies held by a Portfolio. In addition, there may
be substantially less publicly available information about foreign issuers
than about domestic is-
9
<PAGE>
suers, and foreign issuers may not be subject to accounting, auditing and fi-
nancial reporting standards and requirements comparable 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 assets and profits ap-
pearing 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 account-
ing records in local currency, inflation accounting rules in some of the coun-
tries in which a Portfolio will invest require, for both tax and accounting
purposes, that certain assets and liabilities be restated on the issuer's bal-
ance sheet in order to express items in terms of currency of constant purchas-
ing power. Inflation accounting may indirectly generate 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 bro-
kerage commissions are generally higher than in the United States. Foreign se-
curities 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 contractual obliga-
tions and could be subject to extended settlement periods.
HEDGING TECHNIQUES
The following hedging techniques are utilized by the Short-Term Multi-Market
Portfolio:
Cross Hedges. The attractive returns currently available from foreign currency
denominated debt instruments can be adversely affected by changes in exchange
rates. The Adviser believes that the use of foreign currency hedging tech-
niques, including "cross-hedges" (see "Forward Foreign Currency Exchange Con-
tracts," below), can help protect against declines in the U.S. Dollar value of
income available for distribution to shareholders and declines in the net as-
set value of the Portfolio's shares resulting from adverse changes in currency
exchange rates. For example, the return available from securities denominated
in a particular foreign currency would diminish in the event the value of the
U.S. Dollar increased against such currency. Such a decline could be partially
or completely offset by an increase in value of a cross-hedge involving a for-
ward exchange contract to sell a different foreign currency, where such con-
tract is available on terms more advantageous to the Portfolio than a contract
to sell the currency in which the position being hedged is denominated. It is
the Adviser's belief that cross-hedges can therefore provide significant pro-
tection of net asset value in the event of a general rise in the U.S. Dollar
against foreign currencies. However, a cross-hedge cannot protect against ex-
change rate risks perfectly, and if the Adviser is incorrect in its judgment
of future exchange rate relationships, the Portfolio could be in a less advan-
tageous position
10
<PAGE>
than if such a hedge had not been established.
Indexed Debt Securities. The Portfolio may invest without limitation in debt
instruments that are indexed to certain specific foreign currency exchange
rates. The terms of such securities provide that their principal amount is ad-
justed upwards or downwards (but not below zero) at maturity to reflect changes
in the exchange rate between two currencies while the obligation is outstand-
ing. The Portfolio purchases such debt instruments with the currency in which
they are denominated and, at maturity, receives interest and principal payments
thereon in that currency, but the amount of principal payable by the issuer at
maturity will change in proportion to the change (if any) in the exchange rate
between the two specified currencies between the date the instrument is issued
and the date the instrument matures. While such securities entail the risk of
loss of principal, the potential for realizing gains as a result of changes in
foreign currency exchange rates enables the Portfolio to hedge (or cross-hedge)
against a decline in the U.S. Dollar value of investments denominated in for-
eign currencies while providing an attractive money market rate of return. The
Portfolio purchases such debt instruments for hedging purposes only, not for
speculation. The staff of the Securities and Exchange Commission (the "Commis-
sion") is currently considering whether the Portfolio's purchase of this type
of security would result in the issuance of a "senior security" within the
meaning of the Act. The Portfolio believes that such investments do not involve
the creation of such a senior security, but nevertheless the Portfolio has un-
dertaken, pending the resolution of this issue by the staff, to establish a
segregated account with respect to its investments in this type of security and
to maintain in such account cash not available for investment or U.S. Govern-
ment Securities or other liquid high quality debt securities having a value
equal to the aggregate principal amount of outstanding commercial paper of this
type.
Futures Contracts and Options on Futures Contracts. The Portfolio may enter
into contracts for the purchase or sale for future delivery of fixed-income se-
curities or foreign currencies, or contracts based on financial indices includ-
ing any index of U.S. Government Securities, foreign government securities or
corporate debt securities and may purchase and write put and call options to
buy or sell futures contracts ("options on futures contracts"). A "sale" of a
futures contract means the acquisition of a contractual obligation by the Port-
folio to deliver the securities or foreign currencies called for by the con-
tract at a specified price on a specified date. A "purchase" of a futures con-
tract means the incurring of a contractual obligation to acquire the securities
or foreign currencies called for by the contract at a specified price on a
specified date. The specific securities delivered or taken, respectively, at
settlement date, would not be determined until at or near that date. The
determination would be in accordance with the rules of the exchange on which
the futures contract sale or purchase was effected.
Although the terms of futures contracts specify actual delivery or receipt of
securities, in most instances the contracts are closed out before the settle-
ment date without the making or taking of delivery of the securities. Closing
out of a futures contract is effected
11
<PAGE>
by entering into an offsetting purchase or sale transaction.
The purchaser of a futures contract on an index agrees to take or make deliv-
ery of an amount of cash equal to the difference between a specified dollar
multiple of the value of the index on the expiration date of the contract and
the price at which the contract was originally struck.
Unlike a futures contract, which requires the parties to buy and sell a secu-
rity on a set date, an option on a futures contract entitles its holder to de-
cide on or before a future date whether to enter into such a contract. If the
holder decides not to enter into the contract, the premium paid for the option
is lost. Since the value of the option is
fixed at the point of sale, there are no daily payments of cash in the nature
of "variation" or "maintenance" margin payments to reflect the change in the
value of the underlying contract as there are by a purchaser or seller of a
futures contract. The value of the option does not change and is reflected in
the net asset value of the Portfolio.
The ability to establish and close out positions in options on futures will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop or be maintained.
Options on futures contracts to be written or purchased by the Portfolio will
be traded on U.S. or foreign exchanges or over-the-counter.
These investment techniques will be used only to hedge against anticipated fu-
ture changes in market conditions and interest or exchange rates which other-
wise might either adversely affect the value of the Portfolio's securities or
adversely affect the prices of securities which the Portfolio intends to pur-
chase at a later date. See Appendix B to the Fund's Statement of Additional
Information for further discussion of the use, risks and costs of futures con-
tracts and options on futures contracts.
The Portfolio will not (i) enter into any futures contracts or options on
futures contracts if immediately thereafter the aggregate of margin deposits
on all the outstanding futures contracts of the Portfolio and premiums paid on
outstanding options on futures contracts would exceed 5% of the market value
of the total assets of the Portfolio or (ii) enter into any futures contracts
or options on futures contracts if the aggregate of the market value of the
outstanding futures contracts of the Portfolio and the market value of the
currencies and futures contracts subject to outstanding options written by the
Portfolio would exceed 50% of the market value of the total assets of the
Portfolio.
Options on Foreign Currencies. The Portfolio may purchase and write put and
call options on foreign currencies for the purpose of protecting against de-
clines in the U.S. Dollar value of foreign currency-denominated portfolio se-
curities and against increases in the U.S. Dollar cost of such securities to
be acquired. As in the case of other kinds of options, however, the writing of
an option on a foreign currency constitutes only a partial hedge, up to the
amount of the premium received, and the Portfolio could be required to pur-
chase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of
12
<PAGE>
an option on a foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements ad-
verse to the Portfolio's position, it may forfeit the entire amount of the
premium plus related transaction costs. Options on foreign currencies to be
written or purchased by the Portfolio are traded on U.S. and foreign exchanges
or over-the-counter. There is no specific percentage limitation on the Portfo-
lio's investments in options or on foreign currencies. See the Fund's State-
ment of Additional Information for further discussion of the use, risks and
costs of options on foreign currencies.
Forward Foreign Currency Exchange Contracts. The Portfolio may purchase or
sell forward foreign currency exchange contracts ("forward contracts") to at-
tempt to minimize the risk to the Portfolio from adverse changes in the rela-
tionship between the U.S. Dollar and foreign currencies. A forward contract is
an obligation to purchase or sell a specific currency for an agreed price at a
future date which is individually negotiated and privately traded by currency
traders and their customers. Forward contracts reduce the potential gain from
a positive change in the relationship between the U.S. Dollar and other cur-
rencies. Unanticipated changes in currency prices may result in poorer overall
performance for the Portfolio than if it had not entered into such contracts.
The Fund's Custodian will place liquid assets in a segregated account having a
value equal to the aggregate amount of each Portfolio's commitments under for-
ward contracts entered into with respect to position hedges and cross-hedges.
Interest Rate Transactions. In order to attempt to protect the value of the
Portfolio's investments from interest rate or currency cross-rate fluctua-
tions, the Portfolio may enter into various hedging transactions, such as in-
terest rate swaps and may purchase or sell (i.e. write) interest rate caps and
floors. The Portfolio expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its port-
folio. The Portfolio may also enter into these transactions to protect against
any increase in the price of securities the Portfolio anticipates purchasing
at a later date. The Portfolio does not intend to use these transactions in a
speculative manner. Interest rate swaps involve the exchange by the Portfolio
with another party of their respective commitments to pay or receive interest,
e.g., an exchange of floating rate payments for fixed rate payments. Interest
rate swaps are entered into on a net basis, i.e., the two payment streams are
netted out, with the Portfolio receiving or paying, as the case may be, only
the net amount of the two payments. The purchase of an interest rate cap enti-
tles the purchaser, to the extent that a specified index exceeds a predeter-
mined interest rate, to receive payments on a contractually-based principal
amount from the party selling such interest rate cap. The purchase of an in-
terest rate floor entitles the purchaser, to the extent that a specified index
falls below a predetermined interest rate to receive payments on a contractu-
ally-based principal amount from the party selling such interest rate floor.
The Portfolio may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, depending on whether the Portfolio is
hedging its assets or its liabilities. The net amount of the excess, if any,
of the Portfolio's obligations over its
13
<PAGE>
entitlements with respect to each interest rate swap will be accrued on a
daily basis and an amount of liquid assets having an aggregate net asset value
at least equal to the accrued excess will be maintained in a segregated ac-
count by the Fund's Custodian. If the Portfolio enters into an interest rate
swap on other than a net basis, the Portfolio will maintain a segregated ac-
count with the Fund's Custodian in the full amount accrued on a daily basis of
the Portfolio's obligations with respect to the swap. The Portfolio will not
enter into any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other party thereto
is rated in the highest rating category of at least one nationally recognized
statistical rating organization at the time of entering into the transaction.
The Adviser monitors the creditworthiness of counter parties to its interest
rate swap, cap and floor transactions on an ongoing basis. If there is a de-
fault by the other party to such a transaction, the Portfolio has contractual
remedies. The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and
agents utilizing standardized swap documentation. The Adviser has determined
that, as a result, the swap market has become relatively liquid. Caps and
floors are more recent innovations for which standardized documentation has
not yet been developed and, accordingly, they are less liquid than swaps. To
the extent that the Portfolio sells (i.e., writes) caps and floors, it will
maintain in a segregated account with the Fund's Custodian liquid assets hav-
ing an aggregate net asset value at least equal to the full amount, accrued on
a daily basis, of the Portfolio's obligations with respect to the caps or
floors.
General. The successful use of the foregoing investment practices draws upon
the Adviser's special skills and experience with respect to such instruments
and usually depends on the Adviser's ability to forecast interest rate and
currency exchange rate movements correctly. Should interest or exchange rates
move in an unexpected manner, the Portfolio may not achieve the anticipated
benefits of futures contracts, options, interest rate transactions or forward
contracts or may realize losses and thus be in a worse position than if such
strategies had not been used. Unlike many exchange-traded futures contracts
and options on futures contracts, there are no daily price fluctuation limits
with respect to options on currencies and forward contracts, and adverse mar-
ket movements could therefore continue to an unlimited extent over a period of
time. In addition, the correlation between movements in the price of the secu-
rities and currencies hedged or used for cover will not be perfect and could
produce unanticipated losses.
The Portfolio's ability to dispose of its positions in futures contracts, op-
tions, interest rate transactions and forward contracts will depend on the
availability of liquid markets in such instruments. Markets in options and
futures with respect to a number of fixed-income securities and currencies are
relatively new and still developing. It is impossible to predict the amount of
trading interest that may exist in various types of futures contracts, options
and forward contracts. If asecondary market does not exist with respect to an
option purchased or written by the Portfolio over-the-counter, it might not be
possible to effect a closing transaction in the option (i.e., dispose of the
option) with the
14
<PAGE>
result that (i) an option purchased by the Portfolio would have to be exercised
in order for the Portfolio to realize any profit and (ii) the Portfolio may not
be able to sell currencies or portfolio securities covering an option written
by the Portfolio until the option expires or it delivers the underlying futures
contract or currency upon exercise. Therefore, no assurance can be given that
the Portfolio will be able to utilize these instruments effectively for the
purposes set forth above.
ILLIQUID SECURITIES
Subject to any more restrictive applicable investment policies, neither of the
Portfolios maintains more than 15% of its net assets in illiquid securities.
For purposes of each Portfolio's investment objectives and policies and invest-
ment restrictions, illiquid securities include, among others, (a) direct place-
ments or other securities which are subject to legal or contractual restric-
tions on resale or for which there is no readily available market (e.g., trad-
ing 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 pur-
chased 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 Se-
curities Act of 1933, as amended, that have legal or contractual restrictions
on resale but have a readily available market are not deemed illiquid for pur-
poses of this limitation. The Adviser monitors the liquidity of such securities
under the supervision of the Board of Directors. See "Certain Fundamental In-
vestment Policies." See the Statement of Additional Information for further
discussion of illiquid securities.
FIXED-INCOME SECURITIES
The value of the shares of each Portfolio that invests in fixed-income securi-
ties will fluctuate with the value of such investments. The value of each Port-
folio's investments will change as the general level of interest rates fluctu-
ates. During periods of falling interest rates, the values of a Portfolio's se-
curities generally rise. Conversely, during periods of rising interest rates,
the values of a Portfolio's securities generally decline.
In seeking to achieve a Portfolio's investment objective, there will be times,
such as during periods of rising interest rates, when depreciation and realiza-
tion of capital losses on securities in a Portfolio's portfolio will be un-
avoidable. Moreover, medium- and lower-rated securities and non-rated securi-
ties of comparable quality may be subject to wider fluctuations in yield and
market values than higher-rated securities under certain market conditions.
Such fluctuations after a security is acquired do not affect the cash income
received from that security but are reflected in the net asset value of a
Portfolio.
SECURITIES RATINGS
The ratings of fixed-income securities by S&P, Moody's, Duff & Phelps and Fitch
are a generally accepted barometer of credit risk. They are, however, subject
to certain limitations from an investor's standpoint. The rating of an issuer
is heavily weighted by past developments and does not necessarily reflect prob-
able future conditions. There is frequently a lag between the time a rating is
assigned and the time it is updated. In addition, there may be varying degrees
of difference in credit risk of securities within each rating category.
15
<PAGE>
NON-DIVERSIFIED STATUS
The Short-Term Multi-Market Portfolio is a "non-diversified", which means the
Portfolio is not limited in the proportion of its assets that may be invested
in the securities of a single issuer. However, because the Portfolio may in-
vest in a smaller number of individual issuers than a diversified portfolio,
an investment in this Portfolio may, under certain circumstances, present
greater risk to an investor than an investment in a diversified portfolio. The
Portfolio intends to conduct its operations so as to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code. To so qualify,
among other requirements, the Portfolio will limit its investments so that, at
the close of each quarter of the taxable year, (i) not more than 25% of the
market value of the Portfolio's total assets will be invested in the securi-
ties of a single issuer, and (ii) with respect to 50% of the market value of
its total assets, not more than 5% of the market value of its total assets
will be invested in the securities of a single issuer and the Portfolio will
not own more than 10% of the outstanding voting securities of a single issuer.
The Portfolio's investments in U.S. Government Securities are not subject to
these limitations.
DEFENSIVE POSITION
When business or financial conditions warrant, the Growth and Income Portfolio
may assume a temporary defensive position and invest without limit in high
grade fixed income securities or hold their assets in cash equivalents, in-
cluding (i) short-term obligations of the U.S. Government and its agencies or
instrumentalities, (ii) certificates of deposit, bankers' acceptances and in-
terest-bearing savings deposits of banks having total assets of more than $1
billion and which are members of the Federal Deposit 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 outstanding debt issue rated AA
or higher by S&P, Duff & Phelps or Fitch or Aa or higher by Moody's.
PORTFOLIO TURNOVER
Portfolio turnover rates are set forth under "Financial Highlights." These
portfolio turnover rates are greater than those of most other investment 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
16
<PAGE>
their computer systems with the goal of modifying or replacing such systems
prior to January 1, 2000, to the extent necessary to foreclose any such nega-
tive 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 be-
lieve 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, these fundamental
investment policies provide that the Portfolio may not: (i) invest in securi-
ties of any one issuer (including repurchase agreements with any one entity)
other than securities issued or guaranteed by the United States Government, if
immediately after such purchases more than 5% of the value of its total assets
would be invested in such issuer, except that 25% of the value of the total
assets of 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 prin-
cipal business activities in any one industry, except that there is no such
limitation with respect to U.S. Government securities or certificates of de-
posit, 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.
With respect to the Short-Term Multi-Market Portfolio these fundamental in-
vestment policies provide that the Portfolio may not: (i) invest 25% or more
of its total assets in securities of companies engaged principally in any one
industry (other than the banking industry) except that this restriction does
not apply to U.S. Government Securities; (ii) borrow money except from banks
for temporary or emergency purpos-
17
<PAGE>
es, including the meeting of redemption requests which might require the un-
timely disposition of securities; borrowing in the aggregate may not exceed
15%, and borrowing for purposes other than meeting redemptions may not exceed
5% of the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (not including the amount borrowed) at the time the borrowing
is made; securities will not be purchased while borrowings in excess of 5% of
the value of the Portfolio's total assets are outstanding; (iii) pledge, hy-
pothecate, mortgage or otherwise encumber its assets, except to secure permit-
ted borrowings; or (iv) invest in illiquid securities if immediately after such
investment more than 10% of the Portfolio's total assets (taken at market val-
ue) would be invested in such securities.
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.
- --------------------------------------------------------------------------------
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 Of-
ficer 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 consul-
tant.
John H. Dobkin has been the President of Historic Hudson Valley (historic pres-
ervation) 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).
18
<PAGE>
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. The employee of the Adviser principally responsible for the Growth
and Income Portfolio's investment program since its inception is Paul C.
Rissman, who is a Senior Vice President of ACMC, with which he has been asso-
ciated since prior to 1993. The employee of the Adviser principally responsi-
ble for the Short-Term Multi-Market Portfolio's investment program since its
inception is Douglas J. Peebles, who is a Senior Vice President 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 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 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 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
19
<PAGE>
of printing the Fund's prospectuses and shareholder reports, (f) cost of main-
taining the Fund's existence, (g) interest charges, taxes, brokerage fees and
commissions, (h) costs of stationery and supplies, (i) expenses and fees re-
lated to registration and filing with the Commission and with state regulatory
authorities, and (j) cost of certain personnel of the Adviser or its affili-
ates rendering clerical, accounting and other services to the Fund.
As to the obtaining of clerical and accounting services not required to be
provided to the Fund by the Adviser under the Investment Advisory Agreement,
the Fund may employ its own personnel. For such services, it may also utilize
personnel employed by the Adviser or by its affiliates; in such event, the
services are provided to the Fund at cost and the payments specifically ap-
proved in advance by the Fund's Board of Directors.
- --------------------------------------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
PURCHASE OF SHARES
Shares of each Portfolio of the Fund are offered on a continuous basis di-
rectly by the Fund and by Alliance Fund Distributors, Inc., the Fund's Princi-
pal Underwriter, to the separate accounts of certain life insurance companies
without any sales or other charge, at each Portfolio's net asset value, as de-
scribed below. The separate accounts of insurance companies place orders to
purchase shares of each Portfolio based on, among other things, the amount of
premium payments to be invested and surrendered and transfer requests to be
effected on that day pursuant to variable annuity contracts and variable life
insurance policies which are funded by shares of the Portfolios. The Fund re-
serves the right to suspend the sale of the Fund's shares in response to con-
ditions in the securities markets or for other reasons. Individuals may not
place orders directly with the Fund. See the Prospectus of the separate ac-
count of the participating insurance company for more information on the pur-
chase of Portfolio shares.
The public offering price of each Portfolio's shares is their net asset value.
The per share net asset value of each Portfolio is computed in accordance with
the Fund's Articles of Incorporation and By-Laws, at the next close of regular
trading on the New York Stock Exchange (the "Exchange") (currently 4:00 p.m.
Eastern time), 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 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 week-
day exclusive of days on which the Exchange is closed (most national holidays
and Good Friday). For purposes of this computation, the securities in each
Portfolio are valued at their current market value determined on the basis of
market quotations or, if such quotations are not readily available, such other
methods as the Directors believe would accurately reflect fair market value.
Portfolio securities may also be valued on the basis of prices provided by a
pricing service when such prices are believed by the Ad-
20
<PAGE>
viser 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 result
of which it is not reasonably practicable for the Fund fairly to determine 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 in-
formation regarding how to redeem shares in the Fund please see your insurance
company separate account prospectus.
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
Each of the other Portfolios 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
such Portfolios.
Each Portfolio of the Fund qualified and intends to continue to qualify to be
taxed as a regulated investment company under Subchapter M of the Internal Rev-
enue Code (the "Code"). If so qualified, each Portfolio will not be subject to
Federal income or excise taxes on its investment company taxable income and net
capital gains to the extent such investment company taxable income and net cap-
ital gains are distributed to the separate accounts of insurance companies
which hold its shares. Under current tax law, capital gains or dividends from
any Portfolio are not currently taxable when left to accumulate within a vari-
able annuity (other than an annuity interest owned by a person who is not a
natural person) or variable life insurance contract. Distributions of net in-
vestment income and net short-term capital gain will be treated as ordinary in-
come and distributions of net long-term capital gain will be treated as long-
term capital gain in the hands of the insurance companies.
Investment income received by a Portfolio from sources within foreign countries
may be subject to foreign income taxes withheld at the source. Provided that
certain Code requirements are met, a Portfolio may "pass through" to its share-
holders credits or deductions for foreign income taxes paid.
21
<PAGE>
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. 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
Short-Term Multi-Market Portfolio occur primarily with issuers, underwriters
or major dealers acting as principals, while transactions for the Growth and
Income 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
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.
22
<PAGE>
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 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
23
<PAGE>
its average annual compounded total return for its most recently completed
one, five, and ten-year periods (or the period since the Fund's inception).
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 in-
vested to the value of such investment at the end of the period. For purposes
of computing total return, income dividends and capital gains distributions
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.
24
<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
