<PAGE>
As filed with the Securities and Exchange
Commission on January 11, 1999
File Nos. 33-18647
811-5398
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 25
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 26
____________________________________________
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
(Exact Name of Registrant as Specified in Charter)
1345 Avenue of the Americas, New York, New York 10105
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code:(800)221-5672
_______________________________________________________________
EDMUND P. BERGAN, JR.
Alliance Capital Management L.P.
1345 Avenue of the Americas
New York, New York l0105
(Name and address of agent for service)
Copies of communications to:
Thomas G. MacDonald
Seward & Kissel
One Battery Park Plaza
New York, New York 10004
<PAGE>
It is proposed that this filing will become effective
(check appropriate box)
_X_ Immediately upon filing pursuant to paragraph (b)
___ On (date) pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(1)
___ On (date) pursuant to paragraph (a)(1)
___ 75 days after filing pursuant to paragraph (a)(2)
___ On (date) pursuant to paragraph (a) of Rule 485
<PAGE>
CROSS REFERENCE SHEET
(as required by Rule 404 (c))
N-1A Item No. Location in Prospectus
(Caption)
PART A
Item 1. Cover Page Cover Page
Item 2. Synopsis Expense Information
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of
Registrant Description of the
Portfolios
Item 5. Management of the Fund Management of the Fund;
General Information
Item 6. Capital Stock and Other
Securities General Information;
Dividends,
Distributions and Taxes
Item 7. Purchase of Securities Being
Offered Purchase and Redemption
of Shares; General
Information
Item 8. Redemption or Repurchase Purchase and Redemption
of Shares; General
Information
Item 9. Pending Legal Proceedings Not Applicable
Appendix A. Bond Ratings
PART B Location in Statement of
Additional Information
(Caption)
Item 10. Cover Page Cover Page
Item 11. Table of Contents. Cover Page
Item 12. General Information and History Management of the Fund;
General Information
<PAGE>
Item 13. Investment Objectives and Investment Policies and
Policies Restrictions
Item 14. Management of the Fund Management of the Fund
Item 15. Control Persons and Principal Management of the
Holders of Securities Fund; General
Information
Item 16. Investment Advisory and Other Management of the
Services Fund
Item 17. Brokerage Allocation Portfolio Transactions
Item 18. Capital Stock and Other
Securities General Information
Item 19. Purchase, Redemption and Pricing Purchase and Redemp-
of Securities Being Offered tion of Shares; Net
Asset Value
Item 20. Tax Status Dividends, Distribu-
tions and Taxes
Item 21. Underwriters General Information
Item 22. Calculation of Performance Data General Information
Item 23. Financial Statements Financial Statements;
Report of Independent
Auditors
<PAGE>
Part A: The Prospectus contained in the Fund's Post-Effective
Amendment No. 22 filed with the Commission on April 29, 1998
pursuant to Rule 485(b) is incorporated herein by reference.
<PAGE>
<PAGE>
[LOGO OF ALLIANCE CAPITAL APPEARS HERE] ALLIANCE VARIABLE PRODUCTS
SERIES FUND, INC.
- -------------------------------------------------------------------------------
P.O. BOX 1520, SECAUCUS, NEW JERSEY 07096-1520 TOLL FREE (800) 221-5672
- -------------------------------------------------------------------------------
Alliance Variable Products Series Fund, Inc. (the "Fund") is an open-end se-
ries investment company designed to fund variable annuity contracts and vari-
able life insurance policies to be offered by the separate accounts of certain
life insurance companies. The Fund currently offers an opportunity to choose
among the separately managed pools of assets (the "Portfolios") described be-
low which have differing investment objectives and policies. Shares of each
Portfolio are currently divided into two classes: Class A shares, offered pur-
suant to another prospectus, and Class B shares, offered hereby.
- -------------------------------------------------------------------------------
A DIVERSIFIED SELECTION OF INVESTMENT ALTERNATIVES
- -------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO -- seeks safety of principal, maintenance of liquidity
and maximum current income by investing in a broadly diversified portfolio of
money market securities. An investment in the Money Market Portfolio is nei-
ther insured nor guaranteed by the U.S. Government. There can be no assurance
that the Portfolio will be able to maintain a stable net asset value of $1.00
per share, although it expects to do so.
PREMIER GROWTH PORTFOLIO -- seeks growth of capital rather than current in-
come. In pursuing its investment objective, the Premier Growth Portfolio will
employ aggressive investment policies. Since investments will be made based
upon their potential for capital appreciation, current income will be inciden-
tal to the objective of capital growth. The Portfolio is not intended for in-
vestors whose principal objective is assured income or preservation of capi-
tal.
GROWTH AND INCOME PORTFOLIO -- seeks to balance the objectives of reasonable
current income and reasonable opportunities for appreciation through invest-
ments primarily in dividend-paying common stocks of good quality.
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO -- seeks a high level of cur-
rent income consistent with preservation of capital by investing principally
in a portfolio of U.S. Government Securities and other high grade debt securi-
ties.
HIGH-YIELD PORTFOLIO -- seeks the highest level of current income available
without assuming undue risk by investing principally in high-yielding fixed
income securities. As a secondary objective, this Portfolio seeks capital ap-
preciation where consistent with its primary objective. Many of the high-
yielding securities in which the High-Yield Portfolio invests are rated in the
lower rating categories (i.e., below investment grade) by the nationally rec-
ognized rating services. These securities, which are often referred to as
"junk bonds," are subject to greater risk of loss of principal and interest
than higher rated securities and are considered to be predominantly specula-
tive with respect to the issuer's capacity to pay interest and repay princi-
pal.
TOTAL RETURN PORTFOLIO -- seeks to achieve a high return through a combination
of current income and capital appreciation by investing in a diversified port-
folio of common and preferred stocks, senior corporate debt securities, and
U.S. Government and agency obligations, bonds and senior debt securities.
INTERNATIONAL PORTFOLIO -- seeks to obtain a total return on its assets from
long-term growth of capital and from income principally through a broad port-
folio of marketable securities of established non-United States companies (or
United States companies having their principal activities and interests out-
side the United States), companies participating in foreign economies with
prospects for growth, and foreign government securities.
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.
GLOBAL BOND PORTFOLIO -- seeks a high level of return from a combination of
current income and capital appreciation by investing in a globally diversified
portfolio of high quality debt securities denominated in the U.S. Dollar and a
range of foreign currencies.
(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/[ ]
Investors are advised to carefully read this Prospectus and to retain it for
future reference.
<PAGE>
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO -- seeks the highest level of cur-
rent income, consistent with what the Fund's Adviser considers to be prudent
investment risk, that is available from a portfolio of debt securities issued
or guaranteed by the governments of the United States, Canada and Mexico,
their political subdivisions (including Canadian Provinces but excluding the
States of the United States), agencies, instrumentalities or authorities. The
Portfolio seeks high current yields by investing in government securities de-
nominated in local currency and U.S. Dollars. Normally, the Portfolio expects
to maintain at least 25% of its assets in securities denominated in the U.S.
Dollar.
GLOBAL DOLLAR GOVERNMENT PORTFOLIO -- seeks a high level of current income
through investing substantially all of its assets in U.S. and non-U.S. fixed
income securities denominated only in U.S. Dollars. As a secondary objective,
the Portfolio seeks capital appreciation. Substantially all of the Portfolio's
assets will be invested in high yield, high risk securities that are low-rated
(i.e., below investment grade), or of comparable quality and unrated, and that
are considered to be predominately speculative as regards the issuer's capac-
ity to pay interest and repay principal.
UTILITY INCOME PORTFOLIO -- seeks current income and capital appreciation by
investing primarily in the equity and fixed-income securities of companies in
the "utilities industry." The Portfolio's investment objective and policies
are designed to take advantage of the characteristics and historical perfor-
mance of securities of utilities companies. The utilities industry consists of
companies engaged in the manufacture, production, generation, provision,
transmission, sale and distribution of gas, electric energy, and communica-
tions equipment and services, and in the provision of other utility or utili-
ty-related goods and services.
CONSERVATIVE INVESTORS PORTFOLIO -- seeks the highest total return without, in
the view of the Fund's Adviser, undue risk to principal by investing in a di-
versified mix of publicly traded equity and fixed-income securities.
GROWTH INVESTORS PORTFOLIO -- seeks the highest total return consistent with
what the Fund's Adviser considers to be reasonable risk by investing in a di-
versified mix of publicly traded equity and fixed-income securities.
GROWTH PORTFOLIO -- seeks long-term growth of capital by investing primarily
in common stocks and other equity securities.
WORLDWIDE PRIVATIZATION PORTFOLIO -- seeks long-term capital appreciation by
investing principally in equity securities issued by enterprises that are un-
dergoing, or have undergone, privatization. The balance of the Portfolio's in-
vestment portfolio will include equity securities of companies that are be-
lieved by the Fund's Adviser to be beneficiaries of the privatization process.
TECHNOLOGY PORTFOLIO -- seeks growth of capital through investment in compa-
nies expected to benefit from advances in technology. The Portfolio invests
principally in a diversified portfolio of securities of companies which use
technology extensively in the development of new or improved products or
processes.
QUASAR PORTFOLIO -- seeks growth of capital by pursuing aggressive investment
policies. The Portfolio invests principally in a diversified portfolio of eq-
uity securities of any company and industry and in any type of security which
is believed to offer possibilities for capital appreciation.
REAL ESTATE INVESTMENT PORTFOLIO -- seeks a total return on its assets from
long-term growth of capital and from income principally through investing in a
portfolio of equity securities of issuers that are primarily engaged in or re-
lated to the real estate industry.
- -------------------------------------------------------------------------------
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" re-
lating to Class B shares dated [ ], 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.
2
<PAGE>
- --------------------------------------------------------------------------------
EXPENSE INFORMATION--CLASS B SHARES
- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
The Fund has no sales load on purchases or reinvested dividends, deferred
sales load, redemption fee or exchange fee.
<TABLE>
<CAPTION>
U.S.
GROWTH GOVERNMENT/
MONEY PREMIER AND HIGH GRADE HIGH- TOTAL
MARKET GROWTH INCOME SECURITIES YIELD RETURN
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+(1) PORTFOLIO
--------- --------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS AND
NET OF EXPENSE
REIMBURSEMENTS)#
Management Fees........ .50% 1.00% .63% .60% 0% .63%
12b-1 Fees+............ .25% .25% .25% .25% .25% .25%
Other Expenses......... .14% .08% .09% .24% .95% .25%
--- ---- --- ---- ---- ----
Total Portfolio
Operating Expenses.... .89% 1.33% .97% 1.09% 1.20% 1.13%
=== ==== === ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
SHORT- NORTH
TERM AMERICAN GLOBAL
INTER- MULTI- GLOBAL GOVERNMENT UTILITY DOLLAR CONSERVATIVE
NATIONAL MARKET BOND INCOME INCOME GOVERNMENT INVESTORS
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- ----------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS AND
NET OF EXPENSE
REIMBURSEMENTS)#
Management Fees........ .53% .07% .56% .56% .62% .41% .37%
12b-1 Fees+............ .25% .25% .25% .25% .25% .25% .25%
Other Expenses......... .42% .87% .38% .39% .33% .54% .58%
---- ---- ---- ---- ---- ---- ----
Total Portfolio
Operating Expenses.... 1.20% 1.19% 1.19% 1.20% 1.20% 1.20% 1.20%
==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
GROWTH WORLDWIDE REAL ESTATE
INVESTORS GROWTH PRIVATIZATION TECHNOLOGY QUASAR INVESTMENT
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+(2)
--------- --------- ------------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS AND
NET OF EXPENSE
REIMBURSEMENTS)#
Management Fees........ 0% .75% .40% .76% .58% 0%
12b-1 Fees+............ .25% .25% .25% .25% .25% .25%
Other Expenses......... .95% .09% .55% .19% .37% .95%
---- ---- ---- ---- ---- ----
Total Portfolio
Operating Expenses.... 1.20% 1.09% 1.20% 1.20% 1.20% 1.20%
==== ==== ==== ==== ==== ====
</TABLE>
(See footnotes on following page)
3
<PAGE>
- --------
# There were no reimbursements during 1997 with respect to the Money Market,
Growth and Income, U.S. Government/ High Grade Securities, Total Return or
Growth Portfolios. Alliance Capital Management L.P. (the "Adviser") discon-
tinued the expense reimbursement with respect to the Premier Growth Portfolio
effective May 1, 1998. The expenses (as a percentage of average net assets)
of the following Portfolios, before expense reimbursements, would be: Inter-
national Portfolio: Management Fees -- 1.00%, 12b-1 Fees -- .25%, Other Ex-
penses -- .42% and Total Portfolio Operating Expenses -- 1.67%; Short-Term
Multi-Market Portfolio: Management Fees --.55%, 12b-1 Fees -- .25%, Other Ex-
penses -- .87% and Total Portfolio Operating Expenses --1.67%; Global Bond
Portfolio: Management Fees -- .65%, 12b-1 Fees -- .25%, Other Expenses --
.38% and Total Portfolio Operating Expenses -- 1.28%; North American Govern-
ment Income Portfolio: Management Fees -- .65%, 12b-1 Fees -- .25%, Other Ex-
penses --.39% and Total Portfolio Operating Expenses -- 1.29%; Global Dollar
Government Portfolio: Management Fees -- .75%, 12b-1 Fees -- .25%, Other Ex-
penses -- .54% and Total Portfolio Operating Expenses -- 1.54%; Utility In-
come Portfolio: Management Fees -- .75%, 12b-1 Fees -- .25%, Other Ex-
penses -- .33% and Total Portfolio Operating Expenses -- 1.33%; Worldwide
Privatization Portfolio: Management Fee -- 1.00%, 12b-1 Fees -- .25%, Other
Expenses -- .55% and Total Portfolio Operating Expenses -- 1.80%; Conserva-
tive Investors Portfolio: Management Fees -- .75%, 12b-1 Fees -- .25%, Other
Expenses -- .58% and Total Portfolio Operating Expense -- 1.58%; Growth In-
vestors Portfolio: Management Fees -- .75%, 12b-1 Fees -- .25%, Other Ex-
penses -- .95% and Total Portfolio Operating Expenses -- 1.95%; Technology
Portfolio: Management Fees -- 1.00%, 12b-1 Fees -- .25%, Other Expenses --
1.19% and Total Operating Expenses -- 1.44%; Quasar Portfolio: Management
Fees -- 1.00%, 12b-1 Fees --.25%, Other Expenses -- .37% and Total Operating
Expenses -- 1.62%. The estimated expenses of the Real Estate Investment Port-
folio before expense reimbursement would be: Management Fees -- .90%, 12b-1
Fees -- .25%, Other Expenses -- 1.41% and Total Operating Expenses -- 2.56%.
The estimated expenses of High-Yield Portfolio before expense reimbursements
would be: Management Fees -- .75%, 12b-1 Fees -- .25%, Other Expenses --
7.51% and Total Operating Expenses -- 8.51%.
+ Under the Fund's Class B Distribution Plan, the Fund is authorized to pay an
annual distribution fee of up to .50% of the average daily net assets attrib-
utable to the Class B shares of a Portfolio. However, the Class B Distribu-
tion Services Agreement between the Fund and its principal underwriter cur-
rently limits distribution payments to an annual rate of .25% of such average
daily net assets.
+ Annualized.
(1) Inception (10/27/97) through 12/31/97.
(2) Inception (1/9/97) through 12/31/97.
4
<PAGE>
EXAMPLE
You would pay the following expenses on a $1,000 investment in Class B
shares, 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>
Money Market Portfolio......................... $ 9 $29 $50 $115
Premier Growth Portfolio....................... $14 $43 $75 $171
Growth and Income Portfolio.................... $10 $31 $55 $125
U.S. Government/High Grade Securities
Portfolio..................................... $11 $35 $62 $141
High-Yield Portfolio........................... $12 $39 $68 $155
Total Return Portfolio......................... $12 $37 $64 $146
International Portfolio........................ $12 $39 $68 $155
Short-Term Multi-Market Portfolio.............. $12 $38 $67 $153
Global Bond Portfolio.......................... $12 $38 $67 $153
North American Government Income Portfolio..... $12 $39 $68 $155
Utility Income Portfolio....................... $12 $39 $68 $155
Global Dollar Government Portfolio............. $12 $39 $68 $155
Conservative Investors Portfolio............... $12 $39 $68 $155
Growth Investors Portfolio..................... $12 $39 $68 $155
Growth Portfolio............................... $11 $35 $62 $141
Worldwide Privatization Portfolio.............. $12 $39 $68 $155
Technology Portfolio........................... $12 $39 $68 $155
Quasar Portfolio............................... $12 $39 $68 $155
Real Estate Investment Portfolio............... $12 $39 $68 $155
</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. "Other Expenses" for the High-Yield Portfolio and the
Real Estate Investment Portfolio are based on estimated amounts for each Port-
folio's current fiscal year. The expenses listed in the table for the High-
Yield Portfolio, International Portfolio, Short-Term Multi-Market Portfolio,
Global Bond Portfolio, North American Government Income Portfolio, Global Dol-
lar Government Portfolio, Utility Income Portfolio, Conservative Investors
Portfolio, Growth Investors Portfolio, Worldwide Privatization Portfolio,
Technology Portfolio, Quasar Portfolio and Real Estate Investment Portfolio
are net of voluntary expense reimbursements, which are not required to be con-
tinued indefinitely; however, the Adviser intends to continue such reimburse-
ments for the foreseeable future. The example should not be considered repre-
sentative of future expenses; actual expenses may be greater or less than
those shown.
5
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
As of December 31, 1997, none of the Portfolios had begun issuing Class B
shares (which are expected to be first offered on or about the date hereof).
Accordingly, the Financial Highlights set forth below relate solely to Class A
shares and do not reflect the Class B shares' distribution fees currently pay-
able at the annual rate of .25% of average net assets.
The following information as to net asset value, ratios and certain supple-
mental data for Class A shares for each of the periods shown below has been
audited by Ernst & Young LLP, the Fund's independent auditors, whose unquali-
fied report thereon (referring to Financial Highlights) appears in the State-
ment of Additional Information. The following information should be read in
conjunction with the financial statements and related notes included in the
Statement of Additional Information for Class A shares. Further information
about the Fund's performance is contained in the Fund's annual report, which
is available without charge upon request.
<TABLE>
<CAPTION>
PREMIER GROWTH PORTFOLIO
------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ---------------------------------------------
1998 1997 1996 1995 1994 1993
----------- -------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of year........... $ 20.99 $ 15.70 $ 17.80 $ 12.37 $ 12.79 $ 11.38
-------- -------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(a)(b).......... .01 .04 .08 .09 .03 -0-
Net realized and
unrealized gain (loss)
on investment
transactions.......... 5.95 5.27 3.29 5.44 (.41) 1.43
-------- -------- ------- ------- ------- -------
Net increase (decrease)
in net asset value
from operations....... 5.96 5.31 3.37 5.53 (.38) 1.43
-------- -------- ------- ------- ------- -------
LESS: DIVIDENDS AND DIS-
TRIBUTIONS
Dividends from net in-
vestment income....... (.03) (.02) (.10) (.03) (.01) (.01)
Distributions from net
realized gains........ -0- -0- (5.37) (.07) (.03) (.01)
-------- -------- ------- ------- ------- -------
Total dividends and
distributions......... (.03) (.02) (5.47) (.10) (.04) (.02)
-------- -------- ------- ------- ------- -------
Net asset value, end of
year.................. $ 26.92 $ 20.99 $ 15.70 $ 17.80 $ 12.37 $ 12.79
======== ======== ======= ======= ======= =======
TOTAL RETURN
Total investment return
based on net asset
value(c).............. 28.37% 33.86% 22.70% 44.85% (2.96)% 12.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(000's omitted)....... $814,426 $472,326 $96,434 $29,278 $37,669 $13,659
Ratio to average net
assets of:
Expenses, net of waiv-
ers and reimburse-
ments................. .99%(d) .95% .95% .95% .95% 1.18%
Expenses, before waiv-
ers and reimburse-
ments................. 1.07%(d) 1.10% 1.23% 1.19% 1.40% 2.05%
Net investment
income(a)............. .11%(d) .21% .52% .55% .42% .22%
Portfolio turnover
rate.................. .13% 27% 32% 97% 38% 42%
<CAPTION>
GLOBAL BOND PORTFOLIO
------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ---------------------------------------------
1998 1997 1996 1995 1994 1993
----------- -------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of year........... $ 11.10 $ 11.74 $ 12.15 $ 9.82 $ 11.33 $ 11.24
-------- -------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(a)(b).......... .25 .54 .67 .69 .57 .77
Net realized and
unrealized gain (loss)
on investments
and foreign currency
transactions.......... .09 (.48) .01 1.73 (1.16) .43
-------- -------- ------- ------- ------- -------
Net increase (decrease)
in net asset value
from operations....... .34 .06 .68 2.42 (.59) 1.20
-------- -------- ------- ------- ------- -------
LESS: DIVIDENDS AND DIS-
TRIBUTIONS
Dividends from net in-
vestment income....... (.17) (.57) (.84) (.09) (.62) (.85)
Distributions from net
realized gains........ (.06) (.13) (.25) -0- (.30) (.26)
-------- -------- ------- ------- ------- -------
Total dividends and
distributions......... (.23) (.70) (1.09) (.09) (.92) (1.11)
-------- -------- ------- ------- ------- -------
Net asset value, end of
year.................. $ 11.21 $ 11.10 $ 11.74 $ 12.15 $ 9.82 $ 11.33
======== ======== ======= ======= ======= =======
TOTAL RETURN
Total investment return
based on net asset
value(c).............. 3.00% .67% 6.21% 24.73% (5.16)% 11.15%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(000's omitted)....... $ 25,065 $22,194 $18,117 $11,553 $ 7,298 $ 6,748
Ratio to average net
assets of:
Expenses, net of waiv-
ers and reimburse-
ments................. .94%(d) .94% .94% .95% .95% 1.50%
Expenses, before waiv-
ers and reimburse-
ments................. .97%(d) 1.03% 1.15% 1.77% 2.05% 1.50%
Net investment
income(a)............. 4.44%(d) 4.81% 5.76% 6.22% 6.01% 4.85%
Portfolio turnover
rate.................. 29% 257% 191% 262% 102% 125%
</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) Annualized.
6
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
<TABLE>
<CAPTION>
GROWTH AND INCOME PORTFOLIO
-------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ----------------------------------------------
1998 1997 1996 1995 1994 1993
----------- -------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of year........... $ 19.93 $ 16.40 $ 15.79 $ 11.85 $ 12.18 $ 10.99
-------- -------- -------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(a)(b).......... .13 .21 .24 .27 .10 .01
Net realized and
unrealized gain (loss)
on investment
transactions.......... 2.61 4.39 3.18 3.94 (.16) 1.27
-------- -------- -------- ------- ------- -------
Net increase (decrease)
in net asset value
from operations....... 2.74 4.60 3.42 4.21 (.06) 1.28
-------- -------- -------- ------- ------- -------
LESS: DIVIDENDS AND DIS-
TRIBUTIONS
Dividends from net in-
vestment income....... (.16) (.13) (.25) (.13) (.10) (.06)
Distributions from net
realized gains........ (1.96) (.94) (2.56) (.14) (.17) (.03)
-------- -------- -------- ------- ------- -------
Total dividends and
distributions......... (2.12) (1.07) (2.81) (.27) (.27) (.09)
-------- -------- -------- ------- ------- -------
Net asset value, end of
year.................. $ 20.55 $ 19.93 $ 16.40 $ 15.79 $ 11.85 $ 12.18
======== ======== ======== ======= ======= =======
TOTAL RETURN
Total investment return
based on net asset
value(c).............. 13.75% 28.80% 24.09% 35.76% (.35)% 11.69%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(000's omitted)....... $328,268 $250,202 $126,729 $41,993 $41,702 $22,756
Ratio to average net
assets of:
Expenses, net of waiv-
ers and reimburse-
ments................. .72%(d) .72% .82% .79% .90% 1.18%
Expenses, before waiv-
ers and reimburse-
ments................. .72%(d) .72% .82% .79% .91% 1.28%
Net investment
income(a)............. 1.25%(d) 1.16% 1.58% 1.95% 1.71% 1.76%
Portfolio turnover
rate.................. 45% 86% 87% 150% 95% 69%
<CAPTION>
SHORT-TERM MULTI-MARKET PORTFOLIO
-------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ----------------------------------------------
1998 1997 1996 1995 1994 1993
----------- -------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of year........... $ 10.57 $ 10.73 $ 10.58 $ 9.91 $ 11.07 $ 10.77
-------- -------- -------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(a)(b).......... .32 .59 .64 .82 .47 .28
Net realized and
unrealized gain (loss)
on investments
and foreign currency
transactions.......... .04 (.11) .33 (.15) (1.16) .43
-------- -------- -------- ------- ------- -------
Net increase (decrease)
in net asset value
from operations....... .36 .48 .97 .67 (.69) .71
-------- -------- -------- ------- ------- -------
LESS: DIVIDENDS AND DIS-
TRIBUTIONS
Dividends from net in-
vestment income....... (1.11) (.64) (.82) -0- (.46) (.41)
Return of capital...... -0- -0- -0- -0- (.01) -0-
-------- -------- -------- ------- ------- -------
Total dividends and
distributions......... (1.11) (.64) (.82) -0- (.47) (.41)
-------- -------- -------- ------- ------- -------
Net asset value, end of
year.................. $ 9.82 $ 10.57 $ 10.73 $10.58 $ 9.91 $ 11.07
======== ======== ======== ======= ======= =======
TOTAL RETURN
Total investment return
based on net asset
value(c).............. 3.37% 4.59% 9.57% 6.76% (6.51)% 6.62%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(000's omitted)....... $ 6,217 $ 6,489 $ 7,112 $3,152 $20,921 $23,560
Ratio to average net
assets of:
Expenses, net of waiv-
ers and reimburse-
ments................. .93%(d) .94% .95% .95% .94% 1.17%
Expenses, before waiv-
ers and reimburse-
ments................. 1.66%(d) 1.42% 2.09% 1.30% .99% 1.24%
Net investment
income(a)............. 6.15%(d) 5.50% 6.03% 8.22% 6.52% 6.39%
Portfolio turnover
rate.................. 12% 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) Annualized.
7
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
<TABLE>
<CAPTION>
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO
--------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ------------------------------------------
1998 1997 1996 1995 1994 1993
----------- ------- ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of year........... $ 11.93 $ 11.52 $ 11.66 $ 9.94 $10.72 $ 9.89
------- ------- ------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(a)(b).......... .32 .68 .66 .65 .28 .43
Net realized and
unrealized gain (loss)
on investment
transactions.......... .12 .29 (.39) 1.25 (.71) .48
------- ------- ------- ------- ------ ------
Net increase (decrease)
in net asset value
from
operations............ .44 .97 .27 1.90 (.43) .91
------- ------- ------- ------- ------ ------
LESS: DIVIDENDS AND DIS-
TRIBUTIONS
Dividends from net in-
vestment income....... (.55) (.54) (.28) (.18) (.21) (.08)
Distributions from net
realized gains........ (.06) (.02) (.13) -0- (.14) -0-
------- ------- ------- ------- ------ ------
Total dividends and
distributions......... (.61) (.56) (.41) (.18) (.35) (.08)
------- ------- ------- ------- ------ ------
Net asset value, end of
year.................. $ 11.76 $ 11.93 $ 11.52 $ 11.66 $ 9.94 $10.72
======= ======= ======= ======= ====== ======
TOTAL RETURN
Total investment return
based on net asset
value(c).............. 3.72% 8.68% 2.55% 19.26% (4.03)% 9.20%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(000's omitted)....... $42,598 $36,198 $29,150 $16,947 $5,101 $1,350
Ratio to average net
assets of:
Expenses, net of waiv-
ers and reimburse-
ments................. .79%(e) .84% .92% .95% .95% 1.16%
Expenses, before waiv-
ers and reimburse-
ments................. .79%(e) .84% .98% 1.58% 3.73% 5.42%
Net investment
income(a)............. 5.39%(e) 5.89% 5.87% 5.96% 5.64% 4.59%
Portfolio turnover
rate.................. 152% 114% 137% 68% 32% 177%
</TABLE>
<TABLE>
<CAPTION>
HIGH-YIELD PORTFOLIO
--------------------------
OCTOBER 27,
SIX MONTHS 1997(D)
ENDED TO
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Net asset value, beginning of period............... $ 10.33 $10.00
------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a)(b)....................... .46 .13
Net realized and unrealized gain (loss) on
investment transactions.......................... .38 .20
------- ------
Net increase (decrease) in net asset value from
operations....................................... .84 .33
------- ------
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income.............. (.01) -0-
Distributions from net realized gains............. -0- -0-
------- ------
Total dividends and distributions................. (.01) -0-
------- ------
Net asset value, end of period.................... $ 11.16 $10.33
======= ======
TOTAL RETURN
Total investment return based on net asset
value(c)......................................... 8.13% 3.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)......... $13,332 $1,141
Ratio to average net assets of:
Expenses, net of waivers and reimbursements....... .95%(e) .95%(e)
Expenses, before waivers and reimbursements....... 1.31%(e) 8.26%(e)
Net investment income(a).......................... 8.37%(e) 7.28%(e)
Portfolio turnover rate........................... 243% 8%
</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) Commencement of operations.
(e) Annualized.
8
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
<TABLE>
<CAPTION>
TOTAL RETURN PORTFOLIO
--------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ------------------------------------------
1998 1997 1996 1995 1994 1993
----------- ------- ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 16.92 $ 14.63 $ 12.80 $ 10.41 $10.97 $10.01
------- ------- ------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(a)(b).......... .23 .39 .27 .36 .15 .15
Net realized and
unrealized gain (loss)
on investment
transactions ......... 1.46 2.62 1.66 2.10 (.56) .81
------- ------- ------- ------- ------ ------
Net increase (decrease)
in net asset value
from
operations............ 1.69 3.01 1.93 2.46 (.41) .96
------- ------- ------- ------- ------ ------
LESS: DIVIDENDS AND DIS-
TRIBUTIONS
Dividends from net in-
vestment income....... (.29) (.23) (.07) (.07) (.09) -0-
Distributions from net
realized gains ....... (1.34) (.49) (.03) -0- (.06) -0-
------- ------- ------- ------- ------ ------
Total dividends and
distributions......... (1.63) (.72) (.10) (.07) (.15) -0-
------- ------- ------- ------- ------ ------
Net asset value, end of
year.................. $ 16.98 $ 16.92 $ 14.63 $ 12.80 $10.41 $10.97
======= ======= ======= ======= ====== ======
TOTAL RETURN
Total investment return
based on net asset
value(c).............. 10.00% 21.11% 15.17% 23.67% (3.77)% 9.59%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(000's omitted)....... $53,437 $42,920 $25,875 $ 8,242 $ 750 $ 360
Ratio to average net
assets of:
Expenses, net of waiv-
ers and reimburse-
ments................. .81%(d) .88% .95% .95% .95% 1.20%
Expenses, before waiv-
ers and reimburse-
ments................. .81%(d) .88% 1.12% 4.49% 19.49% 25.96%
Net investment
income(a)............. 2.64%(d) 2.46% 2.76% 3.16% 2.29% 1.45%
Portfolio turnover
rate.................. 30% 65% 57% 30% 83% 25%
<CAPTION>
INTERNATIONAL PORTFOLIO
--------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ------------------------------------------
1998 1997 1996 1995 1994 1993
----------- ------- ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of year........... $ 15.02 $ 14.89 $ 14.07 $ 12.88 $12.16 $10.00
------- ------- ------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(a)(b).......... .12 .13 .19 .18 .10 .03
Net realized and
unrealized gain on in-
vestments and
foreign currency
transactions.......... 2.25 .39 .83 1.08 .72 2.13
------- ------- ------- ------- ------ ------
Net increase in net as-
set value from opera-
tions................. 2.37 .52 1.02 1.26 .82 2.16
------- ------- ------- ------- ------ ------
LESS: DIVIDENDS AND DIS-
TRIBUTIONS
Dividends from net in-
vestment income....... (.32) (.15) (.08) (.03) (.02) -0-
Distributions from net
realized gains........ (.49) (.24) (.12) (.04) (.08) -0-
------- ------- ------- ------- ------ ------
Total dividends and
distributions......... (.81) (.39) (.20) (.07) (.10) -0-
------- ------- ------- ------- ------ ------
Net asset value, end of
year.................. $ 16.58 $ 15.02 $ 14.89 $ 14.07 $12.88 $12.16
======= ======= ======= ======= ====== ======
TOTAL RETURN
Total investment return
based on net asset
value(c).............. 15.88% 3.33% 7.25% 9.86% 6.70% 21.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(000's omitted)....... $73,015 $60,710 $44,324 $16,542 $7,276 $ 688
Ratio of average net
assets of:
Expenses, net of waiv-
ers and reimburse-
ments................. .95%(d) .95% .95% .95% .95% 1.20%
Expenses, before waiv-
ers and reimburse-
ments................. 1.26%(d) 1.42% 1.91% 2.99% 7.26% 39.28%
Net investment
income(a)............. 1.42%(d) .87% 1.29% 1.41% .90% .26%
Portfolio turnover
rate.................. 52% 134% 60% 87% 95% 85%
</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) Annualized.
9
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
------------------------------------------------------
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, ----------------------------------------
1998 1997 1996 1995 1994 1993
----------- ------- ------- ------- ------ -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of year........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $1.00
------- ------- ------- ------- ------ -----
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(a)............. .025 .05 .05 .05 .03 .22
------- ------- ------- ------- ------ -----
LESS: DIVIDENDS
Dividends from net in-
vestment income....... (.025) (.05) (.05) (.05) (.03) (.22)
------- ------- ------- ------- ------ -----
Net asset value, end of
year.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $1.00
======= ======= ======= ======= ====== =====
TOTAL RETURN
Total investment return
based on net asset
value(c).............. 2.52% 5.11% 4.71% 4.97% 3.27% 2.25%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(000's omitted)....... $81,294 $67,584 $64,769 $28,092 $6,899 $ 102
Ratio of average net
assets of:
Expenses, net of waiv-
ers and reimburse-
ments................. .65%(e) .64% .69% .95% .95% 1.16%
Expenses, before waiv-
ers and reimburse-
ments................. .65%(e) .64% .69% 1.07% 4.46% 68.14%
Net investment
income(a)............. 5.01%(e) 5.00% 4.64% 4.85% 3.98% 2.15%
</TABLE>
<TABLE>
<CAPTION>
GLOBAL DOLLAR
GOVERNMENT PORTFOLIO
---------------------------------------------------
MAY 2,
SIX MONTHS YEAR ENDED 1994(d)
ENDED DECEMBER 31, TO
JUNE 30, ----------------------- DECEMBER 31,
1998 1997 1996 1995 1994
----------- ------- ------ ------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 14.65 $ 14.32 $11.95 $ 9.84 $10.00
------- ------- ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(a)(b).......... .61 1.17 1.10 .92 .36
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions.......... (1.04) .70 1.78 1.32 (.52)
------- ------- ------ ------ ------
Net increase (decrease)
in net asset value
from operations....... (.43) 1.87 2.88 2.24 (.16)
------- ------- ------ ------ ------
LESS: DIVIDENDS AND
DISTRIBUTIONS
Dividends from net in-
vestment income....... (.95) (.61) (.48) (.13) -0-
Distributions from net
realized gains ....... (.69) (.93) (.03) -0- -0-
------- ------- ------ ------ ------
Total dividends and
distributions ........ (1.64) (1.54) (.51) (.13) -0-
------- ------- ------ ------ ------
Net asset value, end of
period................ $ 12.58 $ 14.65 $14.32 $11.95 $ 9.84
======= ======= ====== ====== ======
TOTAL RETURN
Total investment return
based on net
asset value(c)........ (3.25)% 13.23% 24.90% 22.98% (1.60)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of pe-
riod (000's omitted).. $15,425 $15,378 $8,847 $3,778 $1,146
Ratio to average net
assets of:
Expenses, net of
waivers and
reimbursements........ .95%(e) .95% .95% .95% .95%(e)
Expenses, before
waivers and
reimbursements........ 1.19%(e) 1.29% 1.97% 4.82% 15.00%(e)
Net investment
income(a)............. 8.43%(e) 7.87% 8.53% 8.65% 6.02%(e)
Portfolio turnover
rate.................. 81% 214% 155% 13% 9%
<CAPTION>
NORTH AMERICAN GOVERNMENT
INCOME PORTFOLIO
------------------------------------------------------
MAY 2,
SIX MONTHS YEAR ENDED 1994(d)
ENDED DECEMBER 31, TO
JUNE 30, ------------------------- DECEMBER 31,
1998 1997 1996 1995 1994
------------- -------- -------- ------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 12.97 $ 12.38 $ 10.48 $ 8.79 $ 10.00
------------- -------- -------- ------- --------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(a)(b).......... .58 1.07 1.26 1.13 .50
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions.......... (.33) .10 .69 .83 (1.71)
------------- -------- -------- ------- --------------
Net increase (decrease)
in net asset value
from operations....... .25 1.17 1.95 1.96 (1.21)
------------- -------- -------- ------- --------------
LESS: DIVIDENDS AND
DISTRIBUTIONS
Dividends from net in-
vestment income....... (.82) (.58) (.05) (.27) -0-
Distributions from net
realized gains ....... (.11) -0- -0- -0- -0-
------------- -------- -------- ------- --------------
Total dividends and
distributions ........ (.93) (.58) (.05) (.27) -0-
------------- -------- -------- ------- --------------
Net asset value, end of
period................ $ 12.29 $ 12.97 $ 12.38 $10.48 $ 8.79
============= ======== ======== ======= ==============
TOTAL RETURN
Total investment return
based on net
asset value(c)........ 1.91% 9.62% 18.70% 22.71% (12.10)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of pe-
riod (000's omitted).. $34,253 $30,507 $16,696 $7,278 $3,848
Ratio to average net
assets of:
Expenses, net of
waivers and
reimbursements........ .87%(e) .95% .95% .95% .95%(e)
Expenses, before
waivers and
reimbursements........ 1.11%(e) 1.04% 1.41% 2.57% 4.43%(e)
Net investment
income(a)............. 8.89%(e) 8.34% 11.04% 12.24% 8.49%(e)
Portfolio turnover
rate.................. -0-% 20% 4% 35% 15%
</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
redemption on the last day of the period. Total investment return
calculated for a period of less than one year is not annualized.
(d) Commencement of operations.
(e) Annualized.
10
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
<TABLE>
<CAPTION>
UTILITY INCOME PORTFOLIO
-----------------------------------------------------
SIX MONTHS YEAR ENDED MAY 10,
ENDED DECEMBER 31, 1994(d) TO
JUNE 30, ------------------------ DECEMBER 31,
1998 1997 1996 1995 1994
----------- ------- ------- ------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period........... $ 15.67 $ 12.69 $ 12.01 $ 9.96 $10.00
------- ------- ------- ------ ------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income(a)(b).... .18 .38 .31 .30 .28
Net realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions.... 1.39 2.84 .62 1.83 (.32)
------- ------- ------- ------ ------
Net increase
(decrease) in
net asset value
from operations. 1.57 3.22 .93 2.13 (.04)
------- ------- ------- ------ ------
LESS: DIVIDENDS
AND DISTRIBUTIONS
Dividends from
net investment
income.......... (.31) (.24) (.09) (.08) -0-
Distributions
from net
realized gains.. (.14) -0- (.16) -0- -0-
------- ------- ------- ------ ------
Total dividends
and
distributions .. (.45) (.24) (.25) (.08) -0-
------- ------- ------- ------ ------
Net asset value,
end of period... $ 16.79 $ 15.67 $ 12.69 $12.01 $ 9.96
======= ======= ======= ====== ======
TOTAL RETURN
Total investment
return based on
net asset
value(c)........ 10.07% 25.71% 7.88% 21.45% (.40)%
RATIOS/SUPPLEMENTAL
DATA
Net assets, end
of period (000's
omitted)........ $26.186 $20,347 $14,857 $6,251 $1,254
Ratio to average
net assets of:
Expenses, net of
waivers and
reimbursements.. .95%(e) .95% .95% .95% .95%(e)
Expenses, before
waivers and
reimbursements.. 1.04%(e) 1.08% 1.51% 3.79% 15.98%(e)
Net investment
income(a)....... 2.19%(e) 2.83% 2.61% 2.73% 4.62%(e)
Portfolio
turnover rate... 8% 30% 75% 138% 31%
<CAPTION>
GROWTH PORTFOLIO
----------------------------------------------------------
SIX MONTHS YEAR ENDED SEPTEMBER 15,
ENDED DECEMBER 31, 1994(d) TO
JUNE 30, ---------------------------- DECEMBER 31,
1998 1997 1996 1995 1994
-------------- --------- --------- -------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period........... $ 22.42 $ 17.92 $ 14.23 $ 10.53 $10.00
-------------- --------- --------- -------- --------------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income(a)(b).... .09 .07 .06 .17 .03
Net realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions.... 4.10 5.18 3.95 3.54 .50
-------------- --------- --------- -------- --------------
Net increase
(decrease) in
net asset value
from operations. 4.19 5.25 4.01 3.71 .53
-------------- --------- --------- -------- --------------
LESS: DIVIDENDS
AND DISTRIBUTIONS
Dividends from
net investment
income.......... (.06) (.03) (.04) (.01) -0-
Distributions
from net
realized gains.. (1.40) (.72) (.28) -0- -0-
-------------- --------- --------- -------- --------------
Total dividends
and
distributions .. (1.46) (.75) (.32) (.01) -0-
-------------- --------- --------- -------- --------------
Net asset value,
end of period... $ 25.15 $ 22.42 $ 17.92 $ 14.23 $10.53
============== ========= ========= ======== ==============
TOTAL RETURN
Total investment
return based on
net asset
value(c)........ 18.81% 30.02% 28.49% 35.23% 5.30%
RATIOS/SUPPLEMENTAL
DATA
Net assets, end
of period (000's
omitted)........ $298,229 $235,875 $138,688 $45,220 $5,492
Ratio to average
net assets of:
Expenses, net of
waivers and
reimbursements.. .84%(e) .84% .93% .95% .95%(e)
Expenses, before
waivers and
reimbursements.. .84%(e) .84% .93% 1.27% 4.19%(e)
Net investment
income(a)....... .75%(e) .37% .35% 1.31% 1.17%(e)
Portfolio
turnover rate... 32% 62% 98% 86% 25%
<CAPTION>
WORLDWIDE PRIVATIZATION PORTFOLIO
-----------------------------------------------------
SIX MONTHS YEAR ENDED SEPTEMBER 23,
ENDED DECEMBER 31, 1995 1994(d) TO
JUNE 30, ------------------------ DECEMBER 31,
1998 1997 1996 1995 1994
----------- ------- ------- ------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period........... $ 14.20 $ 13.13 $ 11.17 $10.10 $10.00
------- ------- ------- ------ ------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income(a)(b).... .23 .25 .28 .32 .10
Net realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions.... 1.71 1.17 1.78 .78 -0-
------- ------- ------- ------ ------
Net increase in
net asset value
from operations. 1.94 1.42 2.06 1.10 .10
------- ------- ------- ------ ------
LESS: DIVIDENDS
AND DISTRIBUTIONS
Dividends from
net investment
income.......... (.20) (.16) (.10) (.03) -0-
Distributions
from net real-
ized gains...... (.74) (.19) -0- -0- -0-
------- ------- ------- ------ ------
Total dividends
and distribu-
tions........... (.94) (.35) (.10) (.03) -0-
------- ------- ------- ------ ------
Net asset value,
end of period... $ 15.20 $ 14.20 $ 13.13 $11.17 $10.10
======= ======= ======= ====== ======
TOTAL RETURN
Total investment
return based on
net asset
value(c)........ 13.75% 10.75% 18.51% 10.87% 1.00%
RATIOS/SUPPLEMENTAL
DATA
Net assets, end
of period (000's
omitted)........ $48,510 $41,818 $18,807 $5,947 $1,127
Ratio to average
net assets of:
Expenses, net of
waivers and
reimbursements.. .95%(e) .95% .95% .95% .95%(e)
Expenses, before
waivers and
reimbursements.. 1.47%(e) 1.55% 1.85% 4.17% 18.47%(e)
Net investment
income(a)....... 2.92%(e) 1.76% 2.26% 2.96% 4.27%(e)
Portfolio turn-
over rate....... 34% 58% 47% 23% 0%
<CAPTION>
CONSERVATIVE INVESTORS PORTFOLIO
----------------------------------------------------------
SIX MONTHS YEAR ENDED OCTOBER 28,
ENDED DECEMBER 31, 1994(d) TO
JUNE 30, ---------------------------- DECEMBER 31,
1998 1997 1996 1995 1994
-------------- --------- --------- -------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period........... $ 13.10 $ 12.07 $ 11.76 $ 10.07 $10.00
-------------- --------- --------- -------- --------------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income(a)(b).... .25 .48 .45 .51 .06
Net realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions.... .80 .86 (.01) 1.20 .01
-------------- --------- --------- -------- --------------
Net increase in
net asset value
from operations. 1.05 1.34 .44 1.71 .07
-------------- --------- --------- -------- --------------
LESS: DIVIDENDS
AND DISTRIBUTIONS
Dividends from
net investment
income.......... (.38) (.31) (.09) (.02) -0-
Distributions
from net real-
ized gains...... (.50) -0- (.04) 0 -0-
-------------- --------- --------- -------- --------------
Total dividends
and distribu-
tions........... (.88) (.31) (.13) (.02) -0-
-------------- --------- --------- -------- --------------
Net asset value,
end of period... $ 13.27 $ 13.10 $ 12.07 $ 11.76 $10.07
============== ========= ========= ======== ==============
TOTAL RETURN
Total investment
return based on
net asset
value(c)........ 8.02% 11.22% 3.79% 16.99% 0.70%
RATIOS/SUPPLEMENTAL
DATA
Net assets, end
of period (000's
omitted)........ $ 36,558 $ 30,196 $ 21,729 $ 7,420 $ 701
Ratio to average
net assets of:
Expenses, net of
waivers and
reimbursements.. .95%(e) .95% .95% .95% .95%(e)
Expenses, before
waivers and
reimbursements.. 1.21%(e) 1.33% 1.40% 4.25% 20.35%(e)
Net investment
income(a)....... 3.75%(e) 3.85% 3.93% 4.65% 3.55%(e)
Portfolio turn-
over rate....... 42% 209% 211% 61% 2%
</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) Commencement of operations.
(e) Annualized.
11
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
<TABLE>
<CAPTION>
GROWTH INVESTORS PORTFOLIO TECHNOLOGY PORTFOLIO
---------------------------------------------------- ---------------------------------------
SIX MONTHS YEAR ENDED OCTOBER 28, SIX MONTHS JANUARY 11,
ENDED DECEMBER 31, 1994(d) TO ENDED YEAR ENDED 1996(d) TO
JUNE 30, ------------------------ DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995 1994 1998 1997 1996
----------- ------- ------- ------ ------------ ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 14.38 $ 12.74 $ 11.87 $ 9.86 $10.00 $ 11.72 $ 11.04 $ 10.00
------- ------- ------- ------ ------ ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(a)(b).......... .13 .23 .24 .35 .04 (.02) .02 .11
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions.......... 1.91 1.83 .72 1.67 (.18) 3.35 .69 .93
------- ------- ------- ------ ------ ------- ------- -------
Net increase (decrease)
in net asset value
from operations....... 2.04 2.06 .96 2.02 (.14) 3.33 .71 1.04
------- ------- ------- ------ ------ ------- ------- -------
LESS: DIVIDENDS AND DIS-
TRIBUTIONS
Dividends from net
investment income..... (.18) (.20) (.07) (.01) -0- (.02) (.03) -0-
Distributions from net
realized gains........ (1.16) (.22) (.02) -0- -0- -0- -0- -0-
------- ------- ------- ------ ------ ------- ------- -------
Total dividends and
distributions......... (1.34) (.42) (.09) (.01) -0- (.02) (.03) -0-
------- ------- ------- ------ ------ ------- ------- -------
Net asset value, end of
period................ $ 15.08 $ 14.38 $ 12.74 $11.87 $ 9.86 $ 15.03 $ 11.72 $ 11.04
======= ======= ======= ====== ====== ======= ======= =======
TOTAL RETURN
Total investment return
based on net asset
value(c).............. 14.21% 16.34% 8.18% 20.48% (1.40)% 28.42% 6.47% 10.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000's
omitted).............. $19,505 $16,600 $10,709 $4,978 $ 321 $92,131 $69,240 $28,083
Ratio to average net
assets of:
Expenses, net of
waivers and
reimbursements........ .95%(e) .95% .95% .95% .95%(e) .95%(e) .95% .95%(e)
Expenses, before
waivers and
reimbursements........ 1.69%(e) 1.70% 1.85% 6.17% 41.62%(e) 1.13%(e) 1.19% 1.62%(e)
Net investment
income(a)............. 1.77%(e) 1.72% 2.01% 3.21% 2.29%(e) (.28)%(e) .16% 1.17%(e)
Portfolio turnover
rate.................. 47% 164% 160% 50% 3% 33% 46% 22%
</TABLE>
<TABLE>
<CAPTION>
REAL ESTATE
QUASAR PORTFOLIO INVESTMENT PORTFOLIO
--------------------------------------- --------------------------
SIX MONTHS AUGUST 5, SIX MONTHS JANUARY 9,
ENDED YEAR ENDED 1996(d) TO ENDED 1997(d) TO
JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
1998 1997 1996 1998 1997
----------- ------------ ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 12.61 $ 10.64 $10.00 $ 12.34 $ 10.00
------- ------- ------ ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(a)(b).......... .03 .02 .04 .31 .56
Net realized and
unrealized gain (loss)
on investment
transactions.......... 1.73 1.96 .60 (1.12) 1.78
------- ------- ------ ------- -------
Net increase (decrease)
in net asset value
from operations....... 1.76 1.98 .64 (.81) 2.34
------- ------- ------ ------- -------
LESS: DIVIDENDS AND DIS-
TRIBUTIONS
Dividends from net
investment income..... (.01) (.01) -0- (.16) -0-
Distributions from net
realized gains........ (1.04) -0- -0- (.07) -0-
------- ------- ------ ------- -------
Total dividends and
distributions......... (1.05) -0- -0- (.23) -0-
Net asset value, end of
period................ $ 13.32 $ 12.61 $10.64 $11.30 $ 12.34
======= ======= ====== ======= =======
TOTAL RETURN
Total investment return
based on net asset
value(c).............. 14.20% 18.60% 6.40% (6.49)% 23.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000's
omitted).............. $84,258 $59,277 $8,842 $17,321 $13,694
Ratio to average net
assets of:
Expenses, net of
waivers and
reimbursements........ .95%(e) .95% .95%(e) .95%(e) .95%(e)
Expenses, before
waivers and
reimbursements........ 1.21%(e) 1.37% 4.44%(e) 1.51%(e) 2.31%(e)
Net investment
income(a)............. .42%(e) .17% .93%(e) 5.36%(e) 5.47%(e)
Portfolio turnover
rate.................. 65% 210% 40% 14% 26%
</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) Commencement of operations.
(e) Annualized.
12
<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.
Shares of each Portfolio are currently divided into two classes: Class A
shares are offered pursuant to another prospectus at net asset value and are
not subject to fees imposed pursuant to a distribution plan. Class B shares
are offered pursuant to this prospectus at net asset value and are subject to
distribution fees imposed pursuant to a distribution plan (the "Distribution
Plan") adopted under Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "Act").
The two classes of shares are offered under the Fund's multiple class distri-
bution system approved by the Fund's Board of Directors, and are designed to
allow promotion of insurance products investing in the Fund through alterna-
tive distribution channels. Under the Fund's multi-class system, shares of
each class of a Portfolio represent an equal pro rata interest in the assets
of that Portfolio and, generally, have identical voting, dividend, liquida-
tion, and other rights, other than with respect to the payment of distribution
fees under the Distribution Plan.
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, each of which has Class A and Class B
shares: the Money Market Portfolio, the Premier Growth Portfolio, the Growth
and Income Portfolio, the U.S. Government/High Grade Securities Portfolio, the
High-Yield Portfolio, the Total Return Portfolio, the International Portfolio,
the Short-Term Multi-Market Portfolio, the Global Bond Portfolio, the North
American Government Income Portfolio, the Global Dollar Government Portfolio,
the Utility Income Portfolio, the Conservative Investors Portfolio, the Growth
Investors Portfolio, the Growth Portfolio, the Worldwide Privatization Portfo-
lio, the Technology Portfolio, the Quasar Portfolio and the Real Estate In-
vestment Portfolio.
The Fund is intended to serve as the investment medium for variable annuity
contracts and variable life insurance policies to be offered by the separate
accounts of certain life insurance companies.
It is conceivable that in the future it may be disadvantageous for variable
annuity and
13
<PAGE>
variable life insurance separate accounts to invest simultaneously in the
Fund. Currently, however, the Fund does not foresee any disadvantage to the
holders of variable annuity contracts and variable life insurance policies
arising from the fact that the interests of the holders of such contracts and
policies may differ. Nevertheless, the Fund's Directors intend to monitor
events in order to identify any material irreconcilable conflicts which may
possibly arise and to determine what action, if any, should be taken in re-
sponse thereto.
The investment objectives and policies of each Portfolio are set forth below.
There can be, of course, no assurance that any of the Portfolios will achieve
its respective investment objectives.
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
Each Portfolio has different investment objectives which it pursues through
separate investment policies as described herein. The differences in objec-
tives and policies among the Portfolios determine the types of portfolio secu-
rities in which each Portfolio invests, and can be expected to affect the de-
gree of risk to which each Portfolio is subject and each Portfolio's yield or
return. Each Portfolio's investment objectives cannot be changed without ap-
proval by the holders of a majority of such Portfolio's outstanding voting se-
curities, as defined in the Act. The Fund may change each Portfolio's invest-
ment policies that are not designated "fundamental policies" within the mean-
ing of the Act upon notice to shareholders of the Portfolio, but without their
approval. The types of portfolio securities in which each Portfolio may invest
are described in greater detail below.
MONEY MARKET PORTFOLIO
The Money Market Portfolio's investment objectives are in the following order
of priority -- safety of principal, excellent liquidity, and maximum current
income to the extent consistent with the first two objectives. An investment
in the Money Market Portfolio is neither insured nor guaranteed by the U.S.
Government. As a matter of fundamental policy, the Money Market Portfolio pur-
sues its objectives by maintaining a portfolio of high quality money market
securities, all of which at the time of investment have remaining maturities
of one year or less (which maturities may extend to 397 days).
The securities in which the Money Market Portfolio invests include: (1) mar-
ketable obligations of, or guaranteed by, the United States Government, its
agencies or instrumentalities (collectively, the "U.S. Government"); (2) cer-
tificates of deposit, bankers' acceptances and interest bearing savings depos-
its issued or guaranteed by banks or savings and loan associations having to-
tal assets of more than $1 billion and which are members of the Federal De-
posit Insurance Corporation; (3) commercial paper of prime quality (i.e.,
rated A-1+ or A-1 by Standard & Poor's Corporation ("S&P"), Prime-1 by Moody's
Investors Service, Inc. ("Moody's"), D-1 by Duff & Phelps Credit Rating Co.
("Duff & Phelps") or F1 by Fitch IBCA, Inc. ("Fitch") or, if not rated, issued
by companies having outstanding debt securities rated AAA or AA by S&P, Duff &
Phelps or Fitch, or Aaa or Aa by Moody's) and participation interests in
14
<PAGE>
loans extended by banks to such companies; and (4) repurchase agreements that
are collateralized fully as that term is defined in Rule 2a-7 under the Act.
(See "Other Investment Policies and Techniques -- Repurchase Agreements"). The
Money Market Portfolio may also invest in certificates of deposit issued by,
and time deposits maintained at, foreign branches of domestic banks described
in (2) above, prime quality dollar-denominated commercial paper issued by for-
eign companies meeting the criteria specified in (3) above, and in certificates
of deposit and bankers' acceptances denominated in U.S. dollars that are issued
by U.S. branches of foreign banks having total assets of at least $1 billion
that are believed by Alliance Capital Management L.P. (the "Adviser") to be of
quality equivalent to that of other such investments in which the Portfolio may
invest.
The Money Market Portfolio complies with Rule 2a-7 under the Act, as amended
from time to time, including the diversification, quality and maturity condi-
tions imposed by the Rule. Accordingly, in any case in which there is a varia-
tion between the conditions imposed by the Rule and the Portfolio's investment
policies and restrictions, the Portfolio is governed by the more restrictive of
the two requirements. See the Statement of Additional Information for a further
description of Rule 2a-7.
The Portfolio may purchase restricted securities that are determined by the Ad-
viser to be liquid in accordance with procedures adopted by the Directors of
the Fund. Restricted Securities are securities subject to contractual or legal
restrictions on resale, such as those arising from an issuer's reliance upon
certain exemptions from registration under the Securities Act of 1933, as
amended (the "Securities Act").
PREMIER GROWTH PORTFOLIO
General. The investment objective of the Premier Growth Portfolio is growth of
capital by pursuing aggressive investment policies. Since investments are made
based upon their potential for capital appreciation, current income is inciden-
tal to the objective of capital growth. Because of the market risks inherent in
any investment, the selection of securities on the basis of their appreciation
possibilities cannot ensure against possible loss in value, and there is, of
course, no assurance that the Portfolio's investment objective will be met. The
Portfolio is therefore not intended for investors whose principal objective is
assured income and conservation of capital.
The Portfolio invests predominantly in the equity securities (common stocks,
securities convertible into common stocks and rights and warrants to subscribe
for or purchase common stocks) of a limited number of large, carefully select-
ed, high-quality U.S. companies that, in the judgment of the Adviser, are
likely to achieve superior earnings growth. Normally, about 40 companies are
represented in the Portfolio's investment portfolio, with the 25 most highly
regarded of these companies usually constituting approximately 70% of the Port-
folio's net assets. The Portfolio thus differs from more typical equity mutual
funds by investing most of its assets in a relatively small number of inten-
sively researched companies and is designed for those seeking to accumulate
capital over time with less volatility than that associated with investment in
smaller companies.
15
<PAGE>
The Portfolio, under normal circumstances, invests at least 85% of the value of
its total assets in the equity securities of U.S. companies. The Portfolio de-
fines U.S. companies to be entities (i) that are organized under the laws of
the United States and have their principal office in the United States, and
(ii) the equity securities of which are traded principally in the United States
securities markets.
Within the investment framework described herein, Alfred Harrison, who heads
the Adviser's "Large Cap Growth Group," is ultimately responsible for the in-
vestment decisions for the Portfolio. In managing the Portfolio's assets, the
Adviser's investment strategy emphasizes stock selection and investment in the
securities of a limited number of issuers. As one of the largest multinational
investment firms, the Adviser has access to considerable information concerning
all of the companies followed, an in-depth understanding of the products, serv-
ices, markets and competition of these companies and a good knowledge of the
managements of most of the companies in its research universe.
The Adviser's analysts prepare their own earnings estimates and financial mod-
els for each company followed. While each analyst has responsibility for fol-
lowing companies in one or more identified sectors and/or industries, the lat-
eral structure of the Adviser's research organization and constant
communication among the analysts result in decision-making based on the rela-
tive attractiveness of stocks among industry sectors. The focus during this
process is on the early recognition of change on the premise that value is cre-
ated through the dynamics of changing company, industry and economic fundamen-
tals. Research emphasis is placed on the identification of companies whose sub-
stantially above average prospective earnings growth is not fully reflected in
current market valuations.
The Adviser's investment strategy for the Fund emphasizes stock selection and
investment in the securities of a limited number of issuers. The Adviser relies
heavily upon the fundamental analysis and research of its large internal re-
search staff, which generally follows a primary research universe of more than
600 companies that have strong management, superior industry positions, excel-
lent balance sheets and superior earnings growth prospects. An emphasis is
placed on identifying companies whose substantially above average prospective
earnings growth is not fully reflected in current market valuations.
In the managing of the Portfolio's investment portfolio, the Adviser seeks to
utilize market volatility judiciously (assuming no change in company fundamen-
tals) to adjust the Portfolio's positions. The Portfolio strives to capitalize
on apparently unwarranted price fluctuations, both to purchase or increase po-
sitions on weaknesses and to sell or reduce overpriced holdings. Under normal
circumstances, the Portfolio will remain substantially fully invested in equity
securities and will not take significant cash positions for market timing pur-
poses. Rather, during a market decline, while adding to positions in favored
stocks, the Portfolio will tend to become somewhat more aggressive, gradually
reducing somewhat the number of companies represented in the Portfolio's port-
folio. Conversely, in rising markets, while reducing or eliminating fully val-
ued positions, the Portfolio will tend to become
16
<PAGE>
somewhat more conservative, gradually increasing the number of companies repre-
sented in the Portfolio's portfolio. Through this "buying into declines" and
"selling into strength," the Adviser seeks to gain positive returns in good
markets while providing some measure of protection in poor markets.
The Adviser expects the average weighted market capitalization of companies
represented in the Portfolio's portfolio (i.e., the number of a company's
shares outstanding multiplied by the price per share) to normally be in the
range of or exceed the average weighted market capitalization of companies com-
prising the "S&P 500" (Standard & Poor's 500 Composite Stock Price Index, a
widely recognized unmanaged index of market activity) based upon the aggregate
performance of a selected portfolio of publicly traded stocks, including
monthly adjustments to reflect the reinvestment of dividends and distributions.
The Portfolio intends to invest in special situations from time to time. A spe-
cial situation arises when, in the opinion of the Portfolio's management, the
securities of a particular company will, within a reasonably estimable period
of time, be accorded market recognition at an appreciated value solely by rea-
son of a development particularly or uniquely applicable to that company and
regardless of general business conditions or movements of the market as a
whole.
Short Sales. The Premier Growth Portfolio may not sell securities short, except
that it may make short sales "against the box." A short sale is effected by
selling a security which the Portfolio does not own, or if the Portfolio does
own such security, it is not to be delivered upon consummation of the sale. A
short sale is "against the box" to the extent that the Portfolio contemporane-
ously owns or has the right to obtain securities identical to those sold short
without payment. Not more than 15% of the value of the Portfolio's net assets
will be in deposits on short sales "against the box."
Puts and Calls. The Premier Growth Portfolio may write call options and may
purchase and sell put and call options written by others, combinations thereof
or similar options. The Portfolio may not write put options. The buyer of an
option, upon payment of a premium obtains, in the case of a put option, the
right to deliver to the writer of the option and, in the case of a call option,
the right to call upon the writer to deliver, a specified number of shares of a
specified stock on or before a fixed date at a predetermined price.
Writing, purchasing and selling call options are highly specialized activities
and entail greater than ordinary investment risks. When calls written by the
Portfolio are exercised, the Portfolio will be obligated to sell stocks below
the current market price. A call written by the Portfolio will not be sold un-
less the Portfolio at all times during the option period owns either (a) the
optioned securities, or securities convertible into or carrying rights to ac-
quire the optioned securities, or (b) an offsetting call option on the same se-
curities.
The Premier Growth Portfolio will not sell a call option written or guaranteed
by it if, as a result of such sale, the aggregate of the Portfolio's securities
subject to outstanding call options (valued at the lower of the op-
17
<PAGE>
tion price or market value of such securities) would exceed 15% of the Portfo-
lio's total assets. The Portfolio will not sell any call option if such sale
would result in more than 10% of the Portfolio's assets being committed to
call options written by the Portfolio, which, at the time of sale by the Port-
folio, have a remaining term of more than 100 days.
As noted, the Portfolio may also purchase and sell put and call options writ-
ten by others, combinations thereof, or similar options, but the aggregate
cost of all outstanding options purchased and held by the Portfolio shall at
no time exceed 10% of the Portfolio's total assets. If an option is not so
sold and is permitted to expire without being exercised, the Portfolio would
suffer a loss in the amount of the premium paid by the Portfolio for the op-
tion.
Options on Market Indices. The Portfolio may purchase and sell exchange-traded
index options. An option on a securities index is similar to an option on a
security except that, rather than the right to take or make delivery of a se-
curity at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the chosen index is greater than (in the case of a call) or
less than (in the case of a put) the exercise price of the option.
GROWTH AND INCOME PORTFOLIO
The Growth and Income Portfolio's investment objective is to seek reasonable
current 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.
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO
The investment objective of the U.S. Government/High Grade Securities Portfo-
lio is high current income consistent with preservation of capital. In seeking
to achieve this objective, the Portfolio invests principally in a portfolio
of: (i) obligations issued or guaranteed by the U.S. Government and repurchase
agreements pertaining to U.S. Government Securities, and (ii) other high grade
debt securities rated AAA, AA or A by S&P, Duff & Phelps or Fitch or Aaa, Aa
or A by Moody's or that have not received a rating but are determined to be of
comparable quality by the Adviser. As a fundamental investment policy, the
Portfolio invests at least 65% of its total assets in these types of securi-
ties, including the securities held subject to repurchase agreements. The av-
erage weighted maturity of the Portfolio's portfolio of U.S. Government secu-
rities is expected to vary between one year or less and 30 years. See "Other
Investment Policies and Techniques -- Fixed-Income Securities." The Portfolio
may utilize certain other investment techniques, including options and futures
contracts, intended to enhance income and reduce market risk. The Portfolio is
designed primarily for long-term investors and investors should not consider
it a trading vehicle. As with all investment
18
<PAGE>
company portfolios, there can be no assurance that the Portfolio's objective
will be achieved.
The Portfolio is subject to the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended, which, among other things, limits
the Portfolio to investing no more than 55% of its total assets in any one in-
vestment. For this purpose, all securities issued or guaranteed by the U.S.
Government are considered a single investment. Accordingly, the U.S. Govern-
ment/High Grade Securities Portfolio limits its purchases of U.S. Government
Securities to 55% of the total assets of the Portfolio. Consistent with this
limitation, the Portfolio, as a matter of fundamental policy, invests at least
45% of its total assets in U.S. Government Securities. Nevertheless, the Port-
folio reserves the right to modify the percentage of its investments in U.S.
Government Securities in order to comply with all applicable tax requirements.
U.S. Government Securities. Securities issued or guaranteed by the U.S. Gov-
ernment include: (i) U.S. Treasury obligations, which differ only in their in-
terest rates, maturities and times of issuance: U.S. Treasury bills (maturity
of one year or less), U.S. Treasury notes (maturities of one to 10 years), and
U.S. Treasury bonds (generally maturities of greater than 10 years), all of
which are backed by the full faith and credit of the United States; and (ii)
obligations issued or guaranteed by the U.S. Government, including government
guaranteed mortgage-related securities, some of which are backed by the full
faith and credit of the U.S. Treasury, e.g., direct pass-through certificates
of the Government National Mortgage Association; some of which are supported
by the right of the issuer to borrow from the U.S. Government, e.g., obliga-
tions of Federal Home Loan Banks; and some of which are backed only by the
credit of the issuer itself, e.g., obligations of the Student Loan Marketing
Association. See the Statement of Additional Information of the Fund for a de-
scription of obligations issued or guaranteed by the U.S. Government.
High Grade Securities. High grade debt securities which, together with U.S.
Government Securities, constitute at least 65% of the Portfolio's assets, in-
clude:
1. Debt securities which are rated AAA, AA or A by S&P, Duff & Phelps or
Fitch or Aaa, Aa or A by Moody's;
2. Obligations of, or guaranteed by, national or state bank holding compa-
nies, which obligations, although not rated as a matter of policy by either
S&P or Moody's, are rated AAA, AA or A by Fitch;
3. Commercial paper rated A-1+, A-1, A-2 or A-3 by S&P, Prime-1, Prime-2 or
Prime-3 by Moody's, D-1, D-2 or D-3 by Duff & Phelps or F1, F2 or F3 by
Fitch; and
4. Bankers' acceptances or negotiable certificates of deposit issued by
banks rated AAA, AA or A by Fitch.
Other Securities. While the Portfolio's investment strategy normally empha-
sizes U.S. Government Securities and high grade debt securities, the Portfolio
may, where consistent with its investment objective, invest up to 35% of its
total assets in other types of securities, including, (i) investment grade
corporate debt securities of a type other than the high grade debt securities
described above (including collateralized mortgage obliga-
19
<PAGE>
tions), (ii) certificates of deposit, bankers' acceptances and interest-bear-
ing savings deposits of banks having total assets of more than $1 billion and
which are members of the Federal Deposit Insurance Corporation, and (iii) put
and call options, futures contracts and options on futures contracts. Invest-
ment grade debt securities described in (i) above are those rated BBB or
higher by S&P, Duff & Phelps or Fitch or Baa or higher by Moody's or, if not
so rated, are of equivalent investment quality in the opinion of the Adviser.
Securities rated BBB by S&P, Duff & Phelps or Fitch or Baa by Moody's normally
provide higher yields but may be considered to have speculative
characteristics. See "Other Investment Policies and Techniques -- Securities
Ratings." " -- Investment in Securities Rated Baa and BBB" and Appendix A.
HIGH-YIELD PORTFOLIO
The primary investment objective of the High-Yield Portfolio is to earn the
highest level of current income available without assuming undue risk by in-
vesting principally in high-yielding fixed-income securities rated Baa or
lower by Moody's or BBB or lower by S&P, Duff & Phelps or Fitch or, if not
rated, of comparable investment quality as determined by the Adviser. As a
secondary objective, the High-Yield Portfolio will seek capital appreciation,
but only when consistent with its primary objective. Capital appreciation may
result, for example, from an improvement in the credit standing of an issuer
whose securities are held by the Portfolio or from a general decline in inter-
est rates or a combination of both. Conversely, capital depreciation may re-
sult, for example, from a lowered credit standing or a general rise in inter-
est rates, or a combination of both.
Consistent with the High-Yield Portfolio's primary investment objective, it is
anticipated that, under normal conditions, at least 65% of the total assets of
the High-Yield Portfolio will be invested in fixed-income securities rated be-
low Baa by Moody's or below BBB by S&P, Duff & Phelps or Fitch or, if unrated,
of comparable investment quality as determined by the Adviser. Such high-risk,
high-yield securities (commonly referred to as "junk bonds") are considered to
have speculative or, in, the case of relatively low ratings, predominantly
speculative characteristics. See "Other Investment Policies and Techniques --
Securities Ratings," " -- Investments in Lower-Rated Fixed-Income Securities"
and Appendix A. There is no minimum rating requirement applicable to the Port-
folio's investments in fixed-income securities.
As of December 31, 1997, the percentages of the Portfolio's assets invested in
securities rated (or considered by the Adviser to be of equivalent quality to
securities rated) in particular rating categories were 0% in A and above,
3.16% in Ba or BB, 85.90% in B, .48% in CCC and 10.46% in unrated securities.
The Fund did not invest in securities rated below CCC by each of Moody's, S&P,
Duff & Phelps and Fitch or, if not rated, considered by the Adviser to be of
equivalent quality to securities so rated.
When the spreads between the yields derived from lower rated securities and
those derived from higher-rated issues are relatively narrow, the Portfolio
may invest in the higher-rated issues since they may provide similar yields
with somewhat less risk. Fixed-
20
<PAGE>
income securities appropriate for the Portfolio may include both convertible
and non-convertible debt securities and preferred stock.
Municipal Securities. In circumstances where the Adviser determines that in-
vestment in municipal obligations would facilitate the High-Yield Portfolio's
ability to accomplish its investment objectives, it may invest up to 20% of
its assets in such obli- gations, including municipal bonds issued at a dis-
count. Dividends on shares attributable to interest on municipal securities
held by the Portfolio will not be exempt from Federal income taxes.
Public Utilities. The High-Yield Portfolio's investments in public utilities,
if any, may be subject to certain risks incurred by the Portfolio due to Fed-
eral, state or municipal regulatory changes, insufficient rate increases or
cost overruns.
Mortgage-Related Securities. The High-Yield Portfolio may invest without limi-
tation in mortgage-related securities that provide funds for mortgage loans
made to residential homeowners. These include securities which represent in-
terests in pools of fixed and adjustable mortgage loans made by lenders such
as savings and loan institutions, mortgage bankers, commercial banks and oth-
ers. Pools of mortgage loans are assembled for sale to investors (such as the
High-Yield Portfolio) by various governmental, government-related and private
organizations.
Interests in pools of mortgage-related securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates. In-
stead, these securities provide for a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-
through" of the monthly payments made by the individual borrowers on their
residential mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by repayments of principal re-
sulting from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers
may in addition be the originators of the underlying mortgage loans as well as
the guarantors of the mortgage-related securities. Pools created by such non-
governmental issuers generally offer a higher rate of interest than government
and government-related pools because there are no direct or indirect govern-
ment guarantees of payments in such pools. However, timely payment of interest
and principal of these pools is supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance. There
can be no assurance that the private insurers can meet their obligations under
the policies. The High-Yield Portfolio may buy mortgage-related securities
without insurance or guarantees if through an examination of the loan experi-
ence and practices of the poolers the Adviser determines that the securities
meet the Portfolio's investment criteria. Although the market for mort-
21
<PAGE>
gage-related securities is becoming increasingly liquid, those issued by cer-
tain private organizations may not be readily marketable. In particular, the
secondary markets for mortgage-related securities representing interests in
pass-through pools created by non-governmental issuers may be more volatile and
less liquid than those for other mortgage-related securities, thereby poten-
tially limiting a Fund's ability to buy or sell those securities at any partic-
ular time. The High-Yield Portfolio will not purchase mortgage-related securi-
ties or any other assets which in the Adviser's opinion are illiquid if, as a
result, more than 10% of the value of the Portfolio's total assets will be il-
liquid.
The Adviser expects that governmental, government-related or private entities
may create mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may be second
mortgages or alternative mortgage instruments, that is, mortgage instruments
whose principal or interest payments may vary or whose terms to maturity may
differ from customary long-term fixed rate mortgages. As new types of mortgage-
related securities are developed and offered to investors, the Adviser will,
consistent with the High-Yield Portfolio's investment objective and policies,
consider making investments in such new types of securities.
The High-Yield Portfolio may invest up to 5% of the value of its total assets
directly in mortgages secured by residential real estate. Unlike pass-through
securities, whole loans constitute direct investment in mortgages inasmuch as
the Portfolio, rather than a financial intermediary, becomes the mortgagee with
respect to such loans purchased by the Portfolio.
Writing Covered Put and Call Options. The High-Yield Portfolio may write cov-
ered call options listed on one or more national se-curities exchanges and on
foreign currencies in an aggregate amount not to exceed 25% of its total as-
sets. (See "Other Investment Policies and Techniques -- Writing Covered Call
Options").
In addition to writing covered call options, the High-Yield Portfolio may write
covered put options listed on one or more national securities exchanges and on
foreign currencies. A put option gives the purchaser of the option, upon pay-
ment of a premium, the right to deliver a specified amount of a security to the
writer of the option on or before a fixed date at a predetermined price. When
the High-Yield Portfolio writes a put option it maintains in a segregated ac-
count cash or U.S. Government securities in an amount adequate to purchase the
underlying security should the put be exercised. The High-Yield Portfolio will
not write a put option if, as a result thereof, the aggregate of its portfolio
securities subject to outstanding options (valued at the lower of the option
price or market value of such securities) would exceed 15% of such Portfolio's
total assets.
Purchasing Put and Call Options. In addition to writing put and call options,
the High-Yield Portfolio may purchase put and call options written by others
covering the types of securities in which the Portfolio may invest, and may
purchase put and call options on foreign currencies. The Portfolio may purchase
put and call options to provide protection against adverse price or yield ef-
fects from anticipated changes in prevailing interest rates in the same manner
discussed below under "Other Investment Policies and
22
<PAGE>
Techniques -- When-Issued Securities and Forward Commitments." In purchasing a
call option, the Portfolio would be in a position to realize a gain if, during
the option period, the price of the underlying security or currency increased
by an amount in excess of the premium paid. It would realize a loss if the
price of the security or currency declined or remained the same or did not in-
crease during the period by more than the amount of the premium. By purchasing
a put option, the Portfolio would be in a position to realize a gain if, dur-
ing the option period, the price of the underlying security or currency de-
creased by an amount in excess of the premium paid. It would realize a loss if
the price of the security or currency increased or remained the same or did
not decrease during that period by more than the amount of the premium. If a
put or call option purchased by the Portfolio were permitted to expire without
being sold or exercised, its premium would represent a realized loss to the
Portfolio.
The High-Yield Portfolio may dispose of an option which it has purchased by
entering into a "closing sale transaction" with the writer of the option. A
closing sale transaction terminates the obligation of the writer of the option
and does not result in the ownership of an option. The Portfolio realizes a
profit or loss from a closing sale transaction if the premium received from
the transaction is more than or less than the cost of the option.
When the High-Yield Portfolio purchases put or call options, or when it writes
cov-ered put or call options as described above, it does so in negotiated
transactions. The Portfolio effects such transactions only with investment
dealers and other financial institutions (such as commercial banks or savings
and loan institutions) deemed creditworthy by the Adviser, and the Adviser has
adopted procedures for monitoring the creditworthiness of such entities. Op-
tions purchased or written by the Portfolio in negotiated transactions are il-
liquid and it may not be possible for the Portfolio to effect a closing sale
transaction at a time when the Adviser believes it would be advantageous to do
so.
Futures Contracts and Options on Futures. The High-Yield Portfolio may invest
in financial futures contracts ("futures contracts") and related options
thereon. If the Adviser anticipates that interest rates will rise, the Portfo-
lio may sell a futures contract or a call option thereon or purchase a put op-
tion on such futures contracts as a hedge against a decrease in the value of
the Portfolio's securities. If the Adviser anticipates that interest rates
will decline, the Portfolio may purchase a futures contract or a call option
thereon to protect against an increase in the price of the securities the
Portfolio intends to purchase. These futures contracts and related options
thereon will be used only as a hedge against anticipated interest rate
changes.
Subject to appropriate regulatory relief, the Portfolio may not enter into
futures contracts or related options thereon if immediately thereafter the
amount committed to margin plus the amount paid for premiums for unexpired op-
tions on futures contracts exceeds 5% of the value of the Portfolio's total
assets. The Portfolio may not purchase or sell futures contracts or related
options thereon if immediately thereafter more than 30% of its net assets
would be hedged. See "Other Investment Policies and Tech-
23
<PAGE>
niques -- Hedging Techniques -- Futures Contracts and Options on Futures
Contracts."
TOTAL RETURN PORTFOLIO
The investment objective of the Total Return Portfolio is to achieve a high
return through a combination of current income and capital appreciation. The
Total Return Portfolio's assets are invested in U.S. Government and agency ob-
ligations, bonds, fixed-income senior securities (including short and long-
term debt securities and preferred stocks to the extent their value is attrib-
utable to their fixed-income characteristics), preferred and common stocks in
such proportions and of such type as are deemed best adapted to the current
economic and market outlooks. The percentage of the Portfolio's assets in-
vested in each type of security at any time shall be in accordance with the
judgment of the Adviser.
INTERNATIONAL PORTFOLIO
The International Portfolio's primary investment objective is to seek to ob-
tain a total return on its assets from long-term growth of capital principally
through a broad portfolio of marketable securities of established non-United
States companies (e.g., companies incorporated outside the United States),
companies participating in foreign economies with prospects for growth, and
foreign government securities. As a secondary objective, the Portfolio at-
tempts to increase its current income without assuming undue risk. The Adviser
considers it consistent with these objectives to acquire securities of compa-
nies incorporated in the United States and having their principal activities
and interests outside of the United States. The International Portfolio in-
tends to be invested primarily in such issuers and under normal circumstances
more than 80% of its assets will be so invested.
In seeking its objective, the International Portfolio invests its assets
primarily in common stocks of established non-United States companies which in
the opinion of the Adviser have potential for growth of capital or income or
both. There is no requirement, however, that the Portfolio invest exclusively
in common stocks or other equity securities, and, if deemed advisable, the In-
ternational Portfolio may invest in any other type of security including, but
not limited to, convertible securities preferred stocks, bonds, notes and
other debt securities of foreign issuers (Euro-dollar securities), as well as
warrants, or obligations of the United States or foreign governments and their
political subdivisions. When the Adviser believes that the total return on
debt securities will equal or exceed the return on common stocks, the Interna-
tional Portfolio may, in seeking its objective of total return, substantially
increase its holdings in such debt securities. The International Portfolio may
establish and maintain temporary balances for defensive purposes or to enable
it to take advantage of buying opportunities. The International Portfolio's
temporary cash balances may be invested in United States as well as foreign
short-term money-market instruments, including, but not limited to, government
obligations, certificates of deposit, bankers' acceptances, commercial paper,
short-term corporate debt securities and repurchase agreements.
The International Portfolio diversifies investments broadly among countries
and normally has represented in its portfolio, busi-
24
<PAGE>
ness activities of not less than three different countries excluding the
United States. The Portfolio may invest all or a substantial portion of its
assets in one or more of such countries. The Portfolio may purchase securities
of companies, wherever organized, which, in the judgment of the Adviser, have
their principal activities and interests outside the United States determined
on the basis of such factors as location of the company's assets, or person-
nel, or sales and earnings. See "Other Investment Policies and Techniques --
Foreign Securities."
The Portfolio may purchase or sell forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk to the Portfolio from
adverse changes in the relationship between the U.S. Dollar and other curren-
cies. A forward contract is an obligation to purchase or sell a specific cur-
rency for an agreed price at a future date which is individually negotiated
and privately traded by currency traders and their customers. The Portfolio's
dealings in forward contracts will be limited to hedging involving either spe-
cific transactions or portfolio positions. Transaction hedging is the purchase
or sale of forward contracts with respect to specific receivables or payables
of the Portfolio accruing in connection with the purchase and sale of its
portfolio securities or the payment of dividends and distributions by the
Portfolio. Position hedging is the sale of forward contracts with respect to
portfolio security positions denominated or quoted in such foreign currency.
The Portfolio does not speculate in forward contracts and, therefore, the Ad-
viser believes that the Portfolio is not subject to the risks frequently asso-
ciated with the speculative use of such transactions. The Portfolio may not
position hedge with respect to the currency of a particular country to an ex-
tent greater than the aggregate market value (at the time of making such sale)
of the securities held in its portfolio denominated or quoted in that particu-
lar foreign currency. If the Portfolio enters into a position hedging transac-
tion, its custodian bank will place liquid assets in a separate account of the
Portfolio in an amount equal to the value of the Portfolio's total assets com-
mitted to the consummation of such forward contract. If the value of the secu-
rities placed in the separate account declines, additional cash or securities
will be placed in the account so that the value of the account will equal the
amount of the Portfolio's commitment with respect to such contracts. Hedging
against a decline in the value of a currency does not eliminate fluctuations
in the prices of portfolio securities or prevent losses if the prices of such
securities decline. Such transactions also preclude the opportunity for gain
if the value of the hedge currency should rise. Moreover, it may not be possi-
ble for the Portfolio to hedge against a devaluation that is so generally an-
ticipated that the Portfolio is not able to contract to sell the currency at a
price above the devaluation level it anticipates. The Portfolio will not enter
into a forward contract with a term of more than one year or if, as a result
thereof, more than 50% of the Portfolio's total assets would be committed to
such contracts.
The Portfolio may also invest in warrants which entitle the holder to buy eq-
uity securities at a specific price for a specific period of time.
It is the present intention of the Adviser to invest the Portfolio's assets in
companies based in (or governments of or within) East
25
<PAGE>
Asia (Japan, Hong Kong, Singapore and Malaysia), Western Europe (the United
Kingdom, Germany, The Netherlands, France and Switzerland), Australia, Canada,
and such other areas and countries as the Adviser may determine from time to
time. However, investments may be made from time to time in companies in, or
governments of, developing countries as well as developed countries. Sharehold-
ers should be aware that investing in the equity and fixed-income markets of
developing countries involves exposure to economic structures that are gener-
ally less diverse and mature, and to political systems which can be expected to
have less stability than those of developed countries. The Adviser at present
does not intend to invest more than 10% of the International Portfolio's total
assets in companies in, or governments of, developing countries. For a descrip-
tion of certain risks associated with investing in foreign securities, see
"Other Investment Policies and Techniques -- Foreign Securities."
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 the Adviser considers
to be prudent investment risk, that is available from a portfolio of high-qual-
ity debt securities having remaining maturities of not more than three years.
The Portfolio seeks high current yields by investing in a portfolio of debt se-
curities denominated in the U.S. Dollar and selected foreign currencies. Ac-
cordingly, the Portfolio seeks investment opportunities in foreign, as well as
domestic, securities markets. While the Portfolio normally maintains a substan-
tial portion of its assets in debt securities denominated in foreign curren-
cies, the Portfolio invests at least 25% of its net assets in U.S. Dollar-de-
nominated securities. The Portfolio is designed for the investor who seeks a
higher yield than a money market fund or certificate of deposit and less fluc-
tuation 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.
26
<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 S&P, Duff & Phelps or Fitch or Aaa or Aa by Moody's ("High Quality Ratings")
or, if unrated, determined by the Adviser to be of equivalent quality;
(iii) corporate debt securities having at least one High Quality Rating or, if
unrated, determined by the Adviser to be of equivalent quality; (iv) certifi-
cates of deposit and bankers' acceptances issued or guaranteed by, or time de-
posits maintained at, banks (including 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 Adviser 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 marketability of such securities. European
governments and supranationals, in particular, issue ECU-denominated obliga-
tions.
27
<PAGE>
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 "Other Investment Policies and Techniques --
Hedging Techniques," below. For a description of certain risks associated
with investing in foreign securities, see "Other In-
28
<PAGE>
vestment Policies and Techniques -- Foreign Securities," below.
GLOBAL BOND PORTFOLIO
The investment objective of the Global Bond Portfolio is to seek a high level
of return from a combination of current income and capital appreciation by in-
vesting in a globally diversified portfolio of high quality debt securities
denominated in the U.S. Dollar and a range of foreign currencies. The average
weighted maturity of the Portfolio's portfolio of fixed-income securities is
expected to vary between one year or less and 10 years. See "Other Investment
Policies and Techniques -- Fixed-Income Securities."
In the past, debt securities offered by certain foreign governments have pro-
vided higher investment returns than U.S. government debt securities. The rel-
ative performance of various countries' fixed income markets historically has
reflected wide variations relating to the unique characteristics of each
country's economy. Year-to-year fluctuations in certain markets have been sig-
nificant, and negative returns have been experienced in various markets from
time to time. The Adviser and AIGAM International Limited (the "Sub-Adviser")
believe that investment in a composite of foreign fixed income markets and in
the U.S. government and corporate bond market is less risky than a portfolio
invested exclusively in foreign debt securities, and provides investors with
more opportunities for attractive total return than a portfolio invested ex-
clusively in U.S. debt securities.
The Portfolio invests only in securities of issuers in countries whose govern-
ments are deemed stable by the Adviser and the Sub-Adviser. Their determina-
tion that a particular country should be considered stable depends on their
evaluation of political and economic developments affecting the country as
well as recent experience in the markets for foreign government securities of
the country. Examples of foreign governments which the Adviser and Sub-Adviser
currently consider to be stable, among others, are the governments of Austra-
lia, Austria, Canada, Denmark, France, Germany, Ireland, Italy, Japan, New
Zealand, The Netherlands, Norway, Spain, Sweden, Switzerland and the United
Kingdom. The Adviser does not believe that the credit risk inherent in the ob-
ligations of such stable foreign governments is significantly greater than
that of U.S. government debt securities. The Portfolio intends to spread in-
vestment risk among the capital markets of a number of countries and will in-
vest in securities of the governments of, and companies based in, at least
three, and normally considerably more, such countries. The percentage of the
Portfolio's assets invested in the debt securities of the government of, or a
company based in, a particular country or denominated in a particular currency
varies depending on the relative yields of such securities, the economies of
the countries in which the investments are made and such countries' financial
markets, the interest rate climate of such countries and the relationship of
such countries' currencies to the U.S. Dollar. Currency is judged on the basis
of fundamental economic criteria (e.g., relative inflation levels and trends,
growth rate forecasts, balance of payments status, and economic policies) as
well as technical and political data. Under normal market conditions, it is
expected that approximately
29
<PAGE>
25% of the Portfolio's net assets will be invested in debt securities denomi-
nated in the U.S. Dollar.
The Portfolio seeks to minimize investment risk by limiting its portfolio in-
vestments to high-quality debt securities of U.S. or foreign governments or
supranational organizations, high-quality U.S. or foreign corporate debt secu-
rities, including commercial paper and high-quality debt obligations of banks
and bank holding companies. The Portfolio's investments consist only of debt
securities rated within one of the two highest grades assigned by S&P, Duff &
Phelps, Fitch or Moody's or, if unrated, judged by the Adviser and Sub-Adviser
to be of comparable quality. See "Other Investment Policies and Techniques --
Securities Ratings" and Appendix A. Pending investment, to maintain liquidity
or for temporary defensive purposes, the Portfolio may commit all or any por-
tion of its assets to cash or money market instruments of U.S. or foreign is-
suers. The Portfolio also may engage in certain hedging strategies, including
the purchase and sale of forward foreign currency exchange contracts and other
hedging techniques. For a discussion of these investment policies of the Port-
folio, see "Other Investment Policies and Techniques -- Hedging Techniques,"
below.
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 devel-
opment projects in developing member countries; the European Union, which is a
fifteen-nation organization engaged in cooperative economic activities; the
European Coal and Steel Community, which is an economic cooperative whose mem-
bers are various European nations' steel and coal industries; and the Asian
Development Bank, which is an international development bank established to
lend portfolios, 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 European Cur-
rency Unit ("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 comprising 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 marketability
of such securities. European governments and supranationals, in particular,
issue ECU-denominated obligations.
For a description of certain risks associated with investing in foreign secu-
rities, see "Other Investment Policies and Techniques -- Foreign Securities,"
below.
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO
The North American Government Income Portfolio's investment objective is to
seek the highest level of current income, consistent with what the Adviser
considers to be prudent investment risk, that is available from a portfolio of
debt securities issued or guaranteed by the governments of the United States,
Canada and Mexico, their po-
30
<PAGE>
litical subdivisions (including Canadian Provinces but excluding States of the
United States), agencies, instrumentalities or authorities ("Government Securi-
ties"). The Portfolio invests in investment grade securities denominated in the
U.S. Dollar, the Canadian Dollar and the Mexican Peso and expects to maintain
at least 25% of its assets in securities denominated in the U.S. Dollar. In ad-
dition, the Portfolio may invest up to 25% of its total assets in debt securi-
ties issued by governmental entities of Argentina ("Argentine Government Secu-
rities"). The Portfolio expects that it will not retain a debt security which
is down-graded below BBB or Baa, or, if unrated, determined by the Adviser to
have undergone similar credit quality deterioration, subsequent to purchase by
the Portfolio. There may be circumstances, however, such as the downgrading to
below investment grade of all of the securities of a governmental issuer in one
of the countries in which the Portfolio has substantial investments, under
which the Portfolio, after considering all the circumstances, would conclude
that it is in the best interests of the shareholders to retain its holdings in
securities of that issuer. The average weighted maturity of the Portfolio's in-
vestment portfolio of fixed-income securities is expected to vary between one
year or less and 30 years. See "Other Investment Policies and Techniques --
Fixed-Income Securities." The Portfolio utilizes certain other investment
techniques, including options and futures.
The Adviser believes that the increasingly integrated economic relationship
among the United States, Canada and Mexico, characterized by the reduction and
projected elimination of most barriers to free trade among the three nations
and the growing coordination of their fiscal and monetary policies, will bene-
fit the economic performance of all three countries and promote greater corre-
lation of currency fluctuation among the U.S. and Canadian Dollars and the Mex-
ican Peso. See, however, "General Information About the United Mexican States"
and the Fund's Statement of Additional Information with respect to the current
state of the Mexican economy.
The Portfolio may invest its assets in Government Securities considered invest-
ment grade or higher (i.e., securities rated at least BBB by S&P, Duff & Phelps
or Fitch or at least Baa by Moody's or, if not so rated, of equivalent invest-
ment quality as determined by the Portfolio's Adviser). See "Other Investment
Policies and Techniques -- Securities Ratings," "-- Investments in Fixed-
Income Securities Rated Baa and BBB" and Appendix A.
The Adviser actively manages the Portfolio's assets in relation to market con-
ditions and general economic conditions in the United States, Canada and Mexico
and elsewhere, and adjusts the Portfolio's investments in Government Securities
based on its perception of which Government Securities will best enable the
Portfolio to achieve its investment objective. In this regard, subject to the
limitations described above, the percentage of assets invested in 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 the country's currency to the U.S. Dollar.
The Portfolio invests at least, and normally substantially more than, 65% of
its total as-
31
<PAGE>
sets in Government Securities. To the extent that its assets are not invested
in Government Securities, however, the Portfolio may invest the balance of its
total assets in debt securities issued by the governments of countries located
in Central and South America or any of their political subdivisions, agencies,
instrumentalities or authorities, provided that such securities are denominated
in their local currencies and are rated investment grade or, if not so rated,
are of equivalent investment quality as determined by the Portfolio's Adviser.
The Portfolio does not invest more than 10% of its total assets in debt securi-
ties issued by the governmental entities of any one such country, provided,
however, that the Portfolio may invest up to 25% of its total assets in Argen-
tine Government Securities. Under normal market conditions, the Portfolio in-
vests at least 65% of its total assets in income-producing securities.
U.S. Government Securities. Securities issued or guaranteed by the United
States Government, its agencies or instrumentalities include: (i) U.S. Treasury
obligations, which differ only in their interest rates, maturities and times of
issuance: U.S. Treasury bills (maturity of one year or less with no interest
paid and hence issued at a discount and repaid at full face value upon maturi-
ty), U.S. Treasury notes (maturities of one to 10 years with interest payable
every six months), and U.S. Treasury bonds (generally maturities of greater
than 10 years with interest payable every six months), all of which are backed
by the full faith and credit of the United States (ii) obligations issued or
guaranteed by U.S. Government agencies and instrumentalities that are supported
by the full faith and credit of the U.S. Government, such as securities issued
by the Government National Mortgage Association ("GNMA"), the Farmers Home Ad-
ministration, the Department of Housing and Urban Development, the Export-Im-
port Bank, the General Services Administration and the Small Business Adminis-
tration; and (iii) obligations issued or guaranteed by U.S. Government agencies
and instrumentalities that are not supported by the full faith and credit of
the U.S. Government, such as securities issued by the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation, and governmental
collateralized mortgage obligations. See the Statement of Additional Informa-
tion for a description of obligations issued or guaranteed by U.S. Government
agencies or instrumentalities.
U.S. Government Securities in which the Portfolio may invest also include "zero
coupon" Treasury securities, which are U.S. Treasury bills that are issued
without interest coupons, U.S. Treasury notes and bonds which have been
stripped of their unma-tured interest coupons, and receipts or certificates
representing interests in such stripped debt obligations and coupons. A zero
coupon security is a debt obligation that does not entitle the holder to any
periodic payments prior to maturity but; instead, is issued and traded at a
discount from its face amount. The discount varies depending on the time re-
maining until maturity, prevailing interest rates, liquidity of the security
and perceived credit quality of the issuer. The market prices of zero coupon
securities are generally more volatile than those of interest-bearing securi-
ties, and are likely to respond to changes in interest rates to a greater de-
gree than otherwise compara-
32
<PAGE>
ble securities that do pay periodic interest. Current federal tax law requires
that a holder (such as the Portfolio) of a zero coupon security accrue a por-
tion of the discount at which the security was purchased as income each year,
even though the holder receives no interest payment on the security during the
year. As a result, in order to make the distributions necessary for the Port-
folio not to be subject to federal income or excise taxes, the Portfolio might
be required to pay out as an income distribution each year an amount, obtained
by liquidation of portfolio securities or borrowings if necessary, greater
than the total amount of cash that the Portfolio has actually received as in-
terest during the year. The Adviser believes, however, that it is highly un-
likely that it would be necessary to liquidate portfolio securities or borrow
money in order to make such required distributions or to meet its investment
objective.
Currently, the only U.S. Treasury security issued without coupons is the Trea-
sury bill. Although the U.S. Treasury does not itself issue Treasury notes and
bonds without coupons, under the U.S. Treasury STRIPS program interest and
principal payments on certain long term treasury securities may be maintained
separately in the Federal Reserve book entry system and may be separately
traded and owned. In addition, in the last few years a number of banks and
brokerage firms have separated ("stripped") the principal portions from the
coupon portions of the U.S. Treasury bonds and notes and sold them separately
in the form of receipts or certificates representing undivided interests in
these instruments (which instruments are generally held by a bank in a custo-
dial or trust account). The staff of the Commission has indicated that, in its
view, these receipts or certificates should be considered as securities issued
by the bank or brokerage firm involved and, therefore, should not be included
in the Portfolio's categorization of U.S. Government Securities. The Portfolio
disagrees with the staff's interpretation but will not treat such securities
as U.S. Government Securities until final resolution of the issue.
U.S. Government Securities do not generally involve the credit risks associ-
ated with other types of interest bearing securities, although, as a result,
the yields available from U.S. Government Securities are generally lower than
the yields available from other interest bearing securities. Like other fixed-
income securities, however, the values of U.S. Government Securities change as
interest rates fluctuate.
Canadian Government Securities. Canadian Government Securities include the
sovereign debt of Canada or any of its Provinces (Alberta, British Columbia,
Manitoba, New Brunswick, Newfoundland, Nova Scotia, Ontario, Prince Edward Is-
land, Quebec and Saskatchewan). Canadian Government Securities in which the
Portfolio may invest include Government of Canada bonds and Government of Can-
ada Treasury bills. The Bank of Canada, acting on behalf of the federal gov-
ernment, is responsible for the distribution of these bonds and Treasury
bills. The Bank of Canada offers new issues, as approved by the Government, to
specific investment dealers and banks. Government of Canada Treasury bills are
debt obligations with maturities of less than one year. A new issue of Govern-
ment of Canada bonds frequently consists of several different bonds with matu-
rities ranging from
33
<PAGE>
one to 25 years. The Bank of Canada usually purchases a pre-determined amount
of each issue.
All Canadian Provinces have outstanding bond issues and several Provinces also
guarantee bond issues of Provincial authorities, agents and Crown corporations.
Each new issue yield is based upon a spread from an outstanding Government of
Canada issue of comparable term and coupon. Spreads in the marketplace are de-
termined by various factors, including the relative supply and the rating as-
signed by the rating agencies.
Many Canadian municipalities, municipal financial authorities and Crown corpo-
rations raise funds through the bond market in order to finance capital
expenditures. Unlike U.S. municipal securities, which have special tax status,
Canadian municipal securities have the same tax status as other Canadian Gov-
ernment Securities and trade similarly to such securities.
The Canadian municipal market may be less liquid than the Provincial bond
market.
Canadian Government Securities in which the Fund may invest include a modified
pass-through vehicle issued pursuant to a program established under the Na-
tional Housing Act of Canada. Certificates issued pursuant to the program bene-
fit from the guarantee of the Canada Mortgage and Housing Corporation, a fed-
eral Crown corporation that is (except for certain limited purposes) an agency
of the Government of Canada whose guarantee (similar to that of GNMA in the
United States) is an unconditional obligation of the Government of Canada in
most circumstances.
Mexican Government Securities. The Portfolio may invest in Mexican Government
Securities of investment grade quality. As of the date of this Prospectus,
there are five Mexican Government Securities denominated in the Mexican Peso
that have been rated investment grade by either S&P, Duff & Phelps or Fitch, or
Moody's. These five Mexican Government Securities are Cetes and Tesobonos, each
rated A-2 by S&P, and Ajustabonos, Bondes and Udibonos, each rated BBB+/stable
by S&P. The Portfolio's Adviser, however, believes that there are other Peso-
denominated Mexican Government Securities that are of investment grade quality.
Currently Floating Rate Notes, rated BB+/stable by S&P, is the only Mexican
Government Security denominated in U.S. Dollars that is rated investment grade
by S&P. If qualified investments of this nature appear in the future, the Port-
folio will consider them for investment.
Mexican Government Securities denominated and payable in the Mexican Peso
include: (i) Cetes, which are book-entry securities sold directly by the Mexi-
can government on a discount basis and with maturities that range from seven to
364 days; (ii) Bondes, which are long-term development bonds issued directly by
the Mexican government with a minimum term of 364 days; and (iii) Ajustabonos,
which are adjustable bonds with a minimum three-year term issued directly by
the Mexican government with the face amount adjusted each quarter by the quar-
terly inflation rate as of the end of the preceding month.
Argentine Government Securities. The Portfolio may invest up to 25% of its to-
tal assets in Argentine Government Securities that are denominated and payable
in the Argentine Peso. Argentine Government Securities include: (i) Bonos del
Tesoro ("BOTE"),
34
<PAGE>
which are obligations of the Argentine Treasury, and (ii) Bonos de
Consolidacion Economica ("BOCON"), which are economic consolidation bonds is-
sued directly by the Argentine Government with maturities of up to ten years.
Although not all Argentine Government Securities are rated investment grade
quality by S&P, Moody's, Duff & Phelps or Fitch, the Adviser believes that
there are unrated Argentine Government Securities that are of investment grade
quality.
General Information About Canada. Canada consists of a federation of ten Prov-
inces and two federal territories (which generally fall under federal authori-
ty) with a constitutional division of powers between the federal and Provin-
cial governments. The Parliament of Canada has jurisdiction over all areas not
assigned exclusively to the Provincial legislatures, and has jurisdiction over
such matters as the federal public debt and property, the regulation of trade
and commerce, currency and coinage, banks and banking, national defense, the
postal services, navigation and shipping and unemployment insurance.
The Canadian economy is based on the free enterprise system, with business or-
ganizations ranging from small owner-operated businesses to large multina-
tional corporations. Manufacturing and resource industries are large contribu-
tors to the country's economic output, but as in many other highly developed
countries, there has been a gradual shift from a largely goods-producing econ-
omy to a predominantly service-based one. Agriculture and other primary pro-
duction play a small but key role in the economy. Canada is also an exporter
of energy to the United States in the form of natural gas (of which Canada has
substantial reserves) and hydroelectric power, and has significant mineral re-
sources.
Canadian Dollars are fully exchangeable into U.S. Dollars without foreign ex-
change controls or other legal restriction. Since the major developed-country
currencies were permitted to float freely against one another, the range of
fluctuation in the U.S. Dollar/Canadian Dollar exchange rate generally has
been narrower than the range of fluctuation between the U.S. Dollar and most
other major currencies. Between 1991 and 1995, Canada experienced a weakening
of its currency. In January 1995, the Canadian Dollar fell to a nine-year low
against the U.S. Dollar, decreasing in value compared to the U.S. Dollar by
approximately 20% from October 1991. Between January 1996 and October 1997,
the Canadian Dollar remained steady in value against the U.S. Dollar at a
level approximately 3% to 4% above that low. Beginning in October 1997, howev-
er, the Canadian Dollar decreased in value against the U.S. Dollar by approxi-
mately 6%, reaching an all-time low of 1.4649 Canadian Dollars per U.S. Dollar
on January 29, 1998. On February 20, 1998, the Canadian Dollar/U.S. Dollar ex-
change rate was 1.4206:1. The range of fluctuation that has occurred in the
past is not necessarily indicative of the range of fluctuation that will occur
in the future. Future rates of exchange cannot be accurately predicted.
General Information About The United Mexican States. The United Mexican States
("Mexico") is a nation formed by 31 states and a Federal District (Mexico
City). The Political Constitution of Mexico, which took effect on May 1, 1917,
established Mexico as a Federal Republic and provides for the separa-
35
<PAGE>
tion of executive, legislative and judicial branches. The President and the
members of the General Congress are elected by popular vote.
Prior to 1994, when Mexico experienced an economic crisis that led to the de-
valuation of the Peso in December 1994, the Mexican economy experienced im-
provement in a number of areas, including eight consecutive years (1987-1994)
of growth in gross domestic product and a substantial reduction in the rate of
inflation and in public sector financial deficit. Much of the past improvement
in the Mexican economy has been attributable to a series of economic policy
initiatives intended to modernize and reform the Mexican economy, control in-
flation, reduce the financial deficit, increase public revenues through the
reform of the tax system, establish a competitive and stable currency exchange
rate, liberalize trade restrictions and increase investment and productivity,
while reducing the government's role in the economy. In this regard, the Mexi-
can government has been proceeding with a program for privatizing certain
state owned enterprises, developing and modernizing the securities markets,
increasing investment in the private sector and permitting increased levels of
foreign investment.
In 1994 Mexico faced internal and external conditions that resulted in an eco-
nomic crisis that continues to affect the Mexican economy adversely. Growing
trade and current account deficits, which could no longer be financed by
inflows of foreign capital, were factors contributing to the crisis. A weaken-
ing economy and unsettling political and social developments caused investors
to lose confidence in the Mexican economy. This resulted in a large decline in
foreign reserves followed by a sharp and rapid devaluation of the Mexican Pe-
so. The ensuing economic and financial crisis resulted in higher inflation and
domestic interest rates, a contraction in real gross domestic product and a
liquidity crisis.
In response to the adverse economic conditions that developed at the end of
1994, the Mexican government instituted a new economic program; and a new ac-
cord among the government and the business and labor sectors of the economy
was entered into in an effort to stabilize the economy and the financial mar-
kets. To help relieve Mexico's liquidity crisis and restore financial stabil-
ity to Mexico's economy, the Mexican government also obtained financial assis-
tance from the United States, other countries and certain international agen-
cies conditioned upon the implementation and continuation of the economic re-
form program.
In October 1995, and again in October 1996, the Mexican government announced
new accords designed to encourage economic growth and reduce inflation. While
it cannot be accurately predicted whether these accords will continue to
achieve their objectives, the Mexican economy has stabilized since the eco-
nomic crisis of 1994, and the high inflation and high interest rates that con-
tinued to be a factor after 1994 have subsided as well. After declining for
five consecutive quarters beginning with the first quarter of 1995, Mexico's
gross domestic product began to grow in the second quarter of 1996. That
growth was sustained in 1996, resulting in a 5.1% increase from 1995, and, ac-
cording to preliminary estimates, continued through 1997, resulting in a 7.3%
increase from 1996. In addition, inflation dropped from a 52% annual rate in
36
<PAGE>
1995 to a 27.7% annual rate in 1996 and a 15.7% annual rate in 1997. Mexico's
economy is influenced by international economic conditions, particularly those
in the United States, and by world prices for oil and other commodities. The
recovery of the economy will require continued economic and fiscal discipline
as well as stable political and social conditions. In addition, there is no as-
surance that Mexico's economic policy initiatives will be successful or that
succeeding administrations will continue these initiatives.
In August 1976, the Mexican government established a policy of allowing the
Mexican Peso to float against the U.S. Dollar and other currencies. Under this
policy, the value of the Mexican Peso consistently declined against the U.S.
Dollar. Under economic policy initiatives implemented since December 1987, the
Mexican government introduced a series of schedules allowing for the gradual
devaluation of the Mexican Peso against the U.S. Dollar. These gradual devalua-
tions continued until December 1994. On December 22, 1994 the Mexican govern-
ment announced that it would permit the Peso to float against other currencies,
resulting in a precipitous decline against the U.S. Dollar. By December 31,
1996, the Peso-Dollar exchange rate had decreased approximately 40% from that
on December 22, 1994. After dropping approximately 55% from 1994 through 1996,
in 1997, the average annual Peso-Dollar exchange rate decreased approximately
4% from that in 1996.
Mexico has in the past imposed strict foreign exchange controls. There is no
assurance that future regulatory actions in Mexico would not affect the Fund's
ability to obtain U.S. Dollars in exchange for Mexican Pesos.
General Information About the Republic of Argentina. The Republic of Argentina
("Argentina") consists of 23 provinces and the federal capital of Buenos Aires.
Its federal constitution provides for an executive branch headed by a Presi-
dent, a legislative branch and a judicial branch. Each province has its own
constitution, and elects its own governor, legislators and judges, without the
intervention of the federal government.
The military has intervened in the political process on several occasions since
1930 and has ruled the country for 22 of the past 68 years. The most recent
military government ruled the country from 1976 to 1983. Four unsuccessful mil-
itary uprisings have occurred since 1983, the most recent in December 1990.
Shortly after taking office in 1989, the country's current President adopted
market-oriented and reformist policies, including a large privatization pro-
gram, a reduction in the size of the public sector and an opening of the econ-
omy to international competition.
In the decade prior to the announcement of a new economic plan in March 1991,
the Argentine economy was characterized by low and erratic growth, declining
investment rates and rapidly worsening inflation. Despite its strengths, which
include a well-balanced natural resource base and a high literacy rate, the Ar-
gentine economy failed to respond to a series of economic plans in the 1980's.
The 1991 economic plan represented a pronounced departure from its predecessors
in calling for raising revenues,
37
<PAGE>
cutting expenditures and reducing the public deficit. The extensive
privatization program commenced in 1989 was accelerated, the domestic economy
deregulated and opened up to foreign trade and the frame-work for foreign in-
vestment reformed. As a result of the economic stabilization reforms, gross do-
mestic product increased for four consecutive years before declining in 1995.
During 1996, however, gross domestic product increased 4.3% from 1995. Prelimi-
nary data for 1997 indicate that gross domestic product increased by more than
8.0% from 1996. The rate of inflation is generally viewed to be under control.
Significant progress was also made between 1991 and 1994 in rescheduling Argen-
tina's debt with both external and domestic creditors, which improved fiscal
cash flows in the medium term and allowed a return to voluntary credit markets.
Further reforms are currently being implemented in order to sustain and con-
tinue the progress to date. There is no assurance that Argentina's economic
policy initiatives will be successful or that succeeding administrations will
continue these initiatives.
In 1995 economic policy was directed toward the effects of the Mexican currency
crisis. The Mexican currency crisis led to a run on bank deposits, which was
brought under control by a series of measures designed to strengthen the finan-
cial system. The measures included the "dollarization" of banking reserves, the
establishment of two trust funds and strengthening bank reserve requirements.
In 1991 the Argentine government enacted currency reforms, which required the
domestic currency to be fully backed by international reserves, in an effort to
make the Argentine Peso fully convertible into the U.S. Dollar at a rate of one
to one.
The Argentine Peso has been the Argentine currency since January 1, 1992. Since
that date, the rate of exchange from the Argentine Peso to the U.S. Dollar has
remained approximately one to one. The fixed exchange rate has been instrumen-
tal in stabilizing the economy, but has not reduced pressures from high rates
of unemployment. It is not clear that the government will be able to resist
pressure to devalue the currency. However, the historic range is not necessar-
ily indicative of fluctuations that may occur in the exchange rate over time
and future rates of exchange cannot be accurately predicted. The Argentine for-
eign exchange market was highly controlled until December 1989, when a free ex-
change rate was established for all foreign currency transactions. Argentina
has eliminated restrictions on foreign direct investment and capital repatria-
tion. In 1993, legislation was adopted abolishing previous requirements of a
three-year waiting period for capital repatriation. Under the legislation, for-
eign investors are permitted to remit profits at any time.
ADDITIONAL INVESTMENT POLICIES AND PRACTICES
The North American Government Income Portfolio may utilize various investment
strategies to hedge its investment portfolio against currency and other risks.
The Portfolio may write covered put and call options and purchase put and call
options on U.S. and foreign securities exchanges and over-the-counter, enter
into contracts for the purchase and sale for future delivery of fixed income
securities or foreign curren-
38
<PAGE>
cies or contracts based on financial indices or common stocks and purchase and
write put and call options on such futures contracts or on foreign currencies
and purchase or sell forward foreign currency exchange contracts. In further-
ance of its investment policies, the Portfolio may enter into interest rate
swaps and may purchase or sell interest rate caps and floors and may purchase
and sell options on fixed income securities. The Portfolio may also enter into
forward commitments for the purchase or sale of securities, enter into repur-
chase agreements, standby commitments and make secured loans of its portfolio
securities. See "Other Investment Policies and Techniques."
Risks of Investments in Foreign Securities. Investing in securities issued by
foreign governments involves considerations and possible risks not typically
associated with investing in U.S. Government Securities. For a description of
certain risks associated with investing in foreign securities, see "Other In-
vestment Policies and Techniques -- Foreign Securities," below.
The Portfolio believes that, except for currency fluctuations between the U.S.
Dollar and the Canadian Dollar, the risks of investment in foreign securities
are not likely to have a material adverse effect on the Portfolio's invest-
ments in the securities of Canadian issuers or investments denominated in Ca-
nadian Dollars. The risks of investment in foreign securities described in
"Other Investment Policies and Techniques --Foreign Securities," below are
more likely to have a material adverse effect on the Portfolio's investments
in the securities of Mexican and other non-Canadian Foreign issuers, including
investments in securities denominated in Mexican Pesos or other non-Canadian
Foreign currencies. If not hedged, however, currency fluctuations could affect
the unrealized appreciation and depreciation of non-Canadian Government Secu-
rities as expressed in U.S. dollars.
Currency Risks. Because Portfolio assets are invested in fixed income securi-
ties denominated in the Canadian Dollar, the Mexican Peso and other foreign
currencies and because a substantial portion of the Portfolio's revenues are
received in currencies other than the U.S. Dollar, the U.S. Dollar equivalent
of the Portfolio's net assets and distributions will be adversely affected by
reductions in the value of certain foreign currencies relative to the U.S.
Dollar. These changes will also affect the Portfolio's income. If the value of
the foreign currencies in which the Portfolio receives income falls relative
to the U.S. Dollar between receipt of the income and the making of Portfolio
distributions, the Portfolio may be required to liquidate securities in order
to make distributions if the Portfolio has insufficient cash in U.S. Dollars
to meet the distribution requirements that the Portfolio must satisfy to qual-
ify as a regulated investment company for federal income tax purposes. Simi-
larly, if an exchange rate declines between the time the Portfolio incurs ex-
penses in U.S. Dollars and the time cash expenses are paid, the amount of the
currency required to be converted into U.S. Dollars in order to pay expenses
in U.S. Dollars could be greater than the equivalent amount of such expenses
in the currency at the time they were incurred. In light of these risks, the
Portfolio may engage in certain currency hedging transactions, which them-
selves in-
39
<PAGE>
volve certain special risks. See "Other Investment Policies and Techniques --
Hedging Techniques."
GLOBAL DOLLAR GOVERNMENT PORTFOLIO
The Global Dollar Government Portfolio's primary investment objective is to
seek a high level of current income. Its secondary investment objective is
capital appreciation. In seeking to achieve these objectives, the Portfolio
invests at least 65% of its total assets in fixed income securities issued or
guaranteed by foreign governments, including participations in loans between
foreign governments and financial institutions, and interests in entities or-
ganized and operated for the purpose of restructuring the investment charac-
teristics of instruments issued or guaranteed by foreign governments ("Sover-
eign Debt Obligations"). The Portfolio's investments in Sovereign Debt Obliga-
tions emphasize obligations of a type customarily referred to as "Brady
Bonds," that are issued as part of debt restructurings and that are col-
lateralized in full as to principal due at maturity by zero coupon obligations
issued by the U.S. government, its agencies or instrumentalities ("Collateral-
ized Brady Bonds"). The Portfolio may also invest up to 35% of its total as-
sets in U.S. and non-U.S. corporate fixed income securities. The Portfolio
limits its investments in Sovereign Debt Obligations and U.S. and non-U.S.
corporate fixed income securities to U.S. dollar denominated securities. The
Adviser expects that, based upon current market conditions, the Portfolio's
investment portfolio of U.S. fixed-income securities will have an average ma-
turity range of approximately 9 to 15 years and the Portfolio's investment
portfolio of non-U.S. fixed-income securities will have an average maturity
range of approximately 15 to 25 years. The Adviser anticipates that the Port-
folio's investment portfolio of sovereign debt obligations will have a longer
average maturity.
With respect to its investments in Sovereign Debt Obligations and non-U.S.
corporate fixed income securities, the Portfolio will emphasize investments in
countries that are considered emerging market countries at the time of pur-
chase. As used in this Prospectus, an "emerging market country" is any country
that is considered to be an emerging or developing country by the Interna-
tional Bank for Reconstruction and Development (commonly referred to as the
"World Bank"). It is expected that a substantial part of the Portfolio's in-
vestment focus will be in the U.S. dollar denominated securities or obliga-
tions of Argentina, Brazil, Mexico, Morocco, the Philippines, Russia and Vene-
zuela because these countries are now, or are expected by the Adviser at a fu-
ture date to be, the principal participants in debt restructuring programs
(including, in the case of Argentina, Mexico, the Philippines and Venezuela,
issuers of currently outstanding Brady Bonds) that, in the Adviser's opinion,
will provide the most attractive investment opportunities for the Portfolio.
The Adviser anticipates that other countries that will provide investment op-
portunities for the Portfolio include, among others, Bolivia, Costa Rica, the
Dominican Republic, Ecuador, Jordan, Nigeria, Panama, Peru, Poland, Thailand,
Turkey and Uruguay. See "Brady Bonds" below.
The Portfolio may invest up to 30% of its total assets in the Sovereign Debt
Obligations and corporate fixed income securities of issuers in any one of Ar-
gentina, Brazil, Mexico, Morocco, the Philippines, Russia or
40
<PAGE>
Venezuela, and the Portfolio will limit investments in the Sovereign Debt
Obligations of each such country (or of any other single foreign country) to
less than 25% of its total assets. The Portfolio expects that it will not
invest more than 10% of its total assets in the Sovereign Debt Obligations and
corporate fixed income securities of issuers in any other single foreign coun-
try. At present, each of the above-named countries is an "emerging market coun-
try."
In selecting and allocating assets among countries, the Adviser develops a
long-term view of those countries and analyzes sovereign risk by focusing on
factors such as a country's public finances, monetary policy, external ac-
counts, financial markets, stability of exchange rate policy and labor condi-
tions. In selecting and allocating assets among corporate issues within a given
country, the Adviser considers the relative financial strength of issues and
expects to emphasize investments in securities of issuers that, in the Advis-
er's opinion, are undervalued within each market sector. The Portfolio is not
required to invest any specified minimum amount of its total assets in the se-
curities or obligations of issues located in any particular country.
Sovereign Debt Obligations held by the Portfolio take the form of bonds, notes,
bills, debentures, warrants, short-term paper, loan participations, loan as-
signments and interests issued by entities organized and operated for the pur-
pose of restructuring the investment characteristics of other Sovereign Debt
Obligations. Sovereign Debt Obligations held by the Portfolio generally are not
traded on a securities exchange. The U.S. and non-U.S. corporate fixed income
securities held by the Portfolio include debt securities, convertible securi-
ties and preferred stocks of corporate issuers. The Portfolio will not be sub-
ject to restrictions on the maturities of the securities it holds.
Substantially all of the Portfolio's assets are invested in lower-rated securi-
ties, which may include securities having the lowest rating for non-subordi-
nated debt instruments (i.e., rated C by Moody's or CCC or lower by S&P, Duff &
Phelps and Fitch) and unrated securities of comparable investment quality.
These securities are considered to have extremely poor prospects of ever at-
taining any real investment standing, to have a current identifiable vulnera-
bility to default, to be unlikely to have the capacity to pay interest and re-
pay principal when due in the event of adverse business, financial or economic
conditions, and/or to be in default or not current, in the payment of interest
or principal. The Portfolio may also invest in investment grade securities.
Unrated securities will be considered for investment by the Portfolio when the
Adviser believes that the financial condition of the issuers of such obliga-
tions and the protection afforded by the terms of the obligations themselves
limit the risk to the Adviser to a degree comparable to that of rated securi-
ties which are consistent with the Fund's investment objectives and policies.
As of December 31, 1997, the percentages of the Adviser's assets invested in
securities rated (or considered by the Adviser to be of equivalent quality to
securities rated) in particular rating categories were 2.77% in A and above,
33.91% in Ba or BB, 54.25% in B, 31.44% in CCC and 9.07% in non-rated. See
"Other Investment Policies and Techniques -- Securities Ratings," "-- Invest-
ment in Lower-Rated Fixed-Income Securities" and "Appendix A."
41
<PAGE>
A substantial portion of the Portfolio's investments will be in (i) securities
which were initially issued at discounts from their face values ("Discount Ob-
ligations") and (ii) securities purchased by the Portfolio at a price less
than their stated face amount or, in the case of Discount Obligations, at a
price less than their issue price plus the portion of "original issue dis-
count" previously accrued thereon, i.e., purchased at a "market discount."
Brady Bonds. As noted above, a significant portion of the Portfolio's invest-
ment portfolio will consist of debt obligations customarily referred to as
"Brady Bonds," which are created through the exchange of existing commercial
bank loans to foreign entities for new obligations in connection with debt
restructurings under a plan introduced by former U.S. Secretary of the Trea-
sury, Nicholas F. Brady (the "Brady Plan"). Brady Bonds have been issued only
recently, and, accordingly, do not have a long payment history. They may be
collateralized or uncollateralized and issued in various currencies (although
most are dollar-denominated) and they are actively traded in the over-the-
counter secondary market.
U.S. Dollar-denominated, Collateralized Brady Bonds, which may be fixed-rate
par bonds or floating rate discount bonds, are generally collateralized in
full as to principal due at maturity by U.S. Treasury zero coupon obligations
that have the same maturity as the Brady Bonds. Interest payments on these
Brady Bonds generally are collateralized by cash or securities in an amount
that, in the case of fixed rate bonds, is equal to at least one year of roll-
ing interest payments based on the applicable interest rate at that time and
is adjusted at regular intervals thereafter. Certain Brady Bonds are entitled
to "value recovery payments" in certain circumstances, which in effect consti-
tute supplemental interest payments but generally are not collateralized.
Brady Bonds are often viewed as having up to four valuation components: (i)
collateralized repayment of principal at final maturity; (ii) collateralized
interest payments; (iii) uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In the event of a default with re-
spect to Collateralized Brady Bonds as a result of which the payment obliga-
tions of the issuer are accelerated, the U.S. Treasury zero coupon obligations
held as collateral for the payment of principal will not be distributed to in-
vestors, nor will such obligations be sold and the proceeds distributed. The
collateral will be held by the collateral agent to the scheduled maturity of
the defaulted Brady Bonds, which will continue to be outstanding, at which
time the face amount of the collateral will equal the principal payments that
would have then been due on the Brady Bonds in the normal course. In addition,
in light of the residual risk of Brady Bonds and, among other factors, the
history of defaults with respect to commercial bank loans by public and pri-
vate entities of countries issuing Brady Bonds, investments in Brady Bonds are
to be viewed as speculative.
Structured Securities. The Portfolio may invest up to 25% of its total assets
in interests in entities organized and operated solely for the purpose of re-
structuring the investment characteristics of Sovereign Debt Obligations. This
type of restructuring involves the
42
<PAGE>
deposit with or purchase by an entity, such as a corporation or trust, of
specified instruments (such as commercial bank loans or Brady Bonds) and the
issuance by that entity of one or more classes of securities ("Structured Se-
curities") backed by, or representing interests in, the underlying instru-
ments. The cash flow on the underlying instruments may be apportioned among
the newly issued Structured Securities to create securities with different in-
vestment characteristics such as varying maturities, payment priorities and
interest rate provisions, and the extent of the payments made with respect to
Structured Securities is dependent on the extent of the cash flow on the un-
derlying instruments. Because Structured Securities of the type in which the
Portfolio anticipates it will invest typically involve no credit enhancement,
their credit risk generally will be equivalent to that of the underlying in-
struments.
The Portfolio is permitted to invest in a class of Structured Securities that
is either subordinated or unsubordinated to the right of payment of another
class. Subordinated Structured Securities typically have higher yields and
present greater risks than unsubordinated Structured Securities.
Certain issuers of Structured Securities may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, the Portfolio's invest-
ments in these Structured Securities may be limited by the restrictions con-
tained in the 1940 Act described below under "Investment in Other Investment
Companies."
Loan Participations and Assignments. The Portfolio may invest in fixed and
floating rate loans ("Loans") arranged through private negotiations between an
issuer of Sovereign Debt Obligations and one or more financial institutions
("Lenders"). The Portfolio's investments in Loans are expected in most in-
stances to be in the form of participations in Loans ("Participations") and
assignments of all or a portion of Loans ("Assignments") from third parties.
The Portfolio may invest up to 25% of its total assets in Participations and
Assignments. The government that is the borrower on the Loan will be consid-
ered by the Portfolio to be the issuer of a Participation or Assignment for
purposes of the Portfolio's fundamental investment policy that it will not in-
vest 25% or more of its total assets in securities of issuers conducting their
principal business activities in the same industry (i.e., foreign government).
The Portfolio's investment in Participations typically will result in the
Portfolio having a contractual relationship only with the Lender and not with
the borrower. The Portfolio will acquire Participations only if the Lender
interpositioned between the Portfolio and the borrower is a Lender having to-
tal assets of more than $25 billion and whose senior unsecured debt is rated
investment grade or higher (i.e., Baa or higher by Moody's or BBB or higher by
S&P, Duff & Phelps or Fitch).
When the Portfolio purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan. Because Assignments are arranged
through private negotiations between potential assignees and potential assign-
ors, however, the rights and obligations acquired by the Portfolio as the pur-
chaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender. The assignability of
43
<PAGE>
certain Sovereign Debt Obligations is restricted by the governing documenta-
tion as to the nature of the assignee such that the only way in which the
Portfolio may acquire an interest in a Loan is through a Participation and not
an Assignment. The Portfolio may have difficulty disposing of Assignments and
Participations because to do so it will have to assign such securities to a
third party. Because there may not be a liquid market for such securities, the
Portfolio anticipates that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market may
have an adverse impact on the value of such securities and the Portfolio's
ability to dispose of particular Assignments or Participations when necessary
to meet the Portfolio's liquidity needs in response to a specific economic
event such as a deterioration in the creditworthiness of the borrower. The
lack of a liquid secondary market for Assignments and Participations also may
make it more difficult for the Portfolio to assign a value to these securities
for purposes of valuing the Portfolio's portfolio and calculating its net as-
set value.
U.S. and Non-U.S. Corporate Fixed Income Securities. U.S. and non-U.S. corpo-
rate fixed income securities include debt securities, convertible securities
and preferred stocks of corporate issuers. Differing yields on fixed income
securities of the same maturity are a function of several factors, including
the relative financial strength of the issuers. Higher yields are generally
available from securities in the lower rating categories. When the spread be-
tween the yields of lower rated obligations and those of more highly rated is-
sues is relatively narrow, the Portfolio may invest in the latter since they
may provide attractive returns with somewhat less risk. The Portfolio expects
to invest in investment grade securities (i.e. securities rated Baa or better
by Moody's or BBB or better by S&P, Duff & Phelps or Fitch) and in high yield,
high risk lower rated securities (i.e., securities rated lower than Baa by
Moody's or BBB by S&P, Duff & Phelps or Fitch and commonly referred to as
"junk bonds") and in unrated securities of comparable credit quality. Unrated
securities are considered for investment by the Portfolio when the Adviser be-
lieves that the financial condition of the issuers of such obligations and the
protection afforded by the terms of the obligations themselves limit the risk
to the Portfolio to a degree comparable to that of rated securities which are
consistent with the Portfolio's investment objectives and policies. During the
Fund's fiscal year ended December 31, 1997, on a weighted average basis, the
percentages of the Portfolio's assets invested in securities rated (or consid-
ered by the Adviser to be of equivalent quality to securities rated) in par-
ticular rating categories were 1% in A and above, 50% in Ba or BB, 40% in B,
0% in CC and 9% in non-rated securities. See "Certain Risk Considerations" for
a discussion of the risks associated with the Portfolio's investments in U.S.
and non-U.S. corporate fixed income securities.
Investment in Other Investment Companies. The Portfolio may invest in other
investment companies whose investment objectives and policies are consistent
with those of the Portfolio. In accordance with the 1940 Act, the Portfolio
may invest up to 10% of its total assets in securities of other investment
companies. In addition, under the 1940 Act the Portfolio may not own
44
<PAGE>
more than 3% of the total outstanding voting stock of any investment company
and not more than 5% of the value of the Portfolio's total assets may be in-
vested in the securities of any investment company. If the Portfolio acquired
shares in investment companies, shareholders would bear both their proportion-
ate share of expenses in the Portfolio (including management and advisory
fees) and, indirectly, the expenses of such investment companies (including
management and advisory fees).
Warrants. The Portfolio may invest in warrants, which are option securities
permitting their holder to subscribe for other securities. The Portfolio may
invest in warrants for debt securities or warrants for equity securities that
are acquired in connection with debt instruments. Warrants do not carry with
them dividend or voting rights with respect to the securities that they enti-
tle their holder to purchase, and they do not represent any rights in the as-
sets of the issuer. As a result, an investment in warrants may be considered
more speculative than certain other types of investments. In addition, the
value of a warrant does not necessarily change with the value of the under-
lying securities, and a warrant ceases to have value if it is not exercised
prior to its expiration date.
Reverse Repurchase Agreements and Dollar Rolls. The Portfolio may also use re-
verse repurchase agreements and dollar rolls as part of its investment strate-
gy. Reverse repurchase agreements involve sales by the Portfolio of portfolio
assets concurrently with an agreement by the Portfolio to repurchase the same
assets at a later date at a fixed price. During the reverse repurchase agree-
ment period, the Portfolio continues to receive principal and interest pay-
ments on these securities. Generally, the effect of such a transaction is that
the Portfolio can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are only advantageous if the interest cost to
the Portfolio of the reverse repurchase transaction is less than the cost of
otherwise obtaining the cash.
The Portfolio may enter into dollar rolls in which the Portfolio sells securi-
ties for delivery in the current month and simultaneously contracts to repur-
chase substantially similar (same type and coupon) securities on a specified
future date. During the roll period, the Portfolio forgoes principal and in-
terest paid on the securities. The Portfolio is compensated by the difference
between the current sales price and the lower forward price for the future
purchase (often referred to as the "drop") as well as by the interest earned
on the cash proceeds of the initial sale.
The Portfolio will establish a segregated account with its custodian in which
it will maintain cash and/or liquid high grade debt securities equal in value
to its obligations in respect of reverse repurchase agreements and dollar
rolls. Reverse repurchase agreements and dollar rolls involve the risk that
the market value of the securities the Portfolio is obligated to repurchase
under the agreement may decline below the repurchase price. In the event the
buyer of securities under a reverse repurchase agreement or dollar roll files
for bankruptcy or becomes insolvent, the Portfolio's use of the proceeds of
the agreement may be re-
45
<PAGE>
stricted pending a determination by the other party, or its trustee or receiv-
er, whether to enforce the Portfolio's obligation to repurchase the securi-
ties.
Reverse repurchase agreements and dollar rolls are speculative techniques and
are considered borrowings by the Portfolio. Under the requirements of the 1940
Act, the Portfolio is required to maintain an asset coverage of at least 300%
of all borrowings. Reverse repurchase agreements and dollar rolls, together
with any borrowing will not exceed 33% of the Portfolio's total assets, less
liabilities other than any borrowing.
Short Sales. The Portfolio may make short sales of securities or maintain a
short position only for the purpose of deferring realization of gain or loss
for U.S. federal income tax purposes, provided that at all times when a short
position is open the Portfolio owns an equal amount of such securities of the
same issue as, and equal in amount to, the securities sold short. In addition,
the Portfolio may not make a short sale if more than 10% of the Portfolio's
net assets (taken at market value) is held as collateral for short sales at
any one time. If the price of the security sold short increases between the
time of the short sale and the time the Portfolio replaces the borrowed secu-
rity, the Portfolio will incur a loss; conversely, if the price declines, the
Portfolio will realize a short-term capital gain. See "Investment Restric-
tions" in the Statement of Additional Information.
In furtherance of its investment policies, the Portfolio may, without limit,
enter into interest rate swaps and may purchase or sell interest rate caps and
floors and may purchase and sell options on fixed income securities and indi-
ces thereof. The Portfolio may also enter into forward commitments for the
purchase or sale of securities, enter into repurchase agreements, standby com-
mitments and make secured loans of its portfolio securities. See "Other In-
vestment Policies and Techniques."
Future Developments. The Portfolio may, following written notice to its share-
holders, take advantage of other investment practices which are not at present
contemplated for use by the Portfolio or which currently are not available but
which may be developed, to the extent such investment practices are both con-
sistent with the Portfolio's investment objectives and legally permissible for
the Portfolio. Such investment practices, if they arise, may involve risks
which exceed those involved in the activities described above.
Sovereign Debt Obligations. No established secondary markets may exist for
many of the Sovereign Debt Obligations in which the Portfolio will invest. Re-
duced secondary market liquidity may have an adverse effect on the market
price and the Portfolio's ability to dispose of particular instruments when
necessary to meet its liquidity requirements or in response to specific eco-
nomic events such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain Sovereign Debt Obligations may
also make it more difficult for the Portfolio to obtain accurate market quota-
tions for purpose of valuing its portfolio. Market quotations are generally
available on many Sovereign Debt Obligations only from a limited number of
dealers and may not necessarily represent firm bids of those dealers or prices
for actual sales.
46
<PAGE>
By investing in Sovereign Debt Obligations, the Portfolio will be exposed to
the direct or indirect consequences of political, social and economic changes
in various countries. Political changes in a country may affect the willing-
ness of a foreign government to make or provide for timely payments of its ob-
ligations. The country's economic status, as reflected, among other things, in
its inflation rate, the amount of its external debt and its gross domestic
product, will also affect the government's ability to honor its obligations.
The Sovereign Debt Obligations in which the Portfolio will invest in most
cases pertain to countries that are among the world's largest debtors to com-
mercial banks, foreign governments, international financial organizations and
other financial institutions. In recent years, the governments of some of
these countries have encountered difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructur-
ing of certain indebtedness. Restructuring arrangements have included, among
other things, reducing and rescheduling interest and principal payments by ne-
gotiating new or amended credit agreements or converting outstanding principal
and unpaid interest to Brady Bonds, and obtaining new credit to finance inter-
est payments. Certain governments have not been able to make payments of in-
terest on or principal of Sovereign Debt Obligations as those payments have
come due. Obligations arising from past restructuring agreements may affect
the economic performance and political and social stability of those issuers.
The ability of governments to make timely payments on their obligations is
likely to be influenced strongly by the issuer's balance of payments, includ-
ing export performance, and its access to international credits and invest-
ments. To the extent that a country receives payment for its exports in cur-
rencies other than dollars, its ability to make debt payments denominated in
dollars could be adversely affected. To the extent that a country develops a
trade deficit, it will need to depend on continuing loans from foreign govern-
ments, multilateral organizations or private commercial banks, aid payments
from foreign governments and on inflows of foreign investment. The access of a
country to these forms of external funding may not be certain, and a with-
drawal of external funding could adversely affect the capacity of a government
to make payments on its obligations. In addition, the cost of servicing debt
obligations can be affected by a change in international interest rates since
the majority of these obligations carry interest rates that are adjusted peri-
odically based upon international rates.
The Portfolio is permitted to invest in Sovereign Debt Obligations that are
not current in the payment of interest or principal or are in default, so long
as the Adviser believes it to be consistent with the Portfolio's investment
objectives. The Portfolio may have limited legal recourse in the event of a
default with respect to certain Sovereign Debt Obligations it holds. For exam-
ple, remedies from defaults on certain Sovereign Debt Obligations, unlike
those on private debt, must, in some cases, be pursued in the courts of the
defaulting party itself. Legal recourse therefore may be significantly dimin-
ished. Bankruptcy, moratorium and other similar laws applicable to issuers of
Sovereign Debt Obligations may be substantially
47
<PAGE>
different from those applicable to issuers of private debt obligations. The
political context, expressed as the willingness of an issuer of Sovereign Debt
Obligations to meet the terms of the debt obligation, for example, is of con-
siderable importance. In addition, no assurance can be given that the holders
of commercial bank debt will not contest payments to the holders of securities
issued by foreign governments in the event of default under commercial bank
loan agreements.
U.S. Corporate Fixed Income Securities. The U.S. corporate fixed income secu-
rities in which the Portfolio will invest may include securities issued in
connection with corporate restructurings such as takeovers or leveraged
buyouts, which may pose particular risks. Securities issued to finance corpo-
rate restructurings may have special credit risks due to the highly leveraged
conditions of the issuer. In addition, such issuers may lose experienced man-
agement as a result of the restructuring. Finally, the market price of such
securities may be more volatile to the extent that expected benefits from the
restructuring do not materialize. The Portfolio may also invest in U.S. corpo-
rate fixed income securities that are not current in the payment of interest
or principal or are in default, so long as the Adviser believes such invest-
ment is consistent with the Portfolio's investment objectives. The Portfolio's
rights with respect to defaults on such securities will be subject to applica-
ble U.S. bankruptcy, moratorium and other similar laws.
UTILITY INCOME PORTFOLIO
The Utility Income Portfolio's investment objective is to seek current income
and capital appreciation by investing primarily in equity and fixed-income se-
curities of companies in the utilities industry. The Portfolio may invest in
securities of both United States and foreign issuers, although no more than
15% of the Portfolio's total assets will be invested in issuers in any one
foreign country. The utilities industry consists of companies engaged in (i)
the manufacture, production, generation, provision, transmission, sale and
distribution of gas and electric energy, and communications equipment and
services, including telephone, telegraph, satellite, microwave and other com-
panies providing communication facilities for the public, or (ii) the provi-
sion of other utility or utility-related goods and services, including, but
not limited to, entities engaged in water provision, cogeneration, waste dis-
posal system provision, solid waste electric generation, independent power
producers and non-utility generators. As a matter of fundamental policy, the
Portfolio normally invests at least 65% of the value of its total assets in
securities of companies in the utilities industry. The Portfolio considers a
company to be in the utilities industry if, during the most recent twelve
month period, at least 50% of the company's gross revenues, on a consolidated
basis, is derived from its utilities activities. At least 65% of the Portfo-
lio's total assets are to be invested in income-producing securities.
The Portfolio's investment objective and policies are designed to take advan-
tage of the characteristics and historical performance of securities of compa-
nies in the utilities industry. Many of these companies have established a
reputation for paying regular dividends and for increasing their common stock
dividends over time. In evaluating particular issuers, the Adviser considers a
num-
48
<PAGE>
ber of factors, including historical growth rates and rates of return on capi-
tal, financial condition and resources, management skills and such industry
factors as regulatory environment and energy sources. With respect to invest-
ments in equity securities, the Adviser considers the prospective growth in
earnings and dividends in relation to price/ earnings ratios, yield and risk.
The Adviser believes that above-average dividend returns and below-average
price/earnings ratios are factors that not only provide current income but also
generally tend to moderate risk and to afford opportunity for appreciation of
securities owned by the Portfolio.
The Portfolio invests in equity securities, such as common stocks, securities
convertible into common stocks and rights and warrants to subscribe for pur-
chase of common stocks, and in fixed-income securities, such as bonds and pre-
ferred stocks. There are no fixed percentage limits on the allocation of the
Portfolio's investments between equity securities and fixed income securities.
Rather, the Portfolio varies the percentage of assets invested in any one type
of security based upon the Adviser's evaluation as to the appropriate portfolio
structure for achieving the Portfolio's investment objective under prevailing
market, economic and financial conditions. Certain securities (such as fixed-
income securities) will be selected on the basis of their current yield, while
other securities may be purchased for their growth potential. The values of
fixed-income securities change as the general levels of interest rates fluctu-
ate. When interest rates decline, the values of fixed income securities can be
expected to increase, and when interest rates rise, the values of fixed income
securities can be expected to decrease. The Adviser expects that the average
weighted maturity of the Portfolio's portfolio of fixed-income securities may,
depending upon market conditions, vary between 5 and 25 years.
The Portfolio may maintain up to 35% of its net assets in fixed-income securi-
ties rated below Baa by Moody's or below BBB by S&P, Duff & Phelps or Fitch or,
if not rated, of comparable investment quality as determined by the Adviser.
Such high-risk, high-yield securities (commonly referred to as "junk bonds")
are considered to have speculative or, in the case of relatively low ratings,
predominantly speculative characteristics. See "Other Investment Policies and
Techniques -- Securities Ratings," "-- Investment in Lower-Rated Fixed-Income
Securities" and Appendix A. The Portfolio will not retain a security which is
down-graded below B, or if unrated, determined by the Adviser to have undergone
similar credit quality deterioration subsequent to purchase.
Convertible Securities. Utilities frequently issue convertible securities. Con-
vertible securities include bonds, debentures, corporate notes and preferred
stocks that are convertible at a stated exchange rate into common stock. Prior
to their conversion, convertible securities have the same general character-
istics as non-convertible debt securities, which provide a stable stream of in-
come with generally higher yields than those of equity securities of the same
or similar issuers. The price of a convertible security will normally vary with
changes in the price of the underlying stock, although the higher yield tends
to make the convertible security less volatile than the underlying common
stock. As with debt securities, the market value of
49
<PAGE>
convertible securities tends to decrease as interest rates rise and, converse-
ly, to increase as interest rates decline. While convertible securities gener-
ally offer lower interest or dividend yields than non-convertible debt securi-
ties of similar quality, they offer investors the potential to benefit from in-
creases in the market price of the underlying common stock. The Portfolio may
invest up to 30% of its net assets in the convertible securities of companies
whose common stocks are eligible for purchase by the Portfolio under the in-
vestment policies described above.
Rights and Warrants. The Portfolio may invest up to 5% of its net assets in
rights or warrants which entitle the holder to buy equity securities at a spe-
cific price for a specific period of time, but will do so only if the equity
securities themselves are deemed appropriate by the Adviser for inclusion in
the Portfolio's portfolio. Rights and warrants entitle the holder to buy equity
securities at a specific price for a specific period of time. Rights are simi-
lar to warrants except that they have a substantially shorter duration. Rights
and warrants may be considered more speculative than certain other types of in-
vestments in that they do not entitle a holder to dividends or voting rights
with respect to the underlying securities nor do they represent any rights in
the assets of the issuing company. The value of a right or warrant does not
necessarily change with the value of the underlying security, although the
value of a right or warrant may decline because of a decrease in the value of
the underlying security, the passage of time or a change in perception as to
the potential of the underlying security, or any combination thereof. If the
market price of the underlying security is below the exercise price set forth
in the warrant on the expiration date, the warrant will expire worthless. More-
over, a right or warrant ceases to have value if it is not exercised prior to
the expiration date.
UTILITIES INDUSTRY
United States Utilities. The United States utilities industry has experienced
significant changes in recent years. Electric utility companies in general have
been favorably affected by lower fuel costs, the full or near completion of ma-
jor construction programs and lower financing costs. In addition, many utility
companies have generated cash flows in excess of current operating expenses and
construction expenditures, permitting some degree of diversification into un-
regulated businesses.
Regulatory changes with respect to nuclear and conventionally fueled generating
facilities could increase costs or impair the ability of such electric utili-
ties to operate such facilities, thus reducing their ability to service divi-
dend payments with respect to the securities they issue. Furthermore, rates of
return of utility companies generally are subject to review and limitation by
state public utilities commissions and tend to fluctuate with marginal financ-
ing costs.
Rate changes, however, ordinarily lag behind the changes in financing costs,
and thus can favorably or unfavorably affect the earnings or dividend pay-outs
on utilities stocks depending upon whether such rates and costs are declining
or rising.
Gas transmission companies, gas distribution companies and telecommunications
companies are also undergoing significant
50
<PAGE>
changes. Gas utilities have been adversely affected by declines in the prices
of alternative fuels, and have also been affected by oversupply conditions and
competition. Telephone utilities are still experiencing the effects of the
break-up of American Telephone & Telegraph Company, including increased compe-
tition and rapidly developing technologies with which traditional telephone
companies now compete. Although there can be no assurance that increased com-
petition and other structural changes will not adversely affect the profit-
ability of such utilities, or that other negative factors will not develop in
the future, in the Adviser's opinion, increased competition and change may
provide better positioned utility companies with opportunities for enhanced
profitability.
Utility companies historically have been subject to the risks of increases in
fuel and other operating costs, high interest costs associated with compliance
with environmental and nuclear safety regulations, service interruptions, eco-
nomic slowdowns, surplus capacity, competition and regulatory changes. There
can also be no assurance that regulatory policies or accounting standard
changes will not negatively affect utility companies' earnings or dividends.
Utility companies are subject to regulation by various authorities and may be
affected by the imposition of special tariffs and changes in tax laws. To the
extent that rates are established or reviewed by governmental authorities,
utility companies are subject to the risk that such authorities will not au-
thorize increased rates. Because of the Portfolio's policy of concentrating
its investments in securities of utility companies, the Portfolio may be more
susceptible than most other mutual funds to economic, political or regulatory
occurrences affecting the utilities industry.
Foreign Utilities. Foreign utility companies, like those in the United States,
are generally subject to regulation, although such regulations may or may not
be comparable to domestic regulations. Foreign utility companies in certain
countries may be more heavily regulated by their respective governments than
utility companies located in the United States and, as in the United States,
generally are required to seek government approval for rate increases. In ad-
dition, because many foreign utility companies use fuels that cause more pol-
lution that those used in the United States such utilities may yet be required
to invest in pollution control equipment. Foreign utility regulatory systems
vary from country to country and may evolve in ways different from regulation
in the United States.
The Portfolio's investment policies are designed to enable it to capitalize on
evolving investment opportunities throughout the world. For example, the rapid
growth of certain foreign economies will necessitate expansion of capacity in
the utility industries in those countries. Although many foreign utility com-
panies currently are government-owned, thereby limiting current investment op-
portunities for the Portfolio, the Adviser believes that, in order to attract
significant capital for growth, some foreign governments may engage in a pro-
gram of privatization of their utilities industry, and that the securities is-
sued by privatized utility companies may offer attractive investment opportu-
nities with the potential for long-term growth.
Privatization, which refers to the trend toward investor ownership, rather
than gov-
51
<PAGE>
ernment ownership, of assets is expected to occur both in newer, faster-growing
economies and in mature economies. In addition, efforts toward modernization in
Eastern Europe, as well as the potential of economic unification of European
markets, in the view of the Adviser, may improve economic growth, reduce costs
and increase competition in Europe, which could result in opportunities for in-
vestment by the Portfolio in utilities industries in Europe. There can be no
assurance that securities of privatized companies will be offered to the public
or to foreign companies such as the Portfolio, or that investment opportunities
in foreign markets for the Portfolio will increase for this or other reasons.
The percentage of the Portfolio's assets invested in issuers of particular
countries will vary depending on the relative yields and growth and income po-
tential of such securities, the economies of the countries in which the invest-
ments are made, interest rate conditions in such countries and the relationship
of such countries' currencies to the U.S. dollar. Currency is judged on the ba-
sis of fundamental economic criteria (e.g., relative inflation levels and
trends, growth rate forecasts, balance of payments status, and economic poli-
cies) as well as technical and political data. As mentioned above, the Portfo-
lio will not invest more than 15% of its total assets in issuers in any one
foreign country. See "Other Investment Policies and Techniques -- Foreign
Securities."
OTHER SECURITIES
While the Portfolio's investment strategy normally emphasizes securities of
companies in the utilities industry, the Portfolio may, where consistent with
its investment objective, invest up to 35% of its total assets in equity and
fixed-income securities of domestic and foreign issuers other than companies in
the utilities industry, including (i) U.S. Government Securities and repurchase
agreements pertaining thereto, as discussed below, (ii) foreign government se-
curities, as discussed below, (iii) corporate fixed-income securities of domes-
tic issuers of quality comparable to the fixed-income securities described
above, (iv) certificates of deposit, bankers' acceptances and interest-bearing
savings deposits of banks having total assets of more than $1 billion and which
are members of the Federal Deposit Insurance Corporation, (v) commercial paper
of prime quality rated Prime-1 by Moody's, A-1 by S&P, D-1 by Duff & Phelps or
F1 by Fitch or, if not rated, issued by companies which have an outstanding
debt issue rated Aa or higher by Moody's or AA or higher by S&P, Duff & Phelps
or Fitch, (vi) equity securities of domestic corporate issuers, and (vii) the
additional derivative vehicles discussed below under the caption "Investment
Practices."
U.S. Government Securities. U.S. Government Securities include: (i) U.S. Trea-
sury obligations, which differ only in their interest rates, maturities and
times of issuance: U.S. Treasury bills (maturity of one year or less with no
interest paid and hence issued at a discount and repaid at full face value upon
maturity), U.S. Treasury notes (maturities of one to 10 years with interest
payable every six months), and U.S. Treasury bonds (generally maturities of
greater than 10 years with interest payable every six months), all of which are
backed by the full faith and credit of the United States; (ii) obligations is-
sued or guaranteed by U.S. Government
52
<PAGE>
agencies and instrumentalities that are supported by the full faith and credit
of the U.S. Government, such as securities issued by the Government National
Mortgage Association, the Farmers Home Administration, the Department of Hous-
ing and Urban Development, the Export-Import Bank, the General Services Admin-
istration and the Small Business Administration; and (iii) obligations issued
or guaranteed by U.S. Government agencies and instrumentalities that are not
supported by the full faith and credit of the U.S. Government, such as securi-
ties issued by Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation, and governmental Collateralized Mortgage Obligations.
See Appendix A to the Statement of Additional Information for a further de-
scription of obligations issued or guaranteed by U.S. Government agencies or
instrumentalities.
U.S. Government Securities do not generally involve the credit risks associ-
ated with other types of interest bearing securities, although, as a result,
the yields available from U.S. Government Securities are generally lower than
the yields available from other interest bearing securities. Like other fixed-
income securities, however, the values of U.S. Government Securities change as
interest rates fluctuate. When interest rates decline, the values of U.S. Gov-
ernment Securities can be expected to increase and when interest rates rise,
the values of U.S. Government Securities can be expected to decrease.
Foreign Securities. Foreign fixed-income securities in which the Portfolio in-
vests may include fixed-income securities of quality comparable to the fixed-
income securities described above as determined by the Adviser (i) issued or
guaranteed, as to payment of principal and interest, by governments, quasi-
governmental entities, governmental agencies or other governmental entities
(collectively, "Government Entities") and (ii) of foreign corporate issuers,
denominated in foreign currencies or in U.S. Dollars (including fixed-income
securities of a Government Entity or foreign corporate issuer in a country de-
nominated in the currency of another country). The Portfolio may also invest
in equity securities of foreign corporate issuers. See "Investment Objective
and Policies -- Utilities Industry -- Foreign Utilities." For a description of
certain risks associated with investment in foreign securities, see "Other In-
vestment Policies and Techniques -- Foreign Securities," below.
In addition to purchasing corporate securities of foreign issuers in foreign
securities markets, the Portfolio may invest in American Depositary Receipts
(ADRs), Global Depositary Receipts (GDRs) and other types of Depository Re-
ceipts (which, together with ADRs and GDRs, are hereinafter referred to as
"Depositary Receipts"). Depositary Receipts may not necessarily be denominated
in the same currency as the underlying securities into which they may be con-
verted. In addition, the issuers of the stock of unsponsored Depositary Re-
ceipts are not obligated to disclose material information in the United States
and, therefore, there may not be a correlation between such information and
the market value of the Depositary Receipts. ADRs are Depositary Receipts typ-
ically issued by a United States bank or trust company which evidence owner-
ship of underlying securities issued by a foreign corporation. GDRs and other
types of Depositary Receipts are typically issued by foreign
53
<PAGE>
banks or trust companies, although they also may be issued by United States
banks or trust companies, and evidence ownership of underlying securities is-
sued by either a foreign or a United States corporation. Generally, Depositary
Receipts in registered form are designed for use in the U.S. securities mar-
kets and Depositary Receipts in bearer form are designed for use in foreign
securities markets. For purposes of the Portfolio's investment policies, the
Portfolio's investments in ADRs are deemed to be investments in securities is-
sued by United States issuers and the Portfolio's investments in GDRs and
other types of Depositary Receipts will be deemed to be investments in the un-
derlying securities.
The Portfolio is also authorized to invest in securities of supranational en-
tities denominated in the currency of any country. A supranational entity is
an entity designated or supported by the national government of one or more
countries to promote economic reconstruction or development. Examples of su-
pranational entities include, among others, the World Bank (International Bank
for Reconstruction and Development) and the European Investment Bank. The
Portfolio may, in addition, invest in securities denominated in European Cur-
rency Units. A European Currency Unit is a basket of specified amounts of the
currencies of the member states of the European Union. The Portfolio is fur-
ther authorized to invest in "semi-governmental securities," which are securi-
ties issued by entities owned by either a national, state or equivalent gov-
ernment or are obligations of one of such government jurisdictions which are
not backed by its full faith and credit and general taxing powers.
INVESTMENT PRACTICES
The Portfolio may utilize various investment strategies to hedge its invest-
ment portfolio against currency and other risks. The Portfolio may write cov-
ered put and call options and purchase put and call options on U.S. and for-
eign securities exchanges and over-the-counter, enter into contracts for the
purchase and sale for future delivery of fixed income securities or foreign
currencies or contracts based on financial indices or common stocks and pur-
chase and write put and call options on such futures contracts or on foreign
currencies and purchase or sell forward foreign currency exchange contracts.
In furtherance of its investment policies, the Portfolio may enter into inter-
est rate swaps and may purchase or sell interest rate caps and floors and may
purchase and sell options on fixed income securities. The Portfolio may also
enter into forward commitments for the purchase or sale of securities, enter
into repurchase agreements, standby commitments and make secured loans of its
portfolio securities. See "Other Investment Policies and Techniques."
Short Sales. The Portfolio may make short sales of securities or maintain a
short position only for the purpose of deferring realization of gain or loss
for U.S. federal income tax purposes, provided that at all times when a short
position is open the Portfolio owns an equal amount of such securities of the
same issue as, and equal in amount to, the securities sold short. In addition,
the Portfolio may not make a short sale if more than 10% of the Portfolio's
net assets (taken at market value) is held as collateral for short sales at
any one time. If the price of the security sold short increases be-
54
<PAGE>
tween the time of the short sale and the time the Portfolio replaces the bor-
rowed security, the Portfolio will incur a loss; conversely, if the price de-
clines, the Portfolio will realize a capital gain.
Future Developments. The Portfolio may, following written notice to its share-
holders, take advantage of other investment practices which are not at present
contemplated for use by the Portfolio or which currently are not available but
which may be developed, to the extent such investment practices are both con-
sistent with the Portfolio's investment objective and legally permissible for
the Portfolio. Such investment practices, if they arise, may involve risks
which exceed those involved in the activities described above.
GROWTH INVESTORS PORTFOLIO AND CONSERVATIVE INVESTORS PORTFOLIO
The Conservative Investors Portfolio and Growth Investors Portfolio invest in
a variety of fixed-income securities, money market instruments and equity se-
curities, each pursuant to a different asset allocation strategy, as described
below. The term "asset allocation" is used to describe the process of shifting
assets among discrete categories of investments in an effort to adjust risk
while producing desired return objectives. Portfolio management, therefore,
will consist not only of specific securities selection but also of setting,
monitoring and changing, when necessary, the asset mix.
Each Portfolio has been designed with a view toward a particular "investor
profile." The "conservative investor" has a relatively short-term investment
bias, either because of a limited tolerance for market volatility or a short
investment horizon. This investor is adverse to taking risks that may result
in principal loss, even though such aversion may reduce the potential for
higher long-term gains and result in lower performance during periods of eq-
uity market strength. Consequently, the asset mix for the Conservative Invest-
ors Portfolio attempts to reduce volatility while providing modest upside po-
tential. The "growth investor" has a longer-term investment horizon and is
therefore willing to take more risks in an attempt to achieve long-term growth
of principal. This investor wishes, in effect, to be risk conscious without
being risk averse. The asset mix for the Growth Investors Portfolio should
therefore provide for upside potential without excessive volatility.
The Adviser has established an asset allocation committee (the "Committee"),
all the members of which are employees of the Adviser, which is responsible
for setting and continually reviewing the asset mix ranges of each Portfolio.
Under normal market conditions, the Adviser expects to change allocation
ranges approximately three to five times per year. However, the Adviser has
broad latitude to establish the frequency, as well as the magnitude, of allo-
cation changes within the guidelines established for each Portfolio. During
periods of severe market disruption, allocation ranges may change frequently.
It is also possible that in periods of stable and consistent outlook no change
will be made. The Adviser's decisions are based on and may be limited by a va-
riety of factors, including liquidity, portfolio size, tax consequences and
general market conditions, always within the context of the appro-
55
<PAGE>
priate investor profile for each Portfolio. Consequently, asset mix decisions
for the Conservative Investors Portfolio particularly emphasize risk assessment
of each asset class viewed over the shorter term, while decisions for the
Growth Investors Portfolio are principally based on the longer term total re-
turn potential for each asset class.
The Portfolios are permitted to use a variety of hedging techniques to attempt
to reduce market interest rate and currency risks.
INVESTMENT POLICIES
Conservative Investors Portfolio. The investment objective of the Conservative
Investors Portfolio is to achieve a high total return without, in the view of
the Adviser, undue risk of principal. The Conservative Investors Portfolio at-
tempts to achieve its investment objective by allocating varying portions of
its assets among investment grade, publicly traded fixed-income securities,
money market instruments and publicly traded common stocks and other equity se-
curities of United States and non-United States issuers. The average weighted
maturity of the Portfolio's portfolio of fixed-income securities is expected to
vary between less than one year to 30 years. See "Other Investment Policies and
Techniques -- Fixed Income Securities."
All fixed-income securities owned by the Portfolio will be investment grade at
the time of purchase. This means that they will be in one of the top four rat-
ing categories assigned by S&P, Moody's, Duff & Phelps or Fitch or will be
unrated securities of comparable quality as determined by the Adviser. Securi-
ties in the fourth such rating category (rated Baa by Moody's or BBB by S&P,
Duff & Phelps or Fitch) have speculative characteristics, and changes in eco-
nomic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments on such obligations than in
the case of higher-rated securities. See "Other Investment Policies and Tech-
niques -- Securities Ratings," "-- Investment in Fixed-Income Securities Rated
Baa and BBB" and Appendix A. In the event that the rating of any security held
by the Conservative Investors Portfolio falls below investment grade (or, in
the case of an unrated security, the Adviser determines that it is no longer of
investment grade), the Portfolio will not be obligated to dispose of such secu-
rity and may continue to hold the obligation if, in the opinion of the Adviser,
such investment is considered appropriate in the circumstances.
Equity securities invested in by the Conservative Investors Portfolio consists
of common stocks and securities convertible into common stocks, such as con-
vertible bonds, convertible preferred stocks and warrants, issued by companies
with a favorable outlook for earnings and whose rate of growth is expected to
exceed that of the United States' economy over time.
The Conservative Investors Portfolio holds at all times at least 40% of its to-
tal assets in investment grade fixed-income securities, each having a duration
less than that of a 10-year Treasury bond (the "Fixed Income Core"). The dura-
tion of a fixed-income security is the weighted average maturity, expressed in
years, of the present value of all future cash flows, including coupon payments
and principal repayments.
56
<PAGE>
The Conservative Investors Portfolio is generally expected to hold approxi-
mately 70% of its total assets in fixed-income securities (including the Fixed
Income Core cash and money market instruments) and 30% in equity securities.
Actual asset mixes will be adjusted in response to economic and credit market
cycles. The fixed-income asset class always comprises at least 50%, but never
more than 90%, of the Portfolio's total assets. The equity class always com-
prises at least 10%, but never more than 50%, of the Portfolio's total assets.
For temporary defensive purposes, the Portfolio may invest in money market in-
struments.
Growth Investors Portfolio. The investment objective of the Growth Investors
Portfolio is to achieve the highest total return consistent with the Adviser's
determination of reasonable risk. The Portfolio attempts to achieve its in-
vestment objective by allocating varying portions of its assets among a number
of asset classes. Equity investments will include publicly traded common
stocks and other equity securities of the type in which the Conservative In-
vestors Portfolio may invest but may also include equity securities issued by
intermediate- and small-sized companies with favorable growth prospects, com-
panies in cyclical industries, companies whose securities are temporarily un-
dervalued, companies in special situations and less widely known companies.
Fixed-income investments will include investment grade fixed-income securities
(including cash and money market instruments) and may include securities that
are rated in the lower rating categories by recognized ratings agencies (i.e.,
Ba or lower by Moody's or BB or lower by S&P, Duff & Phelps or Fitch) or that
are unrated but determined by the Adviser to be of comparable quality. Lower-
rated fixed-income securities generally provide greater current income than
higher rated fixed-income securities, but are subject to greater credit and
market risk. The Portfolio will not invest more than 25% of its total assets
in securities rated below investment grade, that is, securities rated Ba or
lower by Moody's or BB or lower by S&P, Duff & Phelps or Fitch, or unrated se-
curities deemed to be of comparable quality by the Adviser. See "Other Invest-
ment Policies and Techniques -- Securities Ratings," "-- Investment in Lower-
Rated Fixed-Income Securities" and Appendix A.
The Growth Investors Portfolio holds at all times at least 40% of its total
assets in publicly traded common stocks and other equity securities of the
type purchased by the Conservative Investors Portfolio (the "Equity Core").
The Growth Investors Portfolio is generally expected to hold approximately 70%
of its total assets in equity securities (including the Equity Core) and 30%
in fixed-income securities (including cash and money market instruments). Ac-
tual asset mixes will be adjusted in response to economic and credit market
cycles. The fixed-income asset class will always comprise at least 10%, but
never more than 60%, of the Portfolio's total assets. The equity class will
always comprise at least 40%, but never more than 90%, of the Portfolio's to-
tal assets. The average weighted maturity of the Portfolio's portfolio of
fixed-income securities is expected to vary between less than one year to 30
years. See "Other Investment Policies and Techniques -- Fixed Income Securi-
ties." For temporary defensive purposes, the Portfolio may invest in money
market instruments.
57
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND TECHNIQUES
Foreign Securities. Each of the Conservative Investors Portfolio and Growth In-
vestors Portfolio may invest without limit in securities which are not publicly
traded in the United States, although the Conservative Investors Portfolio gen-
erally will not invest more than 15% of its total assets, and the Growth In-
vestors Portfolio generally will not invest more than 30% of its total assets,
in such securities.
The Growth Investors Portfolio may invest a portion of its assets in developing
countries or in countries with new or developing capital markets. The risks as-
sociated with investment in foreign securities are generally intensified for
these investments. These countries may have relatively unstable governments,
economies based on only a few industries or securities markets that trade a
small number of securities. Securities of issuers located in these countries
tend to have volatile prices and may offer significant potential for loss.
The value of foreign investments measured in U.S. dollars will rise or fall be-
cause of decreases or increases, respectively, in the value of the U.S. dollar
in comparison to the value of the currency in which the foreign investment is
denominated. The Portfolios may buy or sell foreign currencies, options on for-
eign currencies, foreign currency futures contracts (and related options) and
deal in forward foreign currency exchange contracts in connection with the pur-
chase and sale of foreign investments.
For a description of certain risks associated with investing in foreign securi-
ties, see "Other Investment Policies and Techniques-- Foreign Securities," be-
low.
Non-Publicly Traded Securities. Each Portfolio may invest in securities which
are not publicly traded, including securities sold pursuant to Rule 144A under
the Securities Act of 1933 ("Rule 144A Securities"). The sale of these securi-
ties is usually restricted under Federal securities laws, and market quotations
may not be readily available. As a result, a Portfolio may not be able to sell
these securities (other than Rule 144A Securities) unless they are registered
under applicable Federal and state securities laws, or may have to sell them at
less than fair market value. Investment in these securities is restricted to 5%
of a Portfolio's total assets (not including for these purposes Rule 144A Secu-
rities, to the extent permitted by applicable law) and is also subject to the
Portfolio's restriction against investing more than 15% of total assets in il-
liquid securities. To the extent permitted by applicable law, Rule 144A Securi-
ties are not treated as "illiquid" for purposes of the foregoing restriction so
long as such securities meet liquidity guidelines established by the Board of
Directors. See "Other Investment Policies and Techniques -- Illiquid Securi-
ties," below.
Mortgage-Backed Securities. Each Portfolio may invest in mortgage-backed secu-
rities, including collateralized mortgage obligations or "CMOs." Interest and
principal payments (including prepayments) on the mortgages underlying mort-
gage-backed securities are passed through to the holders of the mortgage-backed
security. Prepayments occur when the mortgagor on an individual mortgage pre-
pays the remaining principal before the mortgage's scheduled maturity
58
<PAGE>
date. As a result of the pass-through of prepayments of principal on the un-
derlying securities, mortgage-backed securities are often subject to more
rapid prepayment of principal than their stated maturity would indicate. Be-
cause the prepayment characteristics of the underlying mortgages vary, it is
not possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. During periods of declining in-
terest rates, such prepayments can be expected to accelerate and the Portfo-
lios would be required to reinvest the proceeds at the lower interest rates
then available. Conversely, during periods of rising interest rates, a reduc-
tion in prepayments may increase the effective maturities of the securities,
subjecting them to a greater risk of decline in market value in response to
rising interest rates. In addition, prepayments of mortgages which underlie
securities purchased at a premium could result in capital losses.
The Portfolios may also invest in derivative instruments, including certifi-
cates representing rights to receive payments of the interest only or princi-
pal only of mortgage-backed securities ("IO/PO Strips"). These securities may
be more volatile than other types of securities. IO Strips involve the addi-
tional risk of loss of the entire remaining value of the investment if the un-
derlying mortgages were prepaid.
Although the market for mortgage-related securities is becoming increasingly
liquid, those issued by certain private organizations may not be readily mar-
ketable. In particular, the secondary markets for CMOs and IO/PO Strips may be
more volatile and less liquid than those for other mortgage-related securi-
ties, thereby potentially limiting a Fund's ability to buy or sell those secu-
rities at any particular time.
Adjustable Rate Securities. Each Portfolio may invest in adjustable rate secu-
rities. Adjustable rate securities are securities that have interest rates
that are reset at periodic intervals, usually by reference to some interest
rate index or market interest rate. Some adjustable rate securities are backed
by pools of mortgage loans. Although the rate adjustment feature may act as a
buffer to reduce sharp changes in the value of adjustable rate securities,
these securities are still subject to changes in value based on changes in
market interest rates or changes in the issuer's creditworthiness. Because the
interest rate is reset only periodically, changes in the interest rate on ad-
justable rate securities may lag behind changes in prevailing market interest
rates. Also, some adjustable rate securities (or the underlying mortgages) are
subject to caps or floors that limit the maximum change in interest rate dur-
ing a specified period or over the life of the security.
Asset-Backed Securities. Each Portfolio may invest in asset-backed securities
which represent fractional interests in pools of leases, retail installment
loans or revolving credit receivables, both secured and unsecured. These as-
sets are generally held by a trust and payments of principal and interest or
interest only are passed through monthly or quarterly to certificate holders
and may be guaranteed up to certain amounts by letters of credit issued by a
financial institution affiliated or unaffiliated with the trustee or origina-
tor of the trust.
Underlying automobile sales contracts or credit card receivables are subject
to pre-
59
<PAGE>
payment, which may reduce the overall return to certificate holders. Certifi-
cate holders may also experience delays in payment on the certificates if the
full amounts due on underlying sales contracts or receivables are not realized
by the trust because of unanticipated legal or administrative costs of enforc-
ing the contracts or because of depreciation or damage to the collateral (usu-
ally automobiles) securing certain contracts, or other factors. If consistent
with its investment objective and policies, the Portfolio may invest in other
asset-backed securities that may be developed in the future.
Investments in High-Yield Securities. The Growth Investors Portfolio may in-
vest in high-yield, high-risk, fixed-income and convertible securities rated
at the time of purchase Ba or lower by Moody's or BB or lower by S&P, Duff &
Phelps or Fitch, or, if unrated, judged by the Adviser to be of comparable
quality ("high-yield securities"). The Growth Investors Portfolio generally
invests in securities with a minimum rating of Caa-- by Moody's or CCC-- by
S&P, Duff & Phelps or Fitch or in unrated securities judged by the Adviser to
be of comparable quality at the time of purchase. However, from time to time,
the Portfolio may invest in securities rated in the lowest grades of Moody's,
S&P and Fitch (C) or Duff & Phelps (CC) or in unrated securities judged by the
Adviser to be of comparable quality, if the Portfolio's management determines
that there are prospects for an upgrade or a favorable conversion into equity
securities (in the case of convertible securities). Securities rated Ba or BB
or lower (and comparable unrated securities) are commonly referred to as "junk
bonds." Securities rated D by S&P and Fitch or DD by Duff & Phelps are in de-
fault. As of December 31, 1997, 1.11% of the Portfolio's assets were invested
in fixed-income securities rated (or considered by the Adviser to be of equiv-
alent quality to securities rated) in the category A and above, 1.72% of the
Portfolio's assets were invested in securities rated B and 25.10% were in non-
rated securities. See "Other Investment Policies and Techniques -- Securities
Ratings," "-- Investment in Lower-Rated Fixed-Income Securities" and Appendix
A.
In the event that the credit rating of a high-yield security held by the Port-
folio falls below its rating at the time of purchase (or, in the case of
unrated securities, the Adviser determines that the quality of such security
has deteriorated since purchased by the Portfolio), the Portfolio will not be
obligated to dispose of such security and may continue to hold the obligation
if, in the opinion of the Adviser, such investment is considered appropriate
in the circumstances.
Convertible Securities. Each Portfolio may invest in convertible securities.
These securities normally provide a higher yield than the underlying stock but
lower than a fixed-income security without the conversion feature. Also, the
price of the convertible security normally varies to some degree with changes
in the price of the underlying stock although in some market conditions the
higher yield tends to make the convertible security less volatile than the un-
derlying common stock. In addition, the price of the convertible security also
varies to some degree inversely with interest rates. Convertible debt securi-
ties that are rated below BBB (S&P, Duff & Phelps or Fitch) or Baa (Moody's)
or comparable unrated securities as determined by the Adviser may share
60
<PAGE>
some or all of the risks of high-yield securities. For a description of these
risks, see "Investments in High-Yield Securities" above.
Zero-Coupon and Payment-in-Kind Bonds. The Portfolios may at times invest in
so-called "zero-coupon" bonds and "payment-in-kind" bonds. Zero-coupon bonds
are issued at a significant discount from their principal amount in lieu of
paying interest periodically. Payment-in-kind bonds allow the issuer, at its
option, to make current interest payments on the bonds either in cash or in
additional bonds. Because zero-coupon bonds do not pay current interest in
cash, their value is generally subject to greater fluctuation in response to
changes in market interest rates than bonds which pay interest currently. Both
zero-coupon and payment-in-kind bonds allow an issuer to avoid the need to
generate cash to meet current interest payments. Accordingly, such bonds may
involve greater credit risks than bonds paying interest in cash currently.
Even though such bonds do not pay current interest in cash, a Portfolio is
nonetheless required to accrue interest income on such investments and to dis-
tribute such amounts at least annually to shareholders. Thus, a Portfolio
could be required at times to liquidate other investments in order to satisfy
its dividend requirements at times when the Adviser would not otherwise deem
it advisable to do so.
Futures and Related Options. Each Portfolio may buy and sell stock index
futures contracts ("index futures") and may buy options on index futures and
on stock indices for hedging purposes. A Portfolio may buy and sell call and
put options on index futures or on stock indices in addition to, or as an
alternative to, purchasing or selling index futures or, to the extent permit-
ted by applicable law, to earn additional income. The Portfolios may also, for
hedging purposes, purchase and sell futures contracts, options thereon and op-
tions with respect to U.S. Treasury securities, including U.S. Treasury bills,
notes and bonds. Each Portfolio may also seek to increase its current return
by writing covered call and put options on securities it owns or in which it
may invest.
The use of futures and options involves certain special risks. Futures and op-
tions transactions involve costs and may result in losses. Certain risks arise
because of the possibility of imperfect correlations between movements in the
prices of futures and options and movements in the prices of the underlying
stock index or security or of the securities in a Portfolio's portfolio that
are the subject of a hedge. The successful use of the strategies described
above further depends on the Portfolio's Adviser's ability to forecast market
movements correctly. Other risks arise from a Portfolio's potential inability
to close out its futures or options positions. In addition there can be no as-
surance that a liquid secondary market will exist for any future or option at
any particular time. Certain provisions of the Internal Revenue Code and cer-
tain regulatory requirements may limit the Portfolios' ability to engage in
futures and options transactions. A more detailed explanation of futures and
options transactions, including the risks associated with them, is included in
the Statement of Additional Information.
Options. Each Portfolio may seek to increase current return by writing covered
call and put options on securities it owns or in which it may invest. A Port-
folio receives a premium from writing a call or put option, which increases
the Portfolio's return if the
61
<PAGE>
option expires unexercised or is closed out at a net profit. When the Portfo-
lio writes a call option, it gives up the opportunity to profit from any in-
crease in the price of a security above the exercise price of the option; when
it writes a put option, the Portfolio takes the risk that it will be required
to purchase a security from the option holder at a price above the current
market price of the security. A Portfolio may terminate an option that it has
written prior to its expiration by entering into a closing purchase transac-
tion in which it purchases an option having the same terms as the option writ-
ten. A Portfolio may also buy and sell put and call options for hedging pur-
poses. A Portfolio may also from time to time buy and sell combinations of put
and call options on the same underlying security to earn additional income. A
Portfolio's use of these strategies may be limited by applicable law.
Securities Loans, Repurchase Agreements and Forward Commitments. Each Portfo-
lio may lend portfolio securities amounting to not more than 25% of its total
assets and may enter into repurchase agreements on up to 25% of its total as-
sets. These transactions must be fully collateralized at all times, but in-
volve some risk to a Fund if the other party should default on its obligation
and the Portfolio is delayed or prevented from recovering the collateral. Each
Portfolio may also purchase securities for future delivery, which may increase
its overall investment exposure and involves a risk of loss if the value of
the securities declines prior to the settlement date.
GROWTH PORTFOLIO
General. The Growth Portfolio's investment objective is to provide long-term
growth of capital. Current income is only an incidental consideration. The
Portfolio seeks to achieve its objective by investing primarily in equity se-
curities of companies with a favorable outlook for earnings and whose rate of
growth is expected to exceed that of the United States economy over time.
The Portfolio invests primarily in common stocks and securities convertible
into common stocks such as convertible bonds, convertible preferred stocks and
warrants convertible into common stocks. Because the values of fixed-income
securities are expected to vary inversely with changes in interest rates gen-
erally, when the Adviser expects a general decline in interest rates, the
Portfolio may also invest for capital growth in fixed-income securities. The
Portfolio may invest up to 25% of its total assets in fixed-income securities
rated at the time of purchase below investment grade, that is, securities
rated Ba or lower by Moody's or BB or lower by S&P, Duff & Phelps or Fitch, or
in unrated fixed income securities determined by the Adviser to be of compara-
ble quality. For a description of the ratings referred to above, see Appendix
A. For temporary defensive purposes, the Portfolio may invest in money market
instruments and repurchase agreements.
Foreign Securities. The Portfolio may invest without limit in securities which
are not publicly traded in the United States, although the Portfolio generally
will not invest more than 15% of its total assets in such securities.
The value of foreign investments measured in U.S. dollars will rise or fall
because of decreases or increases, respectively, in the value of the U.S. dol-
lar in comparison to
62
<PAGE>
the value of the currency in which the foreign investment is denominated. The
Fund may buy or sell foreign currencies, options on foreign currencies, for-
eign currency futures contracts (and related options) and deal in forward for-
eign currency exchange contracts in connection with the purchase and sale of
foreign investments. For a description of certain risks associated with in-
vesting in foreign securities, see "Other Investment Policies and Tech-
niques -- Foreign Securities," below.
Non-Publicly Traded Securities. The Portfolio may invest in securities which
are not publicly traded, including securities sold pursuant to Rule 144A under
the Securities Act of 1933 ("Rule 144A Securities"). The sale of these securi-
ties is usually restricted under Federal securities laws, and market quota-
tions may not be readily available. As a result, the Portfolio may not be able
to sell these securities (other than Rule 144A Securities) unless they are
registered under applicable Federal and state securities laws, or may have to
sell them at less than fair market value. Investment in these securities is
restricted to 5% of the Portfolio's total assets (not including for these pur-
poses Rule 144A Securities, to the extent permitted by applicable law) and is
also subject to the Portfolio's restriction against investing more than 15% of
total assets in illiquid securities. To the extent permitted by applicable
law, Rule 144A Securities will not be treated as "illiquid" for purposes of
the foregoing restriction so long as such securities meet liquidity guidelines
established by the Board of Directors. See "Other Investment Policies and
Techniques -- Illiquid Securities," below.
Investments in High-Yield Securities. The Growth Portfolio may invest in high-
yield, high-risk, fixed-income and convertible securities rated at the time of
purchase Ba or lower by Moody's BB or lower by S&P, Duff & Phelps or Fitch,
or, if unrated, judged by the Adviser to be of comparable quality ("high-yield
securities"). The Portfolio generally invests in securities with a minimum
rating of Caa- by Moody's or CCC- by S&P, Duff & Phelps or Fitch or in unrated
securities judged by the Adviser to be of comparable quality. However, from
time to time, the Portfolio may invest in securities rated in the lowest
grades of Moody's, S&P or Fitch (C) or Duff & Phelps (CC) or in unrated secu-
rities judged by the Adviser to be of comparable quality, if the Portfolio's
management determines that there are prospects for an upgrade or a favorable
conversion into equity securities (in the case of convertible securities). Se-
curities rated Ba or BB or lower (and comparable unrated securities) are com-
monly referred to as "junk bonds." Securities rated D by S&P and Fitch or DD
by Duff & Phelps are in default. See "Other Investment Policies and Tech-
niques -- Securities Ratings," "Investment in Lower-Rated Fixed-Income Securi-
ties" and Appendix A. As of December 31, 1997, the percentages of the Portfo-
lio's assets invested in securities rated (or considered by the Adviser to be
of equivalent quality to securities rated) in particular rating categories
were 0% in A and above, 0% in Ba or BB, .53% in B, 0% in CCC or Caa and .30%
in unrated securities. The Fund did not invest in securities rated below Caa
by Moody's or CCC by each of S&P, Duff & Phelps and Fitch or, if not rated,
considered by the Adviser to be of equivalent quality to securities so rated.
In the event that the credit rating of a high-yield security held by the Port-
folio falls be-
63
<PAGE>
low its rating at the time of purchase (or, in the case of unrated securities,
the Adviser determines that the quality of such security has deteriorated
since purchased by the Portfolio), the Portfolio will not be obligated to dis-
pose of such security and may continue to hold the obligation if, in the opin-
ion of the Adviser, such investment is considered appropriate in the circum-
stances.
Convertible Securities. The Growth Portfolio may invest in convertible securi-
ties. These securities normally provide a higher yield than the underlying
stock but lower than a fixed-income security without the conversion feature.
Also, the price of the convertible security will normally vary to some degree
with changes in the price of the underlying stock although in some market con-
ditions the higher yield tends to make the convertible security less volatile
than the underlying common stock. In addition, the price of the convertible
security will also vary to some degree inversely with interest rates. Convert-
ible debt securities that are rated below BBB (S&P, Duff & Phelps or Fitch) or
Baa (Moody's) or comparable unrated securities as determined by the Adviser
may share some or all of the risks of high-yield securities. For a description
of these risks, see "Investments in High-Yield Securities" above.
Zero-Coupon and Payment-in-Kind Bonds. The Portfolio may at times invest in
so-called "zero-coupon" bonds and "payment-in-kind" bonds. Zero-coupon bonds
are issued at a significant discount from their principal amount in lieu of
paying interest periodically. Payment-in-kind bonds allow the issuer, at its
option, to make current interest payments on the bonds either in cash or in
additional bonds. Because zero-coupon bonds do not pay current interest in
cash, their value is generally subject to greater fluctuation in response to
changes in market interest rates than bonds which pay interest in cash cur-
rently. Both zero-coupon and payment-in-kind bonds allow an issuer to avoid
the need to generate cash to meet current interest payments. Accordingly, such
bonds may involve greater credit risks than bonds paying interest currently.
Even though such bonds do not pay current interest in cash, the Fund is none-
theless required to accrue interest income on such investments and to distrib-
ute such amounts at least annually to shareholders. Thus, the Fund could be
required at times to liquidate other investments in order to satisfy its divi-
dend requirements.
Futures and Options. The Portfolio may buy and sell stock index futures con-
tracts ("index futures") and may buy options on index futures and on stock in-
dices for hedging purposes. The Portfolio may buy and sell call and put op-
tions on index futures or on stock indices in addition to, or as an alterna-
tive to, purchasing or selling index futures or, to the extent permitted by
applicable law, to earn additional income. The Portfolio may also, for hedging
purposes, purchase and sell futures contracts, options thereon and options
with respect to the U.S. Treasury securities, including U.S. Treasury bills,
notes and bonds. The Portfolio may also seek to increase its current return by
writing covered call and put options on securities its owns or in which it may
invest.
The use of futures and options involves certain special risks. Futures and op-
tions transactions involve costs and may result in losses. Certain risks arise
because of the possibility of imperfect correlations between
64
<PAGE>
movements in the prices of futures and options and movements in the prices of
the underlying stock index or security or of the securities in the Portfolio's
investment portfolio that are the subject of the hedge. The successful use of
the strategies described above further depends on the Adviser's ability to
forecast market movements correctly. Other risks arise from the Portfolio's
potential inability to close out its futures or options positions. In addition
there can be no assurance that a liquid secondary market will exist for any
future option at any particular time. Certain provisions of the Internal Reve-
nue Code and certain regulatory requirements may limit the Portfolio's ability
to engage in futures and options transactions.
Securities Loans, Repurchase Agreements and Forward Commitments. The Portfolio
may lend portfolio securities amounting to not more than 25% of its total as-
sets and may enter into repurchase agreements on up to 25% of its total as-
sets. These transactions must be fully collateralized at all times but involve
some risk to the Portfolio if the other party should default on its obligation
and the Portfolio is delayed or prevented from recovering the collateral. The
Portfolio may also purchase securities for future delivery, which may increase
its overall investment exposure and involve a risk of loss if the value of the
securities declines prior to the settlement date.
WORLDWIDE PRIVATIZATION PORTFOLIO
The Worldwide Privatization Portfolio's investment objective is to seek long
term capital appreciation. In seeking to achieve its investment objective, as
a fundamental policy, the Portfolio invests at least 65% of its total assets
in equity securities that are issued by enterprises that are undergoing, or
that have undergone, privatization (as described below), although normally,
significantly more of the Portfolio's total assets will be invested in such
securities. The balance of the Portfolio's investment portfolio includes secu-
rities of companies that are believed by the Adviser to be beneficiaries of
privatizations. Equity securities include common stock, preferred stock,
rights or warrants to subscribe for or purchase common or preferred stock, se-
curities (including debt securities) convertible into common or preferred
stock and securities that give the holder the right to acquire common or pre-
ferred stock.
Investment in Privatizations. The Portfolio is designed for investors desiring
to take advantage of investment opportunities, historically inaccessible to
U.S. individual investors, that are created by privatizations of state enter-
prises in both established and developing economies, including those in West-
ern Europe and Scandinavia, Australia, New Zealand, Latin America, Asia and
Eastern and Central Europe and, to a lesser degree, Canada and the United
States.
The Portfolio's investments in the securities of enterprises undergoing
privatization may comprise three distinct situations. First, the Portfolio may
invest in the initial offering of publicly traded equity securities (an "ini-
tial equity offering") of a government- or state-owned or controlled company
or enterprise (a "state enterprise"). Secondly, the Portfolio may invest in
the securities of a current or former state enterprise following its initial
equity offering. Finally, the Portfolio may make privately negotiated invest-
ments in a state enterprise that has not yet conducted an initial equity of-
fering. Invest-
65
<PAGE>
ments of this type may be structured, for example, as privately negotiated
sales of stock or other equity interests in joint ventures, cooperatives or
partnerships. In the opinion of the Adviser, substantial potential for appre-
ciation in the value of equity securities of an enterprise undergoing or fol-
lowing privatization exists as the enterprise rationalizes its management
structure, operations and business strategy to position itself to compete ef-
ficiently in a market economy, and the Portfolio will seek to emphasize in-
vestments in the equity securities of such enterprises.
The Portfolio intends to spread its portfolio investments among the capital
markets of a number of countries and, under normal market conditions, invests
in the equity securities of issuers based in at least four, and normally con-
siderably more, countries. The percentage of the Portfolio's assets invested
in equity securities of companies based in a particular country will vary in
accordance with the Adviser's assessment of the appreciation potential of such
securities. There is no restriction, however, on the percentage of the Portfo-
lio's assets that may be invested in countries within any one region of the
world. To the extent that the Portfolio's assets are invested within any one
region, the Portfolio may be subject to any special risks that may be associ-
ated with that region. Notwithstanding the foregoing, no more than 15% of the
Portfolio's total assets will be invested in securities of issuers in any one
foreign country, except that the Portfolio may invest up to 30% of its total
assets in securities of issuers in any one of France, Germany, Great Britain,
Italy and Japan. The Portfolio may invest all of its assets within a single
region of the world. To the extent that the Portfolio's assets are invested
within any one region, the Portfolio may be subject to any special risks that
may be associated with that region.
Privatization is a process through which the ownership and control of compa-
nies or assets changes in whole or in part from the public sector to the pri-
vate sector. Through privatization a government or state divests or transfers
all or a portion of its interest in a state enterprise to some form of private
ownership. Governments and states with established economies, including
France, Great Britain, Germany and Italy, and those with developing economies,
including Argentina, Mexico, Chile, Indonesia, Malaysia, Poland and Hungary,
are currently engaged in privatizations. The Portfolio will invest in any
country that presents attractive investment opportunities, and the countries
in which the Portfolio will invest may change from time to time. It is the Ad-
viser's intention to invest approximately 70% of the Portfolio's total assets
in securities of enterprises located in countries with established economies
and the remainder of the Portfolio's assets in securities of enterprises lo-
cated in countries with developing economies.
A major premise of the Portfolio's investment approach is that, because of the
particular characteristics of privatized companies, their equity securities
offer investors opportunities for significant capital appreciation. In partic-
ular, because privatization programs are an important part of a country's eco-
nomic restructuring, equity securities that are brought to the market by means
of initial equity offerings frequently are priced to attract investment in or-
der to secure the issuer's successful transition to private sector ownership.
In addition, these enterprises
66
<PAGE>
generally tend to enjoy dominant market positions in their local markets. Be-
cause of the relaxation of government controls upon privatization, these enter-
prises typically have the potential for significant managerial and operational
efficiency gains, which, among other factors, can increase their earnings due
to the restructuring that accompanies privatization and the incentives manage-
ment frequently receives.
Privatization programs are established to address a range of economic, politi-
cal or social needs. Privatization is generally viewed as a means to achieve
increased efficiency and improve the competitiveness of state enterprises.
Western European countries are currently engaged in privatization programs
partly as a means of increasing government revenues, thereby reducing budget
deficits. The reduction of budget deficits recently has become an important ob-
jective as Western European countries attempt to meet the directives of the Eu-
ropean Commission regarding debt and achieve the target budget deficit levels
established by the Maastricht Treaty. In developing market countries, including
many of those in Latin America and Asia, privatization is viewed as an integral
part of broad economic measures that are designed to reduce external debt and
control inflation as these countries attempt to meet the directives of the In-
ternational Bank for Reconstruction and Development (the World Bank) and the
International Monetary Fund regarding desirable debt levels. Within Eastern and
Central Europe, privatization is also being used as a means of achieving struc-
tural economic changes that will enable Eastern and Central European countries
to develop market economies and compete in the world markets.
The privatization of state enterprises is achieved through various methods. A
gradual approach is commonly taken at the early stages of privatization within
a country. Oftentimes, the government will transfer partial ownership of the
enterprise to a corporation or similar entity and occasionally also broaden
ownership to employees and citizens while retaining an interest. Occasionally,
a few selected foreign minority shareholders are permitted to make private in-
vestments at this stage. After the new corporation has operated under this form
of ownership for a few years, the government may divest itself completely by
means of an equity offering in national and international securities markets.
Another approach is the formation of an investment fund owned by employees and
citizens that, with the assistance of international managers, operates one or
many state enterprises for a set term, after which the government may divest
itself of its remaining interest. Foreign investors are often permitted to be-
come minority shareholders of these investment funds. In less gradual
privatizations, state enterprises are auctioned to qualified investors through
competitive bidding processes in private transactions. Alternatively, equity
offerings may be made directly through the local and international securities
markets.
Although the Portfolio anticipates that it generally will not concentrate its
investments in any industry, it is permitted to invest more than 25% of its to-
tal assets in the securities of issuers whose primary business activity is that
of national commercial banking. Prior to concentrating in the securities of na-
tional commercial banks, the Portfolio's Board of Directors would have to de-
termine that the Portfolio's ability to achieve
67
<PAGE>
its investment objective would be adversely affected if the Portfolio were not
permitted to concentrate. The staff of the Securities and Exchange Commission
is of the view that registered investment companies may not, absent share-
holder approval, change between concentration and non-concentration in the se-
curities of issuers in a single industry. The Portfolio disagrees with the
staff's position but has undertaken that it will not concentrate in the secu-
rities of national commercial banks until, if ever, the issue is resolved. If
the Portfolio were to invest more than 25% of its total assets in the national
commercial banks, the Portfolio's performance could be significantly influ-
enced by events or conditions affecting this industry, which is subject to,
among other things, increases in interest rates and deteriorations in general
economic conditions, and the Portfolio's investments may be subject to greater
risk and market fluctuation than if its portfolio represented a broader range
of investments.
Warrants. The Portfolio may invest up to 20% of its total assets in rights or
warrants which entitle the holder to buy equity securities at a specific price
for a specific period of time, but will do so only if the equity securities
themselves are deemed appropriate by the Adviser for inclusion in the Portfo-
lio's portfolio. Rights are similar to warrants except that they have a sub-
stantially shorter duration. Rights and warrants may be considered more specu-
lative than certain other types of investments in that they do not entitle a
holder to dividends or voting rights with respect to the securities which may
be purchased nor do they represent any rights in the assets of the issuing
company. The value of a right or warrant does not necessarily change with the
value of the underlying security, although the value of a right or warrant may
decline because of a decrease in the value of the underlying security, the
passage of time or a change in perception as to the potential of the under-
lying security, or any combination thereof. If the market price of the under-
lying security is below the exercise price set forth in the warrant on the ex-
piration date, the warrant will expire worthless. Moreover, a right or warrant
ceases to have value if it is not exercised prior to the expiration date.
Debt Securities and Convertible Debt Securities. The Portfolio may invest up
to 35% of its total assets in debt securities and convertible debt securities
of issuers whose common stocks are eligible for purchase by the Portfolio un-
der the investment policies described above. Debt securities include bonds,
debentures, corporate notes and preferred stocks. Convertible debt securities
are such instruments that are convertible at a stated exchange rate into com-
mon stock. Prior to their conversion, convertible securities have the same
general characteristics as non-convertible debt securities which provide a
stable stream of income with generally higher yields than those of equity se-
curities of the same or similar issuers. The market value of debt securities
and convertible debt securities tends to decline as interest rates increase
and, conversely, to increase as interest rates decline. While convertible se-
curities generally offer lower interest yields than non-convertible debt secu-
rities of similar quality, they do enable the investor to benefit from in-
creases in the market price of the underlying common stock.
The Portfolio may maintain not more than 5% of its net assets in debt securi-
ties rated
68
<PAGE>
below Baa by Moody's and BBB by S&P, Duff & Phelps or Fitch, or, if not rated,
determined by the Adviser to be of equivalent quality. See "Other Investment
Policies and Techniques -- Securities Ratings," "-- Investment in Securities
Rated Baa and BBB," "-- Investment in Lower-Rated Fixed-Income Securities" and
Appendix A.
ADDITIONAL INVESTMENT POLICIES AND PRACTICES
The Portfolio may, but is not required to, utilize various investment strate-
gies to hedge its portfolio against currency and other risks. These investment
strategies entail risks. Although the Adviser believes that these investment
strategies may further the Portfolio's investment objective, no assurance can
be given that they will achieve this result. The Portfolio may write covered
put and call options and purchase put and call options on U.S. and foreign se-
curities exchanges and over-the-counter, enter into contracts for the purchase
and sale for future delivery of fixed-income securities or foreign currencies
or contracts based on financial indices, including any index of U.S. Govern-
ment Securities or securities issued by foreign government entities or common
stocks and purchase and write put and call options on such futures contracts
or on foreign currencies, purchase or sell forward foreign currency exchange
contracts, enter into forward commitments for the purchase or sale of securi-
ties, enter into repurchase agreements, standby commitment agreements and cur-
rency swaps, make short sales of securities and make secured loans of its
portfolio securities. Certain of these investment strategies may not currently
be available in many of the countries in which the Portfolio may invest or may
not be permissible under current law. The Portfolio may engage in these
investment strategies in those countries when and to the extent such strate-
gies become available or permissible in the future. Except with regard to
those investment strategies discussed immediately below, each of these invest-
ment strategies is discussed under the caption "Other Investment Policies and
Techniques," below.
Currency Swaps. The Portfolio may enter into currency swaps for hedging pur-
poses. Currency swaps involve the exchange by the Portfolio with another party
of a series of payments in specified currencies. Since currency swaps are in-
dividually negotiated, the Portfolio expects to achieve an acceptable degree
of correlation between its portfolio investments and its currency swaps posi-
tions. A currency swap may involve the delivery at the end of the exchange pe-
riod of a substantial amount of one designated currency in exchange for the
other designated currency. Therefore the entire principal value of a currency
swap is subject to the risk that the other party to the swap will default on
its contractual delivery obligations. The net amount of the excess, if any, of
the Portfolio's obligations over its entitlements with respect to each cur-
rency swap will be accrued on a daily basis and an amount of cash or high-
grade liquid debt securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Portfolio's custodian. The Portfolio will not enter into any currency swap un-
less the credit quality of 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 rating organization at the time of entering
into
69
<PAGE>
the transaction. If there is a default by the other party to such a transac-
tion, the Portfolio will have contractual remedies pursuant to the agreements
related to the transactions.
Short Sales. The Portfolio may make short sales of securities or maintain a
short position only for the purpose of deferring realization of gain or loss
for U.S. federal income tax purposes, provided that at all times when a short
position is open the Portfolio owns an equal amount of such securities of the
same issue as, and equal in amount to, the securities sold short. In addition,
the Portfolio may not make a short sale if more than 10% of the Portfolio's
net assets (taken at market value) is held as collateral for short sales at
any one time. If the price of the security sold short increases between the
time of the short sale and the time the Portfolio replaces the borrowed secu-
rity, the Portfolio will incur a loss; conversely, if the price declines, the
Portfolio will realize a capital gain.
Future Developments. The Portfolio may, following written notice to its share-
holders, take advantage of other investment practices which are not at present
contemplated for use by the Portfolio or which currently are not available but
which may be developed, to the extent such investment practices are both con-
sistent with the Portfolio's investment objective and legally permissible for
the Portfolio. Such investment practices, if they arise, may involve risks
which exceed those involved in the activities described above.
CERTAIN RISK CONSIDERATIONS
Investment in the Portfolio involves the special risk considerations described
below.
Investment in Privatized Enterprises. The governments of certain foreign coun-
tries have, to varying degrees, embarked on privatization programs contemplat-
ing the sale of all or part of their interests in state enterprises. In cer-
tain jurisdictions, the ability of foreign entities, such as the Portfolio, to
participate in privatizations may be limited by local law, or the price or
terms on which the Portfolio may be able to participate may be less advanta-
geous than for local investors. Moreover, there can be no assurance that gov-
ernments that have embarked on privatization programs will continue to divest
their ownership of state enterprises, that proposed privatizations will be
successful or that governments will not re-nationalize enterprises that have
been privatized. Furthermore, in the case of certain of the enterprises in
which the Portfolio may invest, large blocks of the stock of those enterprises
may be held by a small group of stockholders, even after the initial equity
offerings by those enterprises. The sale of some portion or all of those
blocks could have an adverse effect on the price of the stock of any such en-
terprise.
Most state enterprises or former state enterprises go through an internal re-
organization of management prior to conducting an initial equity offering in
an attempt to better enable these enterprises to compete in the private sec-
tor. However, certain reorganizations could result in a management team that
does not function as well as the enterprise's prior management and may have a
negative effect on such enterprise. After making an initial equity offering,
enterprises which may have enjoyed preferential treatment from the respective
state or government that owned or controlled them
70
<PAGE>
may no longer receive such preferential treatment and may become subject to
market competition from which they were previously protected. Some of these en-
terprises may not be able to effectively operate in a competitive market and
may suffer losses or experience bankruptcy due to such competition. In addi-
tion, the privatization of an enterprise by its government may occur over a
number of years, with the government continuing to hold a controlling position
in the enterprise even after the initial equity offering for the enterprise.
Currency Considerations. Because substantially all of the Portfolio's assets
will be invested in securities denominated in foreign currencies and a corre-
sponding portion of the Portfolio's revenues will be received in such curren-
cies, the dollar equivalent of the Portfolio's net assets and distributions
will be adversely affected by reductions in the value of certain foreign cur-
rencies relative to the U.S. dollar. Such changes will also affect the Portfo-
lio's income. The Portfolio, however, has the ability to protect itself against
adverse changes in the values of foreign currencies by engaging in certain of
the investment practices listed above. If the value of the foreign currencies
in which the Portfolio receives its income falls relative to the U.S. dollar
between receipt of the income and the making of Portfolio distributions, the
Portfolio may be required to liquidate securities in order to make distribu-
tions if the Portfolio has insufficient cash in U.S. dollars to meet distribu-
tion requirements. Similarly, if an exchange rate declines between the time the
Portfolio incurs expenses in U.S. dollars and the time cash expenses are paid,
the amount of the currency required to be converted into U.S. dollars in order
to pay expenses in U.S. dollars could be greater than the equivalent amount of
such expenses in the currency at the time they were incurred. In light of these
risks, the Portfolio may engage in certain currency hedging transactions, which
themselves involve certain special risks. See "Other Investment Policies and
Techniques -- Hedging Techniques."
Risk of Foreign Investment. For a description of certain risks associated with
investing in foreign securities, see "Other Investing Policies and Tech-
niques -- Foreign Securities," below.
TECHNOLOGY PORTFOLIO
The Technology Portfolio is a diversified investment portfolio that emphasizes
growth of capital and invests for capital appreciation, and only incidentally
for current income. The Portfolio invests primarily in securities of companies
expected to benefit from technological advances and improvements (i.e., compa-
nies that use technology extensively in the development of new or improved
products or processes). The Portfolio will normally have at least 80% of its
assets invested in the securities of these companies. The Portfolio normally
has substantially all its assets invested in equity securities, but it also in-
vests in debt securities offering an opportunity for price appreciation. The
Portfolio invests in listed and unlisted securities and U.S. and foreign secu-
rities, but it will not purchase a foreign security if as a result 10% or more
of the Portfolio's total assets would be invested in foreign securities.
The Technology Portfolio's policy is to invest in any company and industry and
in any type of security with potential for capital
71
<PAGE>
appreciation. It invests in well-known and established companies and in new and
unseasoned companies.
The Portfolio may maintain up to 15% of its net assets in illiquid securities,
lend portfolio securities equal in value to not more than 30% of the Technology
Portfolio's total assets and invest up to 10% of its total assets in foreign
securities.
Options. In an effort to increase current income and to reduce fluctuations in
net asset value, the Technology Portfolio intends to write covered call options
and purchase put and call options on securities of the types in which it is
permitted to invest that are traded on U.S. and foreign securities exchanges. A
call option written by the Portfolio is "covered" if the Portfolio (i) owns the
underlying security covered by the call (ii) has an absolute and immediate
right to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by the Fund's Custo-
dian) upon conversion or exchange of other portfolio securities, or (iii) holds
a call on the same security in the same principal amount as the call written
where the exercise price of the call held (i) is equal to or less than the ex-
ercise price of the call written or (ii) is greater than the exercise price of
the call written if the difference is maintained by the Portfolio in cash and
liquid high-grade debt securities in a segregated account with the Fund's Cus-
todian. The premium paid by the purchaser of an option will reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates.
The Technology Portfolio will not write uncovered call options and will not
write a call option if the premium to be received by the Portfolio in doing so
would not produce an annualized return of at least 15% of the then current mar-
ket value of the securities subject to the option (without giving effect to
commissions, stock transfer taxes and other expenses that are deducted from
premium receipts). The Portfolio will not write a call option if, as a result,
the aggregate of the Portfolio's securities subject to outstanding call options
(valued at the lower of the option price or market value of such securities)
would exceed 15% of the Portfolio's total assets or more than 10% of the Port-
folio's assets would be committed to call options that at the time of sale have
a remaining term of more than 100 days. The aggregate cost of all outstanding
options purchased and held by the Portfolio will at no time exceed 10% of the
Portfolio's total assets.
The Technology Portfolio may purchase or write options on securities of the
types in which it is permitted to invest in privately negotiated transactions.
The Portfolio will effect such transactions only with investment dealers and
other financial institutions (such as commercial banks or savings and loan in-
stitutions) deemed creditworthy by the Adviser, and the Adviser has adopted
procedures for monitoring the creditworthiness of such entities. Options pur-
chased or written by a Portfolio in negotiated transactions are illiquid and it
may not be possible for the Portfolio to effect a closing transaction at a time
when the Adviser believes it would be advantageous to do so. See "Illiquid Se-
curities." See Appendix C in the Statement of Additional Information for a fur-
72
<PAGE>
ther discussion of the use, risks and costs of option trading.
The Technology Portfolio may purchase and sell exchange-traded options on any
securities index composed of the types of securities in which it may invest.
An option on a securities index is similar to an option on a security except
that, rather than the right to take or make delivery of a security at a speci-
fied price, an option on a securities index gives the holder the right to re-
ceive, upon exercise of the option, an amount of cash if the closing level of
the chosen index is greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option.
Rights and Warrants. The Technology Portfolio may also invest up to 10% of its
total assets in rights and warrants. The Portfolio will invest in right and
warrants only if the underlying equity securities themselves are deemed appro-
priate by the Adviser for inclusion in the Portfolio. Rights and warrants en-
title the holder to buy equity securities at a specific price for a specific
period of time. Right are similar to warrants except that they have a substan-
tially shorter duration. Rights and warrants may be considered more specula-
tive than certain other types of investments in that they do not entitle a
holder to dividends or voting rights with respect to the underlying securities
nor do they represent any rights in the assets of the issuing company. The
value of a warrant does not necessarily change with the value of the under-
lying security, although the value of a right or warrant may decline because
of a decrease in the value of the underlying security, the passage of time or
a change in perception as to the potential of the underlying security, or any
combination thereof. If the market price of the underlying security is below
the exercise price set forth in the warrant on the expiration date, the war-
rant will expire worthless. Moreover, a right or warrant ceases to have value
if it is not exercised prior to the expiration date.
For a further description of the Technology Portfolio's investment policies
and techniques, see "Other Investment Policies and Techniques" below.
QUASAR PORTFOLIO
The Quasar Portfolio is a diversified investment company that seeks growth of
capital by pursuing aggressive investment policies. It invests for capital ap-
preciation and only incidentally for current income. The selection of securi-
ties based on the possibility of appreciation cannot prevent loss in value.
Moreover, because the Portfolio's investment policies are aggressive, an in-
vestment in the Portfolio is risky and investors who want assured income or
preservation of capital should not invest in the Portfolio.
The Portfolio invests in any company and industry and in any type of security
with potential for capital appreciation. It invests in well-known and estab-
lished companies and in new and unseasoned companies. When selecting securi-
ties, the Adviser considers economic and political outlook, the values of spe-
cific securities relative to other investments, trends in the determinants of
corporate profits and management capability and practices.
The Portfolio invests principally in equity securities, but it also invests to
a limited degree in non-convertible bonds and preferred stock. The Portfolio
invests in listed
73
<PAGE>
and unlisted U.S. and foreign securities. The Portfolio periodically invests in
special situations, which occur when the securities of a company are expected
to appreciate due to a development particularly or uniquely applicable to that
company and regardless of general business conditions or movements of the mar-
ket as a whole.
The Portfolio may also: (i) invest up to 15% of its total assets in securities
for which there is no ready market; (ii) make short sales of securities
"against the box," but not more than 15% of its net assets may be deposited on
short sales; and (iii) write call options and purchase and sell put and call
options written by others. For additional information on the use, risks and
costs of the Policies and practices, see "Other Investment Policies and Tech-
niques," below.
The Portfolio's investment objective cannot be changed without approval by the
holders of a majority of the Portfolio's outstanding voting securities, as de-
fined in the Act. Except as otherwise indicated, the investment policies of the
Portfolio are not "fundamental policies" and may, therefore, be changed by the
Board of Directors without shareholder approval.
Options. The Portfolio may write call options and purchase and sell put and
call options written by others. An option gives the purchaser of the option,
upon payment of a premium, the right to deliver to (in the case of a put) or
receive from (in the case of a call) the writer a specified amount of a secu-
rity on or before a fixed date at a predetermined price. A call option written
by the Portfolio is "covered" if the Portfolio owns the underlying security,
has an absolute and immediate right to acquire that security upon conversion or
exchange of another security it holds, or holds a call option on the underlying
security with an exercise price equal to or less than that of the call option
it has written. A put option written by the Portfolio is "covered" if the Port-
folio holds a put option on the underlying securities with an exercise price
equal to or greater than that of the put option it has written.
In purchasing an option, the Portfolio would be in a position to realize a
gain, if, during the option period, the price of the underlying security in-
creased (in the case of a call) or decreased (in the case of a put) by an
amount in excess of the premium paid; otherwise the Portfolio would experience
a loss equal to the premium paid for the option.
If an option written by the Portfolio were exercised, the Portfolio would be
obligated to purchase (in the case of a put) or sell (in the case of a call)
the underlying security at the exercise price. The risk involved in writing an
option is that, if the option were exercised, the underlying security would
then be purchased or sold by the Portfolio at a disadvantageous price. These
risks could be reduced by entering into a closing transaction (i.e., by dispos-
ing of the option prior to its exercise). The Portfolio retains the premium re-
ceived from writing a call option whether or not the option is exercised. The
writing of covered call options could result in increases in the Portfolio's
portfolio turnover rate, especially during periods when market prices of the
underlying securities
appreciate.
The Portfolio will not write a call option if, as a result, the aggregate of
the Portfolio's securities subject to outstanding call options
74
<PAGE>
(valued at the lower of the option price or market value of such securities)
would exceed 15% of the Portfolio's total assets or more than 10% of the Port-
folio's assets would be committed to all options that at time of sale have a
remaining term of more than 100 days. The aggregate cost of all outstanding
options purchased and held by the Portfolio will at no time exceed 10% of the
Portfolio's total assets.
Short Sales. The Portfolio may only make short sales of securities "against
the box". A short sale is effected by selling a security that the Portfolio
does not own, or if the Portfolio does own such security, it is not to be de-
livered upon consummation of the sale. A short sale is "against the box" to
the extent that the Portfolio contemporaneously owns or has the right to ob-
tain securities identical to those sold short without payment. If the price of
the security sold short increases between the time of the short sale and the
time the Portfolio replaces the borrowed security, the Portfolio will incur a
loss; conversely, if the price declines, the Portfolio will realize a capital
gain. Certain special federal income tax considerations may apply to short
sales entered into by the Portfolio. See "Dividends, Distributions and Taxes"
in the Statement of Additional
Information.
Foreign Securities. The Portfolio may invest in foreign securities. To the ex-
tent the Portfolio invests in foreign securities, consideration is given to
certain factors comprising both risk and opportunity. The values of foreign
securities investments are affected by changes in currency rates or exchange
control regulations, application of foreign tax laws, including withholding
taxes, changes in governmental administration or economic, taxation or mone-
tary policy (in the United States and abroad) or changed circumstances in
dealings between nations. Foreign securities markets may also be less liquid,
more volatile, and less subject to governmental supervision than in the United
States. Investments in foreign countries could be affected by other factors
not present in the United States, including expropriation, confiscatory taxa-
tion, lack of uniform accounting and auditing standards and potential diffi-
culties in enforcing contractual obligations and could be subject to extended
settlement periods.
REAL ESTATE INVESTMENT PORTFOLIO
The Real Estate Investment Portfolio's investment objective is to seek a total
return on its assets from long-term growth of capital and from income princi-
pally through investing in a portfolio of equity securities of issuers that
are primarily engaged in or related to the real estate industry.
Under normal circumstances, at least 65% of the Portfolio's total assets will
be invested in equity securities of real estate investment trusts ("REITs")
and other real estate industry companies. A "real estate industry company" is
a company that derives at least 50% of its gross revenues or net profits from
the ownership, development, construction, financing, management or sale of
commercial, industrial or residential real estate or interests therein. The
equity securities in which the Portfolio will invest for this purpose consist
of common stock, shares of beneficial interest of REITs and securities with
common stock characteristics, such as preferred stock or convertible securi-
ties ("Real Estate Equity Securities").
75
<PAGE>
The Portfolio may invest up to 35% of its total assets in (a) securities that
directly or indirectly represent participations in, or are collateralized by
and payable from, mortgage loans secured by real property ("Mortgage-Backed
Securities"), such as mortgage pass-through certificates, real estate mortgage
investment conduit ("REMIC") certificates and collateralized mortgage obliga-
tions ("CMOs") and (b) short-term investments. These instruments are described
below. The risks associated with the Portfolio's transactions in REMICs, CMOs
and other types of mortgage-backed securities, which are considered to be de-
rivative securities, may include some or all of the following: market risk,
leverage and volatility risk, correlation risk, credit risk and liquidity and
valuation risk. See "Certain Risk Considerations -- Mortgage-Backed Securi-
ties" below for a description of these and other risks.
As to any investment in Real Estate Equity Securities, the Adviser's analysis
will focus on determining the degree to which the company involved can achieve
sustainable growth in cash flow and dividend paying capability. The Adviser
believes that the primary determinant of this capability is the economic via-
bility of property markets in which the company operates and that the second-
ary determinant of this capability is the ability of management to add value
through strategic focus and operating expertise. The Portfolio will purchase
Real Estate Equity Securities when, in the judgment of the Adviser, their mar-
ket price does not adequately reflect this potential. In making this determi-
nation, the Adviser will take into account fundamental trends in underlying
property markets as determined by proprietary models, site visits conducted by
individuals knowledgeable in local real estate markets, price-earnings ratios
(as defined for real estate companies), cash flow growth and stability, the
relationship between asset value and market price of the securities, dividend
payment history, and such other factors which the Adviser may determine from
time to time to be relevant. The Adviser will attempt to purchase for the
Portfolio Real Estate Equity Securities of companies whose underlying portfo-
lios are diversified geographically and by property type.
The Portfolio may invest without limitation in shares of REITs. REITs are
pooled investment vehicles which invest primarily in income producing real es-
tate or real estate related loans or interests. REITs are generally classified
as equity REITs, mortgage REITs or a combination of equity and mortgage REITs.
Equity REITs invest the majority of their assets directly in real property and
derive income primarily from the collection of rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs invest the majority of their assets in real estate mortgages
and derive income from the collection of interest payments. Similar to invest-
ment companies such as the Portfolio, REITs are not taxed on income distrib-
uted to shareholders provided they comply with several requirements of the In-
ternal Revenue Code of 1986, as amended ("the Code"). The Portfolio indirectly
bears its proportionate share of expenses incurred by REITs in which the Port-
folio invests in addition to the expenses incurred directly by the Portfolio.
Investment Process for Real Estate Equity Securities. The Portfolio's invest-
ment strategy with respect to Real Estate Equity Securi-
76
<PAGE>
ties is based on the premise that property market fundamentals are the primary
determinant of growth underlying the performance of Real Estate Equity Securi-
ties. Value added management further distinguishes the most attractive Real
Estate Equity Securities. The Portfolio's research and investment process is
designed to identify those companies with strong property fundamentals and
strong management teams. This process is comprised of real estate market re-
search, specific property inspection and securities analysis. The Adviser be-
lieves that this process will result in a portfolio that will consist of Real
Estate Equity Securities of companies that own assets in the most desirable
markets across the country, diversified geographically and by property type.
In implementing the Portfolio's research and investment process, the Adviser
will avail itself of the consulting services of CB Commercial Real Estate
Group, Inc. ("CBC"), a publicly held company and the largest real estate serv-
ices company in the United States, comprised of real estate brokerage, prop-
erty and facilities management, and real estate finance and investment advi-
sory activities (CBC in August of 1997 acquired Koll Management Services
("Koll"), which previously provided these consulting services to the Adviser).
In 1996, CBC (and Koll, on a combined basis) completed 25,000 sale and lease
transactions, managed over 4,100 client properties, created over $3.5 billion
in mortgage originations, and completed over 2,600 appraisal and consulting
assignments. In addition, they advised and managed for institutions over $4
billion in real estate investments. As consultant to the Adviser, CBC provides
access to a proprietary model, REIT . Score, that analyzes the approximately
12,000 properties owned by these 130 companies. Using proprietary databases
and algorithms, CBC analyzes local market rent, expense and occupancy trends,
market specific transaction pricing, demographic and economic trends, and
leading indicators of real estate supply such as building permits. Over 650
asset-type specific geographic markets are analyzed and ranked on a relative
scale by CBC in compiling its REIT . Score database. The relative attractive-
ness of these real estate industry companies is similarly ranked based on the
composite rankings of the properties they own. See "Management of the Fund"
for more information about CBC.
The universe of property-owning real estate industry firms consists of approx-
imately 130 companies of sufficient size and quality to merit consideration
for investment by the Portfolio. Once the universe of real estate industry
companies has been distilled through the market research process, CBC's local
market presence provides the capability to perform site specific inspections
of key properties. This analysis examines specific property location, condi-
tion, and sub-market trends. CBC's use of locally based real estate profes-
sionals provides the Adviser with a window on the operations of the portfolio
companies as information gathered can immediately be put in the context of lo-
cal market events. Only those companies whose specific property portfolios re-
flect the promise of their general markets will be considered for initial and
continued investment by the Portfolio.
The Adviser further screens the universe of real estate industry companies by
using rigorous financial models and by engaging in
77
<PAGE>
regular contact with management of targeted companies. Each management's stra-
tegic plan and ability to execute the plan are determined and analyzed. The Ad-
viser will make extensive use of CBC's network of industry analysts in order to
assess trends in tenant industries. This information is then used to further
interpret management's strategic plans. Financial ratio analysis is used to
isolate those companies with the ability to make value-added acquisitions. This
information is combined with property market trends and used to project future
earnings potential.
Mortgage-Backed Securities and Associated Risks. Mortgage-Backed Securities in-
clude mortgage pass-through certificates and multiple-class pass-through secu-
rities, such as REMIC pass-through certificates, CMOs and stripped mortgage-
backed securities ("SMBS"), and other types of Mortgage-Backed Securities that
may be available in the future.
Guaranteed Mortgage Pass-Through Securities. The Portfolio may invest in guar-
anteed mortgage pass-through securities which represent participation interests
in pools of residential mortgage loans and are issued by U.S. governmental or
private lenders and guaranteed by the U.S. Government or one of its agencies or
instrumentalities, including but not limited to the Government National Mort-
gage Association ("Ginnie Mae"), the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac").
Ginnie Mae certificates are guaranteed by the full faith and credit of the
United States Government for timely payment of principal and interest on the
certificates. Fannie Mae certificates are guaranteed by Fannie Mae, a federally
chartered and privately-owned corporation for full and timely payment of prin-
cipal and interest on the certificates. Freddie Mac certificates are guaranteed
by Freddie Mac, a corporate instrumentality of the United States Government,
for timely payment of interest and the ultimate collection of all principal of
the related mortgage loans.
Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations.
Mortgage-Backed Securities also include CMOs and REMIC pass-through or partici-
pation certificates, which may be issued by, among others, U.S. Government
agencies and instrumentalities as well as private lenders. CMOs and REMIC cer-
tificates are issued multiple classes and the principal of and interest on the
mortgage assets may be allocated among the several classes of CMOs or REMIC
certificates in various ways. Each class of CMOs or REMIC certificates, often
referred to as a "tranche," is issued at a specific adjustable or fixed inter-
est rate and must be fully retired no later than its final distribution date.
Generally, interest is paid or accrues on all classes of CMOs or REMIC certifi-
cates on a monthly basis. The Portfolio will not invest in the lowest tranche
of CMOs and REMIC certificates.
Typically, CMOs are collateralized by Ginnie Mae or Freddie Mac certificates
but also may be collateralized by other mortgage assets such as whole loans or
private mortgage pass-through securities. Debt service on CMOs is provided from
payments of principal and interest on collateral of mortgaged assets and any
reinvestment income thereon.
A REMIC is a CMO that qualifies for special tax treatment under the Code and
invests in
78
<PAGE>
certain mortgages primarily secured by interests in real property and other
permitted investments. Investors may purchase "regular" and "residual" interest
shares of beneficial interest in REMIC trusts although the Portfolio does not
intend to invest in residual interests.
Although the market for mortgage-related securities is becoming increasingly
liquid, those issued by certain private organizations may not be readily mar-
ketable. In particular, the secondary markets for CMOs may be more volatile and
less liquid than those for other mortgage-related securities, thereby poten-
tially limiting a Fund's ability to buy or sell those securities at any partic-
ular time.
Risks. Investing in Mortgage-Backed Securities involves certain unique risks in
addition to those generally associated with investing in the real estate indus-
try in general. These unique risks include the failure of a counterparty to
meet its commitments, adverse interest rate changes and the effects of prepay-
ments on mortgage cash flows. See "Certain Risk Considerations -- Mortgage-
Backed Securities" below for a more complete description of the characteristics
of these and other risks.
Short-Term Investments. The short-term investments in which the Portfolio may
invest are: corporate commercial paper and other short-term commercial obliga-
tions, in each case rated or issued by companies with similar securities out-
standing that are rated Prime-1, Aa or better by Moody's, A-1, AA or better by
S&P, D-1, AA or better by Duff & Phelps or F1, AA or better by Fitch; obliga-
tions (including certificates of deposit, time deposits, demand deposits and
bankers' acceptances) of banks with securities outstanding that are rated
Prime-1, Aa or better by Moody's, A-1, AA or better by S&P, D-1, AA or better
by Duff & Phelps or F1, AA or better by Fitch; and obligations issued or guar-
anteed by the U.S. Government or its agencies or instrumentalities with remain-
ing maturities not exceeding 18 months.
The Portfolio may invest in debt securities rated BBB or higher by S&P or Baa
or higher by Moody's or, if not so rated, of equivalent credit quality as de-
termined by the Adviser. Securities rated BBB by S&P, Duff & Phelps or Fitch or
Baa by Moody's are considered to have speculative characteristics. Sustained
periods of deteriorating economic conditions or rising interest rates are more
likely to lead to a weakening in the issuer's capacity to pay interest and re-
pay principal than in the case of higher-rated securities. The Portfolio ex-
pects that it will not retain a debt security which is downgraded below BBB or
Baa or, if unrated, determined by the Adviser to have undergone similar credit
quality deterioration, subsequent to purchase by the Portfolio.
The Portfolio may also engage in the following investment practices to the ex-
tent indicated: (i) invest up to 10% of its net assets in rights or warrants;
(ii) invest up to 15% of its net assets in the convertible securities of compa-
nies whose common stocks are eligible for purchase by the Portfolio; (iii) lend
portfolio securities on a short or long term basis equal in value to not more
than 25% of total assets; (iv) enter into repurchase agreements of up to seven
days' duration; (v) enter into forward commitment transactions as long as the
Portfolio's aggregate commitments under such transactions
79
<PAGE>
are not more than 30% of the Portfolio's total assets; (vi) enter into standby
commitment agreements; (vii) make short sales of securities or maintain a
short position but only if at all times when a short position is open not more
than 25% of the Portfolio's net assets (taken at market value) is held as col-
lateral or placed in a segregated account for such sales; and (viii) invest in
illiquid securities unless, as a result, more than 15% of its net assets would
be so invested.
ADDITIONAL INVESTMENT POLICIES AND PRACTICES
Convertible Securities. Prior to conversion, convertible securities have the
same general characteristics as non-convertible debt securities, which provide
a stable stream of income with generally higher yields than those of equity
securities of the same or similar issuers. The price of a convertible security
will normally vary with changes in the price of the underlying stock, although
the higher yield tends to make the convertible security less volatile than the
underlying common stock. As with debt securities, the market value of convert-
ible securities tends to decrease as interest rates rise and increase as in-
terest rates decline. While convertible securities generally offer lower in-
terest or dividend yields than non-convertible debt securities of similar
quality, they offer investors the potential to benefit from increases in the
market price of the underlying common stock. Convertible debt securities that
are rated Baa or lower by Moody's or BBB or lower by S&P, Duff & Phelps or
Fitch and comparable unrated securities as determined by the Adviser may share
some or all of the risks of non-convertible debt securities with those rat-
ings.
Rights and Warrants. The Portfolio will invest in rights or warrants only if
the underlying equity securities are themselves deemed appropriate by the Ad-
viser for inclusion in the Portfolio's portfolio. Rights and warrants entitle
the holder to buy equity securities at a specific price for a specific period
of time. Rights are similar to warrants except that they have a substantially
shorter duration. Rights and warrants may be considered more speculative than
certain other types of investments in that they do not entitle a holder to
dividends or voting rights with respect to the underlying securities nor do
they represent any rights in the assets of the issuing company. The value of a
right or warrant does not necessarily change with the value of the underlying
security, although the value of a right or warrant may decline because of a
decrease in the value of the underlying security, the passage of time or a
change in perception as to the potential of the underlying security, or any
combination thereof. If the market price of the underlying security is below
the exercise price set forth in the warrant on the expiration date, the war-
rant will expire worthless. Moreover, a right or warrant ceases to have value
if it is not exercised prior to the expiration date.
Short Sales. A short sale is a transaction in which the Portfolio sells a se-
curity it does not own but has borrowed in anticipation that the market price
of that security will decline. When the Portfolio makes a short sale of a se-
curity that it does not own, it must borrow from a broker-dealer the security
sold short and deliver the security to the broker-dealer upon conclusion of
the short sale. The Portfolio may be required to pay a fee to borrow particu-
lar securities and is often obligated to pay over any payments received on
such borrowed securities. The
80
<PAGE>
Portfolio's obligation to replace the borrowed security will be secured by
collateral deposited with a broker-dealer qualified as a custodian and will
consist of cash or securities. Depending on the arrangements the Portfolio
makes with the broker-dealer from which it borrowed the security regarding re-
mittance of any payments received by the Portfolio on such security, the Port-
folio may not receive any payments (including interest) on its collateral de-
posited with the broker-dealer.
If the price of the security sold short increases between the time of the
short sale and the time the Portfolio replaces the borrowed security, the
Portfolio will incur a loss; conversely, if the price declines, the Portfolio
will realize a short-term capital gain. Any gain will be decreased, and any
loss increased, by the transaction costs described above. Although the Portfo-
lio's gain is limited to the price at which it sold the security short, its
potential loss is theoretically unlimited. In order to defer realization of
gain or loss for U.S. federal income tax purposes, the Portfolio may also make
short sales "against the box." In this type of short sale, at the time of the
sale, the Portfolio owns or has the immediate and unconditional right to ac-
quire at no additional cost the identical security.
The Portfolio may not make a short sale unless at all times when a short posi-
tion is open not more than 25% of the Portfolio's net assets (taken at market
value) is held as collateral for such sales at any one time.
CERTAIN RISK CONSIDERATIONS
Risk Factors Associated with the Real Estate Industry. Although the Portfolio
does not invest directly in real estate, it does invest primarily in Real Es-
tate Equity Securities and does have a policy of concentration of its invest-
ments in the real estate industry. Therefore, an investment in the Portfolio
is subject to certain risks associated with the direct ownership of real es-
tate and with the real estate industry in general. These risks include, among
others: possible declines in the value of real estate; risks related to gen-
eral and local economic conditions; possible lack of availability of mortgage
funds; overbuilding; extended vacancies of properties; increases in competi-
tion, property taxes and operating expenses; changes in zoning laws; costs re-
sulting from the clean-up of, and liability to third parties for damages re-
sulting from, environmental problems; casualty or condemnation losses; unin-
sured damages from floods, earthquakes or other natural disasters; limitations
on and variations in rents; and changes in interest rates. To the extent that
assets underlying the Portfolio's investments are concentrated geographically,
by property type or in certain other respects, the Portfolio may be subject to
certain of the foregoing risks to greater extent.
In addition, if the Portfolio receives rental income or income from the dispo-
sition of real property acquired as a result of a default on securities the
Portfolio owns, the receipt of such income may adversely affect the Portfo-
lio's ability to retain its tax status as a regulated investment company. See
"Dividends, Distributions and Taxes." Investments by the Portfolio in securi-
ties of companies providing mortgage servicing will be subject to the risks
associated with refinancings and their impact on servicing rights.
REITS. Investing in REITs involves certain unique risks in addition to those
risks associ-
81
<PAGE>
ated with investing in the real estate industry in general. Equity REITs may
be affected by changes in the value of the underlying property owned by the
REITs, while mortgage REITs may be affected by the quality of any credit ex-
tended. REITs may be affected by the quality of any credit extended. REITs are
dependent upon management skills, are not diversified, are subject to heavy
cash flow dependency, default by borrowers and self-liquidation. REITs are
also subject to the possibilities of failing to qualify for tax free pass-
through of income under the Code and failing to maintain their exemptions from
registration under the Act.
REITs (especially mortgage REITs) are also subject to interest rate risks.
When interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT's investment in fixed rate obligations can be expected to de-
cline. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REIT's investments in such loans will gradu-
ally align themselves to reflect changes in market interest rates, causing the
value of such investments to fluctuate less dramatically in response to inter-
est rate fluctuations than would investments in fixed rate obligations.
Investing in REITs involves risks similar to those associated with investing
in small capitalization companies. REITs may have limited financial resources,
may trade less frequently and in a limited volume and may be subject to more
abrupt or erratic price movements than larger company securities. Historical-
ly, small capitalization stocks, such as REITs, have been more volatile in
price than the larger capitalization stocks included in the S&P Index of 500
Common Stocks.
Mortgage-Backed Securities. As discussed above, investing in Mortgage-Backed
Securities involves certain unique risks in addition to those risks associated
with investment in the real estate industry in general. These risks include
the failure of a counterparty to meet its commitments, adverse interest rate
changes and the effects of prepayments on mortgage cash flows. When interest
rates decline, the value of an investment in fixed rate obligations can be ex-
pected to rise. Conversely, when interest rates rise, the value of an invest-
ment in fixed rate obligations can be expected to decline. In contrast, as in-
terest rates on adjustable rate mortgage loans are reset periodically, yields
on investments in such loans will gradually align themselves to reflect
changes in market interest rates, causing the value of such investments to
fluctuate less dramatically in response to interest rate fluctuations than
would investments in fixed rate obligations.
Further, the yield characteristics of Mortgage-Backed Securities, such as
those in which the Portfolio may invest, differ from those of traditional
fixed income securities. The major differences typically include more frequent
interest and principal payments (usually monthly), the adjustability of inter-
est rates, and the possibility that prepayments of principal may be made sub-
stantially earlier than their final distribution dates.
Prepayment rates are influenced by changes in current interest rates and a va-
riety of economic, geographic, social and other factors, and cannot be pre-
dicted with certainty. Both adjustable rate mortgage loans and fixed rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment and to a
82
<PAGE>
lesser rate of principal prepayments in an increasing interest rate environ-
ment. Early payment associated with Mortgage-Backed Securities causes these
securities to experience significantly greater price and yield volatility than
that experienced by traditional fixed-income securities. Under certain inter-
est rate and prepayment rate scenarios, the Portfolio may fail to recoup fully
its investment in Mortgage-Backed Securities notwithstanding any direct or in-
direct governmental or agency guarantee. When the Portfolio reinvests amounts
representing payments and unscheduled prepayments of principal, it may receive
a rate of interest that is lower than the rate on existing adjustable rate
mortgage pass-through securities. Thus, Mortgage-Backed Securities, and ad-
justable rate mortgage pass-through securities in particular, may be less ef-
fective than other types of U.S. Government securities as a means of "locking
in" interest rates.
Securities Ratings. The ratings of securities by S&P, Moody's, Duff & Phelps
and Fitch are a generally accepted barometer of credit risk. They are, howev-
er, 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 probable 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 va-
rying degrees of difference in credit risk of securities within each rating
category. See Appendix A.
OTHER INVESTMENT POLICIES AND TECHNIQUES
Except as otherwise noted below, the following description of other investment
policies is applicable to all of the Fund's Portfolios:
REPURCHASE AGREEMENTS
Any Portfolio, except the Total Return Portfolio, Technology Portfolio and the
Quasar Portfolio may enter into agreements pertaining to U.S. Government Secu-
rities or, in the case of the North American Government Income Portfolio, the
Global Dollar Government Portfolio, the Utility Income Portfolio, the Conser-
vative Investors Portfolio, the Growth Investors Portfolio and the Growth
Portfolio, pertaining to the types of securities in which it invests, with
member banks of the Federal Reserve System or "primary dealers" (as designated
by the Federal Reserve Bank of New York) and, in the case of the Money Market
Portfolio, with State Street Bank and Trust Company, the Fund's Custodian, in
such securities. The Real Estate Investment Portfolio may enter into repur-
chase agreements pertaining to U.S. Government Securities with member banks of
the Federal Reserve System or primary dealers. There is no percentage restric-
tion on the ability of the Global Dollar Government Portfolio, the North Amer-
ican Government Income Portfolio, the Utility Income Portfolio, the Worldwide
Privatization Portfolio and the Real Estate Investment Portfolio to enter into
repurchase agreements. The North American Government Income Portfolio, the
Utility Income Portfolio and the Real Estate Investment Portfolio currently
intend to enter into repurchase agreements only with the Fund's Custodian and
such primary dealers.
A repurchase agreement arises when a buyer purchases a security and simultane-
ously agrees to resell it to the vendor at an agreed-upon future date, nor-
mally one day or a few days later. The resale price is greater than the pur-
chase price, reflecting
83
<PAGE>
an agreed-upon interest rate. Such agreements permit the Portfolio to keep all
of its assets at work while retaining "overnight" flexibility in pursuit of
investment of a longer-term nature. If a vendor defaults on its repurchase ob-
ligation, 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 ven-
dor goes bankrupt, the Portfolio might be delayed in, or prevented from, sell-
ing the collateral for its benefit. The Fund's Board of Directors has estab-
lished procedures, which are periodically reviewed by the Board, pursuant to
which the Adviser monitors the creditworthiness of the vendors with which the
Portfolios enter into repurchase agreement transactions.
WRITING COVERED CALL OPTIONS
The Premier Growth Portfolio, the Growth and Income Portfolio, the U.S.
Government/High Grade Securities Portfolio, the High-Yield Portfolio and the
Total Return Portfolio may each write covered call options listed on one or
more national securities exchanges. A call option gives the purchaser of the
option, upon payment of a premium to the writer of the option, the right to
purchase from the writer of the option a specified number of shares of a spec-
ified security on or before a fixed date, at a predetermined price. A Portfo-
lio permitted to write call options may not do so unless the Portfolio at all
times during the option period owns the optioned securities, or securities
convertible or carrying rights to acquire the optioned securities at no addi-
tional cost. None of the above listed Portfolios may write covered call op-
tions in excess of 25% of such Portfolio's assets.
A Portfolio may terminate its obligation to the holder of an option written by
the Portfolio through a "closing purchase transaction." The Portfolio may not,
however, effect a closing purchase transaction with respect to such an option
after it has been notified of the exercise of such option. The Portfolio real-
izes a profit or loss from a closing purchase transaction if the cost of the
transaction is more or less than the premium received by the Portfolio from
writing the option. Although the writing of covered call options only on na-
tional securities exchanges increases the likelihood of a Portfolio being able
to make closing purchase transactions, there is no assurance that a Portfolio
will be able to effect closing purchase transactions at any particular time or
at an acceptable price. The writing of covered call options could result in
increases in the portfolio turnover of a Portfolio, especially during periods
when market prices of the underlying securities appreciate.
OPTIONS
In an effort to increase current income and to reduce fluctuations in net as-
set value, the North American Government Income Portfolio, the Global Dollar
Government Portfolio, the Utility Income Portfolio, and the Worldwide
Privatization Portfolios each intend to write covered put and call options and
purchase put and call options on securities of the types in which it is per-
mitted to invest that are traded on U.S. and foreign securities exchanges.
Each Portfolio also intends to write call options for cross-hedging purposes.
There are no specific limitations on a Portfolio's writing and purchasing of
options.
The purchaser of an option, upon payment of a premium, obtains, in the case of
a put
84
<PAGE>
option the right to deliver to the writer of the option, and in the case of a
call option, the right to call upon the writer to deliver, a specified amount
of a security on or before a fixed date at a predetermined price. A call op-
tion written by a Portfolio is "covered" if the Portfolio (i) owns the under-
lying security covered by the call (ii) has an absolute and immediate right to
acquire that security without additional cash consideration (or for additional
cash consideration held in a segregated account by the Fund's Custodian) upon
conversion or exchange of other portfolio securities, or (iii) holds a call on
the same security in the same principal amount as the call written where the
exercise price of the call held (i) is equal to or less than the exercise
price of the call written or (ii) is greater than the exercise price of the
call written if the difference is maintained by the Portfolio in cash and liq-
uid high-grade debt securities in a segregated account with the Fund's Custo-
dian. A put option written by a Portfolio is "covered" if the Portfolio main-
tains liquid assets with a value equal to the exercise price in a segregated
account with the Fund's Custodian, or else holds a put on the same security in
the same principal amount as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written.
The premium paid by the purchaser of an option will reflect, among other
things, the relationship of the exercise price to the market price and vola-
tility of the underlying security, the remaining term of the option, supply
and demand and interest rates.
A call option is written for cross-hedging purposes if a Portfolio does not
own the underlying security, but seeks to provide a hedge against a decline in
value in another security which the Portfolio owns or has the right to ac-
quire. In such circumstances, the Portfolio collateralizes its obligation un-
der the option (which is not covered) by maintaining in a segregated account
with the Fund's Custodian liquid assets in an amount not less than the market
value of the underlying security, marked to market daily.
In purchasing a call option, a Portfolio would be in a position to realize a
gain if, during the option period, the price of the underlying security in-
creased by an amount in excess of the premium paid. It would realize a loss if
the price of the underlying security declined or remained the same or did not
increase during the period by more than the amount of the premium. In purchas-
ing a put option, a Portfolio would be in a position to realize a gain if,
during the option period, the price of the underlying security declined by an
amount in excess of the premium paid. It would realize a loss if the price of
the underlying security increased or remained the same or did not decrease
during that period by more than the amount of the premium. If a put or call
option purchased by a Portfolio were permitted to expire without being sold or
exercised, its premium would be lost by the Portfolio.
The risk involved in writing a put option is that there could be a decrease in
the market value of the underlying security. If this occurred, the option
could be exercised and the underlying security would then be sold by the op-
tion holder to the Portfolio at a higher price than its current market value.
The risk involved in writing a call option is that there could be an increase
in the market value of the underlying security. If this
85
<PAGE>
occurred, the option could be exercised and the underlying security would then
be sold by the Portfolio at a lower price than its current market value. These
risks could be reduced by entering into a closing transaction. See Appendix C
to the Statement of Additional Information. A Portfolio retains the premium
received from writing a put or call option whether or not the option is
exercised.
A Portfolio may purchase or write options on securities of the types in which
it is permitted to invest in privately negotiated transactions. A Portfolio
will effect such transactions only with investment dealers and other financial
institutions (such as commercial banks or savings and loan institutions)
deemed creditworthy by the Adviser, and the Adviser has adopted procedures for
monitoring the creditworthiness of such entities. Options purchased or written
by a Portfolio in negotiated transactions are illiquid and it may not be pos-
sible for the Portfolio to effect a closing transaction at a time when the Ad-
viser believes it would be advantageous to do so. See "Illiquid Securities."
See Appendix C to the Statement of Additional Information for a further dis-
cussion of the use, risks and costs of option trading.
Each of the Global Dollar Government Portfolio, the Utility Income Portfolio
and the Worldwide Privatization Portfolio may purchase and sell exchange-
traded options on any securities index composed of the types of securities in
which it may invest. An option on a securities index is similar to an option
on a security except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing level of the chosen index is greater than (in the case of a call)
or less than (in the case of a put) the exercise price of the option. There
are no specific limitations on either Portfolio's purchasing and selling of
options on securities indices.
LOANS OF PORTFOLIO SECURITIES
Each Portfolio of the Fund, except the Money Market Portfolio and the Quasar
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', administra-
86
<PAGE>
tive and custodial fees in connection with a loan. No more than 30% of the
value of the assets (25% in the case of the Worldwide Privatization Portfolio
and the Real Estate Investment Portfolio and 20% in the case of the Short-Term
Multi-Market Portfolio, the Global Bond Portfolio, the North American Govern-
ment Income Portfolio and the Utility Income Portfolio) of each Portfolio may
be loaned at any time, nor will a Portfolio lend its portfolio securities to
any officer, director, employee or affiliate of either the Fund or the Advis-
er.
FOREIGN SECURITIES
For a description of the investment policies of the Short-Term Multi-Market
Portfolio, the Global Bond Portfolio, the North American Government Income
Portfolio, the Global Dollar Government Portfolio, the Utility Income Portfo-
lio, the Worldwide Privatization Portfolio and the Quasar Portfolio with re-
spect to foreign securities, see above. Each of the other Portfolios, except
the U.S. Government/High Grade Securities Portfolio and the Real Estate In-
vestment Portfolio, may invest in listed and unlisted foreign securities sub-
ject to the limitation that the International Portfolio may invest only in the
securities of foreign issuers or U.S. companies having their principal
activities and interests outside the United States. The other Portfolios of
the Fund may invest in foreign securities without limitation, although the To-
tal Return Portfolio has no intention of so investing in the future, the Pre-
mier Growth Portfolio intends to invest at least 85% of the value of its total
assets in the equity securities of American companies, the Growth and Income
Portfolio intends to restrict its investment in foreign securities to issues
of high quality and the Money Market Portfolio is limited to investing in
those foreign securities described above in "Investment Objectives and Poli-
cies -- Money Market Portfolio." The Technology Portfolio will not purchase a
foreign security if such purchase at the time thereof would cause 10% or more
of the value of that Portfolio's total assets to be invested in foreign secu-
rities. The High Yield Portfolio may purchase foreign securities, provided the
value of issues denominated in foreign currency shall not exceed 20% of the
Portfolio's total assets and the value of issues denominated in United States
currency shall not exceed 25% of the Portfolio's total assets. The Portfolios
may convert U.S. Dollars into foreign currency, but only to effect securities
transactions on a foreign securities exchange and not to hold such currency as
an investment. Each Portfolio, except the Technology Portfolio and the U.S.
Government/High Grade Securities Portfolio, may enter into forward foreign
currency exchange contracts in order to protect against uncertainty in the
level of future foreign exchange rates.
To the extent a Portfolio, including the Short-Term Multi-Market Portfolio,
the Global Bond Portfolio, the North American Government Income Portfolio, the
Global Dollar Government Portfolio, the Utility Income Portfolio and the
Worldwide Privatization Portfolio, invests in foreign securities, considera-
tion 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, in-
cluding withholding taxes, changes in governmental administration
87
<PAGE>
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 attributable to foreign securities. Costs are incurred in
connection with conversions between various currencies held by a Portfolio. In
addition, there may be substantially less publicly available information about
foreign issuers than about domestic issuers, and foreign issuers may not be
subject to accounting, auditing and financial reporting standards and require-
ments 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 particu-
lar, the assets and profits appearing on the financial statements of a foreign
issuer may not reflect its financial position or results of operations in the
way they would be reflected had the financial statements been prepared in ac-
cordance with U.S. generally accepted accounting principles. In addition, for
an issuer that keeps accounting records in local currency, inflation account-
ing rules in some of the countries in which a Portfolio will invest require,
for both tax and accounting purposes, that certain assets and liabilities be
restated on the issuer's balance sheet in order to express items in terms of
currency of constant purchasing power. Inflation accounting may indirectly
generate losses or profits. Consequently, financial data may be materially
affected by 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 domes-
tic issuers, and foreign brokerage commissions are generally higher than in
the United States. Foreign securities markets may also be less liquid, more
volatile, and less subject to governmental supervision than in the United
States. Investments in foreign countries could be affected by other factors
not present in the United States, including expropriation, confiscatory taxa-
tion, lack of uniform accounting and auditing standards and potential diffi-
culties in enforcing contractual obligations and could be subject to extended
settlement periods.
Investment in Japanese Issuers. Investment in securities of Japanese issuers
involves certain considerations not present with investment in securities of
U.S. issuers. As with any investment not denominated in the U.S. Dollar, the
U.S. Dollar value of each Portfolio's investments denominated in the Japanese
Yen will fluctuate with Yen-Dollar exchange rate movements. Between 1985 and
1995, the Japanese Yen generally appreciated against the U.S. Dollar but has
since fallen from its post-World War II high (in 1995). Since its peak of
April 19, 1995, the Japanese Yen has decreased in value against the U.S. Dol-
lar. On December 31, 1997, the exchange rate was 130.57 Yen per Dollar.
Japan's largest stock exchange is the Tokyo Stock Exchange, the First Section
of which is reserved for larger, established companies. As measured by the
TOPIX, a capitalization-weighted composite index of all common stocks listed
in the First Section, the performance of the First Section reached a peak in
1989. Thereafter, the TOPIX declined approximately 50% through the end of
1993. In 1994, the TOPIX closed at
88
<PAGE>
1,559.09, up approximately 8% from the end of 1993; in 1995, the TOPIX closed
at 1,577.70, up approximately 1% from the end of 1994; and in 1996, the TOPIX
closed at 1,470.94, down approximately 7% from the end of 1995. On December 31,
1997, the TOPIX closed at 1,175.03, down approximately 20% from the end of
1996. Certain valuation measures, such as price-to-book value and price-to-cash
flow ratios, indicate that the Japanese stock market is near its lowest level
in the last twenty years relative to other world markets.
In recent years, Japan has consistently recorded large current account trade
surpluses with the U.S. that have caused difficulties in the relations between
the two countries. On October 1, 1994, the U.S. and Japan reached an agreement
that may lead to more open Japanese markets with respect to trade in certain
goods and services. In June, 1995, the two countries agreed in principle to in-
crease Japanese imports of American automobiles and automotive parts. Neverthe-
less, it is expected that the continuing friction between the U.S. and Japan
with respect to trade issues will thus continue for the foreseeable future.
Each Portfolio's investments in Japanese issuers also will be subject to uncer-
tainty resulting from the instability of recent Japanese ruling coalitions.
From 1955 to 1993, Japan's government was controlled by a single political par-
ty. Between August 1993, and October 1996 Japan was ruled by a series of four
coalition governments. As a result of a general election on October 20, 1996,
however, Japan returned to a single party government led by Prime Minister
Ryutaro Hashimoto. While Mr. Hashimoto's party does not control a majority of
the seats in the parliament, it is only three seats short of the 251 seats re-
quired to attain a majority in the House of Representatives (down from a 12-
seat shortfall just after the October 1996 election). For the past several
years, Japan's banking industry has been weakened by a significant amount of
problem loans. Japan's banks also have significant exposure to the current fi-
nancial turmoil in other Asian markets. On December 17, 1997 the Japanese gov-
ernment proposed to strengthen Japan's banks by means of an infusion of public
funds and other measures. It is unclear whether these proposals, which are un-
der consideration by Japan's parliament, would, if implemented, achieve their
intended effect. For further information regarding Japan, see the Fund's State-
ment of Additional Information.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Forward commitments for the purchase or sale of securities may include pur-
chases on a "when-issued" basis or purchases or sales on a "delayed delivery"
basis. In some cases, a forward commitment may be conditioned upon the occur-
rence of a subsequent event, such as approval and consummation of a debt re-
structuring (i.e., a "when, as and if issued" trade).
When forward commitment transactions are negotiated, the price, which generally
is expressed in yield terms, is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date, normally
within two months after the transaction, delayed settlements beyond two months
may be negotiated. Securities purchased or sold under a forward commitment are
subject to market fluctuation, and
89
<PAGE>
no interest accrues to the purchaser prior to the settlement date. At the time
a Portfolio enters into a forward commitment, it will record the transaction
and thereafter reflect the value of the security purchased or, if a sale, the
proceeds to be received, in determining its net asset value. Any unrealized ap-
preciation or depreciation reflected in such valuation of a "when, as and if
issued" security would be cancelled in the event that the required condition
did not occur and the trade was cancelled.
The use of forward commitments enables a Portfolio to protect against antici-
pated changes in interest rates and prices. How- ever, if the Adviser were to
forecast incorrectly the direction of interest rate movements, the Portfolio
might be required to complete such when-issued or forward transactions at
prices less favorable than current market values. No forward commitments will
be made by the Total Return Portfolio, the U.S. Government/High Grade Securi-
ties Portfolio, the High-Yield Portfolio, the North American Government Income
Portfolio, the Global Dollar Government Portfolio, the Utility Income Portfo-
lio, the Worldwide Privatization Portfolio and the Real Estate Investment Port-
folio if, as a result, the Portfolio's aggregate commitments under such trans-
actions would be more than 30% of the then current value of the Portfolio's to-
tal assets, or, in the case of the Total Return Portfolio and the High-Yield
Portfolio, more than 20% of the then current value of such Portfolio's total
assets.
A Portfolio's right to receive or deliver a security under a forward commitment
may be sold prior to the settlement date, but the Portfolio will enter into
forward commitments only with the intention of actually receiving or delivering
the securities, as the case may be. If the Portfolio, however, chooses to dis-
pose of the right to receive or deliver a security subject to a forward commit-
ment prior to the settlement date of the transaction, it may incur a gain or
loss. In the event the other party to a forward commitment transaction were to
default, the Portfolio might lose the opportunity to invest money at favorable
rates or to dispose of securities at favorable prices.
STANDBY COMMITMENT AGREEMENTS
The Global Dollar Government Portfolio, Utility Income Portfolio, Worldwide
Privatization Portfolio and the Real Estate Investment Portfolio may from time
to time enter into standby commitment agreements. Such agreements commit a
Portfolio, for a stated period of time, to purchase a stated amount of a secu-
rity which may be issued and sold to the Portfolio at the option of the issuer.
The price and coupon of the security are fixed at the time of the commitment.
At the time of entering into the agreement the Portfolio is paid a commitment
fee, regardless of whether or not the security ultimately is issued, which is
typically approximately 0.5% of the aggregate purchase price of the security
which the Portfolio has committed to purchase. Each Portfolio will enter into
such agreements only for the purpose of investing in the security underlying
the commitment at a yield and price which are considered advantageous to the
Portfolio and which are unavailable on a firm commitment basis. Except for the
Real Estate Investment Portfolio, none of the Portfolios will enter into a
standby commitment with a remaining term in excess of 45 days. Each Portfolio
limits its investment in such com-
90
<PAGE>
mitments so that the aggregate purchase price of the securities subject to the
commitments will not exceed 50%, in the cases of the Global Dollar Government
Portfolio and the Worldwide Privatization Portfolio, 25% in the case of the
Real Estate Investment Portfolio, and 20%, in the case of the Utility Income
Portfolio, of their respective assets taken at the time of acquisition of such
commitment. The Portfolios at all times maintain a segregated account with the
Fund's custodian of liquid assets in an aggregate amount equal to the purchase
price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, a Portfolio will bear
the risk of capital loss in the event the value of the security declines and
may not benefit from an appreciation in the value of the security during the
commitment period if the issuer decides not to issue and sell the security to
the Portfolio.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued and the value of the security will thereaf-
ter be reflected in the calculation of the Portfolio's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be re-
corded as income on the expiration date of the standby commitment.
HEDGING TECHNIQUES
The following hedging techniques are utilized by the Short-Term Multi-Market
Portfolio, the Global Bond Portfolio, the North American Government Income
Portfolio and the Utility Income Portfolio. In addition, (High-Yield Portfolio
may utilize futures contracts and options on futures contracts subject to the
restrictions disclosed above with respect to the Portfolio), the Worldwide
Privatization Portfolio may utilize futures contracts and options on futures
contracts, options on foreign currencies and forward foreign currency exchange
contracts, and the Global Dollar Government Portfolio may utilize interest rate
transactions.
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 asset
value of a 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 a Portfolio than a contract to
sell
91
<PAGE>
the currency in which the position being hedged is denominated. It is the Ad-
viser's belief that cross-hedges can therefore provide significant protection
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 exchange rate
risks perfectly, and if the Adviser is incorrect in its judgment of future ex-
change rate relationships, a Portfolio could be in a less advantageous position
than if such a hedge had not been established.
Indexed Debt Securities. The Portfolios 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. A Portfolio may enter into
contracts for the purchase or sale for future delivery of fixed-income securi-
ties or foreign currencies, or contracts based on financial indices including
any index of U.S. Government Securities, foreign government securities or cor-
porate 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 de-
92
<PAGE>
termined 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 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 pro-
93
<PAGE>
tecting against declines in the U.S. Dollar value of foreign currency-denomi-
nated portfolio securities and against increases in the U.S. Dollar cost of
such securities to be acquired. As in the case of other kinds of options, how-
ever, the writing of an option on a foreign currency constitutes only a par-
tial hedge, up to the amount of the premium received, and a Portfolio could be
required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on a foreign cur-
rency may constitute an effective hedge against fluctuations in exchange rates
although, in the event of rate movements adverse 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 Portfo-
lio are traded on U.S. and foreign exchanges or over-the-counter. There is no
specific percentage limitation on the Portfolio's investments in options or on
foreign currencies. See the Fund's Statement 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.
94
<PAGE>
The purchase of an interest rate floor entitles the purchaser, to the extent
that a specified index falls below a predetermined interest rate to receive
payments on a contractually-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 entitlements with respect to each in-
terest rate swap will be accrued on a daily basis and an amount of liquid as-
sets having an aggregate net asset value at least equal to the accrued excess
will be maintained in a segregated account 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 account with the Fund's Custodian in the
full amount accrued on a daily basis of the Portfolio's obligations with re-
spect 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 default by the other party to such a transaction,
the Portfolio has contractual remedies. The swap market has grown substan-
tially in recent years with a large number of banks and investment banking
firms acting both as principals and agents utilizing standardized swap docu-
mentation. 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 having an aggregate net asset value at least
equal to the full amount, accrued on a daily basis, of the Portfolio's obliga-
tions 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
95
<PAGE>
rate transactions and forward contracts will depend on the availability of liq-
uid 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
a secondary market does not exist with respect to an option purchased or writ-
ten 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 result
that (i) an option purchased by the Portfolio would have to be exercised in or-
der 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, none of the
Portfolios maintains more than 15% of its net assets in illiquid securities.
For purposes of each Portfolio's investment objectives and policies and 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
96
<PAGE>
are reflected in the net asset value of a Portfolio.
Certain debt securities in which the Global Dollar Government Portfolio may
invest are floating-rate debt securities. To the extent that the Portfolio
does not enter into interest rate swaps with respect to such floating-rate
debt securities, the Portfolio may be subject to greater risk during periods
of declining interest rates.
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 re-
flect probable 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 vary-
ing degrees of difference in credit risk of securities within each rating cat-
egory.
INVESTMENT IN FIXED-INCOME SECURITIES RATED BAA AND BBB
Securities rated Baa or BBB are considered to have speculative characteristics
and share some of the same characteristics as lower-rated securities, as de-
scribed below. Sustained periods of deteriorating economic conditions or of
rising interest rates are more likely to lead to a weakening in the issuer's
capacity to pay interest and repay principal than in the case of higher-rated
securities.
INVESTMENT IN LOWER-RATED FIXED-INCOME SECURITIES
Lower-rated securities are subject to greater risk of loss of principal and
interest than higher-rated securities. They are also generally considered to
be subject to greater market risk than higher-rated securities, and the capac-
ity of issuers of lower-rated securities to pay interest and repay principal
is more likely to weaken than is that of issuers of higher-rated securities in
times of deteriorating economic conditions or rising interest rates. In addi-
tion, lower-rated securities may be more susceptible to real or perceived ad-
verse economic conditions than investment grade securities, although the mar-
ket values of securities rated below investment grade and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities. Securities rated Ba or BB are judged to have
speculative elements or to be predominantly speculative with respect to the
issuer's ability to pay interest and repay principal. Securities rated B are
judged to have highly speculative elements or to be predominantly speculative.
Such securities may have small assurance of interest and principal payments.
Securities rated Baa by Moody's are also judged to have speculative character-
istics.
The market for lower-rated securities may be thinner and less active than that
for higher-rated securities, which can adversely affect the prices at which
these securities can be sold. To the extent that there is no established sec-
ondary market for lower-rated securities, a Portfolio's may experience diffi-
culty in valuing such securities and, in turn, the Portfolio's assets.
97
<PAGE>
The Adviser will try to reduce the risk inherent in investment in lower-rated
securities through credit analysis, diversification and attention to current
developments and trends in interest rates and economic and political condi-
tions. However, there can be no assurance that losses will not occur. Since
the risk of default is higher for lower-rated securities, the Adviser's re-
search and credit analysis are a correspondingly more important aspect of its
program for managing a Portfolio's securities than would be the case if a
Portfolio did not invest in lower-rated securities. In considering investments
for the Portfolio, the Adviser will attempt to identify those high-yielding
securities whose financial condition is adequate to meet future obligations,
has improved, or is expected to improve in the future. The Adviser's analysis
focuses on relative values based on such factors as interest or dividend cov-
erage, asset coverage, earnings prospects, and the experience and managerial
strength of the issuer.
The Global Dollar Government Portfolio may invest in securities having the
lowest ratings for non-subordinated debt instruments assigned by Moody's, S&P,
Duff & Phelps or Fitch (i.e., rated C by Moody's or CCC or lower by S&P, Duff
& Phelps or Fitch) and in unrated securities of comparable investment quality.
These securities are considered to have extremely poor prospects of ever at-
taining any real investment standing, to have a current identifiable vulnera-
bility to default, to be unlikely to have the capacity to pay interest and re-
pay principal when due in the event of adverse business, financial or economic
conditions, and/or to be in default or not current in the payment of interest
or principal.
Certain lower-rated securities in which the High Yield Portfolio, the Global
Dollar Government Portfolio, the Utility Income Portfolio, the Growth Invest-
ors Portfolio, the Conservative Investors Portfolio and the Growth Portfolio
may invest, contain call or buy-back features which permit the issuer of the
security to call or repurchase it. Such securities may present risks based on
payment expectations. If an issuer exercises such a provision and redeems the
security, the Portfolio may have to replace the called security with a lower
yielding security, resulting in a decreased rate of return for the Portfolio.
NON-RATED SECURITIES
Non-rated securities will also be considered for investment by the High-Yield
Portfolio, North American Government Income Portfolio and Global Dollar Gov-
ernment Portfolio when the Adviser believes that the financial condition of
the issuers of such securities, or the protection afforded by the terms of the
securities themselves, limits the risk to the Portfolio to a degree comparable
to that of rated securities which are consistent with the Portfolio's objec-
tive and policies.
NON-DIVERSIFIED STATUS
The Short-Term Multi-Market Portfolio, the Global Bond Portfolio, the North
American Government Income Portfolio, the Global Dollar Government Portfolio
and the Worldwide Privatization Portfolio are "non-diversified", which means
the Portfolios are not limited in the proportion of their assets that may be
invested in the securities of a single issuer. However, because the Portfolios
may invest in a smaller number of indi-
98
<PAGE>
vidual issuers than a diversified portfolio, an investment in these Portfolios
may, under certain circumstances, present greater risk to an investor than an
investment in a diversified portfolio. Each 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, each Port-
folio 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 to-
tal assets will be invested in the securities 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.
In order to meet the diversification tests and thereby maintain its status as a
regulated investment company, the North American Government Income Portfolio
will be required to diversify its portfolio of Canadian Government Securities,
Mexican Government Securities and other foreign government securities in a man-
ner which would not be necessary if the Portfolio had made similar investments
in U.S. Government Securities.
DEFENSIVE POSITION
When business or financial conditions warrant, the Premier Growth Portfolio,
the Growth and Income Portfolio and the Utility Income Portfolio may assume a
temporary defensive position and invest without limit in high grade fixed in-
come securities or hold their assets in cash equivalents, including (i) short-
term obligations of the U.S. Government and its agencies or instrumentalities,
(ii) certificates of deposit, bankers' acceptances and interest-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 pa-
per 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.
For temporary defensive purposes, the Global Dollar Government Portfolio may
vary from its investment policies during periods in which economic or political
conditions warrant. Under such circumstances, the Portfolio may invest without
limit in (i) Government Securities and (ii) the following U.S. dollar-denomi-
nated investments: (a) indebtedness rated Aa or better by Moody's or AA or bet-
ter by S&P, Duff & Phelps or Fitch, or if not so rated, of equivalent invest-
ment quality as determined by the Adviser, (b) certificates of deposit, bank-
ers' acceptances and interest-bearing savings deposits of banks having total
assets of more than $1 billion and which are members of the Federal Deposit In-
surance Corporation and (c) commercial paper of prime quality rated A-1 or bet-
ter by S&P, D-1 or better by Duff & Phelps, F1 or better by Fitch or Prime-1 by
Moody's or, if not so rated, issued by companies which have an outstanding debt
issue rated AA or better by S&P, Duff & Phelps or Fitch or Aa or better by
99
<PAGE>
Moody's. The Global Dollar Government Portfolio may also at any time, with re-
spect to up to 35% of its total assets, temporarily invest funds awaiting rein-
vestment or held for reserves for dividends and other distributions to share-
holders in such U.S. dollar-denominated money market instruments.
For temporary defensive purposes, the Conservative Investors Portfolio, the
Growth Investors Portfolio and the Growth Portfolio may invest in money market
instruments. The Growth Portfolio may also invest in repurchase agreements.
For temporary defensive purposes, the Worldwide Privatization Portfolio may
vary from its fundamental investment policy during periods in which conditions
in securities markets or other economic or political conditions warrant. The
Portfolio may reduce its position in equity securities and increase without
limit its position in short-term, liquid, high-grade debt securities, which may
include securities issued by the U.S. government, its agencies and instrumen-
talities ("U.S. Government Securities"), bank deposits, money market instru-
ments, short-term (for this purpose, securities with a remaining maturity of
one year or less) debt securities, including notes and bonds, and short-term
foreign currency denominated debt securities rated A or higher by S&P, Duff &
Phelps, Fitch or Moody's or, if not so rated, of equivalent investment quality
as determined by the Adviser. For this purpose the Portfolio will limit its in-
vestments in foreign currency denominated debt securities to securities that
are denominated in currencies in which the Portfolio anticipates its subsequent
investments will be denominated.
Subject to its policy of investing at least 65% of its total assets in equity
securities of enterprises undergoing privatization, the Portfolio may also at
any time temporarily invest funds awaiting reinvestment or held as reserves for
dividends and other distributions to shareholders in money market instruments
referred to above.
For temporary defensive purposes, the Real Estate Investment Portfolio may in-
crease without limit its position in short-term, liquid, high-grade debt secu-
rities, which may include securities issued or guaranteed by the U.S. Govern-
ment, its agencies or instrumentalities ("U.S. Government securities"), bank
deposits, money market instruments, short-term debt securities, including notes
and bonds. For a description of the types of securities in which the Portfolio
may invest while in a temporary defensive position, see the Statement of Addi-
tional Information.
PORTFOLIO TURNOVER
Portfolio turnover rates are set forth under "Financial Highlights." These
portfolio turnover rates are greater than those of most other investment compa-
nies. A high rate of portfolio turnover involves correspondingly greater bro-
kerage and other expenses than a lower rate, which must be borne by a Portfolio
and its shareholders. High portfolio turnover also may result in the realiza-
tion of substantial net short-term capital gains.
YEAR 2000
Year 2000 and Euro. Many computer systems and applications in use today process
transactions using two-digit fields for the year of the transaction, rather
than the full four digits. If these systems are not modified or replaced,
transactions occurring after
100
<PAGE>
1999 could be processed as year "1900", which could result in processing inac-
curacies and computer system failures. This is commonly known as the Year 2000
problem. In addition to the Year 2000 problem, the European Economic and Mone-
tary Union has established a single currency, the Euro Currency ("Euro") that
will replace the national currency of certain European countries effective
January 1, 1999. Computer systems and applications must be adapted in order to
be able to process Euro sensitive information accurately beginning in 1999.
Should any of the computer systems employed by the Fund's major service prov-
iders fail to process Year 2000 or Euro related information properly, that
could have a significant negative impact on the Fund's operations and the
services that are provided to the Fund's shareholders. In addition, to the ex-
tent that the operations of issuers of securities held by the Fund are im-
paired by the Year 2000 problem or the Euro, or prices of securities held by
the Fund decline as a result of real or perceived problems relating to the
Year 2000 or the Euro, the value of the Fund's shares may be materially af-
fected.
With respect to the Year 2000, the Fund has been advised that the Adviser,
Principal Underwriter and transfer agent (collectively, "Alliance") began to
address the Year 2000 issue several years ago in connection with the replace-
ment or upgrading of certain computer systems and applications. During 1997,
Alliance began a formal Year 2000 initiative, which established a structured
and coordinated process to deal with the Year 2000 issue. Alliance reports
that it has completed its assessment of the Year 2000 issues on its domestic
and international computer systems and applications. Currently, management of
Alliance expects that the required modifications for the majority of its sig-
nificant systems and applications that will be in use on January 1, 2000, will
be completed and tested by the end of 1998. Full integration testing of these
systems and testing of interfaces with third-party suppliers will continue
through 1999. At this time, management of Alliance believes that the costs as-
sociated with resolving this issue will not have a material adverse effect on
its operations or on its ability to provide the level of services it currently
provides to the Fund.
With respect to the Euro, the Fund has been advised that Alliance has estab-
lished a project team to assess changes that will be required in connection
with the introduction of the Euro. Alliance reports that its project team has
assessed all systems, including those developed or managed internally, as well
as those provided by vendors, in order to determine the modifications that
will be required in order to process accurately transactions denominated in
Euro after 1998. At this time, management of Alliance expects that the re-
quired modifications for the introduction of the Euro will be completed and
tested before the end of 1998. Management of Alliance believes that the costs
associated with resolving this issue will not have a material adverse effect
on its operations or on its ability to provide the level of services it cur-
rently provides to the Fund.
The Fund and Alliance have been advised by the Fund's Custodian that it is
also in the process of reviewing their systems with the same goals. As of the
date of this prospectus, the Fund and Alliance have no reason to believe that
the Custodian will be unable to achieve these goals.
101
<PAGE>
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 Money Market Portfolio, the Premier Growth Port-
folio, the Growth and Income Portfolio, the U.S. Government/High Grade Securi-
ties Portfolio, the High-Yield Portfolio, the Total Return Portfolio and the
International Portfolio, these fundamental investment policies provide that a
Portfolio may not: (i) invest in securities of any one issuer (including re-
purchase agreements with any one entity) other than securities issued or guar-
anteed 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 issu-
er, except that 25% of the value of the total assets of a Portfolio may be in-
vested 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 pre-
ferred 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 securi-
ties of issuers conducting their principal business activities in any one in-
dustry, except that there is no such limitation with respect to U.S. Govern-
ment securities or certificates of deposit, bankers' acceptances and interest-
bearing deposits (for purposes of this investment restriction, the electric,
gas, telephone and water business shall each be considered as a separate in-
dustry); (iv) borrow money, except that a Portfolio may borrow money only for
extraordinary or emergency purposes and then only in amounts not exceeding 15%
of its total assets at the time of borrowing; (v) mortgage, pledge or hypothe-
cate any of its assets, except as may be necessary in connection with permis-
sible borrowings described in paragraph (iv) above (in an aggregate amount not
to exceed 15% of total assets of a Portfolio), or as permitted in connection
with short sales of securities "against the box" by the Growth Portfolio, as
described above; (vi) invest in illiquid securities if immediately after such
investment more than 10% of the Portfolio's total assets (taken at market val-
ue) would be invested in such securities (illiquid securities purchased by the
High-Yield Portfolio may include: (a) subordinated debentures or other debt
securities issued in the course of acquisition financing such as that associ-
ated with leveraged buyout transactions, and (b) participation interests in
loans to domestic companies, or to foreign companies and governments, origi-
nated by commercial banks and supported by letters of credit or other credit
facilities offered by such banks or other financial institutions); 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 and the Global Bond
Portfolio, these fundamental investment policies provide that a Portfolio may
not: (i) invest 25% or more of its total assets in securities of companies en-
gaged principally in any one industry (other than, with respect to
102
<PAGE>
the Short-Term Multi-Market Portfolio only, 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 purposes, including the
meeting of redemption requests which might require the untimely 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, hypothecate, mortgage
or otherwise encumber its assets, except to secure permitted borrowings; or
(iv) invest in illiquid securities if immediately after such investment more
than 10% of the Portfolio's total assets (taken at market value) would be in-
vested in such securities.
With respect to the North American Government Income Portfolio and the Global
Dollar Government Portfolio, these fundamental investment policies provide
that a Portfolio may not: (i) invest 25% or more of their respective total as-
sets in securities of companies engaged principally in any one industry except
that this restriction does not apply to U.S. Government Securities; (ii) bor-
row money, except (a) the North American Government Income Portfolio and the
Global Dollar Government Portfolio may, in accordance with provisions of the
Act, borrow money from banks for temporary or emergency purposes, including
the meeting of redemption requests which might require the untimely disposi-
tion of securities; borrowing in the aggregate may not exceed 15%, and borrow-
ing for purposes other than meeting redemptions may not exceed 5% of the value
of the Portfolio's total assets (including the amount borrowed) at the time
the borrowing is made; outstanding borrowings in excess of 5% of the value of
the Portfolio's total assets will be repaid before any subsequent investments
are made and (b) the Global Dollar Government Portfolio may enter into reverse
repurchase agreements and dollar rolls; or (iii) pledge, hypothecate, mortgage
or otherwise encumber their respective assets, except to secure permitted
borrowings.
As a matter of fundamental policy, the Utility Income Portfolio may not: (i)
invest more than 5% of its total assets in the securities of any one issuer
except the U.S. Government, although with respect to 25% of its total assets
it may invest in any number of issuers; (ii) invest 25% or more of its total
assets in the securities of issuers conducting their principal business activ-
ities in any one industry, other than the utilities industry, except that this
restriction does not apply to U.S. Government Securities; (iii) purchase more
than 10% of any class of the voting securities of any one issuer; (iv) borrow
money except from banks or temporary or emergency purposes, including the
meeting of redemption requests which might require the untimely 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; outstanding
103
<PAGE>
borrowings in excess of 5% of the value of the Portfolio's total assets will
be repaid before any subsequent investments are made; or (v) purchase a secu-
rity if, as a result (unless the security is acquired pursuant to a plan of
reorganization or an offer of exchange), the Portfolio would own any securi-
ties of an open-end investment company or more than 3% of the total outstand-
ing voting stock of any closed-end investment company or more than 5% of the
value of the Portfolio's net assets would be invested in securities of any one
or more closed-end investment companies.
With respect to the Conservative Investors Portfolio, the Growth Investors
Portfolio and the Growth Portfolio, these fundamental investment policies pro-
vide that a Portfolio may not: (i) invest more than 5% of its total assets in
the securities of any one issuer (other than U.S. Government securities and
repurchase agreements relating thereto), although up to 25% of the Portfolio's
total assets may be invested without regard to this restriction; or (ii) in-
vest 25% or more of its total assets in the securities of any one industry.
(Obligations of a foreign government and its agencies or instrumentalities
constitute a separate "industry" from those of another foreign
government.)
With respect to the Worldwide Privatization Portfolio, these fundamental poli-
cies provide that the Portfolio may not: (i) invest 25% or more of its total
assets in securities of issuers conducting their principal business activities
in the same industry, except that this restriction does not apply to (a) U.S.
Government Securities; or (b) the purchase of securities of issuers whose pri-
mary business activity is in the national commercial banking industry, so long
as the Fund's Board of Directors determines, on the basis of factors such as
liquidity, availability of investments and anticipated returns, that the Port-
folio's ability to achieve its investment objective would be adversely af-
fected if the Portfolio were not permitted to invest more than 25% of its to-
tal assets in those securities, and so long as the Portfolio notifies its
shareholders of any decision by the Board of Directors to permit or cease to
permit the Portfolio to invest more than 25% of its total assets in those se-
curities, such notice to include a discussion of any increased investment
risks to which the Portfolio may be subjected as a result of the Board's de-
termination; (ii) borrow money except from banks for temporary or emergency
purposes, including the meeting of redemption requests which might require the
untimely 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 borrow-
ed) less liabilities (not including the amount borrowed) at the time the bor-
rowing is made; outstanding borrowings in excess of 5% of the value of the
Portfolio's total assets will be repaid before any investments are made; or
(iii) pledge, hypothecate, mortgage or otherwise encumber its assets, except
to secure permitted borrowings.
With respect to the Technology Portfolio, these fundamental policies provide
that the Portfolio may not: (i) with respect to 75% of its total assets, have
such assets represented by other than: (a) cash and cash items, (b) U.S. Gov-
ernment securities, or (c) securities of any one issuer (other than
104
<PAGE>
the U.S. Government and its agencies or instrumentalities) not greater in
value than 5% of the Technology Portfolio's total assets, and not more than
10% of the outstanding voting securities of such issuer; (ii) purchase the se-
curities of any one issuer, other than the U.S. Government and its agencies or
instrumentalities, if as a result (a) the value of the holdings of the Tech-
nology Portfolio in the securities of such issuer exceeds 25% of its total as-
sets, or (b) the Technology Portfolio owns more than 25% of the outstanding
securities of any one class of securities of such issuer; (iii) concentrate
its investments in any one industry, but the Technology Portfolio has reserved
the right to invest up to 25% of its total assets in a particular industry;
and (iv) invest in the securities of any issuer which has a record of less
than three years of continuous operation (including the operation of any pred-
ecessor) if such purchase would cause 10% or more of its total assets to be
invested in the securities of such issuers.
With respect to the Quasar Portfolio these fundamental policies provide that
the Portfolio may not: (i) purchase the securities of any one issuer, other
than the U.S. Government or any of its agencies or instrumentalities, if as a
result more than 5% of its total assets would be invested in such issuer or
the Portfolio would own more than 10% of the outstanding voting securities of
such issuer, except that up to 25% of its total asset may be invested without
regard to these 5% and 10% limitations; (ii) invest more than 25% of its total
assets in any particular industry; and (iii) borrow money except for temporary
or emergency purposes in an amount not exceeding 5% of its total assets at the
time the borrowing is made.
With respect to the Real Estate Investment Portfolio these fundamental poli-
cies provide that the Portfolio may not: (i) with respect to 75% of its total
assets, have such assets represented by other than: (a) cash and cash items,
(b) U.S. Government securities, or (c) securities of any one issuer (other
than the U.S. Government and its agencies or instrumentalities) not greater in
value than 5% of the Portfolio's total assets, and not more than 10% of the
outstanding voting securities of such issuer; (ii) purchase the securities of
any one issuer, other than the U.S. Government and its agencies or instrumen-
talities, if as a result (a) the value of the holdings of the Portfolio in the
securities of such issuer exceeds 25% of its total assets, or (b) the Portfo-
lio owns more than 25% of the outstanding securities of any one class of secu-
rities of such issuer; (iii) invest 25% or more of its total assets in the se-
curities of issuers conducting their principal business activities in any one
industry, other than the real estate industry, in which the Portfolio will in-
vest at least 25% or more of its total assets, except that this restriction
does not apply to U.S. Government securities; (iv) purchase or sell real es-
tate, except that it may purchase and sell securities of companies which deal
in real estate or interests therein, including Real Estate Equity Securities;
or (v) borrow money except for temporary or emergency purposes or to meet re-
demption requests, in an amount not exceeding 5% of the value of its total as-
sets at the time the borrowing is made.
In addition, the Fund has adopted an investment policy, which is not desig-
nated a "fundamental policy" within the meaning of the Act, of intending to
have each Portfolio comply at all times with the diversification requirements
prescribed in Section
105
<PAGE>
817(h) of the Internal Revenue Code or any successor thereto and the applica-
ble Treasury Regulations thereunder. This policy may be changed upon notice to
shareholders of the Fund, but without their approval.
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
DIRECTORS
John D. Carifa, Chairman and President, is President and Chief Operating Offi-
cer and a Director of Alliance Capital Management Corporation ("ACMC"), the
sole general partner of the Adviser, with which he has been associated since
prior to 1993.
Ruth Block was formerly an Executive Vice President and the Chief Insurance
Officer of The Equitable Life Assurance Society of the United States since
prior to 1993. She is a Director of Ecolab Incorporated (specialty chemicals)
and Amoco Corporation (oil and gas).
David H. Dievler was formerly a Senior Vice President of ACMC, with which he
had been associated since prior to 1993. He is currently an independent con-
sultant.
John H. Dobkin has been the President of Historic Hudson Valley (historic
preservation) since prior to 1993. Previously, he was Director of the National
Academy of Design.
William H. Foulk, Jr. is an investment advisor and an independent consultant.
He was formerly Senior Manager of Barrett Associates, Inc., a registered in-
vestment adviser, with which he had been associated since prior to 1993.
Dr. James M. Hester is President of the Harry Frank Guggenheim Foundation. He
was formerly President of New York University, The New York Botanical Garden
and Rector of the United Nations University.
Clifford L. Michel is a partner in the law firm of Cahill Gordon & Reindel,
with which he has been associated since prior to 1993. He is President, Chief
Executive Officer and a Director of Wenonah Development Company (investments)
and a Director of Placer Dome, Inc. (mining).
Donald J. Robinson was formerly a senior partner and a member of the Executive
Committee in the law firm of Orrick, Herrington & Sutcliffe and is currently
Senior Counsel to that firm.
ADVISER
Alliance Capital Management L.P. (the "Adviser"), a Delaware limited partner-
ship with principal offices at 1345 Avenue of the Americas, New York, New York
10105 has been retained under an investment advisory agreement (the "Invest-
ment Advisory Agreement") to provide investment advice and, in general, to
conduct the management and investment program of each of the Fund's Portfolios
subject to the general supervision and control of the Board of Directors of
the Fund.
106
<PAGE>
The following table lists the person or persons who are primarily responsible
for the day-to-day management of each Portfolio's investment portfolio, the
length of time that each person has been primarily responsible, and each per-
son's principal occupation during the past five years.
<TABLE>
<CAPTION>
FUND PRINCIPAL OCCUPATION
---- EMPLOYEE; YEAR; TITLE DURING THE PAST FIVE YEARS
--------------------- --------------------------
<S> <C> <C>
Money Market Portfolio Raymond J. Papera since 1997- Associated with the Adviser
Vice President of Alliance since prior to 1993
Capital Management Corporation
(ACMC)*
Premier Growth Portfolio Alfred Harrison since Associated with the Adviser
inception-Vice Chairman since prior to 1993
of ACMC
Growth and Income Paul C. Rissman since Associated with the Adviser
Portfolio inception-Senior Vice since prior to 1993
President of ACMC
U.S. Government/High Paul J. DeNoon since Associated with the Adviser
Grade Securities inception-Vice President since prior to 1993
Portfolio of ACMC
Total Return Portfolio Paul C. Rissman since (see above)
inception-(see above)
International Portfolio Steven Beinhacker since 1996- Associated with the Adviser
Vice President of ACMC since prior to 1993
Short-Term Multi-Market Douglas J. Peebles since Associated with the Adviser
Portfolio inception-Senior Vice since prior to 1993
President of ACMC
Global Bond Portfolio Ian Coulman since inception- Associated with the Sub-Adviser
an Investment Manager of the since prior to 1993
Sub-Adviser
North American Wayne D. Lyski since Associated with the Adviser
Government Income inception-Executive Vice since prior to 1993
Portfolio President of ACMC
Global Dollar Government Wayne D. Lyski since (see above)
Portfolio inception-(see above)
Utility Income Portfolio Paul C. Rissman since 1996- (see above)
(see above)
Conservative Investors Nicholas D.P. Carn since 1997- Associated with the Adviser
Portfolio Vice President of ACMC since 1997; prior thereto, Chief
Investment Officer and Portfolio
Manager of Draycott Partners
since prior to 1993
Growth Investors Nicholas D.P. Carn since 1997- (see above)
Portfolio (see above)
Growth Portfolio Tyler J. Smith since Associated with the Adviser
inception-Senior Vice since July, 1993; prior thereto,
President of ACMC associated with Equitable
Capital Management Corporation**
</TABLE>
107
<PAGE>
<TABLE>
<CAPTION>
FUND PRINCIPAL OCCUPATION
---- EMPLOYEE; YEAR; TITLE DURING THE PAST FIVE YEARS
--------------------- --------------------------
<S> <C> <C>
Worldwide Privatization Mark H. Breedon since Associated with the Adviser
Portfolio inception-Senior Vice since prior to 1993
President of ACMC and
Director and Vice President
of Alliance Capital
Limited***
Technology Portfolio Peter Anastos since 1992- Associated with the Adviser
Senior Vice President of since prior to 1993
ACMC
Gerald T. Malone since 1992- Associated with the Adviser
Senior Vice President of since prior to 1993
ACMC
Quasar Portfolio Alden M. Stewart since Associated with the Adviser
inception-Executive Vice since prior to July, 1993**
President of ACMC
Randall E. Hasse since Associated with the Adviser
inception-Senior Vice since prior to 1993
President of ACMC
Real Estate Investment Daniel G. Pine since Associated with the Adviser
Portfolio inception-Senior Vice since May, 1996; prior thereto
President of ACMC associated with Desai Capital
Management since prior to 1993
High-Yield Portfolio Nelson R. Jantzen since Associated with the Adviser
inception-Senior Vice since July, 1993**
President of ACMC
Wayne C. Tappe since Associated with the Adviser
inception-Senior Vice since July, 1993**
President of ACMC
</TABLE>
* The sole general partner of the Adviser.
** Prior to July 22, 1993, with Equitable Capital Management Corporation (Eq-
uitable Capital). On that date, the Adviser acquired the business and sub-
stantially all of the assets of Equitable Capital.
*** An indirect wholly-owned subsidiary of the Adviser.
The Adviser has retained under a subadvisory agreement a sub-adviser, AIGAM
International Limited (the "Sub-Adviser"), an indirect, majority owned subsid-
iary of American International Group, Inc., a major international financial
service company to provide research and management services to the Global Bond
Portfolio. In 1994, the Sub-Adviser changed its name from Dempsey & Company
International Limited, which was founded in 1988. For the year ended December
31, 1997, for its services as Sub-Adviser to the Global Bond Portfolio, the
Sub-Adviser received from the Adviser a monthly fee at the annual rate of .40%
of that Portfolio's average daily net assets.
The Sub-Adviser is an asset management firm specializing in global fixed-in-
come money management. It manages a range of institu-
108
<PAGE>
tional specialty funds, investment companies, and dedicated institutional
portfolios. The address of the Sub-Adviser is Unit 1/11, Harbour Yard,
Chelsea, London, England.
The Adviser, with respect to investment in real estate securities, has re-
tained as a consultant CB Richard Ellis, Inc. ("CBRE"), a publicly held com-
pany and the largest real estate services company in the United States, com-
prised of real estate brokerage, property and facilities management, and real
estate finance and investment advisory activities. In 1997, CBRE completed
21,100 sale and lease transactions, managed over 6,600 client properties, cre-
ated over $5 billion in mortgage originations, and completed over 3,600 ap-
praisal and consulting assignments. In addition, they advised and managed for
institutions over $4 billion in real estate investments. CBRE will make avail-
able to the Adviser the CBRE's National Real Estate Index, which gathers, ana-
lyzes and publishes targeted research data for the 66 largest U.S. markets,
based on a variety of public-sector and private-sector sources as well as
CBRE's proprietary database of approximately 80,000 property transactions rep-
resenting over $500 billion of investment property. This information provides
a substantial component of the research and data used to create the REIT .
Score model. As a consultant, CBRE provides to the Adviser, at the Adviser's
expense, such in depth information regarding the real estate market, the fac-
tors influencing regional valuations and analysts of recent transactions in
office, retail, industrial and multi-family properties as the Adviser shall
from time to time request. CBRE will not furnish advice or make recommenda-
tions regarding the purchase or sale of securities by the Fund nor will it be
responsible for making investment decisions involving Fund assets.
CBRE is one of the three largest fee-based property management firms in the
United States, the largest commercial real estate lease brokerage firm in the
country, the largest investment property brokerage firm in the country, as
well as one of the largest publishers of real estate research, with approxi-
mately 8,000 employees worldwide. CBRE will provide the Adviser with exclusive
access to its REIT . Score model which ranks approximately 142 REITs based on
the relative attractiveness of the property markets in which they own real es-
tate. This model scores the approximately 18,000 individual properties owned
by these companies. REIT . Score is in turn based on CBRE's National Real Es-
tate Index which gathers, analyzes and publishes targeted research for the 66
largest U.S. real estate markets based on a variety of public- and private-
sector sources as well as CBRE's proprietary database of 80,000 commercial
property transactions representing over $500 billion of investment property
and over 2,500 tracked properties which report rent and expense data quarter-
ly. CBRE has previously provided access to its REIT . Score model results pri-
marily to the institutional market through subscriptions. The model is no
longer provided to any research publications and the Fund is currently the
only mutual fund available to retail investors that has access to CBRE's REIT
. Score model.
The Adviser is a leading international investment manager supervising client
accounts with assets as of June 30, 1998 totaling more than $262 billion (of
which approximately $107 billion represented the assets of invest-
109
<PAGE>
ment companies). The Adviser's clients are primarily major corporate employee
benefit funds, public employee retirement systems, investment companies, foun-
dations and endowment funds. The 58 registered investment companies managed by
the Adviser comprising 123 separate investment portfolios currently have over
two million shareholders. As of June 30, 1998, the Adviser was an investment
manager of employee benefit plan assets for 32 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, which is a wholly-owned
subsidiary of the Equitable Companies Incorporated, a holding company con-
trolled 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 Fund's 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 of printing the Fund's
prospectuses and shareholder reports, (f) cost of maintaining the Fund's ex-
istence, (g) interest charges, taxes, brokerage fees and commissions, (h)
costs of stationery and supplies, (i) expenses and fees related to registra-
tion and filing with the Commission and with state regulatory authorities, and
(j) cost of certain personnel of the Adviser or its affiliates rendering cler-
ical, accounting and other services to the Fund.
As to the obtaining of clerical and accounting services not required to be
provided to the Fund by the Adviser under the Investment Advisory Agreement,
the Fund may employ its own personnel. For such services, it may also utilize
personnel employed by the Adviser or by its affiliates; in such event, the
services are provided to the Fund at cost and the payments specifically ap-
proved in advance by the Fund's Board of Directors.
DISTRIBUTION PLAN
The Fund has adopted the Distribution Plan pursuant to Rule 12b-1 under the
Act for the Class B shares of the Fund. Pursuant to the Distribution Plan, the
Fund compensates Alliance Fund Distributors, Inc. the Fund's Principal Under-
writer, from assets attributable to the Class B shares for services rendered
and expenses borne in connection with activities primarily intended to result
in the sale of Fund Class B shares. It is anticipated that a portion of the
amounts received by the Principal Underwriter will be
110
<PAGE>
used to defray various costs incurred or paid by the Principal Underwriter in
connection with printing and mailing of Fund prospectuses, statements of addi-
tional information, any supplements thereto and shareholder reports and hold-
ing seminars and sales meetings with wholesale and retail sales personnel de-
signed to promote distribution of Class B shares. The Principal Underwriter
may also use a portion of the amounts received to provide compensation to fi-
nancial intermediaries and third-party broker-dealers for their services in
connection with the distribution of Class B shares.
The Distribution Plan provides that the Fund, on behalf of each Portfolio, may
pay annually up to 0.50% of the average daily net assets of a Portfolio at-
tributable to its Class B shares in respect of activities primarily intended
to result in the sale of Class B shares. However, under the distribution
agreement between the Fund and the Principal Underwriter, payments to the
Principal Underwriter for activities pursuant to the Distribution Plan are
limited to payments at an annual rate equal to 0.25% of average daily net as-
sets of a portfolio attributable to its Class B shares. Under the terms of the
Distribution Plan and the distribution agreement, each Portfolio is authorized
to make payments monthly to the Principal Underwriter which may be used to pay
or reimburse entities providing distribution and shareholder servicing with
respect to the Class B shares for such entities' fees or expenses incurred or
paid in that regard.
The Distribution Plan is of a type known as a "compensation" plan because pay-
ments are made for services rendered to the Fund with respect to Class B
shares regardless of the level of expenditures by the distributor. The Direc-
tors will, however, take into account such expenditures for purposes of re-
viewing operations under the Distribution Plan and in connection with their
annual consideration of the Plan's renewal. The Principal Underwriter has in-
dicated that it expects its expenditures to include, without limitation: (a)
compensation to financial intermediaries and broker-dealers to pay or reim-
burse them for their services or expenses in connection with the distribution
of contracts and policies funded with Class B shares; (b) the printing and
mailing of Fund prospectuses, statements of additional information, any sup-
plements thereto and shareholder reports for the prospective owners of con-
tracts and policies funded with Class B shares; (c) those relating to the de-
velopment, preparation, printing and mailing of advertisements, sales litera-
ture and other promotional materials describing and/or relating to the Class B
shares of the Fund; (d) holding seminars and sales meetings designed to pro-
mote the distribution of the Fund Class B shares; (e) obtaining information
and providing explanations to wholesale and retail distributors of contracts
and policies funded with Class B shares regarding Fund investment objectives
and policies and other information about the Fund and its Portfolios, includ-
ing the performance of the Portfolios; (f) training sales personnel regarding
the Class B shares of the Fund; and (g) financing any other activity that the
Principal Underwriter determines is primarily intended to result in the sale
of Class B shares.
111
<PAGE>
- --------------------------------------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
PURCHASE OF CLASS B SHARES
Class B shares of each Portfolio of the Fund are offered on a continuous basis
directly by the Fund and by Alliance Fund Distributors, Inc., the Fund's Prin-
cipal 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. These shares are subject to distribution fees under the Distri-
bution Plan. The separate accounts of insurance companies place orders to pur-
chase shares of each Portfolio based on, among other things, the amount of pre-
mium payments to be invested and surrendered and transfer requests to be ef-
fected on that day pursuant to variable annuity contracts and variable life in-
surance 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 condi-
tions in the securities markets or for other reasons. Individuals may not place
orders directly with the Fund. See the Prospectus of the separate account of
the participating insurance company for more information on the purchase of
Portfolio shares.
The public offering price of each Portfolio's Class B shares is their net asset
value. The per share net asset value of each Portfolio is computed in accor-
dance with the Fund's Charter 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 weekday exclusive of
days on which the Exchange is closed (most national holidays and Good Friday).
For purposes of this computation, the securities in each Portfolio are valued
at their current market value (in the case of the Money Market Portfolio, amor-
tized cost value is used) determined on the basis of market quotations or, if
such quotations are not readily available, such other methods as the Directors
believe would accurately reflect fair market value. Portfolio securities may
also be valued on the basis of prices provided by a pricing service when such
prices are believed by the Adviser to reflect the fair market value of such se-
curities. In the case of the Money Market Portfolio, per share net asset value
is expected to be constant at $1.00 per share, although this price is not guar-
anteed.
REDEMPTION OF CLASS B SHARES
An insurance company separate account may redeem all or any portion of the
Class B 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 certifi-
cates representing shares being redeemed must be submitted with the redemption
request. Shares redeemed are
112
<PAGE>
entitled to earn dividends, if any, up to and including 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 redemp-
tion.
The right of redemption may be suspended or the date of payment may be post-
poned for any period during which the Exchange is closed (other than customary
weekend and holiday closings) or during which the Commission determines that
trading thereon is restricted, or for any period during which an emergency (as
determined by the Commission) exists as a result of which disposal by the Fund
of securities owned by a Portfolio is not reasonably practicable or as a re-
sult of which it is not reasonably practicable for the Fund fairly to deter-
mine the value of a Portfolio's net assets, or for such other periods as the
Commission may by order permit for the protection of security holders of the
Fund. For information regarding how to redeem shares in the Fund please see
your insurance company separate account prospectus.
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The Money Market Portfolio declares income dividends each business day at 4:00
p.m. Eastern time and such dividends are paid monthly via automatic investment
in additional full and fractional shares in each shareholders' account. As
such additional shares are entitled to dividends, a compounding growth of in-
come occurs. Net income consists of all accrued interest income on Portfolio
assets less the Portfolio's expenses (including accrued expenses and fees pay-
able to the Adviser) applicable to that dividend period. Realized gains and
losses are reflected in net asset value and are not included in net income.
Each of the other Portfolios will declare and distribute dividends from net
investment income and will distribute its net capital gains, if any, at least
annually. Such income and capital gains distributions will be made in shares
of such Portfolios.
The Fund will distribute the return of capital it receives from the REITs in
which the Fund invests. The REITs pay distributions based on cash flow, with-
out regard to depreciation and amortization. As a result, a portion of the
distributions paid to the Fund and subsequently distributed to shareholders
may be a nontaxable return of capital. The final determination of the amount
of the Fund's return of capital distributions for the period will be made af-
ter the end of each calendar year.
Each Portfolio of the Fund qualified and intends to continue to qualify to be
taxed as a regulated investment company under Subchapter M of the Internal
Revenue Code (the "Code"). If so qualified, each Portfolio will not be subject
to Federal income or excise taxes on its investment company taxable income and
net capital gains to the extent such investment company taxable income and net
capital gains are distributed to the separate accounts of insurance companies
which hold its shares. Under current tax law, capital gains or dividends from
any Portfolio are not currently taxable when left to accumulate within a vari-
able annuity (other than an annuity interest owned by a person
113
<PAGE>
who is not a natural person) or variable life insurance contract. Distribu-
tions of net investment income and net short-term capital gain will be treated
as ordinary income 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 coun-
tries may be subject to foreign income taxes withheld at the source. Provided
that certain Code requirements are met, a Portfolio may "pass through" to its
shareholders credits or deductions for foreign income taxes paid.
Section 817(h) of the Code requires that the investments of a segregated asset
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
Money Market Portfolio, the U.S. Government/High Grade Securities Portfolio,
the High-Yield Portfolio, the Short-Term Multi-Market Portfolio, the Global
Bond Portfolio, the North American Government Income Portfolio, the Utility
Income Portfolio and the Global Dollar Government Portfolio occur primarily
with issuers, underwriters or major dealers acting as principals, while trans-
actions for the Premier Growth Portfolio, the Growth and Income Portfolio, the
International Portfolio, the Growth Portfolio, the Worldwide Privatization
Portfolio, the Technology Portfolio and the Quasar Portfolio are normally ef-
fected by brokers, and transactions for the Conservative Investors, the Growth
Invest-
114
<PAGE>
ors, Total Return Portfolio and the Real Estate Investment Portfolio are nor-
mally effected through any one or more of the foregoing entities.
The Fund has no obligation to enter into transactions in portfolio securities
with any broker, dealer, issuer, underwriter or other entity. In placing or-
ders, it is the policy of the Fund to obtain the best price and execution for
its transactions. Consistent with the objective of obtaining best execution,
the Fund may use brokers and dealers who provide research, statistical and
other information to the Adviser.
There may be occasions where the transaction cost charged by a broker may be
greater than that which another broker may charge if the Fund determines in
good faith that the amount of such transaction cost is reasonable in relation
to the value of the brokerage and research and statistical services provided by
the executing broker. Consistent with the Conduct Rules of the National Associ-
ation of Securities Dealers, Inc., and subject to seeking best price and execu-
tion, the Fund may consider sales of shares of the Fund as a factor in the se-
lection of brokers and dealers to enter into portfolio transactions with the
Fund.
The Fund may from time to time place orders for the purchase or sale of securi-
ties on an agency basis with Donaldson, Lufkin & Jenrette Securities Corpora-
tion, an affiliate of the Adviser, and with brokers which may have their trans-
actions cleared or settled, or both, by the Pershing Division of Donaldson,
Lufkin and Jenrette Securities Corporation, for which Donaldson, Lufkin and
Jenrette Securities Corporation may receive a portion of the brokerage commis-
sion. In such instances, the placement of orders with such brokers would be
consistent with the Fund's objective of obtaining best execution and would not
be dependent upon the fact that Donaldson, Lufkin & Jenrette Securities Corpo-
ration is an affiliate of the Adviser.
ORGANIZATION
The Fund is a Maryland corporation organized on November 17, 1987. The autho-
rized capital stock of the Fund consists of 10,000,000,000 shares of Class A
Common Stock and 10,000,000,000 shares of Class B Common Stock, each having a
par value of $.001 per share, which may, without shareholder approval, be di-
vided into an unlimited number of series. Such shares are currently divided
into 19 series, one underlying each Portfolio, of two classes each. 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 manner.
Maryland law does not require a registered investment company to hold annual
meetings of shareholders and it is anticipated that shareholder meetings will
be held only when specifically required by federal or state law. Shareholders
have available certain procedures for the removal of Directors. Shares of each
Portfolio are freely transferable, are entitled to dividends as determined by
the Board of Directors and, in liquidation of the Fund, are entitled to receive
the net assets of that Portfolio. Shareholders have no preference, pre-emptive
or conversion rights. In accordance with current law, it is anticipated that an
insurance company issuing a variable annuity contract or variable life insur-
ance policy that partici-
115
<PAGE>
pates in the Fund will request voting instructions from contract or policy-
holders and will vote shares in the separate account in accordance with the
voting instructions received.
The Board of Directors may establish additional Portfolios and additional
classes of shares. Each share of each class of a Portfolio shall be entitled
to one vote (or fraction thereof in respect of a fractional share) on matters
on which such shares (or class of shares) shall be entitled to vote.
Under the Fund's multi-class plan adopted pursuant to Rule 18f-3 under the
Act, shares of each class of a Portfolio represent equal pro rata interests in
the assets of that Portfolio and, generally, have identical voting, dividend,
liquidation, and other rights, preferences, powers, restrictions, limitations,
qualifications and terms and conditions, except that: (1) each class has a
different designation; (2) each class of shares bears its "Class Expenses";
(3) each class shall have exclusive voting rights on any matter submitted to
shareholders that relates solely to its distribution arrangements; (4) each
class has separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other class;
(5) each class may have separate exchange privileges, although exchange privi-
leges are not currently contemplated; and (6) each class may have different
conversion features, although a conversion feature is not currently contem-
plated. Expenses currently designated as "Class Expenses" by the Fund's Board
of Directors under the plan pursuant to Rule 18f-3 are currently limited to
payments to the Fund's Principal Underwriter pursuant to the Distribution
Plan.
PRINCIPAL UNDERWRITER
Alliance Fund Distributors, Inc., 1345 Avenue of the Americas, New York, New
York 10105, an indirect wholly-owned subsidiary of the Adviser, is the Princi-
pal Underwriter of shares of the Fund.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachu-
setts 02110, acts as Custodian for the securities and cash of the Fund and as
its dividend disbursing agent, but plays no part in deciding on the purchase
or sale of portfolio securities.
REGISTRAR, DIVIDEND-DISBURSING AGENT AND TRANSFER AGENT
Alliance Fund Services, Inc., an indirect wholly-owned subsidiary of the Ad-
viser, located at 500 Plaza Drive, Secaucus, New Jersey, 07094, acts as the
Fund's registrar, dividend-disbursing agent and transfer agent.
PERFORMANCE INFORMATION
From time to time the Fund advertises its "total return." The Fund's "total
return" is its average annual compounded total return for its most recently
completed one, five, and ten-year periods (or the period since the Fund's in-
ception). The Fund's total return for such a period is computed by finding,
through the use of a formula prescribed by the Commission, the average annual
compounded rate of return over the period that would equate an assumed initial
amount invested to the value of such investment at the end of the period. For
purposes of computing total return, income dividends and capital gains distri-
butions paid
116
<PAGE>
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.
117
<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
<PAGE>
Part B: The Statement of Additional Information contained in the
Fund's Post-Effective Amendment No. 22 filed with the Commission
on April 29, 1998 pursuant to Rule 485(b) is incorporated herein
by reference.
<PAGE>
ALLIANCE VARIABLE PRODUCTS
SERIES FUND, INC.
_________________________________________________________________
c/o Alliance Fund Services, Inc.
P. O. Box 1520, Secaucus, New Jersey 07096-1520
Toll Free (800) 221-5672
_________________________________________________________________
STATEMENT OF ADDITIONAL INFORMATION
[ ]
_________________________________________________________________
This Statement of Additional Information is not a
prospectus but supplements and should be read in conjunction with
the Fund's current Prospectus dated [ ] relating to
Class B shares. A separate Statement of Additional Information
relates to the Fund's Class A shares. Copies of such Prospectus
may be obtained by contacting Alliance Fund Services, Inc. at the
address or telephone number shown above.
TABLE OF CONTENTS
PAGE
Introduction...........................................
Investment Policies and Restrictions...................
Money Market Portfolio............................
Premier Growth Portfolio..........................
Growth and Income Portfolio.......................
U.S. Government/High Grade
Securities Portfolio............................
High-Yield Portfolio..............................
Total Return Portfolio............................
International Portfolio...........................
Short-Term Multi-Market Portfolio
and Global Bond Portfolio.......................
North American Government Income
Portfolio.......................................
Global Dollar Government Portfolio................
Utility Income Portfolio..........................
Conservative Investors Portfolio,
Growth Investors Portfolio and
Growth Portfolio................................
Worldwide Privatization Portfolio.................
Technology Portfolio..............................
Quasar Portfolio..................................
Real Estate Investment Portfolio..................
Other Investment Policies.........................
Management of the Fund.................................
Purchase and Redemption of Shares......................
<PAGE>
Net Asset Value........................................
Portfolio Transactions.................................
Dividends, Distributions and Taxes.....................
General Information....................................
Financial Statements and Report of Independent
Auditors..........................................
Appendix A - Description of Obligations Issued
or Guaranteed by U.S. Government Agencies
or Instrumentalities.............................. A-1
Appendix B - Futures Contracts and Options on
Futures Contracts and Foreign Currencies.......... B-1
Appendix C - Options................................... C-1
Appendix D - Japan..................................... D-1
(R): This registered service mark used under license from the
owner, Alliance Capital Management L.P.
<PAGE>
_________________________________________________________________
INTRODUCTION
_________________________________________________________________
Alliance Variable Products Series Fund, Inc. (the
"Fund") is an open-end series investment company designed to fund
variable annuity contracts and variable life insurance policies
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 in the Fund's Prospectus which have differing
investment objectives and policies. The Fund currently has
nineteen Portfolios, all of which are described in this Statement
of Additional Information.
_________________________________________________________________
INVESTMENT POLICIES AND RESTRICTIONS
_________________________________________________________________
The following investment policies and restrictions
supplement, and should be read in conjunction with, the
information regarding the investment objectives, policies and
restrictions of each Portfolio set forth in the Fund's
Prospectus. Except as noted below, the investment policies
described below are not fundamental and may be changed by the
Board of Directors of the Fund without the approval of the
shareholders of the affected Portfolio or Portfolios; however,
shareholders will be notified prior to a material change in such
policies.
Whenever any investment policy or restriction states a
minimum or maximum percentage of a Portfolio's assets which may
be invested in any security or other asset, it is intended that
such minimum or maximum percentage limitation be determined
immediately after and as a result of such Portfolio's acquisition
of such security or other asset. Accordingly, any later increase
or decrease in percentage beyond the specified limitations
resulting from a change in value or net assets will not be
considered a violation.
MONEY MARKET PORTFOLIO
GENERAL. The objectives of the Money Market Portfolio
are in the following order of priority: safety of principal,
excellent liquidity and maximum current income to the extent
consistent with the first two objectives. As a matter of
fundamental policy, the Fund pursues its objectives in this
Portfolio by maintaining the Portfolio's assets in high quality
money market securities, all of which at the time of investment
have remaining maturities of one year or less (which maturities
2
<PAGE>
may extend to 397 days). Accordingly, the Portfolio may make the
following investments diversified by maturities and issuers:
1. Marketable obligations of, or guaranteed by, the
United States Government, its agencies or instrumentalities.
These include issues of the U.S. Treasury, such as bills,
certificates of indebtedness, notes and bonds, and issues of
agencies and instrumentalities established under the authority of
an act of Congress. The latter issues include, but are not
limited to, obligations of the Bank for Cooperatives, Federal
Financing Bank, Federal Home Loan Bank, Federal Intermediate
Credit Banks, Federal Land Banks, Federal National Mortgage
Association and Tennessee Valley Authority. Some of the
securities are supported by the full faith and credit of the U.S.
Treasury, others are supported by the right of the issuer to
borrow from the U.S. Treasury, and still others are supported
only by the credit of the agency or instrumentality.
2. Certificates of deposit, bankers acceptances and
interest-bearing savings deposits issued or guaranteed by banks
or savings and loan associations having total assets of more than
$1 billion and which are members of the Federal Deposit Insurance
Corporation. Certificates of deposit are receipts issued by a
depository institution in exchange for the deposit of funds. The
issuer agrees to pay the amount deposited plus interest to the
bearer of the receipt on the date specified on the certificate.
Such certificates may include, for example, those issued by
foreign subsidiaries of such banks which are guaranteed by them.
The certificate usually can be traded in the secondary market
prior to maturity. Bankers acceptances typically arise from
short-term credit arrangements designed to enable businesses to
obtain funds to finance commercial transactions. Generally, an
acceptance is a time draft drawn on a bank by an exporter or an
importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then accepted by a bank that, in
effect, unconditionally guarantees to pay the face value of the
instrument on its maturity date. The acceptance may then be held
by the accepting bank as an earning asset or it may be sold in
the secondary market at the going rate of discount for a specific
maturity. Although maturities for acceptances can be as long as
270 days, most acceptances have maturities of six months or less.
3. Commercial paper, including variable amount master
demand notes, of prime quality rated A-1+ or A-1 by Standard &
Poor's Corporation (S&P), Prime-1 by Moody's Investors Service,
Inc. (Moody's), D-1 by Duff & Phelps Credit Rating Co. ("Duff &
Phelps") or F1 by Fitch IBCA, Inc. ("Fitch") or, if not rated,
issued by domestic and foreign companies which have an
outstanding debt issue rated AAA or AA by S&P, Duff & Phelps or
Fitch, or Aaa or Aa by Moody's. For a description of such
ratings see Appendix A to the Prospectus. Commercial paper
3
<PAGE>
consists of short-term (usually from 1 to 270 days) unsecured
promissory notes issued by corporations in order to finance their
current operations. A variable amount master demand note
represents a direct borrowing arrangement involving periodically
fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to
which the lender may determine to invest varying amounts.
4. Repurchase agreements are collateralized fully as
that term is defined in Rule 2a-7 under the Investment Company
Act of 1940. Repurchase agreements may be entered into with
member banks of the Federal Reserve System or primary dealers (as
designated by the Federal Reserve Bank of New York) in U.S.
Government securities or the Fund's Custodian. It is the
Portfolio's current practice, which may be changed at any time
without shareholder approval, to enter into repurchase agreements
only with such primary dealers or the Fund's Custodian. While
the maturities of the underlying collateral may exceed one year,
the term of the repurchase agreement is always less than one
year. Repurchase agreements not terminable within seven days
will be limited to no more than 10% of the Portfolio's total
assets.
For additional information regarding repurchase
agreements, see Other Investment Policies -- Repurchase
Agreements, below.
REVERSE REPURCHASE AGREEMENTS. While the Portfolio has
no current plans to do so, it may enter into reverse repurchase
agreements, which involve the sale of money market securities
held by the Portfolio with an agreement to repurchase the
securities at an agreed-upon price, date and interest payment.
The Fund's Custodian will place cash not available for investment
or securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities (Government Securities) or other
liquid high-quality debt securities in a separate account of the
Fund having a value equal to the aggregate amount of the Money
Market Portfolio's commitments in reverse repurchase agreements.
LIQUID RESTRICTED SECURITIES. The Portfolio may
purchase restricted securities eligible for resale under Rule
144A of the Securities Act of 1933, as amended (the Securities
Act) that are determined by Alliance Capital Management L.P. (the
Adviser) to be liquid in accordance with procedures adopted by
the Directors. Restricted securities are securities subject to
contractual or legal restrictions on resale, such as those
arising from an issuers reliance upon certain exemptions from
registration under the Securities Act.
In recent years, a large institutional market has
developed for certain types of restricted securities including,
4
<PAGE>
among others, private placements, repurchase agreements,
commercial paper, foreign securities and corporate bonds and
notes. These instruments are often restricted securities because
they are sold in transactions not requiring registration. For
example, commercial paper issues in which the Portfolio may
invest include, among others, securities issued by major
corporations without registration under the Securities Act in
reliance on the exemption from registration afforded by Section
3(a)(3) of such Act and commercial paper issued in reliance on
the private placement exemption from registration which is
afforded by Section 4(2) of the Securities Act (Section 4(2)
paper). Section 4(2) paper is restricted as to disposition under
the Federal securities laws in that any resale must also be made
in an exempt transaction. Section 4(2) paper is normally resold
to other institutional investors through or with the assistance
of investment dealers who make a market in Section 4(2) paper,
thus providing liquidity. Institutional investors, rather than
selling these instruments to the general public, often depend on
an efficient institutional market in which such restricted
securities can be readily resold in transactions not involving a
public offering. In many instances, therefore, the existence of
contractual or legal restrictions on resale to the general public
does not, in practice, impair the liquidity of such investments
from the perspective of institutional holders.
In 1990, in part to enhance the liquidity in the
institutional markets for restricted securities, the Securities
and Exchange Commission (the Commission) adopted Rule 144A under
the Securities Act to establish a safe harbor from the Securities
Acts registration requirements for resale of certain restricted
securities to qualified institutional buyers. Section 4(2) paper
that is issued by a company that files reports under the
Securities Exchange Act of 1934 is generally eligible to be
resold in reliance on the safe harbor of Rule 144A. Pursuant to
Rule 144A, the institutional restricted securities markets may
provide both readily ascertainable values for restricted
securities and the ability to liquidate an investment in order to
satisfy share redemption orders on a timely basis. An
insufficient number of qualified institutional buyers interested
in purchasing certain restricted securities held by the
Portfolio, however, could affect adversely the marketability of
such portfolio securities and the Portfolio might be unable to
dispose of such securities promptly or at reasonable prices. Rule
144A has already produced enhanced liquidity for many restricted
securities, and market liquidity for such securities may continue
to expand as a result of Rule 144A and the consequent inception
of the PORTAL System sponsored by the National Association of
Securities Dealers, Inc., an automated system for the trading,
clearance and settlement of unregistered securities. The
Portfolio's investments in Rule 144A eligible securities are not
5
<PAGE>
subject to the limitations described above on securities issued
under Section 4(2).
The Fund's Directors have the ultimate responsibility
for determining whether specific securities are liquid or
illiquid. The Directors have delegated the function of making
day-to-day determinations of liquidity to the Adviser, pursuant
to guidelines approved by the Directors. The Adviser takes into
account a number of factors in determining whether a restricted
security being considered for purchase is liquid, including at
least the following:
(i) the frequency of trades and quotations for the
security;
(ii) the number of dealers making quotations to
purchase or sell the security;
(iii) the number of other potential purchasers of
the security;
(iv) the number of dealers undertaking to make a
market in the security;
(v) the nature of the security (including its
unregistered nature) and the nature of the
marketplace for the security (e.g., the time
needed to dispose of the security, the method
of soliciting offers and the mechanics of
transfer); and
(vi) any applicable Securities and Exchange
Commission interpretation or position with
respect to such types of securities.
Following the purchase of a restricted security by the
Portfolio, the Adviser monitors continuously the liquidity of
such security and reports to the Directors regarding purchases of
liquid restricted securities.
MONEY MARKET REQUIREMENTS. While there are many kinds
of short-term securities used by money market investors, the
Portfolio, in keeping with its primary investment objective of
safety of principal, restricts its portfolio to the types of
investments listed above. Of note, the Portfolio does not invest
in issues of savings and loan associations, letters of credit, or
issues of foreign banks. The Portfolio may make investments in
certificates of deposit issued by, and time deposits maintained
at, foreign branches of domestic banks specified above, prime
quality dollar-denominated commercial paper issued by foreign
companies meeting the rating criteria specified above, and in
6
<PAGE>
certificates of deposit and bankers acceptances denominated in
U.S. dollars that are issued by U.S. branches of foreign banks
having total assets of at least $1 billion that are believed by
the Adviser to be of quality equivalent to that of other such
investments in which the Portfolio may invest. To the extent
that the Portfolio invests in such instruments, consideration is
given to their domestic marketability, the lower reserve
requirements generally mandated for overseas banking operations,
the possible impact of interruptions in the flow of international
currency transactions, potential political and social instability
or expropriation, imposition of foreign taxes, less government
supervision of issuers, difficulty in enforcing contractual
obligations and lack of uniform accounting standards. As even
the safest of securities involve some risk, there can be no
assurance, as is true with all investment companies, that the
Portfolio's objective will be achieved. The market value of the
Portfolio's investments tends to decrease during periods of
rising interest rates and to increase during intervals of falling
rates.
The Money Market Portfolio intends to comply with Rule
2a-7 as amended from time to time, including the diversification,
quality and maturity conditions imposed by the Rule.
Accordingly, in any case in which there is a variation between
the conditions imposed by the Rule and the Portfolio's investment
policies and restrictions, the Portfolio will be governed by the
more restrictive of the two requirements.
Currently, pursuant to Rule 2a-7, the Money Market
Portfolio may invest only in U.S. denominated "Eligible
Securities," (as that term is defined in the Rule) that have been
determined by the Adviser to present minimal credit risks
pursuant to procedures approved by the Board of Directors.
Generally, an eligible security is a security that (i) has a
remaining maturity of 397 days or less and (ii) is rated, or is
issued by an issuer with short-term debt outstanding that is
rated, in one of the two highest rating categories by two
nationally recognized statistical rating organizations (NRSROs)
or, if only one NRSRO has issued a rating, by that NRSRO. A
security that originally had a maturity of greater than 397 days
is an eligible security if the issuer has outstanding short-term
debt that would be an eligible security. Unrated securities may
also be eligible securities if the Adviser determines that they
are of comparable quality to a rated eligible security pursuant
to guidelines approved by the Board of Directors. A description
of the ratings of some NRSROs appears in Appendix A to the
Prospectus.
Under Rule 2a-7, the Money Market Portfolio may not
invest more than 5% of its assets in the first tier securities of
any one issuer other than the United States Government, its
7
<PAGE>
agencies and instrumentalities. Generally, a first tier security
is an Eligible Security that has received a short-term rating
from the requisite NRSROs in the highest short-term rating
category for debt obligations, or is an unrated security deemed
to be of comparable quality. Government securities are also
considered to be first tier securities. In addition, the
Portfolio may not invest in a security that has received, or is
deemed comparable in quality to a security that has received, the
second highest rating by the requisite number of NRSROs (a second
tier security) if immediately after the acquisition thereof that
Portfolio would have invested more than (A) the greater of 1% of
its total assets or one million dollars in securities issued by
that issuer which are second tier securities, or (B) five percent
of its total assets in second tier securities.
INVESTMENT RESTRICTIONS. The following restrictions,
which are applicable to the Money Market Portfolio, supplement
those set forth above and in the Prospectus and may not be
changed without Shareholder Approval, as defined under the
caption "General Information," below.
The Portfolio may not:
1. Purchase any security which has a maturity date
more than one year from the date of the Portfolio's purchase;
2. Make investments for the purpose of exercising
control;
3. Purchase securities of other investment companies,
except in connection with a merger, consolidation, acquisition or
reorganization;
4. Invest in real estate (other than money market
securities secured by real estate or interests therein or money
market securities issued by companies which invest in real estate
or interests therein), commodities or commodity contracts,
interests in oil, gas and other mineral exploration or other
development programs;
5. Make short sales of securities or maintain a short
position or write, purchase or sell puts, calls, straddles,
spreads or combinations thereof; or
6. Purchase or retain securities of any issuers if
those officers and directors of the Fund and officers and
directors of the Adviser who own individually more than 1/2% of
the outstanding securities of such issuer together own more than
5% of the securities of such issuer.
8
<PAGE>
PREMIER GROWTH PORTFOLIO
GENERAL. The objective of the Premier Growth Portfolio
is capital growth rather than current income. Since investments
are made based upon their potential for capital appreciation,
current income is incidental to the objective of capital growth.
The Portfolio will seek to achieve its objective through
aggressive investment policies and, therefore, is not intended
for investors whose principal objective is assured income or
conservation of capital. Ordinarily, the annual portfolio
turnover rate may be in excess of 100%. For the fiscal years
ended December 31, 1996 and December 31, 1997, the portfolio
turnover rates were 32% and 27%, respectively.
In seeking its investment goal, the Portfolio invests
predominantly in the equity securities (common stocks, securities
convertible into common stocks and rights and warrants to
subscribe for or purchase common stocks) of a limited number of
large, carefully selected, high-quality American companies that,
in the judgment of the Adviser, are likely to achieve superior
earnings growth. Normally, about 40 companies are represented in
the Portfolio's investment portfolio with the most highly
regarded of these companies usually constituting approximately
70% of the Portfolio's net assets. The Portfolio thus differs
from more typical equity mutual funds by investing most of its
assets in a relatively small number of intensively researched
companies and is designed for those seeking to accumulate capital
over time with less volatility than that associated with
investment in smaller companies.
The Adviser's investment strategy for the Fund
emphasizes stock selection and investment in the securities of a
limited number of issuers. The Adviser relies heavily upon the
fundamental analysis and research of its large internal research
staff, which generally follows a primary research universe of
more than 600 companies that have strong management, superior
industry positions, excellent balance sheets and superior
earnings growth prospects. An emphasis is placed on identifying
companies whose substantially above average prospective earnings
growth is not fully reflected in current market valuations.
The Adviser expects the average weighted market
capitalization of companies represented in the Portfolio's
portfolio (that is the number of a company's shares outstanding
multiplied by the price per share) to normally be in the range of
or exceed the average weighted market capitalization of companies
comprising the "S&P 500" (Standard & Poor's 500 Composite Stock
Price Index), a widely recognized unmanaged index of market
activity based upon the aggregate performance of a selected
portfolio of publicly traded common stocks, including monthly
adjustments to reflect the reinvestment of dividends and other
9
<PAGE>
distributions which reflects the total return of securities
comprising the Index, including changes in market prices as well
as accrued investment income, which is presumed to be reinvested.
Investments are made based upon their potential for capital
appreciation. Current income will be incidental to that
objective. Because of the market risks inherent in any
investment, the selection of securities on the basis of their
appreciation possibilities cannot ensure against possible loss in
value, and there is, of course, no assurance that the Portfolio's
investment objective will be met.
The Adviser expects that, under normal circumstances,
the Portfolio will invest at least 85% of the value of its total
assets in the equity securities of American companies (except
when in a temporary defensive position). The Portfolio defines
American companies to be entities (i) that are organized under
the laws of the United States and have their principal office in
the United States, and (ii) the equity securities of which are
traded principally in the United States securities markets.
The Portfolio may invest in both listed and unlisted
domestic and foreign securities, and in restricted securities,
and in other assets having no ready market, but not more than 10%
of the Portfolio's total assets may be invested in all such
restricted or not readily marketable assets at any one time.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a
registration statement is in effect under the Securities Act, or
pursuant to Rule 144 promulgated under such Act. Where
registration is required, the Portfolio may be obligated to pay
all or part of the registration expense, and a considerable
period may elapse between the time of the decision to sell and
the time the Portfolio may be permitted to sell a security under
an effective registration statement. If during such a period
adverse market conditions were to develop, the Portfolio might
obtain a less favorable price than that which prevailed when it
decided to sell. Restricted securities and other not readily
marketable assets will be valued in such a manner as the Board of
Directors of the Fund in good faith deems appropriate to reflect
their fair market value. See "Other Investment Policies --
Illiquid Securities" below, for a more detailed discussion of the
Portfolio's investment policy on restricted securities and
securities with legal or contractual restrictions on resale.
SPECIAL SITUATIONS. The Portfolio will invest in
special situations from time to time. A special situation arises
when, in the opinion of the Adviser, the securities of a
particular company will, within a reasonably estimable period of
time, be accorded market recognition at an appreciated value
solely by reason of a development particularly or uniquely
applicable to that company, and regardless of general business
10
<PAGE>
conditions or movements of the market as a whole. Developments
creating special situations might include, among others,
liquidations, reorganizations, recapitalizations or mergers,
material litigation, technological breakthroughs and new
management or management policies. Although large and well-known
companies may be involved, special situations often involve much
greater risk than is inherent in ordinary investment securities.
SHORT SALES. The Portfolio may not sell securities
short, except that it may make short sales against the box. Such
sales may be used in some cases by the Portfolio to defer the
realization of gain or loss for federal income tax purposes on
securities then owned by the Portfolio. However, if the
Portfolio has unrealized gain with respect to a security and
enters into a short sale with respect to such security, the
Portfolio generally will be deemed to have sold the appreciated
security and thus will recognize gain for tax purposes.
OPTIONS. The Portfolio may write call options and may
purchase and sell put and call options written by others,
combinations thereof, or similar options. The Portfolio may not
write put options. A put option gives the buyer of such option,
upon payment of a premium, the right to deliver a specified
number of shares of a stock to the writer of the option on or
before a fixed date at a predetermined price. A call option
gives the purchaser of the option, upon payment of a premium, the
right to call upon the writer to deliver a specified number of
shares of a specified stock on or before a fixed date, at a
predetermined price, usually the market price at the time the
contract is negotiated. A call option written by the Portfolio
is covered if the Portfolio owns the underlying security covered
by the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for
additional cash, U.S. Government Securities or other liquid high
grade debt obligation held in a segregated account by the Fund's
Custodian) upon conversion or exchange of other securities held
in its portfolio. A call option is also covered if the Portfolio
holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call
written or (b) is greater than the exercise price of the call
written if the difference is maintained by the Portfolio in cash
in a segregated account with the Fund's Custodian. The premium
paid by the purchaser of an option will reflect, among other
things, the relationship of the exercise price to the market
price and volatility of the underlying security, the remaining
term of the option, supply and demand and interest rates.
The writing of call options will, therefore, involve a
potential loss of opportunity to sell securities at high prices.
In exchange for the premium received by it, the writer of a fully
11
<PAGE>
collateralized call option assumes the full downside risk of the
securities subject to such option. In addition, the writer of
the call gives up the gain possibility of the stock protecting
the call. Generally, the opportunity for profit from the writing
of options occurs when the stocks involved are lower priced or
volatile, or both. While an option that has been written is in
force, the maximum profit that may be derived from the optioned
stock is the premium less brokerage commissions and fees.
It is the Portfolio's policy not to write a call option
if the premium to be received by the Portfolio in connection with
such options would not produce an annualized return of at least
15% of the then market value of the securities subject to the
option. Commissions, stock transfer taxes and other expenses of
the Portfolio must be deducted from such premium receipts.
Option premiums vary widely depending primarily on supply and
demand. Calls written by the Portfolio will ordinarily be sold
either on a national securities exchange or through put and call
dealers, most, if not all, of which are members of a national
securities exchange on which options are traded, and will in such
case be endorsed or guaranteed by a member of a national
securities exchange or qualified broker-dealer, which may be
Donaldson, Lufkin & Jenrette Securities Corporation, an affiliate
of the Adviser. The endorsing or guaranteeing firm requires that
the option writer (in this case the Portfolio) maintain a margin
account containing either corresponding stock or other equity as
required by the endorsing or guaranteeing firm.
The Portfolio will not sell a call option written or
guaranteed by it if, as a result of such sale, the aggregate of
the Portfolio's securities subject to outstanding call options
(valued at the lower of the option price or market value of such
securities) would exceed 15% of the Portfolio's total assets.
The Portfolio will not sell any call option if such sale would
result in more than 10% of the Portfolio's assets being committed
to call options written by the Portfolio which, at the time of
sale by the Portfolio, have a remaining term of more than 100
days.
INVESTMENT RESTRICTIONS. The following restrictions,
which are applicable to the Growth Portfolio, supplement those
set forth above and in the Prospectus and may not be changed
without Shareholder Approval, as defined under the caption
General Information, below.
The Portfolio may not:
1. Write put options;
2. Make investments for the purpose of exercising
control;
12
<PAGE>
3. Except as permitted in connection with short sales
of securities against the box described under the heading Short
Sales above, make short sales of securities;
4. Buy or hold securities of any issuer if any officer
or director of the Fund, the Adviser or any officer, director or
10% shareholder of the Adviser owns individually 1/2 of 1% of a
class of securities of such issuer, and such persons together own
beneficially more than 5% of such securities; or
5. Buy or sell any real estate or interests therein,
commodities or commodity contracts, including commodity futures
contracts.
GROWTH AND INCOME PORTFOLIO
GENERAL. The Growth and Income Portfolio's objective is
reasonable current income and reasonable opportunity for
appreciation through investments primarily in dividend-paying
common stocks of good quality. It may invest whenever the
economic outlook is unfavorable for common stock investments in
other types of securities, such as bonds, convertible bonds,
preferred stocks and convertible preferred stocks. The Portfolio
may also write covered call options listed on domestic securities
exchanges. The Portfolio engages primarily in holding securities
for investment and not for trading purposes. Purchases and sales
of portfolio securities are made at such times and in such
amounts as are deemed advisable in the light of market, economic
and other conditions, irrespective of the volume of portfolio
turnover. Ordinarily the annual portfolio turnover rate will not
exceed 100%. The portfolio turnover rates for the fiscal years
ended December 31, 1996 and December 31, 1997 were 87% and 86%,
respectively.
The Portfolio may invest in foreign securities. Although
not a fundamental policy, the Portfolio will not make any such
investments unless such securities are listed on a national
securities exchange.
It is the Portfolio's policy not to concentrate its
investments in any one industry by investment of more than 25% of
the value of its total assets in such industry, underwrite
securities issued by other persons, purchase any securities as to
which it might be deemed a statutory underwriter under the
Securities Act, purchase or sell commodities or commodity
contracts or engage in the business of purchasing and selling
real estate.
OPTIONS. The Portfolio may write covered call options,
provided that the option is listed on a domestic securities
exchange and that no option will be written if, as a result, more
13
<PAGE>
than 25% of the Portfolio's assets are subject to call options.
For a discussion of options, see "Premier Growth Portfolio -
Options" above.
The Portfolio will purchase call options only to close
out a position in an option written by it. In order to close out
a position, the Portfolio will make a closing purchase
transaction if such is available. In such a transaction, the
Portfolio will purchase a call option on the same security option
which it has previously written. When a security is sold from
the Portfolio against which a call option has been written, the
Portfolio will effect a closing purchase transaction so as to
close out any existing call option on that security. The
Portfolio will realize a profit or loss from a closing purchase
transaction if the amount paid to purchase a call option is less
or more than the amount received as a premium for the writing
thereof. A closing purchase transaction cannot be made if
trading in the option has been suspended.
The premium received by the Portfolio upon writing a
call option will increase the Portfolio's assets, and a
corresponding liability will be recorded and subsequently
adjusted from day to day to the current value of the option
written. For example, if the current value of the option exceeds
the premium received, the excess would be an unrealized loss and,
conversely, if the premium exceeds the current value, such excess
would be an unrealized gain. The current value of the option
will be the last sales price on the principal exchange on which
the option is traded or, in the absence of any transactions, the
mean between the closing bid and asked price.
INVESTMENT RESTRICTIONS. The following investment
restrictions, which are applicable to the Growth and Income
Portfolio, supplement those set forth above and in the Prospectus
and may not be changed without shareholder approval, as defined
under the caption "General Information," below.
The Portfolio may not:
1. Purchase the securities of any other investment
company except in a regular transaction on the open market;
2. Purchase the securities of any issuer if directors
or officers of the Fund or certain other interested persons own
more than 5% of such securities; or
3. Invest in the securities of any company for the
purpose of exercising control of management.
14
<PAGE>
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO
The investment objective of the U.S. Government/High
Grade Securities Portfolio is high current income consistent with
preservation of capital. In seeking to achieve this objective,
the Portfolio invests principally in a portfolio of
(i) obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities (U.S. Government Securities) and
repurchase agreements pertaining to U.S. Government Securities
and (ii) other high grade debt securities rated AAA, AA or A by
S&P, Duff & Phelps Credit Rating Co. ("Duff & Phelps") or Fitch
IBCA, Inc. ("Fitch") or Aaa, Aa or A by Moody's or that have not
received a rating but are determined to be of comparable quality
by the Adviser. As a fundamental investment policy, the
Portfolio invests at least 65% of its total assets in these types
of securities, including the securities held subject to
repurchase agreements. The Portfolio may utilize certain other
investment techniques, including options and futures contracts,
intended to enhance income and reduce market risk. The Fund's
Custodian will place cash not available for investment or U.S.
Government Securities or other liquid high-quality debt
securities in a separate account of the Fund having a value equal
to the aggregate amount of any options transactions which may be
entered into by the Portfolio. The Portfolio is designed
primarily for long-term investors and investors should not
consider it a trading vehicle. As with all investment company
portfolios, there can be no assurance that the Portfolio's
objective will be achieved.
The Portfolio is subject to the diversification
requirements imposed by the Internal Revenue Code of 1986, as
amended, which, among other things, limits the Portfolio to
investing no more than 55% of its total assets in any one
investment. For this purpose, all securities issued or
guaranteed by the U.S. Government or any of its agencies or
instrumentalities are considered a single investment.
Accordingly, the U.S. Government/High Grade Securities Portfolio
limits its purchases of U.S. Government Securities to 55% of the
total assets of the Portfolio. Consistent with this limitation,
the Portfolio, as a matter of fundamental policy, invests at
least 45% of its total assets in U.S. Government Securities.
Nevertheless, the Portfolio reserves the right to modify the
percentage of its investments in U.S. Government Securities in
order to comply with all applicable tax requirements.
U.S. GOVERNMENT SECURITIES. Securities issued or
guaranteed by the United States Government, its agencies or
instrumentalities, include: (i) U.S. Treasury obligations, which
differ only in their interest rates, maturities and times of
issuance, U.S. Treasury bills (maturity of one year or less),
U.S. Treasury notes (maturities of one to 10 years), and U.S.
15
<PAGE>
Treasury bonds (generally maturities of greater than 10 years),
all of which are backed by the full faith and credit of the
United States; and (ii) obligations issued or guaranteed by U.S.
Government agencies or instrumentalities, including government
guaranteed mortgage-related securities, some of which are backed
by the full faith and credit of the U.S. Treasury (e.g., direct
pass-through certificates of the Government National Mortgage
Association), some of which are supported by the right of the
issuer to borrow from the U.S. Government (e.g., obligations of
Federal Home Loan Banks), and some of which are backed only by
the credit of the issuer itself (e.g., obligations of the Student
Loan Marketing Association). See Appendix A hereto for a
description of obligations issued or guaranteed by U.S.
Government agencies or instrumentalities.
U.S. GOVERNMENT GUARANTEED MORTGAGE-RELATED SECURITIES--
GENERAL. Mortgages backing the U.S. Government guaranteed
mortgage-related securities purchased by the Portfolio include,
among others, conventional 30 year fixed rate mortgages,
graduated payment mortgages, 15 year mortgages and adjustable
rate mortgages. All of these mortgages can be used to create
pass-through securities. A pass-through security is formed when
mortgages are pooled together and undivided interests in the pool
or pools are sold. The cash flow from the mortgages is passed
through to the holders of the securities in the form of periodic
payments of interest, principal and prepayments (net of a service
fee). Prepayments occur when the holder of an individual
mortgage prepays the remaining principal before the mortgages
scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage-
backed securities are often subject to more rapid prepayment of
principal than their stated maturity would indicate. Because the
prepayment characteristics of the underlying mortgages vary, it
is not possible to predict accurately the realized yield or
average life of a particular issue of pass-through certificates.
Prepayment rates are important because of their effect on the
yield and price of the securities. Accelerated prepayments
adversely impact yields for pass-throughs purchased at a premium
(i.e., a price in excess of principal amount) and may involve
additional risk of loss of principal because the premium may not
be fully amortized at the time the obligation is repaid. The
opposite is true for pass-throughs purchased at a discount. The
Portfolio may purchase mortgage-related securities at a premium
or at a discount. Principal and interest payments on the
mortgage-related securities are government guaranteed to the
extent described below. Such guarantees do not extend to the
value or yield of the mortgage-related securities themselves or
of the Portfolio's shares of Common Stock.
GNMA CERTIFICATES. Certificates of the Government
National Mortgage Association (GNMA Certificates) are mortgage-
16
<PAGE>
related securities, which evidence an undivided interest in a
pool or pools of mortgages. GNMA Certificates that the Portfolio
may purchase are the modified pass-through type, which entitle
the holder to receive timely payment of all interest and
principal payments due on the mortgage pool, net of fees paid to
the issuer and GNMA, regardless of whether or not the mortgagors
actually make mortgage payments when due.
The National Housing Act authorizes GNMA to guarantee
the timely payment of principal and interest on securities backed
by a pool or mortgages insured by the Federal Housing
Administration (FHA) or guaranteed by the Veterans Administration
(VA). The GNMA guarantee is backed by the full faith and credit
of the United States Government. GNMA is also empowered to
borrow without limitation from the U.S. Treasury if necessary to
make any payments required under its guarantee.
The average life of a GNMA Certificate is likely to be
substantially shorter than the original maturity of the mortgages
underlying the securities. Prepayments of principal by
mortgagors and mortgage foreclosures will usually result in the
return of the greater part of principal investment long before
the maturity of the mortgages in the pool. Foreclosures impose
no risk to principal investment because of the GNMA guarantee,
except to the extent that the Portfolio has purchased the
certificates above par in the secondary market.
FHLMC SECURITIES. The Federal Home Loan Mortgage
Corporation (FHLMC) was created in 1970 through enactment of
Title III of the Emergency Home Finance Act of 1970. Its purpose
is to promote development of a nationwide secondary market in
conventional residential mortgages.
The FHLMC issues two types of mortgage-related pass-
through securities (FHLMC Certificates), mortgage participation
certificates (PCs) and guaranteed mortgage securities (GMCs).
PCs resemble GNMA Certificates in that each PC represents a pro
rata share of all interest and principal payments made and owed
on the underlying pool. The FHLMC guarantees timely monthly
payment of interest on PCs and the ultimate payment of principal.
GMCs also represent a PRO RATA interest in a pool of
mortgages. However, these instruments pay interest semi-annually
and return principal once a year in guaranteed minimum payments.
The expected average life of these securities is approximately
ten years. The FHLMC guarantee is not backed by the full faith
and credit of the United States.
FNMA SECURITIES. The Federal National Mortgage
Association (FNMA) was established in 1938 to create a secondary
market in mortgages insured by the FHA. FNMA issues guaranteed
17
<PAGE>
mortgage pass-through certificates (FNMA Certificates). FNMA
Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. FNMA
guarantees timely payment of interest and principal on FNMA
Certificates. The FNMA guarantee is not backed by the full faith
and credit of the United States.
ZERO COUPON TREASURY SECURITIES. The Portfolio may
invest in zero coupon Treasury securities, which are U.S.
Treasury bills, notes and bonds which have been stripped of their
unmatured interest coupons and receipts or certificates
representing interests in such stripped debt obligations and
coupons. A zero coupon security is a debt obligation that does
not entitle the holder to any periodic payments prior to maturity
but; instead, is issued and traded at a discount from its face
amount. The discount varies depending on the time remaining
until maturity, prevailing interest rates, liquidity of the
security and perceived credit quality of the issuer. The market
prices of zero coupon securities are generally more volatile than
those of interest-bearing securities, and are likely to respond
to changes in interest rates to a greater degree than otherwise
comparable securities that do pay periodic interest. Current
federal tax law requires that a holder (such as the Portfolio) of
a zero coupon security accrue a portion of the discount at which
the security was purchased as income each year, even though the
holder receives no interest payment on the security during the
year. As a result, in order to make the distributions necessary
for the Portfolio not to be subject to federal income or excise
taxes, the Portfolio might be required to pay out as an income
distribution each year an amount, obtained by liquidation of
portfolio securities if necessary, greater than the total amount
of cash that the Portfolio has actually received as interest
during the year. The Adviser believes, however, that it is
highly unlikely that it would be necessary to liquidate any
portfolio securities for this purpose.
Currently the only U.S. Treasury security issued without
coupons is the Treasury bill. Although the U.S. Treasury does
not itself issue treasury notes and bonds without coupons, under
the U.S. Treasury STRIPS program interest and principal on
certain long term treasury securities may be maintained
separately in the Federal Reserve book entry system and may be
separately traded and owned. However, in the last few years a
number of banks and brokerage firms have separated (stripped) the
principal portions (corpus) from the coupon portions of the U.S.
Treasury bonds and notes and sold them separately in the form of
receipts or certificates representing undivided interests in
these instruments (which instruments are generally held by a bank
in a custodial or trust account). The staff of the Commission
has indicated that these receipts or certificates representing
18
<PAGE>
stripped corpus interests in U.S. Treasury securities sold by
banks and brokerage firms should be considered as securities
issued by the bank or brokerage firm involved and, therefore,
should not be included in the Portfolio's categorization of U.S.
Government Securities for purposes of the Portfolio's investing
at least 45% of its assets in U.S. Government Securities. The
Fund disagrees with the staffs interpretation but has undertaken,
until final resolution of the issue, to include the Portfolio's
purchases of such securities in the non-U.S. Government
Securities portion of the Portfolio's investments which may be as
much as 55% of its total assets. However, if such securities are
deemed to be U.S. Government Securities, the Portfolio will
include them as such for purposes of determining the 55%
limitation on U.S. Government Securities.
REPURCHASE AGREEMENTS. The Portfolio may enter into
repurchase agreements pertaining to U.S. Government Securities
with member banks of the Federal Reserve System or primary
dealers (as designated by the Federal Reserve Bank of New York)
in such securities. Currently the Portfolio plans to enter into
repurchase agreements only with the Fund's Custodian and such
primary dealers. For a general discussion of repurchase
agreements, see "Other Investment Policies -- Repurchase
Agreements," below.
GENERAL. U.S. Government Securities do not generally
involve the credit risks associated with other types of interest
bearing securities. As a result, the yields available from U.S.
Government Securities are generally lower than the yields
available from other interest-bearing securities. Like other
fixed-income securities, however, the values of U.S. Government
Securities change as interest rates fluctuate. When interest
rates decline, the values of U.S. Government Securities can be
expected to increase and when interest rates rise, the values of
U.S. Government Securities can be expected to decrease.
HIGH GRADE DEBT SECURITIES. High grade debt securities
which, together with U.S. Government Securities, constitute at
least 65% of the Portfolio's assets include:
1. Debt securities which are rated AAA, AA, or A by
S&P, Duff & Phelps or Fitch or Aaa, Aa or A by Moody's;
2. Obligations of, or guaranteed by, national or state
bank holding companies, which obligations, although not rated as
a matter of policy by either S&P or Moody's, are rated AAA, AA or
A by Fitch;
3. Commercial paper rated A-1+, A-1, A-2 or A-3 by
S&P, D-1, D-2 or D-3 by Duff & Phelps, F1, F2 or F3 by Fitch or
Prime-1, Prime-2 or Prime-3 by Moody's; and
19
<PAGE>
4. Bankers acceptances or negotiable certificates of
deposit issued by banks rated AAA, AA or A by Fitch.
INVESTMENT IN HIGH GRADE DEBT SECURITIES. With respect
to the Portfolio's investment in high grade debt securities, the
Portfolio does not acquire common stocks or equities exchangeable
for or convertible into common stock or rights or warrants to
subscribe for or purchase common stock, except that with respect
to convertible debt securities, the Portfolio may acquire common
stock through the exercise of conversion rights in situations
where it believes such exercise is in the best interest of the
Portfolio and its shareholders. In such event, the Portfolio
will sell the common stock resulting from such conversion as soon
as practical. The Portfolio may acquire debt securities and
nonconvertible preferred stock which may have voting rights, but
in no case will the Portfolio acquire more than 10% of the voting
securities of any one issuer. The relative size of the
Portfolio's investments in any grade or type of security will
vary from time to time. Critical factors which are considered in
the selection of securities relate to other investment
alternatives as well as trends in the determinants of interest
rates, corporate profits and management capabilities and
practices.
RESTRICTED SECURITIES. Consistent with its investment
restrictions, the Portfolio may acquire restricted securities.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a
registration statement is in effect under the Securities Act or
pursuant to Rule 144 promulgated under such Act. Where
registration is required, the Portfolio may be obligated to pay
all or part of the registration expense, and a considerable
period may elapse between the time of the decision to sell and
the time the Portfolio may be permitted to sell a security under
an effective registration statement. If during such a period
adverse market conditions were to develop, the Portfolio might
obtain a less favorable price than prevailed when it decided to
sell. Restricted securities will be valued in such manner as the
Board of Directors of the Fund in good faith deem appropriate to
reflect their fair market value. If through the appreciation of
restricted securities or the depreciation of unrestricted
securities, the Portfolio should be in a position where more than
10% of the value of its total assets is invested in illiquid
assets, including restricted securities, the Portfolio will take
appropriate steps to protect liquidity. See "Other Investment
Policies -- Illiquid Securities" below, for a more detailed
discussion of the Portfolio's investment policy in securities
with legal or contractual restrictions on resale.
OTHER SECURITIES. While the Portfolio's investment
strategy emphasizes U.S. Government Securities and high grade
20
<PAGE>
debt securities, the Portfolio may, consistent with its
investment objectives, invest up to 35% of its total assets in
securities other than U.S. Government Securities and high grade
debt securities, including (i) investment grade corporate debt
securities of a type other than the high grade debt securities
described above (including collateralized mortgage obligations),
(ii) certificates of deposit, bankers acceptances and
interest-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) put and call options, futures
contracts and options thereon. Investment grade debt securities
are those rated Baa or higher by Moody's or BBB or higher by S&P,
Duff & Phelps or Fitch or, if not so rated, of equivalent
investment quality in the opinion of the Adviser. Securities
rated Baa by Moody's or BBB by S&P, Duff & Phelps or Fitch
normally provide higher yields but are considered to have
speculative characteristics. Sustained periods of deteriorating
economic conditions or rising interest rates are more likely to
lead to a weakening in the issuers capacity to pay interest and
repay principal than in the case of higher-rated securities. See
Appendix A to the Prospectus for a description of corporate debt
ratings.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized
mortgage obligations (CMOs) are debt obligations issued generally
by finance subsidiaries or trusts that are secured by mortgage-
backed certificates, including, in many cases, GNMA Certificates,
FHLMC Certificates and FNMA Certificates, together with certain
funds and other collateral.
Scheduled distributions on the mortgage-backed
certificates pledged to secure the CMOs, together with certain
funds and other collateral, will be sufficient to make timely
payments of interest on the CMOs and to retire the CMOs not later
than their stated maturity. Since the rate of payment of
principal of the CMOs depends on the rate of payment (including
prepayments) of the principal of the underlying mortgage-backed
certificates, the actual maturity of the CMOs could occur
significantly earlier than their stated maturity. The CMOs may
be subject to redemption under certain circumstances. CMOs
bought at a premium (i.e., a price in excess of principal amount)
may involve additional risk of loss of principal in the event of
unanticipated prepayments of the underlying mortgages because the
premium may not have been fully amortized at the time the
obligation is repaid.
Although payment of the principal of and interest on the
mortgage-backed certificates pledged to secure the CMOs may be
guaranteed by GNMA, FHLMC, or FNMA, the CMOs represent
obligations solely of the issuer and are not insured or
guaranteed by GNMA, FHLMC, FNMA or any other governmental agency,
21
<PAGE>
or by any other person or entity. The issuers of CMOs typically
have no significant assets other than those pledged as collateral
for the obligations.
The staff of the Commission currently takes the
position, in a reversal of its former view, that certain issuers
of CMOs are not investment companies for purposes of Section
12(d)(i) of the 1940 Act, which limits the ability of one
investment company to invest in another investment company. The
staff of the Commission has determined that certain issuers of
CMOs are investment companies for purposes of the 1940 Act. In
reliance on a recent staff interpretation, the Portfolio's
investments in certain qualifying CMOs, including CMOs that have
elected to be treated as real estate mortgage investment conduits
(REMICs), are not subject to the 1940 Acts limitation on
acquiring interests in other investment companies. In order to
be able to rely on the staffs interpretation, the CMOs and REMICs
must be unmanaged, fixed-asset issuers, that (a) invest primarily
in mortgage-backed securities, (b) do not issue redeemable
securities, (c) operate under general exemptive orders exempting
them from all provisions of the 1940 Act, and (d) are not
registered or regulated under the 1940 Act as investment
companies. To the extent that the Portfolio selects CMOs or
REMICs that do not meet the above requirements, the Portfolio may
not invest more than 10% of its assets in all such entities and
may not acquire more than 3% of the voting securities of any
single such entity.
INVESTMENT PRACTICES.
OPTIONS ON U.S. GOVERNMENT SECURITIES. In an effort to
increase current income and to reduce fluctuations in net asset
value, the Portfolio intends to write covered put and call
options and purchase put and call options on U.S. Government
Securities that are traded on United States securities exchanges
and over the counter. The Portfolio may also write such call
options that are not covered for cross-hedging purposes. There
are no specific percentage limitations on the Portfolio's
investments in options.
The Portfolio intends to write call options for cross-
hedging purposes. A call option is for cross-hedging purposes if
it is designed to provide a hedge against a decline in value in
another security which the Portfolio owns or has the right to
acquire. In such circumstances, the Portfolio collateralizes the
option by maintaining in a segregated account with the Custodian,
cash or U.S. Governmental Securities in an amount not less than
the market value of the underlying security, marked to market
daily.
22
<PAGE>
In purchasing a call option, the Portfolio would be in a
position to realize a gain if, during the option period, the
price of the security increased by an amount in excess of the
premium paid. It would realize a loss if the price of the
security declined or remained the same or did not increase during
the period by more than the amount of the premium. In purchasing
a put option, the Portfolio would be in a position to realize a
gain if, during the option period, the price of the security
declined by an amount in excess of the premium paid. It would
realize a loss if the price of the security increased or remained
the same or did not decrease during that period by more than the
amount of the premium. If a put or call option purchased by the
Portfolio were permitted to expire without being sold or
exercised, its premium would be lost by the Portfolio.
If a put option written by the Portfolio were exercised,
the Portfolio would be obligated to purchase the underlying
security at the exercise price. If a call option written by the
Portfolio were exercised, the Portfolio would be obligated to
sell the underlying security at the exercise price. The risk
involved in writing a put option is that there could be a
decrease in the market value of the underlying security caused by
rising interest rates or other factors. If this occurred, the
option could be exercised and the underlying security would then
be sold to the Portfolio at a higher price than its current
market value. The risk involved in writing a call option is that
there could be an increase in the market value of the underlying
security caused by declining interest rates or other factors. If
this occurred, the option could be exercised and the underlying
security would then be sold by the Portfolio at a lower price
than its current market value. The Portfolio retains the premium
received from writing a put or call option whether or not the
option is exercised.
Over-the-counter options are purchased or written by the
Portfolio in privately negotiated transactions. Such options are
illiquid and it may not be possible for the Portfolio to dispose
of any option it has purchased or terminate its obligations under
an option it has written at a time when the Adviser believes it
would be advantageous to do so.
The Portfolio intends to write covered put and call
options and purchase put and call options on U.S. Government
Securities that are traded on United States securities exchanges
and over the counter. The Portfolio also intends to write call
options that are not covered for cross-hedging purposes.
For additional information on the use, risks and costs
of options, see Appendix C.
23
<PAGE>
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The
Portfolio may enter into contracts for the purchase or sale for
future delivery of fixed-income securities or contracts based on
financial indices including any index of U.S. Government
Securities (futures contracts) and may purchase and write options
to buy or sell futures contracts (options on futures contracts).
Options on futures contracts to be written or purchased by the
Portfolio will be traded on U.S. exchanges or over the counter.
These investment techniques will be used only to hedge against
anticipated future changes in interest or exchange rates which
otherwise might either adversely affect the value of the
Portfolio's securities or adversely affect the prices of
securities which the Portfolio intends to purchase at a later
date. The successful use of such instruments draws upon the
Advisers special skills and experience with respect to such
instrumentalities and usually depends on the Advisers ability to
forecast interest rate movements correctly. Should interest
rates move in an unexpected manner, the Portfolio may not achieve
the anticipated benefits of futures contracts or options on
futures contracts or may realize losses and thus will be in a
worse position than if such strategies had not been used. In
addition, the correlation between movements in the price of
futures contracts or options on futures contracts and movements
in the price of securities hedged or used for cover will not be
perfect.
A sale of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by
the contract at a specified price on a specified date. A
purchase of a futures contract means the acquisition of a
contractual obligation to acquire the securities called for by
the contract at a specified price on a specified date. The
purchaser of a futures contract on an index agrees to take or
make delivery of an amount of cash equal to the difference
between a specified dollar multiple of the value of the index on
the expiration date of the contract and the price at which the
contract was originally struck.
The Portfolio enters into futures contracts which are
based on debt securities that are backed by the full faith and
credit of the U.S. Government, such as long-term U.S. Treasury
bonds, Treasury notes, GNMA modified pass-through mortgage-backed
securities and three-month U.S. Treasury bills. The Portfolio
may also enter into futures contracts which are based on non-U.S.
Government bonds.
The Portfolio's ability to engage in the options and
futures strategies described above depends on the availability of
liquid markets in such instruments. Markets in options and
futures with respect to U.S. Government Securities are relatively
new and still developing. It is impossible to predict the amount
24
<PAGE>
of trading interest that may exist in various types of options or
futures. Therefore no assurance can be given that the Portfolio
will be able to utilize these instruments effectively for the
purposes set forth above. Furthermore, the Portfolio's ability
to engage in options and futures transactions may be limited by
tax considerations.
It is the policy of the Portfolio that futures contracts
and options on futures contracts only be used as a hedge and not
for speculation. In addition to this requirement, the Portfolio
adheres to two percentage restrictions on the use of futures
contracts. The first restriction is that the Portfolio will not
enter into any futures contracts and options on futures contracts
if immediately thereafter the amount of initial margin deposits
on all the futures contracts of the Portfolio and premiums paid
on options on futures contracts would exceed 5% of the market
value of the total assets of the Portfolio. The second
restriction is that the aggregate market value of the futures
contracts held by the Portfolio not exceed 50% of the market
value of the total assets of the Portfolio. Neither of these
restrictions will be changed by the Portfolio without considering
the policies and concerns of the various applicable federal and
state regulatory agencies.
For additional information on the use, risks and costs
of future contracts and options on future contracts, see
Appendix B.
LENDING OF PORTFOLIO SECURITIES. In order to increase
income, the Portfolio may from time to time lend its securities
to brokers, dealers and financial institutions and receive
collateral in the form of cash or U.S. Government Securities.
Under the Portfolio's procedures, collateral for such loans must
be maintained at all times in an amount equal to at least 100% of
the current market value of the loaned securities (including
interest accrued on the loaned securities). The interest
accruing on the loaned securities will be paid to the Portfolio
and the Portfolio will have the right, on demand, to call back
the loaned securities. The Portfolio may pay fees to arrange the
loans. The Portfolio will not lend its securities in excess of
30% of the value of its total assets, nor will the Portfolio lend
its securities to any officer, director, employee or affiliate of
the Fund or the Adviser.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The
Portfolio may enter into forward commitments for the purchase or
sale of securities. Such transactions may include purchases on a
when-issued basis or purchases or sales on a delayed delivery
basis. In some cases, a forward commitment may be conditioned
upon the occurrence of a subsequent event, such as approval and
25
<PAGE>
consummation of a merger, corporate reorganization or debt
restructuring (i.e., a when, as and if issued trade).
When such transactions are negotiated, the price, which
is generally expressed in yield terms, is fixed at the time the
commitment is made, but delivery and payment for the securities
take place at a later date. Normally, the settlement date occurs
within two months after the transaction, but delayed settlements
beyond two months may be negotiated. Securities purchased or
sold under a forward commitment are subject to market
fluctuation, and no interest (or dividend) accrues to the
purchaser prior to the settlement date. At the time the
Portfolio enters into a forward commitment, it will record the
transaction and thereafter reflect the value of the security
purchased or, if a sale, the proceeds to be received, in
determining its net asset value. Any unrealized appreciation or
depreciation reflected in such valuation of a when, as and if
issued security would be cancelled in the event that the required
condition did not occur and the trade was cancelled.
The use of when-issued transactions and forward
commitments enables the Portfolio to protect against anticipated
changes in interest rates and prices. For instance, in periods
of rising interest rates and falling bond prices, the Portfolio
might sell its securities on a forward commitment basis to limit
its exposure to falling prices. In periods of falling interest
rates and rising bond prices, the Portfolio might sell a security
and purchase the same or a similar security on a when-issued or
forward commitment basis, thereby obtaining the benefit of
currently higher cash yields. However, if the Adviser were to
forecast incorrectly the direction of interest rate movements,
the Portfolio might be required to complete such when-issued or
forward transactions at prices inferior to then current market
values. No when-issued transactions forward commitments will be
made by the Portfolio if, as a result, the Portfolio's aggregate
commitments under such transactions would be more than 30% of the
then current value of the Portfolio's total assets.
When-issued and forward commitments may be sold prior to
the settlement date, but the Portfolio enters into forward
commitments only with the intention of actually receiving or
delivering the securities, as the case may be. To facilitate
such transactions, the Custodian will maintain, in the separate
account, cash, U.S. Government Securities or other liquid, high-
grade debt obligations, having value equal to, or greater than,
any commitments to purchase securities on a when-issued or
forward commitment basis and, with respect to forward commitments
to sell the Portfolio's securities themselves. If the Adviser,
however, chooses to dispose of its right to acquire a when-issued
security prior to its acquisition or dispose of its right to
receive or deliver a security subject to a forward commitment
26
<PAGE>
prior to the settlement date of the transaction, the Portfolio
can incur a gain or loss. At the time the Portfolio makes the
commitment to purchase or sell a security on a when-issued or
forward commitment basis, it records the transaction and reflects
the value of the security purchased or, if a sale, the proceeds
to be received, in determining its net asset value. In the event
the other party to a forward commitment transaction were to
default, the Portfolio might lose the opportunity to invest money
at favorable rates or to dispose of securities at favorable
prices.
FUTURE DEVELOPMENTS. The Portfolio may, following
written notice thereof to its shareholders, take advantage of
opportunities in the area of options and futures contracts and
options on futures contracts which are not presently contemplated
for use by the Portfolio or which are not currently available but
which may be developed, to the extent such opportunities are both
consistent with the Portfolio's investment objective and legally
permissible for the Portfolio. Such opportunities, if they
arise, may involve risks which exceed those involved in the
options and futures activities described above.
PORTFOLIO TURNOVER. Because the Portfolio actively uses
trading to benefit from yield disparities among different issues
of fixed-income securities or otherwise to achieve its investment
objective and policies, the Portfolio may be subject to a greater
degree of portfolio turnover than might be expected from
investment companies which invest substantially all of their
funds on a long-term basis. The Portfolio cannot accurately
predict its portfolio turnover rate, but it is anticipated that
the annual turnover rate of the Portfolio generally will not
exceed 400% (excluding turnover of securities having a maturity
of one year or less). An annual turnover rate of 400% occurs,
for example, when all of the Portfolio's securities are replaced
four times in a period of one year. A 400% turnover rate is
greater than that of many other investment companies. A higher
incidence of short term capital gain taxable as ordinary income
than might be expected from investment companies which invest
substantially all their funds on a long term basis and
correspondingly larger mark up charges can be expected to be
borne by the Portfolio. For the fiscal years ended December 31,
1996 and December 31, 1997 the portfolio turnover rates were 137%
and 114%, respectively.
INVESTMENT RESTRICTIONS. The following investment
restrictions, which are applicable to the U.S. Government/High
Grade Securities Portfolio, supplement those set forth above and
in the Prospectus and may not be changed without Shareholder
Approval, as defined under the caption General Information below.
27
<PAGE>
The Portfolio may not:
1. Participate on a joint or joint and several basis
in any securities trading account;
2. Invest in companies for the purpose of exercising
control;
3. Issue senior securities, except in connection with
permitted borrowing for extraordinary emergency purposes;
4. Sell securities short or maintain a short position,
unless at all times when a short position is open it owns an
equal amount of such securities or securities convertible into or
exchangeable for, without payment of any further consideration,
securities of the same issue as, and equal in amount to, the
securities sold short (short sales against the box), and unless
not more than 10% of the Portfolio's net assets (taken at market
value) is held as collateral for such sales at any one time (it
is the Portfolio's present intention to make such sales only for
the purpose of deferring realization of gain or loss for federal
income tax purposes);
5. Borrow money, except the Portfolio may borrow for
temporary purposes in an amount not exceeding 5% of the value of
the total assets of the Portfolio;
6. Invest in illiquid securities, including direct
placements or other securities which are subject to legal or
contractual restrictions on resale or for which there is no
readily available trading market, if more than 10% of the
Portfolio's assets (taken at market value) would be invested in
such securities;
7. Invest more than 5% of the value of its total
assets at the time an investment is made in the nonconvertible
preferred stock of issuers whose nonconvertible preferred stock
is not readily marketable;
8. Invest in the securities of any investment company,
except in connection with a merger, consolidation, acquisition of
assets or other reorganization approved by the Fund's
shareholders;
9. Invest more than 25% of the value of its total
assets at the time of investment in the aggregate of:
(a) nonconvertible preferred stock of issuers
whose senior debt securities are rated Aaa, Aa, or A by Moody's
or AAA, AA or A by S&P, provided that in no event may such
nonconvertible preferred stocks exceed in the aggregate 20% of
28
<PAGE>
the value of the Portfolio's total assets at the time of
investment;
(b) debt securities of foreign issuers which are
rated Aaa, Aa or A by Moody's or AAA, AA or A by S&P; and
(c) convertible debt securities which are rated
Aaa, Aa or A by Moody's, or AAA, AA or A by S&P, provided that in
no event may such securities exceed in the aggregate 10% of the
value of the Portfolio's total assets at the time of investment;
10. Purchase or sell real estate, except that it may
purchase and sell securities of companies which deal in real
estate or interests therein;
11. Purchase or sell commodities or commodity contracts
(except currencies, currency futures, forward contracts or
contracts for the future acquisition or delivery of fixed-income
securities and related options) and other similar contracts; or
12. Purchase securities on margin, except for such
short-term credits as may be necessary for the clearance of
transactions.
HIGH YIELD PORTFOLIO
GENERAL. As discussed in the Prospectus, the Portfolio
invests principally in lower-rated fixed-income securities. The
ratings of fixed-income securities by Moody's, S&P, Duff & Phelps
and Fitch are a generally accepted barometer of credit risk.
They are, however, subject to certain limitations from an
investors standpoint. For a description of credit ratings see
Appendix A to the Prospectus.
Such limitations include the following: the rating of
an issuer is heavily weighted by past developments and does not
necessarily reflect probable future conditions; there is
frequently a lag between the time a rating is assigned and the
time it is updated; and there may be varying degrees of
difference in credit risk of securities in each rating category.
The Adviser attempts to reduce the overall portfolio credit risk
through diversification and selection of portfolio securities
based on considerations mentioned below.
While ratings provide a generally useful guide to credit
risks, they do not, nor do they purport to, offer any criteria
for evaluating interest rate risk. Changes in the general level
of interest rates cause fluctuations in the prices of fixed-
income securities already outstanding and will therefore result
in fluctuation in net asset value of the Portfolio's shares. The
extent of the fluctuation is determined by a complex interaction
29
<PAGE>
of a number of factors. The Adviser evaluates those factors it
considers relevant and makes portfolio changes when it deems it
appropriate in seeking to reduce the risk of depreciation in the
value of the Portfolio.
The Adviser anticipates that the annual turnover rate in
the Portfolio may be in excess of 200% in future years (but is
not expected to exceed 250%). An annual rate of 200% occurs, for
example, when all of the securities in the Portfolio's investment
portfolio are replaced two times in a period of one year. The
portfolio turnover rate for the fiscal period October 27, 1997
(commencement of operations) through December 31, 1997 was 8%.
PUBLIC UTILITIES. The High-Yield Portfolio's
investments in public utilities, if any, may be subject to
certain risks. Such utilities may have difficulty meeting
environmental standards and obtaining satisfactory fuel supplies
at reasonable costs. During an inflationary period, public
utilities also face increasing fuel, construction and other costs
and may have difficulty realizing an adequate return on invested
capital. There is no assurance that regulatory authorities will
grant sufficient rate increases to cover expenses associated with
the foregoing difficulties as well as debt service requirements.
In addition, with respect to utilities engaged in nuclear power
generation, there is the possibility that Federal, State or
municipal governmental authorities may from time to time impose
additional regulations or take other governmental action which
might cause delays in the licensing, construction, or operation
of nuclear power plants, or suspension of operation of such
plants which have been or are being financed by proceeds of the
fixed-income securities in the Portfolio.
MORTGAGE-RELATED SECURITIES. The mortgage-related
securities in which the High-Yield Portfolio may invest provide
funds for mortgage loans made to residential home buyers. These
include securities which represent interests on pools of mortgage
loans made by lenders such as savings and loan institutions,
mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled for sale to investors (such as the Portfolio)
by various governmental, government-related and private
organizations.
Government-related (i.e., not backed by the full faith
and credit of the United States Government) guarantors include
FNMA and FHLMC. For a description of FNMA and FHLMC and the
securities they issue see above, "U.S. Government/High Grade
Securities Portfolio -- U.S. Government Securities, FHLMC
Securities and FNMA Securities."
Yields on mortgage-related securities are typically
quoted by investment dealers and vendors based on the maturity of
30
<PAGE>
the underlying instruments and the associated average life
assumption. In periods of falling interest rates the rate of
prepayment tends to increase, thereby shortening the actual
average life of a pool of mortgage-related securities.
Conversely, in periods of rising interest rates the rate of
prepayment tends to decrease, thereby lengthening the actual
average life of the pool. Historically, actual average life has
been consistent with the 12-year assumption referred to above.
Actual prepayment experience may cause the yield to
differ from the issued average life yield. Reinvestment of
prepayments may occur at higher or lower interest rates than the
original investment, thus affecting the yield of the Portfolio.
The compounding effect from reinvestment of monthly payments
received by the Portfolio will increase the yield to shareholders
compared to bonds that pay interest semi-annually.
DIRECT INVESTMENT IN MORTGAGES. The High-Yield
Portfolio may invest directly in residential mortgages securing
residential real estate (i.e., the Portfolio becomes the
mortgagee). Such investments are not mortgage-related securities
as described above. They are normally available from lending
institutions which group together a number of mortgages for
resale (usually from 10 to 50 mortgages) and which act as serving
agent for the purchaser with respect to, among other things, the
receipt of principal and interest payments. (Such investments
are also referred to as whole loans). The vendor of such
mortgages receives a fee from the Portfolio for acting a
servicing agent. The vendor does not provide any insurance or
guarantees covering the repayment of principal or interest on the
mortgages. At present, such investments are considered to be
illiquid by the Adviser. The Portfolio will invest in such
mortgages only if the Adviser has determined through an
examination of the mortgage loans and their originators (which
may include an examination of such factors as percentage of
family income dedicated to loan service and relationship between
loan value and market value) that the purchase of the mortgages
should not present a significant risk of loss to the Portfolio.
The Portfolio has no present intention of making direct
investments in mortgages.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The
High-Yield Portfolio may purchase securities offered on a when-
issued basis and may purchase or sell securities on a forward
commitment basis. For a general description of when-issued
securities and forward commitments, see above, "U.S.
Government/High Grade Portfolio-Investment Practices-When-Issued
Securities and Forward Commitments". No when-issued or forward
commitments will be made by the Portfolio if, as a result, more
than 20% of the value of the Portfolio's total assets would be
committed to such transactions.
31
<PAGE>
The High-Yield Portfolio may purchase securities on a
when, as and if issued basis as described above in "U.S.
Government/High Grade Portfolio-Investment Practices-When-Issued
Securities and Forward Commitments". The commitment for the
purchase of any such security will not be recognized in the
Portfolio until the Adviser determines that issuance of the
security is probable. At such time, the Portfolio will record
the transaction and, in determining its net asset value, will
reflect the value of the security daily. At such time, the
Portfolio will also establish a segregated account with its
custodian bank in which it will maintain U.S. Government
Securities, cash or cash equivalents or other high grade debt
portfolio securities equal in value to recognized commitments for
such securities. The value of the Portfolio's commitments to
purchase the securities of any one issuer, together with the
value of all securities of such issuer owned by the Portfolio,
may not exceed 5% of the value of the Portfolio's total assets at
the time the initial commitment to purchase such securities is
made. Subject to the foregoing restrictions, the Portfolio may
purchase securities on such basis without limit. An increase in
the percentage of the Portfolio's assets committed to the
purchase of securities on a when, as and if issued basis may
increase the volatility of its net asset value. The Adviser and
the Directors of the Fund do not believe that the net asset value
of the Portfolio will be adversely affected by its purchase of
securities on such basis.
FUTURES CONTRACTS AND OPTIONS ON FUTURES. The High-
Yield Portfolio may invest in financial futures contracts
(futures contracts) and related options thereon. The Portfolio
may sell a futures contract or a call option thereon or purchase
a put option on such futures contract if the Adviser anticipates
that interest rates will rise, as a hedge against a decrease in
the value of the Portfolio's securities. If the Adviser
anticipates that interest rates will decline, the Portfolio may
purchase a futures contract or a call option thereon to protect
against an increase in the price of the securities the Portfolio
intends to purchase. These futures contracts and related options
thereon will be used only as a hedge against anticipated interest
rate changes. For a general discussion of futures contracts and
options thereon, including their risks, see U.S. Government/High
Grade Securities Portfolio-Investment Practices-Futures Contracts
and Options on Futures Contracts above and Appendix B.
Currently, futures contracts can be purchased on debt
securities such as U.S. Treasury bills and bonds, U.S. Treasury
notes with maturities between 6 l/2 years and 10 years,
Government National Mortgage Association ("GNMA") certificates
and bank certificates of deposit. The Portfolio may invest in
futures contracts covering these types of financial instruments
32
<PAGE>
as well as in new types of such contracts that may become
available.
Financial futures contracts are traded in an auction
environment on the floors of several exchanges principally the
Chicago Board of Trade, the Chicago Mercantile Exchange and the
New York Futures Exchange. Each exchange guarantees performance
under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership which
is also responsible for handling daily accounting of deposits or
withdrawals of margin.
The Portfolio may not enter into futures contracts or
related options thereon if immediately thereafter the amount
committed to margin plus the amount paid for option premiums
exceeds 5% of the value of the Portfolio's total assets. In
instances involving the purchase of futures contracts by the
Portfolio, an amount equal to the market value of the futures
contract will be deposited in a segregated account of cash and
cash equivalents to collateralize the position and thereby insure
that the use of such futures contract is unleveraged.
PUT AND CALL OPTIONS. The High-Yield Portfolio may
purchase put and call options written by others and write put and
call options covering the types of securities in which the
Portfolio may invest. For a description of put and call options,
including their risks, see above, U.S. Government/High Grade
Securities Portfolio-Investment Practices-Options on U.S. and
Foreign Government Securities. The Portfolio will not purchase
any option if, immediately thereafter, the aggregate cost of all
outstanding options purchased by the Portfolio would exceed 2% of
the value of its total assets; the Portfolio will not write any
option (other than options on futures contracts) if, immediately
thereafter, the aggregate value of its portfolio securities
subject to outstanding options would exceed 15% of its total
assets.
FOREIGN SECURITIES. The portfolio may purchase foreign
securities provided the value of issues denominated in foreign
currency shall not exceed 20% of the Portfolio's total assets and
the value of issues denominated in United States currency shall
not exceed 25% of the Portfolio's total assets. For the risks
associated with investments in foreign debt securities, see
above, "U.S. Government/High Grade Securities Portfolio--High
Grade Debt Securities--Foreign Securities".
FOREIGN CURRENCY TRANSACTIONS. Since investments in
foreign companies usually involve currencies of foreign
countries, and since the High-Yield Portfolio may temporarily
hold funds in bank deposits in foreign currencies during the
completion of investment programs, the value of the assets of the
33
<PAGE>
Portfolio as measured in United States dollars may be affected
favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations, and the Portfolio may
incur costs in connection with conversions between various
currencies. The Portfolio conducts its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign
currencies. A forward foreign currency exchange contract
involves an obligation to purchase or sell a specific currency at
a future date, which may be any fixed number of days (usually
less than one year) from the date of the contract agreed upon by
the parties, at a price set at the time of the contract. These
contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit
requirement, and no commissions are charged at any stage for
trades. Although foreign exchange dealers do not charge a fee
for conversion, they do realize a profit based on the difference
(the spread) between the price at which they are buying and
selling various currencies.
The Portfolio may enter into forward foreign currency
exchange contracts only under two circumstances. First, when the
Portfolio enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to
"lock in" the U.S. Dollar price of the security. By entering
into a forward contract for the purchase or sale, for a fixed
amount of dollars, of the amount of foreign currency involved in
the underlying security transactions, the Portfolio will be able
to protect itself against a possible loss resulting from an
adverse change in the relationship between the U.S. Dollar and
the subject foreign currency during the period between the date
the security is purchased or sold and the date on which payment
is made or received.
Second, when the Adviser believes that the currency of a
particular foreign country may suffer a substantial decline
against the U.S. Dollar, the Portfolio may enter into a forward
contract to sell for a fixed amount of dollars the amount of
foreign currency approximating the value of some or all of the
Portfolio's investment portfolio securities denominated in such
foreign currency. The precise matching of the forward contract
amounts and the value of the securities involved will not
generally be possible since the future value of such securities
in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the
forward contract is entered into and the date it matures. The
projection of short-term currency market movement is extremely
difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. The Adviser does not intend to
34
<PAGE>
enter into such forward contracts under this second set of
circumstances on a regular or continuous basis, and will not do
so if, as a result, the Portfolio will have more than 5% of the
value of its total assets committed to the consummation of such
contracts.
The Portfolio will also not enter into such forward
contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Portfolio to
deliver an amount of foreign currency in excess of the value of
the securities in the Portfolio or other assets denominated in
that currency. At the consummation of such a forward contract,
the Portfolio may either make delivery of the foreign currency or
terminate its contractual obligation to deliver the foreign
currency by purchasing an offsetting contract obligating it to
purchase, at the same maturity date, the same amount of such
foreign currency. If the Portfolio chooses to make delivery of
the foreign currency, it may be required to obtain such currency
through the sale of portfolio securities denominated in such
currency or through conversion of other assets of the Portfolio
into such currency. If the Portfolio engages in an offsetting
transaction, the Portfolio will incur a gain or a loss to the
extent that there has been a change in forward contract prices.
Under normal circumstances, consideration of the
prospect for currency parities will be incorporated in a longer
term investment decision made with regard to overall
diversification strategies. However, the Adviser believes that
it is important to have a flexibility to enter into such forward
contract when it determines that the best interest of the
Portfolio will be served.
The Fund's custodian bank places liquid assets in a
separate account of the Portfolio in an amount equal to the value
of the Portfolio's total assets committed to the consummation of
forward foreign currency exchange contracts entered into under
the second set of circumstances, as set forth above. If the
value of the securities placed in the separate account declines,
additional cash or securities will be placed in the account on a
daily basis so that the value of the account will equal the
amount of the Portfolio's commitments with respect to such
contracts.
The Portfolio's dealing in forward foreign currency
exchange contracts is limited to the transactions described
above. Of course, the Portfolio is not required to enter into
such transactions with regard to its foreign currency-denominated
securities and will not do so unless deemed appropriate by the
Adviser. It also should be realized that this method of
protecting the value of the Portfolio's portfolio securities
against a decline in the value of a currency does not eliminate
35
<PAGE>
fluctuations in the underlying prices of the securities. It
simply establishes a rate of exchange which can be achieved at
some future point in time. Additionally, although such contracts
tend to minimize the risk of loss due to a decline in the value
of the hedged currency, at the same time they tend to limit any
potential gain which might result should the value of such
currency increase.
RESTRICTED SECURITIES. The Portfolio may acquire
restricted securities within the limits set forth in the
Prospectus. For a description of such securities including their
risks, see above, "U.S. Government/High Grade Securities
Portfolio Restricted Securities and Other Investment Policies-
- -Illiquid Securities below". If through the appreciation of
restricted securities or the depreciation of unrestricted
securities the Portfolio should be in a position where more than
10% of the value of its total assets is invested in illiquid
assets, including restricted securities, the Portfolio will take
appropriate steps to protect liquidity.
REPURCHASE AGREEMENTS. The Portfolio may invest in
repurchase agreements terminable within seven days and pertaining
to issues of the United States Treasury with member banks of the
Federal Reserve System or primary dealers in United States
Government securities, so long as such investments do not in the
aggregate exceed the Investment Restrictions as set forth in the
Prospectus. Such investments would be made in accordance with
procedures established by the Portfolio to require that the
securities serving as collateral for each repurchase agreement be
delivered either physically or in book entry form to the Fund's
custodian and to require that such collateral be marked to the
market with sufficient frequency to ensure that each such
agreement is fully collateralized at all times. The Portfolio
follows established procedures, which are periodically reviewed
by the Fund's Board of Directors, pursuant to which the Adviser
will monitor the creditworthiness of the dealers with which the
Portfolio enters into repurchase agreement transactions. For a
discussion of repurchase agreements, see "Other Investment
Policies -- Repurchase Agreements," below.
LENDING OF PORTFOLIO SECURITIES. Consistent with
applicable regulatory requirements, the Portfolio may loan its
portfolio securities where such loans are continuously secured by
cash collateral equal to no less than the market value,
determined daily, of the securities loaned. In loaning its
portfolio securities, the Portfolio requires that interest or
dividends on securities loaned be paid to the Portfolio. Where
voting or consent rights with respect to loaned securities pass
to the borrower, the Portfolio follows the policy of calling the
loan, in whole or in part as may be appropriate, to permit it to
exercise such voting or consent rights if the exercise of such
36
<PAGE>
rights involves issues having a material effect on the
Portfolio's investment in the securities loaned. Although the
Portfolio cannot at the present time determine the types of
borrowers to whom it may lend its portfolio securities, the
Portfolio anticipates that such loans will be made primarily to
bond dealers.
INVESTMENT RESTRICTIONS. The following restrictions,
which are applicable to the High-Yield Portfolio, supplement
those set forth above and in the Prospectus and may not be
changed without Shareholder Approval, as defined under the
caption "General Information," below.
The Portfolio may not:
1. Invest more than 5% of the value of its total
assets at the time an investment is made in the non-convertible
preferred stock of issuers whose non-convertible preferred stock
is not readily marketable;
2. Act as securities underwriter or invest in
commodities or commodity contracts, except that the Portfolio (i)
may acquire restricted or not readily marketable securities under
circumstances where, if such securities are sold, the Portfolio
might be deemed to be an underwriter for purposes of the
Securities Act, and (ii) may purchase financial futures as
described in the Prospectus and above;
3. Engage in the purchase or sale of real estate,
except that the Portfolio may invest in securities secured by
real estate or interests therein or issued by companies,
including real estate investment trusts, which deal in real
estate or interests therein;
4. Invest in companies for the purpose of exercising
control of management;
5. Issue any senior securities as defined in the 1940
Act (except to the extent that when-issued securities
transactions, forward commitments or stand-by commitments may be
considered senior securities);
6. Participate on a joint, or on a joint and several,
basis in any trading account in securities;
7. Effect a short sale of any security;
8. Purchase securities on margin, but it may obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of securities; or
37
<PAGE>
9. Invest in the securities of any other investment
company except in connection with a merger, consolidation,
acquisition of assets or other reorganization.
TOTAL RETURN PORTFOLIO
The investment objective of the Total Return Portfolio
is to achieve a high return through a combination of current
income and capital appreciation. The Portfolio has adopted, as a
fundamental policy, that it be a "balanced fund"; this
fundamental policy cannot be changed without Shareholder
Approval. The percentage of the Portfolio's assets invested in
each type of security at any time is in accordance with the
judgment of the Adviser. The Portfolio's assets are invested in
U.S. Government and agency obligations, bonds whether convertible
or non-convertible and preferred and common stocks in such
proportions and of such type as are deemed best adapted to the
current economic and market outlooks. The Portfolio engages
primarily in holding securities for investment and not for
trading purposes. Purchases and sales of portfolio securities
are made at such times and in such amounts as are deemed
advisable in the light of market, economic and other conditions,
irrespective of the volume of portfolio turnover. Ordinarily,
the annual portfolio turnover rate will not exceed 100%. For the
fiscal years ended December 31, 1996 and December 31, 1997 the
portfolio turnover rates were 57% and 65%, respectively.
Subject to market conditions the Portfolio may also try
to realize income by writing covered call options listed on a
domestic securities exchange. In so doing, the Portfolio
foregoes the opportunity to profit from an increase in the market
price in the underlying security above the exercise price of the
option in return for the premium it received from the purchaser
of the option. The Adviser believes that such premiums will
increase the Portfolio's distributions without subjecting it to
substantial risks. No option will be written by the Portfolio
if, as a result, more than 25% of the Portfolio's assets are
subject to call options. For a discussion of covered call
options see "High Yield Portfolio -- Put and Call Options" above.
The Portfolio purchases call options only to close out a position
in an option written by it. In order to close out a position the
Portfolio will make a closing purchase transaction if such is
available. Except as stated above, the Portfolio may not
purchase or sell puts or calls or combinations thereof.
Although the Portfolio may invest in foreign securities,
it has no present intention to do so.
INVESTMENT RESTRICTIONS. The following restrictions,
which are applicable to the Total Return Portfolio, supplement
those set forth above and in the Prospectus and may not be
38
<PAGE>
changed without Shareholder Approval, as defined under the
caption "General Information," below.
The Portfolio may not:
1. Purchase the securities of any other investment
company except in a regular transaction in the open market;
2. Retain investments in the securities of any issuer
if directors or officers of the Fund or certain other interested
persons own more than 5% of such securities;
3. Invest in other companies for the purchase of
exercising control of management;
4. Purchase securities on margin, borrow money, or
sell securities short, except that the Portfolio may borrow in an
amount up to 10% of its total assets to meet redemption requests
and for the clearance of purchases and sales of portfolio
securities (this borrowing provision is not for investment
leverage but solely to enable the Portfolio to meet redemption
requests where the liquidation of portfolio securities is deemed
to be disadvantageous or inconvenient and to obtain such short-
term credits as may be necessary for the clearance of purchases
and sales of portfolio securities; all borrowings at any time
outstanding will be repaid before any additional investments are
made; the Portfolio will not mortgage, pledge or hypothecate any
assets in connection with any such borrowing in excess of 15% of
the Portfolio's total assets);
5. Underwrite securities issued by other persons;
6. Purchase any securities as to which it would be
deemed a statutory underwriter under the Securities Act of 1933;
7. Purchase or sell commodities or commodity
contracts; or
8. Issue any securities senior to the capital stock
offered hereby.
INTERNATIONAL PORTFOLIO
GENERAL. The objective of the International Portfolio
is to seek to obtain a total return on its assets from long-term
growth of capital principally through a broad portfolio of
marketable securities of established non-United States companies
(e.g. incorporated outside the United States), companies
participating in foreign economies with prospects for growth and
foreign government securities. As a secondary objective, the
Portfolio attempts to increase its current income without
39
<PAGE>
assuming undue risk. There is no limitation on the percent or
amount of the Portfolio's assets which may be invested for growth
or income, and therefore, at any point in time, the investment
emphasis may be placed solely or primarily on growth of capital
or solely or primarily on income. There can be no assurance, of
course, that the Portfolio will achieve its objective.
Ordinarily, the annual portfolio turnover rate will not exceed
100%. For the fiscal years ended December 31, 1996 and
December 31, 1997 the portfolio turnover rates were 60% and 134%,
respectively.
In determining whether the Portfolio will be invested
for capital appreciation or for income or any combination of
both, the Adviser regularly analyzes a broad range of
international equity and fixed-income markets in order to assess
the degree of risk and level of return that can be expected from
each market. Based upon the current assessment of the Adviser,
the Portfolio expects that its objective will, over the long
term, be met principally through investing in the equity
securities of established non-United States companies which, in
the opinion of the Adviser, have potential for growth of capital.
However, the Portfolio can be expected during certain periods to
place substantial emphasis on income through investment in
foreign debt securities when it appears that the total return
from such securities will equal or exceed the return on equity
securities.
Investments may be made from time to time in companies
in, or governments of, developing countries as well as developed
countries. Although there is no universally accepted definition,
a developing country is generally considered to be a country
which is in the initial stages of its industrialization cycle
with a low per capita gross national product. Historical
experience indicates that the markets of developing countries
have been more volatile than the markets of the more mature
economies of developed countries; however, such markets often
have provided higher rates of return to investors. The Adviser
at present does not intend to invest more than 10% of the
Portfolio's total assets in companies in, or governments of,
developing countries.
The Adviser, in determining the composition of the
Portfolio, will initially seek the appropriate distribution of
investments among various countries and geographic regions.
Accordingly, the Adviser considers the following factors in
making investment decisions on this basis: prospects for relative
economic growth between foreign countries; expected levels of
inflation; government policies influencing business conditions;
the outlook for currency relationships; and the range of
individual investment opportunities available to the
international portfolio investor. On December 31, 1997, 20.49%
40
<PAGE>
of the Portfolio's net assets were invested in Japanese issuers.
For a description of Japan, see Appendix D.
The Adviser, in analyzing individual companies for
investment, looks for one or more of the following
characteristics: an above average earnings growth per share;
high return on invested capital; healthy balance sheet; sound
financial and accounting policies and overall financial strength;
strong competitive advantages; effective research and product
development and marketing; efficient service; pricing
flexibility; strength of management; and general operating
characteristics which enables the companies to compete
successfully in their marketplace. While current dividend income
is not a prerequisite in the selection of portfolio companies,
the companies in which the Portfolio invests normally have
records of paying dividends for at least one year, and will
generally are expected to increase the amounts of such dividends
in future years as earnings increase.
It is expected that the Portfolio's investments will
ordinarily be traded on exchanges located in the respective
countries in which the various issuers of such securities are
principally based and in some case on other exchanges. As much
as 25% of the value of the Portfolio's total assets may be
invested in the securities of issuers having their principal
business activities in the same industry.
Under exceptional economic or market conditions abroad,
the Portfolio may temporarily invest for defensive purposes all
or a major portion of its assets in U.S. government obligations
or debt obligations of companies incorporated in and having their
principal activities in the United States. As discussed below,
the Portfolio may also from time to time invest its temporary
cash balances in United States short-term money market
instruments.
SECURITIES LENDING. The Portfolio may seek to increase
income by lending portfolio securities. The Portfolio has the
right to call a loan to obtain the securities loaned at any time
on five days notice or such shorter period as may be necessary to
vote the securities. During the existence of a loan the
Portfolio will receive the income earned on investment of the
collateral. The Portfolio does not, however, have the right to
vote any securities having voting rights during the existence of
the loan, but the Portfolio will call the loan in anticipation of
an important vote to be taken among holders of the securities or
the giving or withholding of their consent on a material matter
affecting the investment. As with other extensions of credit
there are risks of delay in recovery or even loss of rights in
the collateral should the borrower of the securities fail
financially. However, the loans would be made only to firms
41
<PAGE>
deemed by the Adviser to be in good standing, and when, in its
judgment, the amount which may be earned currently from
securities loans of this type justifies the attendant risk. The
value of the securities loaned will not exceed 30% of the value
of the Portfolio's total assets.
WARRANTS. The Portfolio may invest in warrants which
entitle the holder to buy equity securities at a specific price
for a specific period of time. Warrants may be considered more
speculative than certain other types of investments in that they
do not entitle a holder to dividends or voting rights with
respect to the securities which may be purchased nor do they
represent any rights in the assets of the issuing company. Also,
the value of the warrant does not necessarily change with the
value of the underlying securities and a warrant ceases to have
value if it is not exercised prior to the expiration date.
SPECIAL RISK CONSIDERATIONS. Investors should
understand and consider carefully the substantial risks involved
in securities of foreign companies and governments of foreign
nations, some of which are referred to below, and which are in
addition to the usual risks inherent in domestic investments.
There is generally less publicly available information
about foreign companies comparable to reports and ratings that
are published about companies in the United States. Foreign
companies are also generally not subject to uniform accounting
and auditing and financial reporting standards, practices and
requirements comparable to those applicable to United States
companies.
It is contemplated that foreign securities will be
purchased in over-the-counter markets or on stock exchanges
located in the countries in which the respective principal
offices of the issuers of the various securities are located, if
that is the best available market. Foreign securities markets
are generally not as developed or efficient as those in the
United States. While growing in volume, they usually have
substantially less volume than the New York Stock Exchange, and
securities of some foreign companies are less liquid and more
volatile than securities of comparable United States companies.
Similarly, volume and liquidity in most foreign bond markets is
less than in the United States and, at times, volatility of price
can be greater than in the United States. Fixed commissions on
foreign stock exchanges are generally higher than negotiated
commissions on United States exchanges, although the Portfolio
will endeavor to achieve the most favorable net results on its
portfolio transactions. There is generally less government
supervision and regulation of foreign stock exchanges, brokers
and listed companies than in the United States.
42
<PAGE>
With respect to certain foreign countries, there is the
possibility of adverse changes in investment or exchange control
regulations and interest rates, expropriation or confiscatory
taxation, limitations on the removal of funds or other assets of
the Portfolio, political or social instability, or diplomatic
developments which could affect United States investments in
those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the United States economy in
such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
The dividends and interest payable on certain of the
Portfolio's foreign securities may be subject to foreign
withholding taxes, thus reducing the net amount of income
available for distribution to the Portfolio's shareholders. A
shareholder otherwise subject to United States federal income
taxes may, subject to certain limitations, be entitled to claim a
credit or deduction for U.S. federal income tax purposes for his
or her proportionate share of such foreign taxes paid by the
Portfolio.
Although the Portfolio values its assets daily in terms
of U.S. Dollars, its does not intend to convert its holdings of
foreign currencies into U.S. Dollars on a daily basis. It will
do so from time to time, and investors should be aware of the
costs of currency conversion. Although foreign exchange dealers
do not charge a fee, they do realize a profit based on the
difference (commonly known as the spread) between the price at
which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to the Portfolio at
one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
Investors should understand that the expense ratio of
the Portfolio can be expected to be higher than investment
companies investing in domestic securities since, among other
things, the cost of maintaining the custody of foreign securities
is higher and the purchase and sale of portfolio securities may
be subject to higher transaction charges, such as stamp duties
and turnover taxes.
Investors should further understand that all investments
have a risk factor. There can be no guarantee against loss
resulting from an investment in the Portfolio, and there can be
no assurance that the Portfolio's investment objective will be
attained. The Portfolio is designed for investors who wish to
diversify beyond the United States in an actively researched and
managed portfolio. The Portfolio may not be suitable for all
investors and is intended for long-term investors who can accept
43
<PAGE>
the risks entailed in seeking long-term growth of capital through
investment in foreign securities as described above.
FOREIGN CURRENCY TRANSACTIONS. Since investments in
foreign companies usually involve currencies of foreign
countries, and since the Portfolio may temporarily hold funds in
bank deposits in foreign currencies during the completion of
investment programs, the value of the assets of the Portfolio as
measured in United States dollars may be affected favorably or
unfavorably by changes in foreign currency exchange rates and
exchange control regulations, and the Portfolio may incur costs
in connection with conversions between various currencies. The
Portfolio will conduct its foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign currency exchange market, or through entering into
forward contracts to purchase or sell foreign currencies. For a
discussion of forward foreign currency exchange contracts which
also apply to the International Portfolio, see "High Yield
Portfolio -- Foreign Currency Transactions," above.
INVESTMENT RESTRICTIONS. The following restrictions,
which are applicable to the International Portfolio, supplement
those set forth above and in the Prospectus, and may not be
changed without Shareholder Approval, as defined under the
caption "General Information," below.
The Portfolio may not:
1. Purchase a security if, as a result, the Portfolio
would own any securities of an open-end investment company or
more than 3% of the total outstanding voting stock of any closed-
end investment company, or more than 5% of the value of the
Portfolio's total assets would be invested in securities of any
closed-end investment company or more than 10% of such value in
closed-end investment companies in general, unless the security
is acquired pursuant to a plan of reorganization or an offer of
exchange;
2. Purchase or sell real estate (although it may
purchase securities secured by real estate or interest therein,
or issued by companies or investment trusts which invest in real
estate or interest therein);
3. Purchase or sell commodity contracts, provided,
however, that this policy does not prevent the Portfolio from
entering into forward foreign currency exchange contracts;
4. Purchase securities on margin, except for use of
the short-term credit necessary for clearance of purchases of
portfolio securities;
44
<PAGE>
5. Effect short sales of securities;
6. Act as an underwriter of securities, except insofar
as it might be deemed to be such for purposes of the Securities
Act with respect to the disposition of certain portfolio
securities acquired within the limitations of restriction 4
above;
7. Purchase or retain the securities of any issuer if,
to the knowledge of the Adviser, the officers and directors of
the Fund and of the Adviser, who each owns beneficially more than
1/2 of 1% of the outstanding securities of such issuer, and
together own beneficially more than 5% of the securities of such
issuer;
8. Invest in companies for the purpose of exercising
management or control; or
9. Issue senior securities except as permitted by the
1940 Act.
SHORT-TERM MULTI-MARKET PORTFOLIO AND GLOBAL BOND PORTFOLIO
GENERAL. The objective of the Short-Term Multi-Market
Portfolio is to seek the highest level of current income,
consistent with what the Adviser considers to be prudent
investment risk, that is available from a portfolio of high-
quality debt securities having remaining maturities of not more
than three years. The Portfolio seeks high current yields by
investing in debt securities denominated in the U.S. Dollar and a
range of 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 securities 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 certificate of deposit and less fluctuation
in net asset value than a longer-term bond fund. Certificates of
deposit are insured and generally have fixed interest rates while
yields for the Portfolio fluctuate with changes in interest rates
and other market conditions.
The investment objective of the Global Bond Portfolio is
to seek a high level of return from a combination of current
income and capital appreciation by investing in a globally
diversified portfolio of high quality debt securities denominated
in the U.S. Dollar and a range of foreign currencies.
INVESTMENT POLICIES. The following investment policies,
which are applicable to the Short-Term Multi-Market Portfolio and
45
<PAGE>
the Global Bond Portfolio, supplement, and should be read in
conjunction with, the information set forth in the Prospectus
under "Other Investment Policies and Techniques." The investment
policies are not designated fundamental policies within the
meaning of the 1940 Act and may be changed by the Fund's Board of
Directors without Shareholder Approval as defined under the
caption "General Information," below. However, a Portfolio will
not change its investment policies without contemporaneous
written notice to shareholders.
U.S. GOVERNMENT SECURITIES. See Appendix A hereto for a
description of obligations issued or guaranteed by U.S.
Government agencies or instrumentalities.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS.
Each Portfolio may enter into futures contracts and options on
futures contracts. The successful use of such instruments draws
upon the Advisers special skills and experience with respect to
such instruments and usually depends on the Advisers ability to
forecast interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in an
unexpected manner, a Portfolio may not achieve the anticipated
benefits of futures contracts or options on futures contracts or
may realize losses and thus will be in a worse position than if
such strategies had not been used. In addition, the correlation
between movements in the price of futures contracts or options on
futures contracts and movements in the price of the securities
and currencies hedged or used for cover will not be perfect and
could produce unanticipated losses. The Fund's Custodian will
place cash not available for investment in U.S. Government
Securities or other liquid high-quality debt securities in a
separate account of the Fund having a value equal to the
aggregate amount of, the Short-Term Multi-Market Portfolio's and
the Global Bond Portfolio's commitments in futures and options on
futures contracts.
The Board of Directors has adopted the requirement that
futures contracts and options on futures contracts only be used
as a hedge and not for speculation. In addition to this
requirement, the Board of Directors has also adopted two
percentage restrictions on the use of futures contracts. The
first restriction is that a Portfolio will not enter into any
futures contracts or options on futures contracts if immediately
thereafter the amount of margin deposits on all the futures
contracts of the Portfolio and premiums paid on options on
futures contracts would exceed 5% of the market value of the
total assets of the Portfolio. The second restriction is that
the aggregate market value of the outstanding futures contracts
purchased by a Portfolio not exceed 50% of the market value of
the total assets of the Portfolio. Neither of these restrictions
will be changed by the Board of Directors without considering the
46
<PAGE>
policies and concerns of the various applicable federal and state
regulatory agencies.
For additional information on the use, risks and costs
of futures contracts and options on futures contracts, see
Appendix B.
OPTIONS ON FOREIGN CURRENCIES. For additional
information on the use, risks and costs of options on foreign
currencies, see Appendix B.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Each
Portfolio may purchase or sell forward foreign currency exchange
contracts. While these contracts are not presently regulated by
the CFTC, the CFTC may in the future assert authority to regulate
forward contracts. In such event a Portfolio's ability to
utilize forward contracts in the manner set forth in the
Prospectus may be restricted. Forward contracts reduce the
potential gain from a positive change in the relationship between
the U.S. Dollar and foreign currencies. Unanticipated changes in
currency prices may result in poorer overall performance for a
Portfolio than if it had not entered into such contracts. The
use of foreign currency forward contracts will not eliminate
fluctuations in the underlying U.S. Dollar equivalent value of
the prices of or rates of return on a Portfolio's foreign
currency-denominated portfolio securities and the use of such
techniques will subject the Portfolio to certain risks.
The matching of the increase in value of a forward
contract and the decline in the U.S. Dollar equivalent value of
the foreign currency-denominated asset that is the subject of the
hedge generally will not be precise. In addition, a Portfolio
may not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit the
Portfolio's ability to use such contracts to hedge or cross-hedge
its assets. Also, with regard to a Portfolio's use of cross-
hedges, there can be no assurance that historical correlations
between the movement of certain foreign currencies relative to
the U.S. Dollar will continue. Thus, at any time poor
correlation may exist between movements in the exchange rates of
the foreign currencies underlying the Portfolio's cross-hedges
and the movements in the exchange rates of the foreign currencies
in which the Portfolio's assets that are the subject of such
cross-hedges are denominated.
PORTFOLIO TURNOVER. Since the Short-Term Multi-Market
Portfolio and the Global Bond Portfolio may engage in active
trading, their rates of portfolio turnover may be higher than
that of many other investment companies. The Portfolio's cannot
accurately predict their portfolio turnover rates, but it is
anticipated that the annual turnover rate generally will not
47
<PAGE>
exceed 500% for the Short-Term Multi Market Portfolio and 400%
for the Global Bond Portfolio (excluding turnover of securities
having a maturity of one year of less). An annual turnover rate
of 400% or 500% occurs, for example, when all of the Portfolio's
securities are replaced four or five times, respectively, in a
period of one year. A 400% and 500% turnover rate are greater
than that of many other investment companies. A higher incidence
of short term capital gain taxable as ordinary income than might
be expected from investment companies which invest substantially
all their funds on a long term basis and correspondingly larger
mark up charges can be expected to be borne by the Portfolio's.
The annual portfolio turnover rates of securities of the
Short-Term Multi-Market Portfolio for the fiscal years ended
December 31, 1996 and December 31, 1997 were 159% and 222%,
respectively. The annual portfolio turnover rates of securities
of the Global Bond Portfolio for the fiscal years ended
December 31, 1996 and December 31, 1997 were 191% and 257%,
respectively.
INVESTMENT RESTRICTIONS. The following restrictions,
which are applicable to the Short-Term Multi-Market Portfolio and
the Global Bond Portfolio, supplement those set forth above and
in the Prospectus, and may not be changed without Shareholder
Approval, as defined under the caption General Information,
below.
A Portfolio may not:
1. Make loans except through (i) the purchase of debt
obligations in accordance with its investment objectives and
policies; (ii) the lending of portfolio securities; or (iii) the
use of repurchase agreements;
2. Participate on a joint or joint and several basis
in any securities trading account;
3. Invest in companies for the purpose of exercising
control;
4. Make short sales of securities or maintain a short
position, unless at all times when a short position is open it
owns an equal amount of such securities or securities convertible
into or exchangeable for, without payment of any further
consideration, securities of the same issue as, and equal in
amount to, the securities sold short (short sales against the
box), and unless not more than 10% of the Portfolio's net assets
(taken at market value) is held as collateral for such sales at
any one time (it is the Portfolio's present intention to make
such sales only for the purpose of deferring realization of gain
or loss for Federal income tax purposes);
48
<PAGE>
5. Purchase a security if, as a result (unless the
security is acquired pursuant to a plan of reorganization or an
offer of exchange), the Portfolio would own any securities of an
open-end investment company or more than 3% of the total
outstanding voting stock of any closed-end investment company or
more than 5% of the value of the Portfolio's total assets would
be invested in securities of any one or more closed-end
investment companies; or
6. (i) Purchase or sell real estate, except that it
may purchase and sell securities of companies which deal in real
estate or purchase and sell securities of companies which deal in
real estate or interests therein; (ii) purchase or sell
commodities or commodity contracts (except currencies, futures
contracts on currencies and related options, forward contracts or
contracts for the future acquisition or delivery of fixed-income
securities and related options, futures contracts and options on
futures contracts and other similar contracts); (iii) invest in
interests in oil, gas, or other mineral exploration or
development programs; (iv) purchase securities on margin, except
for such short-term credits as may be necessary for the clearance
of transactions; and (v) act as an underwriter of securities,
except that the Portfolio may acquire restricted securities under
circumstances in which, if such securities were sold, the
Portfolio might be deemed to be an underwriter for purposes of
the Securities Act.
In addition to the restrictions set forth above, in
connection with the qualification of its shares for sale in
certain states, a Portfolio may not invest in warrants if, such
warrants valued at the lower cost or market, would exceed 5% of
the value of the Portfolio's net assets.
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO
The objective of the North American Government Income
Portfolio is to seek the highest level of current income,
consistent with what the Adviser considers to be prudent
investment risk, that is available from a portfolio of debt
securities issued or guaranteed by the governments of the United
States, Canada and Mexico, their political subdivisions
(including Canadian Provinces but excluding States of the United
States), agencies, instrumentalities or authorities (Government
Securities). The Portfolio invests in investment grade
securities denominated in the U.S. Dollar, the Canadian Dollar
and the Mexican Peso and expects to maintain at least 25% of its
assets in securities denominated in the U.S. Dollar. In
addition, the Portfolio may invest up to 25% of its total assets
in debt securities issued by governmental entities of Argentina
("Argentine Government Securities"). The Portfolio utilizes
49
<PAGE>
certain other investment techniques, including options and
futures.
The Portfolio may invest its assets in Government
Securities considered investment grade or higher (i.e.,
securities rated at least BBB by S&P, Duff & Phelps or Fitch or
at least Baa by Moody's) or, if not so rated, of equivalent
investment quality as determined by the Portfolio's Adviser.
Securities rated BBB by S&P, Duff & Phelps or Fitch or Baa by
Moody's are considered to have speculative characteristics.
Sustained periods of deteriorating economic conditions or rising
interest rates are more likely to lead to a weakening in the
issuers capacity to pay interest and repay principal than in the
case of higher-rated securities. The Portfolio expects that it
will not retain a debt security which is downgraded below BBB or
Baa or, if unrated, determined by the Portfolio's Adviser to have
undergone similar credit quality deterioration, subsequent to
purchase by the Portfolio.
The Portfolio's Adviser actively manages the Portfolio's
assets in relation to market conditions and general economic
conditions in the United States, Canada and Mexico and elsewhere,
and adjusts the Portfolio's investments in Government Securities
based on its perception of which Government Securities will best
enable the Portfolio to achieve its investment objective of
seeking the highest level of current income, consistent with what
the Portfolio's Adviser considers to be prudent investment risk.
In this regard, subject to the limitations described above, the
percentage of assets invested in a particular country or
denominated in a particular currency varies in accordance with
the assessment of the Portfolio's Adviser of the relative yield
and appreciation potential of such securities and the
relationship of the country's currency to the U.S. Dollar.
The Portfolio invests at least, and normally
substantially more than, 65% of its total assets in Government
Securities. To the extent that its assets are not invested in
Government Securities, however, the Portfolio may invest the
balance of its total assets in debt securities issued by the
governments of countries located in Central and South America or
any of their political subdivisions, agencies, instrumentalities
or authorities, provided that such securities are denominated in
their local currencies and are rated investment grade or, if not
so rated, are of equivalent investment quality as determined by
the Portfolio's Adviser. The Portfolio does not invest more than
10% of its total assets in debt securities issued by the
governmental entities of any one such country, provided, however,
that the Portfolio may invest up to 25% of its total assets in
Argentine Government Securities.
50
<PAGE>
INVESTMENT POLICIES.
U.S. GOVERNMENT SECURITIES. For a general description
of obligations issued or guaranteed by U.S. Government agencies
or instrumentalities, see Appendix B.
U.S. GOVERNMENT GUARANTEED MORTGAGE-RELATED SECURITIES--
GENERAL. For information regarding U.S. Government guaranteed
mortgage-related securities, see "U.S. Government/High Grade
Securities Portfolio -- U.S. Government Guaranteed Mortgage-
Related Securities -- General," above.
GNMA CERTIFICATES. For information regarding GNMA
Certificates, see "U.S. Government/High Grade Securities
Portfolio -- GNMA Certificates," above.
FHLMC SECURITIES. For information regarding FHLMC
Securities, see "U.S. Government/High Grade Securities Portfolio
- -- FHLMC Securities," above.
FNMA SECURITIES. For information regarding FNMA
Securities, see "U.S. Government/High Grade Securities Portfolio
- -- FNMA Securities," above.
ZERO COUPON TREASURY SECURITIES. The Portfolio may
invest in zero coupon Treasury securities. Currently the only
U.S. Treasury security issued without coupons is the Treasury
bill. Although the U.S. Treasury does not itself issue Treasury
notes and bonds without coupons, under the U.S. Treasury STRIPS
program interest and principal payments on certain long term
treasury securities may be maintained separately in the Federal
Reserve book entry system and may be separately traded and owned.
In addition, in the last few years a number of banks and
brokerage firms have separated (stripped) the principal portions
(corpus) from the coupon portions of the U.S. Treasury bonds and
notes and sold them separately in the form of receipts or
certificates representing undivided interests in these
instruments (which instruments are generally held by a bank in a
custodial or trust account). The staff of the Commission has
indicated that in its view, these receipts or certificates should
be considered as securities issued by the bank or brokerage firm
involved and, therefore, should not be included in the
Portfolio's categorization of U.S. Government Securities. The
Portfolio disagrees with the staffs interpretation, but will not
treat such securities as U.S. Government Securities until final
resolution of the issue.
Zero coupon Treasury securities do not entitle the
holder to any periodic payments of interest prior to maturity.
Accordingly, such securities usually trade at a deep discount
from their face or par value and will be subject to greater
51
<PAGE>
fluctuations of market value in response to changing interest
rates than debt obligations of comparable maturities which make
current distributions of interest. Current federal tax law
requires that a holder (such as the Portfolio) of a zero coupon
security accrue a portion of the discount at which the security
was purchased as income each year even though the Portfolio
receives no interest payment in cash on the security during the
year.
CANADIAN GOVERNMENT GUARANTEED MORTGAGE-RELATED
SECURITIES. Canadian mortgage-related securities may be issued
in several ways, the most common of which is a modified pass-
through vehicle issued pursuant to the program (the NHA MBS
Program) established under the National Housing Act of Canada
(NHA). Certificates issued pursuant to the NHA MBS Program (NHA
Mortgage-Related Securities) benefit from the guarantee of the
Canada Mortgage and Housing Corporation (CMHC), a federal Crown
corporation that is (except for certain limited purposes) an
agent of the Government of Canada whose guarantee (similar to
that of GNMA in the United States) is an unconditional obligation
of the Government of Canada except as described below. The NHA
currently provides that the aggregate principal amount of all
issues of NHA Mortgage-Related Securities in respect of which
CMHC may give a guarantee must not exceed $60 billion.
NHA Mortgage-Related Securities are backed by a pool of
insured mortgages that satisfy the requirements established by
the NHA. Issuers that wish to issue NHA Mortgage-Related
Securities must meet the status and other requirements of CMHC
and submit the necessary documentation to become an approved
issuer. When an approved issuer wishes to issue NHA Mortgage-
Related Securities in respect of a particular pool of mortgages,
it must seek the approval of CMHC. Such mortgages must, among
other things, be first mortgages that are insured under the NHA,
not be in default and provide for equal monthly payments
throughout their respective terms.
The mortgages in each NHA Mortgage-Related Securities
pool are assigned to CMHC which, in turn, issues a guarantee of
timely payment of principal and interest that is shown on the
face of the certificates representing the NHA Mortgage-Related
Securities (the NHA MBS Certificates). NHA Mortgage-Related
Securities do not constitute any liability of, nor evidence any
recourse against, the issuer of the NHA Mortgage-Related
Securities, but in the event of any failure, delay or default
under the terms of NHA MBS Certificates, the holder has recourse
to CMHC in respect of its guarantee set out on the NHA MBS
Certificates.
In any legal action or proceeding or otherwise, CMHC has
agreed not to contest or defend against a demand for the timely
52
<PAGE>
payment of the amount set forth and provided for in, and unpaid
on, any duly and validly issued NHA MBS Certificate, provided
that such payment is sought and claimed by or on behalf of a bona
fide purchaser of and investor in such security, without actual
notice at the time of the purchase of the basis or grounds for
contesting or defending against that demand for timely payment.
While most Canadian Mortgage-Related Securities are
subject to voluntary prepayments, some pools are not and function
more like a traditional bond. The typical maturity of Canadian
Mortgage-Related Securities is five years as most Canadian
residential mortgages provide for a five-year maturity with equal
monthly blended payments of interest and principal based on a
twenty-five year amortization schedule. Pursuant to recent
changes adopted by CMHC, maturities of NHA Mortgaged-Related
Securities may be as short as six months or as long as eighteen
years.
ILLIQUID SECURITIES. The Portfolio has adopted the
following investment policy which may be changed by the vote of
the Board of Directors.
The North American Government Income Portfolio will not
invest in illiquid securities if immediately after such
investment more than 15% of the Portfolio's net assets (taken at
market value) would be invested in such securities. For this
purpose, illiquid securities include, among others,
(a) securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restriction on
resale, (b) options purchased by the Portfolio over-the-counter
and the cover for options written by the Portfolio over-the-
counter and (c) repurchase agreements not terminable within seven
days.
See "Other Investment Policies -- Illiquid Securities,"
below, for a more detailed discussion of the Portfolio's
investment policy on restricted securities and securities with
legal or contractual restrictions on resale.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The
Portfolio may enter into futures contracts and options on futures
contracts. The successful use of such instruments draws upon the
Advisers special skills and experience with respect to such
instruments and usually depends on the Advisers 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 or options on futures contracts or
may realize losses and thus will be in a worse position than if
such strategies had not been used. In addition, the correlation
between movements in the price of futures contracts or options on
53
<PAGE>
futures and movements in the price of the securities and
currencies hedged or used for cover will not be perfect and could
produce unanticipated losses.
The Board of Directors has adopted the requirement that
futures contracts and options on futures contracts only be used
as a hedge and not for speculation. In addition to this
requirement, the Board of Directors has also restricted the
Portfolio's use of futures contracts so that the aggregate of the
market value of the outstanding futures contracts purchased by
the Portfolio not exceed 50% of the market value of the total
assets of the Portfolio. These restrictions will not be changed
by the Fund's Board of Directors without considering the policies
and concerns of the various applicable federal and state
regulatory agencies.
For additional information on the use, risks and costs
of futures contracts and options on futures contracts, see
Appendix B.
OPTIONS ON FOREIGN CURRENCIES. For additional
information on the use, risks and costs of options on foreign
currencies, see Appendix B.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The
Portfolio may purchase or sell forward foreign currency exchange
contracts. The Fund may enter into a forward contract, for
example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to lock
in the U.S. Dollar price of the security (transaction hedge).
Additionally, for example, when the Fund believes that a foreign
currency may suffer a substantial decline against the U.S.
Dollar, it may enter into a forward sale contract to sell an
amount of that foreign currency approximating the value of some
or all of the Fund's portfolio securities denominated in such
foreign currency, or, when the Fund believes that the U.S. Dollar
may suffer a substantial decline against a foreign currency, it
may enter into a forward purchase contract to buy that foreign
currency for a fixed U.S. Dollar amount (position hedge). In
this situation the Fund may, in the alternative, enter into a
forward contract to sell a different foreign currency for a fixed
U.S. Dollar amount where the Fund believes that the U.S. Dollar
value of the currency to be sold pursuant to the forward contract
will fall whenever there is a decline in the U.S. Dollar value of
the currency in which portfolio securities of the Fund are
denominated (cross-hedge). The Fund's Custodian will place cash
not available for investment or liquid high-grade Government
Securities in a segregated account of the Fund having a value
equal to the aggregate amount of the Fund's commitments under
forward contracts entered into with respect to position hedges
and cross-hedges. If the value of the securities placed in the
54
<PAGE>
segregated account declines, additional cash or liquid high-grade
Government Securities will be placed in the account on a daily
basis so that the value of the account will equal the amount of
the Fund's commitments with respect to such contracts. As an
alternative to maintaining all or part of the segregated account,
the Fund may purchase a call option permitting the Fund to
purchase the amount of foreign currency being hedged by a forward
sale contract at a price no higher than the forward contract
price or the Fund may purchase a put option permitting the Fund
to sell the amount of foreign currency subject to a forward
purchase contract at a price as high or higher than the forward
contract price.
While these contracts are not presently regulated by the
Commodity Futures Trading Commission (CFTC), the CFTC may in the
future assert authority to regulate forward contracts. In such
event the Portfolio's ability to utilize forward contracts in the
manner set forth in the Prospectus may be restricted. Forward
contracts will reduce the potential gain from a positive change
in the relationship between the U.S. Dollar and foreign
currencies. Unanticipated changes in currency prices may result
in poorer overall performance for the Portfolio than if it had
not entered into such contracts. The use of foreign currency
forward contracts will not eliminate fluctuations in the
underlying U.S. Dollar equivalent value of the proceeds of or
rates of return on the Portfolio's foreign currency denominated
portfolio securities and the use of such techniques will subject
the Portfolio to certain risks.
The matching of the increase in value of a forward
contract and the decline in the U.S. Dollar equivalent value of
the foreign currency denominated asset that is the subject of the
hedge generally will not be precise. In addition, the Portfolio
may not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit the
Portfolio's ability to use such contracts to hedge its assets.
Also, with regard to the Portfolio's use of cross-hedges, there
can be no assurance that historical correlations between the
movement of certain foreign currencies relative to the U.S.
Dollar will continue. Thus, at any time poor correlation may
exist between movements in the exchange rates of the foreign
currencies underlying the Portfolio's cross-hedges and the
movements in the exchange rates of the foreign currencies in
which the Portfolio's assets that are the subject of such
cross-hedges are denominated.
OPTIONS ON U.S. GOVERNMENT SECURITIES AND FOREIGN
GOVERNMENT SECURITIES. For additional information on the use,
risks and costs of options in U.S. Government Securities and
foreign government securities, see Appendix C.
55
<PAGE>
REPURCHASE AGREEMENTS. The Portfolio may invest in
repurchase agreements pertaining to the types of securities in
which it invests. For additional information regarding
repurchase agreements, see "Other Investment Policies --
Repurchase Agreement," below.
PORTFOLIO TURNOVER. The Portfolio may engage in active
short-term trading to benefit from yield disparities among
different issues of securities, to seek short-term profits during
periods of fluctuating interest rates or for other reasons. Such
trading will increase the Portfolio's rate of turnover and the
incidence of short-term capital gain taxable as ordinary income.
The portfolio turnover rates of securities of the Portfolio for
the fiscal years ended December 31, 1996 and December 31, 1997
were 4% and 20%, respectively. Management anticipates that the
annual turnover in the Portfolio will not be in excess of 400%.
An annual turnover rate of 400% occurs, for example, when all of
the securities in the Portfolio's portfolio are replaced four
times in a period of one year. A high rate of portfolio turnover
involves correspondingly greater expenses than a lower rate,
which expenses must be borne by the Portfolio and its
shareholders. High portfolio turnover also may result in the
realization of substantial net short-term capital gains. See
"Dividends, Distributions and Taxes" and "Portfolio
Transactions."
INVESTMENT RESTRICTIONS
The following restrictions, which are applicable to the
North American Government Income Portfolio, supplement those set
forth above and in the Prospectus, and may not be changed without
Shareholder Approval, as defined under the caption "General
Information," below.
The Portfolio may not:
1. Make loans except through (i) the purchase of debt
obligations in accordance with its investment objectives and
policies; (ii) the lending of portfolio securities; or (iii) the
use of repurchase agreements;
2. Participate on a joint or joint and several basis
in any securities trading account;
3. Invest in companies for the purpose of exercising
control;
4. Make short sales of securities or maintain a short
position, unless at all times when a short position is open it
owns an equal amount of such securities or securities convertible
into or exchangeable for, without payment of any further
56
<PAGE>
consideration, securities of the same issue as, and equal in
amount to, the securities sold short (short sales against the
box), and unless not more than 10% of the Portfolio's net assets
(taken at market value) is held as collateral for such sales at
any one time (it is the Portfolio's present intention to make
such sales only for the purpose of deferring realization of gain
or loss for Federal income tax purposes);
5. Purchase a security if, as a result (unless the
security is acquired pursuant to a plan of reorganization or an
offer of exchange), the Portfolio would own any securities of an
open-end investment company or more than 3% of the total
outstanding voting stock of any closed-end investment company or
more than 5% of the value of the Portfolio's total assets would
be invested in securities of any one or more closed-end
investment companies; or
6. (i) Purchase or sell real estate, except that it
may purchase and sell securities of companies which deal in real
estate or purchase and sell securities of companies which deal in
real estate or interests therein; (ii) purchase or sell
commodities or commodity contracts (except currencies, futures
contracts on currencies and related options, forward contracts or
contracts for the future acquisition or delivery of fixed-income
securities and related options, futures contracts and options on
futures contracts and other similar contracts); (iii) invest in
interests in oil, gas, or other mineral exploration or
development programs; (iv) purchase securities on margin, except
for such short-term credits as may be necessary for the clearance
of transactions; and (v) act as an underwriter of securities,
except that the Portfolio may acquire restricted securities under
circumstances in which, if such securities were sold, the
Portfolio might be deemed to be an underwriter for purposes of
the Securities Act.
In addition to the restrictions set forth above, in
connection with the qualification of its shares for sale in
certain states, the Portfolio may not invest in warrants if, such
warrants valued at the lower of cost or market, would exceed 5%
of the value of the Portfolio's net assets. Included within such
amount, but not to exceed 2% of the Portfolio's net assets may be
warrants which are not listed on the New York Stock Exchange or
the American Stock Exchange. Warrants acquired by the Portfolio
in units or attached to securities may be deemed to be without
value. The Portfolio will also not purchase puts, calls,
straddles, spreads and any combination thereof if by reason
thereof the value of its aggregate investment in such classes of
securities will exceed 5% of its total assets.
57
<PAGE>
_______________________________________________________________
ADDITIONAL INFORMATION ABOUT CANADA,
THE UNITED MEXICAN STATES AND THE REPUBLIC OF ARGENTINA
_______________________________________________________________
The information in this section is based on material
obtained by the Fund from various Canadian, Mexican and Argentine
governmental and other economic sources believed to be accurate
but has not been independently verified by the Fund or the
Adviser. It is not intended to be a complete description of
Canada, Mexico or Argentina, their economies, or the consequences
of investing in Mexican Government Securities, Canadian
Government Securities or Argentine Government Securities.
_______________________________________________________________
ADDITIONAL INFORMATION ABOUT CANADA
_______________________________________________________________
Territory and Population
Canada is the second largest country in the world in
terms of land mass with an area of 9.22 million square kilometers
(3.85 million square miles). It is located north of the
continental United States of America and east of Alaska. Canada
comprises ten provinces (Alberta, British Columbia, Manitoba, New
Brunswick, Newfoundland, Nova Scotia, Ontario, Prince Edward
Island, Quebec and Saskatchewan) and two territories (the
Northwest Territories (scheduled in 1999 to be divided into the
Nunavut Territory and the Northwest Territories) and the Yukon
Territory). Its population is approximately 30 million.
Government
Canada is a constitutional monarchy with Queen Elizabeth
II of the United Kingdom its nominal head of state. The Queen is
represented by the Canadian governor-general, appointed on the
recommendation of the Canadian prime minister. Canada's
government has a federal structure, with a federal government and
ten provincial governments. The legislative branch consists of a
House of Commons (parliament) and the Senate. Members of the
House of Commons are elected by Canadian citizens over 18 years
of age. Senators are appointed on a regional basis by the Prime
Minister. The federal government is headed by the Prime Minister
who is chosen from the party that has won the majority of seats
in the House of Commons. The provincial governments each have a
Legislative Assembly and a Premier. The prime minister has the
privilege of appointing all judges except those of the provincial
courts.
58
<PAGE>
Provinces have extensive power within specific areas of
jurisdiction. The federal government has defined areas of
jurisdiction and the power to act in areas declared by the House
of Commons to be for the general advantage of Canada. This
general power has been used to justify federal action in certain
areas of provincial jurisdiction. Concurrent federal and
provincial jurisdiction exists in certain matters, including
agriculture, immigration and pensions. The power-sharing issue
between the federal government and provincial governments has
been contentious and has proven to be a central issue in the
process of constitutional reform.
Politics
Since World War II, the federal government has been
formed by either the Liberal Party or the Progressive
Conservative Party. In October 1993, the Liberal Party, under
the leadership of Mr. Jean Chretien, won 178 of the 295 seats in
the Canadian House of Commons ending nine years of rule by the
Progressive Conservative Party. The Liberal Party was re-elected
for a second term in the June 2, 1997 general election, but lost
20 seats in the House of Commons. It has been reported that
Mr. Chretien may step down in the near future due to low personal
approval ratings. The next general election is due by June
2002.
Canada has had three major developments regarding unity
and constitutional reform in recent years. The first two major
developments were the rejection of the Meech Lake Agreement in
1990 and the Charlottetown Accord in 1992. Those reforms would
have given Quebec constitutional recognition as a distinct
society, transferred powers from the federal to the provincial
governments and reformed the Senate by providing for more equal
representation among the provinces.
The third major development is the continuing
possibility of Quebec's independence. On September 12, 1994, the
Quebec separatist party, Parti Quebecois, under the leadership of
Jacques Parizeau, won 77 seats in Quebec's provincial election
with 44.7% of the vote. The Liberal Party won 47 seats with 44.3%
of the vote. The Parti Quebecois' agenda included a call for a
referendum supporting independence. On October 30, 1995, the
referendum was defeated in a close ballot, in which 50.6% voted
against secession and 49.4% voted for secession. If the
referendum had been approved, Quebec would have become a separate
country, but would have retained formal political and economic
links with Canada similar to those that join members of the
European Union. It is expected that this issue will dominate the
next provincial election in Quebec, which will be held on
November 30, 1998, according to Quebec Premier Bouchard's
announcement on October 28, 1998. The Parti Quebecois has
59
<PAGE>
indicated that if it wins a second term in the provincial
elections, it will call another referendum, but only if the
referendum stands a strong chance of success, which at this time
is unlikely, given current opinion polls. In August of 1998,
Canada's Supreme Court rendered a unanimous opinion in a legal
action initiated by the federal government to determine the
legality of Quebec's secession. While the Court ruled that
Quebec has no right to unilaterally leave the Canadian
federation, the federal government would have to negotiate a
separation if a clear majority of Quebec voters voted for it. It
is expected that Quebec's position within Canada will continue to
be a matter of political debate.
Monetary and Banking System
The central bank of Canada is the Bank of Canada. Its
main functions are conducting monetary policy, supervising
commercial banks, acting as a fiscal agent to the federal
government and managing the foreign exchange fund. The currency
unit of Canada is the Canadian Dollar. Canada does not impose
foreign exchange controls on capital receipts or payments by
residents or non-residents.
Trade
Canada and the United States are each other's largest
trading partners and as a result there is a significant linkage
between the two economies. Bilateral trade between Canada and
the United States in 1996 was larger than between any other two
countries in the world. In the summer of 1991, the United
States, Canada and Mexico began negotiating the North American
Free Trade Agreement ("NAFTA"). NAFTA was signed on December 17,
1992 at separate ceremonies in Washington D.C., Mexico City and
Ottawa, Canada's capital. On December 30, 1993, after the
Legislatures in the United States and Mexico had ratified NAFTA,
the Canadian government announced that it had proclaimed NAFTA
into law and had exchanged the written notifications with the
United States and Mexico needed to bring NAFTA into force. In
July 1997 a free-trade accord between Canada and Chile took
effect. Talks with Brazil and Argentina are also under way for
similar bilateral trade agreements that are expected eventually
to fall under the umbrella of a new form of NAFTA. When fully
implemented, NAFTA is designed to create a free trade area in
North America, expand the flow of goods, services and investment,
and eventually eliminate tariff barriers, import quotas and
technical barriers among Canada, the United States, Mexico and
future parties to NAFTA. At the April 1998 Summit of the
Americas an agreement was signed by the leaders of 34 governments
across the American continents (including Canada) to begin trade
negotiations toward the creation of a free trade area across the
Western Hemisphere.
60
<PAGE>
Economic Information Regarding Canada
Canada experienced rapid economic expansion during most
of the 1980s. In the early 1990s, however, the economy
experienced a deep recession. This resulted from, among other
things, high government debt and high interest rates. The
recession partly created and partly highlighted some difficulties
which the present government is attempting to resolve. The
relatively low level of economic activity during this period
reduced the growth of tax receipts with the result that the
already high levels of government debt increased.
RECENT DEVELOPMENTS. The deterioration in the
government's fiscal position, which started during the recession
in the early 1990s, was aggravated by a reluctance to decrease
expenditures or increase taxes. In its 1995 budget, however, the
Liberal Party introduced new spending cuts, the largest in over
thirty years, to reduce Canada's budget deficit. For the fiscal
years 1994-95, 1995-96 and 1996-97, the budget deficit was
approximately 5%, 4.2% and 1.1%, respectively of gross domestic
product ("GDP"). On October 14, 1998 the government announced
that there was a budget surplus of $3.5 billion for the 1997/1998
fiscal year, the first time in 28 years the government had
recorded a budget surplus. While the government's budget deficit
objectives can be achieved, it will require continued economic
growth, lower interest rates and additional reductions in
government spending.
In addition to the growth of the federal government
deficit, provincial government debt rose rapidly in the early
1990s. Several developments, including increased spending on
social services at the provincial level, were responsible for a
significant amount of the growth of public debt from 1990-1992.
In response to the increase in provincial debt, a number of
rating agencies downgraded certain provincial debt ratings. All
provinces undertook plans to balance their respective budgets,
and, with the exception of Ontario and Quebec, the provinces have
achieved, or are close to achieving, their goals. While Ontario
and Quebec have not yet balanced their budgets, both have made
significant progress toward that end and it is anticipated that
both provinces will achieve their plans to eliminate their budget
deficits by fiscal year 2000/2001. In March 1998, the federal
transfer payments to the provinces, which had been reduced,
increased by $236 million.
Canada's real GDP growth rate slipped to 2.2% in 1995
and 1.2% in 1996 from 3.9% in 1994. In 1997, real GDP grew 3.7%.
That growth was sustained in the first quarter of 1998, when
Canada's real GDP grew 3.4%, but it moderated to 1.8% in the
second quarter of 1998. The Canadian government had forecast
real GDP growth of 3.5% through mid-1999, but that forecast is
61
<PAGE>
currently under review. The recent growth of the economy has
been broadly based, unlike earlier periods of recovery, when it
was attributable almost entirely to a growth in exports. The
trade sector continues to be an important factor, however, in the
growth of the Canadian economy. In 1995, the trade surplus was
more than three times higher than the average surplus between
1990 and 1994. In 1996, the trade surplus was almost 25% higher
than it was in 1995. Exports grew by 16% in 1995 and by 6% in
1996. In 1997, however, the trade surplus was reduced as the
rate of import growth almost doubled the rate of export
growth.
During 1994, despite growing output and low inflation,
concern over the country's deficit and the uncertainty associated
with Quebec's status within Canada led to a weakening of its
currency and higher interest rates. On January 20, 1995, the
exchange rate for the Canadian Dollar fell to .702 against the
U.S. Dollar, which at that time represented a nine-year low and
was close to its then record low of .692. The Bank of Canada
responded by increasing rates on Treasury bills and selling U.S.
Dollars. Between January 20, 1995 and September 30, 1997, the
Canadian Dollar increased in value from .702 to .724 against the
U.S. Dollar. The renewed strength of the Canadian Dollar during
this period facilitated the easing of monetary policy.
Subsequently, however, the Canadian Dollar depreciated, reaching
a record low of .633 against the U.S. Dollar on August 27, 1998.
On October 28, 1998, the U.S. Dollar-Canadian Dollar exchange
rate was 1:650. In June 1997, with a real growth of 4%
annualized during the first two quarters of 1997 and signs of
weakness in the Canadian Dollar, the Bank of Canada decided to
raise its Bank Rate for the first time since 1995, by 25 basis
points to 3.5%. The Bank Rate was raised several more times,
most recently on August 27, 1998, when it was raised one full
percentage point from 5% to 6%. The Bank Rate was subsequently
lowered to 5.75% on September 29, 1998, and to 5.5% on
October 16, 1998, following rate cuts by the Federal Reserve on
those dates.
The following provides certain statistical and related
information regarding historical rates of exchange between the
U.S. Dollar and the Canadian Dollar, information concerning
inflation rates, historical information regarding the Canadian
GDP and information concerning yields on certain Canadian
Government Securities. Historical statistical information is not
necessarily indicative of future developments.
CURRENCY EXCHANGE RATES. The exchange rate between the
U.S. Dollar and the Canadian Dollar is at any moment related to
the supply of and demand for the two currencies, and changes in
the rate result over time from the interaction of many factors
directly or indirectly affecting economic conditions in the
62
<PAGE>
United States and Canada, including economic and political
developments in other countries and government policy and
intervention in the money markets.
The range of fluctuation in the U.S. Dollar/Canadian
Dollar exchange rate has been narrower than the range of
fluctuation between the U.S. Dollar and most other major
currencies. However, the range that has occurred in the past is
not necessarily indicative of future fluctuations in that rate.
Future rates of exchange cannot be predicted, particularly over
extended periods of time.
The following table sets forth, for each year indicated,
the annual average of the daily noon buying rates in New York for
cable transfers in U.S. Dollars for one Canadian Dollar as
certified by the Federal Reserve Bank of New York:
U.S. Dollars
____________
1981 0.83
1982 0.81
1983 0.81
1984 0.77
1985 0.73
1986 0.72
1987 0.75
1988 0.81
1989 0.84
1990 0.86
1991 0.87
1992 0.83
1993 0.78
1994 0.73
1995 0.73
1996 0.73
1997 0.72
1998
January 0.69
February 0.70
March 0.71
April 0.70
May 0.69
June 0.68
July 0.67
August 0.65
September 0.66
Source: Federal Reserve Statistical Releases.
63
<PAGE>
INFLATION RATE OF THE CANADIAN CONSUMER PRICE INDEX.
Since 1991, when the Canadian government adopted inflation
control targets, inflation in Canada has been maintained within
the targeted range of 1% to 3%. The government announced on
February 24, 1998 that the 1991 targets would be extended to the
end of 2001. The following table sets forth for each year
indicated the average change in the Canadian consumer price index
for the twelve months ended December 31 for the years 1981
through 1997, and for the first nine months of 1998
(annualized).
National Consumer
Price Index
_________________
1981 . . . . . . . . . . . . . . . 12.4%
1982 . . . . . . . . . . . . . . . 10.9
1983 . . . . . . . . . . . . . . . 5.7
1984 . . . . . . . . . . . . . . . 4.4
1985 . . . . . . . . . . . . . . . 3.9
1986 . . . . . . . . . . . . . . . 4.2
1987 . . . . . . . . . . . . . . . 4.4
1988 . . . . . . . . . . . . . . . 4.0
1989 . . . . . . . . . . . . . . . 5.0
1990 . . . . . . . . . . . . . . . 4.8
1991 . . . . . . . . . . . . . . . 5.6
1992 . . . . . . . . . . . . . . . 1.5
1993 . . . . . . . . . . . . . . . 1.8
1994 . . . . . . . . . . . . . . . 0.2
1995 . . . . . . . . . . . . . . . 2.1
1996 . . . . . . . . . . . . . . . 1.6
1997 . . . . . . . . . . . . . . . .1.6
1998
January . . . . . . . . . . . . 1.1
February . . . . . . . . . . . . 1.4
March . . . . . . . . . . . . . 1.2
April . . . . . . . . . . . . . 1.0
May . . . . . . . . . . . . . . 1.2
June . . . . . . . . . . . . . . 0.8
July . . . . . . . . . . . . . . 1.1
August . . . . . . . . . . . . . 1.2
September 1.2
Source: BANK OF CANADA REVIEW Winter 1996-1997; BANK OF CANADA
WEEKLY FINANCIAL STATISTICS, October 23, 1998.
CANADIAN GROSS DOMESTIC PRODUCT. The following table
sets forth Canada's GDP for the years 1981 through 1997 and
annualized GDP for the first and second quarters of 1998, at
current and constant prices.
64
<PAGE>
Gross Domestic Change from
Gross Domestic Product at Prior Year at
Product Constant 1986 Constant Prices
_____________ Prices________ _______________
(millions of Canadian Dollars) (%)
1981 355,994 440,127 3.7%
1982 374,442 425,970 (3.2)
1983 405,717 439,448 3.2
1984 444,735 467,167 6.3
1985 477,988 489,437 3.4
1986 505,666 505,666 2.6
1987 551,597 526,730 4.1
1988 605,906 552,958 4.9
1989 650,748 566,486 2.5
1990 669,467 565,155 0.3
1991 676,477 555,052 (1.9)
1992 690,122 559,305 0.9
1993 712,855 571,722 2.5
1994 747,260 594,990 3.9
1995 776,299 608,835 2.2
1996 797,789 617,795 1.2
1997 856,134 3.7
1998
1st Quarter 3.4
2nd Quarter 1.8
Source: BANK OF CANADA REVIEW Summer 1998.
YIELDS ON CANADIAN GOVERNMENT TREASURY BILLS AND BONDS. The
following table sets forth the average monthly yield on 3-month
and 6-month government of Canada Treasury bills and 5-year and
10-year Canada Benchmark Bonds from January 1995 through
September 1998.
65
<PAGE>
Treasury Bills Benchmark Bonds
1995 3 Months 6 Months 5 Years 10 Years
____ ___________________ __________________
January 8.10 8.47 9.18 9.34
February 8.11 8.15 8.46 8.76
March 8.29 8.35 8.23 8.57
April 7.87 7.87 7.93 8.31
May 7.40 7.36 7.41 7.88
June 6.73 6.65 7.33 7.81
July 6.65 6.87 7.79 8.27
August 6.34 6.62 7.58 8.00
September 6.58 6.80 7.54 7.89
October 7.16 7.21 7.54 7.86
November 5.83 5.87 6.74 7.19
December 5.54 5.64 6.64 7.11
Treasury Bills Benchmark Bonds
1996 3 Months 6 Months 5 Years 10 Years
____ ___________________ __________________
January 5.12 5.20 6.33 7.01
February 5.21 5.38 6.87 7.53
March 5.02 5.25 7.02 7.64
April 4.78 4.97 7.09 7.76
May 4.68 4.88 7.01 7.72
June 4.70 4.94 7.05 7.77
July 4.39 4.75 6.96 7.62
August 4.02 4.32 6.60 7.34
September 3.86 4.13 6.28 7.16
October 3.17 3.33 5.59 6.47
November 2.73 2.89 5.10 6.05
December 2.85 3.24 5.44 6.37
Treasury Bills Benchmark Bonds
1997 3 Months 6 Months 5 Years 10 Years
____ ___________________ __________________
January 2.87 3.21 5.67 6.65
February 2.91 3.17 5.44 6.38
March 3.14 3.45 5.75 6.59
April 3.14 3.55 5.92 6.68
May 2.99 3.39 5.86 6.65
June 2.86 3.19 5.32 6.14
July 3.29 3.62 5.18 5.80
August 3.11 3.68 5.36 6.06
September 2.86 3.49 5.17 5.70
October 3.59 3.82 4.99 5.49
November 3.67 4.11 5.17 5.56
December 3.99 4.56 5.34 5.61
66
<PAGE>
Treasury Bills Benchmark Bonds
1998 3 Months 6 Months 5 Years 10 Years
____ ___________________ __________________
January 4.10 4.42 5.09 5.41
February 4.57 4.84 5.26 5.47
March 4.59 4.70 5.11 5.34
April 4.85 4.97 5.32 5.49
May 4.75 4.97 5.21 5.34
June 4.87 5.04 5.28 5.35
July 4.94 5.13 5.42 5.47
August 4.91 5.25 5.62 5.67
September 4.91 5.03 4.78 4.95
Source: BANK OF CANADA.
_________________________________________________________________
ADDITIONAL INFORMATION ABOUT THE UNITED MEXICAN STATES
_________________________________________________________________
Territory and Population
The United Mexican States ("Mexico") occupies a
territory of approximately 1.97 million square kilometers (759
thousand square miles). To the north, Mexico shares a border
with the United States of America, and to the south it has
borders with Guatemala and Belize. Its coastline is along both
the Gulf of Mexico and the Pacific Ocean. Mexico comprises 31
states and a Federal District (Mexico City). It is the second
most populous nation in Latin America, with an estimated
population of 91.1 million, as reported by the National Institute
of Statistics, Geography and Informatics in 1995.
Mexico's three largest cities are Mexico City,
Guadalajara and Monterrey, with estimated populations in 1995 of
16.4 million, 3.3 million and 2.9 million, respectively. In the
1980s, Government efforts concerning family planning and birth
control, together with declining birth rates among women under 35
and those living in urban areas, have resulted in a reduction of
the population growth rate to a projected 1.6% in 1997.
Government
The present form of government was established by the
Constitution, which took effect on May 1, 1917. The Constitution
establishes Mexico as a Federal Republic and provides for the
separation of the executive, legislative and judicial branches.
The President and the members of Congress are elected by popular
vote of Mexican citizens over 18 years of age.
67
<PAGE>
Executive authority is vested in the President, who is
elected for a single six-year term. The executive branch
consists of 17 ministries, the office of the Federal Attorney
General, the Federal District Department and the office of the
Attorney General of the Federal District.
Federal Legislative authority is vested in the Congress,
which is composed of the Senate and the Chamber of Deputies.
Senators serve a six-year term. Deputies serve a three-year
term, and neither Senators nor Deputies may serve consecutive
terms in the same Chamber. The Senate has 128 members, four from
each state and four from the Federal District. The Chamber of
Deputies has 500 members, of whom 300 are elected by direct vote
from the electoral districts and 200 are elected by a system of
proportional representation. The Constitution provides that the
President may veto bills and that Congress may override such
vetoes with a two-thirds majority of each Chamber.
Federal Judicial authority is vested in the Supreme
Court of Justice, the Circuit and District courts, and the
Federal Judicial Board. The Supreme Court has 11 members who are
selected by the Senate from a pool of candidates nominated by the
President. Its members serve for 15 year terms, except for the
current members of the Court, whose appointments range from eight
to 20 years.
Mexico has diplomatic relations with approximately 176
countries. It is a charter member of the United Nations and a
founding member of the Organization of American States, the
International Monetary Fund (the "IMF"), the World Bank, the
International Finance Corporation, the Inter-American Development
Bank and the European Bank for Reconstruction and Development.
Mexico became a member of the Organization for Economic
Corporation and Development (the "OECD") on April 14, 1994 and
the World Trade Organization ("WTO") on January 1, 1995 (the date
on which the WTO superseded the General Agreement on Trade and
Tariffs ("GATT")).
Politics
The Partido Revolucionario Institucional ("PRI") is the
dominant political party in Mexico. Since 1929 the PRI has won
all presidential elections and until the 1997 Congressional
elections held a majority in Congress. Until 1989 it had also
won all of the state governorships. The oldest opposition party
in Mexico is the Partido Accion Nacional ("PAN"). The third
major party in Mexico is the Partido de la Revolucion Democratica
("PRD").
On August 21, 1994, elections were held to select a new
President of Mexico for a six-year term beginning on December 1,
68
<PAGE>
1994. In addition, elections were held for three-quarters of the
Senate and the entire Chamber of Deputies. The candidate of the
PRI, Ernesto Zedillo Ponce de Leon, won the Presidential election
with 48.77% of the votes, the candidate of the PAN was second
with 25.94% of the votes and the PRD candidate was third with
16.6% of the votes. With respect to the Congressional elections,
the PRI maintained its majority in both chambers, with 93 seats
in the Senate and 298 seats in the Chamber of Deputies. The PAN
had the second largest representation with 25 seats in the Senate
and 118 seats in the Chamber of Deputies and the PRD had the
third largest representation with 10 seats in the Senate and 70
seats in the Chamber of Deputies. The PRI won two additional
seats pursuant to proportional representation and the PAN and the
PRD each won one seat in extraordinary elections held on
April 30, 1995. In the mid-term Congressional elections on
July 6, 1997, the PRI lost its majority in the Chamber of
Deputies and now holds 239 of its 500 seats. In the Senate, the
PRI retained its overall majority but lost the two-thirds
majority important in constitutional amendments. The PRI also
failed to win the election for mayor of Mexico City. More than
40% of Mexico's population is now governed by an opposition party
at the state or municipal level. The next general elections are
due in 2000 (congressional and presidential).
At the beginning of 1994 armed insurgents attacked (and
in some cases temporarily seized control of) several villages in
the southern state of Chiapas. While the Government responded by
providing support to the local authorities and publicly offering
to negotiate a peaceful resolution that would address the
underlying concerns of the local population, the conflict
remained a source of debate and uncertainty for the remainder of
the year. Negotiations with the insurgents continued through the
spring of 1994, but subsequently were broken off. In December of
1994, the Congress approved the creation of a Congressional peace
commission, to be formed by members of both chambers of Congress,
which would be responsible for mediating the negotiations between
the Government and the insurgents. By the end of 1994, however,
the insurgents had not agreed to resume negotiations and there
were additional incidents of civil unrest.
In the Spring of 1995, the Government renewed its
efforts to resolve its differences with the insurgents in the
Chiapas region by facilitating their participation in the
political process. On March 9, 1995, Congress approved a law
granting temporary amnesty to insurgents who participate in peace
talks with the Government, and on March 13, 1995, the law
establishing the framework for these peace talks took effect. On
September 11, 1995, the Government and the insurgents reached an
agreement pursuant to which both sides accepted a common
political agenda and procedural rules, and agreed to the creation
of a working committee regarding the rights of indigenous
69
<PAGE>
peoples. This agreement was expected to represent a first step
toward a comprehensive peace agreement between the parties. The
working committee began negotiations on October 17, 1995 and
concluded a second round of meetings on November 19, 1995 having
made significant progress in laying out the framework for a
plenary session that took place from January 10 through
January 19, 1996. The attendees at the plenary session drafted
an agreement on a series of measures aimed at enhancing and
guaranteeing the rights of the indigenous population. The
agreement was signed on February 16, 1996, but further
negotiations between the government and the insurgents were
unsuccessful.
On August 28, 1996, a newly formed group calling itself
the Popular Revolutionary Army attacked military and police
targets in small cities of some southern states of Mexico. It is
generally believed that this group does not enjoy popular
support, and its terrorists attacks have been condemned by both
Government and nongovernment representatives. The Government has
announced the apprehension of several alleged members of the
group.
On December 22, 1997, a violent incident occurred in the
municipality of Chenalho, Chiapas that resulted in the death of
45 civilians, mostly women and children. This incident has
strengthened the resolve of the government to negotiate peace in
Chiapas and toward that end the government has adopted a new
peace plan. The goals of the new peace plan include
(a) reinitiating an intense dialogue among the federal and state
governments, political parties and insurgent groups,
(b) formulating a legal framework that respects Mexico's
multicultural heritage and includes the indigenous population in
the social and economic development of Mexico, (c) achieving the
disarmament of all non-governmental groups, (d) continuing the
investigation of the Chenalho incident, and (e) restructuring the
Chiapas state police. It is unclear whether the government's new
peace plan will achieve its desired effect. On October 4, 1998
there were elections in the State of Chiapas that, unlike recent
elections, were without violence and were relatively free of
controversy.
In addition to the civil unrest in Chiapas, certain
national developments have led to disillusionment among the
electorate with the institutions of government. These events
include the assassination of Luis Donaldo Colosio, the likely
successor to former President Salinas and the murder of Mr. Jose
Francisco Ruiz Massieu, a high-ranking PRI official. Links
between Mexico's drug cartels and high Government and military
officials have also been discovered. These links could
jeopardize Mexico's status as an ally of the U.S. in the war
against narcotics smuggling. While Mexico is currently certified
70
<PAGE>
by the President of the United States as an ally there is no
assurance that the certification will be maintained. A loss of
certification could result in the termination of U.S. economic
assistance to Mexico.
On January 17, 1995, the major political parties of
Mexico entered into a new accord to further the opening of the
political process in Mexico. On July 25, 1996, the Mexican
Government announced certain proposed constitutional amendments
aimed at reforming the electoral law that were ratified on
August 22, 1996. The amendments, which had been agreed to by the
President and the leaders of the four major political parties
represented in Congress, among other things, exclude the
President from the Federal Electoral Institute, an autonomous
agency charged with organizing elections; eliminate the Electoral
Committee of the Chamber of Deputies, which had been responsible
for determining the validity of presidential elections; impose
limits on expenditures on political campaigns and controls on the
source of and uses of funds contributed to a political party;
grant voting rights to Mexican citizens residing abroad; reduce
from 315 to 300 the maximum number of congressional
representatives who may belong to a single party, and establish
an electoral procedure intended to result in a more proportional
representation in the Senate. The Mexican Supreme Court is
empowered to determine the constitutionality of electoral laws
and the Mexican Federal Electoral Court, which has been part of
the executive branch, will become part of the judicial branch.
Money and Banking
Banco de Mexico, chartered in 1925, is the central bank
of Mexico. It is the Federal Government's primary authority for
the execution of monetary policy and the regulation of currency
and credit. It is authorized by law to regulate interest rates
payable on time deposits, to establish minimum reserve
requirements for credit institutions and to provide discount
facilities for certain types of bank loans. The currency unit of
Mexico is the Peso. Mexico repealed its exchange control rules
in 1991 and now maintains only a market exchange rate.
A constitutional amendment relating to Banco de Mexico's
activities and role within the Mexican economy became effective
on August 23, 1993. The amendment's purpose was to reinforce the
independence of Banco de Mexico, which may in the future act as a
counterbalance to the executive and legislative branches in
monetary policy matters. The amendment significantly strengthens
Banco de Mexico's authority with respect to monetary policy,
foreign exchange and related activities and the regulation of the
financial services industry. On April 1, 1994, a new law
governing the activities of Banco de Mexico became effective.
The new law was intended to put into effect the greater degree of
71
<PAGE>
autonomy granted to Banco de Mexico under the constitutional
amendment described above and also established a Foreign Exchange
Commission charged with determining the nation's exchange rate
policies.
Trade Reform
Mexico became a member of the GATT in 1986 and has been
a member of the WTO since January 1, 1995, the date on which the
WTO superseded the GATT. Mexico has also entered into NAFTA with
the United States and Canada. In addition, Mexico signed an
agreement providing for a framework for a free trade agreement in
1992 with Costa Rica, El Salvador, Guatemala, Honduras and
Nicaragua as a step toward establishing a free-trade area.
Mexico entered into definitive free trade agreements with Costa
Rica in April 1994 and Nicaragua in December 1997. A free trade
agreement between Mexico and Chile went into effect on January 1,
1992. A free trade agreement with Colombia and Venezuela was
signed in June 1994 and a similar agreement with Bolivia was
signed in September 1994; both agreements entered into force in
January 1995. In addition, Mexico began trade negotiations in
July 1998 with the European Union for a trade agreement. In
connection with the implementation of NAFTA, amendments to
several laws relating to financial services (including the
Banking Law and the Securities Market Law) became effective on
January 1, 1994. These measures permit non-Mexican financial
groups and financial intermediaries, through Mexican
subsidiaries, to engage in various activities in the Mexican
financial system, including banking and securities
activities.
Economic Information Regarding Mexico
During the period from World War II through the mid-
1970's, Mexico experienced sustained economic growth. During the
mid 1970's, Mexico experienced high inflation and, as a result,
the government embarked on a high-growth strategy based on oil
exports and external borrowing. The steep decline in oil prices
in 1981 and 1982, together with high international interest rates
and the credit markets' unwillingness to refinance maturing
external Mexican credits, led in 1982 to record inflation,
successive devaluations of the peso by almost 500% in total, a
pubic sector deficit of 16.9% of GDP and, in August 1982, a
liquidity crisis that precipitated subsequent restructurings of a
large portion of the country's external debt. Through much of
the 1980's, the Mexican economy continued to experience high
inflation and large foreign indebtedness. In February 1990,
Mexico became the first Latin American country to reach an
agreement with external creditor banks and multi-national
agencies under the U.S. Treasury's approach to debt reduction
known as the "Brady Plan."
72
<PAGE>
The value of the peso has been central to the
performance of the Mexican economy. From late 1982 until
November 11, 1991, Mexico maintained a dual foreign exchange rate
system, with a "controlled" rate and a "free market" rate. The
controlled exchange rate applied to certain imports and exports
of goods, advances and payments of registered foreign debt and
funds used in connection with the in-bond industry (the industry
is comprised of companies which import raw materials without
paying a duty), and payments of royalties and technical
assistance under registered agreements requiring such payments.
The free market rate was used for all other types of
transactions. The dual system assisted in controlling the value
of the Mexican Peso, particularly from 1983 to 1985. In later
years the difference between the two rates was not significant.
Mexico has since repealed the controlled rate.
A fixed exchange rate was maintained from February to
December 1988. Thereafter, under a Government implemented
devaluation schedule, the intended annual rate of devaluation was
gradually lowered from 16.7% in 1989 to 11.4% in 1990, 4.5% in
1991 and 2.4% in 1992. From October 1992 through December 20,
1994, the peso/dollar exchange rate was allowed to fluctuate
within a band that widened daily. The ceiling of the band, which
was the maximum selling rate, depreciated at a daily rate of
0.0004 pesos (equal to approximately 4.5% per year), while the
floor of the band, i.e., the minimum buying rate, remained fixed.
Banco de Mexico agreed to intervene in the foreign exchange
market to the extent that the peso/dollar exchange rate reached
either the floor or the ceiling of the band.
RECENT DEVELOPMENTS. Beginning on January 1, 1994,
volatility in the peso/dollar exchange rate began to increase,
with the value of the peso relative to the dollar declining at
one point to an exchange rate of 3.375 pesos to the U.S. Dollar,
a decline of approximately 8.69% from the high of 3.1050 pesos
reached in early February. This increased volatility was
attributed to a number of political and economic factors,
including a growing current account deficit, the relative
overvaluation of the peso, investor reactions to the increase in
U.S. interest rates, lower than expected economic growth in
Mexico in 1993, uncertainty concerning the Mexican Presidential
elections in August 1994 and certain related developments.
On December 20, 1994, increased pressure on the
peso/dollar exchange rate led Mexico to increase the ceiling of
the Banco de Mexico intervention band. That action proved
insufficient to address the concerns of foreign investors, and
the demand for foreign currency continued. On December 22, the
Government adopted a free exchange rate policy, eliminating the
intervention band and allowing the peso to float freely against
the dollar. The value of the peso continued to weaken relative
73
<PAGE>
to the dollar in the following days. There was substantial
volatility in the peso/dollar exchange during the first quarter
of 1995, with the peso/dollar exchange rate falling to a low
point of 7.588 pesos to the U.S. Dollar on March 13, 1995. By
the end of April and through September 1995, the exchange rate
began to stabilize; however, the exchange rate began to show
signs of renewed volatility in October and November 1995. The
peso/dollar exchange rate fell to a low for the year of 8.14
pesos to the U.S. Dollar on November 13, 1995.
In order to address the adverse economic situation that
developed at the end of 1994, the Government announced in January
1995 a new economic program and a new accord among the Government
and the business and labor sectors of the economy, which,
together with a subsequent program announced in March 1995 and
the international support package described below, formed the
basis of Mexico's 1995 economic plan (the "1995 Economic Plan").
The objectives of the 1995 Economic Plan were to stabilize the
financial markets, lay the foundation for a return to lower
inflation rates over the medium-term, preserve Mexico's
international competitiveness, maintain the solvency of the
banking system and attempt to reassure long-term investors of the
strong underlying fundamentals of the Mexican economy.
The central elements of the 1995 Economic Plan were
fiscal reform, aimed at increasing public revenues through price
and tax adjustments and reducing public sector expenditures;
restrictive monetary policy, characterized by limited credit
expansion; stabilization of the exchange rate while maintaining
the current floating exchange rate policy; reduction of the
current account deficit; introduction of certain financial
mechanisms to enhance the stability of the banking sector; and
maintenance and enhancement of certain social programs, to ease
the transition for the poorest segments of society.
In addition to the actions described above, in the
beginning of 1995, the Government engaged in a series of
discussions with the IMF, the World Bank, the Inter-American
Development Bank and the U.S. and Canadian Governments in order
to obtain the international financial support necessary to
relieve Mexico's liquidity crisis and aid in restoring financial
stability to Mexico's economy. The proceeds of the loans and
other financial support were used to refinance public sector
short-term debt, primarily Tesobonos, to restore the country's
international reserves and to support the banking sector. The
largest component of the international support package was up to
$20 billion in support from the United States pursuant to four
related agreements entered into on February 21, 1995. During
1995, the U.S. Government and the Canadian Government disbursed
$13.7 billion of proceeds to Mexico under these agreements and
the North American Framework Agreement ("NAFA"), the proceeds of
74
<PAGE>
which were used by Mexico to refinance maturing short-term debt,
including Tesobonos and $1 billion of short-term swaps under the
NAFA. In a series of repayments and prepayments beginning in
October 1995 and ending in January 1997, all of Mexico's
obligations under the agreements were extinguished.
Using resources made available through the international
support package as well as operations by Banco de Mexico, in 1995
Mexico altered its debt profile significantly. The outstanding
Tesobono balance was reduced from $29.2 billion at December 31,
1994 to $16.2 billion at the end of the first quarter of 1995,
$10.0 billion at the end of the second quarter, $2.5 billion at
the end of the third quarter and $246 million at the end of the
fourth quarter. By February 16, 1996, Mexico had no Tesobonos
outstanding, and has not issued Tesobonos since that date. As of
December 31, 1996, 100% of Mexico's net internal debt was
denominated and payable in pesos, as compared with only 44.3% of
such debt at the end of 1994.
On May 31, 1995, the Government announced the Plan
Nacional de Desarrollo 1995-2000 (1995-2000 National Development
Plan, or the "Development Plan"). The Development Plan covers
five topics: sovereignty; the rule of law; democratic
development; social development; and economic growth. The
fundamental strategic objective of the Development Plan is to
promote vigorous and sustainable economic growth. Among other
things, the Development Plan calls for steps to increase domestic
savings, preferences for channeling foreign investment into
direct productive investment, the elimination of unnecessary
regulatory obstacles to foreign participation in productive
activities and further deregulation of the economy.
On October 29, 1995, the Government announced the
establishment of a new accord among the Government and the
business, labor and agricultural sectors of the economy known as
the Alianza para la Recuperacion Economica (Alliance for Economic
Recovery or "ARE"). The chief objectives of the ARE, which was
replaced by the ACE (as defined below), were to stimulate
economic recovery and job creation, and to strengthen the basis
for gradual and sustainable economic growth.
On October 26, 1996, the Government announced the
establishment of another accord among the Government and the
business, labor and agricultural sectors of the economy known as
the Alianza para el Crecimiento Economico (Alliance for Economic
Growth or "ACE"). The chief objectives of the ACE are to foster
sustainable economic growth by emphasizing (i) the export sector,
particularly through domestic and foreign investment, (ii) public
investment, particularly in the hydrocarbon, electricity,
transportation and water sectors and (iii) fiscal and monetary
75
<PAGE>
discipline in order to encourage an environment of greater price
stability and lower interest rates.
On December 31, 1997, the ACE expired. On February 24,
1998, the Government and representatives of the labor,
agriculture and business sectors signed the Acuerdo de
Cooperacion y Consulta (Cooperation and Consultation Accord or
"ACC"). In the ACC, the Government and the three economic
sectors agreed to increase productivity and competitiveness to
prepare Mexico for the globalization of the world economy. The
accord is based on the following commitments: (i) a pledge by
the Government and the three economic sectors to periodically
examine the development of the Mexican economy and to create
subcommissions or working groups to analyze specific economic
problems; (ii) to allow the unimpeded negotiation of collective
bargaining agreements and to foster a cooperative environment to
achieve productivity and competitiveness goals, as well as the
equitable distribution of any resulting benefits; (iii) to set as
a priority workforce education and job training to increase
productivity and to facilitate worker transition to changing
production technology and (iv) to catalyze capital investment,
infrastructure development and labor retraining in rural areas,
in order to increase productivity, competitiveness and the
standards of living in such areas.
On June 3, 1997, the Government announced the Programa
Nacional de Financiamiento del Desarrollo 1997-2000 (National
Development Financing Program 1997-2000, or "PRONAFIDE"). The
PRONAFIDE's goals are to: (i) achieve, on average, real GDP
growth of 5% per year, (ii) generate more than one million jobs
per year, (iii) increase real wages and salaries, (iv) strengthen
the capacity of the Government to respond to social needs and
(v) avoid economic crises of the types suffered by Mexico during
the past 20 years.
The effects of the devaluation of the peso, as well as
the Government's response to that and related events, were
apparent in the performance of the Mexican economy during 1995
and 1996. Mexico's trade deficit decreased during 1995, the
value of imports (including in-bond industries) decreasing by
8.7% between 1994 and 1995, to $72.5 billion in 1995. Although
the value of imports (including in-bond industries) in 1996
increased approximately 23.4% from 1995, to $89.5 billion,
exports increased by almost the same amount. During 1995, Mexico
registered a $7.089 billion trade surplus, its first annual trade
surplus since 1989. Mexico continued to register a trade surplus
in 1996 and 1997 but the surplus decreased by approximately 7.9%
to $6.531 billion in 1996 and 90% to $624 million in 1997. In
the first two quarters of 1998 Mexico registered a $2.89 billion
deficit in its trade balance. During 1996 and 1997, Mexico's
current account balance registered a deficit of $1.923 billion
76
<PAGE>
and $7.450 billion, respectively, as compared with a deficit of
$1.576 billion in 1995.
Banco de Mexico is currently disclosing reserve figures
on a weekly basis. On December 31, 1997, Mexico's international
reserves amounted to $28,000 million, as compared to $17,509
million at December 31, 1996, $15,741 million at December 31,
1995, $6,148 million at December 31, 1994 and $24,538 million at
December 31, 1993.
During 1995 real GDP decreased by 6.9%, as compared with
a growth rate of 3.5% during 1994. This downward trend continued
into the first quarter of 1996, but turned around in the second
quarter of 1996. The real GDP has continued to grow since that
time, resulting in an overall GDP growth rate of 5.2% for 1996
and 7.0% for 1997. During the first six months of 1998, real GDP
grew 5.4% over the same period in 1997. Although the Mexican
economy has stabilized, there can be no assurance that the
government's plan will lead to a full recovery.
Statistical and Related Information
Concerning Mexico
The following provides certain statistical and related
information regarding historical rates of exchange between the
U.S. Dollar and the Mexican Peso, information concerning
inflation rates, historical information regarding the Mexican GDP
and information concerning interest rates on certain Mexican
Government Securities. Historical information is not necessarily
indicative of future fluctuations or exchange rates. In 1982,
Mexico imposed strict foreign exchange controls which shortly
thereafter were relaxed and were eliminated in 1991.
CURRENCY EXCHANGE RATES. There is no assurance that
future regulatory actions in Mexico will not affect the Fund's
ability to obtain U.S. Dollars in exchange for Mexican Pesos.
The following table sets forth the exchange rates of the
Mexican Peso to the U.S. Dollar with respect to each year from
1981 to 1997, and the first nine months of 1998.
77
<PAGE>
Free Market Rate Controlled Rate
________________ _______________
End of End of
Period Average Period Average
______ ________ _______ _______
1981. . . . . . . 26 24 -- --
1982. . . . . . . 148 57 96 57
1983. . . . . . . 161 150 143 120
1984. . . . . . . 210 185 192 167
1985. . . . . . . 447 310 371 256
1986. . . . . . . 915 637 923 611
1987. . . . . . . 2.209 1.378 2.198 1.366
1988. . . . . . . 2.281 2.273 2.257 2.250
1989. . . . . . . 2.681 2.483 2.637 2.453
1990. . . . . . . 2.943 2.838 2.939 2.807
1991. . . . . . . 3.075 3.016 3.065* 3.007*
1992. . . . . . . 3.119 3.094 -- --
1993. . . . . . . 3.192 3.155 -- --
1994. . . . . . . 5.325 3.222 -- --
1995. . . . . . . 7.643 6.419 -- --
1996. . . . . . . 7.851 7.598 -- --
1997. . . . . . . 8.083 7.918 -- --
1998
January . . . . 8.360 8.179
February. . . . 8.583 8.493
March . . . . . 8.517 8.569
April . . . . . 8.482 8.500
May . . . . . . 8.880 8.561
June. . . . . . 9.041 8.895
July. . . . . . 8.918 8.904
August. . . . . 9.990 9.371
September . . . 10.200 10.219
* Through November 10, 1991.
Source: Banco de Mexico; Federal Reserve Statistical
Releases.
INFLATION AND CONSUMER PRICES. Through much of the
1980's, the Mexican economy continued to be affected by high
inflation, low growth and high levels of domestic and foreign
indebtedness. The annual inflation rate, as measured by the
consumer price index, rose from 28.7% in December 1981 to 159.2%
in December 1987. In December 1987, the Mexican Government
agreed with labor and business to curb the economy's inflationary
pressures by freezing wages and prices (the "1987 accord"). The
1987 accord included the implementation of restrictive fiscal and
monetary policies, the elimination of trade barriers and the
reduction of import tariffs. After substantive increases in
78
<PAGE>
public sector prices and utility rates, price controls were
introduced.
The 1987 accord was succeeded by a series of additional
accords, each of which continued to stress the moderation of
inflation, fiscal discipline and a gradual devaluation of the
peso. There was a gradual reduction in the number of goods and
services whose prices were covered by such accords. The two most
recent of these accords also incorporated a reduction in the
income tax rate applicable to corporations and certain self-
employed individuals from 35% to 34% and a reduction in the
withholding tax applicable to interest payments on publicly
issued external debt and external debt payable to certain
financial institutions from 15% to 4.9%. Under the later of
these two accords, tax benefits were proposed for workers
receiving salaries not exceeding twice the minimum wage and asset
taxes to be reduced to 1.8%. These policies lowered the consumer
inflation rate from 159.2% in 1987 to 7.1% in 1994.
Over the medium-term, the Government is committed to
reversing the decline in real wages experienced in the last
decade through control of inflation, a controlled gradual upward
adjustment of wages and a reduction in income taxes for the lower
income brackets. Nonetheless, the effect of the devaluation of
the peso and the Government's response to that event and related
developments caused a significant increase in inflation in 1995,
as well a decline in real wages for much of the population during
1995. Inflation during 1995, 1996 and 1997 (as measured by the
increase in the National Consumer Price Index), was 52.0%, 27.7%
and 15.7%, respectively.
CONSUMER PRICE INDEX. The following table sets forth
the changes in the Mexican consumer price index for the year
ended December 31 for the years 1981 through 1997, and the 1st
quarter of 1998.
79
<PAGE>
Annual
Increases in
National Consumer
Price Index
_________________
1981................................... 28.7%
1982................................... 98.9
1983................................... 80.8
1984................................... 59.2
1985................................... 63.7
1986................................... 105.7
1987................................... 159.2
1988................................... 51.7
1989................................... 19.7
1990................................... 29.9
1991................................... 18.8
1992................................... 11.9
1993................................... 8.0
1994................................... 7.1
1995................................... 52.0
1996................................... 27.7
1997................................... 15.7
1998
1st Quarter......................... 5.2
Source: Banco de Mexico.
MEXICAN GROSS DOMESTIC PRODUCT. The following table
sets forth certain information concerning Mexico's GDP for the
years 1990 through 1997, and annualized GDP for the first and
second quarters of 1998, at current and constant prices.
80
<PAGE>
Gross Domestic Gross Domestic
Product at Product at Change from
Current Constant 1993 Prior Year at
Prices Prices (1) Constant Prices
________________ _______________ _______________
(millions of Mexican New Pesos) (percentage)
1991. . . . 949,148 1,189,017 4.2
1992. . . . 1,125,334 1,232,162 3.6
1993. . . . 1,256,196 1,256,196 2.0
1994. . . . 1,423,364 1,312,200 4.5
1995. . . . 1,840,431 1,230,608 (6.2)
1996 . . 2,508,147 1,294,152 5.2
1997(2). . 3,187,441 1,384,800 7.0
1998(2)
1st quarter 3,588,380 1,423,600 6.6
2nd quarter 3,719,416 4.3
(1) Constant peso with purchasing power at December 31, 1993,
expressed in new pesos.
(2) Preliminary.
Source: Banco de Mexico; Mexico's National Statistics, Geography
and Informatics Institute (INEGI).
INTEREST RATES. The following table sets forth the
average interest rates per annum on 28-day and 91-day CETES,
which are peso-denominated Treasury bills, the average weighted
cost of term deposits for commercial banks ("CPP"), the average
interest rate ("TIIP") and the equilibrium interest rate ("TIIE")
for the periods listed below. The government announced plans in
late 1997 to issue medium-term CETES for the first time in
1998.
81
<PAGE>
Average CETES and Interest Rates
_________________________________
28-Day 91-Day
CETES CETES CPP TIIP TIIE
_____ _____ _____ _____ _____
1990:
Jan.-June 41.2 40.7 43.2% _____ _____
July-Dec. 28.3 29.4 31.0 _____ _____
1991:
Jan.-June 21.2 21.7 24.3 _____ _____
July-Dec. 17.3 18.0 20.8 _____ _____
1992:
Jan.-June 13.8 13.8 16.9 _____ _____
July-Dec. 17.4 18.0 20.7 _____ _____
1993:
Jan.-June 16.4 17.3 20.9 20.4(1) _____
July-Dec. 13.5 13.6 16.2 16.1 _____
1994:
Jan.-June 13.0 13.5 14.2 15.3 _____
July-Dec. 15.2 15.7 16.8 20.4 _____
1995:
Jan.-June 55.0 54.3 49.6 63.6 71.2(2)
July-Dec. 41.9 42.2 40.7 44.5 44.5
1996:
Jan.-June 35.4 37.2 34.5 37.3 37.2
July-Dec. 27.4 28.6 26.9 30.2 30.1
1997:
Jan.-June 20.8 22.2 20.8 23.2 23.2
July-Dec. 18.8 20.3 17.4 20.5 20.6
1998:
January 18.0 19.4 17.0 19.5 19.7
February 18.7 19.6 17.0 20.6 20.5
March 19.9 20.8 17.4 21.7 21.7
April 19.0 19.5 17.7 20.4 20.6
May 17.9 18.9 16.9 20.2 19.9
June 19.5 21.0 17.2 21.1 21.5
July 20.1 21.8 17.8 21.7 21.9
(1) February-June average.
(2) Average for the last two weeks of March.
Source: Banco de Mexico.
82
<PAGE>
________________________________________________________________
ADDITIONAL INFORMATION ABOUT THE REPUBLIC OF ARGENTINA
________________________________________________________________
Territory and Population
The Republic of Argentina ("Argentina") is the second
largest country in Latin America, occupying a territory of 2.8
million square kilometers (1.1 million square miles) (3.8 million
square kilometers (1.5 million square miles) if territorial
claims in the Antarctic and certain South Atlantic islands are
included). It is located at the extreme south of the South
American continent, bordered by Chile, Bolivia, Paraguay, Brazil,
Uruguay and the South Atlantic Ocean. Argentina consists of 23
provinces and the federal capital of Buenos Aires. In 1991, the
year of the last Census, it had a population of approximately
34.6 million.
The most densely inhabited areas and the traditional
agricultural wealth are on the wide temperate belt that stretches
across central Argentina. About one-third of the population lives
in the greater Buenos Aires area. Six other urban centers,
Cordoba, Rosario, Mendoza, San Miguel de Tucuman, Mar del Plata
and La Plata, have a population of over 500,000 each.
Approximately 79% of the country's population is urban. During
the period 1980-1990, Argentina's population grew at a 1.4%
average annual rate. In the 1990-1995 period, Argentina's
population grew at a 1.2% average annual rate.
Government
The current Argentine federal constitution (the
"Constitution"), was promulgated on August 24, 1994 and became
effective immediately. The Constitution retains the basic
principles of the Constitution first established in 1853. The
Constitution provides for a tripartite system of government: an
executive branch headed by a president; a legislative branch made
up of a bicameral congress; and a judicial branch, of which the
Supreme Court of Justice (the "Supreme Court") is the highest
body of authority. The President is directly elected by the
voters and may serve for a maximum of two consecutive four-year
terms. The next election for the Presidency is due by October
1999. The President directs the general administration of the
country and has the power to veto laws in whole or in part,
although Congress may override a veto by a two-thirds vote.
The Congress is made up of the Senate and the Chamber of
Deputies. The 72-member Senate consists of three Senators for
each province and the federal capital of Buenos Aires. Senators
are elected for six-year terms, and serve in staggered terms so
83
<PAGE>
that one-third of the Senate's seats are subject to elections
every two years. The Chamber of Deputies consists of 257 seats
which are allocated according to each province's population.
Representatives are elected for four-year staggered terms so that
one-half of the Chamber is subject to elections every two years.
The judicial system comprises federal and provincial
trial courts, courts of appeal and supreme courts. The supreme
judicial power of the Republic is vested in the Supreme Court,
which has nine members who are appointed for life by the
President (subject to ratification by the Senate). In addition,
in 1994 Argentina's two largest political parties entered into an
agreement whereby future Supreme Court justices will be selected
from a list of nominees mutually agreed upon by both parties.
Each province has its own constitution, and elects its
own governor, legislators and judges, without the intervention of
the federal government.
Politics
The two largest political parties in Argentina are the
Partido Justicialista or Peronist Party ("PJ"), which evolved out
of Juan Peron's efforts to expand the role of labor in the
political process in the 1940s, and the Union Civica Radical or
Radical Civic Union ("UCR"), founded in 1890. Traditionally, the
UCR has had more urban middle-class support and the PJ more labor
support. At present, support for both parties is broadly based,
with the PJ having substantial support from the business
community. Smaller parties occupy varied political positions on
both sides of the political spectrum and some are active only in
certain provinces. Following the October 26, 1997 Congressional
elections, the PJ held 119 seats and the UCR and others held 138
seats in the Chamber of Deputies.
Since the 1930's, Argentina's political parties have had
difficulty in resolving the inter-group conflicts that arose out
of the Great Depression, the deepening social divisions that
occurred under the Peron Government and the economic stagnation
of the past several decades. As a result, the military
intervened in the political process on several occasions and
ruled the country for 22 of the past 68 years. Poor economic
management by the military and the loss of a brief war with the
United Kingdom over the Malvinas (Falkland) Islands led in 1983
to the end of the most recent military government, which had
ruled the country since 1976.
Four military uprisings have occurred since 1983, the
most recent in December 1990. The uprisings, which were led by a
small group of officers, failed due to a lack of support from the
public and the military as a whole.
84
<PAGE>
Since 1983, Argentina has had two successive elected
civilian Presidents. Raul Alfonsin, elected in 1983, was the
first civilian president in six decades to stay in office until
the scheduled election of a successor. His UCR Government re-
established civilian rule, including a functioning Congress. The
current president, Carlos Menem, won the presidential election in
May 1989 and took office in July 1989, several months ahead of
the scheduled inauguration, in the midst of an economic crisis.
President Menem, the leader of the PJ, was first elected
with the backing of organized labor and business interests that
traditionally supported a closed economy and a large public
sector. Shortly after taking office, however, President Menem
adopted market-oriented and reformist policies, including an
aggressive privatization program, a reduction in the size of the
public sector and an opening of the economy to international
competition. President Menem won reelection in May 1995, but his
popularity has eroded recently as the government has faced
allegations of corruption and criticism from both the ruling and
opposition parties concerning its economic policies. In the
October 26, 1997 Congressional elections, the PJ lost 12 seats in
the lower house, leaving it with 119 of the 257 seats, far short
of its pre-election majority. Although President Menem had
planned to seek a third term (which would have required a
constitutional amendment), in July 1998 he announced that he
would not do so, thus sparing Argentina from political turmoil as
it approaches the 1999 elections.
Argentina has diplomatic relations with more than 135
countries. It is a charter member of the United Nations and a
founding member of the Organization of American States. It is
also a member of the IMF and the World Bank. Argentina became a
member of the WTO on January 1, 1995 (the date on which the WTO
superseded GATT).
Monetary and Banking System
The central bank of Argentina is the Banco Central de la
Republica Argentina ("Central Bank of Argentina"). Its primary
functions include the administration of the financial sector,
note issue, credit control and regulation of foreign exchange
markets. The currency unit of Argentina is the Peso. Under the
Government's medium-term program with the IMF, the Government has
agreed to maintain the present fixed exchange rate of one peso
per dollar. Due to the ease of convertibility between the peso
and the dollar as a result of the Government's exchange rate
policies, changes in U.S. interest rates constitute a significant
factor in determining peso-dollar capital flows.
85
<PAGE>
Economic Information Regarding Argentina
The Argentina economy has many strengths including a
well balanced natural resource base and a high literacy rate.
Since World War II, however, it has had a record of erratic
growth, declining investment rates and rapid inflation. Since
the implementation of the current reform program in March 1991,
significant progress has been made in reducing inflation and
increasing real GDP growth. Although the GDP declined by 4.4% in
1995, it has increased every year since then - 4.8% in 1996, an
estimated 8.4% in 1997, and an estimated 6.9% in the first
quarter of 1998 compared to the first quarter of 1997. The basis
for Argentina's recent economic growth has been an increase in
investment and exports.
DEREGULATION OF THE ECONOMY AND PRIVATIZATIONS.
Deregulation of the domestic economy, liberalization of trade and
reforms of investment regulations are prominent features of
Argentina's structural adjustment program. In order to achieve
the free functioning of markets, the Government has undertaken an
extensive program for the removal of economic restrictions and
regulations and the promotion of competition.
In 1989 and 1990, steps were taken to remove various
regulations that restricted both international trade and domestic
commerce. Restrictions were removed in order to allow the
private sector to provide certain public services, such as
telephone, electricity and natural gas, subject to governmental
regulation.
On October 31, 1991, the Argentine government
promulgated its principal deregulation legislation which
deregulated the domestic market for goods, services and
transportation, abolished restrictions on imports and exports,
abolished or simplified a number of regulatory agencies and
allowed free wage bargaining in the private sector. In the
financial sector, this legislation abolished all stamp taxes
relating to publicly offered securities, all capital gains taxes
on stocks and bonds held by non-resident investors and fixed
commissions on the stock exchanges.
In addition, Argentina has eliminated restrictions on
foreign direct investment and capital repatriation. In late
1993, legislation was adopted abolishing previous requirements of
a three-year waiting period for capital repatriation. Under the
new legislation, foreign investors will be permitted to remit
profits at any time and to organize their companies and make use
of domestic credit under the same rights and under the same
conditions as local firms. The process of deregulation and
liberalization is continuing through the privatization process,
86
<PAGE>
the proposed reform of the social security system, regional
integration and further labor law reforms.
In 1989, the State Reform Law declared certain
enterprises eligible for privatization. In addition to
increasing the efficiency of services provided by public sector
enterprises, the privatizations have also served to reduce
outstanding debt (by applying cash proceeds and through the
selective use of debt- to-equity conversions), increase reserves
and increase tax revenues from the new owners of the enterprises.
The privatization program has also served as an important conduit
for direct foreign investment into Argentina attracting
interested investors from Asia, Europe, North America and Latin
America. The Government completed 32 major privatizations in
1993, 11 in 1994 and 3 in 1995. On March 13, 1995 the Government
announced a new fiscal package, which included, among other
measures, an acceleration in the sale of assets and the
privatization of several additional companies. In July 1997, the
postal service was privatized and on February 11, 1998, the
Government officially unveiled a decree awarding the management
of 33 of Argentina's airports to a private consortium, bringing
to more than $30 billion the amount of assets sold since the
privatization program began. Efforts to privatize the Yacireta
hydroelectric dam and the national mortgage bank are ongoing.
The following provides certain statistical and related
information regarding historical rates of exchange between the
U.S. Dollar and the Argentine Peso, information concerning
inflation rates, historical information concerning the Argentine
GDP and information concerning interest rates on certain
Argentine Government Securities. Historical statistical
information is not necessarily indicative of future developments.
CURRENCY EXCHANGE RATES. The Argentine foreign exchange
market was highly controlled until December 1989, when a free
exchange rate was established for all foreign transactions.
Since the institution of the Convertibility Law on April 1, 1991,
the Argentine currency has been tied to the U.S. Dollar. Under
the Convertibility Law, the Central Bank of Argentina must
maintain a reserve in foreign currencies, gold and certain public
bonds denominated in foreign currencies equal to the amount of
outstanding Argentine currency and is obliged to sell dollars to
any person who so requires at a rate of one peso to one dollar.
From April 1, 1991 through the end of 1991, the exchange rate was
approximately 10,000 Australes (the predecessor to the Argentine
Peso) per U.S. Dollar. On January 1, 1992 the Argentine Peso
equal to 10,000 Australes was introduced. Since January 1, 1992,
the rate of exchange from Argentine Peso to U.S. Dollar has been
approximately one to one. However, the historic range is not
necessarily indicative of fluctuations that may occur in the
exchange rate over time which may be wider or more confined than
87
<PAGE>
recorded previously over a comparable period. Future rates of
exchange cannot be predicted, of course, particularly over
extended periods of time.
The following table sets forth, for each year indicated,
the nominal exchange rates of Argentine Peso to U.S. Dollar as of
the last day of the period indicated.
Free Rate
_____________
1990 . . . . . . . . . . . . .5590
1991 . . . . . . . . . . . . .9990
1992 . . . . . . . . . . . . .9990
1993 . . . . . . . . . . . . .9990
1994 . . . . . . . . . . . . 1.0
1995 . . . . . . . . . . . . 1.0
1996 . . . . . . . . . . . . 1.0
1997 . . . . . . . . . . . . 1.0
Source: Banco Central de la Republica Argentina.
WAGES AND PRICES. Prior to the adoption of a new
economic plan announced by former Economy Minister Domingo F.
Cavallo in March 1991, the Argentine economy was characterized by
low and erratic growth, declining investment rates and rapid
inflation. Argentina's high inflation rates and balance of
payments imbalances during the period from 1975 to 1990 resulted
mainly from a lack of control over fiscal policy and the money
supply. Large subsidies to state-owned enterprises and an
inefficient tax collection system led to large persistent public-
sector deficits which were financed in large part through
increases in the money supply and external financings. High
inflation combined with the lag between the accrual and receipt
of taxes reduced real tax revenues and increased the size of the
deficit, further fueling the inflationary cycle. Inflation
accelerated on several occasions and turned into hyperinflation
in 1989 and the end of 1990, with prices rising at an annual rate
of 1,000% or more.
During the 1980's and in 1990, the Argentine government
instituted several economic plans to stabilize the economy and
foster real growth, all of which failed after achieving initial
success mainly because the government was unable to sustain
reductions in the public deficit. The government's initial
stabilization efforts included a devaluation of the Austral, a
fixed exchange rate, wage and price controls and a sharp rise in
public utility rates.
The government's efforts proved inadequate, however, and
foreign exchange markets declined sharply in anticipation of a
new bout of hyperinflation. The government adopted a new set of
88
<PAGE>
stabilization measures in December 1989 which abandoned attempts
to control wages, prices and the exchange rate and sought to
restrain the public deficit which was believed to be the
principal cause of Argentina's chronic inflation. The new
stabilization plan (called the Bonex Plan) featured, among other
things, tax reforms, a tighter rein on public enterprises and
restrictions on lending activities of the public sector banks
(which had been financing provincial government deficits through
loans which were in turn financed with discounts from the Central
Bank), government personnel cuts and a reliance on cash income
generated by privatizations to reduce the public sector deficit.
The plan also eliminated all restrictions on foreign exchange
transactions. In addition, the plan froze fixed-rate short-term
bank deposits pursuant to which holders of 7- to 30-day deposits
were permitted to withdraw no more than the equivalent of
approximately U.S. $1,000 from their accounts, and the balance
was made payable only in 10-year U.S. Dollar denominated
government bonds (Bonex 89). The plan also provided for the
compulsory exchange of certain domestic currency denominated
bonds for Bonex 89.
The stabilization effort succeeded in ending temporarily
the period of hyperinflation, but not in ending the Argentine
economy's susceptibility to inflation. In late 1990, a
deterioration in the finances of the social security system and
provincial governments led to an expansion of Central Bank
credit. The Central Bank loaned funds to the social security
system to allow it to meet year-end payments and also funded
provincial banks suffering deposit runs. The provincial banks
continued to lend to finance provincial government deficits. The
credit expansion led to downward market pressure on the Austral,
and a resurgence of price inflation. Between December 1989 and
December 1990, the CPI rose 1,343.9%, which was significantly
less than the 4,923.6% increase in 1989, but was still an
unacceptably high inflation rate. The government responded by
installing a new economic team headed by Economy Minister
Cavallo, which acted to reduce the public sector deficit by
increasing public utility rates and taxes and by developing a new
stabilization program.
The Argentine government's current stabilization program
is built around the plan announced by Economy Minister Cavallo on
March 20, 1991 (the "Convertibility Plan", as amended and
supplemented), and approved by Congress through passage of the
Convertibility Law. The Convertibility Plan has sought to reduce
inflation and restore economic stability through reforms relating
to the tax system, privatizations and the opening of the economy
that are intended to address underlying structural problems that
had distorted fiscal and monetary policy.
89
<PAGE>
The Convertibility Plan is centered on the two following
fundamental principles:
(1) Full international reserve backing for the monetary
base. The monetary base (consisting of currency in circulation
and peso deposits of financial entities with the Central Bank) is
not to exceed the Central Bank's gross international assets as a
fixed rate of one Argentine Peso per U.S. Dollar. This
effectively means that the money supply can be increased only
when backed by increases in the level of international reserves,
and not whenever the public sector deficit or the financial
sector needs to be financed. Gross international assets include
the Central Bank's holdings of gold, foreign exchange (including
short-term investments), U.S. Dollar denominated Argentine
government bonds (in an amount not to exceed 30% of total assets)
and its net Asociacion Latinoamericana de Integraction ("ALADI")
claims (except overdue claims) all freely available and valued at
market prices. Under this arrangement, in which the Argentine
Peso is fully convertible into the U.S. Dollar, no increase in
the domestic monetary base can occur without an equivalent
increase in gross international assets at the one Argentine Peso
per U.S. Dollar rate; and
(2) the elimination of the fiscal deficit and the
achievement of a surplus in the primary balance to provide funds
for the government to service its debt and thereby eliminate the
need for further borrowings.
The IMF has supported the implementation of the
Convertibility Plan and designed a financial program for the
Argentine public sector. In the event of any noncompliance with
the program, Argentina is required to consult in the first
instance with the IMF in order to obtain a waiver and, if
required, revise the program to remedy the situation. In the
second half of 1994, the Government decided to seek private
financing rather than utilize its EFF allotment for that period.
After the onset of the Mexican currency crisis, however, the
Government determined that it was necessary to seek further
funding through the EFF program, including drawing down on its
unused quota for the later part of 1994. Negotiations with the
IMF led to approval in April 1995 of economic performance waivers
for the last two quarters of 1994, an extension of the EFF credit
for a fourth year through March 30, 1996, and an increase in the
amount of the EFF credit by the equivalent of approximately US
$2.4 billion to a total of approximately US$6.3 billion. On
February 4, 1998, the IMF, citing Argentina's strong
macroeconomic performance in 1997, announced its approval of a
new three-year EFF credit for Argentina in the amount of
approximately US$2.8 billion to support the government's medium-
term economic reform program for 1998-2000.
90
<PAGE>
Argentina, like other Latin American countries, has been
impacted by the recent financial instability in Asia. In October
1998, Argentina negotiated a $5.7 billion aid package with the
World Bank and the Inter-American Development Bank to assist the
government in meeting its financing requirements through the
first quarter of 1999. Argentina is also in negotiations with
private international banks.
The Convertibility Plan has simplified fiscal and market
regulations and reallocated state activities to the private
sector, thereby reducing state expenditures, increasing the
amount of federal revenues and at the same time encouraging
domestic private sector initiative and foreign investment. Since
the Convertibility Plan was introduced in March 1991, inflation
as measured by the consumer price index declined from a 27.0%
monthly rate in February 1991 to a 0.3% monthly rate in December
1992 and resulted in a 24.8% annual rate for 1992. Inflation
continued to decrease in 1993 (to 10.6%), in 1994 (to 4.2%), in
1995 (to 3.4%), in 1996 (to 0.2%) and in 1997 (to 0.5%).
The dismissal of Economy Minister Cavallo by President
Menem in July 1996 has had no effect on the economic priorities
of the government. There is no assurance, however, that in the
future, the Convertibility Plan will not be modified or
abandoned.
CONSUMER PRICE INDEX. The following table sets forth
for each year indicated the change in Argentine Consumer Prices
for the twelve months ended December 31, 1989-97.
91
<PAGE>
INFLATION
Consumer Prices,
Increase Over
Previous Period
----------------
1989....................................... 4,923.6
1990....................................... 1,343.9
1991....................................... 84.1
1992....................................... 24.8
1993....................................... 10.6
1994....................................... 4.2
1995(1).................................... 3.4
1996(1).................................... 0.2
1997....................................... 0.5
(1) In 1996, a new index was introduced called the
Indice Precios Internos al por Mayor (IPIM). The IPIM is broadly
similar to the index formerly used to determine wholesale price
inflation, but varies slightly as to the weighted average of the
goods measured in the index. The 1995 figures were also
recalculated using the new IPIM index.
___________________
Source: Banco Central de la Republica Argentina.
ARGENTINE GROSS DOMESTIC PRODUCT. The following table
sets forth Argentina's GDP for the years 1989 through 1997, and
annualized GDP for the first quarter of 1998, at current and
constant prices.
92
<PAGE>
Gross Domestic
Product at Change from Prior
Gross Constant Year at
Domestic Product 1986 Prices Constant Prices
________________ _______________ _______________
(millions of Argentine Pesos) (percent)
1991 180,898 10,270 8.9
1992 226,847 11,159 8.7
1993 257,570 11,832 6.0
1994 281,600 12,710 7.4
1995 279,500 12,150 (4.6)
1996 294,100 12,672 4.3
1997 327,900 N/A 8.4
1998
1st Qtr N/A N/A 6.9
_______________
Source: Banco Central de la Republica Argentina.
1996, 1997 and 1998 data are preliminary.
GLOBAL DOLLAR GOVERNMENT PORTFOLIO
GENERAL. The primary objective of the Global Dollar
Government Portfolio is to seek a high level of current income
through investing substantially all of its assets in U.S. and
non-U.S. fixed-income securities denominated only in U.S.
Dollars. As a secondary objective, the Portfolio seeks capital
appreciation. In seeking to achieve these objectives, the
Portfolio invests at least 65% of its total assets in
fixed-income securities issued or guaranteed by foreign
governments, including participations in loans between foreign
governments and financial institutions, and interests in entities
organized and operated for the purpose of restructuring the
investment characteristics of instruments issued or guaranteed by
foreign governments (Sovereign Debt Obligations). The
Portfolio's investments in Sovereign Debt Obligations emphasize
obligations of a type customarily referred to as Brady Bonds,
that are issued as part of debt restructurings and that are
collateralized in full as to principal due at maturity by zero
coupon obligations issued by the U.S. Government, its agencies or
instrumentalities. The Portfolio may also invest up to 35% of
its total assets in U.S. corporate fixed-income securities and
non-U.S. corporate fixed-income securities. The Portfolio limits
its investments in Sovereign Debt Obligations, U.S. and non-U.S.
corporate fixed-income securities to U.S. Dollar denominated
securities.
93
<PAGE>
The Portfolio may invest up to 30% of its total assets
in the Sovereign Debt Obligations and corporate fixed-income
securities of issuers in any one of Argentina, Brazil, Mexico,
Morocco, the Philippines, Russia or Venezuela, and the Portfolio
will limit investments in the Sovereign Debt Obligations of each
such country (or of any other single foreign country) to less
than 25% of its total assets. The Portfolio expects that it will
not invest more than 10% of its total assets in the Sovereign
Debt Obligations and corporate fixed-income securities of issuers
in any other single foreign country. At present, each of the
above-named countries is an emerging market country.
In selecting and allocating assets among countries, the
Adviser develops a long-term view of those countries and analyzes
sovereign risk by focusing on factors such as a country's public
finances, monetary policy, external accounts, financial markets,
stability of exchange rate policy and labor conditions. In
selecting and allocating assets among corporate issuers within a
given country, the Adviser considers the relative financial
strength of issuers and expects to emphasize investments in
securities of issuers that, in the Advisers opinion, are
undervalued within each market sector. The Portfolio is not
required to invest any specified minimum amount of its total
assets in the securities or obligations of issuers located in any
particular country.
Sovereign Debt Obligations held by the Portfolio take
the form of bonds, notes, bills, debentures, warrants, short-term
paper, loan participations, loan assignments and interests issued
by entities organized and operated for the purpose of
restructuring the investment characteristics of other Sovereign
Debt Obligations. Sovereign Debt Obligations held by the
Portfolio generally are not traded on a securities exchange. The
U.S. and non-U.S. corporate fixed-income securities held by the
Portfolio include debt securities, convertible securities and
preferred stocks of corporate issuers.
Substantially all of the Portfolio's assets are invested
in lower-rated securities, which may include securities having
the lowest rating for non-subordinated debt instruments (i.e.,
rated C by Moody's or CCC or lower by S&P, Duff & Phelps and
Fitch) and unrated securities of comparable investment quality.
These securities are considered to have extremely poor prospects
of ever attaining any real investment standing, to have a current
identifiable vulnerability to default, to be unlikely to have the
capacity to pay interest and repay principal when due in the
event of adverse business, financial or economic conditions,
and/or to be in default or not current, in the payment of
interest or principal. The Portfolio may also invest in
investment grade securities. Unrated securities will be
considered for investment by the Portfolio when the Adviser
94
<PAGE>
believes that the financial condition of the issuers of such
obligations and the protection afforded by the terms of the
obligations themselves limit the risk to the Adviser to a degree
comparable to that of rated securities which are consistent with
the Fund's investment objectives and policies.
INVESTMENT POLICIES
BRADY BONDS. As noted above, a significant portion of
the Portfolio's investment portfolio consists of debt obligations
customarily referred to as Brady Bonds which are created through
the exchange of existing commercial bank loans to foreign
entities for new obligations in connection with debt
restructurings under a plan introduced by former U.S. Secretary
of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Bonds have been issued only recently, and,
accordingly, do not have a long payment history. They may be
collateralized or uncollateralized and issued in various
currencies (although most are dollar-denominated) and they are
actively traded in the over-the-counter secondary market.
U.S. Dollar-denominated, Collateralized Brady Bonds,
which may be fixed rate par bonds or floating rate discount
bonds, are generally collateralized in full as to principal due
at maturity by U.S. Treasury zero coupon obligations that have
the same maturity as the Brady Bonds. Interest payments on these
Brady Bonds generally are collateralized by cash or securities in
an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments based on the
applicable interest rate at that time and is adjusted at regular
intervals thereafter. Certain Brady Bonds are entitled to value
recovery payments in certain circumstances, which in effect
constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having up to
four valuation components: (i) collateralized repayment of
principal at final maturity; (ii) collateralized interest
payments; (iii) uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the residual risk). In the
event of a default with respect to Collateralized Brady Bonds as
a result of which the payment obligations of the issuer are
accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed
to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent
to the scheduled maturity of the defaulted Brady Bonds which will
continue to be outstanding, at which time the face amount of the
collateral will equal the principal payments that would have then
been due on the Brady Bonds in the normal course. In addition,
in light of the residual risk of Brady Bonds and, among other
95
<PAGE>
factors, the history of defaults with respect to commercial bank
loans by public and private entities of countries issuing Brady
Bonds, investments in Brady Bonds are to be viewed as
speculative.
Brady Plan debt restructurings totaling more than $120
billion have been implemented to date in Argentina, Bolivia,
Brazil, Costa Rica, the Dominican Republic, Ecuador, Mexico,
Nigeria, the Philippines, Uruguay and Venezuela with the largest
proportion of Brady Bonds having been issued to date by
Argentina, Brazil, Mexico and Venezuela.
Most Argentine, Brazilian, Dominican (Republic) and
Mexican Brady Bonds and a significant portion of the Venezuelan
Brady Bonds issued to date are Collateralized Brady Bonds with
interest coupon payments collateralized on a rolling-forward
basis by funds or securities held in escrow by an agent for the
bondholders. Of the other issuers of Brady Bonds, Bolivia,
Nigeria, the Philippines and Uruguay have to date issued
Collateralized Brady Bonds. Thus, at the present time Argentina,
Bolivia, Brazil, the Dominican Republic, Mexico, Nigeria, the
Philippines, Uruguay and Venezuela are the only countries which
have issued Collateralized Brady Bonds.
STRUCTURED SECURITIES. The Portfolio may invest up to
25% of its total assets in interests in entities organized and
operated solely for the purpose of restructuring the investment
characteristics of Sovereign Debt Obligations. This type of
restructuring involves the deposit with or purchase by an entity,
such as a corporation or trust, of specified instruments (such as
commercial bank loans or Brady Bonds) and the issuance by that
entity of one or more classes of securities (Structured
Securities) backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued Structured
Securities to create securities with different investment
characteristics such as varying maturities, payment priorities
and interest rate provisions, and the extent of the payments made
with respect to Structured Securities is dependent on the extent
of the cash flow on the underlying instruments. Because
Structured Securities of the type in which the Portfolio
anticipates it will invest typically involve no credit
enhancement, their credit risk generally will be equivalent to
that of the underlying instruments.
The Portfolio is permitted to invest in a class of
Structured Securities that is either subordinated or
unsubordinated to the right of payment of another class.
Subordinated Structured Securities typically have higher yields
and present greater risks than unsubordinated Structured
Securities.
96
<PAGE>
Certain issuers of Structured Securities may be deemed
to be investment companies as defined in the 1940 Act. As a
result, the Portfolio's investment in these Structured Securities
may be limited by the restrictions contained in the 1940 Act
described in the Prospectus under "Investment in Other Investment
Companies."
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Portfolio may
invest in fixed and floating rate loans (Loans) arranged through
private negotiations between an issuer of Sovereign Debt
Obligations and one or more financial institutions (Lenders).
The Portfolio's investments in Loans are expected in most
instances to be in the form of participations in Loans
(Participations) and assignments of all or a portion of Loans
(Assignments) from third parties. The Portfolio may invest up to
25% of its total assets in Participations and Assignments. The
government that is the borrower on the Loan will be considered by
the Portfolio to be the Issuer of a Participation or Assignment
for purposes of the Portfolio's fundamental investment policy
that it will not invest 25% or more of its total assets in
securities of issuers conducting their principal business
activities in the same industry (i.e., foreign government). The
Portfolio's investment in Participations typically will result in
the Portfolio having a contractual relationship only with the
Lender and not with the borrower. The Portfolio will have the
right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Participations,
the Portfolio generally will have no right to enforce compliance
by the borrower with the terms of the loan agreement relating to
the Loan, nor any rights of set-off against the borrower, and the
Portfolio may not directly benefit from any collateral supporting
the Loan in which it has purchased the Participation. As a
result, the Portfolio may be subject to the credit risk of both
the borrower and the Lender that is selling the Participation.
In the event of the insolvency of the Lender selling a
Participation, the Portfolio may be treated as a general creditor
of the Lender and may not benefit from any set-off between the
Lender and the borrower. Certain Participations may be
structured in a manner designed to avoid purchasers of
Participations being subject to the credit risk of the Lender
with respect to the Participation, but even under such a
structure, in the event of the Lenders insolvency, the Lenders
servicing of the Participation may be delayed and the
assignability of the Participation impaired. The Portfolio will
acquire Participations only the Lender interpositioned between
the Portfolio and the borrower in a Lender having total assets of
more than $25 billion and whose senior unsecured debt is rated
investment grade or higher (i.e. Baa or higher by Moody's or BBB
or higher by S&P, Duff & Phelps or Fitch).
97
<PAGE>
When the Portfolio purchases Assignments from Lenders it
will acquire direct rights against the borrower on the Loan.
Because Assignments are arranged through private negotiations
between potential assignees and potential assignors, however, the
rights and obligations acquired by the Portfolio as the purchaser
of an assignment may differ from, and be more limited than, those
held by the assigning Lender. The assignability of certain
Sovereign Debt Obligations is restricted by the governing
documentation as to the nature of the assignee such that the only
way in which the Portfolio may acquire an interest in a Loan is
through a Participation and not an Assignment. The Portfolio may
have difficulty disposing of Assignments and Participations
because to do so it will have to assign such securities to a
third party. Because there is no liquid market for such
securities, the Portfolio anticipates that such securities could
be sold only to a limited number of institutional investors. The
lack of a liquid secondary market may have an adverse impact on
the value of such securities and the Portfolio's ability to
dispose of particular Assignments or Participations when
necessary to meet the Portfolio's liquidity needs in response to
a specific economic event such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary
market for Assignments and Participations also may make it more
difficult for the Portfolio to assign a value to these securities
for purposes of valuing the Portfolio's portfolio and calculating
its asset value.
U.S. AND NON-U.S. CORPORATE FIXED INCOME SECURITIES.
U.S. and non-U.S. corporate fixed-income securities include debt
securities, convertible securities and preferred stocks of
corporate issuers. Differing yields on fixed-income securities
of the same maturity are a function of several factors, including
the relative financial strength of the issuers. Higher yields
are generally available from securities in the lower rating
categories. When the spread between the yields of lower rated
obligations and those of more highly rated issues is relatively
narrow, the Portfolio may invest in the latter since they may
provide attractive returns with somewhat less risk. The
Portfolio expects to invest in investment grade securities (i.e.
securities rated Baa or better by Moody's or BBB or better by
S&P, Duff & Phelps or Fitch) and in high yield, high risk lower
rated securities (i.e., securities rated lower than Baa by
Moody's or BBB by S&P, Duff & Phelps or Fitch) and in unrated
securities of comparable credit quality. Unrated securities are
considered for investment by the Portfolio when the Adviser
believes that the financial condition of the issuers of such
obligations and the protection afforded by the terms of the
obligations themselves limit the risk to the Portfolio to a
degree comparable to that of rated securities which are
consistent with the Portfolio's investment objectives and
policies. See "Certain Risk Considerations" for a discussion of
98
<PAGE>
the risks associated with the Portfolio's investments in U.S. and
non-U.S. corporate fixed-income securities.
INTEREST RATE TRANSACTIONS. The Portfolio may enter
into interest rate swaps and may purchase or sell interest rate
caps and floors. The use of interest rate swaps is a highly
specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its
forecasts of market values, interest rates and other applicable
factors, the investment performance of the Portfolio would
diminish compared with what it would have been if these
investment techniques were not used. Moreover, even if the
Adviser is correct in its forecasts, there is a risk that the
swap position may correlate imperfectly with the price of the
asset or liability being hedged.
There is no limit on the amount of interest rate swap
transactions that may be entered into by the Portfolio. These
transactions do not involve the delivery of securities or other
underlying assets of principal. Accordingly, the risk of loss
with respect to interest rate swaps is limited to the net amount
of interest payments that the Portfolio is contractually
obligated to make. If the other party to an interest rate swap
defaults, the Portfolio's risk of loss consists of the net amount
of interests payments that the Portfolio contractually is
entitled to receive. The Portfolio may purchase and sell (i.e.,
write) caps and floors without limitation, subject to the
segregated account requirement described in the Prospectus under
"-- Other Investment Policies and Techniques -- Interest Rate
Transactions".
FORWARD COMMITMENTS. The Portfolio may enter into
forward commitments for the purchase or sale of securities. Such
transactions may include purchases on a when-issued basis or
purchases or sales on a delayed delivery basis. In some cases, a
forward commitment may be conditioned upon the occurrence of a
subsequent event, such as approval and consummation of a merger,
corporate reorganization or debt restructuring (i.e., a when, as
and if issued trade).
OPTIONS. The Portfolio may write covered put and call
options and purchase put and call options on securities of the
types in which it is permitted to invest that are traded on U.S.
and foreign securities exchanges. The Portfolio may also write
call options for cross-hedging purposes. There are no specific
limitations on the Fund's writing and purchasing of options.
If a put option written by the Portfolio were exercised,
the Portfolio would be obligated to purchase the underlying
security at the exercise price. If a call option written by the
99
<PAGE>
Portfolio were exercised, the Portfolio would be obligated to
sell the underlying security at the exercise price. For
additional information on the use, risks and costs of options,
see Appendix C.
The Portfolio may purchase or write options on
securities of the types in which it is permitted to invest in
privately negotiated (i.e., over-the-counter) transactions. The
Portfolio will effect such transactions only with investment
dealers and other financial institutions (such as commercial
banks or savings and loan institutions) deemed creditworthy by
the Adviser, and the Adviser has adopted procedures for
monitoring the creditworthiness of such entities. Options
purchased or written by the Portfolio in negotiated transactions
are illiquid and it may not be possible for the Portfolio to
effect a closing transaction at a time when the Adviser believes
it would be advantageous to do so. See "Description of the Fund
- -- Additional Investment Policies and Practices -- Illiquid
Securities in the Fund's Prospectus".
OPTIONS ON SECURITIES INDICES. The Portfolio may
purchase and sell exchange-traded index options on any securities
index composed of the types of securities in which it may invest.
An option on a securities index is similar to an option on a
security except that, rather than the right to take or make
delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of
the chosen index is greater than (in the case of a call) or less
than (in the case of a put) the exercise price of the option.
There are no specific limitations on the Portfolio's purchasing
and selling of options on securities indices.
Through the purchase of listed index options, the
Portfolio could achieve many of the same objectives as through
the use of options on individual securities. Price movements in
the Portfolio's investment portfolio securities probably will not
correlate perfectly with movements in the level of the index and,
therefore, the Portfolio would bear a risk of loss on index
options purchased by it if favorable price movements of the
hedged portfolio securities do not equal or exceed losses on the
options or if adverse price movements of the hedged portfolio
securities are greater than gains realized from the options.
Warrants. The Portfolio may invest in warrants, which
are option securities permitting their holder to subscribe for
other securities. The Portfolio may invest in warrants for debt
securities or warrants for equity securities that are acquired in
connection with debt instruments. Warrants do not carry with
them dividend or voting rights with respect to the securities
that they entitle their holder to purchase, and they do not
100
<PAGE>
represent any rights in the assets of the issuer. As a result,
an investment in warrants may be considered more speculative than
certain other types of investments. In addition, the value of a
warrant does not necessarily change with the value of the
underlying securities, and a warrant ceases to have value if it
is not exercised prior to its expiration date. The Portfolio
does not intend to retain in its investment portfolio any common
stock received upon the exercise of a warrant and will sell the
common stock as promptly as practicable and in a manner that it
believes will reduce its risk of a loss in connection with the
sale. The Portfolio does not intend to retain in its investment
portfolio any warrant for equity securities acquired as a unit
with a debt instrument, if the warrant begins to trade separately
from the related debt instrument.
REPURCHASE AGREEMENTS. For information regarding
repurchase agreements, see "Other Investment Policies -
Repurchase Agreements," below.
ILLIQUID SECURITIES. The fund has adopted the following
investment policy which may be changed by the vote of the Board
of Directors.
The Portfolio will not invest in illiquid securities if
immediately after such investment more than 15% of the
Portfolio's net assets (taken at market value) would be invested
in such securities. For this purpose, illiquid securities
include, among others, securities that are illiquid by virtue of
the absence of a readily available market or legal or contractual
restriction on resale.
For additional information regarding illiquid
securities, see "Other Investment Policies -- Illiquid
Securities," below.
INVESTMENT IN CLOSED-END INVESTMENT COMPANIES. The
Portfolio may invest in other investment companies whose
investment objectives and policies are consistent with those of
the Portfolio. In accordance with the 1940 Act, the Portfolio
may invest up to 10% of its assets in securities of other
investment companies. In addition, under the 1940 Act, the
Portfolio may not own more than 3% of the total outstanding
voting stock of any investment company and not more than 5% of
the Portfolio's total assets may be invested in the securities of
any investment company. If the Portfolio acquires shares in
investment companies, shareholders would bear both their
proportionate share of expenses in the Portfolio (including
advisory fees) and, indirectly, the expenses of such investment
companies (including management and advisory fees).
101
<PAGE>
PORTFOLIO TURNOVER. The Portfolio may engage in active
short-term trading to benefit from yield disparities among
different issues of securities, to seek short-term profits during
periods of fluctuating interest rates or for other reasons. Such
trading will increase the Portfolio's rate of turnover and the
incidence of short-term capital gain taxable as ordinary income.
The portfolio turnover rates of securities of the Portfolio for
the fiscal years ended December 31, 1996 and December 31, 1997
were 155% and 214%, respectively. Management anticipates that
the annual turnover in the Fund will not be in excess of 500%.
An annual turnover rate of 500% occurs, for example, when all of
the securities in the Portfolio's portfolio are replaced five
times in a period of one year. Such high rate of portfolio
turnover involves correspondingly greater expenses than a lower
rate, which expenses must be borne by the Fund and its
shareholders. High portfolio turnover also may result in the
realization of substantial net short-term capital gains. See
"Dividends, Distributions and Taxes" and "Portfolio
Transactions."
CERTAIN RISK CONSIDERATIONS
RISKS OF FOREIGN INVESTMENTS. Foreign issuers are
subject to accounting and financial standards and requirements
that differ, in some cases significantly, from those applicable
to U.S. issuers. In particular, the assets and profits appearing
on the financial statements of a foreign issuer may not reflect
its financial position or results of operations in the way they
would be reflected had the financial statement been prepared in
accordance with U.S. generally accepted accounting principles.
In addition, for an issuer that keeps accounting records in local
currency, inflation accounting rules in some of the countries in
which the Portfolio may invest require, for both tax and
accounting purposes, that certain assets and liabilities be
restated on the issuers balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation
accounting may indirectly generate losses or profits.
Consequently, financial data may be materially affected by
restatements for inflation and may not accurately reflect the
real condition of those issuers and securities markets.
Substantially less information is publicly available abut certain
non-U.S. issuers than is available about U.S. issuers.
Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar
developments, such as military coups, have occurred in the past
in countries in which the Portfolio invests and could adversely
affect the Portfolio's assets should these conditions or events
recur.
102
<PAGE>
Foreign investment in certain foreign securities is
restricted or controlled to varying degrees. These restrictions
or controls may at times limit or preclude foreign investment in
certain foreign securities and increase the costs and expenses of
the Portfolio. Certain countries in which the Portfolio invest
require governmental approval prior to investments by foreign
persons, limit the amount of investment by foreign persons in a
particular issuer, limit the investment by foreign persons only
to a specific class of securities of an issuer that may have less
advantageous rights than the classes available for purchase by
domiciliaries of the countries and/or impose additional taxes on
foreign investors.
Certain countries other than those on which the
Portfolio focus its investments may require governmental approval
for the repatriation of investment income, capital or the
proceeds of sales of securities by foreign investors. In
addition, if a deterioration occurs in a country's balance of
payments, the country could impose temporary restrictions on
foreign capital remittances. The Portfolio could be adversely
affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by
the application to the Portfolio of any restrictions on
investments. Investing in local markets may require the
portfolio to adopt special procedures, seek local governmental
approvals or take other actions, each of which may involve
additional costs to the Portfolio.
Income from certain investments held by the Portfolio
could be reduced by foreign income taxes, including withholding
taxes. It is impossible to determine the effective rate of
foreign tax in advance. The Portfolio's net asset value may also
be affected by changes in the rates or methods of taxation
applicable to the Portfolio or to entities in which the Portfolio
has invested. The Adviser generally considers the cost of any
taxes in determining whether to acquire any particular
investments, but can provide no assurance that the tax treatment
of investments held by the Portfolio will not be subject to
change.
SOVEREIGN DEBT OBLIGATIONS. No established secondary
markets may exist for many of the Sovereign Debt Obligations in
which the Portfolio will invest. Reduced secondary market
liquidity may have an adverse effect on the market price and the
Portfolio's ability to dispose of particular instruments when
necessary to meet its liquidity requirements or in response to
specific economic events such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market
liquidity for certain Sovereign Debt Obligations may also make it
more difficult for the Portfolio to obtain accurate market
quotations for purpose of valuing its portfolio. Market
103
<PAGE>
quotations are generally available on many Sovereign Debt
Obligations only from a limited number of dealers and may not
necessarily represent firm bids of those dealers or prices for
actual sales.
By investing in Sovereign Debt Obligations, the
Portfolio is exposed to the direct or indirect consequences of
political, social and economic changes in various countries.
Political changes in a country may affect the willingness of a
foreign government to make or provide for timely payments of its
obligations. The country's economic status, as reflected, among
other things, in its inflation rate, the amount of its external
debt and its gross domestic product, also affects the governments
ability to honor its obligations.
Many countries providing investment opportunities for
the Portfolio have experienced substantial, and in some periods
extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue
to have adverse effects on the economies and securities markets
of certain of these countries. In an attempt to control
inflation, wage and price controls have been imposed in certain
countries.
Investing in Sovereign Debt Obligations involves
economic and political risks. The Sovereign Debt Obligations in
which the Portfolio will invest in most cases pertain to
countries that are among the worlds largest debtors to commercial
banks, foreign governments, international financial organizations
and other financial institutions. In recent years, the
governments of some of these countries have encountered
difficulties in servicing their external debt obligations, which
led to defaults on certain obligations and the restructuring of
certain indebtedness. Restructuring arrangements have included,
among other things, reducing and rescheduling interest and
principal payments by negotiating new or amended credit
agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance
interest payments. Certain governments have not been able to
make payments of interest on or principal of Sovereign Debt
Obligations as those payments have come due. Obligations arising
from past restructuring agreements may affect the economic
performance and political and social stability of those issuers.
Central banks and other governmental authorities which
control the servicing of Sovereign Debt Obligations may not be
willing or able to permit the payment of the principal or
interest when due in accordance with the terms of the
obligations. As a result, the issuers of Sovereign Debt
Obligations may default on their obligations. Defaults on
certain Sovereign Debt Obligations have occurred in the past.
104
<PAGE>
Holders of certain Sovereign Debt Obligations may be requested to
participate in the restructuring and rescheduling of these
obligations and to extend further loans to the issuers. The
interests of holders of Sovereign Debt Obligations could be
adversely affected in the course of restructuring arrangements or
by certain other factors referred to below. Furthermore, some of
the participants in the secondary market for Sovereign Debt
Obligations may also be directly involved in negotiating the
terms of these arrangements and may therefore have access to
information not available to other market participants.
The ability of governments to make timely payments on
their obligations is likely to be influenced strongly by the
issuers balance of payments, and its access to international
credits and investments. A country whose exports are
concentrated in a few commodities could be vulnerable to a
decline in the international prices of one or more of those
commodities. Increased protectionism on the part of a country's
trading partners could also adversely affect the country's
exports and diminish its trade account surplus, if any. To the
extent that a country receives payment for its exports in
currencies other than dollars, its ability to make debt payments
denominated in dollars could be adversely affected.
To the extent that a country develops a trade deficit,
it will need to depend on continuing loans from foreign
governments, multilateral organizations or private commercial
banks, aid payments from foreign governments and on inflows of
foreign investment. The access of a country to these forms of
external funding may not be certain, and a withdrawal of external
funding could adversely affect the capacity of a government to
make payments on its obligations. In addition, the cost of
servicing debt obligations can be affected by a change in
international interest rates since the majority of these
obligations carry interest rates that are adjusted periodically
based upon international rates.
Another factor bearing on the ability of a country to
repay Sovereign Debt Obligations is the level of the country's
international reserves. Fluctuations in the level of these
reserves can affect the amount of foreign exchange readily
available for external debt payments and, thus, could have a
bearing on the capacity of the country to make payments in its
Sovereign Debt Obligations.
The Portfolio is permitted to invest in Sovereign Debt
Obligations that are not current in the payment of interest or
principal or are in default, so long as the Adviser believes it
to be consistent with the Portfolio's investment objectives. The
Portfolio may have limited legal recourse in the event of a
default with respect to certain Sovereign Debt Obligations it
105
<PAGE>
holds. For example, remedies from defaults on certain Sovereign
Debt Obligations, unlike those on private debt, must, in some
cases, be pursued in the courts of the defaulting party itself.
Legal recourse therefore may be significantly diminished.
Bankruptcy, moratorium and other similar laws applicable to
issuers of Sovereign Debt Obligations may be substantially
different from those applicable to issuers of private debt
obligations. The political context, expressed as the willingness
of an issuer of Sovereign Debt Obligations to meet the terms of
the debt obligation, for example, is of considerable importance.
In addition, no assurance can be given that the holders of
commercial bank debt will not contest payments to the holders of
securities issued by foreign governments in the event of default
under commercial bank loan agreements.
U.S. CORPORATE FIXED INCOME SECURITIES. The U.S.
corporate fixed-income securities in which the Portfolio invests
may include securities issued in connection with corporate
restructurings such as takeovers or leveraged buyouts, which may
pose particular risks. Securities issued to finance corporate
restructuring may have special credit risks due to the highly
leveraged conditions of the issuer. In addition, such issuers
may lose experienced management as a result of the restructuring.
Finally, the market price of such securities may be more volatile
to the extent that expected benefits from the restructuring do
not materialize. The Portfolio may also invest in U.S. corporate
fixed-income securities that are not current in the payment of
interest or principal or are in default, so long as the Adviser
believes such investment is consistent with the Portfolio's
investment objectives. The Portfolio's rights with respect to
defaults on such securities will be subject to applicable U.S.
bankruptcy, moratorium and other similar laws.
INVESTMENT RESTRICTIONS. The following restrictions,
which are applicable to the Global Dollar Government Portfolio,
supplement those set forth above and in the Prospectus, and may
not be changed without Shareholder Approval, as defined under the
caption "General Information", below.
The Portfolio may not:
1. Make loans except through (i) the purchase of debt
obligations in accordance with its investment objectives and
policies; (ii) the lending of portfolio securities; or (iii) the
use of repurchase agreements;
2. Invest in companies for the purpose of exercising
control;
3. Make short sales of securities or maintain a short
position, unless at all times when a short position is open it
106
<PAGE>
owns an equal amount of such securities or securities convertible
into or exchangeable for, without payment of any further
consideration, securities of the same issue as, and equal in
amount to, the securities sold short (short sales against the
box), and unless not more than 10% of the Portfolio's net assets
(taken at market value) is held as collateral for such sales at
any one time (it being the Portfolio's present intention to make
such sales only for the purpose of deferring realization of gain
or loss for federal income tax purposes); or
4. (i) Purchase or sell real estate, except that it
may purchase and sell securities of companies which deal in real
estate or interests therein and securities that are secured by
real estate, provided such securities are securities of the type
in which the Portfolio may invest; (ii) purchase or sell
commodities or commodity contracts, including futures contracts
(except forward commitment contracts or contracts for the future
acquisition or delivery of debt securities); (iii) invest in
interests in oil, gas, or other mineral exploration or
development programs; (iv) purchase securities on margin, except
for such short-term credits as may be necessary for the clearance
of transactions; and (v) act as an underwriter of securities,
except that the Portfolio may acquire restricted securities under
circumstances in which, if such securities were sold, the
Portfolio might be deemed to be an underwriter for purposes of
the Securities Act.
UTILITY INCOME PORTFOLIO
GENERAL. The objective of the Utility Income Portfolio
is to seek current income and capital appreciation by investing
primarily in equity and fixed-income securities of companies in
the utilities industry. The Portfolio may invest in securities
of both United States and foreign issuers, although no more than
15% of the Portfolio's total assets will be invested in issuers
of any one foreign country. The utilities industry consists of
companies engaged in (i) the manufacture, production, generation,
provision, transmission, sale and distribution of gas and
electric energy, and communications equipment and services,
including telephone, telegraph, satellite, microwave and other
companies providing communication facilities for the public, or
(ii) the provision of other utility or utility related goods and
services, including, but not limited to, entities engaged in
water provision, cogeneration, waste disposal system provision,
solid waste electric generation, independent power producers and
non-utility generators. As a matter of fundamental policy, the
Portfolio, under normal circumstances, invests at least 65% of
the value of its total assets in securities of companies in the
utilities industry. The Portfolio considers a company to be in
the utilities industry if, during the most recent twelve month
period, at least 50% of the company's gross revenues, on a
107
<PAGE>
consolidated basis, is derived from the utilities industry. At
least 65% of the Portfolio's total assets are to be invested in
income-producing securities.
The Portfolio's investment objective and policies are
designed to take advantage of the characteristics and historical
performance of securities of utilities companies. Many of these
companies have established a reputation for paying regular
quarterly dividends and for increasing their common stock
dividends over time. In evaluating particular issuers, the
Adviser considers a number of factors, including historical
growth rates and rates of return on capital, financial condition
and resources, management skills and such industry factors as
regulatory environment and energy sources. With respect to
investments in equity securities, the Adviser considers the
prospective growth in earnings and dividends in relation to
price/earnings ratios, yield and risk. The Adviser believes that
above-average dividend returns and below-average price/earnings
ratios are factors that not only provide current income but also
generally tend to moderate risk and to afford opportunity for
appreciation of securities owned by the Portfolio.
The Portfolio invests in equity securities, such as
common stocks, securities convertible into common stocks and
rights and warrants to subscribe for the purchase of common
stocks and in fixed-income securities, such as bonds and
preferred stocks. The Portfolio may vary the percentage of
assets invested in any one type of security based upon the
Advisers evaluation as to the appropriate portfolio structure for
achieving the Portfolio's investment objective under prevailing
market, economic and financial conditions. Certain securities
(such as fixed-income securities) will be selected on the basis
of their current yield, while other securities may be purchased
for their growth potential.
INVESTMENT POLICIES
CONVERTIBLE SECURITIES. Convertible securities include
bonds, debentures, corporate notes and preferred stocks that are
convertible at a stated exchange rate into common stock. Prior
to their conversion, convertible securities have the same general
characteristics as non-convertible debt securities which provide
a stable stream of income with generally higher yields than those
of equity securities of the same or similar issuers. The price
of a convertible security will normally vary with changes in the
price of the underlying stock although the higher yield tends to
make the convertible security less volatile than the underlying
common stock. As with debt securities, the market value of
convertible securities tends to decrease as interest rates rise
and, conversely, to increase as interest rates decline. While
convertible securities generally offer lower interest or dividend
108
<PAGE>
yields than non-convertible debt securities of similar quality,
they offer investors the potential to benefit from increases in
the market price of the underlying common stock. When the market
price of the common stock underlying a convertible security
increases, the price of the convertible security increasingly
reflects the value of the underlying common stock and may rise
accordingly. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on
a yield basis, and thus may not depreciate to the same extent as
the underlying common stock. Convertible securities rank senior
to common stocks on an issuers capital structure. They are
consequently of higher quality and entail less risk than the
issuers common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed-income
security. The Portfolio may invest up to 30% of its net assets
in the convertible securities of companies whose common stocks
are eligible for purchase by the Portfolio under the investment
policies described above and in the Prospectus.
RIGHTS OR WARRANTS. The Portfolio may invest up to 5%
of its net assets in rights or warrants which entitle the holder
to buy equity securities at a specific price for a specific
period of time, but will do so only if the equity securities
themselves are deemed appropriate by the Adviser for inclusion in
the Portfolio's investment portfolio. Rights and warrants
entitle the holder to buy equity securities at a specific price
for a specific period of time. Rights are similar to warrants
except that they have a substantially shorter duration. Rights
and warrants may be considered more speculative than certain
other types of investments in that they do not entitle a holder
to dividends or voting rights with respect to the underlying
securities nor do they represent any rights in the assets of the
issuing company. The value of a right or warrant does not
necessarily change with the value of the underlying security,
although the value of a right or warrant may decline because of a
decrease in the value of the underlying security, the passage of
time or a change in perception as to the potential of the
underlying security, or any combination thereof. If the market
price of the underlying security is below the exercise price set
forth in the warrant on the expiration date, the warrant will
expire worthless. Moreover, a right or warrant ceases to have
value if it is not exercised prior to the expiration date.
U.S. GOVERNMENT SECURITIES. For a general description
of obligations issued or guaranteed by U.S. Government agencies
or instrumentalities, see Appendix A.
OPTIONS. For additional information on the use, risks
and costs of options, see Appendix C.
109
<PAGE>
OPTIONS ON SECURITIES INDICES. The Portfolio may
purchase and sell exchange-traded index options on any securities
index composed of the types of securities in which it may invest.
An option on a securities index is similar to an option on a
security except that, rather than the right to take or make
delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of
the chosen index is greater than (in the case of a call) or less
than (in the case of a put) the exercise price of the option.
There are no specific limitations on the Portfolio's purchasing
and selling of options on securities indices.
Through the purchase of listed index options, the
Portfolio could achieve many of the same objectives as through
the use of options on individual securities. Price movements in
the Portfolio's portfolio securities probably will not correlate
perfectly with movements in the level of the index and,
therefore, the Portfolio would bear a risk of loss on index
options purchased by it if favorable price movements of the
hedged portfolio securities do not equal or exceed losses on the
options or if adverse price movements of the hedged portfolio
securities are greater than gains realized from the options.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. For
a discussion regarding futures contracts and options on futures
contracts, see "North American Government Income Portfolio --
Futures Contracts" and "Options on Futures Contracts", above.
For additional information on the use, risks and costs
of futures contracts and options on futures contracts, see
Appendix B.
OPTIONS ON FOREIGN CURRENCIES. For additional
information on the use, risks and costs of options on foreign
currencies, see Appendix B.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The
Portfolio may purchase or sell forward foreign currency exchange
contracts (forward contracts). For a discussion regarding
forward foreign currency exchange contracts, see "North American
Government Income Portfolio" -- "Forward Foreign Currency
Exchange Contracts," above.
REPURCHASE AGREEMENTS. The Portfolio may invest in
repurchase agreements pertaining to the types of securities in
which it invests. For additional information regarding
repurchase agreements, see "Other Investment Policies --
Repurchase Agreements," below.
110
<PAGE>
ILLIQUID SECURITIES. The Fund has adopted the following
investment policy on behalf of the Portfolio which may be changed
by the vote of the Board of Directors. The Portfolio will not
invest in illiquid securities if immediately after such
investment more than 15% of the Portfolio's net assets (taken at
market value) would be invested in such securities. For this
purpose, illiquid securities include, among others, securities
that are illiquid by virtue of the absence of a readily available
market or legal or contractual restriction on resale. See "Other
Investment Policies -- Illiquid Securities", below, for a more
detailed discussion of the Portfolio's investment policy on
restricted securities and securities with legal or contractual
restrictions on resale.
INVESTMENT IN CLOSED-END INVESTMENT COMPANIES. The
Portfolio may invest in closed-end companies whose investment
objectives and policies are consistent with those of the
Portfolio. The Portfolio may invest up to 5% of its net assets in
securities of closed-end investment companies. However, the
Portfolio may not own more than 3% of the total outstanding
voting stock of any closed-end investment company. If the
Portfolio acquires shares in closed-end investment companies,
shareholders would bear both their proportionate share of
expenses in the Portfolio (including advisory fees) and,
indirectly, the expenses of such investment companies (including
management and advisory fees).
PORTFOLIO TURNOVER. The Portfolio may engage in active
short-term trading in connection with its investment in shorter-
term fixed-income securities in order to benefit from yield
disparities among different issues of securities, to seek short-
term profits during periods of fluctuating interest rates, or for
other reasons. Such trading will increase the Portfolio's rate
of turnover and the incidence of short-term capital gain taxable
as ordinary income. It is anticipated that the Portfolio's
annual turnover rate will not exceed 200%. The Portfolio
turnover rates of the securities of the Portfolio for the fiscal
years ended December 31, 1996 and December 31, 1997 were 75% and
30%, respectively. An annual turnover rate of 200% occurs, for
example, when all of the securities in the Portfolio's portfolio
are replaced twice in a period of one year. A portfolio turnover
rate approximating 200% involves correspondingly greater
brokerage commissions than would a lower rate, which expenses
must be borne by the Portfolio and its shareholders.
CERTAIN RISK CONSIDERATIONS
UTILITY COMPANY RISKS. Utility companies may be subject
to a variety of risks depending, in part, on such factors as the
type of utility involved and its geographic location. The
revenues of domestic and foreign utilities companies generally
111
<PAGE>
reflect the economic growth and development in the geographic
areas in which they do business. The Adviser takes into account
anticipated economic growth rates and other economic developments
when selecting securities of utility companies. Some of the risks
involved in investing in the principal sectors of the utilities
industry are discussed below.
Telecommunications regulation typically limits rates
charged, returns earned, providers of services, types of
services, ownership, areas served and terms for dealing with
competitors and customers. Telecommunications regulation
generally has tended to be less stringent for newer services,
such as mobile services, than for traditional telephone service,
although there can be no assurances that such newer services will
not be heavily regulated in the future. Regulation may limit
rates based on an authorized level of earnings, a price index, or
some other formula. Telephone rate regulation may include
government-mandated cross-subsidies that limit the flexibility of
existing service providers to respond to competition. Regulation
may also limit the use of new technologies and hamper efficient
depreciation of existing assets. If regulation limits the use of
new technologies by established carriers or forces cross-
subsidies, large private networks may emerge.
Many gas utilities generally have been adversely
affected by oversupply conditions, and by increased competition
from other providers of utility services. In addition, some gas
utilities entered into long-term contracts with respect to the
purchase or sale of gas at fixed prices, which prices have since
changed significantly in the open market. In many cases, such
price changes have been to the disadvantage of the gas utility.
Gas utilities are particularly susceptible to supply and demand
imbalances due to unpredictable climate conditions and other
factors and are subject to regulatory risks as well.
Electric utilities that utilize coal in connection with
the production of electric power are particularly susceptible to
environmental regulation, including the requirements of the
federal Clean Air Act and of similar state laws. Such regulation
may necessitate large capital expenditures in order for the
utility to achieve compliance. Due to the public, regulatory and
governmental concern with the cost and safety of nuclear power
facilities in general, certain electric utilities with
uncompleted nuclear power facilities may have problems completing
and licensing such facilities. Regulatory changes with respect
to nuclear and conventionally fueled generating facilities could
increase costs or impair the ability of such electric utilities
to operate such facilities, thus reducing their ability to
service dividend payments with respect to the securities they
issue. Furthermore, rates of return of utility companies
generally are subject to review and limitation by state public
112
<PAGE>
utilities commissions and tend to fluctuate with marginal
financing costs. Electric utilities that utilize nuclear power
facilities must apply for recommissioning from the Nuclear
Regulatory Commission after 40 years. Failure to obtain
recommissioning could result in an interruption of service or the
need to purchase more expensive power from other entities and
could subject the utility to significant capital construction
costs in connection with building new nuclear or alternative-fuel
power facilities, upgrading existing facilities or converting
such facilities to alternative fuels.
INVESTMENTS IN LOWER-RATED FIXED-INCOME SECURITIES.
Adverse publicity and investor perceptions about lower-rated
securities, whether or not based on fundamental analysis, may
tend to decrease the market value and liquidity of such lower-
rated securities. The Adviser tries to reduce the risk inherent
in investment in lower-rated securities through credit analysis,
diversification and attention to current developments and trends
in interest rates and economic and political conditions.
However, there can be no assurance that losses will not occur.
Since the risk of default is higher for lower-rated securities,
the Advisers research and credit analysis are a correspondingly
important aspect of its program for managing the Portfolio's
securities than would be the case if the Portfolio did not invest
in lower-rated securities. In considering investments for the
Portfolio, the Adviser attempts to identify those high-risk,
high-yield securities whose financial condition is adequate to
meet future obligations, has improved or is expected to improve
in the future. The Advisers analysis focuses on relative values
based on such factors as interest or dividend coverage, asset
coverage earnings prospects, and the experience and managerial
strength of the issuer.
Non-rated securities are also considered for investment
by the Portfolio when the Adviser believes that the financial
condition of the issuers of such securities, or the protection
afforded by the terms of the securities themselves, limits the
risk to the Portfolio to a degree comparable to that of rated
securities which are consistent with the Portfolio's objective
and policies.
In seeking to achieve the Portfolio's objective, there
will be times, such as during periods of rising interest rates,
when depreciation and realization of capital losses on securities
in the portfolio will be unavoidable. Moreover, medium- and
lower-rated securities and non-rated securities of comparable
quality may be subject to wider fluctuations in yield and market
values than higher-rated securities under certain market
conditions. Such fluctuations after a security is acquired do
not affect the cash income received from that security but are
reflected in the net asset value of the Portfolio.
113
<PAGE>
INVESTMENT RESTRICTIONS. The following restrictions
which are applicable to the Utility Income Portfolio, supplement
those set forth above and in the Prospectus, may not be changed
without Shareholder Approval, as defined under the caption
"General Information," below. The Portfolio may not:
(1) Make loans except through (i) the purchase of debt
obligations in accordance with its investment objectives and
policies; (ii) the lending of portfolio securities; or (iii) the
use of repurchase agreements;
(2) Participate on a joint or joint and several basis
in any securities trading account;
(3) Invest in companies for the purpose of exercising
control;
(4) Issue any senior security within the meaning of the
Act except that the Portfolio may write put and call options;
(5) Make short sales of securities or maintain a short
position, unless at all times when a short position is open it
owns an equal amount of such securities or securities convertible
into or exchangeable for, without payment of any further
consideration, securities of the same issue as, and equal in
amount to, the securities sold short (short sales against the
box), and unless not more than 10% of the Portfolio's net assets
(taken at market value) is held as collateral for such sales at
any one time (it is the Portfolio's present intention to make
such sales only for the purpose of deferring realization of gain
or loss for Federal income tax purposes); or
(6)(i) Purchase or sell real estate, except that it may
purchase and sell securities of companies which deal in real
estate or interests therein; (ii) purchase or sell commodities or
commodity contracts (except currencies, futures contracts on
currencies and related options, forward contracts or contracts
for the future acquisition or delivery of securities and related
options, futures contracts and options on futures contracts and
options on futures contracts and other similar contracts); (iii)
invest in interests in oil, gas, or other mineral exploration or
development programs; (iv) purchase securities on margin, except
for such short-term credits as may be necessary for the clearance
of transactions; and (v) act as an underwriter of securities,
except that the Portfolio may acquire restricted securities under
circumstances in which, if such securities were sold, the
Portfolio might be deemed to be an underwriter for purposes of
the Securities Act.
114
<PAGE>
CONSERVATIVE INVESTORS PORTFOLIO
GROWTH INVESTORS PORTFOLIO
GROWTH PORTFOLIO
For a general description of the Portfolio's investment
policies, see the Fund's Prospectus.
REPURCHASE AGREEMENTS. Repurchase agreements are
agreements by which a Portfolio purchases a security and obtains
a simultaneous commitment from the seller to repurchase the
security at an agreed upon price and date. The resale price is
in excess of the purchase price and reflects an agreed upon
market rate unrelated to the coupon rate on the purchased
security. The purchased security serves as collateral for the
obligation of the seller to repurchase the security and the value
of the purchased security is initially greater than or equal to
the amount of the repurchase obligation and the seller is
required to furnish additional collateral on a daily basis in
order to maintain with the purchaser securities with a value
greater than or equal to the amount of the repurchase obligation.
Such transactions afford the Portfolios the opportunity to earn a
return on temporarily available cash. While at times the
underlying security may be a bill, certificate of indebtedness,
note, or bond issued by an agency, authority or instrumentality
of the United States Government, the obligation of the seller is
not guaranteed by the U.S. Government and there is a risk that
the seller may fail to repurchase the underlying security,
whether because of the sellers bankruptcy or otherwise. In such
event, the Portfolios would attempt to exercise their rights with
respect to the underlying security, including possible
disposition in the market. However, the Portfolios may be
subject to various delays and risks of loss, including (a)
possible declines in the value of the underlying security (b)
possible reduced levels of income and lack of access to income
during this period and (c) possible inability to enforce rights.
The Portfolios have established standards for the
creditworthiness of parties with which they may enter into
repurchase agreements, and those standards, as modified from time
to time, will be implemented and monitored by the Adviser.
NON-PUBLICLY TRADED SECURITIES. Each of the Portfolios
may invest in securities which are not publicly traded, including
securities sold pursuant to Rule 144A under the Securities Act of
1933 (Rule 144A Securities). The sale of these securities is
usually restricted under Federal securities laws, and market
quotations may not be readily available. As a result, a
Portfolio may not be able to sell these securities (other than
Rule 144A Securities) unless they are registered under applicable
Federal and state securities laws, or may have to sell such
securities at less than fair market value. Investment in these
securities is restricted to 5% of a Portfolio's total assets
115
<PAGE>
(excluding, to the extent permitted by applicable law, Rule 144A
Securities) and is also subject to the restriction against
investing more than 15% of total assets in illiquid securities.
To the extent permitted by applicable law, Rule 144A Securities
will not be treated as illiquid for purposes of the foregoing
restriction so long as such securities meet the liquidity
guidelines established by the Fund's Board of Directors.
Pursuant to these guidelines, the Adviser will monitor the
liquidity of a Portfolio's investment in Rule 144A Securities
and, in reaching liquidity decisions, will consider: (1) the
frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell the security and the
number of other potential purchasers; (3) dealer undertakings to
make a market in the security; and (4) the nature of the security
and the nature of the marketplace trades (e.g., the time needed
to dispose of the security, the method of soliciting offers and
the mechanics of the transfer).
FOREIGN SECURITIES. Each of the Portfolios, may invest
without limit in securities of foreign issuers which are not
publicly traded in the United States, although each of these
Portfolios generally will not invest more than 15% of its total
assets (30% in the case of the Growth Investors Portfolio) in
such securities. Investment in foreign issuers or securities
principally outside the United States may involve certain special
risks due to foreign economic, political, diplomatic and legal
developments, including favorable or unfavorable changes in
currency exchange rates, exchange control regulations (including
currency blockage), expropriation of assets or nationalization,
confiscatory taxation, imposition of withholding taxes on
dividend or interest payments, and possible difficulty in
obtaining and enforcing judgments against foreign entities.
Furthermore, issuers of foreign securities are subject to
different, often less comprehensive, accounting, reporting and
disclosure requirements than domestic issuers. The securities of
some foreign companies and foreign securities markets are less
liquid and at times more volatile than securities of comparable
U.S. companies and U.S. securities markets. Foreign brokerage
commissions and other fees are also generally higher than in the
United States. There are also special tax considerations which
apply to securities of foreign issuers and securities principally
traded overseas.
DESCRIPTION OF CERTAIN MONEY MARKET SECURITIES
IN WHICH THE PORTFOLIOS MAY INVEST
CERTIFICATES OF DEPOSIT, BANKERS ACCEPTANCES AND BANK
TIME DEPOSITS. Certificates of deposit are receipts issued by a
bank in exchange for the deposit of funds. The issuer agrees to
pay the amount deposited plus interest to the bearer of the
receipt on the date specified on the certificate. The
116
<PAGE>
certificate usually can be traded in the secondary market prior
to maturity.
Bankers acceptances typically arise from short-term
credit arrangements designed to enable businesses to obtain funds
to finance commercial transactions. Generally, an acceptance is
a time draft drawn on a bank by an exporter or an importer to
obtain a stated amount of funds to pay for specific merchandise.
The draft is then accepted by another bank that, in effect,
unconditionally guarantees to pay the face value of the
instrument on its maturity date. The acceptance may then be held
by the accepting bank as an earning asset or it may be sold in
the secondary market at the going rate of discount for a specific
maturity. Although maturities for acceptances can be as long as
270 days, most maturities are six months or less.
Bank time deposits are funds kept on deposit with a bank
for a stated period of time in an interest bearing account. At
present, bank time deposits maturing in more than seven days are
not considered by the Adviser to be readily marketable.
COMMERCIAL PAPER. Commercial paper consists of short-
term (usually from 1 to 270 days) unsecured promissory notes
issued by entities in order to finance their current operations.
VARIABLE NOTES. Variable amounts master demand notes
and variable amount floating rate notes are obligations that
permit the investment of fluctuating amounts by a Portfolio at
varying rates of interest pursuant to direct arrangements between
a Portfolio, as lender, and the borrower. Master demand notes
permit daily fluctuations in the interest rate while the interest
rate under variable amount floating rate notes fluctuate on a
weekly basis. These notes permit daily changes in the amounts
borrowed. The Portfolios have the right to increase the amount
under these notes at any time up to the full amount provided by
the note agreement, or to decrease the amount, and the borrower
may repay up to the full amount of the notes without penalty.
Because these types of notes are direct lending arrangements
between the lender and the borrower, it is not generally
contemplated that such instruments will be traded and there is no
secondary market for these notes. Master demand notes are
redeemable (and, thus, immediately repayable by the borrower) at
face value, plus accrued interest, at any time. Variable amount
floating rate notes are subject to next-day redemption for 14
days after the initial investment therein. With both types of
notes, therefore, the Portfolio's right to redeem depends on the
ability of the borrower to pay principal and interest on demand.
In connection with both types of note arrangements, the
Portfolios consider earning power, cash flow and other liquidity
ratios of the issuer. These notes, as such, are not typically
rated by credit rating agencies. Unless they are so rated, a
117
<PAGE>
Portfolio may invest in them only if at the time of an investment
the issuer has an outstanding issue of unsecured debt rated Aa or
better by Moody's or AA or better by S&P, Duff & Phelps or Fitch
A description of Moody's, S&Ps, Duff & Phelps and Fitch
short-term note ratings is included as Appendix A to the
Prospectus.
ASSET-BACKED SECURITIES. The Conservative Investors
Portfolio and the Growth Investors Portfolio may invest in asset-
backed securities (unrelated to first mortgage loans) which
represent fractional interests in pools of retail installment
loans, leases or revolving credit receivables, both secured (such
as Certificates for Automobiles Receivables or CARS) and
unsecured (such as Credit Care Receivables Securities or CARDS).
The staff of the Commission is of the view that certain
asset-backed securities may constitute investment companies under
the 1940 Act. The Portfolios intend to conduct their operations
in a manner consistent with this view, and therefore they
generally may not invest more than 10% of their total assets in
such securities without obtaining appropriate regulatory relief.
LENDING OF SECURITIES. Each Portfolio may seek to
increase its income by lending portfolio securities. Under
present regulatory policies, including those of the Board of
Governors of the Federal Reserve System and the Commission, such
loans may be made only to member firms of the New York Stock
Exchange and would be required to be secured continuously by
collateral in cash, cash equivalents, or U.S. Treasury Bills
maintained on a current basis at an amount at least equal to the
market value of the securities loaned. A Portfolio would have
the right to call a loan and obtain the securities loaned at any
time on five days notice. During the existence of a loan, a
Portfolio would continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned
and would also receive compensation based on investment of the
collateral. A Portfolio would not, however, have the right to
vote any securities having voting rights during the existence of
the loan, but would call the loan in anticipation of an important
vote to be taken among holders of the securities or of the giving
or withholding of their consent on a material matter affecting
the investment. As with other extensions of credit there are
risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail
financially. However, the loans would be made only to firms
deemed by the Adviser to be of good standing, and when, in the
judgment of the Adviser, the consideration which can be earned
currently from securities loans of this type justifies the
attendant risk. If the Adviser determines to make securities
118
<PAGE>
loans, it is not intended that the value of the securities loaned
would exceed 25% of the value of a Portfolio's total assets.
FORWARD COMMITMENTS AND WHEN-ISSUED AND DELAYED DELIVERY
SECURITIES. Each of the Portfolios may enter into forward
commitments for the purchase of securities and may purchase
securities on a when-issued or delayed delivery basis.
Agreements for such purchases might be entered into, for example,
when a Portfolio anticipates a decline in interest rates and is
able to obtain a more advantageous yield by committing currently
to purchase securities to be issued later. When a Portfolio
purchases securities in this manner (i.e., on a forward
commitment, when-issued or delayed delivery basis), it does not
pay for the securities until they are received, and a Portfolio
is required to create a segregated account with the Portfolio's
custodian and to maintain in that account cash, U.S. Government
securities or other liquid high-grade debt obligations in an
amount equal to or greater than, on a daily basis, the amount of
the Portfolio's forward commitments and when-issued or-delayed
delivery commitments.
A Portfolio enters into forward commitments and make
commitments to purchase securities on a when-issued or delayed
delivery basis only with the intention of actually acquiring the
securities. However, a Portfolio may sell these securities
before the settlement date if it is deemed advisable as a matter
of investment strategy.
Although none of the Portfolios intends to make such
purchases for speculative purposes and each Portfolio intends to
adhere to the provisions of policies of the Commission, purchases
of securities on such bases may involve more risk than other
types of purchases. For example, by committing to purchase
securities in the future, a Portfolio subjects itself to a risk
of loss on such commitments as well as on its portfolio
securities. Also, a Portfolio may have to sell assets which have
been set aside in order to meet redemptions. In addition, if a
Portfolio determines it is advisable as a matter of investment
strategy to sell the forward commitment or when-issued or delayed
delivery securities before delivery, that Portfolio may incur a
gain or loss because of market fluctuations since the time the
commitment to purchase such securities was made. Any such gain
or loss would be treated as a capital gain or loss and would be
treated for tax purposes as such. When the time comes to pay for
the securities to be purchased under a forward commitment or on a
when-issued or delayed delivery basis, a Portfolio will meet its
obligations from the then available cash flow or the sale of
securities, or, although it would not normally expect to do so,
from the sale of the forward commitment or when-issued or delayed
delivery securities themselves (which may have a value greater or
less than a Portfolio's payment obligation).
119
<PAGE>
OPTIONS. As noted in the Prospectuses, each of the
Portfolios may write call and put options and may purchase call
and put options on securities. Each Portfolio intends to write
only covered options. This means that so long as a Portfolio is
obligated as the writer of a call option, it will own the
underlying securities subject to the option or securities
convertible into such securities without additional consideration
(or for additional cash consideration held in a segregated
account by the Custodian). In the case of call options on U.S.
Treasury Bills, a Portfolio might own U.S. Treasury Bills of a
different series from those underlying the call option, but with
a principal amount and value corresponding to the option contract
amount and a maturity date no later than that of the securities
deliverable under the call option. A Portfolio is considered
covered with respect to a put option it writes, if, so long as it
is obligated as the writer of a put option, it deposits and
maintains with its custodian in a segregated account cash, U.S.
Government securities or other liquid high-grade debt obligations
having a value equal to or greater than the exercise price of the
option.
Effecting a closing transaction in the case of a written
call option will permit a Portfolio to write another call option
on the underlying security with either a different exercise price
or expiration date or both, or in the case of a written put
option will permit a Portfolio to write another put option to the
extent that the exercise price thereof is secured by deposited
cash or short-term securities. Such transactions permit a
Portfolio to generate additional premium income, which may
partially offset declines in the value of portfolio securities or
increases in the cost of securities to be acquired. Also,
effecting a closing transaction permits the cash or proceeds from
the concurrent sale of any securities subject to the option to be
used for other investments by a Portfolio, provided that another
option on such security is not written. If a Portfolio desires
to sell a particular security from its portfolio on which it has
written a call option, it will effect a closing transaction in
connection with the option prior to or concurrent with the sale
of the security.
A Portfolio will realize a profit from a closing
transaction if the premium paid in connection with the closing of
an option written by the Portfolio is less than the premium
received from writing the option, or if the premium received in
connection with the closing of an option purchased by the
Portfolio is more than the premium paid for the original
purchase. Conversely, a Portfolio will suffer a loss if the
premium paid or received in connection with a closing transaction
is more or less, respectively, than the premium received or paid
in establishing the option position. Because increases in the
market price of a call option will generally reflect increases in
120
<PAGE>
the market price of the underlying security, any loss resulting
from the repurchase of a call option previously written by a
Portfolio is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Portfolio
A Portfolio may purchase a security and then write a
call option against that security or may purchase a security and
concurrently write an option on it. The exercise price of the
call a Portfolio determines to write will depend upon the
expected price movement of the underlying security. The exercise
price of a call option may be below (in-the-money), equal to (at-
the-money) or above (out-of-the-money) the current value of the
underlying security at the time the option is written. In-the-
money call options may be used when it is expected that the price
of the underlying security will decline moderately during the
option period. Out-of-the-money call options may be written when
it is expected that the premiums received from writing the call
option plus the appreciation in the market price of the
underlying security up to the exercise price will be greater than
the appreciation in the price of the underlying security alone.
If the call options are exercised in such transactions, a
Portfolio's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the
difference between the Portfolio's purchase price of the security
and the exercise price. If the options are not exercised and the
price of the underlying security declines, the amount of such
decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms
of risk/return characteristics to buy-and-write transactions. If
the market price of the underlying security rises or otherwise is
above the exercise price, the put option will expire worthless
and a Portfolio's gain will be limited to the premium received.
If the market price of the underlying security declines or
otherwise is below the exercise price, a Portfolio may elect to
close the position or retain the option until it is exercised, at
which time the Portfolio will be required to take delivery of the
security at the exercise price; the Portfolio's return will be
the premium received from the put option minus the amount by
which the market price of the security is below the exercise
price, which could result in a loss. Out-of-the-money put
options may be written when it is expected that the price of the
underlying security will decline moderately during the option
period. In-the-money put options may be used when it is expected
that the premiums received from writing the put option plus the
appreciation in the market price of the underlying security up to
the exercise price will be greater than the appreciation in the
price of the underlying security alone.
121
<PAGE>
Each of the Portfolios may also write combinations of
put and call options on the same security, known as straddles,
with the same exercise and expiration date. By writing a
straddle, a Portfolio undertakes a simultaneous obligation to
sell and purchase the same security in the event that one of the
options is exercised. If the price of the security subsequently
rises above the exercise price, the call will likely be exercised
and the Portfolio will be required to sell the underlying
security at a below market price. This loss may be offset,
however, in whole or part, by the premiums received on the
writing of the two options. Conversely, if the price of the
security declines by a sufficient amount, the put will likely be
exercised. The writing of straddles will likely be effective,
therefore, only where the price of the security remains stable
and neither the call nor the put is exercised. In those
instances where one of the options is exercised, the loss on the
purchase or sale of the underlying security may exceed the amount
of the premiums received.
By writing a call option, a Portfolio limits its
opportunity to profit from any increase in the market value of
the underlying security above the exercise price of the option.
By writing a put option, a Portfolio assumes the risk that it may
be required to purchase the underlying security for an exercise
price above its then current market value, resulting in a capital
loss unless the security subsequently appreciates in value.
Where options are written for hedging purposes, such transactions
constitute only a partial hedge against declines in the value of
portfolio securities or against increases in the value of
securities to be acquired, up to the amount of the premium.
Each of the above Portfolios may purchase put options to
hedge against a decline in the value of portfolio securities. If
such decline occurs, the put options will permit the Portfolio to
sell the securities at the exercise price, or to close out the
options at a profit. By using put options in this way, a
Portfolio will reduce any profit it might otherwise have realized
in the underlying security by the amount of the premium paid for
the put option and by transaction costs.
A Portfolio may purchase call options to hedge against
an increase in the price of securities that the Portfolio
anticipates purchasing in the future. If such increase occurs,
the call option will permit the Portfolio to purchase the
securities at the exercise price, or to close out the options at
a profit. The premium paid for the call option plus any
transaction costs will reduce the benefit, if any, realized by a
Portfolio upon exercise of the option, and, unless the price of
the underlying security rises sufficiently, the option may expire
worthless to the Portfolio and the Portfolio will suffer a loss
on the transaction to the extent of the premium paid.
122
<PAGE>
OPTIONS ON SECURITIES INDEXES. Each of the Portfolios
may write (sell) covered call and put options on securities
indexes and purchase call and put options on securities indexes.
A call option on a securities index is considered covered if, so
long as a Portfolio is obligated as the writer of the call, the
Portfolio holds in its portfolio securities the price changes of
which are, in the option of the Adviser, expected to replicate
substantially the movement of the index or indexes upon which the
options written by the Portfolio are based. A put on a
securities index written by a Portfolio will be considered
covered if, so long as it is obligated as the writer of the put,
the Portfolio segregates with its custodian cash, U.S. Government
securities or other liquid high-grade debt obligations having a
value equal to or greater than the exercise price of the option.
A Portfolio may also purchase put options on securities
indexes to hedge its investments against a decline in value. By
purchasing a put option on a securities index, a Portfolio seeks
to offset a decline in the value of securities it owns through
appreciation of the put option. If the value of a Portfolio's
investments does not decline as anticipated, or if the value of
the option does not increase, the Portfolio's loss will be
limited to the premium paid for the option. The success of this
strategy will largely depend on the accuracy of the correlation
between the changes in value of the index and the changes in
value of a Portfolio's security holdings.
The purchase of call options on securities indexes may
be used by a Portfolio to attempt to reduce the risk of missing a
broad market advance, or an advance in an industry or market
segment, at a time when the Portfolio holds uninvested cash or
short-term debt securities awaiting investment. When purchasing
call options for this purpose, a Portfolio also bears the risk of
losing all or a portion of the premium paid if the value of the
index does not rise. The purchase of call options on stock
indexes when a Portfolio is substantially fully invested is a
form of leverage, up to the amount of the premium and related
transaction costs, and involves risks of loss and of increased
volatility similar to those involved in purchasing calls on
securities the Portfolio owns.
FUTURES AND RELATED OPTIONS. Each of the Conservative
Investors Portfolio and the Growth Investors Portfolio may enter
into interest rate futures contracts. In addition, each of the
Conservative Investors Portfolio, the Growth Investors Portfolio
and the Growth Portfolio may enter into stock futures contracts,
and each of these Portfolios may enter into foreign currency
futures contracts. (Unless otherwise specified, interest rate
futures contracts, stock index futures contracts and foreign
currency futures contracts are collectively referred to as
123
<PAGE>
Futures Contracts.) Such investment strategies will be used as a
hedge and not for speculation.
Purchases or sales of stock or bond index futures
contracts are used for hedging purposes to attempt to protect a
Portfolio's current or intended investments from broad
fluctuations in stock or bond prices. For example, a Portfolio
may sell stock or bond index futures contracts in anticipation of
or during a market decline to attempt to offset the decrease in
market value of the Portfolio's securities portfolio that might
otherwise result. If such decline occurs, the loss in value of
portfolio securities may be offset, in whole or part, by gains on
the futures position. When a Portfolio is not fully invested in
the securities market and anticipates a significant market
advance, it may purchase stock or bond index futures contracts in
order to gain rapid market exposure that may, in part or
entirely, offset increases in the cost of securities that the
Portfolio intends to purchase. As such purchases are made, the
corresponding positions in stock or bond index futures contracts
will be closed out. Each of the Conservative Investors
Portfolio, the Growth Investors Portfolio and the Growth
Portfolio generally intends to purchase such securities upon
termination of the futures position, but under unusual market
conditions a long futures position may be terminated without a
related purchase of securities.
Interest rate futures contracts are purchased or sold
for hedging purposes to attempt to protect against the effects of
interest rate changes on a Portfolio's current or intended
investments in fixed-income securities. For example, if a
Portfolio owned long-term bonds and interest rates were expected
to increase, that Portfolio might sell interest rate futures
contracts. Such a sale would have much the same effect as
selling some of the long-term bonds in that Portfolio's
portfolio. However, since the futures market is more liquid than
the cash market, the use of interest rate futures contracts as a
hedging technique allows a Portfolio to hedge its interest rate
risk without having to sell its portfolio securities. If
interest rates did increase, the value of the debt securities in
the portfolio would decline, but the value of that Portfolio's
interest rate futures contracts would be expected to increase at
approximately the same rate, thereby keeping the net asset value
of that Portfolio from declining as much as it otherwise would
have. On the other hand, if interest rates were expected to
decline, interest rate futures contracts could be purchased to
hedge in anticipation of subsequent purchases of long-term bonds
at higher prices. Because the fluctuations in the value of the
interest rate futures contracts should be similar to those of
long-term bonds, a Portfolio could protect itself against the
effects of the anticipated rise in the value of long-term bonds
without actually buying them until the necessary cash became
124
<PAGE>
available or the market had stabilized. At that time, the
interest rate futures contracts could be liquidated and that
Portfolio's cash reserves could then be used to buy long-term
bonds on the cash market.
Each of the Growth Portfolio, the Conservative Investors
Portfolio and the Growth Investors Portfolio may purchase and
sell foreign currency futures contracts for hedging purposes to
attempt to protect its current or intended investments from
fluctuations in currency exchange rates. Such fluctuations could
reduce the dollar value of portfolio securities denominated in
foreign currencies, or increase the cost of foreign-denominated
securities to be acquired, even if the value of such securities
in the currencies in which they are denominated remains constant.
Each of the Growth Portfolio, the Conservative Investors
Portfolio and the Growth Investors Portfolio may sell futures
contracts on a foreign currency, for example, when it holds
securities denominated in such currency and it anticipates a
decline in the value of such currency relative to the dollar. In
the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in
whole or in part, by gains on the futures contracts. However, if
the value of the foreign currency increases relative to the
dollar, the Portfolio's loss on the foreign currency futures
contract may or may not be offset by an increase in the value of
the securities because a decline in the price of the security
stated in terms of the foreign currency may be greater than the
increase in value as a result of the change in exchange rates.
Conversely, these Portfolios could protect against a
rise in the dollar cost of foreign-denominated securities to be
acquired by purchasing futures contracts on the relevant
currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value
of the underlying currencies. When a Portfolio purchases futures
contracts under such circumstances, however, and the price of
securities to be acquired instead declines as a result of
appreciation of the dollar, the Portfolio sustains losses on its
futures position which could reduce or eliminate the benefits of
the reduced cost of portfolio securities to be acquired.
The Portfolios may also engage in currency cross hedging
when, in the opinion of the Adviser, the historical relationship
among foreign currencies suggests that a Portfolio may achieve
protection against fluctuations in currency exchange rates
similar to that described above at a reduced cost through the use
of a futures contract relating to a currency other than the U.S.
Dollar or the currency in which the foreign security is
denominated. Such cross hedging is subject to the same risk as
those described above with respect to an unanticipated increase
125
<PAGE>
or decline in the value of the subject currency relative to the
dollar.
Each of the Conservative Investors Portfolio and the
Growth Investors Portfolio may purchase and write options on
interest rate futures contracts. In addition, each of the
Growth Portfolio, the Conservative Investors Portfolio and the
Growth Investors Portfolio may purchase and write options on
stock index futures contracts. The Growth Portfolio, the
Conservative Investors Portfolio and the Growth Investors
Portfolio may purchase and write options on foreign currency
futures contracts. (Unless otherwise specified, options on
interest rate futures contracts, options on securities index
futures contracts and options on foreign currency futures
contracts are collectively referred to as Options on Futures
Contracts.)
The writing of a call option on a Futures Contract
constitutes a partial hedge against declining prices of the
securities in the Portfolio's portfolio. If the futures price at
expiration of the option is below the exercise price, a Portfolio
will retain the full amount of the option premium, which provides
a partial hedge against any decline that may have occurred in the
Portfolio's portfolio holdings. The writing of a put option on a
Futures Contract constitutes a partial hedge against increasing
prices of the securities or other instruments required to be
delivered under the terms of the Futures Contract. If the
futures price at expiration of the put option is higher than the
exercise price, a Portfolio will retain the full amount of the
option premium, which provides a partial hedge against any
increase in the price of securities which the Portfolio intends
to purchase. If a put or call option a Portfolio has written is
exercised, the Portfolio will incur a loss which will be reduced
by the amount of the premium it receives. Depending on the
degree of correlation between changes in the value of its
portfolio securities and changes in the value of its options on
futures positions, a Portfolio's losses from exercised options on
futures may to some extent be reduced or increased by changes in
the value of portfolio securities.
The Portfolios may purchase Options on Futures Contracts
for hedging purposes instead of purchasing or selling the
underlying Futures Contracts. For example, where a decrease in
the value of portfolio securities is anticipated as a result of a
projected market-wide decline or changes in interest or exchange
rates, a Portfolio could, in lieu of selling Futures Contracts,
purchase put options thereon. In the event that such decrease
occurs, it may be offset, in whole or part, by a profit on the
option. If the market decline does not occur, the Portfolio will
suffer a loss equal to the price of the put. Where it is
projected that the value of securities to be acquired by a
126
<PAGE>
Portfolio will increase prior to acquisition, due to a market
advance or changes in interest or exchange rates, a Portfolio
could purchase call Options on Futures Contracts, rather than
purchasing the underlying Futures Contracts. If the market
advances, the increased cost of securities to be purchased may be
offset by a profit on the call. However, if the market declines,
the Portfolio will suffer a loss equal to the price of the call,
but the securities which the Portfolio intends to purchase may be
less expensive.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Each of
the Portfolios and the Growth Investors Portfolio may enter into
forward foreign currency exchange contracts (Forward Contracts)
to attempt to minimize the risk to the Portfolio from adverse
changes in the relationship between the U.S. Dollar and foreign
currencies. The Portfolios intend to enter into Forward
Contracts for hedging purposes similar to those described above
in connection with their transactions in foreign currency futures
contracts. In particular, a Forward Contract to sell a currency
may be entered into in lieu of the sale of a foreign currency
futures contract where a Portfolio seeks to protect against an
anticipated increase in the exchange rate for a specific currency
which could reduce the dollar value of portfolio securities
denominated in such currency. Conversely, a Portfolio may enter
into a Forward Contract to purchase a given currency to protect
against a projected increase in the dollar value of securities
denominated in such currency which the Portfolio intends to
acquire. A Portfolio also may enter into a Forward Contract in
order to assure itself of a predetermined exchange rate in
connection with a fixed-income security denominated in a foreign
currency. The Portfolios may engage in currency cross hedging
when, in the opinion of the Adviser, the historical relationship
among foreign currencies suggests that a Portfolio may achieve
the same protection for a foreign security at a reduced cost
through the use of a Forward Contract relating to a currency
other than the U.S. Dollar or the foreign currency in which the
security is denominated.
If a hedging transaction in Forward Contracts is
successful, the decline in the value of portfolio securities or
the increase in the cost of securities to be acquired may be
offset, at least in part, by profits on the Forward Contract.
Nevertheless, by entering into such Forward Contracts, a
Portfolio may be required to forego all or a portion of the
benefits which otherwise could have been obtained from favorable
movements in exchange rates. The Portfolios do not presently
intend to hold Forward Contracts entered into until maturity, at
which time they would be required to deliver or accept delivery
of the underlying currency, but will seek in most instances to
close out positions in such contracts by entering into offsetting
transactions, which will serve to fix a Portfolio's profit or
127
<PAGE>
loss based upon the value of the Contracts at the time the
offsetting transaction is executed.
Each Portfolio has established procedures consistent
with Commission policies concerning purchases of foreign currency
through Forward Contracts. Accordingly, a Portfolio will
segregate liquid assets in an amount least equal to the
Portfolio's obligations under any Forward Contract.
OPTIONS ON FOREIGN CURRENCIES. Each of the Portfolios
may purchase and write options on foreign currencies for hedging
purposes. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated
will reduce the dollar value of such securities, even if their
value in the foreign currency remains constant. In order to
protect against such diminutions in the value of portfolio
securities, these Portfolios may purchase put options on the
foreign currency. If the value of the currency does decline, the
Portfolio will have the right to sell such currency for a fixed
amount in dollars and could thereby offset, in whole or in part,
the adverse effect on its portfolio which otherwise would have
resulted.
Conversely, where a rise in the dollar value of a
currency in which securities to be acquired are denominated is
projected, thereby increasing the cost of such securities, these
Portfolios may purchase call options thereon. The purchase of
such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to a Portfolio deriving
from purchases of foreign currency options will be reduced by the
amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the
direction or to the extent anticipated, a Portfolio could sustain
losses on transactions in foreign currency options which would
require it to forego a portion or all of the benefits of
advantageous changes in such rates.
Each of the Portfolios may write options on foreign
currencies for the same types of hedging purposes or to increase
return. For example, where the Portfolio anticipates a decline
in the dollar value of foreign-denominated securities due to
adverse fluctuations in exchange rates it could, instead of
purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio
securities could be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge
against an anticipated increase in the dollar cost of securities
to be acquired, a Portfolio could write a put option on the
128
<PAGE>
relevant currency, which, if rates move in the manner projected,
will expire unexercised and allow the Portfolio to hedge such
increased cost up to the amount of the premium. As in the case
of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the
amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised
and the Portfolio will be required to purchase or sell the
underlying currency at a loss which may not be offset by the
amount of the premium. Through the writing of options on foreign
currencies, a Portfolio also may be required to forego all or a
portion of the benefits which might otherwise have been obtained
from favorable movements in exchange rates.
RISK FACTORS IN OPTIONS FUTURES AND FORWARD
TRANSACTIONS. The Portfolio's abilities effectively to hedge all
or a portion of their portfolios through transactions in options,
Futures Contracts, Options on Futures Contracts, Forward
Contracts and options on foreign currencies-depend on the degree
to which price movements in the underlying index or instrument
correlate with price movements in the relevant portion of the
Portfolio's portfolios or securities the Portfolios intend to
purchase. In the case of futures and options based on an index,
the portfolio will not duplicate the components of the index, and
in the case of futures and options on fixed-income securities,
the portfolio securities which are being hedged may not be the
same type of obligation underlying such contract. As a result,
the correlation probably will not be exact. Consequently, the
Portfolios bear the risk that the price of the portfolio
securities being hedged will not move by the same amount or in
the same direction as the underlying index or obligation.
For example, if a Portfolio purchases a put option on an
index and the index decreases less than the value of the hedged
securities, the Portfolio will experience a loss that is not
completely offset by the put option. It is also possible that
there may be a negative correlation between the index or
obligation underlying an option or Futures Contract in which the
Portfolio has a position and the portfolio securities the
Portfolio is attempting to hedge, which could result in a loss on
both the portfolio and the hedging instrument.
It should be noted that stock index futures contracts or
options based upon a narrower index of securities, such as those
of a particular industry group, may present greater risk than
options or futures based on a broad market index. This is due to
the fact that a narrower index is more susceptible to rapid and
extreme fluctuations as a result of changes in the value of a
small number of securities.
129
<PAGE>
The trading of futures and options entails the
additional risk of imperfect correlation between movements in the
futures or option price and the price of the underlying index or
obligation. The anticipated spread between the prices may be
distorted due to the differences in the nature of the markets,
such as differences in margin requirements, the liquidity of such
markets and the participation of speculators in the futures
market. In this regard, trading by speculators in futures and
options has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict,
particularly near the expiration of such contracts.
The trading of Options on Futures Contracts also entails
the risk that changes in the value of the underlying Futures
Contract will not be fully reflected in the value of the option.
The risk of imperfect correlation, however, generally tends to
diminish as the maturity date of the Futures Contract or
expiration date of the option approaches.
Further, with respect to options on securities, options
on foreign currencies, options on stock indexes and Options on
Futures Contracts, the Portfolios are subject to the risk of
market movements between the time that the option is exercised
and the time of performance thereunder. This could increase the
extent of any loss suffered by a Portfolio in connection with
such transactions.
If a Portfolio purchases futures or options in order to
hedge against a possible increase in the price of securities
before the Portfolio is able to invest its cash in such
securities, the Portfolio faces the risk that the market may
instead decline. If the Portfolio does not then invest in such
securities because of concern as to possible further market
declines or for other reasons, the Portfolio may realize a loss
on the futures or option contract that is not offset by a
reduction in the price of securities purchased.
In writing a call option on a security, foreign
currency, index or futures contract, a Portfolio also incurs the
risk that changes in the value of the assets used to cover the
position will not correlate closely with changes in the value of
the option or underlying index or instrument. For example, when
a Portfolio writes a call option on a stock index, the securities
used as cover may not match the composition of the index, and the
Portfolio may not be fully covered. As a result, the Portfolio
could suffer a loss on the call which is not entirely offset or
offset at all by an increase in the value of the Portfolio's
portfolio securities.
The writing of options on securities, options on stock
indexes or Options on Futures Contracts constitutes only a
130
<PAGE>
partial hedge against fluctuations in the value of a Portfolio's
portfolio. When a Portfolio writes an option, it will receive
premium income in return for the holders purchase of the right to
acquire or dispose of the underlying security or future or, in
the case of index options, cash. In the event that the price of
such obligation does not rise sufficiently above the exercise
price of the option, in the case of a call, or fall below the
exercise price, in the case of a put, the option will not be
exercised and the Portfolio will retain the amount of the
premium, which will constitute a partial hedge against any
decline that may have occurred in the Portfolio's portfolio
holdings, or against the increase in the cost of the instruments
to be acquired.
When the price of the underlying obligation moves
sufficiently in favor of the holder to warrant exercise of the
option, however, and the option is exercised, the Portfolio will
incur a loss which may only be partially offset by the amount of
the premium it received. Moreover, by writing an option, a
Portfolio may be required to forego the benefits which might
otherwise have been obtained from an increase in the value of
portfolio securities or a decline in the value of securities to
be acquired.
In the event of the occurrence of any of the foregoing
adverse market events, a Portfolio's overall return may be lower
than if it had not engaged in the transactions described above.
With respect to the writing of straddles on securities,
a Portfolio incurs the risk that the price of the underlying
security will not remain stable, that one of the options written
will be exercised and that the resulting loss will not be offset
by the amount of the premiums received. Such transactions,
therefore, while creating an opportunity for increased return by
providing a Portfolio with two simultaneous premiums on the same
security, nonetheless involve additional risk, because the
Portfolio may have an option exercised against it regardless of
whether the price of the security increases or decreases.
Prior to exercise or expiration, a futures or option
position can be terminated only by entering into a closing
purchase or sale transaction. This requires a secondary market
for such instruments on the exchange on which the initial
transaction was entered into. While the Portfolios enter into
options or futures positions only if there appears to be a liquid
secondary market therefor, there can be no assurance that such a
market will exist for any particular contracts at any specific
time. In that event, it may not be possible to close out a
position held by a Portfolio, and the Portfolio could be required
to purchase or sell the instrument underlying an option, make or
receive a cash settlement or meet ongoing variation margin
131
<PAGE>
requirements. Under such circumstances, if the Portfolio has
insufficient cash available to meet margin requirements, it may
be necessary to liquidate portfolio securities at a time when it
is disadvantageous to do so. The inability to close out options
and futures positions, therefore, could have an adverse impact on
the Portfolio's ability to effectively hedge their portfolios,
and could result in trading losses.
The liquidity of a secondary market in a Futures
Contract or option thereon may be adversely affected by daily
price fluctuation limits, established by exchanges, which limit
the amount of fluctuation in the price of a contract during a
single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures or option
positions and requiring traders to make additional margin
deposits. Prices have in the past moved to the daily limit on a
number of consecutive trading days.
The trading of Futures Contracts and options (including
Options on Futures Contracts) is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment
failures, government intervention, insolvency of a brokerage firm
or clearing house or other disruptions of normal trading
activity, which could at times make it difficult or impossible to
liquidate existing positions or to recover excess variation
margin payments.
The staff of the Commission had taken the position that
over-the-counter options and the assets used as cover for over-
the-counter options are illiquid securities, unless certain
arrangements are made with the other party to the option contract
permitting the prompt liquidation of the option position. The
Portfolios will enter into those special arrangements only with
primary U.S. Government securities dealers recognized by the
Federal Reserve Bank of New York (primary dealers). In
connection with these special arrangements, the Fund will
establish standards for the creditworthiness of the primary
dealers with which it may enter into over-the-counter option
contracts and those standards, as modified from time to time,
will be implemented and monitored by the Adviser. Under these
special arrangements, the Fund will enter into contracts with
primary dealers which provide that each Portfolio has the
absolute right to repurchase an option it writes at any time at a
repurchase price which represents fair market value, as
determined in good faith through negotiation between the parties,
but which in no event will exceed a price determined pursuant to
a formula contained in the contract. Although the specific
details of the formula may vary between contracts with different
primary dealers, the formula will generally be based on a
multiple of the premium received by the Portfolio for writing the
132
<PAGE>
option, plus the amount, if any, by which the option is in-the-
money. The formula will also include a factor to account for the
difference between the price of the security and the strike price
of the option if the option is written out-of-the-money. Under
such circumstances the Portfolio will treat as illiquid the
securities used as cover for over-the-counter options it has
written only to the extent described in the Prospectuses.
Although each agreement will provide that the Portfolio's
repurchase price shall be determined in good faith (and that it
shall not exceed the maximum determined pursuant to the formula),
the formula price will not necessarily reflect the market value
of the option written; therefore, the Portfolio might pay more to
repurchase the option contract than the Portfolio would pay to
close out a similar exchange-traded option.
Because of low initial margin deposits made upon the
opening of a futures position and the writing of an option, such
transactions involve substantial leverage. As a result,
relatively small movements in the price of the contract can
result in substantial unrealized gains or losses. However, to
the extent the Portfolio's purchase or sell Futures Contracts and
Options on Futures Contracts and purchase and write options on
securities and securities indexes for hedging purposes, any
losses incurred in connection therewith should, if the hedging
strategy is successful, be offset, in whole or in part, by
increases in the value of securities held by the Portfolio or
decreases in the prices of securities the Portfolio intends to
acquire. When a Portfolio writes options on securities or
options on stock indexes for other than hedging purposes, the
margin requirements associated with such transactions could
expose the Portfolio to greater risk.
The exchanges on which futures and options are traded
may impose limitations governing the maximum number of positions
on the same side of the market and involving the same underlying
instrument which may be held by a single investor, whether acting
alone or in concert with others (regardless of whether such
contracts are held on the same or different exchanges or held or
written in one or more accounts or through one or more brokers).
In addition, the CFTC and the various contract markets have
established limits referred to as speculative position limits on
the maximum net long or net short position which any person may
hold or control in a particular futures or option contract. An
exchange may order the liquidation of positions found to be in
violation of these limits and may impose other sanctions or
restrictions. The Adviser does not believe that these trading
and position limits will have any adverse impact on the
strategies for hedging the portfolios of the Portfolios.
The amount of risk a Portfolio assumes when it purchases
an option on a Futures Contract is the premium paid for the
133
<PAGE>
option, plus related transaction costs. In order to profit from
an option purchased, however, it may be necessary to exercise the
option and to liquidate the underlying Futures Contract, subject
to the risks of the availability of a liquid offset market
described herein. The writer of an option on a Futures Contract
is subject to the risks of commodity futures trading, including
the requirement of initial and variation margin payments, as well
as the additional risk that movements in the price of the option
may not correlate with movements in the price of the underlying
security, index, currency or Futures Contract.
Transactions in Forward Contracts, as well as futures
and options on foreign currencies, are subject to all of the
correlation, liquidity and other risks outlined above. In
addition, however, such transactions are subject to the risk of
governmental actions affecting trading in or the prices of
currencies underlying such contracts, which could restrict or
eliminate trading and could have a substantial adverse effect on
the value of positions held by a Portfolio. In addition, the
value of such positions could be adversely affected by a number
of other complex political and economic factors applicable to the
countries issuing the underlying currencies.
Further, unlike trading in most other types of
instruments, there is no systematic reporting of last sale
information with respect to the foreign currencies underlying
contracts thereon. As a result, the available information on
which trading decisions will be based may not be as complete as
the comparable data on which a Portfolio makes investment and
trading decisions in connection with other transactions.
Moreover, because the foreign currency market is a global,
twenty-four hour market, events could occur on that market which
will not be reflected in the forward, futures or options markets
until the following day, thereby preventing the Portfolios from
responding to such events in a timely manner.
Settlements of exercises of over-the-counter Forward
Contracts or foreign currency options generally must occur within
the country issuing the underlying currency, which in turn
requires traders to accept or make delivery of such currencies in
conformity with any United Sates or foreign restrictions and
regulations regarding the maintenance of foreign banking
relationships and fees, taxes or other charges.
Unlike transactions entered into by the Portfolios in
Futures Contracts and exchange-traded options, options on foreign
currencies, Forward Contracts and over-the-counter options on
securities are not traded on contract markets regulated by the
CFTC or (with the exception of certain foreign currency options)
the Commission. Such instruments are instead traded through
financial institutions acting as market-makers, although foreign
134
<PAGE>
currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to regulation by the
Commission. In an over-the-counter trading environment, many of
the protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation
limits, and adverse market movements could therefore continue to
an unlimited extent over a period of time. Although the
purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could
be lost. Moreover, the option writer could lose amounts
substantially in excess of the initial investment, due to the
margin and collateral requirements associated with such
positions.
In addition, over-the-counter transactions can be
entered into only with a financial institution willing to take
the opposite side, as principal, of a Portfolio's position unless
the institution acts as broker and is able to find another
counterparty willing to enter into the transaction with the
Portfolio. Where no such counterparty is available, it will not
be possible to enter into a desired transaction. There also may
be no liquid secondary market in the trading of over-the-counter
contracts, and a Portfolio could be required to retain options
purchased or written, or Forward Contracts entered into, until
exercise, expiration or maturity. This in turn could limit the
Portfolio's ability to profit from open positions or to reduce
losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject
to the guarantee of an exchange clearing house, and a Portfolio
will therefore be subject to the risk of default by, or the
bankruptcy of, the financial institution serving as its
counterparty. One or more such institutions also may decide to
discontinue their role as market-makers in a particular currency
or security, thereby restricting the Portfolio's ability to enter
into desired hedging transactions. A Portfolio will enter into
an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the
Adviser.
Transactions in over-the-counter options on foreign
currencies are subject to a number of conditions regarding the
commercial purpose of the purchaser of such option. The
Portfolios are not able to determine at this time whether or to
what extent additional restrictions on the trading of over-the-
counter options on foreign currencies may be imposed at some
point in the future, or the effect that any such restrictions may
have on the hedging strategies to be implemented by them.
135
<PAGE>
As discussed below, CFTC regulations require that a
Portfolio not enter into transactions in commodity futures
contracts or commodity option contracts for which the aggregate
initial margin and premiums exceed 5% of the fair market value of
the Portfolio's assets. Premiums paid to purchase over-the-
counter options on foreign currencies, and margins paid in
connection with the writing of such options, are required to be
included in determining compliance with this requirement, which
could, depending upon the existing positions in Futures Contracts
and Options on Futures Contracts already entered into by a
Portfolio, limit the Portfolio's ability to purchase or write
options on foreign currencies. Conversely, the existence of open
positions in options on foreign currencies could limit the
ability of the Portfolio to enter into desired transactions in
other options or futures contracts.
While Forward Contracts are not presently subject to
regulation by the CFTC, the CFTC may in the future assert or be
granted authority to regulate such instruments. In such event,
the Portfolio's ability to utilize Forward Contracts in the
manner set forth above could be restricted.
Options on foreign currencies traded on national
securities exchanges are within the jurisdiction of the
Commission, as are other securities traded on such exchanges. As
a result, many of the protections provided to traders on
organized exchanges will be available with respect to such
transactions. In particular, all foreign currency option
positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation (OCC),
thereby reducing the risk of counterparty default. Further, a
liquid secondary market in options traded on a national
securities exchange may be more readily available than in the
over-the-counter market, potentially permitting a Portfolio to
liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market
movements.
The purchase and sale of exchange-traded foreign
currency options, however, is subject to the risks of the
availability of a liquid secondary market described above, as
well as the risks regarding adverse market movements, the
margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the
effects of other political and economic events. In addition,
exchange-traded options on foreign currencies involve certain
risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in
applicable foreign countries for this purpose. As a result, if
it determines that foreign governmental restrictions or taxes
136
<PAGE>
would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its
clearing member, the OCC may impose special procedures on
exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar
settlement prices or prohibitions on exercise.
RESTRICTIONS ON THE USE OF FUTURES AND OPTION CONTRACTS.
Under applicable regulations of the CFTC, when a Portfolio enters
into transactions in Futures Contracts and Options on Futures
Contracts other than for bona fide hedging purposes, that
Portfolio maintains with its custodian a segregated liquid assets
account which, together with any initial margin deposits, are
equal to the aggregate market value of the Futures Contracts and
Options on Futures Contracts that it purchases. In addition, a
Portfolio may not purchase or sell such instruments if,
immediately thereafter, the sum of the amount of initial margin
deposits on the Portfolio's existing futures and options
positions and premiums paid for options purchased would exceed 5%
of the market value of the Portfolio's total assets.
Each Portfolio has adopted the additional restriction
that it will not enter into a Futures Contract if, immediately
thereafter, the value of securities and other obligations
underlying all such Futures Contracts would exceed 50% of the
value of such Portfolio's total assets. Moreover, a Portfolio
will not purchase put and call options if as a result more than
10% of its total assets would be invested in such options.
When a Portfolio purchases a Futures Contract, an amount
of cash and cash equivalents will be deposited in a segregated
account with the Fund's Custodian so that the amount so
segregated will at all times equal the value of the Futures
Contract, thereby insuring that the use of such futures is
unleveraged.
ECONOMIC EFFECTS AND LIMITATIONS. Income earned by a
Portfolio from its hedging activities is treated as capital gain
and, if not offset by net realized capital losses incurred by a
Portfolio, is distributed to shareholders in taxable
distributions. Although gain from futures and options
transactions may hedge against a decline in the value of a
Portfolio's portfolio securities, that gain, to the extent not
offset by losses, is distributed in light of certain tax
considerations and constitutes a distribution of that portion of
the value preserved against decline.
No Portfolio will over-hedge, that is, a Portfolio will
not maintain open short positions in futures or options contracts
if, in the aggregate, the market value of its open positions
exceeds the current market value of its securities portfolio plus
137
<PAGE>
or minus the unrealized gain or loss on such open positions,
adjusted for the historical volatility relationship between the
portfolio and futures and options contracts
Each Portfolio's ability to employ the options and
futures strategies described above depends on the availability of
liquid markets in such instruments. Markets in financial futures
and related options are still developing. It is impossible to
predict the amount of trading interest that may hereafter exist
in various types of options or futures. Therefore no assurance
can be given that a Portfolio will be able to use these
instruments effectively for the purposes set forth above. In
addition, a Portfolio's ability to engage in options and futures
transactions may be materially limited by tax considerations.
The Portfolio's ability to use options, futures and
forward contracts may be limited by tax considerations. In
particular, tax rules might affect the length of time for which
the Portfolios can hold such contracts and the character of the
income earned on such contracts. In addition, differences
between each Portfolio's book income (upon the basis of which
distributions are generally made) and taxable income arising from
its hedging activities may result in return of capital
distributions, and in some circumstances, distributions in excess
of the Portfolio's book income may be required in order to meet
tax requirements.
FUTURE DEVELOPMENTS. The above discussion relates to
each Portfolio's proposed use of futures contracts, options and
options on futures contracts currently available. As noted
above, the relevant markets and related regulations are still in
the developing stage. In the event of future regulatory or
market developments, each Portfolio may also use additional types
of futures contracts or options and other investment techniques
for the purposes set forth above.
PORTFOLIO TURNOVER. The Adviser manages each
Portfolio's portfolio by buying and selling securities to help
attain its investment objective. The portfolio turnover rate for
each Portfolio for their respective fiscal years ended
December 31, 1996 was 211% for Conservative Investors Portfolio,
160% for Growth Investors Portfolio and 98% for Growth Portfolio.
The portfolio turnover rate for each Portfolio for their
respective fiscal years ended December 31, 1997 was 209% for
Conservative Investors Portfolio, 164% for Growth Investors
Portfolio and 62% for Growth Portfolio. A high portfolio
turnover rate will involve greater costs to a Portfolio
(including brokerage commissions and transaction costs) and may
also result in the realization of taxable capital gains,
including short-term capital gains taxable at ordinary income
138
<PAGE>
rates. See "Dividends, Distributions and Taxes and Portfolio
Transactions" below.
INVESTMENT RESTRICTIONS. Except as described below and
except as otherwise specifically stated in the Prospectus or this
Statement of Additional Information, the investment policies of
each Portfolio set forth in the Prospectus and in this Statement
of Additional Information are not fundamental and may be changed
without shareholder approval.
The following is a description of restrictions on the
investments to be made by the Portfolios, which restrictions may
not be changed without the approval of a majority of the
outstanding voting securities of the relevant Portfolio.
None of the Portfolios will:
(1) Borrow money in excess of lot of the value (taken
at the lower of cost or current value) of its total assets (not
including the amount borrowed) at the time the borrowing is made,
and then only from banks as a temporary measure to facilitate the
meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio
investments or pending settlement of securities transactions or
for extraordinary or emergency purposes.
(2) Underwrite securities issued by other persons
except to the extent that, in connection with the disposition of
its portfolio investments, it may be deemed to be an underwriter
under certain federal securities laws.
(3) Purchase or retain real estate or interests in real
estate, although each Portfolio may purchase securities which are
secured by real estate and securities of companies which invest
in or deal in real estate.
(4) Make loans to other persons except by the purchase
of obligations in which such Portfolio may invest consistent with
its investment policies and by entering into repurchase
agreements, or by lending its portfolio securities representing
not more than 25% of its total assets.
(5) Issue any senior security (as that term is defined
in the 1940 Act), if such issuance is specifically prohibited by
the 1940 Act or the rules and regulations promulgated thereunder.
For the purposes of this restriction, collateral arrangements
with respect to options, Futures Contracts and Options on Futures
Contracts and collateral arrangements with respect to initial and
variation margins are not deemed to be the issuance of a senior
security. (There is no intention to issue senior securities
except as set forth in paragraph 1 above.)
139
<PAGE>
It is also a fundamental policy of each Portfolio that
it may purchase and sell futures contracts and related options.
In addition, the following is a description of operating
policies which the Fund has adopted on behalf of the Portfolios
but which are not fundamental and are subject to change without
shareholder approval.
None of the Portfolios will:
(a) Pledge, mortgage, hypothecate or otherwise encumber
an amount of its assets taken at current value in excess of 15%
of its total assets (taken at the lower of cost or current value)
and then only to secure borrowings permitted by restriction (1)
above. For the purpose of this restriction, the deposit of
securities and other collateral arrangements with respect to
reverse repurchase agreements, options, Futures Contracts,
Forward Contracts and options on foreign currencies, and payments
of initial and variation margin in connection therewith are not
considered pledges or other encumbrances.
(b) Purchase securities on margin, except that each
Portfolio may obtain such short-term credits as may be necessary
for the clearance of purchases and sales of securities, and
except that each Portfolio may make margin payments in connection
with Futures Contracts, Options on Futures Contracts, options,
Forward Contracts or options on foreign currencies.
(c) Make short sales of securities or maintain a short
position for the account of such Portfolio unless at all times
when a short position is open it owns an equal amount of such
securities or unless by virtue of its ownership of other
securities it has at all such times a right to obtain securities
(without payment of further consideration) equivalent in kind and
amount to the securities sold, provided that if such right is
conditional the sale is made upon equivalent conditions and
further provided that no Portfolio will make such short sales
with respect to securities having a value in excess of 5% of its
total assets.
(d) Write, purchase or sell any put or call option or
any combination thereof, provided that this shall not prevent a
Portfolio from writing, purchasing and selling puts, calls or
combinations thereof with respect to securities, indexes of
securities or foreign currencies, and with respect to Futures
Contracts.
(e) Purchase voting securities of any issuer if such
purchase, at the time thereof, would cause more than 10% of the
outstanding voting securities of such issuer to be held by such
Portfolio; or purchase securities of any issuer if such purchase
140
<PAGE>
at the time thereof would cause more than 10% of any class of
securities of such issuer to be held by such Portfolio. For this
purpose all indebtedness of an issuer shall be deemed a single
class and all preferred stock of an issuer shall be deemed a
single class.
(f) Invest in securities of any issuer if, to the
knowledge of the Fund, officers and Directors of such Fund and
officers and directors of the Adviser who beneficially own more
than 0.5% of the shares of securities of that issuer together own
more than 5%.
(g) Invest more than 5% of its assets in the securities
of any one investment company, own more than 3% of any one
investment company's outstanding voting securities or have total
holdings of investment company securities in excess of 10% of the
value of the Portfolio's assets except that the Growth Portfolio
will not purchase securities issued by any other registered
investment company or investment trust except (A) by purchase in
the open market where no commission or profit to a sponsor or
dealer results from such purchase other than the customary
brokers commission, or (B) where no commission or profit to a
sponsor or dealer results from such purchase, or (C) when such
purchase, though not made in the open market, is part of a plan
of merger or consolidation; provided, however, that the Portfolio
will not purchase such securities if such purchase at the time
thereof would cause more than 5% of its total assets (taken at
market value) to be invested in the securities of such issuers;
and, provided further, that the Portfolio's purchases of
securities issued by an open-end investment company will be
consistent with the provisions of the 1940 Act.
(h) Make investments for the purpose of exercising
control or management.
(i) Participate on a joint or joint and several basis
in any trading account in securities.
(j) Invest in interests in oil, gas, or other mineral
exploration or development programs, although each Portfolio may
purchase securities which are secured by such interests and may
purchase securities of issuers which invest in or deal in oil,
gas or other mineral exploration or development programs.
(k) Purchase warrants, if, as a result, a Portfolio
would have more than 5% of its total assets invested in warrants
or more than 28 of its total assets invested in warrants which
are not listed on the New York Stock Exchange or the American
Stock Exchange.
141
<PAGE>
(l) Purchase commodities or commodity contracts,
provided that this shall not prevent a Portfolio from entering
into interest rate futures contracts, securities index futures
contracts, foreign currency futures contracts, forward foreign
currency exchange contracts and options (including options on any
of the foregoing) to the extent such action is consistent with
such Portfolio's investment objective and policies.
(m) Purchase additional securities in excess of 5% of
the value of its total assets until all of a Portfolio's
outstanding borrowings (as permitted and described in Restriction
No. 1 above) have been repaid.
Whenever any investment restriction-states a maximum
percentage of a Portfolio's assets which may be invested in any
security or other asset, it is intended that such maximum
percentage limitation be determined immediately after and as a
result of such Portfolio's acquisition of such securities or
other assets. Accordingly, any later increase or decrease beyond
the specified limitation resulting from a change in value or net
asset value will not be considered a violation of such percentage
limitation.
WORLDWIDE PRIVATIZATION PORTFOLIO
Worldwide Privatization Portfolio seeks long term
capital appreciation. In seeking to achieve its investment
objective, as a fundamental policy, the Portfolio invests at
least 65% of its total assets in equity securities that are
issued by enterprises that are undergoing, or that have
undergone, privatization as described below, although normally,
significantly more of the Portfolio's total assets will be
invested in such securities. The balance of the Portfolio's
investment portfolio includes securities of companies that are
believed by the Adviser to be beneficiaries of the privatization
process. Equity securities include common stock, preferred
stock, rights or warrants to subscribe for or purchase common or
preferred stock, securities (including debt securities)
convertible into common or preferred stock and securities that
give the holder the right to acquire common or preferred stock.
The Portfolio is designed for individual investors
desiring to take advantage of investment opportunities,
historically inaccessible to U.S. investors, that are created by
privatizations of state enterprises in both established and
developing economies, including those in Western Europe and
Scandinavia, Australia, New Zealand, Latin America, Asia and
Eastern and Central Europe and, to a lesser degree, Canada and
the United States. In the opinion of the Adviser, substantial
potential for appreciation in the value of equity securities of
an enterprise undergoing or following privatization exists as the
142
<PAGE>
enterprise rationalizes its management structure, operations and
business strategy to position itself to compete efficiently in a
market economy, and the Portfolio will seek to emphasize
investments in the equity securities of such enterprises.
A major premise of the Portfolio's investment approach
is that, because of the particular characteristics of privatized
companies, their equity securities offer investors opportunities
for significant capital appreciation. In particular, because
privatization programs are an important part of a country's
economic restructuring, equity securities that are brought to the
market by means of initial equity offerings frequently are priced
to attract investment in order to secure the issuers successful
transition to private sector ownership. In addition, these
enterprises generally tend to enjoy dominant market positions in
their local markets. Because of the relaxation of government
controls upon privatization, these enterprises typically have the
potential for significant managerial and operational efficiency
gains, which, among other factors, can increase their earnings
due to the restructuring that accompanies privatization and the
incentives management frequently receives.
The following investment policies and restrictions
supplement, and should be read in conjunction with the
information set forth in the Prospectus of the Portfolio under
the heading Description of the Portfolio. Except as otherwise
noted, the Portfolio's investment policies described below are
not designated fundamental policies within the meaning of the
1940 Act and, therefore, may be changed by the Directors of the
Portfolio without a shareholder vote. However, the Portfolio
will not change its investment policies without contemporaneous
written notice to shareholders.
INVESTMENT POLICIES
DEBT SECURITIES AND CONVERTIBLE DEBT SECURITIES. The
Portfolio may invest up to 35% of its total assets in debt
securities and convertible debt securities of issuers whose
common stocks are eligible for purchase by the Portfolio under
the investment policies described above. Debt securities include
bonds, debentures, corporate notes and preferred stocks.
Convertible debt securities are such instruments that are
convertible at a stated exchange rate into common stock. Prior
to their conversion, convertible securities have the same general
characteristics as non-convertible debt securities which provide
a stable stream of income with generally higher yields than those
of equity securities of the same or similar issuers. The market
value of debt securities and convertible debt securities tends to
decline as interest rates increase and, conversely, to increase
as interest rates decline. While convertible securities
generally offer lower interest yields than non-convertible debt
143
<PAGE>
securities of similar quality, they do enable the investor to
benefit from increases in the market price of the underlying
common stock.
When the market price of the common stock underlying a
convertible security increases, the price of the convertible
security increasingly reflects the value of the underlying common
stock and may rise accordingly. As the market price of the
underlying common stock declines, the convertible security tends
to trade increasingly on a yield basis, and thus may not
depreciate to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks in an issuers
capital structure. They are consequently of higher quality and
entail less risk than the issuers common stock, although the
extent to which such risk is reduced depends in large measure
upon the degree to which the convertible security sells above its
value as a fixed-income security.
The Portfolio may maintain not more than 5% of its net
assets in debt securities rated below Baa by Moody's and BBB by
S&P, Duff & Phelps or Fitch, or, if not rated, determined by the
Adviser to be of equivalent quality. The Portfolio will not
purchase a debt security that, at the time of purchase, is rated
below B by Moody's, Duff & Phelps, Fitch and S&P, or determined
by the Adviser to be of equivalent quality, but may retain a debt
security the rating of which drops below B. See "Special Risk
Considerations" below.
OPTIONS. The Portfolio may write covered put and call
options and purchase put and call options on securities of the
types in which it is permitted to invest that are traded on U.S.
and foreign securities exchanges and over-the-counter, including
options on market indices. The Portfolio will only write covered
put and call options, unless such options are written for cross-
hedging purposes. There are no specific limitations on the
Portfolio's writing and purchasing of options.
If a put option written by the Portfolio were exercised,
the Portfolio would be obligated to purchase the underlying
security at the exercise price. If a call option written by the
Portfolio were exercised, the Portfolio would be obligated to
sell the underlying security at the exercise price. For
additional information on the use, risks and costs of options,
see Appendix C.
The Portfolio may purchase or write options on
securities of the types in which it is permitted to invest in
privately negotiated (i.e., over-the-counter) transactions. The
Portfolio will effect such transactions only with investment
dealers and other financial institutions (such as commercial
banks or savings and loan institutions) deemed creditworthy by
144
<PAGE>
the Adviser, and the Adviser has adopted procedures for
monitoring the creditworthiness of such entities. Options
purchased or written by the Portfolio in negotiated transactions
are illiquid and it may not be possible for the Portfolio to
effect a closing transaction at a time when the Adviser believes
it would be advantageous to do so. See "Description of the
Portfolio -- Additional Investment Policies and Practices --
Illiquid Securities" in the Portfolio's Prospectus.
FUTURES AND RELATED OPTIONS. For a discussion regarding
futures contracts and options on futures contracts, see "North
American Government Income Portfolio -- Futures Contracts and
Options on Futures Contracts," above.
For additional information on the use, risks and costs
of futures contracts and options on futures contracts, see
Appendix B.
OPTIONS ON FOREIGN CURRENCIES. For additional
information on the use, risks and costs of options on foreign
currencies, see Appendix B.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. For a
discussion regarding forward foreign currency exchange contracts,
see "North American Government Income Portfolio -- Forward
Foreign Currency Exchange Contracts," above.
FORWARD COMMITMENTS. No forward commitments will be
made by the Portfolio if, as a result, the Portfolio's aggregate
commitments under such transactions would be more than 30% of the
then current value of the Portfolio's total assets. For a
discussion regarding forward commitments, see "Other Investment
Policies -- Forward Commitments," below.
SECURITIES NOT READILY MARKETABLE. The Portfolio may
invest up to 15% of its net assets in illiquid securities which
include, among others, securities for which there is no readily
available market. The Portfolio may therefore not be able to
readily sell such securities. Such securities are unlike
securities which are traded in the open market and which can be
expected to be sold immediately if the market is adequate. The
sale price of securities not readily marketable may be lower or
higher than the Advisers most recent estimate of their fair
value. Generally, less public information is available with
respect to the issuers of such securities than with respect to
companies whose securities are traded on an exchange. Securities
not readily marketable are more likely to be issued by small
businesses and therefore subject to greater economic, business
and market risks than the listed securities of more well-
established companies. Adverse conditions in the public
securities markets may at certain times preclude a public
145
<PAGE>
offering of an issuers securities. To the extent that the
Portfolio makes any privately negotiated investments in state
enterprises, such investments are likely to be in securities that
are not readily marketable. It is the intention of the Portfolio
to make such investments when the Adviser believes there is a
reasonable expectation that the Portfolio would be able to
dispose of its investment within three years. There is no law in
a number of the countries in which the Portfolio may invest
similar to the U.S. Securities Act of 1933 (the 1933 Act)
requiring an issuer to register the public sale of securities
with a governmental agency or imposing legal restrictions on
resales of securities, either as to length of time the securities
may be held or manner of resale. However, there may be
contractual restrictions on resale of securities. In addition,
many countries do not have informational disclosure requirements
similar in scope to those required under the U.S. Securities
Exchange Act of 1934 (the "1934 Act").
REPURCHASE AGREEMENTS. The Portfolio may invest in
repurchase agreements pertaining to U.S. Government Securities.
For additional information regarding repurchase agreements, see
"Other Investment Policies -- Repurchase Agreements", below.
PORTFOLIO TURNOVER. Generally, the Portfolio's policy
with respect to portfolio turnover is to hold its securities for
six months or longer. However, it is also the Portfolio's policy
to sell any security whenever, in the judgment of the Adviser,
its appreciation possibilities have been substantially realized
or the business or market prospects for such security have
deteriorated, irrespective of the length of time that such
security has been held. The Adviser anticipates that the
Portfolio's annual rate of portfolio turnover will not exceed
200%. A 200% annual turnover rate would occur if all the
securities in the Portfolio's portfolio were replaced twice
within a period of one year. The turnover rate has a direct
effect on the transaction costs to be borne by the Portfolio, and
as portfolio turnover increases it is more likely that the
Portfolio will realize short-term capital gains. The portfolio
turnover rates for the fiscal years ended December 31, 1996 and
December 31, 1997 were 47% and 58%, respectively.
SPECIAL RISK CONSIDERATIONS
Investment in the Portfolio involves the special risk
considerations described below.
RISKS OF FOREIGN INVESTMENT
Participation in Privatizations. The governments of
certain foreign countries have, to varying degrees, embarked on
privatization programs contemplating the sale of all or part of
146
<PAGE>
their interests in state enterprises. In certain jurisdictions,
the ability of foreign entities, such as the Portfolio, to
participate in privatizations may be limited by local law, or the
price or terms on which the Portfolio may be able to participate
may be less advantageous than for local investors. Moreover,
there can be no assurance that governments that have embarked on
privatization programs will continue to divest their ownership of
state enterprises, that proposed privatizations will be
successful or that governments will not re-nationalize
enterprises that have been privatized.
RISK OF SALE OR CONTROL BY MAJOR STOCKHOLDERS. In the
case of the enterprises in which the Portfolio may invest, large
blocks of the stock of those enterprises may be held by a small
group of stockholders, even after the initial equity offerings by
those enterprises. The sale of some portion or all of those
blocks could have an adverse effect on the price of the stock of
any such enterprise.
RECENT MANAGEMENT REORGANIZATION. Prior to making an
initial equity offering, most state enterprises or former state
enterprises go through an internal reorganization of management.
Such reorganizations are made in an attempt to better enable
these enterprises to compete in the private sector. However,
certain reorganizations could result in a management team that
does not function as well as the enterprises prior management and
may have a negative effect on such enterprise. In addition, the
privatization of an enterprise by its government may occur over a
number of years, with the government continuing to hold a
controlling position in the enterprise even after the initial
equity offering for the enterprise.
LOSS OF GOVERNMENT SUPPORT. Prior to privatization,
most of the state enterprises in which the Portfolio may invest
enjoy the protection of and receive preferential treatment from
the respective sovereigns that own or control them. After making
an initial equity offering these enterprises may no longer have
such protection or receive such preferential treatment and may
become subject to market competition from which they were
previously protected. Some of these enterprises may not be able
to effectively operate in a competitive market and may suffer
losses or experience bankruptcy due to such competition.
CURRENCY CONSIDERATIONS. Because substantially all of
the Portfolio's assets will be invested in securities denominated
in foreign currencies and a corresponding portion of the
Portfolio's revenues will be received in such currencies, the
dollar equivalent of the Portfolio's net assets and distributions
will be adversely affected by reductions in the value of certain
foreign currencies relative to the U.S. Dollar. Such changes
will also affect the Portfolio's income. The Portfolio however,
147
<PAGE>
has the ability to protect itself against adverse changes in the
values of foreign currencies by engaging in certain of the
investment practices listed above. If the value of the foreign
currencies in which the Portfolio receives its income falls
relative to the U.S. Dollar between receipt of the income and the
making of Portfolio distributions, the Portfolio may be required
to liquidate securities in order to make distributions if the
Portfolio has insufficient cash in U.S. Dollars to meet
distribution requirements. Similarly, if an exchange rate
declines between the time the Portfolio incurs expenses in U.S.
Dollars and the time cash expenses are paid, the amount of the
currency required to be converted into U.S. Dollars in order to
pay expenses in U.S. Dollars could be greater than the equivalent
amount of such expenses in the currency at the time they were
incurred.
MARKET CHARACTERISTICS. The securities markets of many
foreign countries are relatively small, with the majority of
market capitalization and trading volume concentrated in a
limited number of companies representing a small number of
industries. Consequently, the Portfolio's investment portfolio
may experience greater price volatility and significantly lower
liquidity than a portfolio invested in equity securities of U.S.
companies. These markets may be subject to greater influence by
adverse events generally affecting the market, and by large
investors trading significant blocks of securities, than is usual
in the United States. Securities settlements may in some
instances be subject to delays and related administrative
uncertainties.
INVESTMENT AND REPATRIATION RESTRICTIONS. Foreign
investment in the securities markets of certain foreign countries
is restricted or controlled to varying degrees. These
restrictions or controls may at times limit or preclude
investment in certain securities and may increase the cost and
expenses of the Portfolio. As illustrations, certain countries
require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in
a particular company, or limit the investment by foreign persons
to only a specific class of securities of a company which may
have less advantageous terms than securities of the company
available for purchase by nationals or impose additional taxes on
foreign investors. The national policies of certain countries
may restrict investment opportunities in issuers deemed sensitive
to national interests. In addition, the repatriation of
investment income, capital or the proceeds of sales of securities
from certain of the countries is controlled under regulations,
including in some cases the need for certain advance government
notification or authority. In addition, if a deterioration
occurs in a country's balance of payments, the country could
impose temporary restrictions on foreign capital remittances.
148
<PAGE>
The Portfolio could be adversely affected by delays in, or a
refusal to grant, any required governmental approval for
repatriation, as well as by the application to it of other
restrictions on investment. The liquidity of the Portfolio's
investments in any country in which any of these factors exist
could be affected and the Adviser will monitor the affect of any
such factor or factors on the Portfolio's investments. Investing
in local markets may require the Portfolio to adopt special
procedures, seek local governmental approvals or other actions,
any of which may involve additional costs to the Portfolio.
CORPORATE DISCLOSURE STANDARDS. Issues of securities in
foreign jurisdictions are generally not subject to the same
degree of regulation as are U.S. issuers with respect to such
matters as insider trading rules, restrictions on market
manipulation, shareholder proxy requirements and timely
disclosure of information. The reporting, accounting and
auditing standards of foreign countries may differ from U.S.
standards in important respects and less information may be
available to investors in foreign securities than to investors in
U.S. securities.
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 appearing on the financial
statements of a foreign issuer may not reflect its financial
position or results of operations in the way they would be
reflected had the financial statements been prepared in
accordance with U.S. generally accepted accounting principles.
In addition, for an issuer that keeps accounting records in local
currency, inflation accounting rules in some of the countries in
which the Portfolio will invest require, for both tax and
accounting purposes, that certain assets and liabilities be
restated on the issuers balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation
accounting may indirectly generate losses or profits.
Consequently, financial data may be materially affected by
restatements for inflation and may not accurately reflect the
real condition of those issuers and securities markets.
Substantially less information is publicly available about
certain non-U.S. issuers than is available about U.S. issuers.
TRANSACTION COSTS. Transaction costs including
brokerage commissions for transactions both on and off the
securities exchanges in many foreign countries are generally
higher than in the United States.
U.S. AND FOREIGN TAXES. Foreign taxes paid by the
Portfolio may be creditable or deductible by U.S. shareholders
for U.S. income tax purposes. No assurance can be given that
149
<PAGE>
applicable tax laws and interpretations will not change in the
future. Moreover, non-U.S. investors may not be able to credit
or deduct such foreign taxes. Investors should review carefully
the information discussed under the heading "Dividends,
Distributions and Taxes" and should discuss with their tax
advisers the specific tax consequences of investing in the
Portfolio.
ECONOMIC POLITICAL AND LEGAL RISKS. The economies of
individual foreign countries may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross
domestic product or gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of
payments position. Nationalization, expropriation or
confiscatory taxation, currency blockage, political changes,
government regulation, political or social instability or
diplomatic developments could affect adversely the economy of a
foreign country or the Portfolio's investments in such country.
In the event of expropriation, nationalization or other
confiscation, the Portfolio could lose its entire investment in
the country involved. In addition, laws in foreign countries
governing business organizations, bankruptcy and insolvency may
provide less protection to security holders such as the Portfolio
than that provided by U.S. laws. The Portfolio intends to spread
its portfolio investments among the capital markets of a number
of countries and, under normal market conditions, will invest in
the equity securities of issuers based in at least four, and
normally considerably more, countries. There is no restriction,
however, on the percentage of the Portfolio's assets that may be
invested in countries within any one region of the world. To the
extent that the Portfolio's assets are invested within any one
region, the Portfolio may be subject to any special risks that
may be associated with that region.
NON-DIVERSIFIED STATUS. The Portfolio is a non-
diversified investment company, 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, the Portfolio
intends to conduct its operations so as to qualify to be taxed as
a regulated investment company for purposes of the Internal
Revenue Code of 1986, as amended, which will relieve the
Portfolio of any liability for federal income tax to the extent
its earnings are distributed to shareholders. See "Dividends,
Distribution and Taxes--United States Federal Income Taxes-
- -General." To so qualify, among other requirements, the
Portfolio limits 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
securities 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
150
<PAGE>
securities of a single issuer and the Portfolio will not own more
than 10% of the outstanding voting securities of a single issuer.
Investments in U.S. Government Securities are not subject to
these limitations. Because the Portfolio, as a non-diversified
investment company, may invest in a smaller number of individual
issuers than a diversified investment company, an investment in
the Portfolio may, under certain circumstances, present greater
risk to an investor than an investment in a diversified
investment company.
Securities issued or guaranteed by foreign governments
are not treated like U.S. Government Securities for purposes of
the diversification tests described in the preceding paragraph,
but instead are subject to these tests in the same manner as the
securities of non-governmental issuers.
INVESTMENTS IN LOWER-RATED DEBT SECURITIES. Debt
securities rated below investment grade, i.e., Ba and lower by
Moody's or BB and lower by S&P, Duff & Phelps and Fitch (lower-
rated securities), or, if not rated, determined by the Adviser to
be of equivalent quality, are subject to greater risk of loss of
principal and interest than higher-rated securities and are
considered to be predominantly speculative with respect to the
issuers capacity to pay interest and repay principal, which may
in any case decline during sustained periods of deteriorating
economic conditions or rising interest rates. They are also
generally considered to be subject to greater market risk than
higher-rated securities in times of deteriorating economic
conditions. In addition, lower-rated securities may be more
susceptible to real or perceived adverse economic and competitive
industry conditions than investment grade securities, although
the market values of securities rated below investment grade and
comparable unrated securities tend to react less to fluctuations
in interest rate levels than do those of higher-rated securities.
Debt securities rated Ba by Moody's or BB by S&P, Duff & Phelps
and Fitch are judged to have speculative characteristics or to be
predominantly speculative with respect to the issuers ability to
pay interest and repay principal. Debt securities rated B by
Moody's, S&P, Duff & Phelps and Fitch are judged to have highly
speculative characteristics or to be predominantly speculative.
Such securities may have small assurance of interest and
principal payments. Debt securities having the lowest ratings
for non-subordinated debt instruments assigned by Moody's, S&P,
Duff & Phelps or Fitch (i.e., rated C by Moody's or CCC and
lower by S&P, Duff & Phelps or Fitch) are considered to have
extremely poor prospects of ever attaining any real investment
standing, to have a current identifiable vulnerability to
default, to be unlikely to have the capacity to pay interest and
repay principal when due in the event of adverse business,
financial or economic conditions, and/or to be in default or not
current in the payment of interest or principal.
151
<PAGE>
Ratings of fixed-income securities by Moody's, S&P, Duff
& Phelps or Fitch are a generally accepted barometer of credit
risk. They are, however, subject to certain limitations from an
investors standpoint. the rating of a security is heavily
weighted by past developments and does not necessarily reflect
probable 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 the
credit risk of securities within each rating category. See
Appendix A in the Prospectus for a description of Moody's, S&P,
Duff & Phelps and Fitch bond and commercial paper ratings.
Adverse publicity and investor perceptions about lower-
rated securities, whether or not based on fundamental analysis,
may tend to decrease the market value and liquidity of such
lower-rated securities. The Adviser tries to reduce the risk
inherent in investment in lower-rated securities through credit
analysis, diversification and attention to current developments
and trends in interest rates and economic and political
conditions. However, there can be no assurance that losses will
not occur. Since the risk of default is higher for lower-rated
securities, the Advisers research and credit analysis are a
correspondingly important aspect of its program for managing the
Portfolio's securities than would be the case if the Portfolio
did not invest in lower-rated securities. In considering
investments for the Portfolio, the Adviser attempts to identify
those high-risk, high-yield securities whose financial condition
is adequate to meet future obligations, has improved or is
expected to improve in the future. The Advisers analysis focuses
on relative values based on such factors as interest or dividend
coverage, asset coverage earnings prospects, and the experience
and managerial strength of the issuer.
Non-rated securities will also be considered for
investment by the Portfolio when the Adviser believes that the
financial condition of the issuers of such securities, or the
protection afforded by the terms of the securities themselves,
limits the risk to the Portfolio to a degree comparable to that
of rated securities which are consistent with the Portfolio's
objective and policies.
INVESTMENT RESTRICTIONS
The following restrictions, which supplement those set
forth in the Portfolio's Prospectus, may not be changed without
approval by the vote of a majority of the Portfolio's outstanding
voting securities, which means the affirmative vote of the
holders of (i) 67% or more or the shares represented at a meeting
at which more than 50% of the outstanding shares are represented,
or (ii) more than 50% of the outstanding shares, whichever is
less. The Portfolio may not:
152
<PAGE>
(1) Make loans except through (i) the purchase of debt
obligations in accordance with its investment objectives and
policies; (ii) the lending of portfolio securities; or (iii) the
use of repurchase agreements;
(2) Participate on a joint or joint and several basis
in any securities trading account;
(3) Invest in companies for the purpose of exercising
control;
(4) Issue any senior security within the meaning of the
Act except that the Portfolio may write put and call options;
(5) Make short sales of securities or maintain a short
position, unless at all times when a short position is open it on
an equal amount of such securities or securities convertible into
or exchangeable for, without payment of any further
consideration, securities of the same issue as, and equal in
amount to, the securities sold short (short sales against the
box), and unless not more than 10% of the Portfolio's net assets
(taken at market value) is held as collateral for such sales at
any one time (it is the Portfolio's present intention to make
such sales only for the purpose of deferring realization of gain
or loss for Federal income tax purposes); or
(6)(i) Purchase or sell real estate, except that it may
purchase and sell securities of companies which deal in real
estate or interests therein; (ii) purchase or sell commodities or
commodity contracts including futures contracts (except foreign
currencies, foreign currency options and futures, options and
futures on securities and securities indices and forward
contracts or contracts for the future acquisition or delivery of
securities and foreign currencies and related options on futures
contracts and similar contracts); (iii) invest in interests in
oil, gas, or other mineral exploration or development programs;
(iv) purchase securities on margin, except for such short-term
credits as may be necessary for the clearance of transactions;
and (v) act as an underwriter of securities, except that the
Portfolio may acquire restricted securities under circumstances
in which, if such securities were sold, the Portfolio might be
deemed to be an underwriter for purposes of the Securities Act.
TECHNOLOGY PORTFOLIO
General
The primary investment objective of the Portfolio is to
emphasize growth of capital, and investments will be made based
upon their potential for capital appreciation. Therefore,
current income is incidental to the objective of capital growth.
153
<PAGE>
However, subject to the limitations referred to under Options
below, the Portfolio may seek to earn income through the writing
of listed call options. In seeking to achieve its objective, the
Portfolio invests primarily in securities of companies which are
expected to benefit from technological advances and improvements
(i.e., companies which use technology extensively in the
development of new or improved products or processes). The
Portfolio has at least 80% of its assets invested in the
securities of such companies except when the Portfolio assumes a
temporary defensive position. There obviously can be no
assurance that the Portfolio's investment objective will be
achieved, and the nature of the Portfolio's investment objective
and policies may involve a somewhat greater degree of risk than
would be present in a more conservative investment approach.
Except as otherwise indicated, the investment policies
of the Portfolio are not fundamental policies and may, therefore,
be changed by the Board of Directors without a shareholder vote.
However, the Portfolio will not change its investment policies
without contemporaneous written notice to its shareholders. The
Portfolio's investment objective, as well as the Portfolio's 80%
investment policy described above, may not be changed without
shareholder approval.
The Portfolio expects under normal circumstances to have
substantially all of its assets invested in equity securities
(common stocks or securities convertible into common stocks or
rights or warrants to subscribe for or purchase common stocks).
When business or financial conditions warrant, the Portfolio may
take a defensive position and invest without limit in investment
grade debt securities or preferred stocks or hold its assets in
cash. The Portfolio at times may also invest in debt securities
and preferred stocks offering an opportunity for price
appreciation (e.g., convertible debt securities).
Critical factors which are considered in the selection
of securities included the economic and political outlook, the
value of individual securities relative to other investment
alternatives, trends in the determinants of corporate profits,
and management capability and practices. Generally speaking,
disposal of a security will be based upon factors such as (i)
actual or potential deterioration of the issuers earning power
which the Portfolio believes may adversely affect the price of
its securities, (ii) increases in the price level of the security
or of securities generally which the Portfolio believes are not
fully warranted by the issuers earning power, and (iii) changes
in the relative opportunities offered by various securities.
Companies in which the Portfolio invests include those
whose processes, products or services are anticipated by Alliance
Capital Management L.P., the Portfolio's investment adviser (the
154
<PAGE>
Investment Adviser), to be significantly benefited by the
utilization or commercial application of scientific discoveries
or developments in such fields as, for example, aerospace,
aerodynamics, astrophysics, biochemistry, chemistry,
communications, computers, conservation, electricity, electronics
(including radio, television and other media), energy (including
development, production and service activities), geology, health
care, mechanical engineering, medicine, metallurgy, nuclear
physics, oceanography and plant physiology.
The Portfolio endeavors to invest in companies where the
expected benefits to be derived from the utilization of
technology significantly enhances the prospects of the company as
a whole (including, in the case of a conglomerate, affiliated
companies). The Portfolio's investment objective permits the
Portfolio to seek securities having potential for capital
appreciation in a variety of industries.
Certain of the companies in which the Portfolio invests
may allocate greater than usual amounts to research and product
development. The securities of such companies may experience
above-average price movements associated with the perceived
prospects of success of the research and development programs. In
addition, companies in which the Portfolio invests could be
adversely affected by lack of commercial acceptance of a new
product or products or by technological change and obsolescence.
INVESTMENT POLICIES
OPTIONS. The Portfolio may write call options and may
purchase and sell put and call options written by others,
combinations thereof, or similar options. The Portfolio may not
write put options. A put option gives the buyer of such option,
upon payment of a premium, the right to deliver a specified
number of shares of a stock to the writer of the option on or
before a fixed date at a predetermined price. A call option
gives the purchaser of the option, upon payment of a premium, the
right to call upon the writer to deliver a specified number of
shares of a specified stock on or before a fixed date, at a
predetermined price, usually the market price at the time the
contract is negotiated. A call option written by the Portfolio
is covered if the Portfolio owns the underlying security covered
by the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for
additional cash, U.S. Government Securities or other liquid high
grade debt obligation held in a segregated account by the Fund's
Custodian) upon conversion or exchange of other securities held
in its portfolio. A call option is also covered if the Portfolio
holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call
155
<PAGE>
written or (b) is greater than the exercise price of the call
written if the difference is maintained by the Portfolio in cash
in a segregated account with the Fund's Custodian. The premium
paid by the purchaser of an option will reflect, among other
things, the relationship of the exercise price to the market
price and volatility of the underlying security, the remaining
term of the option, supply and demand and interest rates.
The writing of call options, therefore, involves a
potential loss of opportunity to sell securities at high prices.
In exchange for the premium received by it, the writer of a fully
collateralized call option assumes the full downside risk of the
securities subject to such option. In addition, the writer of the
call gives up the gain possibility of the stock protecting the
call. Generally, the opportunity for profit from the writing of
options occurs when the stocks involved are lower priced or
volatile, or both. While an option that has been written is in
force, the maximum profit that may be derived from the optioned
stock is the premium less brokerage commissions and fees.
It is the Portfolio's policy not to write a call option
if the premium to be received by the Portfolio in connection with
such options would not produce an annualized return of at least
15% of the then market value of the securities subject to the
option. Commissions, stock transfer taxes and other expenses of
the Portfolio must be deducted from such premium receipts.
Option premiums vary widely depending primarily on supply and
demand. Calls written by the Portfolio are ordinarily sold
either on a national securities exchange or through put and call
dealers, most, if not all, of which are members of a national
securities exchange on which options are traded, and in such case
are endorsed or guaranteed by a member of a national securities
exchange or qualified broker-dealer, which may be Donaldson,
Lufkin & Jenrette Securities Corporation, an affiliate of the
Adviser. The endorsing or guaranteeing firm requires that the
option writer (in this case the Portfolio) maintain a margin
account containing either corresponding stock or other equity as
required by the endorsing or guaranteeing firm.
The Portfolio will not sell a call option written or
guaranteed by it if, as a result of such sale, the aggregate of
the Portfolio's securities subject to outstanding call options
(valued at the lower of the option price or market value of such
securities) would exceed 15% of the Portfolio's total assets.
The Portfolio will not sell any call option if such sale would
result in more than 10% of the Portfolio's assets being committed
to call options written by the Portfolio which, at the time of
sale by the Portfolio, have a remaining term of more than 100
days.
156
<PAGE>
OPTIONS ON MARKET INDICES. Options on securities
indices are similar to options on a security except that, rather
than the right to take or make delivery of a security at a
specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of
cash if the closing level of the chosen index is greater than (in
the case of a call) or less than (in the case of a put) the
exercise price of the option.
Through the purchase of listed index options, the
Portfolio could achieve many of the same objectives as through
the use of options on individual securities. Price movements in
the Portfolio's investment portfolio securities probably will not
correlate perfectly with movements in the level of the index and,
therefore, the Portfolio would bear a risk of loss on index
options purchased by it if favorable price movements of the
hedged portfolio securities do not equal or exceed losses on the
options or if adverse price movements of the hedged portfolio
securities are greater than gains realized from the options.
RIGHTS AND WARRANTS. The Portfolio may invest up to 10%
of its total assets in rights and warrants which entitle the
holder to buy equity securities at a specific price for a
specific period of time. Rights and warrants may be considered
more speculative than certain other types of investments in that
they do not entitle a holder to dividends or voting rights with
respect to the securities which may be purchased nor do they
represent any rights in the assets of the issuing company. Also,
the value of a right or warrant does not necessarily change with
the value of the underlying securities and a right or warrant
ceases to have value if it is not exercised prior to the
expiration date.
FOREIGN INVESTMENTS. The Portfolio will not purchase a
foreign security if such purchase at the time thereof would cause
10% or more of the value of the Portfolio's total assets to be
invested in foreign securities. Foreign issuers are subject to
accounting and financial standards and requirements that differ,
in some cases significantly, from those applicable to U.S.
issuers. In particular, the assets and profits appearing on the
financial statements of a foreign issuer may not reflect its
financial position or results of operations in the way they would
be reflected had the financial statement been prepared in
accordance with U.S. generally accepted accounting principles.
In addition, for an issuer that keeps accounting records in local
currency, inflation accounting rules in some of the countries in
which the Portfolio invests require, for both tax and accounting
purposes, that certain assets and liabilities be restated on the
issuers balance sheet in order to express items in terms of
currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits. Consequently, financial
157
<PAGE>
data may be materially affected by restatements for inflation and
may not accurately reflect the real condition of those issuers
and securities markets. Substantially less information is
publicly available about certain non-U.S. issuers than is
available about U.S. issuers.
Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar
developments, such as military coups, have occurred in the past
in countries in which the Portfolio may invest and could
adversely affect the Portfolio's assets should these conditions
or events recur.
Foreign investment in certain foreign securities is
restricted or controlled to varying degrees. These restrictions
or controls may at times limit or preclude foreign investment in
certain foreign securities and increase the costs and expenses of
the Portfolio. Certain countries in which the Portfolio may
invest require governmental approval prior to investments by
foreign persons, limit the amount of investment by foreign
persons in a particular issuer, limit the investment by foreign
persons only to a specific class of securities of an issuer that
may have less advantageous rights than the classes available for
purchase by domiciliaries of the countries and/or impose
additional taxes on foreign investors.
ILLIQUID SECURITIES. The Portfolio will not maintain
more than 15% of its total assets (taken at market value) in
illiquid securities. For this purpose, illiquid securities
include, among others, (a) securities that are illiquid by virtue
of the absence of a readily available market or legal or
contractual restriction or resale, (b) options purchased by the
Portfolio over-the-counter and the cover for options written by
the Portfolio over-the-counter and (c) repurchase agreements not
terminable within seven days.
Securities that have legal or contractual restrictions
on resale but have a readily available market are not deemed
illiquid for purposes of this limitation. The Adviser monitors
the liquidity of such restricted securities under the supervision
of the Board of Directors.
Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of
1933, as amended (the Securities Act), securities which are
otherwise not readily marketable and repurchase agreements having
a maturity of longer than seven days. Securities which have not
been registered under the Securities Act are referred to as
private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual
158
<PAGE>
funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations
on resale may have an adverse effect on the marketability of
portfolio securities and a mutual fund might be unable to dispose
of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days. A mutual fund might
also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay.
Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market
has developed for certain securities that are not registered
under the Securities Act including repurchase agreements,
commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security
can be readily resold or on an issuers ability to honor a demand
for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such
investments.
Rule 144A under the Securities Act allows a broader
institutional trading market for securities otherwise subject to
restriction on resale to the general public. Rule 144A
establishes a safe harbor from the registration requirements of
the Securities Act for resales of certain securities to qualified
institutional buyers. An insufficient number of qualified
institutional buyers interested in purchasing certain restricted
securities held by the Portfolio, however, could affect adversely
the marketability of such portfolio securities and the Portfolio
might be unable to dispose of such securities promptly or at
reasonable prices. Rule 144A has already produced enhanced
liquidity for many restricted securities, and market liquidity
for such securities may continue to expand as a result of this
regulation and the consequent inception of the PORTAL System
sponsored by the National Association of Securities Dealers,
Inc., an automated system for the trading, clearance and
settlement of unregistered securities of domestic and foreign
issuers.
LENDING OF PORTFOLIO SECURITIES. In order to increase
income, the Portfolio may from time to time lend its securities
to brokers, dealers and financial institutions and receive
collateral in the form of cash or U.S. Government Securities.
Under the Portfolio's procedures, collateral for such loans must
be maintained at all times in an amount equal to at least 100% of
the current market value of the loaned securities (including
159
<PAGE>
interest accrued on the loaned securities). The interest
accruing on the loaned securities will be paid to the Portfolio
and the Portfolio has the right, on demand, to call back the
loaned securities. The Portfolio may pay fees to arrange the
loans. The Portfolio will not lend its securities in excess of
30% of the value of its total assets, nor will the Portfolio lend
its securities to any officer, director, employee or affiliate of
the Fund or the Adviser.
PORTFOLIO TURNOVER. The investment activities described
above are likely to result in the Portfolio engaging in a
considerable amount of trading of securities held for less than
one year. Accordingly, it can be expected that the Portfolio will
have a higher turnover rate than might be expected from
investment companies which invest substantially all of their
funds on a long-term basis. Correspondingly heavier brokerage
commission expenses can be expected to be borne by the Portfolio.
Management anticipates that the Portfolio's annual rate of
portfolio turnover will not be in excess of 100% in future years.
A 100% annual turnover rate would occur, for example, if all the
stocks in the Portfolio's portfolio were replaced once in a
period of one year. The portfolio turnover rates for the fiscal
period ended December 31, 1996 and for the fiscal year ended
December 31, 1997 were 22% and 46%, respectively.
Within this basic framework, the policy of the Portfolio
is to invest in any company and industry and in any type of
security which are believed to offer possibilities for capital
appreciation. Investments may be made in well-known and
established companies as well as in new and unseasoned companies.
Since securities fluctuate in value due to general economic
conditions, corporate earnings and many other factors, the shares
of the Portfolio will increase or decrease in value accordingly,
and there can be no assurance that the Portfolio will achieve its
investment goal or be successful.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
approval of a majority of the outstanding voting securities of
the Portfolio, which means the vote of (i) 67% or more of the
shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the
outstanding shares, whichever is less.
To maintain portfolio diversification and reduce
investment risk, as a matter of fundamental policy, the Portfolio
may not:
(i) with respect to 75% of its total assets, have
such assets represented by other than:
160
<PAGE>
(a) cash and cash items, (b) securities issued
or guaranteed as to principal or interest by
the U.S. Government or its agencies or
instrumentalities, or (c) securities of any
one issuer (other than the U.S. Government and
its agencies or instrumentalities) not greater
in value than 5% of the Portfolio's total
assets, and not more than 10% of the
outstanding voting securities of such issuer;
(ii) purchase the securities of any one issuer,
other than the U.S. Government and its
agencies or instrumentalities, if immediately
after and as a result of such purchase (a) the
value of the holdings of the Portfolio in the
securities of such issuer exceeds 25% of the
value of the Portfolio's total assets, or
(b) the Portfolio owns more than 25% of the
outstanding securities of any one class of
securities of such issuer;
(iii) concentrate its investments in any one
industry, but the Portfolio has reserved the
right to invest up to 25% of its total assets
in a particular industry;
(iv) invest in the securities of any issuer which
has a record of less than three years of
continuous operation (including the operation
of any predecessor) if such purchase at the
time thereof would cause 10% or more of the
value of the total assets of the Portfolio to
be invested in the securities of such issuer
or issuers;
(v) make short sales of securities or maintain a
short position or write put options;
(vi) mortgage, pledge or hypothecate or otherwise
encumber its assets, except as may be
necessary in connection with permissible
borrowings mentioned in investment restriction
(xiv) listed below;
(vii) purchase the securities of any other
investment company or investment trust, except
when such purchase is part of a merger,
consolidation or acquisition of assets;
(viii) purchase or sell real property (including
limited partnership interests but excluding
161
<PAGE>
readily marketable interests in real estate
investment trusts or readily marketable
securities of companies which invest in real
estate) commodities or commodity contracts;
(ix) purchase participations or other direct
interests in oil, gas, or other mineral
exploration or development programs;
(x) participate on a joint or joint and several
basis in any securities trading account;
(xi) invest in companies for the purpose of
exercising control;
(xii) purchase securities on margin, but it may
obtain such short-term credits from banks as
may be necessary for the clearance of
purchases and sales of securities;
(xiii) make loans of its assets to any other person,
which shall not be considered as including the
purchase of portion of an issue of publicly-
distributed debt securities; except that the
Portfolio may purchase non-publicly
distributed securities subject to the
limitations applicable to restricted or not
readily marketable securities and except for
the lending of portfolio securities as
discussed under "Other Investment Policies and
Techniques - Loans of Portfolio Securities" in
the Prospectus;
(xiv) borrow money except for the short-term credits
from banks referred to in paragraph (xii)
above and except for temporary or emergency
purposes and then only from banks and in an
aggregate amount not exceeding 5% of the value
of its total assets at the time any borrowing
is made. Money borrowed by the Portfolio will
be repaid before the Portfolio makes any
additional investments;
(xv) act as an underwriter of securities of other
issuers, except that the Portfolio may acquire
restricted or not readily marketable
securities under circumstances where, if sold,
the Portfolio might be deemed to be an
underwriter for purposes of the Securities Act
of 1933 (the Portfolio will not invest more
than 10% of its net assets in aggregate in
162
<PAGE>
restricted securities and not readily
marketable securities); and
(xvi) purchase or retain the securities of any
issuer if, to the knowledge of the Portfolio's
management, those officers and directors of
the Portfolio, and those employees of the
Investment Adviser, who each owns beneficially
more than one-half of 1% of the outstanding
securities of such issuer together own more
than 5% of the securities of such issuer.
QUASAR PORTFOLIO
General
The investment objective of the Portfolio is growth of
capital by pursuing aggressive investment policies. Investments
will be made based upon their potential for capital appreciation.
Therefore, current income will be incidental to the objective of
capital growth. Because of the market risks inherent in any
investment, the selection of securities on the basis of their
appreciation possibilities cannot ensure against possible loss in
value. Moreover, to the extent the Portfolio seeks to achieve its
objective through the more aggressive investment policies
described below, risk of loss increases. The Portfolio is
therefore not intended for investors whose principal objective is
assured income or preservation of capital.
Except as otherwise indicated, the investment policies
of the Portfolio are not fundamental policies and may, therefore,
be changed by the Board of Directors without a shareholder vote.
However, the Portfolio will not change its investment policies
without contemporaneous written notice to its shareholders. The
Portfolio's investment objective, may not be changed without
shareholder approval.
Within this basic framework, the policy of the Portfolio
is to invest in any companies and industries and in any types of
securities which are believed to offer possibilities for capital
appreciation. Investments may be made in well-known and
established companies as well as in new and unseasoned companies.
Critical factors considered in the selection of securities
include the economic and political outlook, the values of
individual securities relative to other investment alternatives,
trends in the determinants of corporate profits, and management
capability and practices.
It is the policy of the Portfolio to invest principally
in equity securities (common stocks, securities convertible into
common stocks or rights or warrants to subscribe for or purchase
163
<PAGE>
common stocks); however, it may also invest to a limited degree
in non-convertible bonds and preferred stocks when, in the
judgment of Alliance Capital Management L.P., the Portfolio's
adviser (the Adviser), such investments are warranted to achieve
the Fund's investment objective. When business or financial
conditions warrant, a more defensive position may be assumed and
the Portfolio may invest in short-term fixed-income securities,
in investment grade debt securities, in preferred stocks or hold
its assets in cash.
The Portfolio may invest in both listed and unlisted
domestic and foreign securities, in restricted securities, and in
other assets having no ready market, but not more than 15% of the
Portfolio's total assets may be invested in all such restricted
or not readily marketable assets at any one time. Restricted
securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration
statement is in effect under Rule 144 or 144A promulgated under
the Securities Act. Where registration is required, the
Portfolio may be obligated to pay all or part of the registration
expense, and a considerable period may elapse between the time of
the decision to sell and the time the Portfolio may be permitted
to sell a security under an effective registration statement.
If, during such a period adverse market conditions were to
develop, the Portfolio might obtain a less favorable price than
that which prevailed when it decided to sell. Restricted
securities and other not readily marketable assets will be valued
in such manner as the Board of Directors of the Fund in good
faith deems appropriate to reflect their fair market value.
The Portfolio intends to invest in special situations
from time to time. A special situation arises when, in the
opinion of the Fund's management, the securities of a particular
company will, within a reasonably estimable period of time, be
accorded market recognition at an appreciated value solely by
reason of a development particularly or uniquely applicable to
that company and regardless of general business conditions or
movements of the market as a whole. Developments creating
special situations might include, among others, the following:
liquidations, reorganizations, recapitalizations or mergers,
material litigation, technological breakthroughs and new
management or management policies. Although large and well-known
companies may be involved, special situations often involve much
greater risk than is inherent in ordinary investment securities.
The Portfolio will not, however, purchase securities of any
company with a record of less than three years continuous
operation (including that of predecessors) if such purchase would
cause the Portfolio's investments in such companies, taken at
cost, to exceed 25% of the value of the Portfolio's total assets.
164
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND PRACTICES
The following additional investment policies supplement
those set forth above.
GENERAL. In seeking to attain its investment objective
of growth of capital, the Portfolio supplements customary
investment practices by engaging in a broad range of investment
techniques including short sales against the box, writing call
options, purchases and sales of put and call options written by
others and investing in special situations. These techniques are
speculative, may entail greater risk, may be considered of a more
short-term nature, and to the extent used, may result in greater
turnover of the Portfolio's portfolio and a greater expense than
is customary for most investment companies. Consequently, the
Portfolio is not a complete investment program and is not a
suitable investment for those who cannot afford to take such
risks or whose objective is income or preservation of capital.
No assurance can be given that the Portfolio will achieve its
investment objective. However, by buying shares in the Portfolio
an investor may receive advantages he would not readily obtain as
an individual, including professional management and continuous
supervision of investments. The Portfolio is subject to the
overall limitation (in addition to the specific restrictions
referred to below) that the aggregate value of all restricted and
not readily marketable securities of the Portfolio, and of all
cash and securities covering outstanding call options written or
guaranteed by the Portfolio, shall at no time exceed 15% of the
value of the total assets of the Portfolio.
There is also no assurance that the Portfolio will at
any particular time engage in all or any of the investment
activities in which it is authorized to engage. In the opinion
of the Portfolio's management, however, the power to engage in
such activities provides an opportunity which is deemed to be
desirable in order to achieve the Portfolio's investment
objective.
SHORT SALES. The Portfolio may only make short sales of
securities against the box. A short sale is effected by selling
a security which the Portfolio does not own, or if the Portfolio
does own such security, it is not to be delivered upon
consummation of the sale. A short sale is against the box to the
extent that the Portfolio contemporaneously owns or has the right
to obtain securities identical to those sold short without
payment. Short sales may be used in some cases by the Portfolio
to defer the realization of gain or loss for Federal income tax
purposes on securities then owned by the Portfolio. However, if
the Portfolio has unrealized gain with respect to a security and
enters into a short sale with respect to such security, the
165
<PAGE>
Portfolio generally will be deemed to have sold the appreciated
security and thus will recognize gain for tax purposes.
PUTS AND CALLS. The Portfolio may write call options
and may purchase and sell put and call options written by others,
combinations thereof, or similar options. The Portfolio may not
write put options. A put option gives the buyer of such option,
upon payment of a premium, the right to deliver a specified
number of shares of a stock to the writer of the option on or
before a fixed date at a predetermined price. A call option
gives the purchaser of the option, upon payment of a premium, the
right to call upon the writer to deliver a specified number of
shares of a specified stock on or before a fixed date, at a
predetermined price, usually the market price at the time the
contract is negotiated. When calls written by the Portfolio are
exercised, the Portfolio will be obligated to sell stocks below
the current market price.
The writing of call options will, therefore, involve a
potential loss of opportunity to sell securities at higher
prices. In exchange for the premium received, the writer of a
fully collateralized call option assumes the full downside risk
of the securities subject to such option. In addition, the
writer of the call gives up the gain possibility of the stock
protecting the call. Generally, the opportunity for profit from
the writing of options is higher, and consequently the risks are
greater when the stocks involved are lower priced or volatile, or
both. While an option that has been written is in force, the
maximum profit that may be derived from the optioned stock is the
premium less brokerage commissions and fees. (For a discussion
regarding certain tax consequences of the writing of call options
by the Fund, see "Dividends, Distributions and Taxes.")
Writing, purchasing and selling call options are highly
specialized activities and entail greater than ordinary
investment risks. It is the Portfolio's policy not to write a
call option if the premium to be received by the Portfolio in
connection with such option would not produce an annualized
return of at least 15% of the then market value of the securities
subject to option. Commissions, stock transfer taxes and other
expenses of the Fund must be deducted from such premium receipts.
Option premiums vary widely depending primarily on supply and
demand. Calls written by the Portfolio will ordinarily be sold
either on a national securities exchange or through put and call
dealers, most, if not all, of whom are members of a national
securities exchange on which options are traded, and will in such
cases be endorsed or guaranteed by a member of a national
securities exchange or qualified broker-dealer, which may be
Donaldson, Lufkin & Jenrette Securities Corporation (DLJ), an
affiliate of the Adviser. The endorsing or guaranteeing firm
166
<PAGE>
requires that the option writer (in this case the Portfolio)
maintain a margin account containing either corresponding stock
or other equity as required by the endorsing or guaranteeing
firm. A call written by the Portfolio will not be sold unless
the Portfolio at all times during the option period owns either
(a) the optioned securities, or securities convertible into or
carrying rights to acquire the optioned securities or (b) an
offsetting call option on the same securities.
The Portfolio will not sell a call option written or
guaranteed by it if, as a result of such sale, the aggregate of
the Portfolio's portfolio securities subject to outstanding call
options (valued at the lower of the option price or market value
of such securities) would exceed 15% of the Portfolio's total
assets. The Portfolio will not sell any call option if such sale
would result in more than 10% of the Portfolio's assets being
committed to call options written by the Portfolio, which, at the
time of sale by the Portfolio, have a remaining term of more than
100 days. The aggregate cost of all outstanding options
purchased and held by the Portfolio shall at no time exceed 10%
of the Portfolio's total assets.
In buying a call, the Portfolio would be in a position
to realize a gain if, during the option period, the price of the
shares increased by an amount in excess of the premium paid and
commissions payable on exercise. It would realize a loss if the
price of the security declined or remained the same or did not
increase during the period by more than the amount of the premium
and commissions payable on exercise. By buying a put, the
Portfolio would be in a position to realize a gain if, during the
option period, the price of the shares declined by an amount in
excess of the premium paid and commissions payable on exercise.
It would realize a loss if the price of the security increased or
remained the same or did not decrease during that period by more
than the amount of the premium and commissions payable on
exercise. In addition, the Portfolio could realize a gain or
loss on such options by selling them.
As noted above, the Portfolio may purchase and sell put
and call options written by others, combinations thereof, or
similar options. There are markets for put and call options
written by others and the Portfolio may from time to time sell or
purchase such options in such markets. If an option is not so
sold and is permitted to expire without being exercised, its
premium would be lost by the Portfolio.
PORTFOLIO TURNOVER. Generally, the Portfolio's policy
with respect to portfolio turnover is to purchase securities with
a view to holding them for periods of time sufficient to assure
long-term capital gains treatment upon their sale and not for
trading purposes. However, it is also the Portfolio's policy to
167
<PAGE>
sell any security whenever, in the judgment of the Adviser, its
appreciation possibilities have been substantially realized or
the business or market prospects for such security have
deteriorated, irrespective of the length of time that such
security has been held. This policy may result in the Portfolio
realizing short-term capital gains or losses on the sale of
certain securities. See "Dividends, Distributions and Taxes". It
is anticipated that the Portfolio's rate of portfolio turnover
will not exceed 200% during the current fiscal year. A 200%
annual turnover rate would occur, for example, if all the stocks
in the Portfolio's portfolio were replaced twice within a period
of one year. A portfolio turnover rate approximating 200%
involves correspondingly greater brokerage commission expenses
than would a lower rate, which expenses must be borne by the
Portfolio and its shareholders. The portfolio turnover rates for
the fiscal period ended December 31, 1996 and for the fiscal year
ended December 31, 1997 were 40% and 210%, respectively.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
approval of a majority of the outstanding voting securities of
the Portfolio, which means the vote of (i) 67% or more of the
shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the
outstanding shares, whichever is less.
As a matter of fundamental policy, the Portfolio may
not:
(i) purchase the securities of any one issuer,
other than the U.S. Government or any of its
agencies or instrumentalities, if immediately
after such purchase more than 5% of the value
of its total assets would be invested in such
issuer or the Portfolio would own more than
10% of the outstanding voting securities of
such issuer, except that up to 25% of the
value of the Portfolio's total assets may be
invested without regard to such 5% and 10%
limitations;
(ii) invest more than 25% of the value of its total
assets in any particular industry;
(iii) borrow money except for temporary or emergency
purposes in an amount not exceeding 5% of its
total assets at the time the borrowing is
made;
(iv) purchase or sell real estate;
168
<PAGE>
(v) participate on a joint or joint and several
basis in any securities trading account;
(vi) invest in companies for the purpose of
exercising control;
(vii) purchase or sell commodities or commodity
contracts;
(viii) except as permitted in connection with short
sales of securities against the box described
under the heading Short Sales above, make
short sales of securities;
(ix) make loans of its funds or assets to any other
person, which shall not be considered as
including the purchase of a portion of an
issue of publicly distributed bonds,
debentures, or other securities, whether or
not the purchase was made upon the original
issuance of the securities; except that the
Portfolio may not purchase non-publicly
distributed securities subject to the
limitations applicable to restricted
securities;
(x) except as permitted in connection with short
sales of securities or writing of call
options, described under the headings Short
Sales and Puts and Calls above, pledge,
mortgage or hypothecate any of its assets;
(xi) except as permitted in connection with short
sales of securities against the box described
under the heading Additional Investment
Policies and Practices above, make short sales
of securities; and
(xii) purchase securities on margin, but it may
obtain such short-term credits as may be
necessary for the clearance of purchases and
sales of securities.
REAL ESTATE INVESTMENT PORTFOLIO
GENERAL
The investment objective of the Portfolio is to seek a
total return on its assets from long-term growth of capital and
from income principally through investing in a portfolio of
169
<PAGE>
equity securities of issuers that are primarily engaged in or
related to the real estate industry.
Except as otherwise indicated, the investment policies
of the Portfolio are not fundamental policies and may, therefore,
be changed by the Board of Directors without a shareholder vote.
However, the Portfolio will not change its investment policies
without contemporaneous written notice to its shareholders. The
Portfolio's investment objective may not be changed without
shareholder approval.
Under normal circumstances, at least 65% of the
Portfolio's total assets are invested in equity securities of
real estate investment trusts (REITs) and other real estate
industry companies. A real estate industry company is a company
that derives at least 50% of its gross revenues or net profits
from the ownership, development, construction, financing,
management or sale of commercial, industrial or residential real
estate or interests therein. The equity securities in which the
Portfolio invests for this purpose consist of common stock,
shares of beneficial interest of REITs and securities with common
stock characteristics, such as preferred stock or convertible
securities (Real Estate Equity Securities).
The Portfolio may invest up to 35% of its total assets
in (a) securities that directly or indirectly represent
participations in, or are collateralized by and payable from,
mortgage loans secured by real property (Mortgage-Backed
Securities), such as mortgage pass-through certificates, real
estate mortgage investment conduit (REMIC) certificates and
collateralized mortgage obligations (CMOs) and (b) short-term
investments. These instruments are described below. The risks
associated with the Portfolio's transactions in REMICs, CMOs and
other types of mortgage-backed securities, which are considered
to be derivative securities, may include some or all of the
following: market risk, leverage and volatility risk, correlation
risk, credit risk and liquidity and valuation risk. See "Certain
Risk Considerations--Risk Factors Associated with the Real Estate
Industry" in the Prospectus for a description of these and other
risks.
As to any investment in Real Estate Equity Securities,
the analysis of the Adviser will focus on determining the degree
to which the company involved can achieve sustainable growth in
cash flow and dividend paying capability. The Adviser believes
that the primary determinant of this capability is the economic
viability of property markets in which the company operates and
that the secondary determinant of this capability is the ability
of management to add value through strategic focus and operating
expertise. The Portfolio will purchase Real Estate Equity
Securities when, in the judgment of the Adviser, their market
170
<PAGE>
price does not adequately reflect this potential. In making this
determination, the Adviser will take into account fundamental
trends in underlying property markets as determined by
proprietary models, site visits conducted by individuals
knowledgeable in local real estate markets, price-earnings ratios
(as defined for real estate companies), cash flow growth and
stability, the relationship between asset value and market price
of the securities, dividend payment history, and such other
factors which the Adviser may determine from time to time to be
relevant. The Adviser will attempt to purchase for the Portfolio
Real Estate Equity Securities of companies whose underlying
portfolios are diversified geographically and by property type.
The Portfolio may invest without limitation in shares of
REITs. REITs are pooled investment vehicles which invest
primarily in income producing real estate or real estate related
loans or interests. REITs are generally classified as equity
REITs, mortgage REITs or a combination of equity and mortgage
REITs. Equity REITs invest the majority of their assets directly
in real property and derive income primarily from the collection
of rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs invest
the majority of their assets in real estate mortgages and derive
income from the collection of interest payments. Similar to
investment companies such as the Portfolio, REITs are not taxed
on income distributed to shareholders provided they comply with
several requirements of the Code. The Portfolio indirectly bears
its proportionate share of expenses incurred by REITs in which
the Portfolio invests in addition to the expenses incurred
directly by the Portfolio. The Portfolio may invest up to 5% of
its total assets in Real Estate Equity Securities of non-U.S.
issuers.
ADDITIONAL INVESTMENT POLICIES AND PRACTICES
To the extent not described in the Portfolio's
Prospectus, set forth below is additional information regarding
the Portfolio's investment policies and practices. Except as
otherwise noted, the Portfolio's investment policies are not
designated fundamental policies within the meaning of the 1940
Act and, therefore, may be changed by the Directors of the Fund
without a shareholder vote. However, the Portfolio will not
change its investment policies without contemporaneous written
notice to shareholders.
CONVERTIBLE SECURITIES. The Portfolio may invest up to
15% of its net assets in convertible securities of issuers whose
common stocks are eligible for purchase by the Portfolio under
the investment policies described above. Convertible securities
include bonds, debentures, corporate notes and preferred stocks.
Convertible securities are instruments that are convertible at a
171
<PAGE>
stated exchange rate into common stock. Prior to their
conversion, convertible securities have the same general
characteristics as non-convertible securities which provide a
stable stream of income with generally higher yields than those
of equity securities of the same or similar issuers. The market
value of convertible securities tends to decrease as interest
rates rise and, conversely, to increase as interest rates
decline. While convertible securities generally offer lower
interest yields than non-convertible debt securities of similar
quality, they offer investors the potential from increases in the
market price of the underlying common stock. Convertible debt
securities that are rated Baa or lower by Moody's or BBB or lower
by S&P, Duff & Phelps or Fitch and comparable unrated securities
as determined by the Adviser may share some or all of the risk of
non-convertible debt securities with those rating.
When the market price of the common stock underlying a
convertible security increases, the price of the convertible
security increasingly reflects the value of the underlying common
stock and may rise accordingly. As the market price of the
underlying common stock declines, the convertible security tends
to trade increasingly on a yield basis, and thus may not
depreciate to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks in an issuers
capital structure. They are consequently of higher quality and
entail less risk than the issuers common stock, although the
extent to which such risk is reduced depends in large measure
upon the degree to which the convertible security sells above its
value as a fixed-income security.
FORWARD COMMITMENTS. No forward commitments will be
made by the Portfolio if, as a result, the Portfolio's aggregate
commitments under such transactions would be more than 30% of the
then current value of the Portfolio's total assets. The
Portfolio's right to receive or deliver a security under a
forward commitment may be sold prior to the settlement date, but
the Fund will enter into forward commitments only with the
intention of actually receiving or delivering the securities, as
the case may be. To facilitate such transactions, the Fund's
custodian maintains, in a segregated account of the Fund, cash
and/or securities having value equal to, or greater than, any
commitments to purchase securities on a forward commitment basis
and, with respect to forward commitments to sell portfolio
securities of the Fund, the portfolio securities themselves. If
the Fund, however, chooses to dispose of the right to receive or
deliver a security subject to a forward commitment prior to the
settlement date of the transaction, it may incur a gain or loss.
In the event the other party to a forward commitment transaction
were to default, the Fund might lose the opportunity to invest
money at favorable rates or to dispose of securities at favorable
prices.
172
<PAGE>
STANDBY COMMITMENT AGREEMENTS. The purchase of a
security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the
security can reasonably be expected to be issued and the value of
the security will thereafter be reflected in the calculation of
the Portfolio's net asset value. The cost basis of the security
will be adjusted by the amount of the commitment fee. In the
event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby
commitment. The Portfolio will at all times maintain a
segregated account with its custodian of cash and/or securities
in an aggregate amount equal to the purchase price of the
securities underlying the commitment.
There can be no assurance that the securities subject to
a standby commitment will be issued and the value of the
security, if issued, on the delivery date may be more or less
than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the
Portfolio will bear the risk of capital loss in the event the
value of the security declines and may not benefit from an
appreciation in the value of the security during the commitment
period if the issuer decides not to issue and sell the security
to the Portfolio.
REPURCHASE AGREEMENTS. The Portfolio may enter into
repurchase agreements pertaining to U.S. Government Securities
with member banks of the Federal Reserve System or primary
dealers (as designated by the Federal Reserve Bank of New York)
in such securities. There is no percentage restriction on the
Portfolio's ability to enter into repurchase agreements.
Currently, the Portfolio intends to enter into repurchase
agreements only with its custodian and such primary dealers. A
repurchase agreement arises when a buyer purchases a security and
simultaneously agrees to resell it to the vendor at an agreed-
upon future date, normally one day or a few days later. The
resale price is greater than the purchase price, reflecting an
agreed-upon interest rate which is effective for the period of
time the buyers money is invested in the security and which is
related to the current market rate rather than the coupon rate on
the purchased security. This results in a fixed rate of return
insulated from market fluctuations during such period. Such
agreements permit the Portfolio to keep all of its assets at work
while retaining overnight flexibility in pursuit of investments
of a longer-term nature. The Portfolio requires continual
maintenance by its Custodian for its account in the Federal
Reserve/Treasury Book Entry System of collateral in an amount
equal to, or in excess of, the resale price. In the event a
vendor defaulted on its repurchase obligation, the Portfolio
might suffer a loss to the extent that the proceeds from the sale
of the collateral were less than the repurchase price. In the
173
<PAGE>
event of a vendors bankruptcy, the Portfolio might be delayed in,
or prevented from, selling the collateral for its benefit. The
Fund's Board of Directors has established procedures, which are
periodically reviewed by the Board, pursuant to which the Adviser
monitors the creditworthiness of the dealers with which the
Portfolio enters into repurchase agreement transactions.
SHORT SALES. When engaging in a short sale, in addition
to depositing collateral with a broker-dealer, the Portfolio is
currently required under the 1940 Act to establish a segregated
account with its custodian and to maintain therein cash or
securities in an amount that, when added to cash or securities
deposited with the broker-dealer, will at all times equal at
least 100% of the current market value of the security sold
short.
ILLIQUID SECURITIES. Historically, illiquid securities
have included securities subject to contractual or legal
restrictions on resale because they have not been registered
under the Securities Act, securities which are otherwise not
readily marketable and repurchase agreements having a maturity of
longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not
typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale
and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a
mutual fund might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions within seven
days. A mutual fund might also have to register such restricted
securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a
public offering of securities.
In recent years, however, a large institutional market
has developed for certain securities that are not registered
under the Securities Act, including repurchase agreements,
commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security
can be readily resold or on an issuers ability to honor a demand
for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such
investments.
The Portfolio may invest in restricted securities issued
under Section 4(2) of the Securities Act, which exempts from
174
<PAGE>
registration transactions by an issuer not involving any public
offering. Section 4(2) instruments are restricted in the sense
that they can only be resold through the issuing dealer to
institutional investors and in private transactions; they cannot
be resold to the general public without registration.
Rule 144A under the Securities Act allows a broader
institutional trading market for securities otherwise subject to
restriction on resale to the general public. Rule 144A
establishes a safe harbor from the registration requirements of
the Securities Act for resales of certain securities to qualified
institutional buyers. An insufficient number of qualified
institutional buyers interested in purchasing certain restricted
securities held by the Portfolio, however, could affect adversely
the marketability of such portfolio securities and the Portfolio
might be unable to dispose of such securities promptly or at
reasonable prices. Rule 144A has already produced enhanced
liquidity for many restricted securities, and market liquidity
for such securities may continue to expand as a result of this
regulation and the consequent inception of the PORTAL System, an
automated system for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers sponsored
by the National Association of Securities Dealers, Inc. The
Portfolio's investment in Rule 144A eligible securities are not
subject to the limitations described above on securities issued
under Section 4(2).
The Adviser, under the supervision of the Fund's Board
of Directors, monitors the liquidity of restricted securities in
the Portfolio's portfolio. In reaching liquidity decisions, the
Adviser considers, among other factors, the following: (1) the
frequency of trades and quotes for the security; (2) the number
of dealers making quotations to purchase or sell the security;
(3) the number of other potential purchasers of the security;
(4) the number of dealers undertaking to make a market in the
security; (5) the nature of the security (including its
unregistered nature) and the nature of the marketplace for the
security (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer);
and (6) any applicable Commission interpretation or position with
respect to such type of security.
DEFENSIVE POSITION. For temporary defensive purposes,
the Portfolio may vary from its investment objectives during
periods in which conditions in securities markets or other
economic or political conditions warrant. During such periods,
the Portfolio may increase without limit its position in short-
term, liquid, high-grade debt securities, which may include
securities issued by the U.S. government, its agencies and,
instrumentalities (U.S. Government Securities), bank deposit,
money market instruments, short-term (for this purpose,
175
<PAGE>
securities with a remaining maturity of one year or less) debt
securities, including notes and bonds, and short-term foreign
currency denominated debt securities rated A or higher by
Moody's, S&P, Duff & Phelps or Fitch or, if not so rated, of
equivalent investment quality as determined by the Adviser.
Subject to its policy of investing at least 65% of its
total assets in equity securities of real estate investment
trusts and other real estate industry companies, the Portfolio
may also at any time temporarily invest funds awaiting
reinvestment or held as reserves for dividends and other
distributions to shareholders in money market instruments
referred to above.
PORTFOLIO TURNOVER. Generally, the Portfolio's policy
with respect to portfolio turnover is to hold its securities for
six months or longer. However, it is also the Portfolio's policy
to sell any security whenever, in the judgment of the Adviser,
its appreciation possibilities have been substantially realized
or the business or market prospects for such security have
deteriorated, irrespective of the length of time that such
security has been held. The Adviser anticipates that the
Portfolio's annual rate of portfolio turnover will not exceed
100%. A 100% annual turnover rate would occur if all the
securities in the Portfolio's portfolio were replaced once within
a period of one year. The turnover rate has a direct effect on
the transaction costs to be borne by the Portfolio, and as
portfolio turnover increases it is more likely that the Portfolio
will realize short-term capital gains. The portfolio turnover
rate for the fiscal period ended December 31, 1997 was 26%.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
approval of a majority of the outstanding voting securities of
the Portfolio, which means the vote of (i) 67% or more of the
shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the
outstanding shares, whichever is less.
As a matter of fundamental policy, the Portfolio may
not:
(i)pledge, hypothecate, mortgage or otherwise encumber
its assets, except to secure permitted borrowings;
(ii)make loans except through (a) the purchase of debt
obligations in accordance with its investment objectives and
policies; (b) the lending of portfolio securities; or (c) the use
of repurchase agreements;
176
<PAGE>
(iii) participate on a joint or joint and several
basis in any securities trading account;
(iv)invest in companies for the purpose of exercising
control;
(v)issue any senior security within the meaning of the
1940 Act;
(vi)make short sales of securities or maintain a short
position, unless at all times when a short position is open not
more than 25% of the Portfolio's net assets (taken at market
value) is held as collateral for such sales at any one time;
(vii) (a) purchase or sell commodities or commodity
contracts including futures contracts;
(b) invest in interests in oil, gas, or other
mineral exploration or development programs;
(c) purchase securities on margin, except for
such short-term credits as may be necessary
for the clearance of transactions; and (d) act
as an underwriter of securities, except that
the Portfolio may acquire restricted
securities under circumstances in which, if
such securities were sold, the Portfolio might
be deemed to be an underwriter for purposes of
the Securities Act.
OTHER INVESTMENT POLICIES
REPURCHASE AGREEMENTS. Each Portfolio, except the Total
Return Portfolio and the Technology Portfolio, may invest in
repurchase agreements pertaining to the types of securities in
which it invests. A repurchase agreement arises when a buyer
purchases a security and simultaneously agrees to resell it to
the vender 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 market rate which is effective
for the period of time the buyers money is invested in the
security and which is not related to the coupon rate on the
purchased security. Such agreements permit a Portfolio to keep
all of its assets at work while retaining overnight flexibility
in pursuit of investments of a longer-term nature. Each
Portfolio requires continual maintenance of collateral held by
the Fund's Custodian in an amount equal to, or in excess of, the
market value of the securities which are the subject of the
agreement. In the event that a vendor defaulted on its
repurchase obligation, the Portfolio might suffer a loss to the
extent that the proceeds from the sale of the collateral were
less than the repurchase price. If the vendor became bankrupt,
the Portfolio might be delayed in, or prevented from, selling the
177
<PAGE>
collateral. Repurchase agreements may be entered into with
member banks of the Federal Reserve System or primary dealers (as
designated by the Federal Reserve Bank of New York) in U.S.
Government securities. Repurchase agreements often are for short
periods such as one day or a week, but may be longer.
ILLIQUID SECURITIES. The following investment policy,
which is not fundamental and may be changed by the vote of the
Board of Directors, is applicable to each of the Fund's
Portfolios.
A Portfolio will not invest in illiquid securities if
immediately after such investment more than 10% or, in the case
of the North American Government Income Portfolio, Global Dollar
Government Portfolio, Utility Income Portfolio, Technology
Portfolio, Quasar Portfolio and the Real Estate Investment
Portfolio, 15%, of the Portfolio's total assets (taken at market
value) would be invested in such securities. For this purpose,
illiquid securities include, among others, (a) securities that
are illiquid by virtue of the absence of a readily available
market or legal or contractual restriction or resale, (b) options
purchased by the Portfolio over-the-counter and the cover for
options written by the Portfolio over-the-counter and (c)
repurchase agreements not terminable within seven days.
Securities that have legal or contractual restrictions
on resale but have a readily available market are not deemed
illiquid for purposes of this limitation. The Adviser will
monitor the liquidity of such restricted securities under the
supervision of the Board of Directors.
Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act,
securities which are otherwise not readily marketable and
repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the
Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a
mutual fund might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions within seven
days. A mutual fund might also have to register such restricted
securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a
public offering of securities.
178
<PAGE>
In recent years, however, a large institutional market
has developed for certain securities that are not registered
under the Securities Act including repurchase agreements,
commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security
can be readily resold or on an issuers ability to honor a demand
for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such
investments.
During the coming year, each Portfolio may invest up to
5% of its total assets in restricted securities issued under
Section 4(2) of the Securities Act, which exempts from
registration transactions by an issuer not involving any public
offering. Section 4(2) instruments are restricted in the sense
that they can only be resold through the issuing dealer and only
to institutional investors; they cannot be resold to the general
public without registration.
Rule 144A under the Securities Act allows a broader
institutional trading market for securities otherwise subject to
restriction on resale to the general public. Rule 144A
establishes a safe harbor from the registration requirements of
the Securities Act for resales of certain securities to qualified
institutional buyers. An insufficient number of qualified
institutional buyers interested in purchasing certain restricted
securities held by a Portfolio, however, could affect adversely
the marketability of such portfolio securities and the Portfolio
might be unable to dispose of such securities promptly or at
reasonable prices. Rule 144A has already produced enhanced
liquidity for many restricted securities, and market liquidity
for such securities may continue to expand as a result of this
regulation and the consequent inception of the PORTAL System
sponsored by the National Association of Securities Dealers,
Inc., an automated system for the trading, clearance and
settlement of unregistered securities of domestic and foreign
issuers. The Portfolio's investments in Rule 144A eligible
securities are not subject to the limitations described above
under Section 4(2).
The Adviser, acting under the supervision of the Board
of Directors, will monitor the liquidity of restricted securities
in each of the Fund's Portfolios that are eligible for resale
pursuant to Rule 144A. In reaching liquidity decisions, the
Adviser will consider, among others, the following factors:
(i) the frequency of trades and quotes for the security; (ii) the
number of dealers making quotations to purchase or sell the
security; (iii) the number of other potential purchasers of the
security; (iv) the number of dealers undertaking to make a market
179
<PAGE>
in the security; (v) the nature of the security and the nature of
the marketplace for the security (e.g., the time needed to
dispose of the security, the method of soliciting offers and the
mechanics of the transfer); and (vi) any applicable Commission
interpretation or position with respect to such type of
securities.
FORWARD COMMITMENTS. The use of forward commitments
enables the Fund's Portfolios to protect against anticipated
changes in interest rates and prices. For instance, in periods
of rising interest rates and falling bond prices, the Portfolio
might sell securities in its portfolio on a forward commitment
basis to limit its exposure to falling prices. In periods of
falling interest rates and rising bond prices, the Portfolio
might sell a security in its portfolio and purchase the same or a
similar security on a when-issued or forward commitment basis,
thereby obtaining the benefit of currently higher cash yields.
However, if the Adviser were to forecast incorrectly the
direction of interest rate movements, the Portfolio might be
required to complete such when-issued or forward transactions at
prices inferior to then current market values.
The Portfolio's right to receive or deliver a security
under a forward commitment may be sold prior to the settlement
date, but the Portfolio will enter into forward commitments only
with the intention of actually receiving or delivering the
securities, as the case may be. To facilitate such transactions,
the Portfolio's Custodian will maintain, in the separate account
of the Portfolio, cash or liquid high-grade Government Securities
having value equal to, or greater than, any commitments to
purchase securities on a forward commitment basis and, with
respect to forward commitments to sell portfolio securities of
the Portfolio, the portfolio securities themselves.
GENERAL. Whenever any investment policy or restriction
states a minimum or maximum percentage of a Portfolio's assets
which may be invested in any security or other asset, it is
intended that such minimum or maximum percentage limitation be
determined immediately after and as a result of the Portfolio's
acquisition of such security or other asset. Accordingly, any
later increase or decrease in percentage beyond the specified
limitations resulting from a change in values or net assets will
not be considered a violation.
The Fund has voluntarily agreed that each Portfolio with
the ability to invest in foreign issuers will adhere to the
foreign security diversification guidelines promulgated by
certain State Insurance Departments. Pursuant to these
guidelines, each such Portfolio will invest in issuers from a
minimum of five different foreign countries. This minimum will
be reduced to four different foreign countries when foreign
180
<PAGE>
securities comprise less than 80% of the Portfolio's net asset
value, three different foreign countries when foreign securities
comprise less than 60% of the Portfolio's net asset value, two
different foreign countries when foreign securities comprise less
than 40% of the Portfolio's net asset value and one foreign
country when foreign securities comprise less than 20% of the
Portfolio's net asset value. The Fund has also voluntarily
agreed that each Portfolio which may invest in foreign securities
will limit its investment in the securities of issuers located in
any one country to 20% of the Portfolio's net asset value, except
that the Portfolio may have an additional 15% of its net asset
value invested in securities of issuers located in Australia,
Canada, France, Japan, the United Kingdom or West Germany.
_________________________________________________________________
MANAGEMENT OF THE FUND
_________________________________________________________________
DIRECTORS AND OFFICERS
The Directors and principal officers of the Fund, their
ages and their primary occupations during the past five years are
set forth below. Each such Director and officer is also a
trustee, director or officer of other registered investment
companies sponsored by the Adviser. Unless otherwise specified,
the address of each of the following persons is 1345 Avenue of
the Americas, New York, New York 10105.
DIRECTORS
JOHN D. CARIFA,* 53, Chairman of the Board and President
of the Fund, is the President, Chief Operating Officer 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, 68, was formerly an Executive Vice President
and the Chief Insurance Officer of The Equitable Life Assurance
Society of the United States since prior to 1993. She is a
Director of Ecolab Incorporated (specialty chemicals) and Amoco
____________________
* An interested person of the Fund as defined in the 1940
Act.
** For purposes of this Statement of Additional Information,
ACMC refers to Alliance Capital Management Corporation,
the sole general partner of the Adviser, and the
predecessor general partner of the Adviser, and the
predecessor general partner of the same name.
181
<PAGE>
Corporation (oil and gas). Her address is 75 Briarwoods Trail
Stamford, Connecticut 06903.
DAVID H. DIEVLER, 69, was formerly a Senior Vice
President of ACMC until 1994. He is currently an independent
consultant. His address is P.O. Box 167, Spring Lake, New Jersey
07762.
JOHN H. DOBKIN, 56, has been the President of Historic
Hudson Valley (historic preservation) since prior to 1993.
Previously, he was Director of the National Academy of Design.
His address is 150 White Plains Road, Tarrytown, New York 10591.
WILLIAM H. FOULK, JR., 66, is an investment adviser and
an independent consultant. He was formerly Senior Manager of
Barrett Associates, Inc., a registered investment adviser, with
which he had been associated since prior to 1993. His address is
Suite 100, 2 Greenwich Plaza, Greenwich, Connecticut 06830.
DR. JAMES M. HESTER, 74, is President of the Harry Frank
Guggenheim Foundation, with which he has been associated since
prior to 1993. He was formerly President of New York University,
the New York Botanical Garden and Rector of the United Nations
University. His address is 45 East 89th Street, New York, New
York 10128.
CLIFFORD L. MICHEL, 59, is a member 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). His address is
St. Bernards Road, Gladstone, New Jersey 07934.
DONALD J. ROBINSON, 64, was formerly a partner in the
law firm of Orrick, Herrington & Sutcliffe and is currently
senior counsel to that firm. His address is 666 Fifth Avenue,
19th Floor, New York, New York 10103.
OFFICERS
KATHLEEN A. CORBET, SENIOR VICE PRESIDENT, 38, is an
Executive Vice President of ACMC with which she has been
associated since July 1993. Prior thereto, she headed Equitable
Capital Management Corporation's Fixed Income Management
Department since prior to 1993.
ALFRED L. HARRISON, SENIOR VICE PRESIDENT, 60, is a Vice
Chairman of ACMC with which he has been associated since prior to
1993.
182
<PAGE>
NELSON R. JANTZEN, SENIOR VICE PRESIDENT, 52, is a
Senior Vice President of ACMC with which he has been associated
since prior to 1993.
WAYNE D. LYSKI, SENIOR VICE PRESIDENT, 56, is an
Executive Vice President of ACMC with which he has been
associated with since prior to 1993.
RAYMOND J. PAPERA, SENIOR VICE PRESIDENT, 41, is a
Senior Vice President of ACMC with which he has been associated
since prior to 1993.
ALDEN M. STEWART, SENIOR VICE PRESIDENT, 52, is an
Executive Vice President of ACMC with which he has been
associated since July, 1993. Previously, he was associated with
ECMC since prior to 1993.
PETER ANASTOS, SENIOR VICE PRESIDENT, 56, is a Senior
Vice President of ACMC, with which he has been associated since
prior to 1993.
EDWARD BAKER, VICE PRESIDENT, 47, is a Senior Vice
President and Chief Investment Officer - Emerging Markets of
ACMC, with which he has been associated since May 1995. Prior
thereto, he was a Senior Vice President of BARRA, Inc. since
prior to 1993.
THOMAS BARDONG, VICE PRESIDENT, 53, is a Senior Vice
President of ACMC, with which he has been associated since prior
to 1993.
STEPHEN BEINHACKER, VICE PRESIDENT, 34, is a Senior Vice
President of ACMC, with which he has been associated since prior
to 1993.
MARK H. BREEDON, SENIOR VICE PRESIDENT, 45, has been a
Vice President of ACMC and a Director and Vice President of
Alliance Capital Limited since prior to 1993.
RUSSEL BRODY, 31, is a VICE PRESIDENT of ACMC, with
which he has been associated since April 1997. Prior thereto, he
was the head of European Equity Dealing of Lambard Odier et Cie
since prior to 1993.
NICHOLAS D.P. CARN, 40, VICE PRESIDENT, is a Vice
President of ACMC with which he has been associated since 1997.
Prior thereto, he was a Chief Investment Officer and Portfolio
Manager at Draycott Partners.
PAUL J. DENOON, VICE PRESIDENT, 36, is a Vice President
of ACMC with which he has been associated since prior to 1993.
183
<PAGE>
DAVID EDGARLY, VICE PRESIDENT, 56, is the General
Manager of Alliance Capital Management (Turkey) Ltd., with which
he has associated since prior to 1993.
VICKI FULLER, VICE PRESIDENT, 40, has been a Senior Vice
President of ACMC since July 1994. Previously she was Managing
Director of High Yield of Equitable Capital Management
Corporation since prior to 1993.
RANDALL E. HAASE, SENIOR VICE PRESIDENT, 33, has been a
Vice President of ACMC since July, 1993. Prior thereto he was
associated with ECMC.
GERALD T. MALONE, VICE PRESIDENT, 44, is a Senior Vice
President of ACMC, with which he has been associated since prior
to 1993.
DANIEL V. PANKER, VICE PRESIDENT, 59, is a Senior Vice
President of ACMC, with which he has been associated since prior
to 1993.
DOUGLAS J. PEEBLES, VICE PRESIDENT, 33, is a Vice
President of ACMC with which he has been associated since prior
to 1993.
DANIEL G. PINE, SENIOR VICE PRESIDENT, 45, has been
associated with the Adviser since 1996. Previously, he was a
Senior Vice President of Desai Capital Management since prior to
1993.
PAUL RISSMAN, VICE PRESIDENT, 41, is a Vice President of
ACMC, with which he has been associated since prior to 1993.
TYLER SMITH, VICE PRESIDENT, 60, is a Senior Vice
President of ACMC with which he has been associated since July
1993.
WAYNE C. TAPPE, VICE PRESIDENT, 34, of ACMC, is a Senior
Vice President of ACMC, with which he has been associated since
1993.
JEAN VAN DE WALLE, VICE PRESIDENT, 39, has been Vice
President of ACMC since prior to 1993.
EDMUND P. BERGAN, JR., SECRETARY, 48, is a Senior Vice
President and the General Counsel of Alliance Fund Distributors,
Inc. (AFD) and Alliance Fund Services Inc. ("AFS") with which he
has been associated since prior to 1993.
184
<PAGE>
MARK D. GERSTEN, TREASURER AND CHIEF FINANCIAL OFFICER,
48, is a Senior Vice President of AFS with which he has been
associated since prior to 1993.
ANDREW GANGOLF, ASSISTANT SECRETARY, 44, is a Vice
President and Assistant General Counsel of AFD with which he has
been associated since December 1994. Prior thereto, he was a
Vice President and Assistant Secretary of Delaware Management
Company, Inc. since prior to 1993.
THOMAS R. MANLEY, CONTROLLER, 45, has been a Vice
President of ACMC since July 1993. Previously he was associated
with ECMC since prior to 1993.
The Fund does not pay any fees to, or reimburse expenses
of, its Directors who are considered interested persons of the
Fund. The aggregate compensation paid by the Fund to each of the
Directors during its fiscal year ended December 31, 1997 and the
aggregate compensation paid to each of the Directors during
calendar year 1997 by all of the registered investment companies
to which the Adviser provides investment advisory services
(collectively, the Alliance Fund Complex) and the total number of
registered investment companies (and separate investment
portfolios within those companies) in the Alliance Fund Complex
with respect to which each of the Directors serves as a director
or trustee, are set forth below. Neither the Fund nor any other
registered investment company in the Alliance Fund Complex
provides compensation in the form of pension or retirement
benefits to any of its directors or trustees. Each of the
Directors is a director or trustee of one or more other
registered investment companies in the Alliance Fund Complex.
185
<PAGE>
Total Number
of Registered
Investment Total Number
Companies in of Investment
the Alliance Portfolios
Total Fund Complex, in the,
Compensation Including the Alliance Fund
from the Fund, as to Complex, Including
Alliance Fund which the the Fund, as to
Aggregate Complex, Director is which the Director
Compensation Including a Director is a Director
Name of Director From the Fund the Fund or Trustee or Trustee
John D. Carifa $-0- $-0- 53 118
Ruth Block $ 3,577 $164,000 40 88
David H. Dievler $ 3,557 $188,500 46 83
John H. Dobkin $ 3,617 $126,500 43 80
William H. Foulk, Jr. $ 3,699 $149,145 48 113
Dr. James M. Hester $ 3,507 $156,500 40 77
Clifford L. Michel $ 3,507 $194,500 41 93
Donald J. Robinson $ 3,473 $217,358 44 107
As of January 8, 1999 the Directors and officers of the
Fund as a group owned less than 1% of the shares of the Fund.
ADVISER
Alliance Capital Management L.P. ("the Adviser"), a New
York Stock Exchange listed company with principal offices at 1345
Avenue of the Americas, New York, New York 10105, has been
retained under an advisory agreement (the Advisory Agreement) to
provide investment advice and, in general, to conduct the
management and investment program of the Fund under the
supervision and control of the Fund's Board of Directors (see
Management of the Fund in the Prospectus).
The Adviser is a leading international investment
manager supervising client accounts with assets as of
September 30, 1998, totaling more than $241 billion (of which
more than $99 billion represented the assets of investment
companies). The Adviser's clients are primarily major corporate
employee benefit funds, public employee retirement systems,
investment companies, foundations and endowment funds. The 54
registered investment companies managed by the Adviser,
comprising 119 separate investment portfolios, currently have
more than 3.5 million shareholders. As of September 30, 1998,
the Adviser and its subsidiaries employed approximately 2,000
employees who operate out of domestic offices and the offices of
subsidiaries in Bahrain, Bangalore, Cairo, Chennai, Hong Kong,
Istanbul, Johannesburg, London, Luxembourg, Madrid, Moscow,
186
<PAGE>
Mumbai, New Delhi, Paris, Pune, Sao Paolo, Seoul, Singapore,
Sydney, Tokyo, Toronto, Vienna and Warsaw. As of September 30,
1998, the Adviser was retained as an investment manager for
employee benefit plan assets of 34 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 Equitable Life Assurance Society
of the United States ("Equitable"), one of the largest life
insurance companies in the United States and a wholly-owned
subsidiary of the Equitable Companies Incorporated ("ECI"). ECI
is a holding company controlled by AXA-UAP ("AXA") a French
insurance holding company which at March 1, 1998, beneficially
owned approximately 59% of the outstanding voting shares of ECI.
As of June 30, 1998, ACMC, Inc. and Equitable Capital Management
Corporation, each a wholly-owned direct or indirect subsidiary of
Equitable, together with Equitable, owned in the aggregate
approximately 57% of the issued and outstanding units
representing assignments of beneficial ownership of limited
partnership interests in the Adviser.
AXA is a holding company for an international group of
insurance and related financial services companies. AXA's
insurance operations include activities in life insurance,
property and casualty insurance and reinsurance. The insurance
operations are diverse geographically, with activities
principally in Western Europe, North America and the Asia/Pacific
area. AXA is also engaged in asset management, investment
banking, securities trading, brokerage, real estate and other
financial services activities principally in the United States,
as well as in Western Europe and the Asia/Pacific area.
Based on information provided by AXA, as of March 31,
1998, more than 30% of the voting power of AXA was controlled
directly and indirectly by FINAXA, a French holding company. As
of March 31, 1998 approximately 74% of the voting power of FINAXA
was controlled directly and indirectly by four French mutual
insurance companies (the "Mutuelles AXA"), one of which, AXA
Assurances I.A.R.D. Mutuelle, itself controlled directly and
indirectly more than 42% of the voting power of FINAXA. Acting
as a group, the Mutuelles AXA control AXA and FINAXA.
The Investment Advisory Agreement became effective on
July 22, 1992. The Investment Advisory Agreement was approved by
the unanimous vote, cast in person, of the Fund's Directors
including the Directors who are not parties to the Investment
Advisory Agreement or interested persons as defined in the Act,
of any such party, at a meeting called for the purpose and held
on September 10, 1991. At a meeting held on June 11, 1992, a
187
<PAGE>
majority of the outstanding voting securities of the Fund
approved the Investment Advisory Agreement. The Investment
Advisory Agreement was amended as of June 2, 1994 to provide for
the addition of the North American Government Income Portfolio,
the Global Dollar Government Portfolio and the Utility Income
Portfolio. The amendment to the Investment Advisory Agreement
was approved by the unanimous vote, cast in person, of the
disinterested Directors at a meeting called for that purpose and
held on December 7, 1993. The Investment Advisory Agreement was
amended as of October 24, 1994 to provide for the addition of the
Growth Portfolio, Worldwide Privatization Portfolio, Conservative
Investors Portfolio and Growth Investors Portfolio. The
amendment to the Investment Advisory Agreement was approved by
the unanimous vote, cast in person of the disinterested Directors
at a meeting called for that purpose and held on June 14, 1994.
The Investment Advisory Agreement was amended as of February 1,
1996 to provide for the addition of the Technology Portfolio.
The amendment to the Investment Advisory Agreement was approved
by the unanimous vote, cast in person, of the disinterested
Directors at a meeting called for that purpose and held on
November 28, 1995. The Investment Advisory Agreement was amended
as of July 22, 1996 to provide for the addition of the Quasar
Portfolio. The amendment to the Investment Advisory Agreement
was approved by the unanimous vote, cast in person, of the
disinterested Directors at a meeting called for that purpose and
held on June 4, 1996. The Investment Advisory Agreement was
amended as of December 31, 1996 to provide for the addition of
the Real Estate Investment Portfolio. The amendment to the
Investment Advisory Agreement was approved by the unanimous vote,
cast in person, of the disinterested Directors at a meeting
called for that purpose and held on September 10, 1996. The
Investment Advisory Agreement was amended as of May 1, 1997 to
provide for the addition of the High-Yield Portfolio. The
amendment to the Investment Advisory Agreement was approved by
the unanimous vote, cast in person, of the disinterested
Directors at a meeting called for that purpose and held on
April 12, 1997.
The Adviser provides investment advisory services and
order placement facilities 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 Adviser or its
affiliates also furnish the Fund, without charge, management
supervision and assistance and office facilities and provide
persons satisfactory to the Fund's Board of Directors to serve as
the Fund's officers. Each of the Portfolios pays the Adviser at
the following annual percentage rate of its average daily net
asset value:
188
<PAGE>
Money Market Portfolio .500%
Premier Growth Portfolio 1.000%
Growth and Income Portfolio .625%
U.S. Government/High-Grade
Securities Portfolio .600%
High-Yield Portfolio .750%
Total Return Portfolio .625%
International Portfolio 1.000%
Short-Term Multi-Market Portfolio .550%
Global Bond Portfolio .650%
North American Government
Income Portfolio .650%
Global Dollar Government
Portfolio .750%
Utility Income Portfolio .750%
Conservative Investors
Portfolio .750%
Growth Investors Portfolio .750%
Growth Portfolio .750%
Worldwide Privatization
Portfolio 1.000%
Technology Portfolio 1.000%
Quasar Portfolio 1.000%
Real Estate Investment Portfolio .900%
For the fiscal years ended December 31, 1995,
December 31, 1996 and December 31, 1997, the advisory fee paid by
the Money Market Portfolio to the Adviser was $62,062, $250,603
and $345,313, respectively; for the fiscal years ended
December 31, 1995, December 31, 1996 and December 31, 1997, the
advisory fees paid by the Premier Growth Portfolio to the Adviser
were $434,845, $449,415 and $2,398,742, respectively; for the
fiscal years ended December 31, 1995, December 31, 1996 and
December 31, 1997, the advisory fees paid to the Adviser by the
Growth and Income Portfolio were $362,532, $504,313 and
$1,180,305, respectively; for each of the fiscal years ended
December 31, 1995, December 31, 1996 and December 31, 1997, the
advisory fee paid by the U.S. Government/High Grade Securities
Portfolio to the Adviser was $-0-, $132,023 and $189,543,
respectively; for each of the fiscal years ended December 31,
1995, December 31, 1996 and December 31, 1997, the advisory fee
paid by the Total Return Portfolio to the Adviser was $-0-,
$78,063 and $208,618, respectively; for each of the fiscal years
ended December 31, 1995, December 31, 1996 and December 31, 1997,
the advisory fee paid by the International Portfolio to the
Adviser was $-0-, $12,587 and $293,261, respectively; for the
fiscal years ended December 31, 1995, December 31, 1996 and
December 31, 1997, the advisory fees paid by the Short-Term Multi
Market Portfolio to the Adviser were $32,003, $-0- and $5,553,
respectively; for each of the fiscal years ended December 31,
1995, December 31, 1996 and December 31, 1997, the advisory fee
189
<PAGE>
paid by the Global Bond Portfolio to the Adviser was $-0-,
$66,976 and $108,709, respectively; for the fiscal years ended
December 31, 1995, December 31, 1996 and December 31, 1997, the
advisory fee paid by the North American Government Income
Portfolio to the Advisor was $-0-, $21,264 and $139,842,
respectively; for the fiscal years ended December 31, 1995,
December 31, 1996 and December 31, 1997, the advisory fee paid by
the Global Dollar Government Portfolio to the Adviser was $-0-,
$-0- and $52,644, respectively; for the fiscal years ended
December 31, 1995, December 31, 1996 and December 31, 1997, the
advisory fee paid by the Utility Income Portfolio to the Advisor
was $-0-, $21,431 and $100,662, respectively; for the fiscal
years ended December 31, 1995, December 31, 1996 and December 31,
1997, the advisory fee paid by the Conservative Investors
Portfolio to the Adviser was $-0-, $46,778 and $94,774,
respectively; for the fiscal years ended December 31, 1995,
December 31, 1996 and December 31, 1997 the advisory fee paid by
the Growth Investors Portfolio to the Adviser was $-0-, $-0-, and
$-0-, respectively; for the fiscal years ended December 31, 1995,
December 31, 1996 and December 31, 1997, the advisory fees paid
by the Growth Portfolio to the Adviser were $89,502, $656,813
and $1,393,231, respectively; for the fiscal years ended
December 31, 1995, December 31, 1996 and December 31, 1997, the
advisory fee paid by the Worldwide Privatization Portfolio to the
Advisor was $-0-, $11,158 and $129,108, respectively; for the
period January 11, 1996 (commencement of operations) through
December 31, 1996 and for the fiscal year ended December 31,
1997, the advisory fees paid by the Technology Portfolio to the
Advisor was $40,218 and $392,622, respectively; for the period
August 5, 1996 (commencement of operations) through December 31,
1996 and for the fiscal year ended December 31, 1997, the
advisory fee paid by the Quasar Portfolio to the Adviser was $-0-
and $199,096, respectively; for the fiscal period January 9, 1997
(commencement of operations) through December 31, 1997, the
advisory fee paid by the Real Estate Investment Portfolio to the
Adviser was $-0- and for the fiscal period October 27, 1997
(commencement of operations) through December 31, 1997 the
advisory fee paid by the High-Yield Portfolio to the Adviser was
$-0-.
Certain other clients of the Adviser may have investment
objectives and policies similar to those of the Fund. The
Adviser may, from time to time, make recommendations which result
in the purchase or sale of the particular security by its other
clients simultaneously with the Fund. If transactions on behalf
of more than one client during the same period increase the
demand for securities being purchased or the supply of securities
being sold, there may be an adverse effect on price. It is the
policy of the Adviser to allocate advisory recommendations and
the placing of orders in a manner which is deemed equitable by
the Adviser to the accounts involved, including the Fund. When
190
<PAGE>
two or more of the clients of the Adviser (including the Fund)
are purchasing or selling the same security on a given day from
the same broker or dealer, such transactions may be averaged as
to price.
As to the obtaining of services other than those
specifically provided to the Fund by the Adviser, the Fund may
employ its own personnel. For such services, it also may utilize
personnel employed by the Adviser or by other subsidiaries of
Equitable. In such event, the services will be provided to the
Fund at cost and the payments specifically approved by the Fund's
Board of Directors.
The Investment Advisory Agreement is terminable with
respect to any Portfolio without penalty on 60 days written
notice by a vote of a majority of the outstanding voting
securities of such Portfolio or by a vote of a majority of the
Fund's Directors, or by the Adviser on 60 days written notice,
and will automatically terminate in the event of its assignment.
The Investment Advisory Agreement provides that in the absence of
willful misfeasance, bad faith or gross negligence on the part of
the Adviser, or of reckless disregard of its obligations
thereunder, the Adviser shall not be liable for any action or
failure to act in accordance with its duties thereunder.
The Investment Advisory Agreement continues in effect
until each December 31, and thereafter for successive twelve
month periods computed from each January 1, provided that such
continuance is specifically approved at least annually by a vote
of a majority of the Fund's outstanding voting securities or by
the Fund's Board of Directors, including in either case approval
by a majority of the Directors who are not parties to the
Investment Advisory Agreement or interested persons of such
parties as defined by the 1940 Act. Most recently, continuance of
the Agreement was approved for the period ending December 31,
1999 by the Board of Directors, including a majority of the
Directors who are not parties to the Advisory Agreement or
interested persons of any such party, at their Regular Meeting
held on October 15, 1998.
The Adviser may act as an investment adviser to other
persons, firms or corporations, including investment companies,
and is investment adviser to The Alliance Fund, Inc., AFD
Exchange Reserves, Alliance All-Asia Investment Fund, Inc.,
Alliance Balanced Shares, Inc., Alliance Bond Fund, Inc.,
Alliance Capital Reserves, Alliance Global Dollar Government
Fund, Inc., Alliance Global Environment Fund, Inc., Alliance
Global Small Cap Fund, Inc., Alliance Global Strategic Income
Trust, Inc., Alliance Government Reserves, Alliance Greater China
'97 Fund, Inc., Alliance Growth and Income Fund, Inc., Alliance
High Yield Fund, Inc., Alliance Institutional Reserves, Inc.,
191
<PAGE>
Alliance International Fund, Alliance International Premier
Growth Fund, Inc., Alliance Limited Maturity Government Fund,
Inc., Alliance Money Market Fund, Alliance Mortgage Securities
Income Fund, Inc., Alliance Multi-Market Strategy Trust, Inc.,
Alliance Municipal Income Fund, Inc., Alliance Municipal Income
Fund II, Inc., Alliance Municipal Trust, Alliance New Europe
Fund, Inc., Alliance North American Government Income Trust,
Inc., Alliance Premier Growth Fund, Inc., Alliance Quasar Fund,
Inc., Alliance Real Estate Investment Fund, Inc., Alliance/Regent
Sector Opportunity Fund, Inc., Alliance Select Investors Series,
Inc., Alliance Technology Fund, Inc., Alliance Utility Income
Fund, Inc., Alliance Worldwide Privatization Fund, The Alliance
Portfolios, and The Hudson River Trust, all registered open-end
investment companies; ACM Government Income Fund, Inc., ACM
Government Securities Fund, Inc., ACM Government Spectrum Fund,
Inc., ACM Government Opportunity Fund, Inc., ACM Managed Dollar
Income Fund, Inc., ACM Managed Income Fund, Inc., ACM Municipal
Securities Income Fund, Inc., Alliance All-Market Advantage Fund,
Inc., Alliance World Dollar Government Fund, Inc., Alliance World
Dollar Government Fund II, Inc., The Austria Fund, Inc., The
Korean Investment Fund, Inc., The Southern Africa Fund, Inc. and
The Spain Fund, Inc., all registered closed-end investment
companies.
SUB-ADVISER TO THE GLOBAL BOND PORTFOLIO
The Adviser has retained under a sub-advisory agreement
(the Sub-Advisory Agreement) a sub-adviser, AIGAM International
Limited (the Sub-Adviser), an indirect, majority owned subsidiary
of American International Group, Inc., a major international
financial service company, to provide research and management
services to the Global Bond Portfolio. The Sub-Adviser may, from
time to time, direct transactions for its investment accounts
which result in the purchase or sale of a particular security by
its investment accounts simultaneously with the recommendation by
the Sub-Adviser to the Global Bond Portfolio to purchase or sell
such security. If transactions on behalf of such investment
accounts increase the demand for securities being purchased or
the supply of securities being sold, there may be an adverse
effect on price for the Portfolio. In 1994 the Sub-Advisor
changed its name from Dempsey & Company International Limited,
which was founded in 1988. For its services as Sub-Adviser to
the Global Bond Portfolio, the Sub-Adviser receives from the
Adviser a monthly fee at the annual rate of .40 of 1% of the
Portfolio's average daily net asset value. The fee is accrued
daily and payable in arrears for services performed during each
calendar month within fifteen days following the end of such
month.
The Sub-Advisory Agreement is terminable without penalty
on 60 days written notice to the Sub-Adviser by a vote of the
192
<PAGE>
holders of a majority of the Global Bond Portfolios outstanding
voting securities or by the Directors or by the Adviser, or by
the Sub-Adviser on 60 days written notice to the Adviser and the
Portfolio, and will automatically terminate in the event of its
assignment or of the assignment of the Investment Advisory
Agreement. The Sub-Advisory Agreement provides that in the
absence of willful misfeasance, bad faith or gross negligence on
the part of the Sub-Adviser, or reckless disregard of the Sub-
Advisers obligations thereunder, the Sub-Adviser shall not be
liable for any action or failure to act in accordance with its
duties thereunder.
The Sub-Advisory Agreement became effective on July 22,
1992. At a meeting held on June 11, 1992, a majority of the
outstanding voting securities of the Portfolio approved the Sub-
Advisory Agreement.
The Sub-Advisory Agreement provides that it shall remain
in effect from year to year provided that such continuance is
specifically approved at least annually by the Board of Directors
of the Fund, or by vote of a majority of the outstanding voting
securities of the Global Bond Portfolio, and, in either case, by
a majority of the Directors who are not parties to the Investment
Advisory Agreement or Sub-Advisory Agreement or interested
persons as defined by the 1940 Act. Most recently, continuance of
the Sub-Advisory Agreement was approved for the period ending
December 31, 1999 by the Board of Directors, including a majority
of the Directors who are not parties to the Sub-Advisory
Agreement or interested persons of any such party, at their
Regular Meeting held on October 15, 1998.
In providing advisory services to the Fund and other
clients investing in real estate securities, Alliance has access
to the research services of CB Richard Ellis, Inc. ("CBRE"),
which acts as a consultant to Alliance with respect to the real
estate market. As a consultant, CBRE provides to Alliance, at
Alliances expense, such in-depth information regarding the real
estate market, the factors influencing regional valuations and
analysis of recent transactions in office, retail, industrial and
multi-family properties as Alliance shall from time to time
request. CBRE will not furnish investment advice or make
recommendations regarding the purchase or sale of securities by
the Fund nor will it be responsible for making investment
decisions involving Fund assets.
CBRE is a publicly held company and the largest real
estate services company in the United States, comprised of real
estate brokerage, property and facilities management, and real
estate finance and investment advisory activities (CBRE in August
of 1997 acquired Koll Management Services, which previously
provided these consulting services to Alliance). In 1997, CBRE
193
<PAGE>
completed 22,100 sale and lease transactions, managed over 6,600
client properties, created over $5 billion in mortgage
originations, and completed over 3,600 appraisal and consulting
assignments. In addition, they advised and managed for
institutions over $4 billion in real estate investments. As
consultant to Alliance, CBRE provides access to its proprietary
model, REIT-Score, that analyzes the approximately 18,000
individual properties owned by these 142 companies. Using
proprietary databases and algorithms, CBRE analyzes local market
rent, expense, and occupancy trends, market specific transaction
pricing, demographic and economic trends, and leading indicators
of real estate supply such as building permits. Over 650 asset-
type specific geographic markets are analyzed and ranked on a
relative scale by CBRE in compiling its REIT-Score database. The
relative attractiveness of these real estate industry companies
is similarly ranked based on the composite rankings of the
properties they own. CBRE has previously provided access to its
REIT-Score model results primarily to the institutional market
through subscriptions. The model is no longer provided to any
research publications and the Fund is currently the only mutual
fund available to retail investors that has access to CBREs REIT-
Score model.
DISTRIBUTION SERVICES AGREEMENT
The Fund has entered into a Distribution Services
Agreement (the "Agreement") with Alliance Fund Distributors,
Inc., the Company's principal underwriter (the "Principal
Underwriter"), to permit the Principal Underwriter to distribute
the Fund's shares and to permit the Fund to pay distribution
services fees to defray expenses associated with distribution of
its Class B shares in accordance with a plan of distribution
which has been duly adopted and approved in accordance with Rule
12b-1 adopted by the Commission under the 1940 Act (the "Rule
12b-1 Plan").
Distribution services fees are accrued daily and paid
monthly and charged as expenses of the Fund as accrued. Under
the Agreement, the Treasurer of the Company Fund reports the
amounts expended under the Rule 12b-1 Plan and the purposes for
which such expenditures were made to the Directors of the Company
on a quarterly basis. Also, the Agreement provides that the
selection and nomination of Directors who are not "interested
persons" of the Fund, as defined in the 1940 Act, are committed
to the discretion of such disinterested Directors then in office.
The Agreement was initially approved by the Directors of the Fund
at a meeting held on January 6, 1999.
The Agreement will continue in effect until December 31,
1999 and continue in effect thereafter so long as its continuance
194
<PAGE>
is specifically approved at least annually by the Directors of
the Fund or by vote of the holders of a majority of the
outstanding Class B shares (as defined in the 1940 Act) and, in
either case, by a majority of the Directors of the Fund who are
not parties to the Agreement or interested persons, as defined in
the 1940 Act, of any such party (other than as directors of the
Fund) and who have no direct or indirect financial interest in
the operation of the Rule 12b-1 Plan or any agreement related
thereto.
The Adviser may from time to time and from its own funds
or such other resources as may be permitted by rules of the
Commission make payments for distribution services to the
Principal Underwriter; the latter may in turn pay part or all of
such compensation to brokers or other persons for their
distribution assistance. The Principal Underwriter will pay for
printing and distributing prospectuses or reports prepared for
its use in connection with the offering of the Class B shares to
the public and preparing, printing and mailing any other
literature or advertising in connection with the offering of the
Class B shares to the public. The Principal Underwriter will pay
all fees and expenses in connection with its qualification and
registration as a broker or dealer under Federal and state laws
and of any activity which is primarily intended to result in the
sale of Class B shares issued by the Fund, unless the plan of
distribution in effect for Class B shares provides that the Fund
shall bear some or all of such expenses.
In the event that the Agreement is terminated or not
continued with respect to the Class B shares of a Portfolio,
(i) no distribution services fees (other than current amounts
accrued but not yet paid) would be owed by the Fund to the
Principal Underwriter with respect to Class B shares of such
Portfolio and (ii) the Fund would not be obligated to pay the
Principal Underwriter for any amounts expended under the
Agreement not previously recovered by the Principal Underwriter
from distribution services fees in respect of shares of such
class or through deferred sales charges.
All material amendments to the Agreement with respect to
a Portfolio must be approved by a vote of the Directors or the
holders of a majority of the outstanding Class B shares of that
Portfolio and in either case, by a majority of the disinterested
Directors, cast in person at a meeting called for the purpose of
voting on such approval; and the Agreement may not be amended in
order to increase materially the costs that the Class B shares of
a Portfolio may bear pursuant to the Agreement without the
approval of a majority of the holders of the outstanding Class B
shares of that Portfolio. The Agreement may be terminated (a) by
the Fund with respect to a Portfolio without penalty at any time
by a majority vote of the holders of the outstanding Class B
195
<PAGE>
shares of that Portfolio (as defined in the 1940 Act), or by a
majority vote of the Directors who are not "interested persons"
as defined in the 1940 Act, or (b) by the Principal Underwriter.
To terminate the Agreement, any party must give the other parties
60 days' written notice. To terminate the Rule 12b-1 Plan only,
the Fund need give no notice to the Principal Underwriter. The
Agreement will terminate automatically in the event of its
assignment. Under the Agreement, the Fund has agreed to
indemnify the distributor, in the absence of its willful
misfeasance, bad faith, gross negligence or reckless disregard of
its obligations thereunder, against certain civil liabilities,
including liabilities under the Securities Act.
_________________________________________________________________
PURCHASE AND REDEMPTION OF SHARES
_________________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus under the heading "Purchase and Redemption
of Shares".
REDEMPTION OF SHARES
The value of a shareholders shares on redemption or
repurchase may be more or less than the cost of such shares to
the shareholder, depending upon the market value of the
Portfolio's securities at the time of such redemption or
repurchase. Payment either in cash or in portfolio securities
received by a shareholder upon redemption or repurchase of his
shares, assuming the shares constitute capital assets in his
hands, will result in long-term or short-term capital gains (or
loss) depending upon the shareholders holding period and basis in
respect of the shares redeemed.
_________________________________________________________________
NET ASSET VALUE
_________________________________________________________________
A. With respect to the Premier Growth Portfolio and the
Real Estate Investment Portfolio, the per share net asset value
is computed in accordance with the Portfolio's Articles of
Incorporation and By-Laws at the next close of regular trading on
the Exchange (ordinarily 4:00 p.m. Eastern time) following
receipt of a purchase or redemption order by the Portfolio on
each Portfolio business day on which such an order is received
and on such other days as the Board of Directors deems
appropriate or necessary in order to comply with Rule 22c-1 under
the 1940 Act. The Portfolio's per share net asset value is
calculated by dividing the value of the Portfolio's total assets,
196
<PAGE>
less its liabilities, by the total number of its shares then
outstanding. A Portfolio business day is any weekday on which
the Exchange is open for trading.
In accordance with applicable rules under the 1940 Act,
portfolio securities are valued at current market value or at
fair value as determined in good faith by the Board of Directors.
The Board of Directors has delegated to the Adviser certain of
the Board's duties with respect to the following procedures.
Readily marketable securities listed on the Exchange are valued,
except as indicated below, at the last sale price reflected on
the consolidated tape at the close of the Exchange on the
business day as of which such value is being determined. If
there has been no sale on such day, the securities are valued at
the mean of the closing bid and asked prices on such day. If no
bid or asked prices are quoted on such day, then the security is
valued in good faith at fair value by, or in accordance with
procedures established by, the Board of Directors. Readily
marketable securities not listed on the Exchange but listed on
other national securities exchanges or traded on The Nasdaq Stock
Market, Inc. are valued in like manner. Securities traded on the
Exchange and on one or more other national securities exchanges,
and portfolio securities not traded on the Exchange but traded on
one or more other national securities exchanges are valued in
accordance with these procedures by reference to the principal
exchange on which the securities are traded.
Readily marketable securities traded in the over-the-
counter market, including securities listed on a national
securities exchange whose primary market is believed to be over-
the-counter but excluding securities traded on The Nasdaq Stock
Market, Inc., are valued at the mean of the current bid and asked
prices as reported by Nasdaq or, in the case of securities not
quoted by Nasdaq, the National Quotation Bureau or another
comparable sources.
Listed put or call options purchased by the Portfolio
are valued at the last sale price. If there has been no sale on
that day, such securities will be valued at the closing bid
prices on that day.
Open futures contracts and options thereon will be
valued using the closing settlement price or, in the absence of
such a price, the most recent quoted bid price. If there are no
quotations available for the day of valuations, the last
available closing settlement price will be used.
U.S. Government securities and other debt instruments
having 60 days or less remaining until maturity are valued at
amortized cost if their original maturity was 60 days or less, or
by amortizing their fair value as of the 61st day prior to
197
<PAGE>
maturity if their original term to maturity exceeded 60 days
(unless in either case the Board of Directors determines that
this method does not represent fair value).
Fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities.
The prices provided by a pricing service take into account many
factors, including institutional size trading in similar groups
of securities and any developments related to specific
securities.
All other assets of the Fund are valued in good faith at
fair value by, or in accordance with procedures established by,
the Board of Directors.
The Board of Directors may suspend the determination of
the Portfolio's net asset value (and the offering and sale of
shares), subject to the rules of the Commission and other
governmental rules and regulations, at a time when: (1) the New
York Stock Exchange ("the Exchange") is closed, other than
customary weekend and holiday closings, (2) an emergency exists
as a result of which it is not reasonably practicable for the
Portfolio to dispose of securities owned by it or to determine
fairly the value of its net assets, or (3) for the protection of
shareholders, the Commission by order permits a suspension of the
right of redemption or a postponement of the date of payment on
redemption.
For purposes of determining the Portfolio's net asset
value per share, all assets and liabilities initially expressed
in a foreign currency will be converted into U.S. Dollars at the
mean of the current bid and asked prices of such currency against
the U.S. Dollar last quoted by a major bank that is a regular
participant in the relevant foreign exchange market or on the
basis of a pricing service that takes into account the quotes
provided by a number of such major banks. If such quotations are
not available as of the close of the Exchange, the rate of
exchange will be determined in good faith by, or under the
direction of, the Board of Directors.
The assets attributable to the Class A shares and Class
B shares of each Portfolio, will be invested together in a single
portfolio. The net asset value of each class will be determined
separately by subtracting the liabilities allocated to that class
from the assets belonging to that class in conformance with the
provisions of a plan adopted by the Fund in accordance with Rule
18f-3 under the 1940 Act.
B. With respect to the Growth & Income Portfolio,
International Portfolio, Utility Income Portfolio, Conservative
198
<PAGE>
Investors Portfolio, Growth Investors Portfolio, Growth
Portfolio, Worldwide Privatization Portfolio, Technology
Portfolio and Quasar Portfolio the per share net asset value is
computed in accordance with the Portfolio's Articles of
Incorporation and By-Laws at the next close of regular trading on
the Exchange (ordinarily 4:00 p.m. Eastern time) following
receipt of a purchase or redemption order by the Portfolio on
each Portfolio business day on which such an order is received
and on such other days as the Board of Directors deems
appropriate or necessary in order to comply with Rule 22c-1 under
the 1940 Act. The Portfolio's per share net asset value is
calculated by dividing the value of the Fund's total assets, less
its liabilities, by the total number of its shares then
outstanding. A Portfolio business day is any weekday on which
the Exchange is open for trading.
In accordance with applicable rules under the 1940 Act,
portfolio securities are valued at current market value or at
fair value as determined in good faith by the Board of Directors.
The Board of Directors has delegated to the Adviser certain of
the Board's duties with respect to the following procedures.
Readily marketable securities listed on the Exchange or on a
foreign securities exchange (other than foreign securities
exchanges whose operations are similar to those of the United
States over-the-counter market) are valued, except as indicated
below, at the last sale price reflected on the consolidated tape
at the close of the Exchange or, in the case of a foreign
securities exchange, at the last quoted sale price, in each case
on the business day as of which such value is being determined.
If there has been no sale on such day, the securities are valued
at the mean of the closing bid and asked prices on such day. If
no bid or asked prices are quoted on such day, then the security
is valued in good faith at fair value by, or in accordance with
procedures established by, the Board of Directors. Readily
marketable securities not listed on the Exchange or on a foreign
securities exchange but listed on other United States national
securities exchanges or traded on The Nasdaq Stock Market, Inc.
are valued in like manner. Portfolio securities traded on the
Exchange and on one or more foreign or other national securities
exchanges, and portfolio securities not traded on the Exchange
but traded on one or more foreign or other national securities
exchanges are valued in accordance with these procedures by
reference to the principal exchange on which the securities are
traded.
Readily marketable securities traded in the over-the-
counter market, securities listed on a foreign securities
exchange whose operations are similar to those of the United
States over-the-counter market, and securities listed on a U.S.
national securities exchange whose primary market is believed to
be over-the-counter (but excluding securities traded on The
199
<PAGE>
Nasdaq Stock Market, Inc.), are valued at the mean of the current
bid and asked prices as reported by Nasdaq or, in the case of
securities not quoted by Nasdaq, the National Quotation Bureau or
another comparable sources.
Listed put or call options purchased by the Portfolio
are valued at the last sale price. If there has been no sale on
that day, such securities will be valued at the closing bid
prices on that day.
Open futures contracts and options thereon will be
valued using the closing settlement price or, in the absence of
such a price, the most recent quoted bid price. If there are no
quotations available for the day of valuations, the last
available closing settlement price will be used.
U.S. Government securities and other debt instruments
having 60 days or less remaining until maturity are valued at
amortized cost if their original maturity was 60 days or less, or
by amortizing their fair value as of the 61st day prior to
maturity if their original term to maturity exceeded 60 days
(unless in either case the Board of Directors determines that
this method does not represent fair value).
Fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities.
The prices provided by a pricing service take into account many
factors, including institutional size trading in similar groups
of securities and any developments related to specific
securities.
All other assets of the Portfolio are valued in good
faith at fair value by, or in accordance with procedures
established by, the Board of Directors.
Trading in securities on Far Eastern and European
securities exchanges and over-the-counter markets is normally
completed well before the close of business of each Portfolio
business day. In addition, trading in foreign markets may not
take place on all Portfolio business days. Furthermore, trading
may take place in various foreign markets on days that are not
Fund business days. The Portfolio's calculation of the net asset
value per share, therefore, does not always take place
contemporaneously with the most recent determination of the
prices of portfolio securities in these markets. Events
affecting the values of these portfolio securities that occur
between the time their prices are determined in accordance with
the above procedures and the close of the Exchange will not be
reflected in the Fund's calculation of net asset value unless it
is believed that these prices do not reflect current market
200
<PAGE>
value, in which case the securities will be valued in good faith
by, or in accordance with procedures established by, the Board of
Directors at fair value.
The Board of Directors may suspend the determination of
the Portfolio's net asset value (and the offering and sale of
shares), subject to the rules of the Commission and other
governmental rules and regulations, at a time when: (1) the
Exchange is closed, other than customary weekend and holiday
closings, (2) an emergency exists as a result of which it is not
reasonably practicable for the Portfolio to dispose of securities
owned by it or to determine fairly the value of its net assets,
or (3) for the protection of shareholders, the Commission by
order permits a suspension of the right of redemption or a
postponement of the date of payment on redemption.
For purposes of determining the Portfolio's net asset
value per share, all assets and liabilities initially expressed
in a foreign currency will be converted into U.S. Dollars at the
mean of the current bid and asked prices of such currency against
the U.S. Dollar last quoted by a major bank that is a regular
participant in the relevant foreign exchange market or on the
basis of a pricing service that takes into account the quotes
provided by a number of such major banks. If such quotations are
not available as of the close of the Exchange, the rate of
exchange will be determined in good faith by, or under the
direction of, the Board of Directors.
The assets attributable to the Class A shares and Class
B shares of each Portfolio, will be invested together in a single
portfolio. The net asset value of each class will be determined
separately by subtracting the liabilities allocated to that class
from the assets belonging to that class in conformance with the
provisions of a plan adopted by the Fund in accordance with Rule
18f-3 under the 1940 Act.
C. With respect to the U.S. Government/High Grade
Securities Portfolio and the Total Return Portfolio, the per
share net asset value is computed in accordance with the
Portfolio's Articles of Incorporation and By-Laws at the next
close of regular trading on the Exchange (ordinarily 4:00 p.m.
Eastern time) following receipt of a purchase or redemption order
by the Portfolio on each Portfolio business day on which such an
order is received and on such other days as the Board of
Directors deems appropriate or necessary in order to comply with
Rule 22c-1 under the 1940 Act. The Portfolio's per share net
asset value is calculated by dividing the value of the
Portfolio's total assets, less its liabilities, by the total
number of its shares then outstanding. A Portfolio business day
is any weekday on which the Exchange is open for trading.
201
<PAGE>
In accordance with applicable rules under the 1940 Act,
portfolio securities are valued at current market value or at
fair value as determined in good faith by the Board of Directors.
The Board of Directors has delegated to the Adviser certain of
the Board's duties with respect to the following procedures.
Readily marketable securities listed on the Exchange are valued,
except as indicated below, at the last sale price reflected on
the consolidated tape at the close of the Exchange on the
business day as of which such value is being determined. If
there has been no sale on such day, the securities are valued at
the quoted bid prices on such day. If no bid prices are quoted
on such day, then the security is valued at the mean of the bid
and asked prices at the close of the Exchange on such day as
obtained from one or more dealers regularly making a market in
such securities. Where a bid and asked price can be obtained
from only one such dealer, the security is valued at the mean of
the bid and asked price obtained from such dealer, unless it is
determined that such price does not represent current market
value, in which case the security shall be valued in good faith
at fair value by, or in accordance with procedures established
by, the Board of Directors. Securities for which no bid and
asked price quotations are readily available are valued in good
faith at fair value by, or in accordance with procedures
established by, the Board of Directors. Readily marketable
securities not listed on the Exchange but listed on other
national securities exchanges are valued in like manner.
Portfolio securities traded on the Exchange and on one or more
other national securities exchanges, and portfolio securities not
traded on the Exchange but traded on one or more other national
securities exchanges are valued in accordance with these
procedures by reference to the principal exchange on which the
securities are traded.
Readily marketable securities traded only in the over-
the-counter market, and debt securities listed on a national
securities exchange whose primary market is believed to be over-
the-counter, are valued at the mean of the bid and asked prices
at the close of the Exchange on such day as obtained from two or
more dealers regularly making a market in such securities. Where
a bid and asked price can be obtained from only one such dealer,
such security is valued at the mean of the bid and asked prices
obtained from such dealer unless it is determined that such price
does not represent current market value, in which case the
security shall be valued in good faith at fair value by, or in
accordance with procedures established by, the Board of
Directors.
Listed put and call options purchased by the Portfolio
are valued at the last sale price. If there has been no sale on
that day, such securities will be valued at the closing bid
prices on that day.
202
<PAGE>
Open futures contracts and options thereon will be
valued using the closing settlement price or, in the absence of
such a price, the most recent quoted bid price. If there are no
quotations available for the day of valuations, the last
available closing settlement price will be used.
U.S. Government securities and other debt instruments
having 60 days or less remaining until maturity are valued at
amortized cost if their original maturity was 60 days or less, or
by amortizing their fair value as of the 61st day prior to
maturity if their original term to maturity exceeded 60 days
(unless in either case the Board of Directors determines that
this method does not represent fair value).
Fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities.
The prices provided by a pricing service take into account many
factors, including institutional size trading in similar groups
of securities and any developments related to specific
securities.
All other assets of the Portfolio are valued in good
faith at fair value by, or in accordance with procedures
established by, the Board of Directors.
The Board of Directors may suspend the determination of
the Portfolio's net asset value (and the offering and sales of
shares), subject to the rules of the Commission and other
governmental rules and regulations, at a time when: (1) the
Exchange is closed, other than customary weekend and holiday
closings, (2) an emergency exists as a result of which it is not
reasonably practicable for the Portfolio to dispose of securities
owned by it or to determine fairly the value of its net assets,
or (3) for the protection of shareholders, the Commission by
order permits a suspension of the right of redemption or a
postponement of the date of payment on redemption.
For purposes of determining the Portfolio's net asset
value per share, all assets and liabilities initially expressed
in a foreign currency will be converted into U.S. Dollars at the
mean of the current bid and asked prices of such currency against
the U.S. Dollar last quoted by a major bank that is a regular
participant in the relevant foreign exchange market or on the
basis of a pricing service that takes into account the quotes
provided by a number of such major banks. If such quotations are
not available as of the close of the Exchange, the rate of
exchange will be determined in good faith by, or under the
direction of, the Board of Directors.
203
<PAGE>
The assets attributable to the Class A shares and Class
B shares of each Portfolio, will be invested together in a single
portfolio. The net asset value of each class will be determined
separately by subtracting the liabilities allocated to that class
from the assets belonging to that class in conformance with the
provisions of a plan adopted by the Fund in accordance with Rule
18f-3 under the 1940 Act.
D. With respect to the High-Yield Portfolio, Short-Term
Multi-Market Portfolio, Global Bond Portfolio, North American
Government Income Portfolio and Global Dollar Government
Portfolio, the per share net asset value is computed in
accordance with the Portfolio's Articles of Incorporation and
By-Laws at the next close of regular trading on the Exchange
(ordinarily 4:00 p.m. Eastern time) following receipt of a
purchase or redemption order by the Portfolio on each Portfolio
business day on which such an order is received and on such other
days as the Board of Directors of the Portfolio deems appropriate
or necessary in order to comply with Rule 22c-1 under the 1940
Act. The Portfolio's per share net asset value is calculated by
dividing the value of the Portfolio's total assets, less its
liabilities, by the total number of its shares then outstanding.
A Portfolio business day is any weekday on which the Exchange is
open for trading.
In accordance with applicable rules under the 1940 Act,
portfolio securities are valued at current market value or at
fair value as determined in good faith by the Board of Directors.
The Board of Directors has delegated to the Adviser certain of
the Board's duties with respect to the following procedures.
Readily marketable securities listed on the Exchange or on a
foreign securities exchange (other than foreign securities
exchanges whose operations are similar to those of the United
States over-the-counter market) are valued, except as indicated
below, at the last sale price reflected on the consolidated tape
at the close of the Exchange or, in the case of a foreign
securities exchange, at the last quoted sale price, in each case
on the business day as of which such value is being determined.
If there has been no sale on such day, the securities are valued
at the quoted bid prices on such day. If no bid prices are
quoted on such day, then the security is valued at the mean of
the bid and asked prices at the close of the Exchange on such day
as obtained from one or more dealers regularly making a market in
such security. Where a bid and asked price can be obtained from
only one such dealer, such security is valued at the mean of the
bid and asked price obtained from such dealer unless it is
determined that such price does not represent current market
value, in which case the security shall be valued in good faith
at fair value by, or pursuant to procedures established by, the
Board of Directors. Securities for which no bid and asked price
quotations are readily available are valued in good faith at fair
204
<PAGE>
value by, or in accordance with procedures established by, the
Board of Directors. Readily marketable securities not listed on
the Exchange or on a foreign securities exchange are valued in
like manner. Portfolio securities traded on the Exchange and on
one or more other foreign or other national securities exchanges,
and portfolio securities not traded on the Exchange but traded on
one or more foreign or other national securities exchanges are
valued in accordance with these procedures by reference to the
principal exchange on which the securities are traded.
Readily marketable securities traded only in the over-
the-counter market, securities listed on a foreign securities
exchange whose operations are similar to those of the United
States over-the-counter market, and debt securities listed on a
U.S. national securities exchange whose primary market is
believed to be over-the-counter, are valued at the mean of the
bid and asked prices at the close of the Exchange on such day as
obtained from two or more dealers regularly making a market in
such security. Where a bid and asked price can be obtained from
only one such dealer, such security is valued at the mean of the
bid and asked price obtained from such dealer unless it is
determined that such price does not represent current market
value, in which case the security shall be valued in good faith
at fair value by, or in accordance with procedures established
by, the Board of Directors.
Listed put and call options purchased by the Portfolio
are valued at the last sale price. If there has been no sale on
that day, such securities will be valued at the closing bid
prices on that day.
Open futures contracts and options thereon will be
valued using the closing settlement price or, in the absence of
such a price, the most recent quoted bid price. If there are no
quotations available for the day of valuations, the last
available closing settlement price will be used.
U.S. Government Securities and other debt instruments
having 60 days or less remaining until maturity are valued at
amortized cost if their original maturity was 60 days or less, or
by amortizing their fair value as of the 61st day prior to
maturity if their original term to maturity exceeded 60 days
(unless in either case the Board of Directors determines that
this method does not represent fair value).
Fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities.
The prices provided by a pricing service take into account many
factors, including institutional size trading in similar groups
205
<PAGE>
of securities and any developments related to specific
securities.
All other assets of the Portfolio are valued in good
faith at fair value by, or in accordance with procedures
established by, the Board of Directors.
Trading in securities on Far Eastern and European
securities exchanges and over-the-counter markets is normally
completed well before the close of business of each Portfolio
business day. In addition, trading in foreign markets may not
take place on all Portfolio business days. Furthermore, trading
may take place in various foreign markets on days that are not
Portfolio business days. The Portfolio's calculation of the net
asset value per share, therefore, does not always take place
contemporaneously with the most recent determination of the
prices of portfolio securities in these markets. Events
affecting the values of these portfolio securities that occur
between the time their prices are determined in accordance with
the above procedures and the close of the Exchange will not be
reflected in the Portfolio's calculation of net asset value
unless these prices do not reflect current market value, in which
case the securities will be valued in good faith at fair value
by, or in accordance with procedures established by, the Board of
Directors.
The Board of Directors may suspend the determination of
the Portfolio's net asset value (and the offering and sales of
shares), subject to the rules of the Commission and other
governmental rules and regulations, at a time when: (1) the
Exchange is closed, other than customary weekend and holiday
closings, (2) an emergency exists as a result of which it is not
reasonably practicable for the Portfolio to dispose of securities
owned by it or to determine fairly the value of its net assets,
or (3) for the protection of shareholders, the Commission by
order permits a suspension of the right of redemption or a
postponement of the date of payment on redemption.
For purposes of determining the Portfolio's net asset
value per share, all assets and liabilities initially expressed
in a foreign currency will be converted into U.S. Dollars at the
mean of the current bid and asked prices of such currency against
the U.S. Dollar last quoted by a major bank that is a regular
participant in the relevant foreign exchange market or on the
basis of a pricing service that takes into account the quotes
provided by a number of such major banks. If such quotations are
not available as of the close of the Exchange, the rate of
exchange will be determined in good faith by, or under the
direction of, the Board of Directors.
206
<PAGE>
The assets attributable to the Class A shares and Class
B shares of each Portfolio, will be invested together in a single
portfolio. The net asset value of each class will be determined
separately by subtracting the liabilities allocated to that class
from the assets belonging to that class in conformance with the
provisions of a plan adopted by the Fund in accordance with Rule
18f-3 under the 1940 Act.
E. The Money Market Portfolio utilizes the amortized
cost method of valuation of portfolio securities in accordance
with the provisions of Rule 2a-7 under the Act. The amortized
cost method involves valuing an instrument at its cost and
thereafter applying a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. The Fund
maintains procedures designed to stabilize, to the extent
reasonably possible, the price per share of the Portfolio as
computed for the purpose of sales and redemptions at $1.00. Such
procedures include review of the Portfolio's investment portfolio
holdings by the Directors at such intervals as they deem
appropriate to determine whether and to what extent the net asset
value of the Portfolio calculated by using available market
quotations or market equivalents deviates from net asset value
based on amortized cost. If such deviation as to the Portfolio
exceeds 1/2 of 1%, the Directors will promptly consider what
action, if any, should be initiated. In the event the Directors
determine that such a deviation may result in material dilution
or other unfair results to new investors or existing
shareholders, they will consider corrective action which might
include (1) selling instruments held by the Portfolio prior to
maturity to realize capital gains or losses or to shorten average
portfolio maturity; (2) withholding dividends of net income on
shares of the Portfolio; or (3) establishing a net asset value
per share of the Portfolio by using available market quotations
or equivalents. The net asset value of the shares of the
Portfolio is determined as of the close of business each Fund
business day (generally 4:00 p.m. Eastern time).
The assets attributable to the Class A shares and Class
B shares of the Portfolio, will be invested together in a single
portfolio. The net asset value of each class will be determined
separately by subtracting the liabilities allocated to that class
from the assets belonging to that class in conformance with the
provisions of a plan adopted by the Fund in accordance with Rule
18f-3 under the 1940 Act.
207
<PAGE>
_________________________________________________________________
PORTFOLIO TRANSACTIONS
_________________________________________________________________
Neither the Fund nor the Adviser has entered into
agreements or understandings with any brokers or dealers
regarding the placement of securities transactions because of
research or statistical services they provide. To the extent
that such persons or firms supply investment information to the
Adviser for use in rendering investment advice to the Fund, such
information may be supplied at no cost to the Adviser and,
therefore, may have the effect of reducing the expenses of the
Adviser in rendering advice to the Fund. While it is impossible
to place an actual dollar value on such investment information,
its receipt by the Adviser probably does not reduce the overall
expenses of the Adviser to any material extent.
The investment information provided to the Adviser is of
the types described in Section 28(e)(3) of the Securities
Exchange Act of 1934 and is designed to augment the Advisers own
internal research and investment strategy capabilities. Research
and statistical services furnished by brokers through which the
Fund effects securities transactions are used by the Adviser in
carrying out its investment management responsibilities with
respect to all its client accounts but not all such services may
be utilized by the Adviser in connection with the Fund.
The Fund will deal in some instances in equity
securities which are not listed on a national stock exchange but
are traded in the over-the-counter market. In addition, most
transactions for the U.S. Government/High-Grade Securities
Portfolio and the Money Market Portfolio are executed in the
over-the-counter market. Where transactions are executed in the
over-the-counter market, the Fund will seek to deal with the
primary market makers, but when necessary in order to obtain the
best price and execution, it will utilize the services of others.
In all cases, the Fund will attempt to negotiate best execution.
The Fund may from time to time place orders for the
purchase or sale of securities (including listed call options)
with Donaldson, Lufkin & Jenrette Securities Corporation (DLJ),
an affiliate of the Adviser, the Fund's distributor, and with
brokers which may have their transactions cleared or settled, or
both, by the Pershing Division of DLJ for which DLJ may receive a
portion of the brokerage commission. With respect to orders
placed with DLJ for execution on a national securities exchange,
commissions received must conform to Section 17(e)(2)(A) of the
1940 Act and Rule 17e-1 thereunder, which permit an affiliated
person of a registered investment company (such as the Fund), or
any affiliated person of such person, to receive a brokerage
208
<PAGE>
commission from such registered investment company provided that
such commission is reasonable and fair compared to the
commissions received by other brokers in connection with
comparable transactions involving similar securities during a
comparable period of time.
Brokerage commissions paid for the fiscal year ended
December 31, 1995 on securities transactions amounted to $1,373,
$3,055, $104,323, $229,432, $64,196, $148,418, $7,479, $22,347
and $11,055 with respect to the Conservative Investors Portfolio,
the Growth Investors Portfolio, the Growth Portfolio, the Growth
and Income Portfolio, the International Portfolio, the Premier
Growth Portfolio, the Total Return Portfolio, the Utility
Portfolio and the Worldwide Privatization Portfolio,
respectively. The Global Bond Portfolio, the Global Dollar
Government Portfolio, the Money Market Portfolio, the North
American Government Income, the Short-Term Multi-Market Portfolio
and the U.S. Government/High Grade Securities Portfolio did not
incur any brokerage commissions for the fiscal year ended
December 31, 1995. Brokerage commission paid for the fiscal year
ended December 31, 1996 on securities transactions amounted to
$90,253, $255,607, $260,435, $30,275, $31,907,$287,449, $41,894,
$23,162, $28,063, $10,847 and $12,207 with respect to the Premier
Growth Portfolio, the Growth and Income Portfolio, the
International Portfolio, the Total Return Portfolio, the Utility
Income Portfolio, the Growth Portfolio, the Worldwide
Privatization Portfolio, the Conservative Investors Portfolio,
the Growth Investors Portfolio, the Technology Portfolio and the
Quasar Portfolio, respectively. The Global Bond Portfolio, the
Short-Term Multi-Market Portfolio, the U.S. Government/High Grade
Securities Portfolio, the Money Market Portfolio, the Global
Dollar Government Portfolio, and the North American Government
Income Portfolio did not incur and brokerage commission for the
fiscal year ended December 31, 1996. Brokerage commission paid
for the fiscal year ended December 31, 1997 on securities
transactions amounted to $377,288, $409,972, $355,055, $48,588,
$14,332, $272,666, $110,817, $33,041, $43,551, $35,250, $231,416
and $26,891 with respect to the Premier Growth Portfolio, the
Growth and Income Portfolio, the International Portfolio, the
Total Return Portfolio, the Utility Income Portfolio, the Growth
Portfolio, the Worldwide Privatization Portfolio, the
Conservative Investors Portfolio, the Growth Investors Portfolio,
the Technology Portfolio, and the Quasar Portfolio, the Real
Estate Investment Portfolio and the High Yield Portfolio,
respectively. The Global Bond Portfolio, the Short-Term Multi-
Market Portfolio, the U.S. Government/High Grade Securities
Portfolio, the Money Market Portfolio, the Global Dollar
Government Portfolio, and the North American Government Income
Portfolio did not incur and brokerage commission for the fiscal
year ended December 31, 1997. During the fiscal years ended
209
<PAGE>
December 31, 1995, 1996 and 1997 $-0-, $-0-, and $820*** in
brokerage commissions were paid to Donaldson, Lufkin & Jenrette
Securities Corporation and no brokerage commissions were paid to
brokers utilizing the Pershing Division of Donaldson, Lufkin &
Jenrette Securities Corporation.
_________________________________________________________________
DIVIDENDS, DISTRIBUTIONS AND TAXES
_________________________________________________________________
Each Portfolio of the Fund qualified and intends to
continue to qualify to be taxed as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the "Code").
If so qualified, each Portfolio will not be subject to federal
income and excise taxes on its investment company taxable income
and net capital gains to the extent such investment company
taxable income and net capital gains are distributed to the
separate accounts of insurance companies which hold its shares.
Under current tax law, capital gains or dividends from any
Portfolio are not currently taxable to the holder of a variable
annuity or variable life insurance contract when left to
accumulate within such variable annuity or variable life
insurance contract. Distributions of net investment income and
net short-term capital gains will be treated as ordinary income
and distributions of net long-term capital gains 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. If more than 50% of the value of the
Portfolio's total assets at the close of its taxable year
consists of stocks or securities of foreign corporations (which
for this purpose should include obligations issued by foreign
governments), the Portfolio will be eligible to file an election
with the Internal Revenue Service to pass through to its
shareholders the amount of foreign taxes paid by the Portfolio.
If eligible, each such Portfolio intends to file such an
election, although there can be no assurance that such Portfolio
will be able to do so.
Section 817(h) of the Code requires that the investments
of a segregated asset account of an insurance company be
adequately diversified, in accordance with Treasury Regulations
promulgated thereunder, in order for the holders of the variable
annuity contracts or variable life insurance policies underlying
the account to receive the tax-deferred or tax-free treatment
____________________
*** Paid by the Growth Portfolio.
210
<PAGE>
generally afforded holders of annuities or life insurance
policies under the Code. The Department 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 investment company. Each Portfolio plans to
satisfy these conditions at all times so that the shares of such
Portfolio owned by a segregated asset account of a life insurance
company will be subject to this treatment under the Code.
For information concerning the 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
_________________________________________________________________
CAPITALIZATION
The Fund's shares have non-cumulative voting rights,
which means that the holders of more than 50% of the shares
voting for the election of Directors can elect 100% of the
Directors if they choose to do so, and in such election of
Directors will not be able to elect any person or persons to the
Board of Directors.
All shares of the Fund when duly issued will be fully
paid and nonassessable. The Board of Directors is authorized to
reclassify and issue any unissued shares to any number of
additional series without shareholder approval. Accordingly, the
Board of Directors in the future, for reasons such as the desire
to establish one or more additional Portfolio's with different
investment objectives, policies or restrictions, may create
additional series of shares. Any issuance of shares of such
additional series would be governed by the 1940 Act and the law
of the State of Maryland.
If shares of another series were issued in connection
with the creation of the new portfolio, each share of any of the
Fund's Portfolio's would normally be entitled to one vote for all
purposes. Generally, shares of each Portfolio would vote as a
211
<PAGE>
single series for the election of directors and on any other
matter that affected each portfolios in substantially the same
manner. As to matters affecting each Portfolio differently, such
as approval of the Investment Advisory Agreement and changes in
investment policy, shares of each Portfolio would vote as
separate series.
Procedures for calling shareholders meeting for the
removal of Directors of the Fund, similar to those set forth in
Section 16(c) of the 1940 Act, are available to shareholder of
the Fund. Meetings of shareholders may be called by 10% of the
Fund's outstanding shareholders.
The outstanding voting shares of each outstanding
Portfolio of the Fund as of June30, 1998 consisted of the
following numbers of Class A common stock: Money Market
Portfolio, 81,924,333; Premier Growth Portfolio, 30,255,644;
Growth and Income Portfolio, 15,972,577; U.S. Government/High
Grade Securities Portfolio, 3,622,893; International Portfolio,
4,403,195; Total Return Portfolio, 3,146,540; Short-Term Multi-
Market Portfolio, 632,923; Global Bond Portfolio, 2,235,069;
North American Government Income Portfolio, 2,786,886; Global
Dollar Government Portfolio, 1,226,388; Utility Income Portfolio,
1,560,020; Conservative Investors Portfolio, 2,755,506; Growth
Investors Portfolio, 1,293,818; Growth Portfolio, 11,858,536;
Worldwide Privatization Portfolio, 3,192,469; Technology
Portfolio, 6,328,037; Quasar Portfolio, 6,131,713; Real Estate
Investment Portfolio, 1,533,299; and High-Yield Portfolio,
1,195,112. Set forth and discussed below is certain information
as to all persons who owned of record or beneficially 5% of more
of the outstanding Class A shares of the Fund's Portfolios at
January 8, 1999.
NUMBER OF % OF
CLASS A CLASS A
PORTFOLIO NAME AND ADDRESS SHARES SHARES
Money Market AIG Life Insurance 84,231,131 72%
Company ("AIG")
One ALICO Plaza
600 N. King Street
Wilmington, DE 19801
American International 13,032,010 11%
Life Assurance Company
of New York ("American")
80 Pine Street
New York, NY 10005
Fortis Financial Group 14,461,707 12.4%
("Fortis")
212
<PAGE>
P.O. Box 64284
St. Paul, MN 55164
Premier Growth AIG 10,953,872 27%
American 2,014,440 5%
Merrill Lynch Life 20,458,808 51%
Insurance Company
800 Scudders Mill Road
Plainsboro, NJ 08536
Growth and Income AIG 12,589,992 72%
American 2,618,944 15%
U.S. Government/ AIG 3,716,631 78%
High Grade
American 814,811 17%
Total Return AIG 2,481,292 75%
American Skandia 198,460 6%
Life Assurance Corp.
("Skandia")
1 Corporate Drive
Shelton, CT 06484
American 576,310 18%
International AIG 3,154,843 79%
America 596,836 15%
Short-Term American 121,915 19%
Multi-Market
AIG 430,279 67%
Reliastar/Bankers
Security Insurance 46,116 7%
Company
20 Washington Avenue S.
Minneapolis, MN 55401
Global Bond American 197,323 7%
213
<PAGE>
AIG 768,244 27%
National Union Fire 751,853 27%
Insurance Co.
c/o American
Attn: Bill Tucker
80 Pine Street
New York, NY 10005
Keyport Life 931,121 33%
Insurance Co.
125 High Street
Boston, MA 02110
North American AIG 1,982,993 78%
Government Income
American 552,022 22%
Global Dollar AIG 785,072 77%
Government
American 178,960 18%
Skandia 51,215 5%
Utility Income AIG 1,391,742 76%
America 353,258 19%
Conservative AIG 1,910,085 72%
Investors
American 564,644 21%
Growth Investors AIG 859,503 67%
AIG 64,365 5%
America 252,318 19%
Skandia 84,047 7%
Growth AIG 9,418,638 78%
American 1,749,465 15%
Worldwide AIG 2,488,492 80%
Privatization
American 514,209 16%
Technology AIG 5,477,168 80%
American 924,238 14%
214
<PAGE>
Quasar AIG 5,879,299 72%
American 942,956 11%
Merrill Lynch 991,836 12%
Real Estate AIG 1,319,607 75%
American 198,890 11%
COVA 158,884 9%
1 Tower Lane
Suite 3000
Oakbrook Terrace, IL 60181
High-Yield AIG 1,485,325 87%
American 158,661 9.2%
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110, acts as Custodian for the
securities and cash of the Fund but plays no part in deciding the
purchase or sale of portfolio securities. Subject to the
supervision of the Fund's Directors, State Street may enter into
sub-custodial agreements for the holding of the Fund's foreign
securities.
PRINCIPAL UNDERWRITER
Alliance Fund Distributors, Inc., 1345 Avenue of the
Americas, New York, New York 10105, serves as the Fund's
Principal Underwriter, and as such may solicit orders from the
public to purchase shares of the Fund.
COUNSEL
Legal matters in connection with the issuance of the
shares of the Fund offered hereby will be passed upon by Seward &
Kissel, New York, New York. Seward & Kissel has relied upon the
opinion of Venable, Baetjer and Howard, LLP, Baltimore, Maryland,
for matters relating to Maryland law.
INDEPENDENT AUDITORS
Ernst & Young LLP, New York, New York, have been
appointed as independent auditors for the Fund.
215
<PAGE>
SHAREHOLDER APPROVAL
The capitalized term Shareholder Approval as used in
this Statement of Additional Information means (1) the vote of
67% or more of the shares of that Portfolio represented at a
meeting at which more than 50% of the outstanding shares are
represented or (2) more than 50% of the outstanding shares of
that Portfolio, whichever is less.
YIELD AND TOTAL RETURN QUOTATIONS FOR CLASS A SHARES
From time to time a Portfolio of the Fund states its
yield, and total return. A Portfolio's yield for any 30-day (or
one-month) period is computed by dividing the net investment
income per share earned during such period by the maximum public
offering price per share on the last day of the period, and then
annualizing such 30-day (or one-month) yield in accordance with a
formula prescribed by the Commission which provides for
compounding on a semi-annual basis. The Portfolio's actual
distribution rate, which may be advertised in items of sales
literature, is computed in the same manner as yield except that
actual income dividends declared per share during the period in
question are substituted for net investment income per share.
Advertisements of a Portfolio's total return disclose the
Portfolio's average annual compounded total return for the period
since the Portfolio's inception. The Portfolio's total return
for each such period is computed by finding, through the use of a
formula prescribed by the Commission, the average annual
compounded rate of return over the period that would equate an
assumed initial amount invested to the value of such investment
at the end of the period. For purposes of computing total
return, income dividends and capital gains distributions paid on
shares of the Portfolio are assumed to have been reinvested when
received and the maximum sales charge applicable to purchases of
Portfolio shares is assumed to have been paid. The past
performance of each Portfolio is not intended to indicate future
performance.
The Money Market Portfolio's yield on its Class A shares
for the seven days ended June 30, 1998 was 5.01%. The U.S.
Government/High Grade Securities Portfolio's yield on its Class A
shares for the month ended June 30, 1998 was 0.93%. The Short-
Term Multi-Market Portfolio's yield on its Class A shares for the
month ended June 30, 1998 was 0.42%. The Global Bond Portfolio's
yield on its Class A shares for the month ended June 30, 1998 was
- -0.06%. The North American Government Income Portfolio's yield
on its Class A shares for the month ended June 30, 1998 was
- -0.02%. The Global Dollar Government Portfolio's yield on its
Class A shares for the month ended June 30, 1998 was -4.42%. The
High-Yield Portfolio's yield on its Class A shares for the month
ended June 30, 1998 was 0.00%.
216
<PAGE>
The Money Market Portfolio's average annual total
returns on its Class A shares for the one year period ended
June 30, 1998, for the five year period ended June 30, 1998 and
for the period December 30, 1992 (commencement of operations)
through June 30, 1998 were 6.15%, 3.38% and 4.57%. The Premier
Growth Portfolio's average annual total returns on its Class A
shares for the one year period ending June 30, 1998, for the five
year period ended June 30, 1998 and for the period ended June 30,
1998 and for the period June 26, 1992 (commencement of
operations) through June 30, 1998 were 43.63%, 26.24% and 24.87%.
The Growth and Income Portfolio's average annual total returns on
its Class A shares for the one year period ending June 30, 1998,
for the five year period ended June 30, 1998 and for the period
January 14, 1991 (commencement of operations) through June 30,
1998 were 28.08%, 21.31% and 16.22%. The U.S. Government/High
Grade Securities Portfolio's average annual total returns on its
Class A shares for the one year period ending June 30, 1998, for
the five year period ended June 30, 1998 and for the period
September 17, 1992 (commencement of operations) through June 30,
1998 were 9.50%, 6.05% and 6.36%. The Total Return Portfolio's
average annual total returns on its Class A shares for the one
year period ending June 30, 1998, for the five year period
June 30, 1998 and for the period December 28, 1992 (commencement
of operations) through June 30, 1998 were 21.32%, 13.70% and
13.44%. The International Portfolio's average annual total
returns on its Class A shares for the one year period ending
June 30, 1998, for the five year period ended June 30, 1998 and
for the period December 28, 1992 (commencement of operations)
through June 30, 1998 were 8.44%, 10.40% and 11.60%. The Short-
Term Multi-Market Portfolio's average annual total returns on its
Class A shares for the one year period ending June30, 1998, for
the five year period ended June 30, 1998 and for the period
November 28, 1990 (commencement of operations) through June 30,
1998 were 6.18%, 3.81% and 4.18%. The Global Bond Portfolio's
average annual total returns on its Class A shares for the one
year period ending June 30, 1998, for the five year period
June 30, 1998 and for the period July 15, 1991 (commencement of
operations) through June 30, 1998 were 5.28%, 6.61% and 7.79%.
The North American Government Income Portfolio's average annual
total return on its Class A shares for the one year period ending
June 30, 1998 and for the period May 3, 1994 (commencement of
operations) through June 30, 1998 were 5.57% and 8.98%. The
Global Dollar Government Portfolio's average annual total return
on its Class A shares for the one year period ending June 30,
1998 and for the period May 2, 1994 (commencement of operations)
through June 30, 1998 were -1.22% and 12.89%. The Utility Income
Portfolio's average annual total return on its Class A shares for
the one year period June 30, 1998 and for the period May 10, 1994
(commencement of operations) through June 30, 1998 were 31.07%
and 15.34%. The Conservative Investors Portfolio's average
annual total return on its Class A shares for the one year period
217
<PAGE>
June 30, 1998 and for the period October 28, 1994 (commencement
of operations) through June 30, 1998 were 14.02% and 11.05%. The
Growth Investors Portfolio's average annual total return on its
Class A shares for the one year period ending June 30, 1998 and
for the period October 28, 1994 (commencement of operations)
through June 30, 1998 were 21.30% and 15.69%. The Growth
Portfolio's average annual total return on its Class A shares for
the one year period ending June 30, 1998 and for the period
September 15, 1994 (commencement of operations) through June 30,
1998 were 39.89% and 31.54%. The Worldwide Privatization
Portfolio's average annual total return on its Class A shares for
the one year period ending June 30, 1998 and for the period
September 23, 1994 (commencement of operations) through June 30,
1998 were 10.63% and 14.60%. The Technology Portfolio's average
annual total return on its Class A shares for the one year period
ending June 30, 1998 and for the period January 11, 1996
(commencement of operations) through June 30, 1998 were 30.19%
and 18.14%. The Quasar Portfolio's average annual total return
on its Class A shares for the one year period ending June 30,
1998 and for the period August 15, 1996 (commencement of
operations) through June 30, 1998 were 24.47% and 21.21%. The
Real Estate Investment Portfolio's average annual total return on
its Class A shares for the one year period ending June 30, 1998
and for the period January 9, 1997 (commencement of operations)
through June 30, 1998 were 8.35% and 10.23%. The High-Yield
Portfolio's average annual total return on its Class A shares for
the period October 17, 1997 (commencement of operations) through
June 30, 1998 was 17.67%, unannualized.
218
<PAGE>
_________________________________________________________________
FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT AUDITORS
_________________________________________________________________
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND
SEMI-ANNUAL REPORT
JUNE 30, 1998
(UNAUDITED)
PREMIER GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON STOCKS-94.8%
TECHNOLOGY-24.0%
COMMUNICATIONS EQUIPMENT-8.4%
EMC Corp. (a) 104,000 $ 4,660,500
Ericsson (L.M.) Telephone Co.
Cl.B (ADR) (b) 481,380 13,809,589
Lucent Technologies, Inc. 87,342 7,265,762
Nokia Corp. (ADR) (c) 522,400 37,906,650
Tellabs, Inc. (a) 68,000 4,868,375
------------
68,510,876
COMPUTER HARDWARE-6.6%
Compaq Computer Corp. 557,200 15,810,550
Dell Computer Corp. (a) 411,700 38,198,041
------------
54,008,591
COMPUTER SOFTWARE-2.0%
Microsoft Corp. (a) 148,700 16,120,009
NETWORKING SOFTWARE-4.6%
Cisco Systems, Inc. (a) 404,600 37,261,131
SEMI-CONDUCTOR COMPONENTS-2.4%
Intel Corp. 262,900 19,479,247
------------
195,379,854
FINANCE-21.4%
BANKING-MONEY CENTER-3.2%
BankAmerica Corp. 57,500 4,970,156
Citicorp 144,400 21,551,700
------------
26,521,856
BANKING-REGIONAL-2.6%
Fifth Third Bancorp 54,300 3,415,809
First Union Corp. 35,400 2,062,050
NationsBank Corp. 143,700 10,993,050
Norwest Corp. 122,200 4,567,225
------------
21,038,134
BROKERAGE & MONEY MANAGEMENT-4.5%
Merrill Lynch & Co., Inc. 167,700 15,470,325
Morgan Stanley Dean Witter and Co. 230,955 21,103,513
------------
36,573,838
INSURANCE-2.3%
American International Group, Inc. 81,850 11,950,100
Progressive Corp. 48,300 6,810,300
------------
18,760,400
MORTGAGE BANKING-3.4%
Federal National Mortgage Assn. 246,500 14,974,875
H.F. Ahmanson & Co. 185,500 13,170,500
------------
28,145,375
MISCELLANEOUS-5.4%
Associates First Capital Corp. Cl.A 134,028 10,303,403
Household International, Inc. 147,000 7,313,250
MBNA Corp. 777,500 25,657,500
MGIC Investment Corp. 6,900 393,731
------------
43,667,884
------------
174,707,487
CONSUMER SERVICES-21.4%
AIRLINES-3.3%
KLM Royal Dutch Air 117,776 4,821,455
Northwest Airlines Corp. Cl.A (a) 271,960 10,495,956
UAL Corp. (a) 153,000 11,934,000
------------
27,251,411
BROADCASTING & CABLE-5.2%
AirTouch Communications, Inc. (a) 576,000 33,660,000
Tele-Communications, Inc.-
Liberty Media Group Cl.A (a) 217,405 8,444,825
------------
42,104,825
ENTERTAINMENT & LEISURE-3.1%
Carnival Corp. Cl.A 52,600 2,084,275
Walt Disney Co. 216,600 22,756,538
------------
24,840,813
PRINTING & PUBLISHING-0.2%
Gannett Co., Inc. 23,100 1,641,544
RESTAURANTS & LODGING-0.5%
Marriott International, Inc. C1.A 45,200 1,463,350
McDonald's Corp. 35,300 2,435,700
------------
3,899,050
RETAIL-GENERAL MERCHANDISE-9.1%
Dayton Hudson Corp. 427,000 20,709,500
Federated Department Stores, Inc. (a) 136,300 7,334,644
Home Depot, Inc. 344,149 28,585,876
Kohl's Corp. (a) 122,400 6,349,500
May Department Stores Co. 60,000 3,930,000
Wal-Mart Stores, Inc. 124,300 7,551,225
------------
74,460,745
------------
174,198,388
B-1
PREMIER GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SHARES OR
PRINCIPAL
AMOUNT
COMPANY (000) U.S. $ VALUE
- -------------------------------------------------------------------------
HEALTH CARE-11.6%
DRUGS-8.7%
Bristol-Myers Squibb Co. 174,500 $ 20,056,594
Merck & Co., Inc. 174,200 23,299,250
Pfizer, Inc. 174,600 18,976,837
Schering-Plough Corp. 98,500 9,025,063
------------
71,357,744
MEDICAL PRODUCTS-0.6%
Medtronic, Inc. 73,800 4,704,750
MEDICAL SERVICES-2.3%
Humana, Inc. (a) 53,300 1,662,294
United Healthcare Corp. 267,600 16,992,600
------------
18,654,894
------------
94,717,388
CONSUMER STAPLES-6.5%
COSMETICS-0.6%
Gillette Co. 83,000 4,705,063
FOOD-0.7%
Coca-Cola Co. 69,600 5,950,800
HOUSEHOLD PRODUCTS-0.7%
Colgate-Palmolive Co. 60,500 5,324,000
TOBACCO-4.5%
Philip Morris Cos., Inc. 935,200 36,823,500
------------
52,803,363
MULTI INDUSTRY COMPANY-3.3%
Tyco International, Ltd. 421,800 26,573,400
ENERGY-2.9%
OIL SERVICE-2.9%
Baker Hughes, Inc. 68,000 2,350,250
Camco International, Inc. 49,100 3,823,663
Halliburton Co. 172,300 7,678,119
Schlumberger, Ltd. 148,100 10,117,081
------------
23,969,113
CAPITAL GOODS-2.6%
ELECTRICAL EQUIPMENT-1.0%
General Electric Co. 87,900 7,998,900
MISCELLANEOUS-1.6%
United Technologies Corp. 138,800 12,839,000
------------
20,837,900
UTILITIES-1.1%
TELEPHONE UTILITY-1.1%
MCI Communications Corp. 152,600 8,865,106
Total Common Stocks
(cost $548,992,686) 772,051,999
SHORT-TERM INVESTMENTS-5.3%
COMMERCIAL PAPER-4.7%
General Electric Capital Corp.
6.10%, 7/01/98 $38,412 38,412,000
TIME DEPOSIT-0.6%
State Street Cayman Islands
5.25%, 7/01/98 4,499 4,499,000
Total Short-Term Investments
(amortized cost $42,911,000) 42,911,000
TOTAL INVESTMENTS-100.1%
(cost $591,903,686) 814,962,999
Other assets less liabilities-(0.1%) (536,927)
NET ASSETS-100% $ 814,426,072
(a) Non-income producing security.
(b) Country of origin--Sweden.
(c) Country of origin--Finland.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-2
GLOBAL BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------------
AUSTRALIA-3.9%
GOVERNMENT OBLIGATION-3.9%
Queensland Treasury
6.50%, 6/14/05 (a) AU$ 1,500 $ 970,698
AUSTRIA-3.8%
GOVERNMENT OBLIGATION-3.8%
Republic of Austria
4.50%, 9/28/05 (a) JPY 110,000 959,029
FRANCE-9.2%
GOVERNMENT OBLIGATION-9.2%
Government of France Treasury
Bill 4.00%, 7/12/00 XEU 2,100 2,295,320
GERMANY-13.9%
GOVERNMENT OBLIGATION-13.9%
Government of Germany
6.00%, 2/16/06 (a) DEM 5,800 3,478,167
ITALY-10.0%
GOVERNMENT OBLIGATION-10.0%
Republic of Italy
6.25%, 5/15/02 ITL 4,200,000 2,500,025
JAPAN-8.2%
DEBT OBLIGATION-8.2%
European Investment Bank
3.00%, 9/20/06 (a) JPY 130,000 1,041,730
Export Import Bank
2.875%, 7/28/05 130,000 1,024,807
------------
2,066,537
SPAIN-8.7%
GOVERNMENT OBLIGATION-8.7%
Government of Spain
5.25%, 1/31/03 (a) ESP 325,000 2,176,557
UNITED KINGDOM-4.8%
DEBT OBLIGATION-0.7%
International Bank for
Reconstruction & Development
7.125%, 7/30/07 GBP 100 177,155
GOVERNMENT OBLIGATIONS-4.1%
U.K. Treasury Gilts
8.50%, 7/16/07 (a) 520 1,021,489
------------
1,198,644
UNITED STATES-35.7%
GOVERNMENT/AGENCY OBLIGATIONS-33.2%
Federal National Mortgage Assn.
2.125%, 10/09/07 (a) JPY 120,000 903,450
U.S. Treasury Notes
6.25%, 2/15/03 US$ 900 926,154
6.875%, 5/15/06 3,600 3,898,116
7.25%, 8/15/04 2,400 2,611,128
------------
8,338,848
TIME DEPOSIT-2.5%
State Street Bank and Trust Co.
5.25%, 7/02/98 620,000 620,000
------------
8,958,848
TOTAL INVESTMENTS-98.2%
(cost $24,542,635) 24,603,825
Other assets less liabilities-1.8% 460,858
NET ASSETS-100% $ 25,064,683
(a) Securities, or portion thereof, with an aggregate market value of
$9,111,878 have been segregated to collateralize forward exchange currency
contracts.
See Notes to Financial Statements.
B-3
GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON STOCKS & OTHER INVESTMENTS-94.3%
FINANCE-20.8%
BANKING-MONEY CENTER-7.2%
Chase Manhattan Corp. 176,500 $ 13,325,750
Citicorp 68,200 10,178,850
------------
23,504,600
BANKING-REGIONAL-3.6%
First Union Corp. 140,000 8,155,000
NationsBank Corp. 48,650 3,721,725
------------
11,876,725
BROKERAGE & MONEY MANAGEMENT-0.9%
Morgan Stanley Dean Witter and Co. 32,300 2,951,413
INSURANCE-2.6%
Conseco, Inc. 26,000 1,215,500
Hartford Life, Inc. Cl.A 34,600 1,970,037
PennCorp Financial Group, Inc. 43,700 895,850
Travelers Group, Inc. 19,500 1,182,188
Travelers Property Casualty Corp. Cl.A 77,100 3,305,662
------------
8,569,237
MORTGAGE BANKING-1.2%
Federal National Mortgage Assn. 65,600 3,985,200
Security Capital Group, Inc. Cl.B
warrants, expiring 9/18/98 (a) 1,726 593
------------
3,985,793
REAL ESTATE-0.3%
Security Capital Industrial Trust 37,090 927,250
MISCELLANEOUS-5.0%
Associates First Capital Corp.
Cl.A 40,250 3,094,219
Household International, Inc. 134,300 6,681,425
MBNA Corp. 75,900 2,504,700
PMI Group, Inc. 58,787 4,313,496
------------
16,593,840
------------
68,408,858
HEALTH CARE-12.4%
BIOTECHNOLOGY-1.0%
Centocor, Inc. (a) 49,100 1,781,410
Genzyme Corp. (a) 57,500 1,462,656
------------
3,244,066
DRUGS-5.2%
Bristol-Myers Squibb Co. 107,100 12,309,806
Merck & Co., Inc. 35,400 4,734,750
------------
17,044,556
MEDICAL PRODUCTS-1.9%
Abbott Laboratories 155,600 6,360,150
MEDICAL SERVICES-4.3%
Columbia HCA/Healthcare Corp. 172,300 5,018,237
PacifiCare Health Systems, Inc.
Cl.B (a) 52,000 4,593,875
United Healthcare Corp. 68,050 4,321,175
------------
13,933,287
------------
40,582,059
TECHNOLOGY-12.0%
COMMUNICATIONS EQUIPMENT-0.3%
PairGain Technologies, Inc. 53,900 938,197
COMPUTER HARDWARE-1.6%
Compaq Computer Corp. 189,150 5,367,131
COMPUTER SERVICES-3.6%
Electronic Data Systems Corp. 98,100 3,924,000
First Data Corp. 238,100 7,931,706
------------
11,855,706
COMPUTER SOFTWARE-0.9%
Oracle Corp. (a) 122,600 3,007,531
NETWORKING SOFTWARE-1.8%
Cisco Systems, Inc. (a) 50,000 4,604,688
FORE Systems, Inc. (a) 42,300 1,119,628
------------
5,724,316
SEMI-CONDUCTOR COMPONENTS-2.7%
Altera Corp. (a) 121,200 3,579,187
Atmel Corp. (a) 200,500 2,731,813
National Semiconductor Corp. (a) 15,300 201,769
Xilinx, Inc. (a) 71,400 2,429,831
------------
8,942,600
MISCELLANEOUS-1.1%
Solectron Corp. (a) 83,100 3,495,394
------------
39,330,875
ENERGY-9.9%
DOMESTIC INTEGRATED-2.6%
USX-Marathon Group 251,700 8,636,456
DOMESTIC PRODUCERS-1.7%
Apache Corp. 116,600 3,672,900
Murphy Oil Corp. 20,850 1,056,834
Union Pacific Resources Group, Inc. 48,200 846,513
------------
5,576,247
B-4
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
INTERNATIONAL-2.5%
Mobil Corp. 15,400 $ 1,180,025
Texaco, Inc. 118,400 7,067,000
------------
8,247,025
OIL SERVICE-2.5%
BJ Services Co. (a) 33,600 976,500
Dresser Industries, Inc. 71,600 3,154,875
Halliburton Co. 61,000 2,718,312
Noble Drilling Corp. (a) 52,000 1,251,250
------------
8,100,937
MISCELLANEOUS-0.6%
AES Corp. (a) 35,000 1,839,688
------------
32,400,353
CONSUMER SERVICES-9.3%
AIRLINES-1.1%
Northwest Airlines Corp.
Cl.A (a) 58,500 2,257,734
UAL Corp. (a) 18,500 1,443,000
------------
3,700,734
APPAREL-0.5%
Nautica Enterprises, Inc. (a) 62,400 1,677,000
BROADCASTING & CABLE-1.3%
A.H. Belo Corp. Series A 175,500 4,277,813
ENTERTAINMENT & LEISURE-2.2%
Eastman Kodak Co. 28,200 2,060,363
Harley-Davidson, Inc. 91,100 3,530,125
Mirage Resorts, Inc. (a) 82,400 1,756,150
------------
7,346,638
PRINTING & PUBLISHING-0.9%
Donnelley (R.R.) & Sons Co. 63,700 2,914,275
RETAIL-GENERAL MERCHANDISE-3.3%
CompUSA, Inc. (a) 57,000 1,029,563
Dayton Hudson Corp. 105,700 5,126,450
Federated Department Stores, Inc. (a) 80,600 4,337,287
Staples, Inc. (a) 9,400 272,306
------------
10,765,606
------------
30,682,066
CONSUMER STAPLES-9.1%
COSMETICS-1.8%
Avon Products, Inc. 76,200 5,905,500
FOOD-4.1%
Campbell Soup Co. 95,100 5,052,187
General Mills, Inc. 46,300 3,165,762
Tyson Foods, Inc. Cl.A 152,100 3,298,669
Whitman Corp. 87,300 2,002,444
------------
13,519,062
TOBACCO-3.2%
Philip Morris Cos., Inc. 194,850 7,672,219
RJR Nabisco Holdings Corp. 110,900 2,633,875
------------
10,306,094
------------
29,730,656
UTILITIES-8.9%
ELECTRIC & GAS UTILITY-4.3%
Allegheny Energy, Inc. 56,200 1,693,025
CMS Energy Corp. 58,400 2,569,600
Duke Power Energy Corp. 16,200 959,850
FPL Group, Inc. 90,900 5,726,700
NIPSCO Industries, Inc. 43,000 1,204,000
Pinnacle West Capital Corp. 19,900 895,500
Texas Utilities Co. 22,600 940,725
------------
13,989,400
TELEPHONE UTILITY-4.6%
AT&T Corp. 61,100 3,490,337
MCI Communications Corp. 74,900 4,351,222
Teleport Communications
Group, Inc. Cl.A (a) 58,000 3,144,688
WorldCom, Inc. (a) 87,400 4,225,244
------------
15,211,491
------------
29,200,891
CAPITAL GOODS-4.7%
ELECTRICAL EQUIPMENT-1.0%
General Electric Co. 35,700 3,248,700
POLLUTION CONTROL-0.2%
USA Waste Services, Inc. (a) 13,000 641,875
MISCELLANEOUS-3.5%
Allied-Signal, Inc. 113,800 5,049,875
United Technologies Corp. 69,700 6,447,250
------------
11,497,125
------------
15,387,700
MULTI INDUSTRY COMPANIES-3.2%
Honeywell, Inc. 15,100 1,261,794
Tyco International, Ltd. 109,200 6,879,600
U.S. Industries, Inc. 94,800 2,346,300
------------
10,487,694
BASIC INDUSTRIES-1.8%
CHEMICALS-1.6%
Dow Chemical Co. 19,200 1,856,400
Praxair, Inc. 71,500 3,347,094
------------
5,203,494
CONTAINERS-0.2%
Sealed Air Corp. (a) 23,000 845,250
------------
6,048,744
B-5
GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
AEROSPACE & DEFENSE-1.3%
AEROSPACE-1.3%
General Dynamics Corp. 90,800 $ 4,222,200
TRANSPORTATION-0.7%
RAILROAD-0.7%
Canadian Pacific, Ltd. (b) 42,900 1,217,287
Union Pacific Corp. 28,200 1,244,325
------------
2,461,612
CONSUMER MANUFACTURING-0.2%
APPLIANCES-0.2%
Sunbeam Corp. 49,900 517,713
Total Common Stocks &
Other Investments
(cost $271,198,857) 309,461,421
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
SHORT-TERM INVESTMENTS-5.6%
COMMERCIAL PAPER-5.3%
American Express Co.
5.57%, 7/01/98 $ 4,100 $ 4,100,000
5.60%, 7/07/98 4,389 4,384,903
Ford Motor Credit Corp.
5.70%, 7/02/98 4,600 4,599,272
Prudential Funding Corp.
5.75%, 7/06/98 4,500 4,496,406
------------
17,580,581
TIME DEPOSIT-0.3%
State Street Cayman Islands
5.25%, 7/01/98 979 979,000
Total Short-Term Investments
(amortized cost $18,559,581) 18,559,581
TOTAL INVESTMENTS-99.9%
(cost $289,758,438) 328,021,002
Other assets less liabilities-0.1% 246,543
NET ASSETS-100% $ 328,267,545
(a) Non-income producing security.
(b) Country of origin--Canada.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-6
SHORT-TERM MULTI-MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
DENMARK-5.2%
GOVERNMENT OBLIGATION-5.2%
Kingdom of Denmark
9.00%, 11/15/00 DKK 2,000 $ 320,780
FRANCE-4.2%
GOVERNMENT OBLIGATION-4.2%
Government of France
7.75%, 4/12/00 (a) FRF 1,500 263,741
GERMANY-22.1%
DEBT OBLIGATIONS-12.9%
Bayerische Landesbank
5.25%, 1/29/99 (a) US$ 300 298,500
Bremer Landesbank
Kreditanstalt Oldenburg
6.375%, 12/29/99 (a) 500 503,000
------------
801,500
GOVERNMENT OBLIGATION-9.2%
Government of Germany
5.75%, 8/22/00 (a) DEM 1,000 573,346
------------
1,374,846
ITALY-9.3%
GOVERNMENT OBLIGATION-9.3%
Republic of Italy
6.00%, 2/15/00 (A) ITL 1,000,000 576,502
NEW ZEALAND-6.5%
DEBT OBLIGATION-3.3%
International Bank for
Reconstruction &
Development
7.00%, 9/18/00 (a) NZ$ 400 205,538
GOVERNMENT OBLIGATION-3.2%
Government of New Zealand
6.50%, 2/15/00 (a) 380 195,657
------------
401,195
NORWAY-4.3%
GOVERNMENT OBLIGATION-4.3%
Kingdom of Norway
9.00%, 1/31/99 (a) NOK 2,000 266,215
POLAND-4.8%
GOVERNMENT/AGENCY OBLIGATION-4.8%
Government of Poland
Treasury Bill
21.29%, 9/30/98 (b) PLN 1,100 299,180
SPAIN-5.2%
GOVERNMENT OBLIGATION-5.2%
Government of Spain
6.75%, 4/15/00 (a) ESP 48,000 326,312
SWEDEN-6.7%
GOVERNMENT OBLIGATION-6.7%
Kingdom of Sweden
10.25%, 5/05/00 (a) SEK 3,000 414,907
UNITED STATES-29.9%
DEBT OBLIGATIONS-14.5%
Bank Nederlandse
Gemeenten NV
5.875%, 4/19/99 (a) US$ 300 299,700
Rabobank Nederland
6.25%, 12/31/99 (a) 300 302,100
Suedwest Deutsche
Landesbank
5.75%, 12/20/99 (a) 300 298,950
------------
900,750
GOVERNMENT/AGENCY OBLIGATIONS-8.9%
FNMA Global
7.00%, 9/26/00 (a) NZ$ 500 255,362
U.S. Treasury Note
5.875%, 8/31/99 US$ 300 301,173
------------
556,535
TIME DEPOSIT-6.5%
State Street Bank and Trust Co.
5.25%, 7/01/98 404 404,000
------------
1,861,285
TOTAL INVESTMENTS-98.2%
(cost $6,391,416) 6,104,963
Other assets less liabilities-1.8% 111,651
NET ASSETS-100% $ 6,216,614
(a) Securities, or portion thereof, with an aggregate market value of
$4,486,149 have been segregated to collateralize forward exchange currency
contracts.
(b) Interest rate represents yield to maturity at purchase date.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-7
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
U.S. GOVERNMENT/AGENCY OBLIGATIONS-67.5%
FEDERAL AGENCIES-45.8%
Federal Home Loan Bank
5.67%, 1/14/00 $5,000 $ 5,000,800
Federal National Mortgage Association
5.25%, 1/15/03 1,500 1,472,340
6.50%, 5/01/13 792 796,664
7.00%, 4/01/26 1,459 1,480,232
7.00%, 5/01/28 1,957 1,985,952
Government National Mortgage Association
6.50%, 3/15/28 1,824 1,819,702
7.00%, 7/15/23 69 70,548
7.00%, 7/15/27 965 980,575
7.00%, 2/15/28 789 802,002
7.00%, 3/15/28 1,084 1,101,403
7.50%, 6/15/27 1,431 1,470,374
7.50%, 3/15/28 1,487 1,528,430
Student Loan Marketing Association
6.05%, 9/14/00 1,000 1,006,410
------------
19,515,432
U.S. TREASURY SECURITIES-21.7%
U.S. Treasury Bond
6.125%, 11/15/27 5,280 5,657,837
U.S. Treasury Notes
6.50%, 8/31/01 125 128,398
6.50%, 5/31/02 1,575 1,627,416
6.875%, 5/15/06 1,700 1,840,777
------------
9,254,428
Total U.S. Government/Agency Obligations
(cost $28,549,770) 28,769,860
CORPORATE DEBT OBLIGATIONS-20.2%
FINANCE-1.5%
Goldman Sachs Group LP
7.25%, 10/01/05 (a) 500 529,576
Wachovia Corp.
6.375%, 4/15/03 75 76,020
------------
605,596
INDUSTRIAL-9.2%
Comcast Corp.
8.375%, 5/01/07 1,000 1,124,941
Computer Associates International, Inc.
6.375%, 4/15/05 (a) 1,350 1,357,788
Time Warner, Inc.
9.125%, 1/15/13 1,170 1,443,092
------------
3,925,821
YANKEE BONDS-9.5%
Australian Gas Light Company
6.40%, 4/15/08 (a) 1,150 1,168,218
CS First Boston
6.50%, 5/01/08 (a) 1,000 1,011,497
Sony Corp.
6.125%, 3/04/03 1,350 1,354,212
St. George Bank, Ltd.
7.15%, 10/15/05 (a) 500 518,935
------------
4,052,862
Total Corporate Debt Obligations
(cost $8,457,027) 8,584,279
SHORT-TERM INVESTMENT-11.3%
TIME DEPOSIT-11.3%
State Street Bank and Trust Co.
5.25%, 7/01/98
(cost $4,809,000) 4,809 4,809,000
TOTAL INVESTMENTS-99.0%
(cost $41,815,797) 42,163,139
Other assets less liabilities-1.0% 435,052
NET ASSETS-100% $ 42,598,191
(a) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At June 30, 1998,
the aggregate market value of these securities amounted to $4,586,014 or 10.8%
of net assets.
See Notes to Financial Statements.
B-8
TOTAL RETURN PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON STOCKS & OTHER INVESTMENTS-61.0%
FINANCE-13.3%
BANKING-MONEY CENTER-4.7%
Chase Manhattan Corp. 19,200 $ 1,449,600
Citicorp 7,000 1,044,750
------------
2,494,350
BANKING-REGIONAL-2.3%
First Union Corp. 14,400 838,800
NationsBank Corp. 5,400 413,100
------------
1,251,900
BROKERAGE & MONEY MANAGEMENT-0.6%
Morgan Stanley Dean Witter and Co. 3,410 311,589
INSURANCE-1.8%
Conseco, Inc. 3,000 140,250
Hartford Life, Inc. Cl.A 3,600 204,975
PennCorp Financial Group, Inc. 5,400 110,700
Travelers Group, Inc. 2,250 136,406
Travelers Property Casualty
Corp. Cl.A 8,300 355,863
------------
948,194
MORTGAGE BANKING-0.8%
Federal National Mortgage Assn. 7,100 431,325
Security Capital Group, Inc. Cl.B
warrants, expiring 9/18/98 (a) 223 76
------------
431,401
MISCELLANEOUS-3.1%
Associates First Capital Corp.
Cl.A 4,400 338,250
Household International, Inc. 14,400 716,400
MBNA Corp. 9,500 313,500
PMI Group, Inc. 4,200 308,175
------------
1,676,325
------------
7,113,759
HEALTH CARE-8.0%
BIOTECHNOLOGY-0.7%
Centocor, Inc. (a) 5,300 192,291
Genzyme Corp. (a) 6,300 160,256
------------
352,547
DRUGS-3.4%
Bristol-Myers Squibb Co. 11,300 1,298,794
Merck & Co., Inc. 3,700 494,875
------------
1,793,669
MEDICAL PRODUCTS-1.2%
Abbott Laboratories 16,400 670,350
MEDICAL SERVICES-2.7%
Columbia HCA/Healthcare Corp. 18,050 525,706
PacifiCare Health Systems, Inc. Cl.B (a) 5,400 477,056
United Healthcare Corp. 7,300 463,550
------------
1,466,312
------------
4,282,878
TECHNOLOGY-7.8%
COMMUNICATIONS EQUIPMENT-0.2%
PairGain Technologies, Inc. 5,600 97,475
COMPUTER HARDWARE-1.1%
Compaq Computer Corp. 20,000 567,500
COMPUTER SERVICES-2.3%
Electronic Data Systems Corp. 10,500 420,000
First Data Corp. 24,600 819,488
------------
1,239,488
COMPUTER SOFTWARE-0.6%
Oracle Corp. (a) 13,100 321,359
NETWORKING SOFTWARE-1.1%
Cisco Systems, Inc. (a) 5,300 488,097
FORE Systems, Inc. (a) 4,600 121,756
------------
609,853
SEMI-CONDUCTOR COMPONENTS-1.8%
Altera Corp. (a) 12,900 380,953
Atmel Corp. (a) 21,200 288,850
National Semiconductor Corp. (a) 1,600 21,100
Xilinx, Inc. (a) 7,600 258,638
------------
949,541
MISCELLANEOUS-0.7%
Solectron Corp. (a) 8,900 374,356
------------
4,159,572
ENERGY-6.4%
DOMESTIC INTEGRATED-1.6%
USX-Marathon Group 25,100 861,244
DOMESTIC PRODUCERS-1.2%
Apache Corp. 12,400 390,600
Murphy Oil Corp. 2,550 129,253
Union Pacific Resources Group, Inc. 5,400 94,837
------------
614,690
INTERNATIONAL-1.6%
Mobil Corp. 1,600 122,600
Texaco, Inc. 12,400 740,125
------------
862,725
B-9
TOTAL RETURN PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
OIL SERVICE-1.6%
BJ Services Co. (a) 3,600 $ 104,625
Dresser Industries, Inc. 7,700 339,281
Halliburton Co. 6,600 294,113
Noble Drilling Corp. (a) 5,700 137,156
------------
875,175
MISCELLANEOUS-0.4%
AES Corp. (a) 4,000 210,250
------------
3,424,084
CONSUMER SERVICES-6.1%
AIRLINES-0.8%
Northwest Airlines Corp. Cl.A (a) 6,100 235,422
UAL Corp. (a) 2,100 163,800
------------
399,222
APPAREL-0.3%
Nautica Enterprises, Inc. (a) 6,800 182,750
BROADCASTING & CABLE-0.9%
A.H. Belo Corp. Series A 18,800 458,250
ENTERTAINMENT & LEISURE-1.4%
Eastman Kodak Co. 3,000 219,188
Harley-Davidson, Inc. 9,400 364,250
Mirage Resorts, Inc. (a) 8,800 187,550
------------
770,988
PRINTING & PUBLISHING-0.6%
Donnelley (R.R.) & Sons Co. 6,800 311,100
RETAIL-GENERAL MERCHANDISE-2.1%
CompUSA, Inc. (a) 6,200 111,987
Dayton Hudson Corp. 11,200 543,200
Federated Department Stores, Inc. (a) 8,100 435,881
Staples, Inc. (a) 1,000 28,969
------------
1,120,037
------------
3,242,347
CONSUMER STAPLES-5.8%
COSMETICS-1.2%
Avon Products, Inc. 8,200 635,500
FOOD-2.6%
Campbell Soup Co. 9,400 499,375
General Mills, Inc. 4,900 335,037
Tyson Foods, Inc. Cl.A 16,700 362,181
Whitman Corp. 9,700 222,494
------------
1,419,087
TOBACCO-2.0%
Philip Morris Cos., Inc. 20,000 787,500
RJR Nabisco Holdings Corp. 11,700 277,875
------------
1,065,375
------------
3,119,962
UTILITIES-5.7%
ELECTRIC & GAS UTILITY-2.8%
Allegheny Energy, Inc. 6,200 186,775
CMS Energy Corp. 6,200 272,800
Duke Power Energy Corp. 1,700 100,725
FPL Group, Inc. 9,500 598,500
NIPSCO Industries, Inc. 4,600 128,800
Pinnacle West Capital Corp. 2,300 103,500
Texas Utilities Co. 2,400 99,900
------------
1,491,000
TELEPHONE UTILITY-2.9%
AT&T Corp. 6,400 365,600
MCI Communications Corp. 7,900 458,941
Teleport Communications
Group, Inc. Cl.A (a) 5,200 281,937
WorldCom, Inc. (a) 9,300 449,597
------------
1,556,075
------------
3,047,075
CAPITAL GOODS-3.1%
ELECTRICAL EQUIPMENT-0.7%
General Electric Co. 3,800 345,800
POLLUTION CONTROL-0.1%
USA Waste Services, Inc. (a) 1,400 69,125
MISCELLANEOUS-2.3%
Allied-Signal, Inc. 12,000 532,500
United Technologies Corp. 7,500 693,750
------------
1,226,250
------------
1,641,175
MULTI INDUSTRY COMPANIES-2.3%
Honeywell, Inc. 1,700 142,056
Tyco International, Ltd. 13,200 831,600
U.S. Industries, Inc. 10,100 249,975
------------
1,223,631
BASIC INDUSTRIES-1.1%
CHEMICALS-1.0%
Dow Chemical Co. 2,000 193,375
Praxair, Inc. 7,800 365,138
------------
558,513
CONTAINERS-0.1%
Sealed Air Corp. (a) 1,000 36,750
------------
595,263
B-10
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
AEROSPACE & DEFENSE-0.9%
AEROSPACE-0.9%
General Dynamics Corp. 9,700 $ 451,050
TRANSPORTATION-0.4%
RAILROAD-0.4%
Canadian Pacific, Ltd. (b) 3,200 90,800
Union Pacific Corp. 3,100 136,788
------------
227,588
CONSUMER MANUFACTURING-0.1%
APPLIANCES-0.1%
Sunbeam Corp. 5,200 53,950
Total Common Stocks &
Other Investments
(cost $28,336,869) 32,582,334
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS-31.6%
U.S. Treasury Notes
4.75%, 8/31/98 $2,317 $ 2,315,193
5.50%, 2/15/08 1,500 1,499,055
6.50%, 10/15/06 8,900 9,450,643
7.25%, 8/15/04 3,355 3,650,139
Total U.S. Government Obligations
(cost $16,438,042) 16,915,030
SHORT-TERM INVESTMENT-7.3%
TIME DEPOSIT-7.3%
State Street Cayman Islands
5.25%, 7/01/98
(amortized cost $3,899,000) 3,899 3,899,000
TOTAL INVESTMENTS-99.9%
(cost $48,673,911) 53,396,364
Other assets less liabilities-0.1% 40,738
NET ASSETS-100% $ 53,437,102
(a) Non-income producing security.
(b) Country of origin--Canada.
See Notes to Financial Statements.
B-11
INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON & PREFERRED STOCKS-93.9%
AUSTRALIA-0.3%
Normandy Mining, Ltd. 250,000 $ 204,847
BRAZIL-2.3%
Telecomunicacoes Brasileiras,
SA (ADR) 15,000 1,637,812
CANADA-0.8%
Newcourt Credit Group, Inc. 11,500 548,214
DENMARK-1.7%
Ratin A/S Series B 6,000 1,270,835
FINLAND-8.2%
Nokia AB OY Corp.
Series A 60,000 4,417,037
Orion-Yhtymae OY Cl.B 49,564 1,528,232
------------
5,945,269
FRANCE-6.1%
Sanofi SA 14,700 1,728,783
SEITA 17,000 770,465
Total, SA Cl.B 15,000 1,950,146
Union des Assurances Federales 100 15,763
------------
4,465,157
GERMANY-6.6%
Adidas AG 9,000 1,569,492
Merck KG 4,420 198,275
ProSieben Media AG pfd. (a) 21,985 1,139,814
Volkswagen AG 1,500 1,449,721
Wella AG pfd. 400 448,030
------------
4,805,332
HONG KONG-2.9%
Cheung Kong Holdings, Ltd. 120,400 592,055
Dickson Concepts
International, Ltd. 97,500 135,906
Hong Kong Electric
Holdings, Ltd. 100,000 309,757
Hutchison Whampoa, Ltd. 200,000 1,055,756
------------
2,093,474
ITALY-4.1%
Credito Italiano 350,000 1,832,982
Telecom Italia SpA 160,000 1,178,331
------------
3,011,313
JAPAN-14.3%
Bridgestone Corp. 40,000 948,868
Canon, Inc. 28,000 637,883
Daito Trust Construction Co., Ltd. 1,100 8,353
Daiwa Securities Co., Ltd. 180,000 777,175
Fuji Photo Film Co. (b) 19,000 663,702
Honda Motor Co. (b) 35,000 1,250,452
Japan Tobacco, Inc. 65 441,419
Nintendo Corp. Ltd. 10,000 929,341
Orix Corp. 7,000 474,362
Rohm Co. 9,000 927,533
Sankyo Co., Ltd. 10,000 228,539
Sony Corp. (b) 12,000 1,037,101
TDK Corp. 13,000 963,694
Tokai Bank 91,000 502,813
Yamanouchi Pharmaceutical Co., Ltd. 32,000 668,836
------------
10,460,071
MEXICO-1.0%
Coca-Cola Femsa, SA (ADS) 7,600 132,050
Pan American Beverage, Inc. Cl.A 20,000 628,750
------------
760,800
NETHERLANDS-13.4%
Akzo Nobel NV (a) 18,000 4,004,231
ASM Lithography Holding NV 30,000 888,451
ING Groep NV 40,000 2,621,080
Philips Electronics 12,000 1,009,470
Wolters Kluwer NV 9,295 1,276,676
------------
9,799,908
NORWAY-1.5%
Stolt Comex Seaway, SA 40,000 772,500
Cl.A (a) 20,000 347,500
------------
1,120,000
SOUTH KOREA-0.0%
SK Telecom Co., Ltd. (ADR) 729 4,060
SPAIN-3.9%
Tabacalera, SA Series A 70,000 1,433,323
Telefonica de Espana 30,000 1,387,023
------------
2,820,346
SWEDEN-2.9%
Astra AB Series A 60,000 1,226,178
Sparbanken Sverige AB
Series A 10,000 300,903
Volvo AB Series B 20,000 595,537
------------
2,122,618
SWITZERLAND-10.1%
Ciba Specialty Chemicals AG (a) 11,000 1,414,680
Nestle, SA 1,400 3,000,991
Novartis AG (a) 1,000 1,666,777
Zurich Versicherungsgesellschaft 2,025 1,294,459
------------
7,376,907
UNITED KINGDOM-13.8%
Bank of Scotland 90,000 1,008,332
BPB Plc 140,000 848,541
Compass Group Plc 120,000 1,380,508
Diageo Plc 189,999 2,252,413
Granada Group Plc 40,000 736,004
B-12
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
Ladbroke Group Plc 370,000 $ 2,032,526
Tomkins Plc 190,000 1,031,833
United Assurance Group Plc 70,000 663,873
United News Media Plc 10,000 139,921
------------
10,093,951
Total Common & Preferred Stocks
(cost $59,764,668) 68,540,914
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
SHORT-TERM INVESTMENTS-5.7%
TIME DEPOSIT -5.7%
State Street Cayman Islands
5.25%, 7/01/98
(amortized cost $4,211,000) $4,211 $ 4,211,000
TOTAL INVESTMENTS-99.6%
(cost $63,975,668) 72,751,914
Other assets less liabilities-0.4% 262,927
NET ASSETS-100% $ 73,014,841
(a) Non-income producing security.
(b) Securities, or portion thereof, with an aggregate market value of
$2,951,255 have been segregated to collateralized forward exchange currency
contracts.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-13
MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
COMMERCIAL PAPER-83.1%
Associates Corp. of North America
6.15%, 7/01/98 $2,000 $ 2,000,000
Bank of America
5.53%, 8/17/98 4,000 3,971,121
Bankers Trust
5.52%, 9/15/98 4,000 3,953,387
Cargill Financial Services Corp.
5.60%, 7/15/98 4,000 3,991,289
Colgate Palmolive Co.
5.53%, 8/28/98 4,000 3,964,362
Dupont (E. I.) de Nemours & Co.
5.54%, 8/12/98 4,000 3,974,147
Ford Motor Credit Corp.
5.55%, 7/15/98 4,000 3,991,367
General Electric Capital Corp.
5.53%, 9/21/98 4,000 3,949,615
General Motors Acceptance Corp.
5.54%, 8/17/98 4,000 3,971,069
General Re Corp.
5.60%, 7/31/98 4,000 3,981,333
Henkel Corp.
5.52%, 8/11/98 3,000 2,981,140
Household Finance Corp.
5.57%, 7/15/98 4,000 3,991,336
Koch Industries
6.30%, 7/01/98 (a) 4,000 4,000,000
Merrill Lynch & Co., Inc.
5.57%, 7/29/98 4,000 3,982,671
Morgan Stanley Group, Inc.
6.25%, 7/01/98 3,458 3,458,000
Norwest Corp.
5.54%, 8/31/98 4,000 3,962,451
Prudential Funding Corp.
6.45%, 7/01/98 4,000 4,000,000
Salomon Smith Barney, Inc.
5.55%, 8/12/98 4,000 3,974,100
Total Commercial Paper
(amortized cost $68,097,388) 68,097,388
U.S. GOVERNMENT & AGENCY OBLIGATIONS-7.3%
Federal Home Loan Bank
5.44%, 7/30/98 FRN 3,000 2,999,817
5.65%, 3/12/99 3,000 3,000,000
Total U.S. Government &
Agency Obligations
(amortized cost $5,999,817) 5,999,817
CERTIFICATE OF DEPOSIT-4.9%
First Tennessee Bank
5.57%, 7/30/98
(amortized cost $4,000,000) 4,000 4,000,000
PROMISSORY NOTE-4.9%
Goldman Sachs Group LP FRN
5.66%, 11/24/98 (a)
(amortized cost $4,000,000) 4,000 4,000,000
TOTAL INVESTMENTS-100.2%
(cost $82,097,205) 82,097,205
Other assets less liabilities-(0.2%) (173,146)
NET ASSETS-100% $ 81,924,059
(a) Securities issued in reliance on Section (4) 2 or Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions exempt
from registration normally to qualified institutional buyers. At June 30, 1998,
the aggregate market value of these securities amounted to $8,000,000 or 9.8%
of net assets.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-14
GLOBAL DOLLAR GOVERNMENT PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
SOVEREIGN DEBT OBLIGATIONS-70.7%
OTHER SOVEREIGN DEBT-29.0%
ARGENTINA-6.0%
Province of Tucuman
9.45%, 8/01/04 (a) $ 714 $ 662,906
Republic of Argentina Global Bond
11.375%, 1/30/17 250 265,250
------------
928,156
COLOMBIA-3.1%
Republic of Colombia
8.625%, 4/01/08 500 475,500
MEXICO-4.0%
United Mexican States
9.875%, 1/15/07 600 624,000
RUSSIA-12.5%
Russian IAN FRN
6.625%, 12/15/15 1,769 983,415
Russian Ministry of Finance
12.75%, 6/24/28 (a) 350 312,812
Russian Principal Loans FRN
6.625%, 12/15/20 (b) 1,350 628,965
------------
1,925,192
SOUTH KOREA-3.0%
Republic of Korea
8.875%, 4/15/08 500 458,750
TRINIDAD & TOBAGO-0.4%
Republic of Trinidad & Tobago
11.75%, 10/03/04 50 57,925
Total Other Sovereign Debt
(cost $5,050,562) 4,469,523
NON-COLLATERALIZED BRADY BONDS-33.5%
BRAZIL-14.3%
Republic of Brazil C-Bonds
8.00%, 4/15/14 (c) 2,019 1,488,839
Republic of Brazil FRN
6.688%, 4/15/12 1,020 712,776
------------
2,201,615
BULGARIA-3.1%
Republic of Bulgaria FLIRB
2.25%, 7/28/12 (d) 800 483,040
ECUADOR-5.0%
Republic of Ecuador FRN
6.625%, 2/27/15 (e) 1,335 767,742
PANAMA-2.6%
Republic of Panama PDI FRN
6.562%, 7/17/16 (f) 521 395,759
PERU-3.8%
Republic of Peru FLIRB
3.25%, 3/07/17 (a)(d) 500 281,250
Republic of Peru PDI
4.00%, 3/07/17 (d) 500 308,150
------------
589,400
VENEZUELA-4.7%
Republic of Venezuela
6.625%, 12/18/07 452 369,821
Republic of Venezuela
FLIRB FRN
6.625%, 3/31/07 429 355,714
------------
725,535
Total Non-Collateralized Brady Bonds
(cost $5,474,930) 5,163,091
COLLATERALIZED BRADY BONDS-8.2%
ARGENTINA-2.2%
Republic of Argentina Euro
Par Bonds FRN
5.75%, 3/31/23 460 342,412
BULGARIA-1.5%
Republic of Bulgaria Series A
Discount FRN
6.563%, 7/28/24 300 229,140
ECUADOR-4.5%
Republic of Ecuador Discount
Bonds FRN
6.625%, 2/28/25 430 298,850
Republic of Ecuador Par Bonds
3.50%, 2/28/25 750 404,100
------------
702,950
Total Collateralized Brady Bonds
(cost $1,298,752) 1,274,502
Total Sovereign Debt Obligations
(cost $11,824,244) 10,907,116
CORPORATE DEBT OBLIGATIONS-23.9%
INDUSTRIAL-11.0%
Impsat Corp.
12.125%, 7/15/03 300 309,750
Petroleos Mexicanos
9.25%, 3/30/18 (a) 1,500 1,387,500
------------
1,697,250
B-15
GLOBAL DOLLAR GOVERNMENT PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
TELEPHONE-1.7%
Interamericas Communications
14.00%, 10/27/07 (a)(g) $100 $ 99,000
Iridium Capital Corp. LLC
14.00%, 7/15/05 (a)(h) 150 167,625
------------
266,625
TRANSPORTATION-1.0%
Navigator Gas Transport Plc
10.50%, 6/30/07 (a) 150 157,125
YANKEE BONDS-10.2%
Cantv Finance Ltd.
9.25%, 2/01/04 500 473,750
Conecel
14.00%, 5/01/02 (a) 400 400,000
Fugi Jgb Investment LLC
9.87%, 12/31/49 (a)(d) 200 176,065
Innova S de R.L.
12.875%, 4/01/07 (a) 500 506,250
Transportacion Maritima
Mexicana SA
9.25%, 5/15/03 12 11,040
------------
1,567,105
Total Corporate Debt Obligations
(cost $3,849,773) 3,688,105
TOTAL INVESTMENTS-94.6%
(cost $15,674,017) 14,595,221
Other assets less liabilities-5.4% 829,721
NET ASSETS-100% $ 15,424,942
(a) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At June 30, 1998 the
aggregate market value of these securities amounted to $4,150,533 or 26.9% of
net assets.
(b) Coupon consists of 3.3125% cash payment and 3.3125% paid in kind of
Russian IAN'S.
(c) Coupon consists of 5.0% cash payment and 3.0% paid-in-kind.
(d) Coupon will increase periodically based upon a predetermined schedule.
Stated interest rate in effect at June 30, 1998.
(e) Coupon consists of 3.25% cash payment and 3.375% paid-in-kind.
(f) Coupon consists of 4.00% cash payment and 2.5625% paid-in-kind.
(g) Security trades with warrants expiring in October 2007.
(h) Indicates a security that has a zero coupon that remains in effect until a
predetermined date at which time the stated coupon rate becomes effective until
final maturity.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-16
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
ARGENTINA-16.6%
GOVERNMENT OBLIGATIONS-16.6%
Republic of Argentina
Pensioner-Bocon Pre I FRN
2.99%, 4/01/01 ARS 238 $ 214,147
Pensioner-Bocon Pre III FRN
2.99%, 9/01/02 63 51,766
Supplier-Bocon Pro I FRN
2.99%, 4/01/07 7,638 5,400,980
------------
5,666,893
CANADA-6.5%
GOVERNMENT/AGENCY OBLIGATIONS-6.5%
Government of Canada
6.50%, 6/01/04 CA$ 850 611,153
Province of British Columbia
8.00%, 9/08/23 400 348,748
Province of Manitoba
7.75%, 12/22/25 450 389,751
Province of Ontario
8.25%, 12/01/05 275 217,806
Province of Quebec
7.75%, 3/30/06 325 249,878
Province of Saskatchewan
9.60%, 2/04/22 400 403,711
------------
2,221,047
MEXICO-23.7%
GOVERNMENT/AGENCY OBLIGATIONS-23.7%
Mexican Treasury Bills (a)
19.75%, 12/17/98 MXP 30,417 3,043,090
19.99%, 7/02/98 7,369 819,079
20.18%, 5/06/99 7,341 672,244
20.72%, 3/11/99 11,567 1,094,314
21.38%, 8/27/98 5,120 550,301
21.93%, 6/03/99 21,660 1,952,339
------------
8,131,367
UNITED STATES-52.4%
FEDERAL AGENCY/OBLIGATIONS-2.3%
Federal Home Loan Bank
7.26%, 9/06/01 US$ 200 208,812
Federal Home Loan Mortgage
Corp.
6.13%, 8/19/99 150 150,633
Federal National Mortgage
Association
5.05%, 11/10/98 305 303,999
Government National Mortgage
Association
9.00%, 9/15/24 111 119,091
------------
782,535
U.S. GOVERNMENT OBLIGATIONS-20.7%
U.S. Treasury Notes
6.25%, 10/31/01 1,300 1,327,014
6.50%, 4/30/99 85 85,678
7.00%, 7/15/06 2,400 2,620,872
7.125%, 9/30/99 320 326,099
7.25%, 8/15/04 2,500 2,719,925
------------
7,079,588
TIME DEPOSIT-29.4%
State Street Bank and Trust Co.
5.25%, 7/01/98 10,089 10,089,000
------------
17,951,123
TOTAL INVESTMENTS-99.2%
(cost $33,684,893) 33,970,430
Other assets less liabilities-0.8% 282,948
NET ASSETS-100% $ 34,253,378
(a) Interest rate represents annualized yield to maturity at purchase date.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-17
UTILITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON & PREFERRED STOCKS-90.6%
UNITED STATES INVESTMENTS-81.7%
UTILITIES-56.0%
ELECTRIC & GAS UTILITY-30.3%
AGL Resources, Inc. 6,100 $ 121,238
American Electric Power, Inc. 16,900 766,837
CINergy Corp. 22,100 773,500
CMS Energy Corp. 18,400 809,600
Consolidated Edison, Inc. 24,500 1,128,531
DPL, Inc. 21,000 380,625
FPL Group, Inc. 15,600 982,800
MarketSpan Corp. (a) 4,600 137,713
MCN Corp. 4,600 114,425
New Jersey Resources Corp. 4,400 157,025
NIPSCO Industries, Inc. 36,400 1,019,200
Northwest Natural Gas Co. 5,250 146,836
People's Energy Corp. 3,600 139,050
Pinnacle West Capital Corp. 25,000 1,125,000
Questar Corp. 7,000 137,375
------------
7,939,755
TELEPHONE UTILITY-25.0%
Ameritech Corp. 19,400 870,575
AT&T Corp. 12,560 717,490
Bell Atlantic Corp. 12,800 584,000
BellSouth Corp. 7,400 496,725
Frontier Corp. 21,000 661,500
GTE Corp. 10,500 584,062
Telephone and Data Systems, Inc. 6,000 236,250
Teleport Communications Group, Inc.
Cl.A (a) 13,600 737,375
US West Communications Group 10,800 507,600
WorldCom, Inc. 24,000 1,160,250
------------
6,555,827
MISCELLANEOUS-0.7%
Sempra Energy (a) 6,165 171,079
------------
14,666,661
CONSUMER SERVICES-14.8%
BROADCASTING & CABLE-9.9%
AirTouch Communications, Inc. Cl.C
4.25% cv. pfd. 10,100 833,250
Comcast Corp. Cl.A 18,000 730,687
Omnipoint Corp.
7.00% cv. pfd. (a)(b) 11,000 522,500
TCI Communications, Inc. Series A
$2.125 cv. pfd. 6,200 516,150
------------
2,602,587
ENTERTAINMENT & LEISURE-4.9%
Cablevision Systems Corp. Series I
8.50% cv. pfd. 20,000 1,278,750
------------
3,881,337
ENERGY-8.7%
DOMESTIC PRODUCERS-3.4%
The Williams Cos., Inc.
3.50% pfd. 4,700 747,300
Washington Gas Light Co. 5,600 149,800
------------
897,100
PIPELINES-1.8%
Enron Corp. 5,800 313,562
Piedmont Natural Gas Co., Inc. 5,100 171,488
------------
485,050
MISCELLANEOUS-3.5%
AES Corp. (a) 17,200 904,075
------------
2,286,225
MULTI INDUSTRY COMPANIES-1.3%
Southwest Gas Corp. 7,000 171,063
Wicor, Inc. 7,000 161,875
------------
332,938
TECHNOLOGY-0.9%
COMMUNICATION EQUIPMENT-0.9%
NTL, Inc. (a) 4,172 223,072
Total United States Investments
(cost $15,493,008) 21,390,233
FOREIGN INVESTMENTS-8.9%
BRAZIL-2.5%
Companhia Energetica de
Minas Gerais (ADR) 1,958 60,606
Companhia Paranaense de
Energia-Copel pfd. (ADR) 4,700 43,475
Companhia Riograndense de
Telecom pfd. 129,000 140,650
Telecomunicacoes Brasileiras,
SA (ADR) 3,800 414,913
------------
659,644
FINLAND-1.4%
Nokia Corp. (ADR) 5,000 362,812
KOREA-0.5%
Korea Electric Power Corp. 4,020 42,893
SK Telecom Co., Ltd. (ADR) 15,244 84,795
------------
127,688
MEXICO-2.3%
Telefonos de Mexico, SA
Series L (ADR) 12,400 595,975
B-18
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
PERU-0.5%
Telefonica del Peru, SA
Cl.B 62,000 $ 127,694
PHILIPPINES-0.5%
Philippine Long Distance
Telephone Co. Series III
3.50% cv. pfd. (ADR) 6,000 135,750
SWEDEN-1.2%
Ericsson (L.M.) Telephone Co. Cl.B (ADR) 11,200 321,300
Total Foreign Investments
(cost $2,044,985) 2,330,863
Total Common & Preferred Stocks
(cost $17,537,993) 23,721,096
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
SHORT-TERM INVESTMENTS-9.1%
COMMERCIAL PAPER-9.1%
American Express Co.
5.95%, 7/02/98 1,200 1,199,801
Ford Motor Credit Corp.
5.61%, 7/06/98 1,200 1,199,065
Total Short-Term Investments
(amortized cost $2,398,866) 2,398,866
TOTAL INVESTMENTS-99.7%
(cost $19,936,859) 26,119,962
Other assets less liabilities-0.3% 66,204
NET ASSETS-100% $ 26,186,166
(a) Non-income producing security.
(b) Security exempt from registration under Rule 144A of the Securities Act of
1933. This security may be resold in transactions exempt from registration
normally applied to certain qualified buyers. At June 30, 1998, the aggregate
market value of this security amounted to $522,500 or 2.0% of net assets.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-19
GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON & PREFERRED STOCKS-94.1%
FINANCE-26.5%
BANKING-MONEY CENTER-7.3%
American Express Co. 42,600 $4,856,400
Automatic Common Exchange
Security Trust II 25,000 600,000
Chase Manhattan Corp. 85,840 6,480,920
Citicorp 20,000 2,985,000
NationsBank Corp. 80,600 6,165,900
The Bank of Tokyo-Mitsubishi,
Ltd. (ADR) 59,400 653,400
------------
21,741,620
BANKING-REGIONAL-1.8%
First Union Corp. 55,000 3,203,750
Newcourt Credit Group, Inc. 43,000 2,115,063
------------
5,318,813
BROKERAGE & MONEY MANAGEMENT-0.3%
Morgan Stanley, Dean Witter,
Discover and Co. 10,600 968,575
INSURANCE-5.7%
Acceptance Insurance Co. 9,000 221,062
American International Group, Inc. 70,025 10,223,650
Travelers Group, Inc. 107,499 6,517,127
------------
16,961,839
INVESTMENT COMPANY-2.8%
TCI Ventures Group
Series A (a) 421,700 8,447,178
REAL ESTATE-4.8%
Alexandria Real Estate
Equities, Inc. 50,800 1,520,825
Arden Realty Group, Inc. 45,600 1,179,900
Entertainment Properties
Trust 56,000 1,022,000
Excel Realty Trust, Inc. 60,000 1,728,750
Humphrey Hospitality Trust, Inc. 99,100 997,194
JP Realty, Inc. 38,000 895,375
Koger Equity, Inc. 100,000 2,018,750
Macerich Co. 52,500 1,538,906
Prentiss Properties Trust 14,000 340,375
Spieker Properties, Inc. 56,000 2,170,000
Starwood Hotels & Resorts 19,395 937,021
------------
14,349,096
MISCELLANEOUS-3.8%
Associates First Capital Corp.
Cl. A 26,000 1,998,750
MBNA Corp. 230,250 7,598,250
PMI Group, Inc. 23,000 1,687,625
------------
11,284,625
------------
79,071,746
TECHNOLOGY-25.4%
COMMUNICATION SERVICES-0.8%
Nextel Communications, Inc.
Cl. A (a) 102,000 2,534,063
COMMUNICATIONS EQUIPMENT-4.5%
ADC Telecommunications, Inc. (a) 56,000 2,045,750
Ericsson (L.M.) Telephone Co.
Cl.B (ADR) (b) 30,000 860,625
Loral Space & Communications (a) 55,800 1,576,350
PairGain Technologies, Inc. 147,000 2,558,719
Sterling Commerce, Inc. (a) 112,789 5,470,266
Tellabs, Inc. (a) 11,000 787,531
------------
13,299,241
COMPUTER SERVICES-2.9%
Ceridian Corp. (a) 148,500 8,724,375
COMPUTER SOFTWARE-4.3%
Networks Associates, Inc. (a) 74,200 3,550,006
Sterling Software, Inc. (a) 314,200 9,288,538
------------
12,838,544
ELECTRONICS-1.3%
EMC Corp. (a) 24,000 1,075,500
Philips Electronics NV 8,000 680,000
SCI Systems, Inc. (a) 57,400 2,159,675
------------
3,915,175
MULTIMEDIA-0.7%
Reuters Group Plc (ADR) (c) 30,213 2,075,255
NETWORKING SOFTWARE-4.9%
Cisco Systems, Inc. (a) 148,200 13,648,294
Fore Systems, Inc. (a) 39,000 1,032,281
------------
14,680,575
SEMI-CONDUCTOR COMPONENTS-1.8%
Texas Instruments, Inc. 84,000 4,898,250
Xilinx, Inc. (a) 16,000 544,500
------------
5,442,750
TELECOM SERVICES-0.3%
Electric Lightware, Inc.
Cl.A (a) 77,800 858,231
TELECOMMUNICATIONS-2.0%
Colt Telecom Group Plc
(ADR) (a)(c) 18,500 2,999,312
Millicom International Cellular,
SA (a)(d) 39,500 1,726,891
Telephone and Data Systems, Inc. 27,900 1,098,563
------------
5,824,766
B-20
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
MISCELLANEOUS-1.9%
Sanmina Corp. (a) 84,000 $ 3,630,375
Solectron Corp. (a) 45,300 1,905,431
------------
5,535,806
------------
75,728,781
CONSUMER SERVICES-13.3%
AIRLINES-3.3%
Continental Airlines, Inc.
Cl.B (a) 67,000 4,078,625
Delta Air Lines, Inc. 27,000 3,489,750
Northwest Airlines Corp.
Cl.A (a) 11,500 443,828
U.S. Airways Group, Inc. (a) 10,000 792,500
UAL Corp. (a) 11,600 904,800
------------
9,709,503
BROADCASTING & CABLE-3.2%
Tele-Communications, Inc.-
Liberty Media Group
Cl.A (a) 111,055 4,313,793
Viacom, Inc. Cl.B (a) 90,900 5,294,925
------------
9,608,718
BUSINESS SERVICES-1.9%
Cendant Corp. (a) 271,050 5,658,169
ENTERTAINMENT & LEISURE-1.0%
Harley-Davidson, Inc. 17,800 689,750
Royal Caribbean Cruises, Ltd. 30,200 2,400,900
------------
3,090,650
PRINTING & PUBLISHING-0.8%
Readers Digest Association, Inc. 90,000 2,317,500
RETAIL-GENERAL MERCHANDISE-3.1%
Home Depot, Inc. 49,150 4,082,522
Office Depot, Inc. (a) 36,000 1,136,250
The Limited, Inc. 118,300 3,918,687
------------
9,137,459
------------
39,521,999
UTILITIES-7.3%
TELEPHONE UTILITY-7.3%
Telecomunicacoes Brasilieras,
SA (ADR) (e) 22,400 2,445,800
WorldCom, Inc.
8.00%, cv. pfd. 397,784 19,230,370
------------
21,676,170
HEALTH CARE-7.1%
BIOTECHNOLOGY-0.1%
Gensia Sicor, Inc.
3.75%, cv. pfd. (a)(f) 8,000 194,000
DRUGS-4.9%
Bristol-Myers Squibb Co. 52,000 5,976,750
Merck & Co., Inc. 47,900 6,406,625
Schering-Plough Corp. 25,000 2,290,625
------------
14,674,000
MEDICAL PRODUCTS-1.6%
Boston Scientific Corp. (a) 43,400 3,108,525
Medtronic, Inc. 26,200 1,670,250
------------
4,778,775
MEDICAL SERVICES-0.5%
Columbia HCA/Healthcare Corp. 18,600 541,725
Quest Medical, Inc. (a) 38,000 358,625
United Healthcare Corp. 11,000 698,500
------------
1,598,850
------------
21,245,625
ENERGY-5.1%
OIL SERVICE-5.1%
BJ Services Co. (a) 47,700 1,386,281
Dresser Industries, Inc. 94,600 4,168,312
Gulf Canada Resources, Ltd. (g) 619,300 3,057,794
Halliburton Co. 56,800 2,531,150
Nabors Industries, Inc. (a) 27,000 534,938
Noble Drilling Corp. (a) 96,000 2,310,000
Transocean Offshore, Inc. 28,000 1,246,000
------------
15,234,475
CAPITAL GOODS-2.9%
MACHINERY-2.9%
Mannesmann AG (h) 83,025 8,539,820
CONSUMER STAPLES-2.5%
TOBACCO-2.5%
Loews Corp. 46,800 4,077,450
Philip Morris Cos., Inc. 88,000 3,465,000
------------
7,542,450
MULTI INDUSTRY COMPANIES-1.3%
Tyco International, Ltd. 62,572 3,942,036
CONSUMER MANUFACTURING-1.1%
AUTO & RELATED-1.1%
Republic Industries, Inc. (a) 134,000 3,350,000
BUSINESS SERVICES-1.1%
BROADCASTING & CABLE-0.7%
CBS Corp. 61,400 1,949,450
PRINTING & PUBLISHING-0.4%
News Corp., Ltd. (ADR) 35,800 1,150,075
------------
3,099,525
B-21
GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SHARES OR
PRINCIPAL
AMOUNT
COMPANY (000) U.S. $ VALUE
- -------------------------------------------------------------------------
BASIC INDUSTRY-0.5%
CONTAINERS-0.5%
Sealed Air Corp. (a) 40,900 $ 1,503,075
Total Common & Preferred Stocks
(cost $202,376,157) 280,455,702
SHORT-TERM INVESTMENTS-6.1%
US GOVERNMENT & AGENCIES-6.0%
Federal Home Loan Mortgage Corp.
5.45%, 7/20/98 $3,000 2,991,371
5.45%, 8/24/98 3,000 2,975,475
5.85%, 7/01/98 9,000 9,000,000
Federal National Mortgage Assn.
5.45%, 8/14/98 3,000 2,980,016
------------
17,946,862
TIME DEPOSIT-0.1%
State Street Cayman Islands
5.25%, 7/01/98 312 312,000
Total Short-Term Investments
(amortized cost $18,258,862) 18,258,862
TOTAL INVESTMENTS-100.2%
(cost $220,635,019) 298,714,564
Other assets less liabilities-(0.2%) (485,700)
NET ASSETS-100% $ 298,228,864
(a) Non-income producing security.
(b) Country of origin--Sweden.
(c) Country of origin--United Kingdom.
(d) Country of origin--Luxembourg.
(e) Country of origin--Brazil.
(f) Security exempt from registration under Rule 144A of the Securities Act of
1933. This security may be resold in transactions exempt from registration
normally applied to certain qualified buyers. At June 30, 1998, the aggregate
market value of this security amounted to $194,000 or 0.1% of net assets.
(g) Country of origin--Canada.
(h) Country of origin--Germany.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-22
WORLDWIDE PRIVATIZATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON STOCKS & OTHER INVESTMENTS-94.2%
ARGENTINA-0.6%
Nortel Inversora, SA
Series B pfd. (ADR) 7,400 $ 184,075
Telecom Argentina, SA (ADR) 3,700 110,306
------------
294,381
AUSTRALIA-3.9%
Amrad Corporation, Ltd. (a) 140,000 169,465
CSL, Ltd. 150,700 977,566
GIO Australia Holdings, Ltd. 140,000 360,134
TAB Corp. Holdings, Ltd. 66,500 340,559
TAB Ltd. (a) 29,200 43,139
------------
1,890,863
AUSTRIA-6.3%
Austria Mikro Systeme
International AG 4,270 289,435
Austria Tabakwerke AG 20,506 1,142,679
Bank Austria AG 14,000 1,137,655
rights (a) 14,000 12,138
Boehler-Uddeholm AG 2,800 185,159
Premier Telesports (a) (b) 6,600 119,645
Voest-Alpine Stahl AG 4,000 160,473
------------
3,047,184
BELGIUM-0.9%
Credit Communal Holding Dexia 2,920 439,688
BOTSWANA-0.3%
Sechaba Breweries, Ltd. 120,500 159,708
BRAZIL-7.9%
Banco Estado de Sao Paulo,
SA pfd. (a) 3,500,000 161,934
Bardella Industrias
Mecanicas, SA pfd. 1,600 162,539
Celese Centrais Eletricas de
Santa Catarina, SA pfd. 315,001 239,679
pfd. (GDR) (c) 750 61,603
Companhia Energetica de
Minas Gerais (ADR) 4,405 136,363
Companhia Paranaense de
Energia-Copel (ADR) 6,300 58,275
Companhia Paulista de
Forca e Luz pfd. 2,000,000 204,072
Receipts pfd. (a) 1,591 146
Companhia Riograndense de
Telecom Cl. A pfd. 354,782 386,823
Empresa Bandeirant de
Energia, SA pfd. (a) 816,000 12,911
Eletropaulo Metropolitana pfd. 816,000 61,383
Empresa Metropolitana de
Aguas e Energie,
SA pfd. (a) 816,000 635
Empresa Paulista de
Transmissao de Energia
Eletrica, SA pfd. (a) 816,000 2,886
Espirito Santo Centrais
Electricas, SA 324 19,050
Gerdau, SA pfd. 19,024,144 263,185
Iven, SA pfd. (b) 588,100 294,673
Light Particpacoes, SA 480,000 170
Metalurgica Gerdau, SA (b) 419,660 9,834
pfd. 11,038,243 352,941
Multicanal Participacoes,
SA (ADR) (a) 15,700 77,519
Petroleo Brasileros, SA (ADR) 7,500 139,335
Telecomunicacoes Brasileiras,
SA (ADR) 9,650 1,053,659
Telepar Cellular, SA pfd. (a) 129,000 11,710
Telepar Tel Parana pfd. (a) 129,000 32,346
rights, (a) 4,359 0
Trikem, SA pfd. (a) 15,000,000 21,400
Uniao de Bancos Brasileiras,
SA (GDR) 2,300 67,850
------------
3,832,921
COLOMBIA-0.1%
Banco de Colombia
(GDR) (a)(c) 8,400 37,548
CZECH REPUBLIC-1.9%
Ceske Energeticke Zavody
(GDR) (a) 3,000 82,963
Ceske Radiokomunikace
AS (a) 1,340 254,714
New Shares (a) 4,861 92,400
Komercni Banka AS (GDR) (a) 28,900 358,360
Podnik Vypocetni Techniky (a) 500 40,485
Tabak AS 330 79,584
------------
908,506
EGYPT-0.7%
Commercial International Bank (GDR) 9,152 97,022
Egyptian Financial & Industrial 1,900 40,659
Housing Development Bank 2,200 52,271
Madinet Nasar for Housing &
Development Bank 2,000 95,713
Torrah Portland Cement 4,000 68,890
------------
354,555
FINLAND-1.4%
Merita, PLC Series A 62,100 410,144
Outokumpu Oy Cl.A 22,200 283,522
------------
693,666
FRANCE-8.9%
Sanofi, SA 7,270 854,983
Seita 19,630 889,660
SGS-Thomson Microelectronics NV (a) 14,460 1,024,879
Societe Generale 2,176 452,426
B-23
WORLDWIDE PRIVATIZATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
Societe National Elf Aquitaine 5,660 $ 795,772
Union Assurances Federales 2,070 326,300
------------
4,344,020
GERMANY-4.4%
BHW Holding AG 16,350 282,586
Salzgitter AG 14,000 183,981
Viag AG 1,817 1,251,332
Volkswagen AG 440 425,251
------------
2,143,150
GREECE-2.2%
Commercial Bank of Greece 4,000 297,052
Hellenic Petroleum, SA (a) 21,000 171,706
Hellenic Telecommunication
Organization, SA 11,827 303,536
National Bank Of Greece 1,080 138,554
Stet Hellas Telecommunications,
SA (a) 2,190 90,748
(ADR) (a) 2,190 91,575
------------
1,093,171
HONG KONG-0.0%
The Guangshen Railway Co.,
Ltd. (ADR) 4,600 31,337
HUNGARY-1.0%
Inter-Europa Bank rights 838 51,357
Magyar Olaj Gazipare
Resvenytar 4,000 107,935
(GDR) (c) 6,000 160,800
OTP Bank (GDR) 3,630 176,055
------------
496,147
INDIA-1.2%
Industrial Credit & Investment
Corporation of India,
Ltd. (GDR) (c) 20,900 206,388
Mahanagar Telephone Nigam,
Ltd. (GDR) (a) 8,400 85,260
State Bank of India (GDR) (c) 1,200 13,800
(GDS) (c) 3,900 44,850
Videsh Sanchar Nigam, Ltd.
(GDR) (c) 21,700 221,340
(GDS) (a) 2,000 20,400
------------
592,038
INDONESIA-0.2%
PT Tambang Timah (GDR) 20,000 87,000
ISRAEL-0.7%
Bank Hapoalim, Ltd. 79,500 240,351
Tadiran, Ltd. (ADR) 3,800 125,875
------------
366,226
ITALY-4.7%
Alitalia SpA (a) 114,800 368,291
ENI SpA 73,300 480,622
Instituto Mobilaire Italiano
SpA 28,800 453,862
Instituto Nazionale delle
Assicurazioni 118,300 336,240
Telecom Italia Mobile di Risp
SpA 109,000 368,088
Telecom Italia SpA 55,169 267,190
------------
2,274,293
JAPAN-5.5%
Daiwa Securities Co., Ltd. 149,000 643,328
East Japan Railway Co. 50 235,771
Japan Tobacco, Inc. 117 794,554
Nippon Telegraph &
Telephone, Corp. 65 540,609
Nomura Securities Co., Ltd. 37,000 432,162
------------
2,646,424
JORDAN-0.2%
Arab Potash Co. 14,500 121,955
MALAYSIA-0.2%
Telekom Malaysia Berhad 70,000 118,065
MALTA-0.2%
Maltacom Plc (GDR) (a) 7,000 98,000
MEXICO-1.6%
ALFA, SA 17,400 71,068
Grupo Financiero Banamex,
Cl.B (a) 95,700 186,384
Grupo Financiero Bancrecer,
SA de CV Cl.B (a)(b) 75,000 2,504
Grupo Financiero Banorte, SA
de CV Cl.B (a) 248,500 276,557
Grupo Financiero GBM Atlantico
Cl.L (ADR) (a)(b) 8,400 8,400
Grupo Profesional Planeacion y
Proyectos, SA Cl.B (a) (b) 4,800 11,058
Telefonos de Mexico, SA
Cl.L (ADR) 2,500 120,156
Tubos de Acero de Mexico,
SA (ADR) 7,000 89,687
------------
765,814
NETHERLANDS-5.4%
Akzo Nobel NV 6,300 1,401,481
ING Groep NV 18,410 1,206,352
------------
2,607,833
NEW ZEALAND-0.1%
Tranz Rail Holdings, Ltd. 12,800 29,306
NORWAY-0.7%
Christiana Bank OG
Kreditkasse 40,000 167,526
Den Norske Bank 36,300 190,392
------------
357,918
PAKISTAN-0.1%
Hub Power Co., Ltd. (GDR) 5,000 34,375
B-24
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
PEOPLES REPUBLIC OF CHINA-1.0%
Beijing Datang Power
Generation Co., Ltd. 442,000 $ 124,077
Yanzhou Coal Mining Co.,
Ltd. Cl. H (a) 456,000 87,104
Zhejiang Southeast Electric
Power Co., Ltd. (GDR) (c) 18,300 253,455
------------
464,636
PERU-0.8%
Cementos Norte Pacasmayo,
SA Cl.C 93,596 149,754
Explosivios, SA Cl.C (a) (b) 104,636 115,766
Ferreyros, SA 82,300 110,947
------------
376,467
PHILIPPINES-1.5%
First Philippine Holdings Corp.
Series B 168,540 113,168
International Container Terminal
Services, Inc. (a) 299,000 34,059
Manila Electric Co. Series B 149,300 393,837
Philippine Long Distance
Telephone Co. 7,290 166,079
------------
707,143
POLAND-1.6%
Bank Polska Kasa Opieki, SA 10,700 168,770
Banka Przemyslowo Handlowy, SA 1,400 100,373
Elektrim, SA 16,400 199,885
Kredyt Bank, SA
(GDR) (a)(c) 8,000 149,600
Orbis, SA (a) 17,886 159,009
------------
777,637
PORTUGAL-1.2%
Electricidade de Portugal, SA 25,000 581,528
RUSSIA-1.7%
Gazprom (ADR) (c) 6,100 67,100
Lukoil Holdings (ADR) 10,800 362,880
Nearmedic, Ltd. (a)(b) 65,000 66,601
JSC Rosneftegazstroy (ADR) (a) 6,842 33,386
Sberbank of Russia 1,845 177,120
Sun Brewing, Ltd. (GDR) (a)(c) 10,400 121,118
------------
828,205
SLOVAKIA-0.1%
Slovakofarma AS (GDR) (a) 10,400 57,460
SOUTH AFRICA-0.8%
Iscor, Ltd. 2,160,492 408,052
SOUTH KOREA-1.5%
Korea Electric Power Corp.
(ADR) 17,000 121,125
Korean Air Lines 2,125 5,479
Pohang Iron & Steel Co., Ltd. 440 14,672
(ADR) 13,800 165,600
SK Telecom Co., Ltd. 516 249,318
(ADR) 29,000 161,317
------------
717,511
SPAIN-5.8%
Aceralia Corporacion
Siderurgica, SA 43,600 643,978
Aldeasa, SA 14,600 521,734
Empresa Nacional de
Celulosas, SA 21,800 383,828
Repsol, SA 6,550 360,923
Tabacalera, SA Cl. A 21,000 429,997
Telefonica de Espana 10,000 462,341
------------
2,802,801
SWEDEN-2.4%
Assi Doman AB 13,250 385,406
Castellum AB 20,900 246,314
Diligentia AB 10,400 89,970
Mandamus AB (a) 690 4,325
Sparbanken Sverige AB, Cl. A 14,500 436,309
------------
1,162,324
SWITZERLAND-1.7%
Sair group 2,450 807,337
THAILAND-0.4%
PTT Exploration & Production
Public Co., Ltd. (a) 24,500 185,782
TURKEY-1.4%
Eregli Demir Ve Celik
Fabrikalari TAS (a) 454,000 70,751
Petrokimya Holdings AS 141,000 76,774
Turkiye Is Bankasi Series C 3,500,000 141,288
Tupras Turkiye Petrol
Rafinerileri AS (a) 1,453,000 234,619
Usas Ucak Servisi AS 57,000 134,848
------------
658,280
UNITED KINGDOM-10.5%
Anglian Water Plc 21,800 305,756
Birkby Plc 63,800 162,986
British Energy Plc 109,000 953,666
Energis Plc (a) 92,800 1,414,026
Mersey Docks & Harbor Co. 37,700 357,858
National Grid Holding Plc 61,800 416,877
National Power Plc 48,000 452,021
Powergen Plc 16,500 228,114
RJB Mining 21,800 44,407
Stagecoach Holdings Plc 22,100 470,480
Wessex Water Plc 35,000 266,484
------------
5,072,675
UNITED STATES-0.2%
Central European Media
Enterprises, Ltd. Cl. A (a) 4,300 92,853
B-25
WORLDWIDE PRIVATIZATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
VENEZUELA-0.3%
Compania Anonima Nacional
Telefonos de Venezuela
(ADR) 5,100 $ 127,500
Mercantil Servicios Financieros
(ADR) 5,000 24,610
------------
152,110
Total Common Stocks & Other Investments
(cost $42,155,473) 45,718,893
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
SHORT-TERM INVESTMENTS-5.2%
TIME DEPOSIT-5.2%
State Street Cayman Islands
5.25%, 7/01/98
(amortized cost $2,500,000) $2,500 $ 2,500,000
TOTAL INVESTMENTS-99.4%
(cost $44,655,473) 48,218,893
Other assets less liabilities-0.6% 291,104
NET ASSETS-100% $ 48,509,997
(a) Non-income producing security.
(b) Illiquid security-valued at fair market value. (see Note A)
(c) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At June 30, 1998,
the aggregate market value of these securities amounted to $1,337,602 or 2.8%
of net assets.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-26
CONSERVATIVE INVESTORS PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON & PREFERRED STOCKS-28.4%
UNITED STATES INVESTMENTS-21.1%
FINANCE-4.9%
BANKING-MONEY CENTER-1.8%
BankAmerica Corp. 4,000 $ 345,750
Chase Manhattan Corp. 4,000 302,000
------------
647,750
BROKERAGE & MONEY MANAGEMENT-1.2%
Merrill Lynch & Co., Inc. 3,000 276,750
Morgan Stanley Dean Witter and Co. 2,000 182,750
------------
459,500
INSURANCE-1.2%
American International Group, Inc. 2,000 292,000
Travelers Group, Inc. 2,250 136,406
------------
428,406
MISCELLANEOUS-0.7%
MBNA Corp. 8,000 264,000
------------
1,799,656
CONSUMER SERVICES-4.9%
BROADCASTING & CABLE-1.8%
Cox Communications, Inc.
Cl.A (a) 4,000 193,750
Scripps E.W. Co. Cl.A 4,000 219,250
Tele-Communications, Inc.-
Liberty Media Group
Cl.A (a) 6,000 233,062
------------
646,062
ENTERTAINMENT & LEISURE-1.5%
Harley-Davidson, Inc. 9,000 348,750
Walt Disney Co. 2,000 210,125
------------
558,875
RETAIL-GENERAL MERCHANDISE-1.6%
Dayton Hudson Corp. 6,000 291,000
Home Depot, Inc. 3,500 290,719
------------
581,719
------------
1,786,656
HEALTH CARE-3.2%
DRUGS-2.7%
Bristol-Myers Squibb Co. 5,000 574,688
Merck & Co., Inc. 3,000 401,250
------------
975,938
MEDICAL PRODUCTS-0.5%
Medtronic, Inc. 3,000 191,250
------------
1,167,188
TECHNOLOGY-2.9%
COMMUNICATION EQUIPMENT-0.4%
Tellabs, Inc. (a) 2,000 143,188
COMPUTER HARDWARE-0.5%
Compaq Computer Corp. 6,000 170,250
COMPUTER SERVICES-0.5%
First Data Corp. 6,000 199,875
COMPUTER SOFTWARE-0.2%
Microsoft Corp. (a) 800 86,725
NETWORKING SOFTWARE-0.9%
Cisco Systems, Inc. (a) 3,500 322,328
SEMI-CONDUCTOR COMPONENTS-0.4%
Altera Corp. (a) 2,000 59,063
Intel Corp. 1,200 88,912
------------
147,975
------------
1,070,341
CONSUMER STAPLES-2.4%
COSMETICS-1.2%
Avon Products, Inc. 2,000 155,000
Gillette Co. 2,400 136,050
The Estee Lauder Co., Inc.
Cl.A 2,000 139,375
------------
430,425
RETAIL-FOOD & DRUG-0.6%
Kroger Co. (a) 5,000 214,375
TOBACCO-0.6%
Philip Morris Cos., Inc. 6,000 236,250
------------
881,050
ENERGY-1.1%
DOMESTIC PRODUCERS-0.3%
Apache Corp. 3,000 94,500
OIL SERVICE-0.8%
Halliburton Co. 3,000 133,688
Noble Drilling Corp. (a) 7,000 168,437
------------
302,125
------------
396,625
UTILITIES-0.9%
TELEPHONE UTILITY-0.9%
WorldCom, Inc. 7,000 338,406
B-27
CONSERVATIVE INVESTORS PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SHARES OR
PRINCIPAL
AMOUNT
COMPANY (000) U.S. $ VALUE
- -------------------------------------------------------------------------
MULTI INDUSTRY COMPANIES-0.8%
Tyco International, Ltd. 3,000 $ 189,000
U.S. Industries, Inc. 4,000 99,000
------------
288,000
Total United States Investments
(cost $5,815,835) 7,727,922
FOREIGN INVESTMENTS-7.3%
BRAZIL-0.3%
Telecomunicacoes Brasileiras,
SA (ADR) 900 98,269
DENMARK-0.3%
Ratin Series B 600 127,083
FINLAND-1.4%
Nokia AB OY Corp.
Series A 6,000 441,704
Orion-Yhtymae OY Cl.B 2,800 86,334
------------
528,038
FRANCE-0.9%
Sanofi, SA 1,000 117,604
SEITA 1,400 63,450
Total, SA Cl.B 1,100 143,011
------------
324,065
GERMANY-0.4%
Adidas AG 400 69,755
ProSieben Media AG pfd. 1,500 77,768
------------
147,523
HONG KONG-0.2%
Cheung Kong Holdings, Ltd. 5,000 24,587
Hutchison Whampoa, Ltd. 7,000 36,951
------------
61,538
JAPAN-0.5%
Canon, Inc. 2,000 45,563
Fuji Photo Film 2,000 69,863
Honda Motor Co. 2,000 71,455
------------
186,881
NETHERLANDS-1.3%
AKZO Nobel NV (a) 700 155,720
ASM Lithography Holding
NV 4,000 118,460
ING Groep NV 3,000 196,581
------------
470,761
SPAIN-0.3%
Telefonica de Espana 2,000 92,468
SWEDEN-0.1%
Astra AB Series A 2,000 40,873
SWITZERLAND-0.9%
Nestle, SA 100 214,356
Zurich Versicherungsgesellschaft 200 127,848
------------
342,204
UNITED KINGDOM-0.7%
BPB Plc 12,000 72,732
Compass Group Plc 8,000 92,034
Tomkins Plc 8,000 43,446
United News & Media Plc 3,000 41,976
------------
250,188
Total Foreign Investments
(cost $2,234,127) 2,669,891
Total Common & Preferred Stocks
(cost $8,049,962) 10,397,813
DEBT OBLIGATIONS-70.8%
U.S. GOVERNMENT & AGENCY OBLIGATIONS-60.0%
Federal Home Loan Bank
7.00%, 9/01/11 $ 386 394,472
7.00%, 1/01/12 81 82,912
Federal Home Loan Mortgage Corp.
5.44%, 8/24/98 2,000 1,983,680
5.85%, 7/01/98 4,900 4,900,000
Federal National Mortgage Assn.
6.00%, 4/01/11 410 406,306
6.50%, 6/01/11 278 279,964
6.50%, 4/01/12 225 226,176
7.00%, 5/01/26 525 532,393
7.00%, 9/01/27 238 241,450
7.00%, 12/01/27 936 949,188
Government National Mortgage Assn.
6.50%, 3/15/28 708 706,005
7.00%, 2/15/28 793 805,776
7.00%, 5/15/28 795 807,978
7.50%, 3/15/28 611 627,922
U.S. Treasury Bond
6.125%, 11/15/27 2,620 2,807,487
U.S. Treasury Notes
6.00%, 8/15/00 2,100 2,120,013
6.25%, 4/30/01 1,240 1,263,052
6.375%, 5/15/99 1,395 1,405,030
6.50%, 8/31/01 995 1,022,054
6.50%, 5/31/02 350 361,648
------------
21,923,506
B-28
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
CORPORATE DEBT OBLIGATIONS-6.9%
BANKING-1.7%
City National Bank California
6.375%, 1/15/08 $625 $ 628,375
FINANCIAL-1.3%
Goldman Sachs Group LP
7.20%, 11/01/06 (b) 450 482,337
INDUSTRIAL-3.1%
Computer Associates International, Inc.
6.375%, 4/15/05 (b) 600 603,461
Time Warner, Inc.
8.375%, 3/15/23 450 527,090
------------
1,130,551
PUBLIC UTILITIES-0.8%
Texas Utilities Co. Series C
6.375%, 1/01/08 300 294,908
------------
2,536,171
YANKEE BONDS-3.9%
Australian Gas Light Co.
6.40%, 4/15/08 (b) 545 553,634
Corporacion Andina de Fomento
7.25%, 3/01/07 400 415,283
St. George Bank, Ltd.
7.15%, 10/15/05 (b) 425 441,095
------------
1,410,012
Total Debt Obligations
(cost $25,501,782) 25,869,689
TOTAL INVESTMENTS -99.2%
(cost $33,551,744) 36,267,502
Other assets less liabilities-0.8% 290,424
NET ASSETS-100% $ 36,557,926
(a) Non-income producing security.
(b) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At June 30, 1998,
the aggregate market value of these securities amounted to $2,080,527 or 5.7%
of net assets.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-29
GROWTH INVESTORS PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON & PREFERRED STOCKS-65.7%
UNITED STATES INVESTMENTS-50.9%
CONSUMER SERVICES-12.9%
BROADCASTING & CABLE-4.4%
Cox Communications, Inc. Cl.A (a) 4,000 $ 193,750
Scripps E.W. Co. Cl.A 5,000 274,063
Tele-Communications, Inc.-
Liberty Media Group Cl.A (a) 10,000 388,437
------------
856,250
ENTERTAINMENT & LEISURE-4.0%
Harley-Davidson, Inc. 12,000 465,000
Walt Disney Co. 3,000 315,187
------------
780,187
RETAIL-GENERAL MERCHANDISE-4.5%
Dayton Hudson Corp. 8,000 388,000
Home Depot, Inc. 6,000 498,375
------------
886,375
------------
2,522,812
FINANCE-11.6%
BANKING-MONEY CENTER-4.5%
BankAmerica Corp. 4,000 345,750
Chase Manhattan Corp. 7,000 528,500
------------
874,250
BROKERAGE & MONEY MANAGEMENT-3.3%
Merrill Lynch & Co., Inc. 4,000 369,000
Morgan Stanley Dean Witter and Co. 3,000 274,125
------------
643,125
INSURANCE-2.4%
American International Group, Inc. 2,000 292,000
Travelers Group, Inc. 3,000 181,875
------------
473,875
MISCELLANEOUS-1.4%
MBNA Corp. 8,000 264,000
------------
2,255,250
HEALTH CARE-6.7%
DRUGS-5.7%
Bristol-Myers Squibb Co. 5,000 574,688
Merck & Co., Inc. 4,000 535,000
------------
1,109,688
MEDICAL PRODUCTS-1.0%
Medtronic, Inc. 3,000 191,250
------------
1,300,938
CONSUMER STAPLES-6.1%
COSMETICS-3.0%
Avon Products, Inc. 2,000 155,000
Gillette Co. 3,800 215,412
The Estee Lauder Co., Inc. Cl.A 3,000 209,063
------------
579,475
RETAIL-FOOD & DRUG-1.5%
Kroger Co. (a) 7,000 300,125
TOBACCO-1.6%
Philip Morris Cos., Inc. 8,000 315,000
------------
1,194,600
TECHNOLOGY-5.9%
COMMUNICATION EQUIPMENT-0.7%
Tellabs, Inc. (a) 2,000 143,188
COMPUTER HARDWARE-0.9%
Compaq Computer Corp. 6,000 170,250
COMPUTER SERVICES-1.0%
First Data Corp. 6,000 199,875
COMPUTER SOFTWARE-0.4%
Microsoft Corp. (a) 700 75,884
NETWORKING SOFTWARE-1.9%
Cisco Systems, Inc. (a) 4,000 368,375
SEMI-CONDUCTOR COMPONENTS-1.0%
Altera Corp. (a) 2,800 82,687
Intel Corp. 1,500 111,141
------------
193,828
------------
1,151,400
ENERGY-2.7%
DOMESTIC PRODUCERS-0.3%
Apache Corp. 2,000 63,000
OIL SERVICE-2.4%
Halliburton Co. 4,000 178,250
Noble Drilling Corp. (a) 12,000 288,750
------------
467,000
------------
530,000
UTILITIES-2.5%
TELEPHONE UTILITY-2.5%
WorldCom, Inc. 10,000 483,438
MULTI INDUSTRY COMPANIES-1.6%
Tyco International, Ltd. 3,400 214,200
U.S. Industries, Inc. 4,000 99,000
------------
313,200
B-30
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SHARES OR
PRINCIPAL
AMOUNT
COMPANY (000) U.S. $ VALUE
- -------------------------------------------------------------------------
CAPITAL GOODS-0.9%
MISCELLANEOUS-0.9%
United Technologies Corp. 2,000 $ 185,000
Total United States Investments
(cost $7,584,828) 9,936,638
FOREIGN INVESTMENTS-14.8%
BRAZIL-0.6%
Telecomunicacoes Brasileiras, SA (ADR) 1,000 109,188
DENMARK-0.6%
Ratin Series B 600 127,083
FINLAND-2.5%
Nokia AB OYJ Corp. Cl. A 5,000 368,086
Orion-Yhtyma OY Cl.B 4,200 129,501
------------
497,587
FRANCE-2.1%
Sanofi, SA 1,000 117,604
SEITA 2,000 90,643
Total, SA Cl.B 1,500 195,015
------------
403,262
GERMANY-1.0%
Adidas-Salomon AG 500 87,194
ProSieben Media AG pfd. 2,000 103,690
------------
190,884
HONG KONG-0.3%
Cheung Kong Holdings, Ltd. 7,000 34,422
Hutchison Whampoa, Ltd. 6,000 31,672
------------
66,094
JAPAN-1.0%
Canon, Inc. 2,000 45,563
Fuji Photo Film Co. 2,000 69,863
Honda Motor Co. 2,000 71,455
------------
186,881
NETHERLANDS-2.6%
Akzo Nobel NV (a) 1,000 222,457
ASM Lithography Holdings NV 3,000 88,845
ING Groep NV 3,000 196,581
------------
507,883
SPAIN-0.5%
Telefonica de Espana 2,000 92,468
SWEDEN-0.5%
Astra AB Series A 5,000 102,182
SWITZERLAND-1.2%
Nestle, SA 50 107,178
Zurich Versicherungsgesellschaft 200 127,848
------------
235,026
UNITED KINGDOM-1.9%
BPB Plc 20,000 121,220
Compass Group Plc 12,000 138,051
Tomkins Plc 9,000 48,876
United News & Media Plc 4,000 55,969
------------
364,116
Total Foreign Investments
(cost $2,348,703) 2,882,654
Total Common & Preferred Stocks
(cost $9,933,531) 12,819,292
DEBT OBLIGATIONS-17.7%
U.S. GOVERNMENT & AGENCY OBLIGATIONS-14.0%
Federal Home Loan Mortgage Corp.
7.00%, 9/01/11 6,667,060
Federal National Mortgage Assn.
6.00%, 4/01/11 82 81,261
6.50%, 1/01/11 52 52,838
6.50%, 5/01/13 50 49,792
7.00%, 12/01/11 40 40,675
7.00%, 5/01/26 71 72,405
7.00%, 3/01/27 121 122,398
7.00%, 12/01/27 148 149,871
Government National Mortgage Assn.
6.50%, 3/15/28 184 183,959
7.00%, 2/15/28 148 150,822
7.50%, 4/15/27 118 120,940
U.S. Treasury Bond
6.125%, 11/15/27 390 417,909
U.S. Treasury Notes
6.375%, 5/15/99 390 392,804
6.50%, 5/31/02 810 836,957
------------
2,739,691
CORPORATE DEBT OBLIGATIONS-2.7%
AUTOMOTIVE-0.4%
Federal Mogul Corp.
7.75%, 7/01/06 75 75,000
BANKING-0.4%
Chase Manhattan Corp.
6.75%, 8/15/08 80 82,764
INDUSTRIAL-1.9%
Auburn Hills Trust
12.00%, 5/01/20 50 82,451
Beckman Instruments, Inc.
7.45%, 3/04/08 (b) 40 40,648
B-31
GROWTH INVESTORS PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
Coltec Industries, Inc.
7.50%, 4/15/08 (b) $ 60 $ 59,700
Iridium LLC/CAP
10.875%, 7/15/05 60 59,850
Time Warner, Inc.
9.125%, 1/15/13 100 123,341
------------
365,990
------------
523,754
YANKEE BONDS-1.0%
Corporacion Andina de Fomento
7.25%, 3/01/07 100 103,821
Credit Suisse First Boston
6.50%, 5/01/08 (b) 85 85,977
------------
189,798
Total Debt Obligations
(cost $3,404,523) 3,453,243
SHORT-TERM DEBT SECURITIES -16.9%
Federal Home Loan Mortgage Corp.
5.85%, 7/01/98 3,300
(amortized cost $3,300,000) 3,300,000
TOTAL INVESTMENTS -100.3%
(cost $16,638,054) 19,572,535
Other assets less liabilities-(0.3%) (67,071)
NET ASSETS-100% $19,505,464
(a) Non-income producing security.
(b) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At June 30, 1998,
the aggregate market value of these securities amounted to $186,325 or 1.0% of
net assets.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-32
TECHNOLOGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------------
COMMON STOCKS-92.4%
TECHNOLOGY-90.9%
COMMUNICATIONS EQUIPMENT-10.4%
Alcatel Alsthom (ADR) (a) 50,000 $ 2,034,375
Glenayre Technologies, Inc. (b) 62,900 680,106
Nokia Corp. (ADR) (c) 45,400 3,294,337
PairGain Technologies, Inc. 24,000 417,750
Tellabs, Inc. (b) 43,600 3,121,488
------------
9,548,056
COMPUTER HARDWARE-10.5%
Apex PC Solutions, Inc. (b) 30,300 844,613
Compaq Computer Corp. 122,300 3,470,262
Dell Computer Corp. (b) 57,800 5,362,756
------------
9,677,631
COMPUTER PERIPHERALS-1.6%
Lexmark International Group, Inc. Cl.A (b) 24,000 1,464,000
COMPUTER SERVICES-14.2%
Computer Sciences Corp. 35,900 2,297,600
DST Systems, Inc. (b) 39,625 2,219,000
First Data Corp. 57,200 1,905,475
Fiserv, Inc. (b) 41,600 1,766,700
Galileo International, Inc. 21,000 946,313
Gartner Group, Inc. Cl.A (b) 32,800 1,146,975
Renaissance Worldwide, Inc. (b) 26,540 578,074
SunGard Data Systems, Inc. (b) 57,400 2,202,725
------------
13,062,862
COMPUTER SOFTWARE-18.3%
Cadence Design Systems, Inc. (b) 34,000 1,062,500
HBO & Co. 90,000 3,175,313
Health Management Systems, Inc. (b) 61,900 700,244
I2 Technologies, Inc. (b) 8,000 281,500
Industri-Matematik International Corp. (b) 25,300 277,509
Interplay Entertainment Corp. (b) 33,000 192,844
Intuit, Inc. (b) 57,800 3,542,056
J.D. Edwards & Co. (b) 12,400 532,425
Microsoft Corp. (b) 16,000 1,734,500
Networks Associates, Inc. (b) 69,700 3,334,709
Pegasystems, Inc. (b) 21,000 570,938
PeopleSoft, Inc. (b) 32,000 1,503,000
------------
16,907,538
NETWORKING SOFTWARE-14.9%
America Online, Inc. 6,000 636,000
Ascend Communications, Inc. (b) 14,800 733,062
Bay Networks, Inc. (b) 30,000 967,500
CIENA Corp. (b) 30,500 2,121,656
Cisco Systems, Inc. (b) 66,600 6,133,444
FORE Systems, Inc. (b) 100,500 2,660,109
Newbridge Networks Corp. (b) 21,000 502,688
------------
13,754,459
SEMI-CONDUCTOR CAPITAL EQUIPMENT-3.6%
Amkor Technology, Inc. (b) 41,100 384,028
Applied Materials, Inc. (b) 39,300 1,160,578
KLA-Tencor Corp. (b) 38,000 1,053,313
Teradyne, Inc. (b) 25,800 690,150
------------
3,288,069
SEMI-CONDUCTOR COMPONENTS-8.7%
Altera Corp. (b) 66,100 1,952,016
Cirrus Logic, Inc. 12,900 143,916
Intel Corp. 17,200 1,274,412
PMC-Sierra, Inc. (b) 23,700 1,109,456
Taiwan Semiconductor
Manufacturing Co., Ltd. (ADR) (b)(d) 44,000 742,500
Texas Instruments, Inc. 26,300 1,533,619
Xilinx, Inc. (b) 36,400 1,238,737
------------
7,994,656
MISCELLANEOUS-8.7%
Ingram Micro, Inc. Cl.A (b) 50,000 2,212,500
Sanmina Corp. (b) 59,800 2,584,482
Solectron Corp. (b) 48,500 2,040,031
Tech Data Corp. (b) 28,500 1,222,828
------------
8,059,841
------------
83,757,112
UTILITIES-1.2%
TELEPHONE UTILITY-1.2%
WorldCom, Inc. 22,700 1,097,403
CONSUMER SERVICES-0.3%
MISCELLANEOUS-0.3%
Equifax, Inc. 8,000 290,500
Total Common Stocks
(cost $62,912,346) 85,145,015
B-33
TECHNOLOGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS-7.9%
COMMERCIAL PAPER-7.5%
American Express Credit Corp.
5.57%, 7/02/98 $ 990 $ 989,847
Ford Motor Credit Corp.
5.62%, 7/06/98 2,500 2,498,048
5.63%, 7/09/98 575 574,281
Prudential Funding Corp.
5.62%, 7/14/98 2,780 2,774,358
------------
6,836,534
TIME DEPOSIT-0.4%
State Street Bank and Trust Co.
5.25%, 7/01/98 385 385,000
Total Short-Term Investments
(amortized cost $7,221,534) 7,221,534
TOTAL INVESTMENTS-100.3%
(cost $70,133,880) 92,366,549
Other assets less liabilities-(0.3%) (235,838)
NET ASSETS-100% $92,130,711
(a) Country of origin--France
(b) Non-income producing security.
(c) Country of origin--Finland.
(d) Country of origin--Taiwan.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-34
QUASAR PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON STOCKS & OTHER INVESTMENTS-74.9%
CONSUMER PRODUCTS & SERVICES-38.3%
ADVERTISING-0.1%
Princeton Video Image, Inc. (a) 16,100 $ 73,456
AIRLINES-4.4%
Alaska Air Group, Inc. (a) 36,000 1,964,250
America West Airlines, Inc. Cl.B (a) 45,200 1,291,025
Mesa Air Group, Inc. (a) 58,100 470,247
------------
3,725,522
APPAREL-3.4%
Nautica Enterprises, Inc. (a) 24,900 669,188
Stride Rite Corp. 44,100 664,256
Tommy Hilfiger Corp. (a) 11,800 737,500
Wolverine World Wide, Inc. 37,900 821,956
------------
2,892,900
BROADCASTING & CABLE-2.1%
Sinclair Broadcast Group, Inc. Cl.A (a) 26,200 751,612
Young Broadcasting Corp. Cl.A (a) 15,100 982,444
------------
1,734,056
BUSINESS SERVICES-2.7%
Carey International, Inc. (a) 29,600 832,500
FirstService Corp. (a) 5,400 68,850
Renaissance Worldwide, Inc. (a) 30,000 653,438
TeleSpectrum Worldwide, Inc. (a) 81,700 717,428
------------
2,272,216
ENTERTAINMENT & LEISURE-4.6%
Bally Total Fitness Holding Corp. (a) 29,500 1,062,000
Family Golf Centers, Inc. (a) 15,250 386,016
N2K, Inc. (a) 15,600 306,637
Premier Parks, Inc. (a) 18,200 1,212,575
Signature Resorts, Inc. (a) 54,400 897,600
------------
3,864,828
FUNERAL SERVICES-0.6%
Carriage Services, Inc. Cl.A (a) 20,100 505,012
RESTAURANTS & LODGING-1.9%
CapStar Hotel Co. (a) 34,300 960,400
Florida Panthers Holdings, Inc. Cl.A (a) 32,000 630,000
------------
1,590,400
RETAILING-16.4%
Abercrombie & Fitch Co. Cl.A (a) 23,100 1,016,400
Avis Rent A Car, Inc. (a) 25,800 638,550
Brylane, Inc. (a) 21,300 979,800
Budget Group, Inc. Cl.A (a) 56,700 1,810,856
Cash America International, Inc. 6,700 102,175
Circuit City Stores, Inc.- Car
Max Group (a) 97,000 988,188
Furniture Brands International, Inc. (a) 27,200 763,300
Industrie Natuzzi SpA (ADR) (b) 40,800 1,060,800
Mens Wearhouse, Inc. (a) 23,850 787,795
Movado Group, Inc. 18,500 558,469
Pacific Sunwear of California (a) 32,775 1,149,174
Petco Animal Supplies, Inc. (a) 23,500 470,000
PETsMART, Inc. (a) 38,700 386,395
Tiffany & Co. 31,100 1,492,800
Transport World Entertainment Corp. (a) 7,600 326,325
United Rentals, Inc. (a) 29,500 1,239,000
------------
13,770,027
MISCELLANEOUS-2.1%
Central Garden & Pet Co. (a) 16,200 503,213
Century Business Services, Inc. (a) 58,700 1,170,331
Hines Horticulture, Inc. (a) 11,900 131,272
------------
1,804,816
------------
32,233,233
BASIC INDUSTRIES-10.5%
BUILDING & RELATED-0.4%
Associate Materials, Inc. (a) 26,200 347,150
METAL HARDWARE-2.4%
Bethlehem Steel Corp. (a) 161,100 2,003,681
METALS & MINING-0.2%
Royal Oak Mines, Inc. (a) 242,000 211,750
TEXTILE PRODUCTS-2.9%
Mohawk Industries, Inc. (a) 66,850 2,118,309
Novel Denim Holdings, Ltd. (a) 11,500 299,000
------------
2,417,309
B-35
QUASAR PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------------
TRANSPORTATION & SHIPPING-4.6%
Consolidated Freightways Corp. (a) 87,700 $1,222,319
Knightsbridge Tankers, Ltd. 21,900 584,456
Marine Transport Corp. 16,100 65,910
OMI Corp. (a) 161,000 1,288,000
Teekay Shipping Corp. 28,000 701,750
------------
3,862,435
------------
8,842,325
TECHNOLOGY-8.9%
COMMUNICATIONS EQUIPMENT-1.1%
Comverse Technology, Inc. (a) 17,300 897,978
COMPUTER HARDWARE-1.0%
Apex PC Solutions, Inc. (a) 31,400 875,275
COMPUTER SOFTWARE & SERVICES-3.8%
Checkfree Corp. (a) 19,500 574,640
DBT Online, Inc. (a) 35,200 950,400
Insight Enterprises, Inc. (a) 30,500 1,218,094
Preview Travel, Inc. (a) 11,700 401,091
QAD, Inc. (a) 6,700 60,719
------------
3,204,944
SEMI-CONDUCTOR EQUIPMENT-0.8%
Brooks Automation, Inc. (a) 24,200 316,113
Photronics, Inc. (a) 14,500 319,906
------------
636,019
TELECOMMUNICATIONS-1.9%
Globecomm Systems, Inc. (a) 13,300 119,700
GST Telecommunications, Inc. (a) 31,800 458,119
Millicom International Cellular, SA (a)(c) 23,500 1,027,390
------------
1,605,209
MISCELLANEOUS-0.3%
Excalibur Technologies Corp. (a) 20,100 222,356
Seitel, Inc. (a) 2,800 45,325
------------
267,681
------------
7,487,106
HEALTH CARE-6.3%
BIOTECHNOLOGY-3.3%
Corixa Corp. (a) 12,000 82,125
GelTex Pharmaceuticals, Inc. (a) 63,410 1,184,974
Gensia Sicor, Inc. (a) 80,100 317,897
MedImmune, Inc. (a) 19,000 1,189,875
------------
2,774,871
DRUGS, HOSPITAL SUPPLIES &
MEDICAL SERVICES-3.0%
Aradigm Corp. (a) 32,900 448,263
Physio-Control International Corp. (a) 33,700 887,784
Synetic, Inc. (a) 12,800 731,200
Veterinary Centers of America, Inc. (a) 26,100 491,822
------------
2,559,069
------------
5,333,940
FINANCIAL SERVICES-5.4%
INSURANCE-0.5%
Reinsurance Group of America, Inc. (a) 8,500 436,156
REAL ESTATE-4.8%
Chelsea GCA Realty, Inc. 45,500 1,820,000
Glenborough Realty Trust, Inc. 24,400 643,550
Golf Trust of America, Inc. 21,700 745,938
Taubman Centers, Inc. 56,600 806,550
------------
4,016,038
OTHER-0.1%
International Alliance Services, Inc.
warrants, expiring 1/01/49 (a) 9,700 95,933
------------
4,548,127
CONSUMER MANUFACTURING-3.0%
AUTO & RELATED-3.0%
Group 1 Automotive, Inc. (a) 43,700 699,200
Miller Industries, Inc. (a) 49,350 382,462
Monaco Coach Corp. (a) 23,800 699,125
United Auto Group, Inc. (a) 33,600 735,000
------------
2,515,787
ENERGY-2.5%
OIL & GAS SERVICES-2.5%
Oceaneering International, Inc. (a) 31,000 550,250
Parker Drilling Co. (a) 92,700 654,694
Southern Union Co. 28,925 932,831
------------
2,137,775
Total Common Stocks & Other Investments
(cost $57,897,448) 63,098,293
B-36
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
SHORT-TERM
INVESTMENTS-24.3%
U.S. GOVERNMENT & AGENCIES-23.9%
Federal Home Loan Mortgage Corp.
Zero Coupon, 7/27/98 $3,000 $ 2,988,127
5.45%, 8/24/98 3,000 2,975,475
5.48%, 7/27/98 3,000 2,988,127
5.85%, 7/01/98 6,200 6,200,000
Federal National Mortgage Assn.
5.45%, 8/14/98 5,000 4,966,694
------------
20,118,423
TIME DEPOSIT-0.4%
State Street Bank and Trust Co.
5.25%, 7/01/98 341 341,000
Total Short-Term Investments
(amortized cost $20,459,423) 20,459,423
TOTAL INVESTMENTS-99.2%
(cost $78,356,871) 83,557,716
Other assets less liabilities-0.8% 700,248
NET ASSETS-100% $84,257,964
(a) Non-income producing security.
(b) Country of origin--Italy.
(c) Country of origin--Luxembourg.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-37
REAL ESTATE INVESTMENT PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SHARES OR
PRINCIPAL
AMOUNT
COMPANY (000) U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON STOCKS & OTHER INVESTMENTS-97.2%
REAL ESTATE INVESTMENT TRUSTS-97.2%
APARTMENTS-10.4%
Avalon Bay Communities, Inc. 17,334 $ 658,692
Essex Property Trust, Inc. 20,100 623,100
Security Capital Pacific Trust 23,100 519,750
------------
1,801,542
DIVERSIFIED-9.9%
Correctional Properties Trust (a) 15,700 317,925
Excel Legacy Corp. (a) 7,100 31,284
Glenborough Realty Trust, Inc. 25,900 683,113
Golf Trust of America, Inc. 12,400 426,250
Vornado Realty Trust 6,400 254,000
------------
1,712,572
HOTELS-14.5%
American General Hospitality Corp. 17,500 371,875
Innkeepers USA Trust 25,600 323,200
Patriot American Hospitality, Inc. 25,300 605,619
Starwood Hotels & Resorts 18,300 884,118
Sunstone Hotel Investors, Inc. 25,100 334,144
------------
2,518,956
OFFICE-18.0%
Arden Realty Group, Inc. 22,800 589,950
Boston Properties, Inc. 9,100 313,950
Cornerstone Properties, Inc. 20,500 361,312
Crescent Real Estate Equities Co. 19,400 652,325
Mack-Cali Realty Corp. 15,200 522,500
SL Green Realty Corp. 29,800 670,500
------------
3,110,537
OFFICE-INDUSTRIAL MIX-20.7%
Brandywine Realty Trust 24,600 550,425
Duke Realty Investments, Inc. 15,000 354,375
Equity Office Properties Trust 28,400 805,850
Great Lakes REIT, Inc. 10,800 188,325
Highwoods Properties, Inc. 17,400 562,238
Reckson Associates Realty Corp. 21,000 496,125
Reckson Services Industries, Inc. (a) 9,880 33,654
Spieker Properties, Inc. 15,400 596,750
------------
3,587,742
REGIONAL MALLS-5.8%
Macerich Co. 18,500 542,281
Mills Corp. 19,200 460,800
------------
1,003,081
SHOPPING CENTERS-8.5%
Entertainment Properties Trust 18,000 328,500
Excel Realty Trust, Inc. 11,600 334,225
Pacific Retail Trust Co. (b) 19,000 247,000
Pan Pacific Retail Properties, Inc. 28,800 558,000
------------
1,467,725
STORAGE-3.7%
Public Storage, Inc. 23,200 649,600
WAREHOUSE & INDUSTRIAL-5.7%
Cabot Industrial Trust 18,800 401,850
Security Capital Group, Inc. Cl.B
warrants, expiring 9/18/98 (a) 498 171
Security Capital Industrial Trust 23,600 590,000
------------
992,021
Total Common Stocks & Other Investments
(cost $17,401,282) 16,843,776
SHORT-TERM INVESTMENT-3.4%
TIME DEPOSIT-3.4%
State Street Cayman Islands
5.25%, 7/01/98
(amortized cost $585,000) $ 585 585,000
TOTAL INVESTMENTS-100.6%
(cost $17,986,282) 17,428,776
Other assets less liabilities-(0.6%) (107,354)
NET ASSETS-100% $17,321,422
(a) Non-income producing security.
(b) Illiquid security valued at fair market value (see Note A).
See Notes to Financial Statements.
B-38
HIGH-YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------------
CORPORATE DEBT OBLIGATIONS-95.5%
AIRLINES-2.3%
Canadian Airlines Corp.
10.00%, 5/01/05 $300 $304,500
BANKING-2.0%
Fuji Jgb Investment LLC
9.87%, 12/31/49 (a) (b) 300 264,098
BUSINESS SERVICES-2.9%
ATC Group Services, Inc.
12.00%, 1/15/08 (a) 40 37,000
Employee Solutions, Inc.
10.00%, 10/15/04 50 49,500
United States Office Product Co.
9.75%, 6/15/08 (a) 300 297,000
------------
383,500
CHEMICALS-2.4%
Aqua Chemical, Inc.
11.25%, 7/01/08 (a) 300 305,250
Climachem, Inc.
10.75%, 12/01/07 10 10,475
------------
315,725
COMMUNICATIONS-21.6%
Dobson Wireline Co.
12.25%, 6/15/08 (a) 300 292,500
Globalstar LP
10.75%, 11/01/04 110 105,600
Iridium Capital Corp. LLC
14.00%, 7/15/05 (c) 50 55,875
Iridium Operating LLC
10.875%, 7/15/05 500 498,750
Long Distance International, Inc.
12.25%, 4/15/08 (a) 500 497,500
Nextel Communications, Inc.
Zero Coupon, 10/31/07 (c) 500 327,500
Price Communications Wireless
9.125%, 12/15/06 (a) 300 300,000
Startec Global Communications
12.00%, 5/15/08 (a) 300 292,500
United States Xchange LLC
15.00%, 7/01/08 (a) 500 515,000
------------
2,885,225
CONGLOMERATES-2.2%
Wesco Distribution, Inc.
9.125%, 6/01/08 (a) 300 297,000
CONSUMER MANUFACTURING-5.3%
Imperial Home Decor Group, Inc.
11.00%, 3/15/08 (a) 400 416,000
Samsonite Corp.
10.75%, 6/15/08 (a) 300 298,125
------------
714,125
ELECTRONICS-2.2%
CHS Electronics, Inc.
9.875%, 4/15/05 (a) 300 296,250
ENERGY-9.0%
Dailey International, Inc.
9.50%, 2/15/08 575 563,500
Gothic Production Corp.
11.125%, 5/01/05 (a) 300 288,750
Northern Offshore ASA
10.00%, 5/15/05 (a) 300 288,000
Transamerican Energy Corp.
11.50%, 6/15/02 60 56,100
------------
1,196,350
ENTERTAINMENT & LEISURE-0.1%
Livent, Inc.
9.375%, 10/15/04 10 10,025
FINANCIAL-2.1%
Emergent Group, Inc.
10.75%, 9/15/04 225 165,375
Metris Companies, Inc.
10.00%, 11/01/04 50 52,500
Wilshire Financial Services
Group, Inc.
13.00%, 8/15/04 55 59,400
------------
277,275
FOOD/BEVERAGES-2.5%
Favorite Brands International, Inc.
10.75%, 5/15/06 (a) 300 304,500
Grupo Azucarero Mexico SA de CV
11.50%, 1/15/05 (a) 40 34,350
------------
338,850
HEALTHCARE-0.7%
Packard Bioscience, Inc.
9.375%, 3/01/07 100 97,500
INDUSTRIAL-7.6%
Advanced Accessory Systems
9.75%, 10/01/07 (a) 300 302,250
Anchor Lamina, Inc.
9.875%, 2/01/08 75 73,875
Elgar Holdings, Inc.
9.875%, 2/01/08 (a) 50 46,750
Marsulex, Inc.
9.625%, 7/01/08 (a) 300 304,125
Morris Material Handling, Inc.
9.50%, 4/01/08 (a) 300 281,250
------------
1,008,250
MEDIA-4.0%
Perry-Judd, Inc.
10.625%, 12/15/07 (a) 25 26,375
Regional Independent Media Group
10.50%, 7/01/08 (a) 500 505,000
------------
531,375
B-39
HIGH-YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------------
METALS & MINERALS-4.5%
Great Central Mines, Ltd.
8.875%, 4/01/08 (a) $ 300 $ 296,250
P&L Coal Holdings Corp.
9.625%, 5/15/08 (a) 300 309,750
------------
606,000
METALS & MINING-5.2%
Schuff Steel Co.
10.50%, 6/01/08 (a) 400 396,000
Simcala, Inc.
9.625%, 4/15/06 (a) 300 296,625
------------
692,625
PAPER / PACKAGING-1.5%
Plainwell, Inc.
11.00%, 3/01/08 (a) 100 101,000
Riverwood International Corp.
10.875%, 4/01/08 100 101,500
------------
202,500
REAL ESTATE-2.3%
LNR Property Corp.
9.375%, 3/15/08 (A) 300 302,250
RETAIL-4.6%
HMV Media Group Plc
10.25%, 5/15/08 (a) 300 306,000
Home Interiors & Gifts, Inc.
10.125%, 6/01/08 (a) 300 308,250
------------
614,250
TECHNOLOGY-6.2%
American Mobile Satellite Corp.
12.25%, 4/01/08 (a) 300 283,500
Concentric Network Corp.
12.75%, 12/15/07 25 26,562
Telex Communications, Inc.
10.50%, 5/01/07 25 22,625
Viasystems, Inc.
9.75%, 6/01/07 500 496,250
------------
828,937
TRANSPORTATION-4.3%
American Commercial Lines LLC
10.25%, 6/30/08 (a) 300 305,250
Cathay International, Ltd.
13.00%, 4/15/08 (a) 300 265,500
------------
570,750
Total Corporate Debt Obligations
(cost $12,837,540) 12,737,360
PREFERRED STOCK-0.4%
Nextel Communications, Inc.
11.125%, 2/15/10 (a)
(cost $49,560) 0 52,530
SHORT-TERM INVESTMENT-1.9%
TIME DEPOSIT-1.9%
State Street Bank and Trust Co.
5.25%, 7/01/98
(cost $250,000) 250 250,000
TOTAL INVESTMENTS-97.8%
(cost $13,137,100) 13,039,890
Other assets less liabilities-2.2% 292,496
NET ASSETS-100% $ 13,332,386
(a) Securities exempt from registration under Rule 144a of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At June 30, 1998,
the aggregate market value of these securities amounted to $9,712,478 or 72.8%
of net assets.
(b) Coupon will increase periodically based upon a predetermined schedule.
Stated interest rate in effect at June 30, 1998.
(c) Indicates a security that has a zero coupon that remains in effect until a
predetermined date at which time the stated coupon rate becomes effective until
final maturity.
Glossary of Terms
ADR - American Depositary Receipts
ADS - American Depositary Shares
FLIRB - Front Load Interest Reduction Bond
FRN - Floating Rate Note
GDR - Global Depositary Receipts
GDS - Global Depositary Shares
IAN - Interest Arrears Note
PDI - Past Due Interest
See Notes to Financial Statements.
B-40
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
PREMIER GLOBAL GROWTH AND SHORT-TERM
GROWTH BOND INCOME MULTI-MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at value
(cost $591,903,686, $24,542,635,
$289,758,438 and $6,391,416,
respectively) $814,962,999 $24,603,825 $328,021,002 $6,104,963
Cash, at value (cost $361, $9,320,
$366 and $310,
respectively) 361 9,320 366 310
Dividends receivable 675,583 -0- 374,796 -0-
Interest receivable 656 478,780 143 145,563
Receivable for investment
securities sold -0- -0- 2,214,704 -0-
Receivable from Adviser -0- -0- -0- 3,780
Total assets 815,639,599 25,091,925 330,611,011 6,254,616
LIABILITIES
Advisory fee payable 627,213 13,139 162,824 -0-
Payable for investment securities
purchased 399,731 -0- 2,097,523 -0-
Unrealized depreciation on
forward exchange currency contracts -0- 706 -0- 31,376
Accrued expenses 186,583 13,397 83,119 6,626
Total liabilities 1,213,527 27,242 2,343,466 38,002
NET ASSETS $814,426,072 $25,064,683 $328,267,545 $6,216,614
COMPOSITION OF NET ASSETS
Capital stock, at par $30,255 $2,235 $15,973 $633
Additional paid-in capital 577,779,874 24,506,746 263,855,852 7,414,689
Undistributed net investment income 212,983 387,032 1,772,741 40,935
Accumulated net realized gain
(loss) on investments and
foreign currency transactions 13,343,647 110,833 24,360,419 (920,687)
Net unrealized appreciation
(depreciation) of investments
and foreign currency
denominated assets and liabilities 223,059,313 57,837 38,262,560 (318,956)
$814,426,072 $25,064,683 $328,267,545 $6,216,614
Shares of capital stock
outstanding 30,255,644 2,235,069 15,972,577 632,923
Net asset value per share $26.92 $11.21 $20.55 $9.82
</TABLE>
See Notes to Financial Statements.
B-41
STATEMENTS OF ASSETS AND LIABILITIES
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
U.S. GOVERNMENT/
HIGH GRADE TOTAL MONEY
SECURITIES RETURN INTERNATIONAL MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at value
(cost $41,815,797, $48,673,911,
$63,975,668 and $82,097,205,
respectively) $42,163,139 $53,396,364 $72,751,914 $82,097,205
Cash, at value (cost $33, $413,
$121,439 and $117,913,
respectively) 33 413 123,151 117,913
Interest receivable 472,973 281,437 614 144,283
Dividends receivable -0- 39,732 137,606 -0-
Receivable for investment
securities sold -0- 235,321 426,317 -0-
Unrealized appreciation of
forward exchange currency
contracts -0- -0- 7,359 -0-
Total assets 42,636,145 53,953,267 73,446,961 82,359,401
LIABILITIES
Advisory fee payable 20,593 26,640 40,250 37,805
Payable for investment securities
purchased -0- 466,116 333,896 -0-
Dividends payable -0- -0- -0- 374,657
Accrued expenses 17,361 23,409 57,974 22,880
Total liabilities 37,954 516,165 432,120 435,342
NET ASSETS $42,598,191 $53,437,102 $73,014,841 $81,924,059
COMPOSITION OF NET ASSETS
Capital stock, at par $3,623 $3,147 $4,403 $81,924
Additional paid-in capital 40,523,453 45,455,931 63,450,511 81,841,606
Undistributed (overdistributed)
net investment income 1,039,030 626,577 (654,618) 1,046
Accumulated net realized gain
(loss) on investments and
foreign currency transactions 684,743 2,628,994 1,426,498 (517)
Net unrealized appreciation of
investments and foreign
currency denominated assets
and liabilities 347,342 4,722,453 8,788,047 -0-
$42,598,191 $53,437,102 $73,014,841 $81,924,059
Shares of capital stock
outstanding 3,622,893 3,146,540 4,403,195 81,924,333
Net asset value per share $11.76 $16.98 $16.58 $1.00
</TABLE>
See Notes to Financial Statements.
B-42
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
GLOBAL DOLLAR NORTH AMERICAN UTILITY
GOVERNMENT GOVERNMENT INCOME INCOME GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ----------------- ---------- ---------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at value
(cost $15,674,017, $33,684,893,
$19,936,859 and $220,635,019,
respectively) $14,595,221 $33,970,430 $26,119,962 $298,714,564
Cash, at value (cost $159,246,
$31,374, $37,575 and $576,
respectively) 159,246 31,344 37,575 576
Receivable for investment
securities sold 384,396 80,584 -0- 1,402,061
Interest receivable 302,471 232,856 -0- 46
Dividends receivable -0- -0- 46,741 290,152
Deferred organization expenses 2,791 3,605 2,620 2,410
Total assets 15,444,125 34,318,819 26,206,898 300,409,809
LIABILITIES
Advisory fee payable 6,436 18,898 18,797 172,788
Payable for investment securities
purchased -0- -0- -0- 1,928,965
Accrued expenses 12,747 46,543 1,935 79,192
Total liabilities 19,183 65,441 20,732 2,180,945
NET ASSETS $15,424,942 $34,253,378 $26,186,166 $298,228,864
COMPOSITION OF NET ASSETS
Capital stock, at par $1,226 $2,787 $1,560 $11,858
Additional paid-in capital 16,016,410 32,785,673 19,594,660 198,666,088
Undistributed net investment
income 670,942 1,422,218 246,306 1,007,361
Accumulated net realized gain
(loss) on investments and
foreign currency transactions (184,290) (242,068) 160,537 20,464,112
Net unrealized appreciation
(depreciation) of investments
and foreign currency
denominated assets and
liabilities (1,079,346) 284,768 6,183,103 78,079,445
$15,424,942 $34,253,378 $26,186,166 $298,228,864
Shares of capital stock
outstanding 1,226,388 2,786,886 1,560,020 11,858,536
Net asset value per share $12.58 $12.29 $16.79 $25.15
</TABLE>
See Notes to Financial Statements.
B-43
STATEMENTS OF ASSETS AND LIABILITIES
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
WORLDWIDE CONSERVATIVE GROWTH
PRIVATIZATION INVESTORS INVESTORS TECHNOLOGY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ----------- --------- ----------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at value
(cost $44,655,473, $33,551,744,
$16,638,054 and $70,133,880,
respectively) $48,218,893 $36,267,502 $19,572,535 $92,366,549
Cash, at value (cost $287,632,
$124,939, $0 and $574,
respectively) 287,955 124,974 -0- 574
Dividends receivable 235,244 14,112 16,287 24,209
Deferred organization expenses 2,454 2,646 2,646 11,049
Interest receivable 203 224,909 29,571 56
Receivable for investment
securities sold -0- -0- -0- 437,688
Total assets 48,744,749 36,634,143 19,621,039 92,840,125
LABILITIES
Due to custodian -0- -0- 60,225 -0-
Payable for investment securities
purchased 165,504 -0- -0- 618,000
Advisory fee payable 19,557 17,872 6,842 68,256
Accrued expenses 49,691 58,345 48,508 23,158
Total liabilities 234,752 76,217 115,575 709,414
NET ASSETS $48,509,997 $36,557,926 $19,505,464 $92,130,711
COMPOSITION OF NET ASSETS
Capital stock, at par $3,192 $2,756 $1,294 $6,132
Additional paid-in capital 42,246,711 32,830,312 16,067,077 69,376,873
Undistributed (overdistributed)
net investment income 569,091 616,895 147,020 (147,857)
Accumulated net realized gain
on investments and
foreign currency transactions 2,127,084 392,275 355,638 662,894
Net unrealized appreciation of
investments and foreign
currency denominated assets
and liabilities 3,563,919 2,715,688 2,934,435 22,232,669
$48,509,997 $36,557,926 $19,505,464 $92,130,711
Shares of capital stock
outstanding 3,192,469 2,755,506 1,293,818 6,131,713
Net asset value per share $15.20 $13.27 $15.08 $15.03
</TABLE>
See Notes to Financial Statements.
B-44
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
REAL ESTATE
QUASAR INVESTMENT HIGH-YIELD
PORTFOLIO PORTFOLIO PORTFOLIO
---------- ----------- ----------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value
(cost $78,356,871, $17,986,282 and
$13,137,100, respectively) $83,557,716 $17,428,776 $13,039,890
Cash, at value (cost $671, $885 and $1,982,
respectively) 671 885 1,982
Receivable for investment securities sold 696,042 34,881 104,337
Dividends receivable 100,017 132,902 -0-
Deferred organization expenses 16,180 14,109 -0-
Interest receivable 49 85 201,871
Total assets 84,370,675 17,611,638 13,348,080
LIABILITIES
Advisory fee payable 50,958 6,440 6,495
Payable for investment securities purchased 35,788 240,190 -0-
Accrued expenses 25,965 43,586 9,199
Total liabilities 112,711 290,216 15,694
NET ASSETS $84,257,964 $17,321,422 $13,332,386
COMPOSITION OF NET ASSETS
Capital stock, at par $6,328 $1,533 $1,195
Additional paid-in capital 75,872,338 17,299,903 12,965,832
Undistributed net investment income 37,000 450,493 285,415
Accumulated net realized gain on investment
transactions 3,041,453 126,999 177,154
Net unrealized appreciation (depreciation) of
investments 5,200,845 (557,506) (97,210)
$84,257,964 $17,321,422 $13,332,386
Shares of capital stock
outstanding 6,328,037 1,533,299 1,195,112
Net asset value per share $13.32 $11.30 $11.16
</TABLE>
See Notes to Financial Statements.
B-45
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
SHORT-TERM
PREMIER GLOBAL GROWTH AND MULTI-
GROWTH BOND INCOME MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends (net of foreign tax
withheld of $57,643, $0,
$1,267 and $0, respectively) $ 2,863,527 $ -0- $ 2,483,369 $ -0-
Interest 678,205 626,933 360,258 228,141
Total investment income 3,541,732 626,933 2,843,627 228,141
EXPENSES
Advisory fee 3,200,706 75,773 905,109 17,714
Printing 89,999 1,605 34,597 873
Custodian 61,079 31,724 48,464 32,397
Audit and legal 59,074 2,776 23,769 812
Transfer agency 514 440 458 526
Directors' fees 391 643 660 793
Administrative fee -0- -0- 21,811 -0-
Miscellaneous 4,308 383 1,413 476
Total expenses 3,416,071 113,344 1,036,281 53,591
Less: expense reimbursement (240,762) (3,662) -0- (23,485)
Net expenses 3,175,309 109,682 1,036,281 30,106
Net investment income 366,423 517,251 1,807,346 198,035
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
TRANSACTIONS
Net realized gain (loss) on
investment transactions 20,958,666 47,933 24,585,084 (7,860)
Net realized gain (loss) on foreign
currency transactions -0- 81,150 (105) 217,759
Net change in unrealized
appreciation (depreciation) of
investments 132,949,090 173,586 9,896,293 (5,538)
Net change in unrealized
appreciation (depreciation) of
foreign currency denominated
assets and liabilities -0- (124,561) (15) (189,453)
Net gain on investments 153,907,756 178,108 34,481,257 14,908
NET INCREASE IN NET
ASSETS FROM OPERATIONS $154,274,179 $ 695,359 $ 36,288,603 $ 212,943
</TABLE>
See Notes to Financial Statements.
B-46
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
U.S. GOVERNMENT/
HIGH GRADE TOTAL MONEY
SECURITIES RETURN INTERNATIONAL MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------------- --------- ------------ ---------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $ 1,207,400 $ 560,673 $ 58,133 $ 2,281,465
Dividends (net of foreign tax
withheld of $0, $81, $99,316
and $0, respectively) -0- 267,358 728,518 -0-
Total investment income 1,207,400 828,031 786,651 2,281,465
EXPENSES
Advisory fee 117,198 149,683 331,793 201,300
Custodian 31,418 32,353 69,929 35,186
Printing 2,879 5,594 8,273 5,857
Audit and legal 1,892 5,697 6,324 6,250
Directors' fees 672 756 1,061 754
Transfer agency 327 481 428 572
Administrative fee -0- -0- -0- 12,190
Miscellaneous 576 395 868 1,477
Total expenses 154,962 194,959 418,676 263,586
Less: expense reimbursement -0- -0- (103,073) -0-
Net expenses 154,962 194,959 315,603 263,586
Net investment income 1,052,438 633,072 471,048 2,017,879
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
TRANSACTIONS
Net realized gain on investment
transactions 695,983 2,663,792 923,992 124
Net realized gain (loss) on foreign
currency transactions (723) (8) 1,124,005 -0-
Net change in unrealized
appreciation (depreciation) of
investments (314,303) 1,213,374 7,931,693 -0-
Net change in unrealized
appreciation (depreciation) of
foreign currency denominated
assets and liabilities -0- -0- (684,727) -0-
Net gain on investments 380,957 3,877,158 9,294,963 124
NET INCREASE IN NET
ASSETS FROM OPERATIONS $ 1,433,395 $ 4,510,230 $ 9,766,011 $ 2,018,003
</TABLE>
See Notes to Financial Statements.
B-47
STATEMENTS OF OPERATIONS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
NORTH
GLOBAL AMERICAN
DOLLAR GOVERNMENT UTILITY
GOVERNMENT INCOME INCOME GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ----------- --------- ---------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $ 754,931 $ 1,610,056 $ 62,077 $ 312,940
Dividends (net of foreign tax
withheld of $0, $0, $2,824
and $18,693, respectively) -0- -0- 299,775 1,787,754
Total investment income 754,931 1,610,056 361,852 2,100,694
EXPENSES
Advisory fee 60,336 107,234 86,392 988,896
Custodian 28,061 57,754 25,530 46,599
Audit and legal 2,887 6,550 3,759 21,040
Amortization of organization
expenses 1,658 2,139 1,517 992
Printing 1,408 6,617 1,832 27,415
Directors' fees 736 682 391 660
Transfer agency 470 486 460 484
Administrative fee -0- -0- -0- 21,799
Miscellaneous 200 895 412 1,853
Total expenses 95,756 182,357 120,293 1,109,738
Less: expense reimbursement (19,330) (39,141) (10,892) -0-
Net expenses 76,426 143,216 109,401 1,109,738
Net investment income 678,505 1,466,840 252,451 990,956
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
TRANSACTIONS
Net realized gain (loss) on
investment transactions (177,545) 164,350 165,717 20,502,391
Net realized gain (loss) on foreign
currency transactions -0- (392,367) 131 (28,709)
Net change in unrealized
appreciation (depreciation) of
investments (1,006,861) (623,758) 1,845,018 24,222,823
Net change in unrealized
appreciation (depreciation) of
foreign currency denominated
assets and liabilities -0- (4,481) 2 (99)
Net gain (loss) on investments (1,184,406) (856,256) 2,010,868 44,696,406
NET INCREASE (DECREASE)
IN NET ASSETS FROM
OPERATIONS $ (505,901) $ 610,584 $ 2,263,319 $ 45,687,362
</TABLE>
See notes to financial statements.
B-48
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
WORLDWIDE CONSERVATIVE GROWTH
PRIVATIZATION INVESTORS INVESTORS TECHNOLOGY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends (net of foreign tax
withheld of $112,079,
$8,539, $9,505 and
$7,016, respectively) $ 821,355 $ 65,905 $ 83,364 $ 75,964
Interest 65,430 720,255 162,174 188,550
Total investment income 886,785 786,160 245,538 264,514
EXPENSES
Advisory fee 229,437 125,337 67,692 397,453
Custodian 95,744 64,881 77,474 31,074
Audit and legal 5,084 3,614 3,089 7,117
Printing 4,084 3,543 2,480 7,685
Amortization of organization
expenses 992 992 992 2,130
Directors' fees 777 1,721 619 865
Transfer agency 514 529 307 497
Miscellaneous 128 1,493 202 954
Total expenses 336,760 202,110 152,855 447,775
Less: expense reimbursement (118,794) (43,350) (67,112) (70,194)
Net expenses 217,966 158,760 85,743 377,581
Net investment income (loss) 668,819 627,400 159,795 (113,067)
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
TRANSACTIONS
Net realized gain on investment
transactions 2,300,455 431,228 392,627 3,204,514
Net realized gain (loss) on foreign
currency transactions 5,087 (13,197) (9,239) -0-
Net change in unrealized
appreciation of investments 2,664,283 1,522,473 1,858,330 16,841,420
Net change in unrealized
appreciation (depreciation) of
foreign currency denominated
assets and liabilities 5,261 460 60 -0-
Net gain on investments 4,975,086 1,940,964 2,241,778 20,045,934
NET INCREASE IN NET
ASSETS FROM OPERATIONS $ 5,643,905 $ 2,568,364 $ 2,401,573 $ 19,932,867
</TABLE>
See Notes to Financial Statements.
B-49
STATEMENTS OF OPERATIONS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
REAL ESTATE
QUASAR INVESTMENT HIGH-YIELD
PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ ------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest $ 286,088 $ 15,039 $ 322,026
Dividends (net of foreign tax
withheld of $5,486, $0
and $0, respectively) 199,644 460,041 -0-
Total investment income 485,732 475,080 322,026
EXPENSES
Advisory fee 353,886 67,786 25,918
Custodian 49,820 38,064 14,734
Audit and legal 11,886 3,127 2,302
Printing 9,404 1,228 196
Amortization of organization
expenses 2,587 1,982 -0-
Directors' fees 631 668 685
Transfer agency 422 528 483
Miscellaneous 1,100 397 813
Total expenses 429,736 113,780 45,131
Less: expense reimbursement (93,544) (42,229) (12,301)
Net expenses 336,192 71,551 32,830
Net investment income 149,540 403,529 289,196
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENT
TRANSACTIONS
Net realized gain on investment
transactions 3,856,466 152,603 176,910
Net change in unrealized
appreciation (depreciation)
of investments 4,973,491 (1,589,967) (108,768)
Net gain (loss) on investments 8,829,957 (1,437,364) 68,142
NET INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS $ 8,979,497 $ (1,033,835) $ 357,338
</TABLE>
See Notes to Financial Statements.
B-50
STATEMENTS OF CHANGES
IN NET ASSETS ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
PREMIER GROWTH PORTFOLIO GLOBAL BOND PORTFOLIO
------------------------------------- -------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS FROM
OPERATIONS
Net investment income $ 366,423 $ 595,531 $ 517,251 $ 934,603
Net realized gain (loss) on
investments and foreign
currency transactions 20,958,666 (6,667,622) 129,083 (551,283)
Net change in unrealized
appreciation (depreciation) of
investments and foreign
currency denominated assets
and liabilities 132,949,090 72,666,731 49,025 (187,415)
Net increase in net assets from
operations 154,274,179 66,594,640 695,359 195,905
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (748,382) (324,686) (359,373) (945,935)
Net realized gain on investments -0- -0- (126,325) (219,946)
CAPITAL STOCK TRANSACTIONS
Net increase 188,574,170 309,621,843 2,660,677 5,047,231
Total increase 342,099,967 375,891,797 2,870,338 4,077,255
NET ASSETS
Beginning of year 472,326,105 96,434,308 22,194,345 18,117,090
End of period (including
undistributed net investment
income of $212,983, $594,942,
$387,032 and $229,154,
respectively) $ 814,426,072 $ 472,326,105 $ 25,064,683 $ 22,194,345
</TABLE>
See Notes to Financial Statements.
B-51
STATEMENTS OF CHANGES
IN NET ASSETS (CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
GROWTH AND INCOME PORTFOLIO SHORT-TERM MULTI-MARKET PORTFOLIO
------------------------------------- -------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS FROM
OPERATIONS
Net investment income $ 1,807,346 $ 2,195,334 $ 198,035 $ 395,342
Net realized gain on investments
and foreign currency
transactions 24,584,979 27,935,671 209,899 111,719
Net change in unrealized
appreciation (depreciation) of
investments and foreign
currency denominated assets
and liabilities 9,896,278 15,634,977 (194,991) (181,535)
Net increase in net assets from
operations 36,288,603 45,765,982 212,943 325,526
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (2,226,956) (1,272,246) (630,815) (412,899)
Net realized gain on investments (28,160,219) (9,150,387) -0- -0-
CAPITAL STOCK TRANSACTIONS
Net increase (decrease) 72,164,522 88,128,841 145,054 (535,499)
Total increase (decrease) 78,065,950 123,472,190 (272,818) (622,872)
NET ASSETS
Beginning of year 250,201,595 126,729,405 6,489,432 7,112,304
End of period (including
undistributed net investment
income of $1,772,741,
$2,192,351, $40,935 and
$473,715, respectively) $ 328,267,545 $ 250,201,595 $ 6,216,614 $ 6,489,432
</TABLE>
See Notes to Financial Statements.
B-52
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
U.S. GOVERNMENT/HIGH GRADE
SECURITIES PORTFOLIO TOTAL RETURN PORTFOLIO
------------------------------------- -------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS FROM
OPERATIONS
Net investment income $ 1,052,438 $ 1,860,009 $ 633,072 $ 822,012
Net realized gain on investments
and foreign currency
transactions 695,260 242,976 2,663,784 3,789,362
Net change in unrealized
appreciation (depreciation) of
investments and foreign
currency denominated assets
and liabilities (314,303) 558,819 1,213,374 1,754,576
Net increase in net assets from
operations 1,433,395 2,661,804 4,510,230 6,365,950
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (1,873,533) (1,409,036) (828,887) (480,826)
Net realized gain on investments (214,996) (54,796) (3,824,312) (1,019,434)
CAPITAL STOCK TRANSACTIONS
Net increase 7,055,547 5,849,902 10,660,102 12,178,929
Total increase 6,400,413 7,047,874 10,517,133 17,044,619
NET ASSETS
Beginning of year 36,197,778 29,149,904 42,919,969 25,875,350
End of period (including
undistributed net investment
income of $1,039,030,
$1,860,125, $626,577
and $822,392, respectively) $ 42,598,191 $ 36,197,778 $ 53,437,102 $ 42,919,969
</TABLE>
See Notes to Financial Statements.
B-53
STATEMENTS OF CHANGES
IN NET ASSETS (CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
INTERNATIONAL PORTFOLIO MONEY MARKET PORTFOLIO
------------------------------------- -------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS FROM
OPERATIONS
Net investment income $ 471,048 $ 478,040 $ 2,017,879 $ 3,452,183
Net realized gain (loss) on
investments and foreign
currency transactions 2,047,997 1,303,323 124 (298)
Net change in unrealized
appreciation of investments
and foreign currency
denominated assets and
liabilities 7,246,966 116,846 -0- -0-
Net increase in net assets from
operations 9,766,011 1,898,209 2,018,003 3,451,885
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (1,367,666) (523,610) (2,017,879) (3,452,183)
Net realized gain on investments (2,040,979) (836,368) -0- -0-
CAPITAL STOCK TRANSACTIONS
Net increase 5,947,077 15,848,071 14,340,114 2,814,828
Total increase 12,304,443 16,386,302 14,340,238 2,814,530
NET ASSETS
Beginning of year 60,710,398 44,324,096 67,583,821 64,769,291
End of period (including
undistributed/(distributions in
excess of net investment income)
net investment income of
$(654,618), $242,000, $1,046
and $1,046, respectively) $ 73,014,841 $ 60,710,398 $ 81,924,059 $ 67,583,821
</TABLE>
See Notes to Financial Statements.
B-54
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
NORTH AMERICAN GOVERNMENT
GLOBAL DOLLAR GOVERNMENT PORTFOLIO INCOME PORTFOLIO
------------------------------------- -------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS FROM
OPERATIONS
Net investment income $ 678,505 $ 1,020,022 $ 1,466,840 $ 2,088,881
Net realized gain (loss) on
investments and foreign
currency transactions (177,545) 739,413 (228,017) 292,939
Net change in unrealized
appreciation (depreciation) of
investments and foreign
currency denominated assets
and liabilities (1,006,861) (463,672) (628,239) (243,915)
Net increase (decrease) in
net assets from operations (505,901) 1,295,763 610,584 2,137,905
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (1,020,590) (489,948) (2,126,978) (1,103,754)
Net realized gain on investments (745,193) (742,125) (285,326) -0-
CAPITAL STOCK TRANSACTIONS
Net increase 2,318,182 6,467,348 5,548,597 12,776,700
Total increase 46,498 6,531,038 3,746,877 13,810,851
NET ASSETS
Beginning of year 15,378,444 8,847,406 30,506,501 16,695,650
End of period (including
undistributed net investment
income of $670,942,
$1,013,027, $1,422,218 and
$2,082,356, respectively) $ 15,424,942 $ 15,378,444 $ 34,253,378 $ 30,506,501
</TABLE>
See Notes to Financial Statements.
B-55
STATEMENTS OF CHANGES
IN NET ASSETS (CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
UTILITY INCOME PORTFOLIO GROWTH PORTFOLIO
------------------------------------- -------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
INCREASE IN NET
ASSETS FROM OPERATIONS
Net investment income $ 252,451 $ 462,850 $ 990,956 $ 687,639
Net realized gain on investments
and foreign currency
transactions 165,848 258,014 20,473,682 15,669,717
Net change in unrealized
appreciation of investments and
foreign currency denominated
assets and liabilities 1,845,020 3,238,860 24,222,724 33,639,619
Net increase in net assets from
operations 2,263,319 3,959,724 45,687,362 49,996,975
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (467,584) (289,532) (667,879) (265,892)
Net realized gain on investments (217,903) -0- (15,606,121) (6,564,799)
CAPITAL STOCK TRANSACTIONS
Net increase 4,261,328 1,820,021 32,940,517 54,020,810
Total increase 5,839,160 5,490,213 62,353,879 97,187,094
NET ASSETS
Beginning of year 20,347,006 14,856,793 235,874,985 138,687,891
End of period (including
undistributed net investment
income of $246,306,
$461,439, $1,007,361 and
$684,284, respectively) $ 26,186,166 $ 20,347,006 $ 298,228,864 $ 235,874,985
</TABLE>
See Notes to Financial Statements.
B-56
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
WORLDWIDE PRIVATIZATION PORTFOLIO CONSERVATIVE INVESTORS PORTFOLIO
------------------------------------- -------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS FROM
OPERATIONS
Net investment income $ 668,819 $ 569,265 $ 627,400 $ 983,136
Net realized gain on investments
and foreign currency
transactions 2,305,542 2,030,990 418,031 1,295,033
Net change in unrealized
appreciation (depreciation) of
investments and foreign
currency denominated assets
and liabilities 2,669,544 (439,024) 1,522,933 469,660
Net increase in net assets from
operations 5,643,905 2,161,231 2,568,364 2,747,829
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (602,038) (348,486) (983,527) (608,412)
Net realized gain on investments (2,230,552) (421,270) (1,277,810) -0-
CAPITAL STOCK TRANSACTIONS
Net increase 3,880,717 21,619,677 6,054,518 6,327,771
Total increase 6,692,032 23,011,152 6,361,545 8,467,188
NET ASSETS
Beginning of year 41,817,965 18,806,813 30,196,381 21,729,193
End of period (including
undistributed net investment
income of $569,091,
$502,310, $616,895 and
$973,022, respectively) $ 48,509,997 $ 41,817,965 $ 36,557,926 $ 30,196,381
</TABLE>
See Notes to Financial Statements.
B-57
STATEMENTS OF CHANGES
IN NET ASSETS (CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
GROWTH INVESTORS PORTFOLIO TECHNOLOGY PORTFOLIO
------------------------------------- -------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE)
IN NET ASSETS FROM
OPERATIONS
Net investment income (loss) $ 159,795 $ 226,698 $ (113,067) $ 84,919
Net realized gain (loss) on
investments and foreign
currency transactions 383,388 1,347,406 3,204,514 (2,186,460)
Net change in unrealized
appreciation of investments and
foreign currency denominated
assets and liabilities 1,858,390 334,892 16,841,420 3,331,455
Net increase in net assets from
operations 2,401,573 1,908,996 19,932,867 1,229,914
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (214,940) (180,480) (121,060) (141,660)
Net realized gain on investments (1,371,580) (200,739) -0- -0-
CAPITAL STOCK TRANSACTIONS
Net increase 2,090,501 4,362,797 3,079,071 40,068,148
Total increase 2,905,554 5,890,574 22,890,878 41,156,402
NET ASSETS
Beginning of year 16,599,910 10,709,336 69,239,833 28,083,431
End of period (including
undistributed net investment
income/(distributions in excess
of net investment income, of
$147,020, $202,165, $(147,857)
and $86,270, respectively) $ 19,505,464 $ 16,599,910 $ 92,130,711 $ 69,239,833
</TABLE>
See Notes to Financial Statements.
B-58
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
QUASAR PORTFOLIO REAL ESTATE INVESTMENT PORTFOLIO
------------------------------------- -------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997 (A)
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS FROM
OPERATIONS
Net investment income $ 149,540 $ 59,268 $ 403,529 $ 287,942
Net realized gain on investment
transactions 3,856,466 5,195,196 152,603 79,169
Net change in unrealized
appreciation (depreciation) of
investments and foreign
currency denominated assets
and liabilities 4,973,491 79,213 (1,589,967) 1,032,461
Net increase (decrease) in net
assets from operations 8,979,497 5,333,677 (1,033,835) 1,399,572
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (58,060) (22,104) (240,978) -0-
Net realized gain on investments (6,038,261) -0- (104,773) -0-
CAPITAL STOCK TRANSACTIONS
Net increase 22,097,620 45,123,778 5,006,951 12,294,485
Total increase 24,980,796 50,435,351 3,627,365 13,694,057
NET ASSETS
Beginning of period 59,277,168 8,841,817 13,694,057 -0-
End of period (including
undistributed net investment
income of $137,000,
$45,520, $450,493 and
$287,942, respectively) $ 84,257,964 $ 59,277,168 $ 17,321,422 $ 13,694,057
</TABLE>
(a) Commencement of operations, January 9, 1997.
See Notes to Financial Statements.
B-59
STATEMENTS OF CHANGES
IN NET ASSETS (CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
HIGH-YIELD PORTFOLIO
-------------------------------------
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (A)
----------------- -----------------
INCREASE (DECREASE) IN
NET ASSETS FROM
OPERATIONS
Net investment income $ 289,196 $ 7,694
Net realized gain on
investment transactions 176,910 244
Net change in unrealized
appreciation (depreciation) of
investments and foreign
currency denominated assets
and liabilities (108,768) 11,558
Net increase in net assets
from operations 357,338 19,496
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (11,475) -0-
Net realized gain on investments -0- -0-
CAPITAL STOCK TRANSACTIONS
Net increase 11,845,168 1,121,859
Total increase 12,191,031 1,141,355
NET ASSETS
Beginning of period 1,141,355 -0-
End of period (including
undistributed net investment
income of $285,415 and
$7,694, respectively) $ 13,332,386 $ 1,141,355
(a) Commencement of operations, October 27, 1997.
See Notes to Financial Statements.
B-60
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 (UNAUDITED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
Alliance Variable Products Series Fund, Inc. (the "Fund"), was incorporated in
the State of Maryland on November 17, 1987, as an open-end series investment
company. The Fund had no operations prior to November 28, 1990. The Fund offers
nineteen separately managed pools of assets which have differing investment
objectives and policies. The Fund currently issues shares of the Premier Growth
Portfolio, Global Bond Portfolio, Growth and Income Portfolio, Short-Term
Multi-Market Portfolio, U.S. Government/High Grade Securities Portfolio, Total
Return Portfolio, International Portfolio, Money Market Portfolio, Global
Dollar Government Portfolio, North American Government Income Portfolio,
Utility Income Portfolio, Growth Portfolio, Worldwide Privatization Portfolio,
Conservative Investors Portfolio, Growth Investors Portfolio, Technology
Portfolio, Quasar Portfolio, Real Estate Investment Portfolio and High-Yield
Portfolio (the "Portfolios"). The investment objectives of each Portfolio are
as follows:
PREMIER GROWTH PORTFOLIO--seeks growth of capital rather than current income.
In pursuing its investment objective, the Premier Growth Portfolio will employ
aggressive investment policies. Since investments will be made based upon their
potential for capital appreciation, current income will be incidental to the
objective of capital growth. The Portfolio is not intended for investors whose
principal objective is assured income or preservation of capital.
GLOBAL BOND PORTFOLIO--seeks a high level of return from a combination of
current income and capital appreciation by investing in a globally diversified
portfolio of high quality debt securities denominated in the U.S. Dollar and a
range of foreign currencies.
GROWTH AND INCOME PORTFOLIO--seeks to balance the objectives of reasonable
current income and reasonable opportunities for appreciation through
investments primarily in dividend-paying common stocks of good quality.
SHORT-TERM MULTI-MARKET PORTFOLIO--seeks the highest level of current income,
consistent with what the Fund's Adviser considers to be prudent investment
risk, that is available from a portfolio of high-quality debt securities having
remaining maturities of not more than three years.
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO--seeks a high level of current
income consistent with preservation of capital by investing principally in a
portfolio of U.S. government securities and other high grade debt securities.
TOTAL RETURN PORTFOLIO--seeks to achieve a high return through a combination of
current income and capital appreciation by investing in a diversified portfolio
of common and preferred stocks, senior corporate debt securities, and U.S.
government and agency obligations, bonds and senior debt securities.
INTERNATIONAL PORTFOLIO--seeks to obtain a total return on its assets from
long-term growth of capital and from income principally through a broad
portfolio of marketable securities of established non-United States companies,
(or United States companies having their principal activities and interests
outside the United States), companies participating in foreign economies with
prospects for growth, and foreign government securities.
MONEY MARKET PORTFOLIO--seeks safety of principal, maintenance of liquidity and
maximum current income by investing in a broadly diversified portfolio of money
market securities.
GLOBAL DOLLAR GOVERNMENT PORTFOLIO--seeks a high level of current income
through investing substantially all of its assets in U.S. and non-U.S. fixed
income securities denominated only in U.S. Dollars. As a secondary objective,
the Portfolio seeks capital appreciation substantially all of the Portfolios'
assets will be invested in high yield, high risk securities that are low-rated
(i.e. below investment grade), or of comparable quality and unrated, and that
are considered to be predominantly speculative as regards the issuer capacity
to pay interest and repay principal.
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO--seeks the highest level of current
income, consistent with what the Fund's Adviser considers to be prudent
investment risk, that is available from a portfolio of debt securities issued
or guaranteed by the governments of the United States, Canada and Mexico, their
political subdivisions (including Canadian Provinces but excluding the states
of the United States), agencies, instrumentalities or authorities. The
Portfolio seeks high current yields by investing in government securities
denominated in local currency and U.S. Dollars. Normally, the Portfolio expects
to maintain at least 25% of its assets in securities denominated in the U.S.
Dollar.
UTILITY INCOME PORTFOLIO--seeks current income and capital appreciation by
investing primarily in the equity and fixed-income securities of companies in
the utilities industry. The Portfolio's investment objective and policies are
designed to take advantage of the characteristics and historical performance of
securities of utilities companies. The utilities industry consists of companies
B-61
NOTES TO FINANCIAL STATEMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
engaged in the manufacture, production, generation, provision, transmission,
sale and distribution of gas, electric energy, and communication equipment and
services, and in the provision of other utility-related goods and services.
GROWTH PORTFOLIO--seeks long-term growth of capital by investing primarily in
common stocks and other equity securities.
WORLDWIDE PRIVATIZATION PORTFOLIO--seeks long-term capital appreciation by
investing principally in equity securities issued by enterprises that are
undergoing, or have undergone, privatization. The balance of the Portfolio's
investment portfolio will include equity securities of companies that are
believed by the Fund's Adviser to be beneficiaries of the privatization process.
CONSERVATIVE INVESTORS PORTFOLIO--seeks the highest total return without, in
the view of the Fund's Adviser, undue risk to principal by investing in a
diversified mix of publicly traded equity and fixed-income securities.
GROWTH INVESTORS PORTFOLIO--seeks the highest total return consistent with what
the Fund's Adviser considers to be reasonable risk by investing in a
diversified mix of publicly traded equity and fixed-income securities.
TECHNOLOGY PORTFOLIO--seeks growth of capital through investment in companies
expected to benefit from advances in technology. The Portfolio invests
principally in a diversified portfolio of securities of companies which use
technology extensively in the development of new or improved products or
processes.
QUASAR PORTFOLIO--seeks growth of capital by pursuing aggressive investment
policies. The Portfolio invests principally in a diversified portfolio of
equity securities of any company and industry and in any type of security which
is believed to offer possibilities for capital appreciation.
REAL ESTATE INVESTMENT PORTFOLIO--seeks total return on its assets from
long-term growth of capital and from income principally through investing in a
portfolio of equity securities of issuers that are primarily engaged in or
related to the real estate industry.
HIGH-YIELD PORTFOLIO--seeks the highest level of current income available
without assuming undue risk by investing principally in high-yielding
fixed-income securities. As a secondary objective this Portfolio seeks capital
appreciation where consistent with its primary objective. Many of the
high-yielding securities in which the High-Yield Portfolio invests are rated in
the lower rating categories (i.e. below investment grade) by the nationally
recognized rating service. These securities, which are often referred to as
"junk bonds", are subject to greater risk of loss of principle and interest
than higher rated securities and are considered to be predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal.
The Fund offers and sells its shares only to separate accounts of certain life
insurance companies, for the purpose of funding variable annuity contracts and
variable life insurance policies. Sales are made without a sales charge, at
each Portfolio's net asset value per share.
The financial statements have been prepared in conformity with generally
accepted accounting principles which require management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities in the financial statements and amounts of income and expenses
during the reporting period. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the
Fund.
1. SECURITY VALUATION
Portfolio securities traded on a national securities exchange are generally
valued at the last reported sales price on such exchange on the day of
valuation or, if there was no sale on such day, the last bid price quoted on
such day. Listed securities not traded and securities traded in the
over-the-counter market, including listed debt securities whose primary market
is believed to be over-the-counter, are valued at the mean between the most
recent quoted bid and asked prices provided by the principal market makers.
Publicly traded sovereign debt obligations are typically traded internationally
on the over-the-counter market. Readily marketable sovereign debt obligations
and fixed income securities may be valued on the basis of prices provided by a
pricing service when such prices are believed by the Adviser to reflect the
fair value of such securities. Options are valued at market value or fair value
using methods determined by the Board of Directors. Restricted securities,
illiquid securities and securities for which market quotations are not readily
available are valued in good faith at fair value using methods determined by
the Board of Directors. Securities which mature in 60 days or less are valued
at amortized cost, which approximates market value, unless this method does not
represent fair value.
Securities in which the Money Market Portfolio invests are valued at amortized
cost, under which method a portfolio instrument is valued at cost and any
premium or discount is amortized on a straight-line basis to maturity.
B-62
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
2. CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies and commitments under
forward exchange currency contracts are translated into U.S. dollars at the
mean of the quoted bid and asked price of such currencies against the U.S.
dollar. Purchases and sales of portfolio securities are translated into U.S.
dollars at the rates of exchange prevailing when such securities were acquired
or sold. Income and expenses are translated into U.S. dollars at rates of
exchange prevailing when accrued.
The Portfolios isolate that portion of the results of operations resulting from
changes in foreign exchange rates on investments from the fluctuations arising
from changes in market prices of securities held.
Net realized foreign currency gains and losses represent foreign exchange gains
and losses from sales and maturities of debt securities, closed forward
exchange currency contracts, holding of foreign currencies, options on foreign
currencies, currency gains or losses realized between the trade and settlement
dates on security transactions and the difference between the amounts of
interest and dividends recorded on the Portfolio's books and the U.S. dollar
equivalent amounts actually received or paid. Net currency gains and losses
from valuing foreign currency denominated assets and liabilities at year end
exchange rates are reflected as a component of net unrealized appreciation
(depreciation) of investments and foreign currency denominated assets and
liabilities.
3. ORGANIZATION EXPENSES
Organization expenses of each Portfolio have been deferred and are being
amortized on a straight-line basis as follows: Global Dollar Government
Portfolio $16,723 through April 1999; North American Government Income
Portfolio $21,570 through April 1999; Utility Income Portfolio $15,299 through
April 1999; Growth Portfolio $10,000 through September 1999; Worldwide
Privatization Portfolio $10,000 through September 1999; Conservative Investors
Portfolio $10,000 through October 1999; Growth Investors Portfolio $10,000
through October 1999; Technology Portfolio $21,500 through January 2001; Quasar
Portfolio $26,098 through August 2001; Real Estate Investment Portfolio $20,000
through January 2002.
4. TAXES
It is the Fund's policy to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
investment company taxable income and net realized gains, if any, to
shareholders. Therefore, no provisions for federal income or excise taxes are
required.
5. INVESTMENT INCOME AND INVESTMENT TRANSACTIONS
Dividend income is recorded on the ex-dividend date. Interest income is accrued
daily. Investment transactions are accounted for on the date securities are
purchased or sold. The Fund accretes discounts as adjustments to interest
income and in the case of the Money Market Portfolio, amortizes premium as
well. Investment gains and losses are determined on the identified cost basis.
6. DIVIDENDS AND DISTRIBUTIONS
Each Portfolio declares and distributes dividends and distributions from net
investment income and net realized gains, respectively, if any, at least
annually, except for dividends on the Money Market Portfolio, which are
declared daily and paid monthly. Income dividends and capital gains
distributions to shareholders are recorded on the ex-dividend date.
Income dividends and capital gains distributions are determined in accordance
with federal tax regulations and may differ from those determined in accordance
with generally accepted accounting principles. To the extent these differences
are permanent, such amounts are reclassified within the capital accounts based
on their federal tax basis treatment; temporary differences, do not require
such reclassification.
NOTE B: ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of an investment advisory agreement, each Portfolio pays
Alliance Capital Management L.P. (the "Adviser"), an investment advisory fee,
based on average net assets at the following annual rates: Premier Growth
Portfolio, 1%; Global Bond Portfolio, .65 of 1%; Growth and Income Portfolio,
.625 of 1%; Short-Term Multi-Market Portfolio, .55 of 1%; U.S. Government/High
Grade Securities Portfolio, .60 of 1%; Total Return Portfolio, .625 of 1%;
International Portfolio, 1%; Money Market Portfolio, .50 of 1%; Global Dollar
Government Portfolio, .75 of 1%; North American Government Income Portfolio,
.65 of 1%; Utility Income Portfolio, .75 of 1%; Growth Portfolio, .75 of 1%;
Worldwide Privatization Portfolio, 1%; Conservative Investors Portfolio, .75 of
1%; Growth Investors Portfolio, .75 of 1%; Technology Portfolio, 1%; Quasar
Portfolio, 1%; Real Estate Investment Portfolio, .90 of 1%; and High-Yield
Portfolio, .75 of 1%. The fee is accrued daily and paid monthly. For the Global
Bond Portfolio, the Adviser has retained, under a sub-advisory
B-63
NOTES TO FINANCIAL STATEMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
agreement, a sub-adviser, AIGAM International Limited, an affiliate of American
International Group, Inc.
Pursuant to the Advisory Agreement the Growth & Income, Growth, and Money
Market portfolios paid $21,811, $21,799 and $12,190 respectively to the Adviser
representing the cost of certain legal and accounting services provided to the
Funds by the Adviser for the period ended June 30, 1998.
The Fund compensates Alliance Fund Services, Inc., a wholly-owned subsidiary of
the Adviser, under a Transfer Agency Agreement for providing personnel and
facilities to perform transfer agency services for the Fund. For the six
months ended June 30, 1998, the Fund paid a total of $9,000 which was allocated
evenly among the portfolios.
During the six months ended June 30, 1998, the Adviser voluntarily agreed to
waive its fee and to reimburse the additional operating expenses of each
Portfolio, except for the Premier Growth Portfolio, so that expenses did not
exceed .95% of average net assets. Expense waivers/reimbursements, if any, are
accrued daily and paid monthly. For the six months ended June 30, 1998, such
waivers/reimbursements amounted to $3,662, $23,485, $103,073, $19,330, $39,141,
$10,892, $118,794, $43,350, $67,112, $70,194, $93,544, $42,229 and $12,301 for
the Global Bond Portfolio, the Short-Term Multi-Market Portfolio, the
International Portfolio, the Global Dollar Government Portfolio, the North
American Government Income Portfolio, the Utility Income Portfolio, the
Worldwide Privatization Portfolio, the Conservative Investors Portfolio, the
Growth Investors Portfolio, the Technology Portfolio, the Quasar Portfolio, the
Real Estate Investment Portfolio and the High-Yield Portfolio, respectively. In
addition, for the period from January 1, 1998 to April 30, 1998, the Advisor
agreed to waive/reimburse the Premier Growth Portfolio expenses in the amount
of $240,762.
Brokerage commissions paid for the six months ended June 30, 1998, on
investment transactions amounted to $211,359, $260,713, $27,339, $164,611,
$7,365, $180,007, $79,617, $15,592, $17,435, $36,911, $94,869 and $17,601 for
the Premier Growth Portfolio, the Growth and Income Portfolio, the Total Return
Portfolio, the International Portfolio, the Utility Income Portfolio, the
Growth Portfolio, the Worldwide Privatization Portfolio, the Conservative
Investors Portfolio, the Growth Investors Portfolio, the Technology Portfolio,
the Quasar Portfolio and the Real Estate Investment Portfolio, respectively, of
which $5,910 was paid by the Premier Growth Portfolio and $65 was paid by the
Quasar Portfolio to Donaldson, Lufkin & Jenrette Securities Corp., an affiliate
of the Adviser.
NOTE C: INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding short-term investments)
for the six months ended June 30, 1998, were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------------------------------ ------------------------------------
STOCKS AND U.S. GOVERNMENT STOCKS AND U.S. GOVERNMENT
PORTFOLIO DEBT OBLIGATIONS AND AGENCIES DEBT OBLIGATIONS AND AGENCIES
- -------------------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Premier Growth $ 245,386,335 $ -0- $ 78,664,120 $ -0-
Global Bond 7,150,616 1,943,461 5,873,670 627,250
Growth and Income 156,211,785 3,739,620 126,603,951 -0-
Short-Term Multi-Market 670,811 -0- 870,222 -0-
U.S. Government/High Grade
Securities 10,118,831 51,522,680 10,157,759 43,338,073
Total Return 16,600,623 1,900,063 13,489,568 -0-
International 36,422,462 -0- 32,655,012 -0-
Global Dollar Government 13,374,564 -0- 12,566,836 -0-
North American Government
Income 1,776,582 -0- -0- -0-
Utility Income 4,507,148 -0- 1,643,611 -0-
Growth 88,472,861 -0- 81,338,195 -0-
Worldwide Privatization 18,042,157 -0- 14,628,033 -0-
Conservative Investors 7,155,458 8,681,642 5,436,956 5,957,244
Growth Investors 5,551,733 1,952,183 6,555,329 1,755,924
Technology 30,864,236 -0- 24,579,331 -0-
</TABLE>
B-64
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
PURCHASES SALES
------------------------------------ ------------------------------------
STOCKS AND U.S. GOVERNMENT STOCKS AND U.S. GOVERNMENT
PORTFOLIO DEBT OBLIGATIONS AND AGENCIES DEBT OBLIGATIONS AND AGENCIES
- -------------------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Quasar 40,714,534 -0- 39,657,820 -0-
Real Estate Investment 7,043,478 -0- 2,055,569 -0-
High-Yield 28,162,279 -0- 16,334,707 -0-
</TABLE>
At June 30, 1998, the cost of investments for federal income tax purposes and
the tax basis gross unrealized appreciation, depreciation and net unrealized
appreciation (depreciation) were as follows:
<TABLE>
<CAPTION>
NET
GROSS UNREALIZED UNREALIZED
------------------------------------ APPRECIATION
PORTFOLIO COST APPRECIATION DEPRECIATION (DEPRECIATION)
- -------------------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Premier Growth $ 591,903,686 $ 226,646,400 $ (3,587,087) $ 223,059,313
Global Bond 24,542,635 230,283 (169,093) 61,190
Growth and Income 289,758,438 47,842,160 (9,579,596) 38,262,564
Short-Term Multi-Market 6,391,416 3,648 (290,101) (286,453)
U.S. Government/High Grade
Securities 41,815,797 416,167 (68,825) 347,342
Total Return 48,673,911 5,739,058 (1,016,605) 4,722,453
International 63,975,668 11,008,587 (2,232,341) 8,776,246
Global Dollar Government 15,700,445 127,012 (1,232,236) (1,105,224)
North American Government
Income 33,684,893 991,194 (705,657) 285,537
Utility Income 19,936,859 6,595,992 (412,889) 6,183,103
Growth 220,635,019 84,443,717 (6,364,172) 78,079,545
Worldwide Privatization 44,655,473 8,466,161 (4,902,741) 3,563,420
Conservative Investors 33,551,744 2,890,355 (174,597) 2,715,758
Growth Investors 16,638,054 3,138,223 (203,742) 2,934,481
Technology 70,133,880 25,336,988 (3,104,319) 22,232,669
Quasar 78,356,871 9,677,387 (4,476,542) 5,200,845
Real Estate Investment 17,986,282 269,182 (826,688) (557,506)
High-Yield 13,141,253 109,458 (210,821) (101,363)
</TABLE>
At December 31, 1997, for federal income tax purposes, the Premier Growth,
Money Market, North American Government Income and Technology Portfolios had
net capital loss carryforwards of $1,518,008 (of which $714,472 expires in the
year 2004 and $803,536 expires in the year 2005), $641 (of which $343 expires
in the year 2004 and $298 expires in the year 2005), $2,290 which expires in
the year 2004, $2,125,395 (of which $355,160 expires in the year 2004 and
$1,770,235 expires in the year 2005). During the year ended December 31, 1997,
the Conservative Investors and Utility Income utilized all of the capital loss
carryforward which amounted to $33,655 and $46,396. Short-Term Multi-Market had
net capital loss carryforward of $1,130,583 (of which $5,518 expires in the
year 2000, $150,822 expires in the year 2002, $941,593 expires in the year 2003
and $32,650 expires in the year 2005).
1. FORWARD EXCHANGE CURRENCY CONTRACTS
The Global Bond, Short-Term Multi-Market, International and North American
Government Income Portfolios enter into forward exchange currency contracts in
order to hedge exposure to changes in foreign currency exchange rates on
foreign portfolio holdings. A forward exchange currency contract is a
commitment to purchase or sell a foreign currency at a future date at a
negotiated forward rate. The Portfolios may enter into contracts to deliver or
receive foreign currency it will receive from or require for its normal
investment activities. It may also use contracts in a manner intended to
protect foreign currency denominated securities from declines in value due to
unfavorable exchange rate movements. The gain or loss arising from the
difference between the original contracts and the closing of such contracts is
included in realized gain or loss on foreign currency transactions.
B-65
NOTES TO FINANCIAL STATEMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
Fluctuations in the value of forward exchange currency contracts held are
recorded for financial reporting purposes as unrealized gains or losses by the
Portfolio.
Each Portfolio's custodian will place and maintain cash not available for
investment or other liquid assets in a separate account of the Fund having a
value equal to the aggregate amount of the respective portfolios commitments
under forward exchange currency contracts entered into with respect to position
hedges.
Risks may arise from the potential inability of a counterparty to meet the
terms of a contract and from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar. The face or contract amount, in U.S.
dollars, reflects the total exposure each Portfolio has in that particular
currency contract.
At June 30, 1998, the outstanding forward exchange currency contracts were as
follows:
GLOBAL BOND PORTFOLIO:
CONTRACT VALUE ON U.S. $ UNREALIZED
AMOUNT ORIGINATION CURRENT APPRECIATION/
(000) DATE VALUE DEPRECIATION
--------- ----------- -------------- -------------
FOREIGN CURRENCY
SALE CONTRACTS
Australian Dollar,
settling 7/29/98 1,550 $ 936,309 $ 962,583 $ (26,274)
Japanese Yen,
settling 7/22/98 250,000 1,839,588 1,814,020 25,568
$ (706)
SHORT-TERM MULTI-MARKET PORTFOLIO:
CONTRACT VALUE ON U.S. $ UNREALIZED
AMOUNT ORIGINATION CURRENT APPRECIATION/
(000) DATE VALUE DEPRECIATION
--------- ----------- -------------- -------------
FOREIGN CURRENCY
SALE CONTRACTS
Deutsche Mark,
settling 8/20/98 2,979 $1,664,624 $1,657,091 $ 7,533
French Franc,
settling 7/15/98 1,769 291,231 292,814 (1,583)
Italian Lira,
settling 7/27/98 1,004 565,053 565,051 2
New Zealand Dollar,
settling 9/17/98 1,303 638,568 674,710 (36,142)
Spanish Peseta,
settling 7/14/98 3,000 19,534 19,573 (39)
Swedish Krona,
settling 8/17/98 3,438 430,720 431,867 (1,147)
$ (31,376)
INTERNATIONAL PORTFOLIO:
CONTRACT VALUE ON U.S. $ UNREALIZED
AMOUNT ORIGINATION CURRENT APPRECIATION/
(000) DATE VALUE DEPRECIATION
--------- ----------- -------------- -------------
FOREIGN CURRENCY
SALE CONTRACTS
Japanese Yen,
settling 9/24/98 360,605 $2,648,000 $2,640,641 $ 7,359
2. OPTION TRANSACTIONS
For hedging and investment purposes, the Portfolios purchase and write (sell)
put and call options on U.S. securities that are traded on U.S. securities
exchanges and over-the-counter markets.
The risk associated with purchasing an option is that the Portfolio pays a
premium whether or not the option is exercised. Additionally, the Portfolio
bears the risk of loss of premium and change in market value should the
counterparty not perform under the contract. Put and call options purchased are
accounted for in the same manner as portfolio securities. The cost of
securities acquired through the exercise of call options is increased by
premiums paid. The proceeds from securities sold through the exercise of put
options are decreased by the premiums paid.
When the Portfolio writes an option, the premium received by the Portfolio is
recorded as a liability and is subsequently adjusted to the current market
value of the option written. Premiums received from writing options
B-66
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
which expire unexercised are recorded by the Portfolio on the expiration date
as realized gains from option transactions. The difference between the premium
received and the amount paid on effecting a closing purchase transaction,
including brokerage commissions, is also treated as a realized gain, or if the
premium received is less than the amount paid for the closing purchase
transaction, as a realized loss. If a call option is exercised, the premium
received is added to the proceeds from the sale of the underlying security or
currency in determining whether the Portfolio has realized a gain or loss. If a
put option is exercised, the premium received reduces the cost basis of the
security or currency purchased by the Portfolio. The risk involved in writing
an option is that, if the option was exercised the underlying security could
then be purchased or sold by the Portfolio at a disadvantageous price.
For the six months ended June 30, 1998, the Portfolio did not engage in any
option transactions.
NOTE D: CAPITAL STOCK
There are 10,000,000,000 shares of capital stock, $.001 par value per share of
the Fund authorized. Transactions in capital stock were as follows:
PREMIER GROWTH PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------ ------------ -------------- --------------
Shares sold 9,151,166 18,381,290 $223,088,818 $348,392,336
Shares issued in
reinvestment of
dividends and
distributions 27,956 17,344 748,382 324,686
Shares redeemed (1,427,796) (2,038,212) (35,263,030) (39,095,179)
Net increase 7,751,326 16,360,422 $188,574,170 $309,621,843
GLOBAL BOND PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------ ------------ -------------- --------------
Shares sold 406,526 615,554 $ 4,592,796 $ 6,854,237
Shares issued in
reinvestment of
dividends and
distributions 43,327 107,060 485,698 1,165,881
Shares redeemed (214,015) (266,344) (2,417,817) (2,972,887)
Net increase 235,838 456,270 $ 2,660,677 $ 5,047,231
GROWTH AND INCOME PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------ ------------ -------------- --------------
Shares sold 2,296,243 4,651,201 $ 49,589,344 $ 85,220,780
Shares issued in
reinvestment of
dividends and
distributions 1,482,301 585,541 30,387,175 10,422,633
Shares redeemed (358,784) (411,208) (7,811,997) (7,514,572)
Net increase 3,419,760 4,825,534 $ 72,164,522 $ 88,128,841
B-67
NOTES TO FINANCIAL STATEMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SHORT-TERM MULTI-MARKET PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------ ------------ -------------- --------------
Shares sold 132,952 366,280 $ 1,428,543 $ 3,882,391
Shares issued in
reinvestment of
dividends 64,303 40,165 630,815 412,899
Shares redeemed (177,998) (455,606) (1,914,304) (4,830,789)
Net increase (decrease) 19,257 (49,161) $ 145,054 $ (535,499)
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------ ------------ -------------- --------------
Shares sold 735,504 870,507 $ 8,898,670 $ 10,135,743
Shares issued in
reinvestment of
dividends and
distributions 178,050 129,085 2,088,529 1,463,832
Shares redeemed (324,515) (497,164) (3,931,652) (5,749,673)
Net increase 589,039 502,428 $ 7,055,547 $ 5,849,902
TOTAL RETURN PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------ ------------ -------------- --------------
Shares sold 514,670 880,572 $ 9,239,833 $ 14,008,071
Shares issued in
reinvestment of
dividends and
distributions 274,525 97,356 4,653,200 1,500,260
Shares redeemed (178,953) (210,529) (3,232,931) (3,329,402)
Net increase 610,242 767,399 $ 10,660,102 $ 12,178,929
INTERNATIONAL PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------ ------------ -------------- --------------
Shares sold 4,940,837 5,433,762 $ 82,857,939 $ 83,558,930
Shares issued in
reinvestment of
dividends and
distributions 209,505 85,533 3,408,645 1,359,978
Shares redeemed (4,789,200) (4,454,018) (80,319,507) (69,070,837)
Net increase 361,142 1,065,277 $ 5,947,077 $ 15,848,071
B-68
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
MONEY MARKET PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------ ------------ -------------- --------------
Shares sold 224,306,095 260,121,111 $224,306,095 $260,121,111
Shares issued in
reinvestment of
dividends 2,017,879 3,452,183 2,017,879 3,452,183
Shares redeemed (211,983,860) (260,758,466) (211,983,860) (260,758,466)
Net increase 14,340,114 2,814,828 $ 14,340,114 $ 2,814,828
GLOBAL DOLLAR GOVERNMENT PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------ ------------ -------------- --------------
Shares sold 155,611 567,148 $ 2,288,484 $ 8,477,375
Shares issued in
reinvestment of
dividends and
distributions 136,882 90,285 1,765,784 1,232,073
Shares redeemed (116,158) (225,116) (1,736,086) (3,242,100)
Net increase 176,335 432,317 $ 2,318,182 $ 6,467,348
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------ ------------ -------------- --------------
Shares sold 545,226 1,306,695 $ 7,187,988 $ 16,666,170
Shares issued in
reinvestment of
dividends and
distributions 195,804 88,019 2,412,304 1,103,754
Shares redeemed (306,827) (391,062) (4,051,695) (4,993,224)
Net increase 434,203 1,003,652 $ 5,548,597 $ 12,776,700
UTILITY INCOME PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------ ------------ -------------- --------------
Shares sold 280,560 353,259 $ 4,570,216 $ 4,795,124
Shares issued in
reinvestment of
dividends and
distributions 41,319 22,136 685,488 289,532
Shares redeemed (60,205) (247,410) (994,376) (3,264,635)
Net increase 261,674 127,985 $ 4,261,328 $ 1,820,021
B-69
NOTES TO FINANCIAL STATEMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
GROWTH PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------ ------------ -------------- --------------
Shares sold 1,029,886 3,011,243 $ 25,345,483 $ 58,667,838
Shares issued in
reinvestment of
dividends and
distributions 657,801 359,699 16,274,000 6,830,691
Shares redeemed (350,366) (589,726) (8,678,966) (11,477,719)
Net increase 1,337,321 2,781,216 $ 32,940,517 $ 54,020,810
WORLDWIDE PRIVATIZATION PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------ ------------ -------------- --------------
Shares sold 296,934 1,621,182 $ 4,755,788 $ 23,165,163
Shares issued in
reinvestment of
dividends and
distributions 188,588 53,013 2,832,590 769,756
Shares redeemed (237,761) (162,366) (3,707,661) (2,315,242)
Net increase 247,761 1,511,829 $ 3,880,717 $ 21,619,677
CONSERVATIVE INVESTORS PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------ ------------ -------------- --------------
Shares sold 447,275 780,780 $ 6,069,403 $ 9,838,439
Shares issued in
reinvestment of
dividends and
distributions 171,184 48,986 2,261,337 608,412
Shares redeemed (167,675) (325,161) (2,276,222) (4,119,080)
Net increase 450,784 504,605 $ 6,054,518 $ 6,327,771
GROWTH INVESTORS PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------ ------------ -------------- --------------
Shares sold 105,805 436,739 $ 1,631,237 $ 6,003,204
Shares issued in
reinvestment of
dividends and
distributions 105,839 28,259 1,586,520 381,219
Shares redeemed (72,278) (150,934) (1,127,256) (2,021,626)
Net increase 139,366 314,064 $ 2,090,501 $ 4,362,797
B-70
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
TECHNOLOGY PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------ ------------ -------------- --------------
Shares sold 916,892 3,792,319 $ 12,402,287 $ 45,101,686
Shares issued in
reinvestment of
dividends 8,130 12,276 121,060 141,660
Shares redeemed (703,520) (437,863) (9,444,276) (5,175,198)
Net increase 221,502 3,366,732 $ 3,079,071 $ 40,068,148
QUASAR PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------ ------------ -------------- --------------
Shares sold 1,373,827 4,114,230 $ 18,999,746 $ 48,077,255
Shares issued in
reinvestment of
dividends and
distributions 471,122 1,959 6,096,321 22,104
Shares redeemed (217,788) (246,062) (2,998,447) (2,975,581)
Net increase 1,627,161 3,870,127 $ 22,097,620 $ 45,123,778
REAL ESTATE INVESTMENT PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED PERIOD ENDED SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997(A) (UNAUDITED) 1997(A)
------------ ------------ -------------- --------------
Shares sold 599,924 1,182,129 $ 7,127,944 $ 13,064,224
Shares issued in
reinvestment of
dividends and
distributions 31,720 -0- 345,750 -0-
Shares redeemed (208,476) (71,998) (2,466,743) (769,739)
Net increase 423,168 1,110,131 $ 5,006,951 $ 12,294,485
HIGH-YIELD PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
SIX MONTHS ENDED PERIOD ENDED SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997(B) (UNAUDITED) 1997(B)
------------ ------------ -------------- --------------
Shares sold 1,211,343 110,513 $ 13,248,298 $ 1,122,331
Shares issued in
reinvestment of
dividends 1,032 -0- 11,475 -0-
Shares redeemed (127,729) (47) (1,414,605) (472)
Net increase 1,084,646 110,466 $ 11,845,168 $ 1,121,859
(a) Commencement of operations, January 9, 1997.
(b) Commencement of operations, October 27, 1997.
B-71
FINANCIAL HIGHLIGHTS ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
PREMIER GROWTH PORTFOLIO
------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 ---------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $20.99 $15.70 $17.80 $12.37 $12.79 $11.38
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .01 .04 .08 .09 .03 -0-
Net realized and unrealized gain (loss)
on investment transactions 5.95 5.27 3.29 5.44 (.41) 1.43
Net increase (decrease) in net asset
value from operations 5.96 5.31 3.37 5.53 (.38) 1.43
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.03) (.02) (.10) (.03) (.01) (.01)
Distributions from net realized gains -0- -0- (5.37) (.07) (.03) (.01)
Total dividends and distributions (.03) (.02) (5.47) (.10) (.04) (.02)
Net asset value, end of period $26.92 $20.99 $15.70 $17.80 $12.37 $12.79
TOTAL RETURN
Total investment return based on
net asset value (c) 28.37% 33.86% 22.70% 44.85% (2.96)% 12.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $814,426 $472,326 $96,434 $29,278 $37,669 $13,659
Ratios to average net assets of:
Expenses, net of waivers and
reimbursements .99%(d) .95% .95% .95% .95% 1.18%
Expenses, before waivers and
reimbursements 1.07%(d) 1.10% 1.23% 1.19% 1.40% 2.05%
Net investment income (a) .11%(d) .21% .52% .55% .42% .22%
Portfolio turnover rate .13% 27% 32% 97% 38% 42%
</TABLE>
<TABLE>
<CAPTION>
GLOBAL BOND PORTFOLIO
------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 ---------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.10 $11.74 $12.15 $ 9.82 $11.33 $11.24
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .25 .54 .67 .69 .57 .77
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions .09 (.48) .01 1.73 (1.16) .43
Net increase (decrease) in net asset
value from operations .34 .06 .68 2.42 (.59) 1.20
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.17) (.57) (.84) (.09) (.62) (.85)
Distributions from net realized gains (.06) (.13) (.25) -0- (.30) (.26)
Total dividends and distributions (.23) (.70) (1.09) (.09) (.92) (1.11)
Net asset value, end of period $11.21 $11.10 $11.74 $12.15 $ 9.82 $11.33
TOTAL RETURN
Total investment return based on
net asset value (c) 3.00% .67% 6.21% 24.73% (5.16)% 11.15%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $25,065 $22,194 $18,117 $11,553 $7,298 $6,748
Ratios to average net assets of:
Expenses, net of waivers and
reimbursements .94%(d) .94% .94% .95% .95% 1.50%
Expenses, before waivers and
reimbursements .97%(d) 1.03% 1.15% 1.77% 2.05% 1.50%
Net investment income (a) 4.44%(d) 4.81% 5.76% 6.22% 6.01% 4.85%
Portfolio turnover rate 29% 257% 191% 262% 102% 125%
</TABLE>
See footnote summary on page B-80.
B-72
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
GROWTH AND INCOME PORTFOLIO
------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 ---------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $19.93 $16.40 $15.79 $11.85 $12.18 $10.99
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .13 .21 .24 .27 .10 .01
Net realized and unrealized gain (loss)
on investment transactions 2.61 4.39 3.18 3.94 (.16) 1.27
Net increase (decrease) in net asset
value from operations 2.74 4.60 3.42 4.21 (.06) 1.28
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.16) (.13) (.25) (.13) (.10) (.06)
Distributions from net realized gains (1.96) (.94) (2.56) (.14) (.17) (.03)
Total dividends and distributions (2.12) (1.07) (2.81) (.27) (.27) (.09)
Net asset value, end of period $20.55 $19.93 $16.40 $15.79 $11.85 $12.18
TOTAL RETURN
Total investment return based on
net asset value (c) 13.75% 28.80% 24.09% 35.76% (.35)% 11.69%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $328,268 $250,202 $126,729 $41,993 $41,702 $22,756
Ratios to average net assets of:
Expenses, net of waivers and
reimbursements .72%(d) .72% .82% .79% .90% 1.18%
Expenses, before waivers and
reimbursements .72%(d) .72% .82% .79% .91% 1.28%
Net investment income (a) 1.25%(d) 1.16% 1.58% 1.95% 1.71% 1.76%
Portfolio turnover rate 45% 86% 87% 150% 95% 69%
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM MULTI-MARKET PORTFOLIO
------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 ---------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.57 $10.73 $10.58 $ 9.91 $11.07 $10.77
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .32 .59 .64 .82 .47 .28
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions .04 (.11) .33 (.15) (1.16) .43
Net increase (decrease) in net asset
value from operations .36 .48 .97 .67 (.69) .71
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (1.11) (.64) (.82) -0- (.46) (.41)
Return of capital -0- -0- -0- -0- (.01) -0-
Total dividends and distributions (1.11) (.64) (.82) -0- (.47) (.41)
Net asset value, end of period $9.82 $10.57 $10.73 $10.58 $ 9.91 $11.07
TOTAL RETURN
Total investment return based on
net asset value (c) 3.37% 4.59% 9.57% 6.76% (6.51)% 6.62%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $6,217 $6,489 $7,112 $3,152 $20,921 $23,560
Ratios to average net assets of:
Expenses, net of waivers and
reimbursements .93%(d) .94% .95% .95% .94% 1.17%
Expenses, before waivers and
reimbursements 1.66%(d) 1.42% 2.09% 1.30% .99% 1.24%
Net investment income (a) 6.15%(d) 5.50% 6.03% 8.22% 6.52% 6.39%
Portfolio turnover rate 12% 222% 159% 379% 134% 210%
</TABLE>
See footnote summary on page B-80.
B-73
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO
------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 ---------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.93 $11.52 $11.66 $ 9.94 $10.72 $9.89
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .32 .68 .66 .65 .28 .43
Net realized and unrealized gain (loss)
on investment transactions .12 .29 (.39) 1.25 (.71) .48
Net increase (decrease) in net asset
value from operations .44 .97 .27 1.90 (.43) .91
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.55) (.54) (.28) (.18) (.21) (.08)
Distributions from net realized gains (.06) (.02) (.13) -0- (.14) -0-
Total dividends and distributions (.61) (.56) (.41) (.18) (.35) (.08)
Net asset value, end of period $11.76 $11.93 $11.52 $11.66 $ 9.94 $10.72
TOTAL RETURN
Total investment return based on
net asset value (c) 3.72% 8.68% 2.55% 19.26% (4.03)% 9.20%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $42,598 $36,198 $29,150 $16,947 $5,101 $1,350
Ratios to average net assets of:
Expenses, net of waivers and
reimbursements .79%(d) .84% .92% .95% .95% 1.16%
Expenses, before waivers and
reimbursements .79%(d) .84% .98% 1.58% 3.73% 5.42%
Net investment income (a) 5.39%(d) 5.89% 5.87% 5.96% 5.64% 4.59%
Portfolio turnover rate 152% 114% 137% 68% 32% 177%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN PORTFOLIO
------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 ---------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $16.92 $14.63 $12.80 $10.41 $10.97 $10.01
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .23 .39 .27 .36 .15 .15
Net realized and unrealized gain (loss)
on investment transactions 1.46 2.62 1.66 2.10 (.56) .81
Net increase (decrease) in net asset
value from operations 1.69 3.01 1.93 2.46 (.41) .96
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.29) (.23) (.07) (.07) (.09) -0-
Distributions from net realized gains (1.34) (.49) (.03) -0- (.06) -0-
Total dividends and distributions (1.63) (.72) (.10) (.07) (.15) -0-
Net asset value, end of period $16.98 $16.92 $14.63 $12.80 $10.41 $10.97
TOTAL RETURN
Total investment return based on
net asset value (c) 10.00% 21.11% 15.17% 23.67% (3.77)% 9.59%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $53,437 $42,920 $25,875 $8,242 $750 $360
Ratios to average net assets of:
Expenses, net of waivers and
reimbursements .81%(d) .88% .95% .95% .95% 1.20%
Expenses, before waivers and
reimbursements .81%(d) .88% 1.12% 4.49% 19.49% 25.96%
Net investment income (a) 2.64%(d) 2.46% 2.76% 3.16% 2.29% 1.45%
Portfolio turnover rate 30% 65% 57% 30% 83% 25%
</TABLE>
See footnote summary on page B-80.
B-74
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INTERNATIONAL PORTFOLIO
------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 ---------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $15.02 $14.89 $14.07 $12.88 $12.16 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .12 .13 .19 .18 .10 .03
Net realized and unrealized gain on
investments and foreign currency
transactions 2.25 .39 .83 1.08 .72 2.13
Net increase in net asset value
from operations 2.37 .52 1.02 1.26 .82 2.16
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.32) (.15) (.08) (.03) (.02) -0-
Distributions from net realized gains (.49) (.24) (.12) (.04) (.08) -0-
Total dividends and distributions (.81) (.39) (.20) (.07) (.10) -0-
Net asset value, end of period $16.58 $15.02 $14.89 $14.07 $12.88 $12.16
TOTAL RETURN
Total investment return based on
net asset value (c) 15.88% 3.33% 7.25% 9.86% 6.70% 21.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $73,015 $60,710 $44,324 $16,542 $7,276 $688
Ratios to average net assets of:
Expenses, net of waivers and
reimbursements .95%(d) .95% .95% .95% .95% 1.20%
Expenses, before waivers and
reimbursements 1.26%(d) 1.42% 1.91% 2.99% 7.26% 39.28%
Net investment income (a) 1.42%(d) .87% 1.29% 1.41% .90% .26%
Portfolio turnover rate 52% 134% 60% 87% 95% 85%
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 ---------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .025 .05 .05 .05 .03 .22
LESS: DIVIDENDS
Dividends from net investment income (.025) (.05) (.05) (.05) (.03) (.22)
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
TOTAL RETURN
Total investment return based on
net asset value (c) 2.52% 5.11% 4.71% 4.97% 3.27% 2.25%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $81,924 $67,584 $64,769 $28,092 $6,899 $102
Ratios to average net assets of:
Expenses, net of waivers and
reimbursements .65%(d) .64% .69% .95% .95% 1.16%
Expenses, before waivers and
reimbursements .65%(d) .64% .69% 1.07% 4.46% 68.14%
Net investment income (a) 5.01%(d) 5.00% 4.64% 4.85% 3.98% 2.15%
</TABLE>
See footnote summary on page B-80.
B-75
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
GLOBAL DOLLAR GOVERNMENT PORTFOLIO
-----------------------------------------------------------------
SIX MONTHS MAY 2, 1994(E)
ENDED YEAR ENDED DECEMBER 31, TO
JUNE 30, 1998 ------------------------------------- DECEMBER 31,
(UNAUDITED) 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $14.65 $14.32 $11.95 $ 9.84 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .61 1.17 1.10 .92 .36
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (1.04) .70 1.78 1.32 (.52)
Net increase (decrease) in net asset
value from operations (.43) 1.87 2.88 2.24 (.16)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.95) (.61) (.48) (.13) -0-
Distributions from net realized gains (.69) (.93) (.03) -0- -0-
Total dividends and distributions (1.64) (1.54) (.51) (.13) -0-
Net asset value, end of period $12.58 $14.65 $14.32 $11.95 $ 9.84
TOTAL RETURN
Total investment return based on
net asset value (c) (3.25)% 13.23% 24.90% 22.98% (1.60)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $15,425 $15,378 $8,847 $3,778 $1,146
Ratios to average net assets of:
Expenses, net of waivers and
reimbursements .95%(d) .95% .95% .95% .95%(d)
Expenses, before waivers and
reimbursements 1.19%(d) 1.29% 1.97% 4.82% 15.00%(d)
Net investment income (a) 8.43%(d) 7.87% 8.53% 8.65% 6.02%(d)
Portfolio turnover rate 81% 214% 155% 13% 9%
</TABLE>
<TABLE>
<CAPTION>
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO
-----------------------------------------------------------------
SIX MONTHS MAY 3, 1994(E)
ENDED YEAR ENDED DECEMBER 31, TO
JUNE 30, 1998 ------------------------------------- DECEMBER 31,
(UNAUDITED) 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.97 $12.38 $10.48 $ 8.79 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .58 1.07 1.26 1.13 .50
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (.33) .10 .69 .83 (1.71)
Net increase (decrease) in net asset
value from operations .25 1.17 1.95 1.96 (1.21)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.82) (.58) (.05) (.27) -0-
Distributions from net realized gains (.11) -0- -0- -0- -0-
Total dividends and distributions (.93) (.58) (.05) (.27) -0-
Net asset value, end of period $12.29 $12.97 $12.38 $10.48 $ 8.79
TOTAL RETURN
Total investment return based on
net asset value (c) 1.91% 9.62% 18.70% 22.71% (12.10)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $34,253 $30,507 $16,696 $7,278 $3,848
Ratios to average net assets of:
Expenses, net of waivers and
reimbursements .87%(d) .95% .95% .95% .95%(d)
Expenses, before waivers and
reimbursements 1.11%(d) 1.04% 1.41% 2.57% 4.43%(d)
Net investment income (a) 8.89%(d) 8.34% 11.04% 12.24% 8.49%(d)
Portfolio turnover rate -0-% 20% 4% 35% 15%
</TABLE>
See footnote summary on page B-80.
B-76
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
UTILITY INCOME PORTFOLIO
-----------------------------------------------------------------
SIX MONTHS MAY 10, 1994(E)
ENDED YEAR ENDED DECEMBER 31, TO
JUNE 30, 1998 ------------------------------------- DECEMBER 31,
(UNAUDITED) 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $15.67 $12.69 $12.01 $ 9.96 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .18 .38 .31 .30 .28
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 1.39 2.84 .62 1.83 (.32)
Net increase (decrease) in net asset
value from operations 1.57 3.22 .93 2.13 (.04)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.31) (.24) (.09) (.08) -0-
Distributions from net realized gains (.14) -0- (.16) -0- -0-
Total dividends and distributions (.45) (.24) (.25) (.08) -0-
Net asset value, end of period $16.79 $15.67 $12.69 $12.01 $ 9.96
TOTAL RETURN
Total investment return based on
net asset value (c) 10.07% 25.71% 7.88% 21.45% (.40)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $26,186 $20,347 $14,857 $6,251 $1,254
Ratios to average net assets of:
Expenses, net of waivers and
reimbursements .95%(d) .95% .95% .95% .95%(d)
Expenses, before waivers and
reimbursements 1.04%(d) 1.08% 1.51% 3.79% 15.98%(d)
Net investment income (a) 2.19%(d) 2.83% 2.61% 2.73% 4.62%(d)
Portfolio turnover rate 8% 30% 75% 138% 31%
</TABLE>
<TABLE>
<CAPTION>
GROWTH PORTFOLIO
-----------------------------------------------------------------
SEPTEMBER 15,
SIX MONTHS 1994(E)
ENDED YEAR ENDED DECEMBER 31, TO
JUNE 30, 1998 ------------------------------------- DECEMBER 31,
(UNAUDITED) 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $22.42 $17.92 $14.23 $10.53 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .09 .07 .06 .17 .03
Net realized and unrealized gain
on investment transactions 4.10 5.18 3.95 3.54 .50
Net increase in net asset value
from operations 4.19 5.25 4.01 3.71 .53
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.06) (.03) (.04) (.01) -0-
Distributions from net realized gains (1.40) (.72) (.28) -0- -0-
Total dividends and distributions (1.46) (.75) (.32) (.01) -0-
Net asset value, end of period $25.15 $22.42 $17.92 $14.23 $10.53
TOTAL RETURN
Total investment return based on
net asset value (c) 18.81% 30.02% 28.49% 35.23% 5.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $298,229 $235,875 $138,688 $45,220 $5,492
Ratios to average net assets of:
Expenses, net of waivers and
reimbursements .84%(d) .84% .93% .95% .95%(d)
Expenses, before waivers and
reimbursements .84%(d) .84% .93% 1.27% 4.19%(d)
Net investment income (a) .75%(d) .37% .35% 1.31% 1.17%(d)
Portfolio turnover rate 32% 62% 98% 86% 25%
</TABLE>
See footnote summary on page B-80.
B-77
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
WORLDWIDE PRIVATIZATION PORTFOLIO
-----------------------------------------------------------------
SEPTEMBER 23,
SIX MONTHS 1994(E)
ENDED YEAR ENDED DECEMBER 31, TO
JUNE 30, 1998 ------------------------------------- DECEMBER 31,
(UNAUDITED) 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $14.20 $13.13 $11.17 $10.10 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .23 .25 .28 .32 .10
Net realized and unrealized gain
on investments and foreign
currency transactions 1.71 1.17 1.78 .78 -0-
Net increase in net asset value
from operations 1.94 1.42 2.06 1.10 .10
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.20) (.16) (.10) (.03) -0-
Distributions from net realized gains (.74) (.19) -0- -0- -0-
Total dividends and distributions (.94) (.35) (.10) (.03) -0-
Net asset value, end of period $15.20 $14.20 $13.13 $11.17 $10.10
TOTAL RETURN
Total investment return based on
net asset value (c) 13.75% 10.75% 18.51% 10.87% 1.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $48,510 $41,818 $18,807 $5,947 $1,127
Ratios to average net assets of:
Expenses, net of waivers and
reimbursements .95%(d) .95% .95% .95% .95%(d)
Expenses, before waivers and
reimbursements 1.47%(d) 1.55% 1.85% 4.17% 18.47%(d)
Net investment income (a) 2.92%(d) 1.76% 2.26% 2.96% 4.27%(d)
Portfolio turnover rate 34% 58% 47% 23% 0%
</TABLE>
<TABLE>
<CAPTION>
CONSERVATIVE INVESTORS PORTFOLIO
-----------------------------------------------------------------
OCTOBER 28,
SIX MONTHS 1994(E)
ENDED YEAR ENDED DECEMBER 31, TO
JUNE 30, 1998 ------------------------------------- DECEMBER 31,
(UNAUDITED) 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $13.10 $12.07 $11.76 $10.07 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .25 .48 .45 .51 .06
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions .80 .86 (.01) 1.20 .01
Net increase in net asset value from
operations 1.05 1.34 .44 1.71 .07
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.38) (.31) (.09) (.02) -0-
Distributions from net realized gains (.50) -0- (.04) -0- -0-
Total dividends and distributions (.88) (.31) (.13) (.02) -0-
Net asset value, end of period $13.27 $13.10 $12.07 $11.76 $10.07
TOTAL RETURN
Total investment return based on
net asset value (c) 8.02% 11.22% 3.79% 16.99% .70%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $36,558 $30,196 $21,729 $7,420 $701
Ratios to average net assets of:
Expenses, net of waivers and
reimbursements .95%(d) .95% .95% .95% .95%(d)
Expenses, before waivers and
reimbursements 1.21%(d) 1.33% 1.40% 4.25% 20.35%(D)
Net investment income (a) 3.75%(d) 3.85% 3.93% 4.65% 3.55%(d)
Portfolio turnover rate 42% 209% 211% 61% 2%
</TABLE>
See footnote summary on page B-80.
B-78
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
GROWTH INVESTORS PORTFOLIO
-----------------------------------------------------------------
OCTOBER 28,
SIX MONTHS 1994(E)
ENDED YEAR ENDED DECEMBER 31, TO
JUNE 30, 1998 ------------------------------------- DECEMBER 31,
(UNAUDITED) 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $14.38 $12.74 $11.87 $ 9.86 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .13 .23 .24 .35 .04
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 1.91 1.83 .72 1.67 (.18)
Net increase (decrease) in net asset
value from operations 2.04 2.06 .96 2.02 (.14)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.18) (.20) (.07) (.01) -0-
Distributions from net realized gains (1.16) (.22) (.02) -0- -0-
Total dividends and distributions (1.34) (.42) (.09) (.01) -0-
Net asset value, end of period $15.08 $14.38 $12.74 $11.87 $ 9.86
TOTAL RETURN
Total investment return based on
net asset value (c) 14.21% 16.34% 8.18% 20.48% (1.40)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $19,505 $16,600 $10,709 $4,978 $321
Ratios to average net assets of:
Expenses, net of waivers and
reimbursements .95%(d) .95% .95% .95% .95%(d)
Expenses, before waivers and
reimbursements 1.69%(d) 1.70% 1.85% 6.17% 41.62%(d)
Net investment income (a) 1.77%(d) 1.72% 2.01% 3.21% 2.29%(d)
Portfolio turnover rate 47% 164% 160% 50% 3%
</TABLE>
<TABLE>
<CAPTION>
TECHNOLOGY PORTFOLIO
----------------------------------------
JANUARY 11,
SIX MONTHS 1996(E)
ENDED YEAR ENDED TO
JUNE 30, 1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net asset value, beginning of period $11.72 $11.04 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (a)(b) (.02) .02 .11
Net realized and unrealized gain on
investment transactions 3.35 .69 .93
Net increase in net asset value from
operations 3.33 .71 1.04
LESS: DIVIDENDS
Dividends from net investment income (.02) (.03) -0-
Net asset value, end of period $15.03 $11.72 $11.04
TOTAL RETURN
Total investment return based on
net asset value (c) 28.42% 6.47% 10.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $92,131 $69,240 $28,083
Ratios to average net assets of:
Expenses, net of waivers and
reimbursements .95%(d) .95% .95%(d)
Expenses, before waivers and
reimbursements 1.13%(d) 1.19% 1.62%(d)
Net investment income (loss) (a) (.28)%(d) .16% 1.17%(d)
Portfolio turnover rate 33% 46% 22%
</TABLE>
See footnote summary on page B-80.
B-79
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
QUASAR PORTFOLIO
----------------------------------------
AUGUST 5,
SIX MONTHS 1996(E)
ENDED YEAR ENDED TO
JUNE 30, 1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net asset value, beginning of period $12.61 $10.64 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .03 .02 .04
Net realized and unrealized gain
on investment transactions 1.73 1.96 .60
Net increase in net asset value
from operations 1.76 1.98 .64
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.01) (.01) -0-
Distributions from net realized gains (1.04) -0- -0-
Total dividends and distributions (1.05) (.01) -0-
Net asset value, end of period $13.32 $12.61 $10.64
TOTAL RETURN
Total investment return based on
net asset value (c) 14.20% 18.60% 6.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $84,258 $59,277 $8,842
Ratios to average net assets of:
Expenses, net of waivers and
reimbursements .95%(d) .95% .95%(d)
Expenses, before waivers and
reimbursements 1.21%(d) 1.37% 4.44%(d)
Net investment income (a) .42%(d) .17% .93%(d)
Portfolio turnover rate 65% 210% 40%
</TABLE>
<TABLE>
<CAPTION>
REAL ESTATE
INVESTMENT PORTFOLIO HIGH-YIELD PORTFOLIO
-------------------------- ------------------------
SIX MONTHS JANUARY 9, SIX MONTHS OCTOBER 27,
ENDED 1997(E) TO ENDED 1997(E) TO
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $12.34 $10.00 $10.33 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .31 .56 .46 .13
Net realized and unrealized gain (loss)
on investment transactions (1.12) 1.78 .38 .20
Net increase (decrease) in net asset
value from operations (.81) 2.34 .84 .33
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.16) -0- (.01) -0-
Distributions from net realized gains (.07) -0- -0- -0-
Total dividends and distributions (.23) -0- (.01) -0-
Net asset value, end of period $11.30 $12.34 $11.16 $10.33
TOTAL RETURN
Total investment return based on
net asset value (c) (6.49)% 23.40% 8.13% 3.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $17,321 $13,694 $13,332 $1,141
Ratios to average net assets of:
Expenses, net of waivers and
reimbursements .95%(d) .95%(d) .95%(d) .95%(d)
Expenses, before waivers and
reimbursements 1.51%(d) 2.31%(d) 1.31%(d) 8.26%(d)
Net investment income (a) 5.36%(d) 5.47%(d) 8.37%(d) 7.28%(d)
Portfolio turnover rate 14% 26% 243% 8%
</TABLE>
Footnote Summary:
(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
redemption on the last day of the period. Total investment return calculated
for a period of less than one year is not annualized.
(d) Annualized.
(e) Commencement of operations.
B-80
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND
ANNUAL REPORT
DECEMBER 31, 1997
PREMIER GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON STOCKS & OTHER INVESTMENTS-95.6%
TECHNOLOGY-23.7%
COMMUNICATIONS EQUIPMENT-7.3%
Ericsson (L.M.) Telephone Co. Cl.B (ADR) (a) 240,690 $ 8,988,267
Lucent Technologies, Inc. 69,421 5,545,002
Nokia Corp. (ADR) (b) 284,600 19,922,000
------------
34,455,269
COMPUTER HARDWARE-7.4%
COMPAQ Computer Corp. 315,500 17,806,031
Dell Computer Corp. (c) 202,900 17,049,941
------------
34,855,972
COMPUTER SOFTWARE-2.0%
Microsoft Corp. (c) 74,600 9,639,719
NETWORKING SOFTWARE-3.2%
Cisco Systems, Inc. (c) 271,700 15,164,256
SEMI-CONDUCTOR CAPITAL EQUIPMENT-0.2%
Applied Materials, Inc. (c) 22,600 680,119
SEMI-CONDUCTOR COMPONENTS-3.6%
Intel Corp. 9,800 688,144
warrants, expiring 3/14/98 (c) 278,800 13,844,162
Texas Instruments, Inc. 58,400 2,628,000
------------
17,160,306
------------
111,955,641
FINANCE-19.9%
BANKING - MONEY CENTER-1.1%
Citicorp 42,700 5,398,881
BANKING - REGIONAL-2.2%
Banc One Corp. 35,500 1,928,094
First Union Corp. 35,400 1,814,250
NationsBank Corp. 31,900 1,939,919
Norwest Corp. 122,200 4,719,975
------------
10,402,238
BROKERAGE & MONEY MANAGEMENT-5.7%
Merrill Lynch & Co., Inc. 182,200 13,289,213
Morgan Stanley, Dean Witter,
Discover and Co. 230,955 13,655,214
------------
26,944,427
INSURANCE-1.8%
American International Group, Inc. 56,850 6,182,438
Progressive Corp. 19,400 2,325,575
------------
8,508,013
MORTGAGE BANKING-3.0%
Federal National Mortgage Assn. 246,500 14,065,906
MISCELLANEOUS-6.1%
Household International, Inc. 49,000 6,250,562
MBNA Corp. 764,950 20,892,697
MGIC Investment Corp. 21,600 1,436,400
------------
28,579,659
------------
93,899,124
CONSUMER SERVICES-19.0%
AIRLINES-4.7%
KLM Royal Dutch Air 43,776 1,652,544
Northwest Airlines Corp. Cl.A (c) 135,060 6,470,218
UAL Corp. (c) 153,000 14,152,500
------------
22,275,262
BROADCASTING & CABLE-3.8%
AirTouch Communications, Inc. (c) 270,500 11,242,656
Cox Communications, Inc. Cl.A (c) 31,500 1,261,969
Tele-Communications, Inc. -
Liberty Media Group Cl.A (c) 144,937 5,267,554
------------
17,772,179
ENTERTAINMENT & LEISURE-2.5%
Walt Disney Co. 121,600 12,046,000
RESTAURANTS & LODGING-0.7%
Marriot International, Inc. 22,600 1,565,050
McDonald's Corp. 35,300 1,685,575
------------
3,250,625
RETAIL - GENERAL MERCHANDISE-7.3%
Dayton Hudson Corp. 100,800 6,804,000
Home Depot, Inc. 344,149 20,261,772
Kohl's Corp. (c) 61,200 4,169,250
Wal-Mart Stores, Inc. 86,100 3,395,569
------------
34,630,591
------------
89,974,657
HEALTH CARE-11.4%
DRUGS-8.0%
Merck & Co., Inc. 174,200 18,508,750
Pfizer, Inc. 174,600 13,018,612
Schering-Plough Corp. 98,500 6,119,313
------------
37,646,675
MEDICAL PRODUCTS-0.8%
Medtronic, Inc. 73,800 3,860,663
B-1
PREMIER GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
MEDICAL SERVICES-2.6%
United Healthcare Corp. 246,200 $12,233,062
------------
53,740,400
CONSUMER STAPLES-9.2%
COSMETICS-0.9%
Gillette Co. 41,500 4,168,156
FOOD-1.5%
Campbell Soup Co. 40,600 2,359,875
Coca-Cola Co. 69,600 4,637,100
------------
6,996,975
HOUSEHOLD PRODUCTS-0.9%
Colgate-Palmolive Co. 60,500 4,446,750
TOBACCO-5.9%
Philip Morris Cos., Inc. 613,900 27,817,344
------------
43,429,225
MULTI-INDUSTRY COMPANY-3.8%
Tyco International, Ltd. 401,800 18,106,113
ENERGY-3.1%
OIL SERVICE-3.1%
Baker Hughes, Inc. 68,000 2,966,500
Halliburton Co. 80,500 4,180,969
Schlumberger, Ltd. 90,400 7,277,200
------------
14,424,669
CAPITAL GOODS-2.5%
ELECTRICAL EQUIPMENT-0.4%
General Electric Co. 22,000 1,614,250
MISCELLANEOUS-2.1%
United Technologies Corp. 138,800 10,106,375
------------
11,720,625
SHARES OR
PRINCIPAL
AMOUNT
COMPANY (000) U.S. $ VALUE
- -------------------------------------------------------------------------
UTILITIES-2.0%
TELEPHONE UTILITY-2.0%
MCI Communications Corp. 144,300 $ 6,182,353
WorldCom, Inc. (c) 109,000 3,300,656
------------
9,483,009
CONSUMER MANUFACTURING-1.0%
AUTO & RELATED-1.0%
Ford Motor Co. 96,300 4,688,606
Total Common Stocks & Other Investments
(cost $361,311,846) 451,422,069
SHORT-TERM INVESTMENTS-3.9%
COMMERCIAL PAPER-3.6%
General Electric Capital Corp.
6.75%, 1/02/98 $17,196 17,192,776
TIME DEPOSIT-0.3%
State Street Bank and Trust Co.
5.25%, 1/02/98 1,341 1,341,000
Total Short-Term Investments
(amortized cost $18,533,776) 18,533,776
TOTAL INVESTMENTS-99.5%
(cost $379,845,622) 469,955,845
Other assets less liabilities-0.5% 2,370,260
NET ASSETS-100% $472,326,105
(a) Country of origin--Sweden.
(b) Country of origin--Finland.
(c) Non-income producing security.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-2
GLOBAL BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
AUSTRALIA-4.5%
GOVERNMENT OBLIGATION-4.5%
Queensland Treasury
6.50%, 6/14/05 (a) AU$ 1,500 $ 995,134
AUSTRIA-4.5%
GOVERNMENT OBLIGATION-4.5%
Republic of Austria
4.50%, 9/28/05 (a) JPY 110,000 1,009,372
FRANCE-8.7%
GOVERNMENT OBLIGATION-8.7%
Government of France
9.50%, 4/25/00 (a) XEU 1,600 1,940,303
GERMANY-8.9%
GOVERNMENT OBLIGATION-8.9%
Government of Germany
6.00%, 2/16/06 (a) DEM 3,400 1,984,869
ITALY-9.2%
GOVERNMENT OBLIGATION-9.2%
Republic of Italy
6.00%, 5/15/00 (a) ITL 3,500,000 2,029,763
JAPAN-9.4%
DEBT OBLIGATIONS-9.4%
European Investment Bank
3.00%, 9/20/06 (a) JPY 130,000 1,085,864
Japan Development Bank
2.875%, 12/20/06 (a) 120,000 992,571
------------
2,078,435
SPAIN-9.7%
GOVERNMENT OBLIGATION-9.7%
Government of Spain
5.25%, 1/31/03 (a) ESP 325,000 2,146,259
UNITED KINGDOM-9.8%
DEBT OBLIGATION-5.4%
International Bank for
Reconstruction & Development
7.125%, 7/30/07 (a) GBP 700 1,187,692
GOVERNMENT OBLIGATION-4.4%
U.K. Treasury Gilts
8.50%, 7/16/07 (a) 520 980,346
------------
2,168,038
UNITED STATES-33.4%
GOVERNMENT/AGENCY OBLIGATIONS-31.5%
Federal National Mortgage Assn.
2.125%, 10/09/07 (a) JPY 120,000 934,211
U.S. Treasury Notes
6.25%, 2/15/03 US$ 1,300 1,329,458
6.875%, 5/15/06 3,000 3,210,000
7.25%, 8/15/04 1,400 1,513,092
6,986,761
TIME DEPOSIT-1.9%
State Street Bank and Trust Co.
5.25%, 1/05/98 425 425,000
7,411,761
TOTAL INVESTMENTS-98.1%
(cost $21,876,330) 21,763,934
Other assets less liabilities-1.9% 430,411
NET ASSETS-100% $22,194,345
(a) Securities, or portion thereof, with an aggregate market value of
$15,286,384 have been segregated to collateralize forward exchange currency
contracts.
See Notes to Financial Statements.
B-3
GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON STOCKS & OTHER INVESTMENTS-96.6%
FINANCE-19.2%
BANKING - MONEY CENTER-5.2%
Chase Manhattan Corp. 79,600 $ 8,716,200
Citicorp 33,200 4,197,725
------------
12,913,925
BANKING - REGIONAL-3.8%
Banc One Corp. 21,200 1,151,425
First Union Corp. 118,800 6,088,500
NationsBank Corp. 37,400 2,274,388
------------
9,514,313
BROKERAGE & MONEY MANAGEMENT-2.7%
Morgan Stanley, Dean Witter, Discover and Co. 114,200 6,752,075
INSURANCE-3.7%
General Reinsurance Corp. 11,500 2,438,000
Hartford Life, Inc. Cl. A 29,900 1,354,844
PennCorp Financial Group, Inc. 40,000 1,427,500
The Hartford Financial Services Group, Inc. 30,900 2,891,081
Travelers Group, Inc. 24,000 1,293,000
------------
9,404,425
MORTGAGE BANKING-0.6%
Allstate Corp. 6.76% exchangeable note (a) 25,250 1,515,000
REAL ESTATE-0.4%
Security Capital Group, Inc. Cl.B
warrants, expiring 9/18/98 (b) 1,726 9,061
Security Capital Industrial Trust (b) 37,090 922,614
------------
931,675
MISCELLANEOUS-2.8%
Household International, Inc. 16,500 2,104,781
MBNA Corp. 75,000 2,048,438
PMI Group, Inc. 39,700 2,870,806
------------
7,024,025
------------
48,055,438
CONSUMER STAPLES-12.9%
COSMETICS-0.3%
Avon Products, Inc. 12,400 761,050
FOOD-5.8%
Anheuser-Busch Cos., Inc. 77,800 3,423,200
Campbell Soup Co. 102,800 5,975,250
General Mills, Inc. 27,500 1,969,687
Heinz (H.J.) Co. 27,500 1,397,344
Tyson Foods, Inc. Cl.A 77,200 1,582,600
------------
14,348,081
RETAIL - FOOD & DRUG-0.9%
Kroger Co. (b) 62,000 2,290,125
TOBACCO-5.9%
Philip Morris Cos., Inc. 139,750 6,332,422
RJR Nabisco Holdings Corp. 224,600 8,422,500
------------
14,754,922
------------
32,154,178
CONSUMER SERVICES-11.0%
AIRLINES-0.9%
Northwest Airlines Corp. Cl.A (b) 44,200 2,117,456
APPAREL-0.6%
Reebok International, Ltd. 54,000 1,555,875
ENTERTAINMENT & LEISURE-1.8%
Eastman Kodak Co. 23,600 1,435,175
Harley-Davidson, Inc. 38,000 1,040,250
Walt Disney Co. 21,600 2,139,750
------------
4,615,175
PRINTING & PUBLISHING-2.0%
Gannett Co., Inc. 28,400 1,755,475
Reuters Holdings Plc Cl.B (ADR) (c) 48,000 3,180,000
------------
4,935,475
RESTAURANTS & LODGING-0.7%
McDonald's Corp. 37,200 1,776,300
RETAIL - GENERAL MERCHANDISE-5.0%
Dayton Hudson Corp. 34,300 2,315,250
Federated Department Stores, Inc. (b) 63,600 2,738,775
Home Depot, Inc. 64,500 3,797,438
Sears, Roebuck & Co. 82,000 3,710,500
------------
12,561,963
------------
27,562,244
ENERGY-10.3%
DOMESTIC INTEGRATED-2.0%
USX-Marathon Group 148,000 4,995,000
DOMESTIC PRODUCERS-2.5%
Apache Corp. 97,800 3,429,112
Enron Oil & Gas Co. 44,500 942,844
Murphy Oil Corp. 18,000 975,375
Union Pacific Resources Group, Inc. 37,000 897,250
------------
6,244,581
B-4
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
INTERNATIONAL-5.0%
Mobil Corp. 61,100 $ 4,410,656
Texaco, Inc. 150,600 8,188,875
------------
12,599,531
OIL SERVICE-0.8%
Dresser Industries, Inc. 47,600 1,996,225
------------
25,835,337
HEALTH CARE-9.9%
BIOTECHNOLOGY-1.4%
Centocor, Inc. (b) 74,900 2,499,788
Genzyme Corp. (b) 36,000 996,750
------------
3,496,538
DRUGS-5.4%
American Home Products Corp. 73,700 5,638,050
Merck & Co., Inc. 56,400 5,992,500
Schering-Plough Corp. 28,900 1,795,412
------------
13,425,962
MEDICAL PRODUCTS-1.7%
Baxter International, Inc. 33,200 1,674,525
Becton, Dickinson & Co. 38,700 1,935,000
Boston Scientific Corp. (b) 16,700 766,112
------------
4,375,637
MEDICAL SERVICES-1.4%
Columbia HCA/Healthcare Corp. 28,300 838,388
PacifiCare Health Systems, Inc. Cl.B (b) 52,000 2,731,625
------------
3,570,013
------------
24,868,150
TECHNOLOGY-9.9%
COMMUNICATIONS EQUIPMENT-0.5%
DSC Communications Corp. (b) 25,100 600,831
Scientific-Atlanta, Inc. 41,000 686,750
------------
1,287,581
COMPUTER HARDWARE-1.5%
COMPAQ Computer Corp. 21,775 1,228,927
Hewlett-Packard Co. 42,100 2,631,250
------------
3,860,177
COMPUTER SERVICES-3.2%
Electronic Data Systems Corp. 52,900 2,324,294
First Data Corp. 191,000 5,586,750
------------
7,911,044
NETWORKING SOFTWARE-2.5%
Cabletron Systems, Inc. (b) 61,100 916,500
Cisco Systems, Inc. (b) 95,250 5,316,141
------------
6,232,641
SEMI-CONDUCTOR CAPITAL EQUIPMENT-0.2%
Applied Materials, Inc. (b) 16,300 490,528
SEMI-CONDUCTOR COMPONENTS-1.4%
Atmel Corp. (b) 127,300 2,366,984
Micron Technology, Inc. 19,000 494,000
National Semiconductor Corp. (b) 7,600 197,125
Texas Instruments, Inc. 7,600 342,000
------------
3,400,109
MISCELLANEOUS-0.6%
Solectron Corp. (b) 34,600 1,438,062
------------
24,620,142
CAPITAL GOODS-7.1%
ELECTRICAL EQUIPMENT-1.7%
General Electric Co. 56,800 4,167,700
ENGINEERING & CONSTRUCTION-0.5%
Fluor Corp. 33,000 1,233,375
MACHINERY-0.5%
Cooper Industries, Inc. 27,000 1,323,000
POLLUTION CONTROL-2.3%
USA Waste Services, Inc. (b) 82,600 3,242,050
Waste Management, Inc. 97,200 2,673,000
------------
5,915,050
MISCELLANEOUS-2.1%
Allied-Signal, Inc. 59,400 2,312,887
United Technologies Corp. 40,000 2,912,500
------------
5,225,387
------------
17,864,512
UTILITIES-7.1%
ELECTRIC & GAS UTILITY-2.9%
CMS Energy Corp. 43,000 1,894,687
FPL Group, Inc. 47,300 2,799,569
NIPSCO Industries, Inc. 33,500 1,656,156
Pinnacle West Capital Corp. 19,000 805,125
------------
7,155,537
TELEPHONE UTILITY-4.2%
AT&T Corp. 42,200 2,584,750
MCI Communications Corp. 61,400 2,630,606
Teleport Communications Group, Inc. Cl.A (b) 58,000 3,186,375
WorldCom, Inc. (b) 71,600 2,168,138
------------
10,569,869
------------
17,725,406
B-5
GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
BASIC INDUSTRY-3.2%
CHEMICALS-2.7%
Du Pont E.I. de Nemours & Co. 75,300 $ 4,522,706
Praxair, Inc. 48,000 2,160,000
-------------
6,682,706
CONTAINERS-0.5%
Sealed Air Corp. (b) 23,000 1,420,250
-------------
8,102,956
MULTI INDUSTRY COMPANIES-2.9%
Tyco International, Ltd. 109,200 4,920,825
U.S. Industries, Inc. 27,100 816,388
Whitman Corp. 55,000 1,433,437
-------------
7,170,650
TRANSPORTATION-1.2%
RAILROADS-1.2%
Canadian Pacific, Ltd. (d) 42,000 1,144,500
Union Pacific Corp. 28,200 1,760,738
------------
2,905,238
CONSUMER MANUFACTURING-1.1%
APPLIANCES-1.1%
Sunbeam Corp. 66,000 2,780,250
SHARES OR
PRINCIPAL
AMOUNT
COMPANY (000) U.S. $ VALUE
- -------------------------------------------------------------------------
AEROSPACE & DEFENSE-0.8%
AEROSPACE-0.8%
General Dynamics Corp. 23,000 $ 1,988,063
Total Common Stocks & Other Investments
(cost $213,266,293) 241,632,564
SHORT-TERM INVESTMENTS-3.1%
COMMERCIAL PAPER-3.0%
American Express Co.
6.25%, 1/02/98 $2,100 2,099,635
Ford Motor Credit Corp.
5.91%, 1/06/98 3,800 3,796,881
Prudential Funding Corp.
5.80%, 1/05/98 1,600 1,598,969
-------------
7,495,485
TIME DEPOSIT-0.1%
State Street Bank and Trust Co.
5.25%, 1/02/98 200 200,000
Total Short-Term Investments
(amortized cost $7,695,485) 7,695,485
TOTAL INVESTMENTS-99.7%
(cost $220,961,778) 249,328,049
Other assets less liabilities-0.3% 873,546
NET ASSETS-100% $250,201,595
(a) Exchangeable for PMI Group, Inc. common stock.
(b) Non-income producing security.
(c) Country of origin--United Kingdom.
(d) Country of origin--Canada.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-6
SHORT-TERM MULTI-MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
AUSTRALIA-2.9%
GOVERNMENT OBLIGATION-2.9%
Government of Australia
7.00%, 4/15/00 (a) AU$ 275 $ 185,483
DENMARK-5.1%
GOVERNMENT OBLIGATION-5.1%
Kingdom of Denmark
9.00%, 11/15/98 (a) DKK 2,200 333,504
FRANCE-4.1%
GOVERNMENT OBLIGATION-4.1%
Government of France
7.75%, 4/12/00 (a) FRF 1,500 267,425
GERMANY-21.2%
DEBT OBLIGATIONS-12.3%
Bayerische Landesbank
5.25%, 1/29/99 (a) US$ 300 297,563
Bremer Landesbank
Kreditanstalt Oldenburg
6.375%, 12/29/99 (a) 500 502,187
------------
799,750
GOVERNMENT OBLIGATION-8.9%
Government of Germany
5.75%, 8/22/00 (a) DEM 1,000 574,446
------------
1,374,196
ITALY-8.9%
GOVERNMENT OBLIGATION-8.9%
Republic of Italy
6.00%, 2/15/00 (a) ITL 1,000,000 579,141
NEW ZEALAND-6.8%
DEBT OBLIGATION-3.5%
International Bank for Reconstruction
& Development
7.00%, 9/18/00 (a) NZ$ 400 226,686
GOVERNMENT OBLIGATION-3.3%
Government of New Zealand
6.50%, 2/15/00 (a) 380 215,903
------------
442,589
NORWAY-4.4%
GOVERNMENT OBLIGATION-4.4%
Kingdom of Norway
9.00%, 1/31/99 (a) NOK 2,000 283,463
POLAND-4.1%
GOVERNMENT/AGENCY OBLIGATION-4.1%
Government of Poland Treasury Bill
23.05%, 9/30/98 (b) PLN 1,100 266,646
SPAIN-5.1%
GOVERNMENT OBLIGATION-5.1%
Kingdom of Spain
6.75%, 4/15/00 (a) ESP 48,000 329,510
SWEDEN-6.4%
GOVERNMENT OBLIGATION-6.4%
Kingdom of Sweden
10.25%, 5/05/00 (a) SEK 3,000 417,368
UNITED STATES-22.9%
DEBT OBLIGATIONS-13.9%
Bank Nederlandse Gemeenten NV
5.875%, 4/19/99 (a) US$ 300 299,250
Rabobank Nederland
6.25%, 12/31/99 (a) 300 300,750
Suedwest Deutsche Landesbank
5.75%, 12/20/99 (a) 300 298,312
------------
898,312
GOVERNMENT/AGENCY OBLIGATIONS-9.0%
FNMA Global
7.00%, 9/26/00 (a) NZ$ 500 283,067
U.S. Treasury Note
5.875%, 8/31/99 US$ 300 300,936
------------
584,003
------------
1,482,315
TOTAL INVESTMENTS-91.9%
(cost $6,242,555) 5,961,640
Other assets less liabilities-8.1% 527,792
NET ASSETS-100% $ 6,489,432
(a) Securities, or portion thereof, with an aggregate market value of
$5,394,058 have been segregated to collateralize forward exchange currency
contracts.
(b) Interest rate represents yield to maturity at purchase date.
See Notes to Financial Statements.
B-7
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
U.S. GOVERNMENT/AGENCY OBLIGATIONS-60.9%
U.S. TREASURY SECURITIES-50.2%
U.S. Treasury Bonds
6.125%, 11/15/27 $1,000 $ 1,027,660
6.375%, 8/15/27 500 527,345
6.625%, 2/15/27 25 27,141
U.S. Treasury Notes
5.00%, 1/31/98 3,900 3,897,543
6.25%, 2/15/07 2,750 2,837,642
7.00%, 7/15/06 4,900 5,288,913
7.125%, 9/30/99 4,480 4,586,400
------------
18,192,644
FEDERAL AGENCIES-10.7%
AID - Israel
8.00%, 11/15/01 200 214,334
Federal National Mortgage Association
7.00%, 4/01/26 1,572 1,586,970
Government National Mortgage Association
7.00%, 7/15/23 74 75,090
Overseas Private Investment Corp.
6.08%, 8/15/04 980 981,049
Student Loan Marketing Association
6.05%, 9/14/00 1,000 1,005,310
------------
3,862,753
Total U.S. Government/Agency Obligations
(cost $21,644,878) 22,055,397
CORPORATE DEBT OBLIGATIONS-18.7%
ASSET BACKED-2.7%
Chemical Master Credit Card Trust I
5.98%, 9/15/08 1,000 981,250
FINANCE-8.8%
First Union Capital
8.04%, 12/01/26 (a) 1,000 1,068,272
Ford Motor Credit Co.
6.125%, 1/09/06 500 489,026
SHARES OR
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
Goldman Sachs Group LP
7.25%, 10/01/05 (a) $ 500 $ 518,759
John Hancock Mutual Life Insurance Co.
7.375%, 2/15/24 (a) 1,000 1,049,190
Wachovia Corp.
6.375%, 4/15/03 75 75,546
------------
3,200,793
INDUSTRIAL-1.5%
International Business Machines Corp.
7.125%, 12/01/96 500 522,549
YANKEE BONDS-5.7%
Banco Santiago
7.00%, 7/18/07 1,000 1,004,788
Bridas Corp.
12.50%, 11/15/99 500 537,500
St. George Bank, Ltd.
7.15%, 10/15/05 (a) 500 515,110
------------
2,057,398
Total Corporate Debt Obligations
(cost $6,512,957) 6,761,990
SOVEREIGN DEBT OBLIGATION-1.3%
POLAND-1.3%
Republic of Poland FRN
6.6875%, 10/27/24
(cost $490,507) 500 485,625
PREFERRED STOCK-0.2%
FINANCE-0.2%
Banesto Holdings, Ltd.
10.50% c.v. Series A (a)
(cost $49,725) 1,800 56,700
SHORT-TERM INVESTMENT-17.5%
TIME DEPOSIT-17.5%
State Street Bank and Trust Co.
5.25%, 1/02/98
(cost $6,318,000) 6,318 6,318,000
TOTAL INVESTMENTS-98.6%
(cost $35,016,067) 35,677,712
Other assets less liabilities-1.4% 520,066
NET ASSETS-100% $36,197,778
(a) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At December 31,
1997, the aggregate market value of these securities amounted to $3,208,031 or
8.9% of net assets.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-8
TOTAL RETURN PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON STOCKS & OTHER INVESTMENTS-59.1%
FINANCE-11.6%
BANKING - MONEY CENTER-3.1%
Chase Manhattan Corp. 8,200 $ 897,900
Citicorp 3,400 429,888
------------
1,327,788
BANKING - REGIONAL-2.3%
Banc One Corp. 2,200 119,487
First Union Corp. 12,300 630,375
NationsBank Corp. 3,900 237,169
------------
987,031
BROKERAGE & MONEY MANAGEMENT-1.7%
Morgan Stanley, Dean Witter,
Discover and Co. 12,410 733,741
INSURANCE-2.7%
General Reinsurance Corp. 1,800 381,600
Hartford Life, Inc. Cl.A 3,200 145,000
PennCorp Financial Group, Inc. 5,100 182,006
The Hartford Financial Services Group, Inc. 3,200 299,400
Travelers Group, Inc. 2,700 145,463
------------
1,153,469
REAL ESTATE-0.0%
Security Capital Group, Inc.
warrants, expiring 9/18/98 (a) 223 1,171
MISCELLANEOUS-1.8%
Household International, Inc. 1,700 216,856
MBNA Corp. 9,300 254,006
PMI Group, Inc. 4,300 310,944
------------
781,806
------------
4,985,006
CONSUMER STAPLES-8.0%
COSMETICS-0.2%
Avon Products, Inc. 1,300 79,788
FOOD-3.5%
Anheuser-Busch Cos., Inc. 8,100 356,400
Campbell Soup Co. 11,000 639,375
General Mills, Inc. 2,900 207,712
Heinz (H.J.) Co. 2,800 142,275
Tyson Foods, Inc. Cl. A 8,200 168,100
------------
1,513,862
RETAIL-FOOD & DRUG-0.5%
Kroger Co. (a) 5,500 203,156
TOBACCO-3.8%
Philip Morris Cos., Inc. 16,400 743,125
RJR Nabisco Holdings Corp. 23,300 873,750
------------
1,616,875
------------
3,413,681
CONSUMER SERVICES-6.7%
AIRLINES-0.5%
Northwest Airlines Corp. Cl.A (a) 4,700 $225,159
APPAREL-0.3%
Reebok International, Ltd. 4,900 141,181
ENTERTAINMENT & LEISURE-1.2%
Eastman Kodak Co. 2,400 145,950
Harley-Davidson, Inc. 4,600 125,925
Walt Disney Co. 2,300 227,844
------------
499,719
PRINTING & PUBLISHING-1.3%
Gannett Co., Inc. 3,000 185,438
Reuters Holdings Plc Cl.B (ADR) (b) 5,700 377,625
------------
563,063
RESTAURANTS & LODGING-0.5%
McDonald's Corp. 4,000 191,000
RETAIL - GENERAL MERCHANDISE-2.9%
Dayton Hudson Corp. 3,600 243,000
Federated Department Stores, Inc. (a) 6,700 288,519
Home Depot, Inc. 7,500 441,562
Sears, Roebuck & Co. 6,400 289,600
------------
1,262,681
------------
2,882,803
ENERGY-6.5%
DOMESTIC INTEGRATED-1.2%
USX-Marathon Group 15,300 516,375
DOMESTIC PRODUCERS-1.6%
Apache Corp. 10,400 364,650
Enron Oil & Gas Co. 4,600 97,463
Murphy Oil Corp. 2,100 113,794
Union Pacific Resources Group, Inc. 4,000 97,000
------------
672,907
INTERNATIONAL-3.2%
Mobil Corp. 7,000 505,313
Texaco, Inc. 16,100 875,437
------------
1,380,750
OIL SERVICE-0.5%
Dresser Industries, Inc. 5,100 213,881
------------
2,783,913
B-9
TOTAL RETURN PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
HEALTH CARE-6.2%
BIOTECHNOLOGY-0.8%
Centocor, Inc. (a) 8,000 $ 267,000
Genzyme Corp. (a) 3,200 88,600
------------
355,600
DRUGS-3.4%
American Home Products Corp. 7,900 604,350
Merck & Co., Inc. 6,000 637,500
Schering-Plough Corp. 3,100 192,587
------------
1,434,437
MEDICAL PRODUCTS-1.1%
Baxter International, Inc. 3,500 176,531
Becton, Dickinson & Co. 4,000 200,000
Boston Scientific Corp. (a) 1,900 87,163
------------
463,694
MEDICAL SERVICES-0.9%
Columbia HCA/Healthcare Corp. 3,450 102,206
PacifiCare Health Systems, Inc. Cl.B (a) 5,400 283,669
------------
385,875
------------
2,639,606
TECHNOLOGY-5.9%
COMMUNICATIONS EQUIPMENT-0.3%
DSC Communications Corp. (a) 2,600 62,238
Scientific-Atlanta, Inc. 4,500 75,375
------------
137,613
COMPUTER HARDWARE-1.0%
COMPAQ Computer Corp. 2,400 135,450
Hewlett-Packard Co. 4,500 281,250
------------
416,700
COMPUTER SERVICES-1.9%
Electronic Data Systems Corp. 5,500 241,656
First Data Corp. 19,800 579,150
------------
820,806
NETWORKING SOFTWARE-1.4%
Cabletron Systems, Inc. (a) 3,300 49,500
Cisco Systems, Inc. (a) 9,900 552,544
------------
602,044
SEMI-CONDUCTOR CAPITAL EQUIPMENT-0.1%
Applied Materials, Inc. (a) 1,700 51,159
SEMI-CONDUCTOR COMPONENTS-0.8%
Atmel Corp. (a) 13,100 243,578
Micron Technology, Inc. 2,000 52,000
National Semiconductor Corp. (a) 800 20,750
Texas Instruments, Inc. 800 36,000
------------
352,328
MISCELLANEOUS-0.4%
Solectron Corp. (a) 3,800 157,937
------------
2,538,587
CAPITAL GOODS-4.4%
ELECTRICAL EQUIPMENT-1.0%
General Electric Co. 5,600 410,900
ENGINEERING & CONSTRUCTION-0.3%
Fluor Corp. 3,900 145,763
MACHINERY-0.3%
Cooper Industries, Inc. 2,200 107,800
POLLUTION CONTROL-1.4%
USA Waste Services, Inc. (a) 8,600 337,550
Waste Management, Inc. 10,000 275,000
------------
612,550
MISCELLANEOUS-1.4%
Allied-Signal, Inc. 6,800 264,775
United Technologies Corp. 4,600 334,937
------------
599,712
------------
1,876,725
UTILITIES-4.2%
ELECTRIC & GAS UTILITY-1.6%
CMS Energy Corp. 6,100 268,781
FPL Group, Inc. 5,200 307,775
NIPSCO Industries, Inc. 2,300 113,706
------------
690,262
TELEPHONE UTILITY-2.6%
AT&T Corp. 5,300 324,625
MCI Communications Corp. 6,400 274,200
Teleport Communications Group, Inc. Cl.A (a) 5,200 285,675
WorldCom, Inc. (a) 7,700 233,166
------------
1,117,666
------------
1,807,928
MULTI INDUSTRY COMPANIES-1.9%
Tyco International, Ltd. 13,200 594,825
U.S. Industries, Inc. 2,900 87,363
Whitman Corp. 5,700 148,556
------------
830,744
B-10
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
BASIC INDUSTRY-1.9%
CHEMICALS-1.7%
Du Pont E.I. de Nemours & Co. 8,100 $ 486,506
Praxair, Inc. 5,500 247,500
------------
734,006
CONTAINERS-0.2%
Sealed Air Corp. (a) 1,000 61,750
------------
795,756
CONSUMER MANUFACTURING-0.7%
APPLIANCES-0.7%
Sunbeam Corp. 7,000 294,875
TRANSPORTATION-0.6%
RAILROADS-0.6%
Canadian Pacific, Ltd. (c) 2,900 79,025
Union Pacific Corp. 3,000 187,313
------------
266,338
AEROSPACE & DEFENSE-0.5%
AEROSPACE-0.5%
General Dynamics Corp. 2,700 233,381
Total Common Stocks & Other Investments
(cost $22,156,332) 25,349,343
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS-35.5%
U.S. Treasury Notes
4.75%, 8/31/98 $2,317 $ 2,303,955
6.50%, 10/15/06 8,900 9,318,567
7.25%, 8/15/04 3,355 3,626,017
Total U.S. Government Obligations
(cost $14,932,471) 15,248,539
SHORT-TERM INVESTMENT-4.7%
TIME DEPOSIT-4.7%
State Street Bank and Trust Co.
5.25%, 1/02/98
(amortized cost $2,028,000) 2,028 2,028,000
TOTAL INVESTMENTS-99.3%
(cost $39,116,803) 42,625,882
Other assets less liabilities-0.7% 294,087
NET ASSETS-100% $42,919,969
(a) Non-income producing security.
(b) Country of origin--United Kingdom.
(c) Country of origin--Canada.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-11
INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON STOCKS & OTHER INVESTMENTS-92.1%
ARGENTINA-0.6%
Telecom Argentina, SA (ADR) 10,000 $ 357,500
AUSTRALIA-1.0%
Coca Cola Amatil, Ltd. 27,171 203,048
Normandy Mining, Ltd. 193,108 187,528
Qantas Airways, Ltd. 14,362 25,423
Woolworths, Ltd. 50,963 170,394
------------
586,393
BELGIUM-0.5%
Barco NV 1,790 328,520
BRAZIL-0.6%
Dixie Toga, SA pfd. 11,800 6,027
Telecomunicacoes Brasileiras SA (ADR) 3,000 349,312
------------
355,339
DENMARK-1.2%
Sophus Berendsen AS Cl.B 4,384 722,999
FINLAND-5.1%
Enso OY 32,000 247,737
Nokia AB OY Corp. Series A pfd. 28,700 2,037,608
Orion-Yhtymae OY Series B 31,626 835,477
------------
3,120,822
FRANCE-9.6%
Banque Nationale de Paris 14,757 784,376
Sanofi, SA 15,250 1,697,682
SGS-Thomson Microelectronics (a) 4,200 259,948
Societe Generale 8,403 1,144,880
Societe Nacionale Elf Aquitaine, SA (b) 6,811 792,174
Total, SA (ADR) 1,270 70,485
Total, SA Cl.B 10,154 1,105,071
------------
5,854,616
GERMANY-3.7%
Adidas AG 5,530 727,312
Merck KG 11,754 382,228
ProSieben Media AG pfd. (a) 24,547 1,146,195
------------
2,255,735
HONG KONG-8.5%
Cheung Kong Holdings, Ltd. 88,400 578,952
Citic Pacific, Ltd. 41,000 162,963
Dickson Concepts International, Ltd. 63,000 91,870
Guangshen Railway Co., Ltd. (ADR) (a) 6,700 90,031
Henderson Land Development Co., Ltd. 117,000 551,103
HSBC Holdings Plc. 51,000 1,257,066
Hutchison Whampoa, Ltd. 177,000 1,110,105
Hysan Development Co., Ltd
warrants, expiring 4/30/98 (a) 500 3
Sun Hung Kai Properties, Ltd. 167,000 1,163,763
Television Broadcasting, Ltd. 51,000 145,451
------------
5,151,307
INDIA-0.3%
Industrial Credit & Investment Corp. 2,000 25,200
Industrial Credit & Investment Corp. (GDR) (c) 5,000 63,000
State Bank of India (GDR) (c) 2,400 42,600
Videsh Sanchar Nigam, Ltd. (GDR) (c) 1,900 26,030
------------
156,830
INDONESIA-0.2%
PT Indosat (ADR) 56,000 103,855
ITALY-3.6%
Credito Italiano 448,350 1,382,561
Telecom Italia SpA 126,778 809,831
------------
2,192,392
JAPAN-20.5%
Advantest Corp. 14,200 804,779
Bank of Tokyo-Mitsubishi 48,200 664,471
Bridgestone Corp. 30,000 650,226
Canon, Inc. 30,000 698,476
Dai Nippon Printing Co., Ltd. 7,000 131,347
Daito Trust Construction Co., Ltd. 69,600 424,839
Fuji Photo Film Co. 3,000 114,881
Fujitsu, Ltd. 55,000 589,722
Honda Motor Co. 27,000 990,503
Hoya Corp. 12,000 376,809
Japan Tobacco, Inc. 71 503,531
Kokuyo 6,000 103,393
Nintendo Co., Ltd. 9,900 970,514
Rohm Co., Ltd. 8,000 814,888
Santen Pharmaceutical Co., Ltd. 24,100 276,863
Shimano, Inc. 11,000 202,190
Shiseido Co., Ltd. 20,000 272,651
Sony Corp. 10,000 888,412
Sumitomo Electric Industries 22,000 299,916
Sumitomo Realty & Development Co., Ltd. 47,000 269,970
Takeda Chemical Industries 3,000 85,471
TDK Corp. 11,000 828,981
Tokai Bank 156,000 726,415
Yamanouchi Pharmaceutical Co., Ltd. 35,000 750,555
------------
12,439,803
B-12
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
MEXICO-1.2%
Fomento Ecomo, SA 52,000 $ 415,588
Pan American Beverage, Inc. Cl.A 10,000 326,250
------------
741,838
NETHERLANDS-6.6%
AKZO Nobel NV 9,320 1,606,920
ING Groep NV 27,700 1,166,661
KLM Royal Dutch Air NV 32,670 1,208,419
------------
3,982,000
PHILIPPINES-0.1%
Manila Electric Co. Cl.B 21,359 70,669
RUSSIA-0.3%
Lukoil Holding (ADR) 2,190 199,290
SINGAPORE-0.3%
Singapore Press Holdings, Ltd. 16,000 200,297
SOUTH KOREA-0.3%
SK Telecom Co., Ltd. (ADR) 25,061 162,903
SWEDEN-3.8%
Abb AB 62,333 737,957
Ericsson (L.M.) Telecom Series B 20,748 780,019
Sparbanken Sverige AB Series A 34,100 775,205
------------
2,293,181
SHARES OR
PRINCIPAL
AMOUNT
COMPANY (000) U.S. $ VALUE
- -------------------------------------------------------------------------
SWITZERLAND-11.9%
Ciba Specialty Chemicals AG (a) 16,986 $ 2,022,696
Nestle, SA 1,264 1,893,578
Novartis AG (ADR) (a) 1,131 1,834,431
Sair Group 452 618,669
Zurich Versicherungs-Gesellschaft 1,848 880,241
------------
7,249,615
UNITED KINGDOM-12.2%
Bass Plc. 41,260 641,805
BPB Plc. 145,100 810,311
Compass Group Plc. 89,500 1,101,058
Diageo Plc. 137,620 1,259,048
Guardian Royal Exchange Plc. 158,912 863,300
Ladbroke Group Plc . 362,608 1,572,341
Tomkins Plc. 82,310 389,359
United Assurance Group Plc. 87,515 754,653
------------
7,391,875
Total Common Stocks & Other Investments
(cost $55,073,226) 55,917,779
SHORT-TERM INVESTMENT-5.9%
TIME DEPOSIT-5.9%
State Street Bank and Trust Co.
5.25%, 1/02/98
(amortized cost $3,583,000) $3,583 3,583,000
TOTAL INVESTMENTS-98.0%
(cost $58,656,226) 59,500,779
Other assets less liabilities-2.0% 1,209,619
NET ASSETS-100% $60,710,398
(a) Non-income producing security.
(b) Securities, or portion thereof, with an aggregate market value of $639,694
have been segregated to collateralize forward exchange currency contracts.
(c) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At December 31,
1997, the aggregate market value of these securities amounted to $131,630 or
.22% of net assets.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-13
MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
COMMERCIAL PAPER-57.3%
Associates Corp. of North America
5.74%, 3/16/98 $3,000 $ 2,964,603
Bank of New York
5.72%, 2/11/98 3,000 2,980,457
Cregem North America, Inc.
5.56%, 2/23/98 1,500 1,487,722
General Electric Capital Corp.
5.59%, 2/25/98 2,600 2,577,795
General Re Corp.
5.88%, 2/27/98 3,000 2,972,070
Glencore Finance, Ltd.
5.58%, 2/04/98 2,600 2,586,298
IMI Funding Corp. (USA)
5.55%, 2/17/98 2,000 1,985,508
JES Developments, Inc.
6.00%, 2/02/98 (a) 3,000 2,984,000
Koch Industries, Inc.
6.75%, 1/02/98 (a) 2,800 2,799,475
Merrill Lynch & Co., Inc.
5.74%, 3/17/98 2,000 1,976,083
Morgan Stanley Group, Inc.
5.75%, 2/25/98 3,000 2,973,646
Motorola Credit Corp.
5.70%, 3/10/98 3,000 2,967,700
National City Corp.
5.85%, 2/13/98 3,000 2,979,038
National Rural Cooperative Finance
5.70%, 3/19/98 1,555 1,536,042
Texaco, Inc.
5.75%, 3/12/98 3,000 2,966,458
Total Commercial Paper
(amortized cost $38,736,895) 38,736,895
U.S. GOVERNMENT AND AGENCY OBLIGATIONS-25.8%
Federal Home Loan Mortgage Corp.
5.60%, 3/06/98 3,000 2,970,133
5.63%, 3/09/98 2,000 1,979,044
5.65%, 2/19/98 2,000 1,984,619
Federal National Mortgage Assn.
5.57%, 4/13/98 2,077 2,044,222
5.60%, 3/20/98 1,500 1,481,800
5.63%, 3/13/98 2,000 1,977,793
5.65%, 2/18/98 3,000 2,977,400
5.74%, 1/27/98 2,000 1,991,709
Total U.S. Government and Agency Obligations
(amortized cost $17,406,720) 17,406,720
BANK OBLIGATIONS-7.4%
Bankers Trust FRN
6.06%, 2/17/98 2,000 2,000,000
Fifth Third Bank
5.85%, 1/15/98 3,000 2,999,810
Total Bank Obligations
(amortized cost $4,999,810) 4,999,810
PROMISSORY NOTE-4.4%
Goldman Sachs Group LP
5.875%, 5/27/98
(amortized cost $3,000,000) 3,000 3,000,000
CERTIFICATE OF DEPOSIT-4.4%
Morgan Guarantee Trust Co.
5.74%, 3/04/98
(amortized cost $2,999,496) 3,000 2,999,496
TOTAL INVESTMENTS-99.3%
(cost $67,142,921) 67,142,921
Other assets less liabilities-0.7% 440,900
NET ASSETS-100% $67,583,821
(a) Securities issued in reliance on Section (4) 2 or Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions exempt
from registration, normally to qualified institutional buyers. These securities
have been determined by the Adviser to be liquid pursuant to procedures
adopted by the Trustees. At December 31, 1997, the aggregate market value of
these securities amounted to $5,783,475 or 8.6% of net assets.
See Notes to Financial Statements.
B-14
GLOBAL DOLLAR GOVERNMENT PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
SOVEREIGN DEBT OBLIGATIONS-74.9%
NON-COLLATERALIZED BRADY BONDS-32.0%
BRAZIL-13.2%
Republic of Brazil C Bonds
4.50%, 4/15/14 (a) $1,596 $ 1,257,137
Republic of Brazil FRN
6.75%, 4/15/12 1,020 775,200
-------------
2,032,337
BULGARIA-3.2%
Republic of Bulgaria FLIRB
2.25%, 7/28/12 (b) 800 488,000
PERU-4.0%
Republic of Peru FLIRB
3.25%, 3/07/17 (b) (c) 500 296,250
Republic of Peru PDI
4.00%, 3/07/17 (c) 500 328,750
-------------
625,000
POLAND-3.4%
Republic of Poland PDI
4.00%, 10/27/14 (b) 600 519,750
VENEZUELA-8.2%
Republic of Venezuela
9.25%, 9/15/27 946 850,690
Republic of Venezuela FLIRB FRN
6.75%, 3/31/07 452 407,142
-------------
1,257,832
Total Non-Collateralized Brady Bonds
(cost $4,883,507) 4,922,919
OTHER SOVEREIGN DEBT-25.8%
ARGENTINA-6.1%
Province of Tucuman
9.45%, 8/01/04 (c) 964 944,999
MEXICO-8.2%
United Mexican States
9.875%, 1/15/07 1,200 1,254,000
PANAMA-0.5%
Republic of Panama IRB
3.75%, 7/17/14 (b) (c) 100 76,250
RUSSIA-7.8%
Russian IAN FRN
6.7188%, 12/02/15 (c) 637 452,568
Russian Principal Loans
2.6875%, 12/15/20 (b) 1,200 745,500
-------------
1,198,068
TRINIDAD & TOBAGO-0.4%
Republic of Trinidad & Tobago
11.75%, 10/03/04 50 60,150
VENEZUELA-2.8%
Republic of Venezuela
6.8125%, 12/18/07 476 427,381
Total Other Sovereign Debt
(cost $3,973,220) 3,960,848
COLLATERALIZED BRADY BONDS-17.1%
ARGENTINA-4.5%
Republic of Argentina Euro Par Bonds FRN
5.50%, 3/31/23 710 522,290
Republic of Argentina FRN
6.6875%, 3/31/05 192 172,080
-------------
694,370
ECUADOR-4.3%
Republic of Ecuador Discount Bonds, FRN
6.6875%, 2/28/25 880 664,400
JORDAN-4.5%
Republic of Jordan
5.00%, 12/23/23 1,000 690,000
PANAMA-3.8%
Republic of Panama PDI FRN
4.00%, 7/17/16 (c) 719 584,177
Total Collateralized Brady Bonds
(cost $2,643,200) 2,632,947
Total Sovereign Debt Obligations
(cost $11,499,927) 11,516,714
CORPORATE DEBT OBLIGATIONS-22.2%
INDUSTRIAL-2.0%
Impsat Corp.
12.125%, 7/15/03 300 303,000
TELEPHONE-1.7%
Interamericas Communications
14.00%, 10/27/07 (c) (d) 100 100,250
Iridium Capital Corp. LLC
14.00%, 7/15/05 (c) (e) 150 162,750
-------------
263,000
TRANSPORTATION-1.0%
Navigator Gas Transport Plc
10.50%, 6/30/07 (c) 150 159,750
B-15
GLOBAL DOLLAR GOVERNMENT PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
YANKEE BONDS-17.5%
Banco Nacional
11.25%, 5/30/06 (c) $400 $ 444,000
Cantv Finance Ltd.
9.25%, 2/01/04 500 500,000
Conecel
14.00%, 5/01/02 (c) 400 408,052
14.00%, 5/01/02 250 255,032
Innova S de R.L.
12.875%, 4/01/07 (c) 500 506,250
Russian Ministry of Finance
10.00%, 6/26/07 (c) 600 556,950
Transportacion Maritima Mexicana SA
9.25%, 5/15/03 12 11,850
------------
2,682,134
Total Corporate Debt Obligations
(cost $3,497,156) 3,407,884
SHORT-TERM INVESTMENT-2.0%
TIME DEPOSIT-2.0%
State Street Bank and Trust Co.
5.25%, 1/02/98
(cost $315,000) $315 $ 315,000
TOTAL INVESTMENTS-99.1%
(cost $15,312,083) 15,239,598
Other assets less liabilities-0.9% 138,846
NET ASSETS-100% $15,378,444
(a) Coupon consists of 4.5% cash payment and 3.5% paid in kind.
(b) Coupon will increase periodically based upon a predetermined schedule.
Stated interest rate in effect at December 31, 1997.
(c) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At December 31,
1997, the aggregate market value of these securities amounted to $5,020,996 or
32.6% of net assets.
(d) Security trades with warrants expiring in October 2007.
(e) Indicates a security that has a zero coupon that remains in effect until a
predetermined date at which time the stated coupon rate becomes effective until
final maturity.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-16
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
ARGENTINA-13.6%
GOVERNMENT OBLIGATIONS-13.6%
Republic of Argentina
Pensioner-Bocon Pre I FRN
3.241%, 4/01/01 ARS 281 $ 246,222
Pensioner-Bocon Pre III FRN
2.43%, 9/01/02 62 49,389
Supplier-Bocon Pro I FRN
3.19%, 4/01/07 5,518 3,846,029
------------
4,141,640
CANADA-7.3%
GOVERNMENT/AGENCY OBLIGATIONS-7.3%
Government of Canada
6.50%, 6/01/04 CA$ 850 625,915
Province of British Columbia
8.00%, 9/08/23 400 345,096
Province of Manitoba
7.75%, 12/22/25 450 381,353
Province of Ontario
8.25%, 12/01/05 275 222,456
Province of Quebec
7.75%, 3/30/06 325 253,691
Province of Saskatchewan
9.60%, 2/04/22 400 396,375
------------
2,224,886
MEXICO-19.0%
GOVERNMENT/AGENCY OBLIGATIONS-19.0%
Mexican Treasury Bills (a)
19.99%, 7/02/98 MXP 7,369 829,946
21.38%, 8/27/98 5,120 561,033
22.85%, 6/04/98 17,729 2,026,237
23.16%, 5/07/98 6,097 706,686
23.86%, 4/02/98 13,687 1,615,234
25.00%, 12/17/98 696 72,484
------------
5,811,620
UNITED STATES-59.8%
FEDERAL AGENCY-25.6%
Federal Home Loan Bank
7.26%, 9/06/01 (b) US$ 200 208,718
Federal Home Loan Mortgage Corp.
6.00%, 1/02/98 3,500 3,499,417
6.13%, 8/19/99 (b) 150 150,774
Federal National Mortgage Association
5.05%, 11/10/98 (b) 305 303,094
5.70%, 1/05/98 3,500 3,497,783
Government National Mortgage Association
9.00%, 9/15/24 137 146,661
------------
7,806,447
U.S. TREASURY SECURITIES-23.0%
U.S. Treasury Notes (b)
6.25%, 10/31/01 1,300 1,322,139
6.50%, 4/30/99 85 85,916
7.00%, 7/15/06 2,400 2,590,488
7.125%, 9/30/99 320 327,600
7.25%, 8/15/04 2,500 2,701,950
------------
7,028,093
TIME DEPOSIT-11.2%
State Street Bank and Trust Co.
5.25%, 1/02/98 3,398 3,398,000
------------
18,232,540
TOTAL INVESTMENTS-99.7%
(cost $29,501,391) 30,410,686
Other assets less liabilities-0.3% 95,815
NET ASSETS-100% $30,506,501
(a) Interest rate represents annualized yield to maturity at purchase date.
(b) Securities, or portion thereof, with an aggregate market value of
$7,690,679 have been segregated to collateralize forward exchange currency
contracts .
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-17
UTILITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON & PREFERRED STOCKS-92.0%
UNITED STATES INVESTMENTS-81.6%
UTILITIES-61.1%
ELECTRIC & GAS UTILITY-38.9%
AGL Resources, Inc. 6,100 $ 124,669
Allegheny Power, Inc. 23,500 763,750
American Electric Power, Inc. 16,900 872,462
CINergy Corp. 22,100 846,706
CMS Energy Corp. 18,400 810,750
DPL, Inc. 14,000 402,500
Edison International 22,000 598,125
FPL Group, Inc. 15,600 923,325
KeySpan Energy Corp. 4,600 169,338
MCN Corp. 4,600 185,725
New Jersey Resources Corp. 4,400 176,275
NIPSCO Industries, Inc. 18,200 899,762
Northwest Natural Gas Co. 5,250 163,734
Pacific Enterprises 4,100 154,263
People's Energy Corp. 3,600 141,750
Pinnacle West Capital Corp. 12,500 529,687
Questar Corp. 3,500 156,188
------------
7,919,009
TELEPHONE UTILITY-21.2%
Ameritech Corp. 4,700 378,350
AT&T Corp. 12,560 769,300
Bell Atlantic Corp. 6,400 582,400
BellSouth Corp. 7,400 416,713
Frontier Corp. 21,000 505,312
GTE Corp. 10,500 548,625
Teleport Communications Group, Inc.(a) 13,600 747,150
WorldCom, Inc. (a) 12,000 363,375
------------
4,311,225
MISCELLANEOUS-1.0%
AES Corp. (a) 4,400 205,150
------------
12,435,384
CONSUMER SERVICES-13.0%
BROADCASTING & CABLE-9.2%
AirTouch Communications, Inc. Cl.C
4.25% cv. pfd. 10,100 629,356
Comcast Corp. Cl.A 18,000 567,563
TCI Communications, Inc. Series A
$2.125 cv. pfd. 6,200 403,775
Telephone and Data Systems, Inc. 6,000 279,375
------------
1,880,069
ENTERTAINMENT & LEISURE-3.8%
Cablevision Systems Corp.
8.5% cv. pfd. 20,000 $770,000
------------
2,650,069
ENERGY-6.0%
DOMESTIC PRODUCERS-3.9%
The Williams Cos., Inc.
3.50% pfd. 4,700 625,687
Washington Gas Light Co. 5,600 173,250
------------
798,937
PIPELINES-2.1%
Enron Corp. 5,800 241,063
Piedmont Natural Gas Co., Inc. 5,100 183,281
------------
424,344
------------
1,223,281
MULTI INDUSTRY COMPANIES-1.5%
Southwest Gas Corp. 7,000 130,813
Wicor, Inc. 3,500 162,531
------------
293,344
Total United States Investments
(cost $12,417,110) 16,602,078
FOREIGN INVESTMENTS-10.4%
BRAZIL-3.6%
Companhia Energetica de Minas Gerais (ADR) 1,600 64,800
Companhia Paranaense de Energia-Copel pfd. 4,700 64,331
Companhia Riograndense de Telecom pfd. (a) 129,000 158,931
Telecomunicacoes Brasileiras, SA(ADR) 3,800 442,463
------------
730,525
FINLAND-0.8%
Nokia Corp. (ADR) 2,500 175,000
MEXICO-1.7%
Telefonos de Mexico, SA Series L (ADR) 6,200 347,588
PERU-0.7%
Telefonica del Peru, SA Cl.B (ADR) 62,000 138,561
PHILIPPINES-0.7%
Philippine Long Distance Telephone Co.
Series III
3.50% cv. pfd. (GDS) 6,000 135,000
SOUTH KOREA-0.7%
Korea Electric Power Corp. 4,020 36,761
SK Telecom Co., Ltd. (ADR) 15,244 99,086
------------
135,847
B-18
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SHARES OR
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
SWEDEN-1.0%
Ericsson (L.M.) Telephone Co. Cl.B (ADR) 5,600 $ 209,125
VENEZUELA-1.2%
Compania Anonima Nacional Telefonos
de Venezuela 5,800 241,425
Total Foreign Investments
(cost $1,967,429) 2,113,071
Total Common & Preferred Stocks
(cost $14,384,539) 18,715,149
CORPORATE BOND-0.6%
International Cabletel, Inc.
7.25%, 4/15/05
(cost $124,200) $115 131,675
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
SHORT-TERM INVESTMENTS-7.2%
COMMERCIAL PAPER-7.2%
General Electric Capital Corp.
5.65%, 1/02/98 459 458,928
6.10%, 1/02/98 300 299,949
6.10%, 1/05/98 400 399,729
Prudential Funding Corp.
5.50%, 1/02/98 300 299,954
Total Short-Term Investments
(amortized cost $1,458,560) 1,458,560
TOTAL INVESTMENTS-99.8%
(cost $15,967,299) 20,305,384
Other assets less liabilities-0.2% 41,622
NET ASSETS-100% $20,347,006
(a) Non-income producing security.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-19
GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON STOCKS & OTHER INVESTMENTS-96.1%
FINANCE-26.0%
BANKING - MONEY CENTER-4.0%
Automatic Common Exchange Security Trust II 25,000 $ 587,500
Chase Manhattan Corp. 43,920 4,809,240
NationsBank Corp. 22,000 1,337,875
Newcourt Credit Group, Inc. (a) 35,000 1,150,625
The CIT Group, Inc. Cl. A (a) 52,000 1,677,000
------------
9,562,240
BANKING - REGIONAL-1.3%
First Union Corp. 44,000 2,255,000
Fleet Financial Group, Inc. 9,500 711,906
------------
2,966,906
BROKERAGE & MONEY MANAGEMENT-0.8%
Morgan Stanley, Dean Witter,
Discover and Co. 30,600 1,809,225
INSURANCE-6.3%
20th Century Industries, Inc. 58,000 1,508,000
Acceptance Insurance Co. (a) 44,000 1,064,250
American International Group, Inc. 47,025 5,113,969
Progressive Corp. 6,900 827,137
Stirling Cooke Brown Holdings, Ltd. (a) 20,000 496,250
Travelers Group, Inc. 107,499 5,791,509
------------
14,801,115
INVESTMENT COMPANY-1.6%
TCI Ventures Group Series A 132,300 3,749,878
REAL ESTATE-7.7%
Alexandria Real Estate Equities, Inc. 50,800 1,603,375
Arden Realty Group, Inc. 75,600 2,324,700
Entertainment Properties Trust 56,000 1,085,000
Equity Office Properties Trust 36,100 1,139,406
Excel Realty Trust, Inc. 60,000 1,890,000
Humphrey Hospitality Trust, Inc. 78,100 917,675
JP Realty, Inc. 38,000 985,625
Koger Equity, Inc. 100,000 2,193,750
Macerich Co. 52,500 1,496,250
Prentiss Properties Trust 49,000 1,368,938
SL Green Realty Corp. 30,000 778,125
Spieker Properties, Inc. 56,000 2,401,000
------------
18,183,844
MISCELLANEOUS-4.3%
American Express Co. 42,600 $3,802,050
MBNA Corp. 230,250 6,288,703
------------
10,090,753
------------
61,163,961
TECHNOLOGY-20.9%
COMMUNICATION EQUIPMENT-1.9%
DSC Communications Corp. (a) 26,000 622,375
Sterling Commerce, Inc. (a) 100,789 3,874,077
------------
4,496,452
COMMUNICATION SERVICES-0.9%
Nextel Communications, Inc. (a) 86,000 2,225,250
COMPUTER SERVICES-2.7%
Ceridian Corp. (a) 138,500 6,345,031
COMPUTER SOFTWARE-2.7%
Sterling Software, Inc. 157,100 6,441,100
ELECTRONICS-0.3%
EMC Corp. (a) 24,000 658,500
SCI Systems, Inc. (a) 1,400 60,988
------------
719,488
NETWORKING SOFTWARE-6.3%
3Com Corp. (a) 6,800 237,363
Cisco Systems, Inc. (a) 217,200 12,122,475
Networks Associates, Inc. (a) 45,000 2,375,156
------------
14,734,994
SEMI-CONDUCTOR CAPITAL EQUIPMENT-0.2%
Teradyne, Inc. (a) 17,000 544,000
TELECOM SERVICES-0.6%
Electric Lightwave, Inc. Cl. A (a) 90,000 1,344,375
TELECOMMUNICATIONS-4.4%
Brooks Fiber Properties, Inc. (a) 54,600 3,008,119
Colt Telecom Group Plc (a) (b) 95,400 4,036,612
Millicom International Cellular, SA (a) (c) 39,500 1,476,312
Telephone and Data Systems, Inc. 37,900 1,764,719
------------
10,285,762
MISCELLANEOUS-0.9%
Sanmina Corp. (a) 18,000 1,225,125
Solectron Corp. (a) 23,300 968,406
------------
2,193,531
------------
49,329,983
B-20
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
CONSUMER SERVICES-15.7%
AIRLINES-3.4%
Continental Airlines, Inc. Cl.B (a) 67,000 $ 3,224,375
Delta Air Lines, Inc. 19,400 2,308,600
Northwest Airlines Corp. Cl.A (a) 16,300 780,872
UAL Corp. (a) 11,600 1,073,000
U.S. Airways Group, Inc. (a) 10,000 625,000
------------
8,011,847
BROADCASTING & CABLE-1.2%
ProSieben Media AG (a) (d) 27,500 639,375
Tele-Communications, Inc. -
Liberty Media Group Cl.A (a) 62,037 2,254,657
------------
2,894,032
BUSINESS SERVICES-6.1%
Cendant Corp. (a) 418,050 14,370,469
ENTERTAINMENT & LEISURE-0.0%
Carnival Corp. Cl.A 2,100 116,288
PRINTING & PUBLISHING-0.2%
Readers Digest Association, Inc. 18,000 425,250
RESTAURANTS & LODGING-1.1%
ITT Corp. 32,000 2,652,000
RETAIL - GENERAL MERCHANDISE-3.7%
AutoZone, Inc. (a) 62,100 1,800,900
Home Depot, Inc. 64,150 3,776,831
The Limited, Inc. 119,000 3,034,500
------------
8,612,231
------------
37,082,117
ENERGY-11.2%
DOMESTIC PRODUCERS-0.7%
Union Pacific Resources Group, Inc. 67,600 1,639,300
OIL SERVICE-10.5%
Baker Hughes, Inc. 21,000 916,125
BJ Services Co. (a) 21,300 1,532,269
Dresser Industries, Inc. 90,600 3,799,538
Gulf Canada Resources, Ltd. (a) 700,300 4,902,100
Halliburton Co. 56,800 2,950,050
Nabors Industries, Inc. (a) 123,000 3,866,812
Noble Drilling Corp. (a) 74,000 2,266,250
Rowan Cos., Inc. (a) 37,000 1,128,500
Santa Fe International Corp. 32,700 1,330,481
Transocean Offshore, Inc. 44,000 2,120,250
------------
24,812,375
------------
26,451,675
UTILITIES-8.7%
TELEPHONE UTILITY-8.7%
AT&T Corp. 13,000 796,250
MCI Communications Corp. 150,000 6,426,562
Telecomunicacoes Brasileiras, SA (ADR) 10,400 1,210,950
Teleport Communications
Group, Inc. Cl.A (a) 50,200 2,757,863
WorldCom, Inc. (a) 265,462 8,038,521
8.0% cv. pfd. 12,000 1,288,500
------------
20,518,646
CONSUMER STAPLES-5.6%
TOBACCO-5.6%
Loews Corp. 46,800 4,966,650
Philip Morris Cos., Inc. 183,000 8,292,188
------------
13,258,838
HEALTH CARE-5.5%
BIOTECHNOLOGY-0.1%
Gensia Sicor, Inc.
3.75%, conv. pfd. 8,000 212,000
DRUGS-3.8%
Merck & Co., Inc. 47,900 5,089,375
Pfizer, Inc. 30,000 2,236,875
Schering-Plough Corp. 25,000 1,553,125
------------
8,879,375
MEDICAL PRODUCTS-1.5%
Boston Scientific Corp. (a) 37,400 1,715,725
Medtronic, Inc. 33,200 1,736,775
------------
3,452,500
MEDICAL SERVICES-0.1%
Quest Medical, Inc. (a) 38,000 265,406
------------
12,809,281
CONSUMER MANUFACTURING-1.3%
AUTO & RELATED-1.3%
Republic Industries, Inc. (a) 134,000 3,123,875
MULTI INDUSTRY COMPANIES-1.2%
Tyco International, Ltd. 62,572 2,819,651
Total Common Stocks & Other Investments
(cost $171,611,145) 226,558,027
B-21
GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
CONVERTIBLE BONDS-0.9%
Altera Corp.
5.75%, 6/15/02 (d) $ 185 $ 254,606
Applied Magnetics Corp.
7.00%, 3/15/06 900 730,125
HMT Technology Corp.
5.75%, 1/15/04 (d) 1,195 1,053,094
Total Convertible Bonds
(cost $3,127,986) 2,037,825
SHORT-TERM INVESTMENTS-6.1%
U.S. GOVERNMENT & AGENCY-6.1%
Federal Home Loan Mortgage Corp.
5.75%, 1/30/98 $ 3,796 $3,778,417
6.00%, 1/02/98 10,700 10,698,217
Total Short-Term Investments
(amortized cost $14,476,634) 14,476,634
TOTAL INVESTMENTS-103.1%
(cost $189,215,765) 243,072,486
Other assets less liabilities-(3.1%) (7,197,501)
NET ASSETS-100% $235,874,985
(a) Non-income producing security.
(b) Country of origin--United Kingdom.
(c) Country of origin--Luxembourg.
(d) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At December 31,
1997, the aggregate market value of these securities amounted to $1,947,075 or
0.8% of net assets.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-22
WORLDWIDE PRIVATIZATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON & PREFERRED STOCKS-89.3%
ARGENTINA-0.8%
Banco Rio de La Plata, SA Cl.B(ADR) 2,300 $ 32,200
Metrogas, SA Cl.B (ADR) 7,663 59,388
Nortel Inversora, SA pfd. (ADR) 4,800 122,400
Telecom Argentina, SA (ADR) 3,700 132,275
------------
346,263
AUSTRALIA-2.8%
Amrad Corp. 140,000 209,864
CSL, Ltd. 109,900 687,622
TAB Corp. Holdings, Ltd. 58,600 274,986
------------
1,172,472
AUSTRIA-3.2%
Austria Mikro Systeme International AG 4,270 216,348
Austria Tabakwerke AG (a) 20,000 886,672
Bohler-Uddeholm AG 2,300 134,834
Voest Alpine Stahl AG 3,000 115,663
------------
1,353,517
BELGIUM-1.0%
Credit Communal Holding Dexia 3,000 402,823
BOTSWANA-0.5%
Sechaba Investment Trust, Ltd. 200,000 210,040
BRAZIL-9.2%
Banco do Estado de Sao Paulo, SA pfd. (a) 3,100,000 126,383
Bardella Industrias Mecanicas, SA pfd. 1,600 172,035
Celesc (b) 750 77,250
pfd. 315,001 392,322
Companhia Energetica de Minas Gerais (ADR) 3,600 145,800
Companhia Paranaense de Energia-Copel
pfd. (ADR) 5,000 68,438
Companhia Paulista de
Forca e Luz 2,316,000 305,051
pfd. 373,501 38,486
Companhia Riograndense de Telecom 7,258 8,997
pfd. (a) 364,500 449,073
Companhia Vale Do Rio Doce PNB (Receipts) 2,360 0
Escelsa Espirito Santo Centrais 324 42,092
Gerdau, SA pfd. 20,824,144 261,223
Iven, SA pfd. 438,100 249,266
Light Participacoes, SA 480,000 144,080
Metalurgica Gerdau, SA 419,660 8,340
pfd. 7,438,243 223,271
Multicanal Participacoes, SA (ADR)(a) 8,700 52,200
Petroleo Brasileiro, SA (ADR) 7,500 166,763
Telecomunicacoes Brasileiras SA (ADR) 7,000 815,062
Telepar Tel Parana pfd. 14,000 7,527
Trikem, SA pfd. (a) 15,000,000 22,176
Uniao de Bancos Brasileiras, SA (GDR) (a) 2,300 74,031
------------
3,849,866
CHINA-1.6%
Beijing Datang Power Generation Co., Ltd. 448,000 205,239
China Southern Airlines Co., Ltd. 694,000 179,120
Zhejiang Southeast Electric Power Co.,
Ltd. (GDR) (a) (b) 17,700 281,430
------------
665,789
COLOMBIA-0.1%
Banco de Colombia (GDS) (a) (b) 8,400 48,300
CZECH REPUBLIC-0.9%
Ceske Energeticke Zavody (GDR) (a) 1,500 49,225
Ceske Radiokomunikace AS 990 124,487
Komercni Banka AS (GDR) 3,600 43,200
Podnik Vypocetni Techniky 500 31,617
Tabak AS 480 109,640
------------
358,169
EGYPT-2.5%
Commercial International Bank 10,250 206,838
(GDR) 10,500 217,350
Egypt International Pharmaceutical
Industries Co. 2,996 209,566
Egyptian Financial & Industrial 950 57,232
Housing & Development Bank 2,200 58,839
MISR Bank 500 14,914
NASR City for Housing & Reconstruction 2,000 129,317
Paints & Chemicals 1,600 51,256
Tourah Portland Cement Co. 4,000 91,685
------------
1,036,997
FINLAND-0.7%
Outokumpu OY Cl.A 23,500 286,693
B-23
WORLDWIDE PRIVATIZATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
FRANCE-8.1%
Pechiney, SA Cl.A 3,248 $ 128,225
Renault, SA 7,300 205,349
Sanofi, SA 6,700 745,867
SEITA 11,000 394,783
SGS-Thomson Microelectronics N.V. (a) 4,000 247,570
Societe Generale 2,656 361,871
Societe Nacionale Elf Aquitaine SA 4,390 510,592
Union des Assurances Federales 2,800 367,534
Usinor Sacilor 30,000 433,164
------------
3,394,955
GERMANY-3.1%
BHW Holding AG (a) 7,150 117,249
Deutsche Lufthansa AG (a) 23,200 444,926
Viag AG 1,387 747,104
------------
1,309,279
GREECE-0.0%
Hellenic Telecommunication Organization, SA 645 13,215
HONG KONG-0.1%
Guangshen Railway Co., Ltd. (ADR) 4,600 61,813
Tianjin Development Holdings, Ltd.(a) 11,000 10,221
------------
72,034
HUNGARY-0.7%
Mol Magyar Olay (GDR) (b) 6,000 144,600
OTP Bank (GDR) 4,000 150,000
------------
294,600
INDIA-1.8%
Industrial Credit & Investment Corp. (GDR) 3,000 37,800
(GDR) (b) 16,900 212,940
Mahanagar Telephone Nigam Ltd. (GDR) (a) 9,700 149,089
State Bank of India (GDS) 3,900 69,225
(GDR) (b) 1,200 21,300
Videsh Sanchar Nigam, Ltd. (GDS) (a) 2,000 27,400
(GDR) (b) 18,700 256,190
------------
773,944
INDONESIA-1.8%
PT Indosat (ADR) 239,000 443,236
PT Tambang Timah (GDR) 20,000 208,000
PT Telekomunikasi Indonesia 55,000 29,250
(ADR) 6,000 66,375
------------
746,861
ISRAEL-0.6%
Bank Hapoalim, Ltd. 62,500 149,964
Tadiran Ltd. (ADR) 3,000 106,125
------------
256,089
ITALY-4.9%
Aeroporti di Roma S.p.A. (a) 51,000 529,028
Ente Nazionale Idrocarburi S.p.A. 51,300 290,864
IMI LNV 33,000 391,747
Instituto Nazionale delle Assicurazioni 100,000 202,657
Telecom Italia Mobile S.p.A 109,000 309,932
(RNC) 25,000 115,390
Telecom Italia S.p.A. (a) 46,569 205,335
------------
2,044,953
JAPAN-4.2%
Daiwa Securities Co., Ltd. 67,000 230,911
DDI Corp. 17 44,918
East Japan Railway Co. 23 103,753
Japan Tobacco, Inc. 82 581,542
Nippon Telegraph and Telephone Corp. 41 351,689
Nomura Securities Co., Ltd. 33,000 439,764
------------
1,752,577
JORDAN-0.2%
Arab Potash Co. 8,300 72,673
KOREA-0.1%
Korean Air 1,700 7,241
Pohang Iron & Steel Co., Ltd. 440 12,219
------------
19,460
MALAYSIA-0.0%
Malakoff Berhad 6,820 14,203
MEXICO-2.8%
ALFA SA 26,000 176,222
Empresas Ica Sociedad Control (ADR) 3,200 52,600
Grupo Financiero Banamex, SA Cl.B (a) 78,700 235,500
Grupo Financiero Bancrecer,
SA de C.V. Cl.B (a) 75,000 3,996
Grupo Financiero Banorte,
SA de C.V. Cl.B (a) 218,500 380,659
Grupo Financiero GBM Atlantico Cl.L
(ADR) (a) (c) 8,400 8,400
Grupo Financiero Probursa, SA
de C.V. Cl.B (a) 152,173 39,408
Grupo Minsa, SA C.V. (a) 75,000 54,829
Grupo Profesional Planeacion
Proyectos, SA Cl.B (c) 4,800 18,646
B-24
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
Telefonos de Mexico, SA Cl.L (ADR) 1,400 $ 78,488
Tubos de Acero de Mexico, SA (ADR) (a) 5,000 108,125
------------
1,156,873
NETHERLANDS-5.1%
AKZO Nobel NV 5,710 984,497
ING Groep NV 12,030 506,676
KLM Royal Dutch Airlines NV 17,192 635,909
------------
2,127,082
NEW ZEALAND-0.1%
Tranz Rail Holdings, Ltd. 12,800 48,310
NORWAY-0.7%
Christiana Bank OG Kreditkasse 40,000 161,391
Den Norske Bank 30,000 141,352
------------
302,743
PAKISTAN-0.5%
Hub Power Co. (GDR) (a) 4,000 124,000
Pakistan Telecom (GDS) 1,350 98,550
------------
222,550
PERU-1.3%
Cementos Lima, SA 3,785 82,478
Cl.C 90,175 129,058
Cementos Norte Pacasmayo Cl.T 46,810 66,135
Explosivios, SA Cl. C (c) 86,354 98,238
Ferreyros, SA 62,300 65,844
Telefonica Del Peru, SA ADR 42,000 93,864
------------
535,617
PHILIPPINES-1.1%
First Philippines Holdings Corp. Series B 140,450 109,239
International Container Terminal
Services, Inc. 299,000 36,913
Manila Electric Co. Series B 96,000 317,630
------------
463,782
POLAND-2.1%
Bank Handlowy W Warseawie (GDR) (a) (c) 7,500 95,745
Banka Przemyslowo Handlowy, SA 1,400 72,681
Elektrim, SA 13,000 125,759
Kredyt Bank, SA (GDR) (a) (b) 41,000 514,550
Wielkopolski Bank Kredytowy, SA 15,000 75,319
------------
884,054
PORTUGAL-1.9%
Electricidade de Portugal, SA (a) 38,500 729,000
Portucel Industrial Empresa
Productora de Celulose, SA 9,600 58,576
------------
787,576
RUSSIA-1.7%
Gazprom (ADR) (b) 4,500 107,100
Lukoil Holding (ADR) 2,000 182,000
Nearmedic, SA (a) (c) 65,000 133,792
RNGS Holdings (ADR) (a) 6,842 98,126
Sun Brewing (GDR) (a) (b) 13,000 170,300
------------
691,318
SLOVAKIA-0.2%
Slovakofarma AS (GDR) (a) 10,400 86,840
SOUTH AFRICA-0.4%
Iscor Ltd. 625,492 185,083
SOUTH KOREA-1.3%
Korea Electric Power Corp. (ADR) 17,000 171,063
SK Telecom, Ltd. 220 71,036
(ADR) 49,191 319,746
------------
561,845
SPAIN-4.1%
Aceralia Corporacion Siderurgica, SA (a) 48,700 597,762
Aldeasa, SA (a) 23,465 497,486
Empresa Nacional de Celulosas, SA 21,788 296,751
Repsol, SA 7,320 312,307
------------
1,704,306
SWEDEN-1.9%
Assi Doman AB 10,450 264,544
Castellum AB (a) 20,900 207,950
Sparbanken Sverige AB Cl.A 15,000 340,999
------------
813,493
SWITZERLAND-2.1%
Sair Group 630 862,305
TURKEY-0.8%
Petrokimya Holdings AS 141,000 76,538
Tupras Turkiye Petrol Rafinerileri AS 1,300,000 147,406
Usas Ucak Servisi AS 43,500 104,946
------------
328,890
UNITED KINGDOM-11.5%
Anglian Water Plc 40,000 545,310
Birkby Plc 46,000 118,621
British Energy Plc 110,000 764,255
Energis Plc (a) 185,000 774,849
National Grid Group Plc 70,000 332,278
National Power Plc 36,600 360,693
B-25
WORLDWIDE PRIVATIZATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
Northern Ireland Electricity Plc 36,600 $ 318,966
PowerGen Plc 40,000 520,344
RJB Mining 12,000 25,032
Scottish Hydro Electric 36,600 301,780
Stagecoach Holdings Plc 20,187 276,862
Wessex Water Plc 53,772 453,084
------------
4,792,074
UNITED STATES-0.3%
Central European Media Enterprises, Ltd. (a) 4,300 108,575
VENEZUELA-0.5%
Compania Anonima Nacional
Telefonos de Venezuela Cl.D (ADR) 3,100 129,038
Mercantil Servicios Financier (ADR) (a) 5,000 71,981
------------
201,019
Total Common & Preferred Stocks
(cost $36,460,970) 37,360,107
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
SHORT-TERM INVESTMENT-10.6%
TIME DEPOSIT-10.6%
State Street Bank and Trust Co.
5.25%, 1/02/98
(amortized cost $4,409,000) $4,409 $ 4,409,000
TOTAL INVESTMENTS-99.9%
(cost $40,869,970) 41,769,107
Other assets less liabilities-0.1% 48,858
NET ASSETS-100% $41,817,965
(a) Non-income producing security.
(b) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At December 31,
1997, the aggregate market value of these securities amounted to $2,004,260 or
4.8% of net assets.
(c) Illiquid securities valued at fair market value (see Note A).
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-26
CONSERVATIVE INVESTORS PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON & PREFERRED STOCKS-27.9%
UNITED STATES INVESTMENTS-18.4%
FINANCE-4.6%
BANKING - MONEY CENTER-1.2%
Chase Manhattan Corp. 1,600 $ 175,200
Citicorp 1,500 189,656
------------
364,856
BANKING - REGIONAL-0.4%
Banc One Corp. 2,000 108,625
BROKERAGE & MONEY MANAGEMENT-0.9%
Merrill Lynch & Co., Inc. 2,000 145,875
Morgan Stanley, Dean Witter, Discover and Co. 2,000 118,250
------------
264,125
INSURANCE-0.8%
American International Group, Inc. 1,200 130,500
Travelers Group, Inc. 2,250 121,219
------------
251,719
MISCELLANEOUS-1.3%
MBNA Corp. 8,000 218,500
PMI Group, Inc. 2,500 180,781
------------
399,281
------------
1,388,606
TECHNOLOGY-2.5%
COMMUNICATION EQUIPMENT-0.5%
Lucent Technologies, Inc. 2,000 159,750
COMPUTER HARDWARE-0.6%
COMPAQ Computer Corp. 3,000 169,313
NETWORKING SOFTWARE-0.7%
Cisco Systems, Inc. (a) 3,750 209,297
SEMI-CONDUCTOR CAPITAL EQUIPMENT-0.3%
Applied Materials, Inc. (a) 3,000 90,281
SEMI-CONDUCTOR COMPONENTS-0.4%
Altera Corp. (a) 1,500 49,734
Intel Corp. 1,000 70,219
------------
119,953
------------
748,594
CONSUMER STAPLES-2.4%
COSMETICS-0.9%
Avon Products, Inc. 1,000 61,375
Estee Lauder Co., Inc. Cl. A 1,800 92,588
Gillette Co. 1,100 110,481
------------
264,444
RETAIL - FOOD & DRUG-0.6%
Kroger Co. (a) 5,000 $184,687
TOBACCO-0.9%
Philip Morris Cos., Inc. 6,000 271,875
------------
721,006
CONSUMER SERVICES-2.4%
BROADCASTING & CABLE-0.6%
Cox Communications, Inc. Cl.A (a) 3,000 120,187
Tele-Communications, Inc. -
Liberty Media Group Cl.A (a) 2,000 72,688
------------
192,875
ENTERTAINMENT & LEISURE-1.3%
Harley-Davidson, Inc. 6,000 164,250
Walt Disney Co. 2,300 227,844
------------
392,094
RETAIL - GENERAL MERCHANDISE-0.5%
Dayton Hudson Corp. 2,000 135,000
------------
719,969
ENERGY-2.4%
DOMESTIC INTEGRATED-0.5%
USX-Marathon Group 4,000 135,000
DOMESTIC PRODUCERS-0.2%
Apache Corp. 2,000 70,125
OIL SERVICE-1.7%
BJ Services Co. (a) 2,500 179,844
Halliburton Co. 3,400 176,587
Noble Drilling Corp. (a) 5,000 153,125
------------
509,556
------------
714,681
HEALTH CARE-1.7%
DRUGS-1.5%
Merck & Co., Inc. 2,500 265,625
Schering-Plough Corp. 3,000 186,375
------------
452,000
MEDICAL PRODUCTS-0.2%
Medtronic, Inc. 1,520 79,515
------------
531,515
MULTI INDUSTRY COMPANIES-0.7%
Tyco International, Ltd. 2,800 126,175
U.S. Industries, Inc. 2,850 85,856
------------
212,031
UTILITIES-0.7%
TELEPHONE UTILITY-0.7%
WorldCom, Inc. (a) 7,000 211,969
B-27
CONSERVATIVE INVESTORS PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
CAPITAL GOODS-0.7%
POLLUTION CONTROL-0.3%
USA Waste Services, Inc. (a) 2,500 $ 98,125
MISCELLANEOUS-0.4%
United Technologies Corp. 1,500 109,219
------------
207,344
CONSUMER MANUFACTURING-0.3%
APPLIANCES-0.3%
Sunbeam Corp. 2,100 88,463
Total United States Investments
(cost $4,638,749) 5,544,178
FOREIGN INVESTMENTS-9.5%
AUSTRALIA-0.1%
Normandy Mining, Ltd. 17,000 16,509
BRAZIL-0.2%
Telecomunicacoes Brasileiras, SA (ADR) 600 69,862
CANADA-0.4%
Gulf Canada Resources, Ltd. (a) 8,000 56,000
Magna International, Inc. Cl.A 1,000 62,979
------------
118,979
DENMARK-0.3%
Den Danske Bank 500 66,624
Sophus Berendsen AS Cl.B 200 32,983
------------
99,607
FINLAND-0.7%
Nokia AB OY Corp. Series A pfd. 2,000 141,993
Orion-Yhtymae OY Cl.B 2,800 73,969
------------
215,962
FRANCE-0.5%
Sanofi, SA 500 55,662
Societe Generale 401 54,635
Unibail, SA 502 50,129
------------
160,426
GERMANY-0.6%
Adidas AG 400 52,608
Hornbach Holding AG pfd. 600 41,524
ProSieben Media AG pfd. (a) 1,500 70,041
Schmalbach-Lubeca AG pfd. 166 27,360
------------
191,533
HONG KONG-0.3%
Cheung Kong Holdings, Ltd. 4,000 $26,197
Citic Pacific, Ltd. 6,000 23,848
Dickson Concepts International, Ltd. 6,000 8,750
Sun Hung Kai Properties, Ltd. 3,000 20,906
------------
79,701
JAPAN-2.3%
Bank of Tokyo, Ltd. 2,000 27,571
Canon, Inc. 2,000 46,565
Daiwa Securities Co., Ltd. 7,000 24,125
Honda Motor Co. 2,000 73,371
Japan Tobacco, Inc. 4 28,368
Nintendo Corp., Ltd. 500 49,016
Promise Co., Ltd. 1,000 55,449
Rohm Co. 1,000 101,861
Santen Pharmaceutical Co. 2,000 22,976
Sony Corp. 700 62,189
Sumitomo Electric Industries 2,000 27,265
TDK Corp. 1,000 75,362
Yamanouchi Pharmaceutical Co., Ltd. 4,000 85,778
------------
679,896
MEXICO-0.3%
Coca-Cola Femsa, SA (ADR) 1,500 87,000
NETHERLANDS-0.6%
AKZO Nobel NV 500 86,208
Internationale Nederlanden Groep NV 2,000 84,236
------------
170,444
NORWAY-0.1%
Bergesen D.Y. AS Cl.A 1,500 35,338
PHILIPPINES-0.0%
Manila Electric Co. Cl.B 2,000 6,617
SPAIN-0.1%
Tabacalera, SA Series A 500 40,532
SWEDEN-0.4%
Ericsson (L.M.) Telecom Series B 900 33,836
Sparbanken Sverige AB Series A 1,000 22,733
Volvo AB Series A 2,000 53,401
------------
109,970
SWITZERLAND-1.3%
Baloise Holdings, Ltd. 50 92,493
Ciba Specialty Chemicals AG (a) 400 47,632
Nestle, SA 50 74,904
Novartis AG 50 81,098
Zurich Versicherungs-Gesellschaft 200 95,264
------------
391,391
B-28
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SHARES OR
PRINCIPAL
AMOUNT
COMPANY (000) U.S. $ VALUE
- -------------------------------------------------------------------------
UNITED KINGDOM-1.3%
BAA Plc 8,000 $ 65,437
BPB Plc 12,000 67,014
British Petroleum Co. Plc 3,007 39,778
Compass Group Plc 7,000 86,116
SmithKline Beecham Plc 6,000 61,840
Tomkins Plc 8,000 37,843
United News & Media Plc 3,000 34,148
------------
392,176
Total Foreign Investments
(cost $2,860,912) 2,865,943
Total Common & Preferred Stocks
(cost $7,499,661) 8,410,121
U.S. GOVERNMENT & AGENCIES-41.2%
Federal Home Loan Mortgage
7.00%, 9/01/11 $ 432 440,351
7.00%, 1/01/12 92 93,694
Federal National Mortgage Assn.
6.00%, 4/01/11 433 426,364
6.50%, 6/01/11 303 304,403
6.50%, 4/01/12 240 240,223
7.00%, 5/01/26 568 573,127
7.00%, 9/01/27 250 251,656
U.S. Treasury Bond
6.125%, 11/15/27 1,915 1,967,969
U.S. Treasury Notes
6.00%, 8/15/00 1,950 1,964,020
6.25%, 4/30/01 1,240 1,259,369
6.375%, 5/15/99 1,395 1,407,862
6.50%, 8/31/01 1,900 1,947,196
6.50%, 5/31/02 1,325 1,363,717
6.625%, 5/15/07 200 211,688
Total U.S. Government & Agencies
(cost $12,288,350) 12,451,639
PRINCIPAL
AMOUNT
(000) U.S. $ Value
- -------------------------------------------------------------------------
CORPORATE DEBT OBLIGATIONS-5.1%
BANKING-1.8%
ABN Amro Bank NV Chicago
7.125%, 6/18/07 $ 525 $ 551,000
FINANCIAL-1.6%
Goldman Sachs Group LP
7.20%, 11/01/06 (b) 450 475,681
INDUSTRIAL-1.7%
Time Warner, Inc.
8.375%, 3/15/23 450 513,531
Total Corporate Debt Obligations
(cost $1,444,853) 1,540,212
YANKEE BONDS-2.8%
Corporacion Andina de Fomento
7.25%, 3/01/07 400 407,974
St. George Bank, Ltd.
7.15%, 10/15/05 (b) 425 437,844
Total Yankee Bonds
(cost $821,641) 845,818
SHORT-TERM INVESTMENT-22.2%
Federal Home Loan Mortgage Corp.
6.00%, 1/02/98
(amortized cost $6,698,883) 6,700 6,698,883
TOTAL INVESTMENTS -99.2%
(cost $28,753,388) 29,946,673
Other assets less liabilities-0.8% 249,708
NET ASSETS-100% $30,196,381
(a) Non-income producing security.
(b) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At December 31,
1997, the aggregate market value of these securities amounted to $913,525 or
3.0% of net assets.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-29
GROWTH INVESTORS PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON & PREFERRED STOCKS-71.3%
UNITED STATES INVESTMENTS-48.7%
FINANCE-11.8%
BANKING - MONEY CENTER-3.5%
Chase Manhattan Corp. 3,000 $ 328,500
Citicorp 2,000 252,875
------------
581,375
BANKING - REGIONAL-1.0%
Banc One Corp. 3,000 162,937
BROKERAGE & MONEY MANAGEMENT-2.2%
Merrill Lynch & Co., Inc. 2,500 182,344
Morgan Stanley, Dean Witter, Discover and Co. 3,000 177,375
------------
359,719
INSURANCE-2.1%
American International Group, Inc. 1,800 195,750
Travelers Group, Inc. 3,000 161,625
------------
357,375
MISCELLANEOUS-3.0%
MBNA Corp. 8,000 218,500
PMI Group, Inc. 3,900 282,019
------------
500,519
------------
1,961,925
ENERGY-7.0%
DOMESTIC INTEGRATED-1.4%
USX-Marathon Group, Inc. 7,000 236,250
DOMESTIC PRODUCERS-0.9%
Apache Corp. 4,000 140,250
OIL SERVICE-4.7%
BJ Services Co. (a) 4,000 287,750
Halliburton Co. 3,700 192,169
Noble Drilling Corp. (a) 10,000 306,250
------------
786,169
------------
1,162,669
CONSUMER STAPLES-6.4%
COSMETICS-2.3%
Avon Products, Inc. 1,000 61,375
Gillette Co. 1,900 190,831
The Estee Lauder Co., Inc. Cl. A 2,600 133,738
------------
385,944
RETAIL - FOOD & DRUG-1.6%
Kroger Co. (a) 7,000 258,563
TOBACCO-2.5%
Philip Morris Cos., Inc. 9,000 407,812
------------
1,052,319
TECHNOLOGY-6.2%
COMMUNICATION EQUIPMENT-0.7%
Lucent Technologies, Inc. 1,500 119,813
COMPUTER HARDWARE-1.7%
COMPAQ Computer Corp. (a) 5,000 282,187
NETWORKING SOFTWARE-2.0%
Cisco Systems, Inc. (a) 6,000 334,875
SEMI-CONDUCTOR CAPITAL EQUIPMENT-0.7%
Applied Materials, Inc. (a) 4,000 120,375
SEMI-CONDUCTOR COMPONENTS-1.1%
Altera Corp. (a) 2,800 92,837
Intel Corp. 1,200 84,263
------------
177,100
------------
1,034,350
CONSUMER SERVICES-6.2%
BROADCASTING & CABLE-1.4%
Cox Communications, Inc. Cl.A (a) 4,000 160,250
Tele-Communications, Inc. -
Liberty Media Group Cl.A (a) 2,000 72,687
------------
232,937
ENTERTAINMENT & LEISURE-3.6%
Harley-Davidson, Inc. 9,000 246,375
Walt Disney Co. 3,500 346,719
------------
593,094
RETAIL - GENERAL MERCHANDISE-1.2%
Dayton Hudson Corp. 3,000 202,500
------------
1,028,531
HEALTH CARE-4.5%
DRUGS-4.0%
Merck & Co., Inc. 4,000 425,000
Schering-Plough Corp. 4,000 248,500
------------
673,500
MEDICAL PRODUCTS-0.5%
Medtronic, Inc. 1,500 78,469
------------
751,969
MULTI INDUSTRY COMPANIES-2.1%
Tyco International, Ltd. 3,400 153,213
U.S. Industries, Inc. 6,300 189,787
------------
343,000
B-30
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
UTILITIES-1.8%
TELEPHONE UTILITY-1.8%
WorldCom, Inc. (a) 10,000 $ 302,812
CAPITAL GOODS-1.8%
POLLUTION CONTROL-0.9%
USA Waste Services, Inc. (a) 4,000 157,000
MISCELLANEOUS-0.9%
United Technologies Corp. 2,000 145,625
------------
302,625
CONSUMER MANUFACTURING-0.9%
APPLIANCES-0.9%
Sunbeam Corp., Inc. 3,300 139,013
Total United States Investments
(cost $7,025,543) 8,079,213
FOREIGN INVESTMENTS-22.6%
AUSTRALIA-0.1%
Normandy Mining, Ltd. 25,000 24,278
BRAZIL-0.7%
Telecomunicacoes Brasileiras, SA (ADR) 1,000 116,437
CANADA-0.8%
Gulf Canada Resources, Ltd. (a) 10,000 70,000
Magna International, Inc. Cl.A 1,000 62,979
------------
132,979
DENMARK-1.0%
Den Danske Bank 500 66,624
Sophus Berendsen AS Cl.B 600 98,950
------------
165,574
FINLAND-1.9%
Nokia AB OY Corp. Series A pfd. 3,000 212,991
Orion-Yhtymae OY Cl.B 4,200 110,953
------------
323,944
FRANCE-1.0%
Sanofi, SA 500 55,662
Societe Generale 401 54,635
Unibail, SA 502 50,129
------------
160,426
GERMANY-1.6%
Adidas AG 500 65,761
Hornbach Holding AG pfd. 1,000 69,207
ProSieben Media AG pfd. (a) 2,000 93,388
Schmalbach-Lubeca AG pfd. 258 42,523
------------
270,879
HONG KONG-0.8%
Cheung Kong Holdings, Ltd. 6,000 39,295
Citic Pacific, Ltd. 12,000 47,697
Dickson Concepts International, Ltd. 9,000 13,124
Sun Hung Kai Properties, Ltd. 4,000 27,875
------------
127,991
JAPAN-4.6%
Bank of Tokyo, Ltd. 3,000 41,357
Canon, Inc. 2,000 46,565
Daiwa Securities Co., Ltd. 12,000 41,357
Honda Motor Co. 2,000 73,371
Japan Tobacco, Inc. 6 42,552
Nintendo Corp., Ltd. 1,000 98,032
Promise Co., Ltd. 1,000 55,449
Rohm Co. 1,000 101,861
Santen Pharmaceutical Co. 3,000 34,464
Sony Corp. 700 62,189
Sumitomo Electric Industries 2,000 27,265
TDK Corp. 1,000 75,362
Yamanouchi Pharmaceutical Co., Ltd. 3,000 64,333
------------
764,157
MEXICO-0.7%
Coca-Cola Femsa, SA (ADR) 2,000 116,000
NETHERLANDS-1.2%
AKZO Nobel NV 700 120,692
Internationale Nederlanden Groep NV 2,000 84,235
------------
204,927
NORWAY-0.3%
Bergesen D.Y. AS Cl.A 2,000 47,117
PHILIPPINES-0.1%
Manila Electric Co. Cl.B 3,000 9,926
SPAIN-0.5%
Tabacalera, SA Series A 1,000 81,063
SWEDEN-0.9%
Ericsson (L.M.) Telecom Series B 1,400 52,633
Sparbanken Sverige AB Series A 1,000 22,733
Volvo AB Series A 3,000 80,102
------------
155,468
SWITZERLAND-2.9%
Baloise Holdings Ltd. 40 73,994
Ciba Specialty Chemicals AG (a) 600 71,448
Nestle, SA 50 74,904
Novartis AG 100 162,196
Zurich Versicherungs-Gesellschaft 200 95,264
------------
477,806
B-31
GROWTH INVESTORS PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SHARES OR
PRINCIPAL
AMOUNT
COMPANY (000) U.S. $ VALUE
- -------------------------------------------------------------------------
UNITED KINGDOM-3.5%
BAA Plc 10,000 $ 81,796
BPB Plc 20,000 111,690
British Petroleum Co. Plc 4,007 53,007
Compass Group Plc 10,000 123,023
SmithKline Beecham Plc 12,000 123,680
Tomkins Plc 9,000 42,574
United News Media Plc 4,000 45,530
------------
581,300
Total Foreign Investments
(cost $3,784,640) 3,760,272
Total Common & Preferred Stocks
(cost $10,810,183) 11,839,485
U.S. GOVERNMENT & AGENCIES-15.5%
Federal Home Loan Bank
7.00%, 8/01/11 $ 73 74,860
Federal National Mortgage Assn.
6.00%, 4/01/11 87 85,273
6.50%, 12/01/10 58 58,128
7.00%, 12/01/11 45 45,718
7.00%, 4/01/26 77 77,945
U.S. Treasury Bond
6.125%, 11/15/27 275 282,606
U.S. Treasury Notes
6.00%, 8/15/00 200 201,438
6.25%, 4/30/01 50 50,781
6.375%, 5/15/99 390 393,596
6.50%, 8/31/01 275 281,831
6.50%, 5/31/02 795 818,230
6.875%, 5/15/06 190 203,300
Total U.S. Government & Agencies
(cost $2,545,915) 2,573,706
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
CORPORATE DEBT OBLIGATIONS-2.8%
BANKING-1.1%
ABN Amro Bank NV Chicago
7.125%, 6/18/07 $ 100 $ 104,952
Dime Capital Trust I Series A
9.33%, 5/06/27 75 84,342
------------
189,294
FINANCIAL-0.5%
United Companies Financial Corp.
8.375%, 7/01/05 80 82,371
INDUSTRIAL-1.2%
Auburn Hills Trust
12.00%, 5/01/20 50 79,496
Time Warner, Inc.
9.125%, 1/15/13 100 119,685
------------
199,181
Total Corporate Debt Obligations
(cost $451,788) 470,846
SHORT-TERM INVESTMENT-9.7%
Federal Home Loan Mortgage Corp.
6.00%, 1/02/98
(amortized cost $1,599,733) 1,600 1,599,733
TOTAL INVESTMENTS -99.3%
(cost $15,407,619) 16,483,770
Other assets less liabilities-0.7% 116,140
NET ASSETS-100% $16,599,910
(a) Non-income producing security.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-32
TECHNOLOGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON STOCKS-84.9%
TECHNOLOGY-83.5%
COMMUNICATIONS EQUIPMENT-9.0%
Ericsson (L.M.) Telephone Co. Cl.B (ADR) (a) 26,900 $ 1,004,547
Lucent Technologies, Inc. 10,900 870,638
Motorola, Inc. 10,180 580,896
Nokia Corp. (ADR) (b) 28,200 1,974,000
PairGain Technologies, Inc. (c) 16,000 310,500
Tellabs, Inc. (c) 27,790 1,466,791
------------
6,207,372
COMPUTER HARDWARE-10.6%
Apex PC Solutions, Inc. (c) 15,800 341,675
COMPAQ Computer Corp. 57,000 3,216,937
Dell Computer Corp. (c) 41,550 3,491,498
Sun Microsystems, Inc. (c) 7,000 279,563
------------
7,329,673
COMPUTER PERIPHERALS-0.8%
Iomega Corp. (c) 43,200 537,300
COMPUTER SERVICES-9.4%
Computer Sciences Corp. (c) 17,300 1,444,550
DST Systems, Inc. (c) 19,925 850,548
ETRADE Group, Inc. (c) 6,500 149,703
First Data Corp. 23,200 678,600
Fiserv, Inc. (c) 11,900 586,075
Galileo International, Inc. 13,900 383,988
Gartner Group, Inc. Cl.A (c) 26,200 977,587
PMT Services, Inc. (c) 12,400 173,213
Registry, Inc. (c) 8,270 382,488
SunGard Data Systems, Inc. (c) 29,200 905,200
------------
6,531,952
COMPUTER SOFTWARE-14.7%
Cadence Design Systems, Inc (c) 35,000 857,500
Concord Communications, Inc. (c) 1,100 22,619
HBO & Co. 49,000 2,350,469
I2 Technologies, Inc. (c) 4,000 211,125
Industri-Matematik International Corp. (c) 15,800 467,087
J.D. Edwards & Co. (c) 8,400 249,375
Microsoft Corp. (c) 12,000 1,550,625
Networks Associates, Inc. (c) 22,600 1,192,856
New Era of Networks, Inc. (c) 3,700 40,700
Oracle Corp. (c) 44,250 985,945
Pegasystems, Inc. (c) 17,500 351,641
PeopleSoft, Inc. (c) 49,000 1,904,875
SCM Microsystems, Inc. (c) 900 21,431
------------
10,206,248
NETWORKING SOFTWARE-11.9%
3Com Corp. (c) 17,800 621,331
Bay Networks, Inc. (c) 72,890 1,863,251
Cisco Systems, Inc. (c) 66,600 3,717,112
Fore Systems (c) 85,000 1,296,250
Newbridge Networks Corp. (c) 21,000 732,375
------------
8,230,319
SEMI-CONDUCTOR CAPITAL EQUIPMENT-4.4%
Applied Materials, Inc. (c) 54,800 1,649,137
Silicon Valley Group, Inc. (c) 26,600 605,150
Teradyne, Inc. (c) 25,800 825,600
------------
3,079,887
SEMI-CONDUCTOR COMPONENTS-16.1%
Altera Corp. (c) 59,500 1,972,797
Atmel Corp. (c) 21,000 390,469
Cirrus Logic, Inc. (c) 90,000 959,062
Intel Corp. 28,500 2,001,234
KLA-Tencor Corp. (c) 21,600 833,625
Microchip Technology, Inc. (c) 26,720 803,270
National Semiconductor Corp. (c) 39,300 1,019,344
PMC-Sierra, Inc. (c) 19,700 614,394
Taiwan Semiconductor Manufacturing Co.,
Ltd. (ADR) (c) (d) 68,500 1,245,844
Texas Instruments, Inc. 14,100 634,500
Xilinx, Inc. (c) 20,000 700,000
------------
11,174,539
MISCELLANEOUS-6.6%
Ingram Micro, Inc. Cl.A (c) 27,500 800,938
Sanmina Corp. (c) 23,400 1,592,662
Solectron Corp. (c) 37,900 1,575,219
Tech Data Corp. (c) 14,800 577,200
------------
4,546,019
------------
57,843,309
UTILITIES-1.0%
TELEPHONE UTILITY-1.0%
WorldCom, Inc. (c) 22,700 687,385
CONSUMER SERVICES-0.4%
MISCELLANEOUS-0.4%
Equifax, Inc. 8,000 283,500
Total Common Stocks
(cost $53,422,945) 58,814,194
B-33
TECHNOLOGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
SHORT-TERM INVESTMENTS-14.2%
COMMERCIAL PAPER-14.2%
American Express Credit Corp.
5.85%, 1/02/98 $2,480 $ 2,479,597
Ford Motor Credit Corp.
5.80%, 1/14/98 3,000 2,993,716
General Electric Capital Corp.
5.95%, 1/12/98 2,000 1,996,364
Prudential Funding Corp.
5.85%, 1/07/98 2,360 2,357,699
Total Short-Term Investments
(amortized cost $9,827,376) 9,827,376
TOTAL INVESTMENTS-99.1%
(cost $63,250,321) $68,641,570
Other assets less liabilities-0.9% 598,263
NET ASSETS-100% $69,239,833
(a) Country of origin--Sweden.
(b) Country of origin--Finland.
(c) Non-income producing security.
(d) Country of origin--Taiwan.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-34
QUASAR PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON STOCKS& OTHER INVESTMENTS-89.8%
CONSUMER PRODUCTS & SERVICES-27.5%
ADVERTISING-1.3%
Princeton Video Image, Inc. (a) 12,100 $ 111,169
Snyder Communications, Inc. (a) 17,500 638,750
------------
749,919
AIRLINES-6.3%
Alaska Air Group, Inc. (a) 29,100 1,127,625
America West Airlines, Inc. Cl.B (a) 21,600 402,300
Continental Airlines, Inc. (a) 39,100 1,881,687
Trans World Airlines, Inc. (a) 28,600 289,575
------------
3,701,187
APPAREL-4.1%
Nautica Enterprises, Inc. (a) 24,900 585,150
St. John Knits, Inc. 10,000 400,000
Tommy Hilfiger Corp. (a) 23,300 818,412
Wolverine World Wide, Inc. 28,600 647,075
------------
2,450,637
BROADCASTING & CABLE-0.9%
Sinclair Broadcast Group, Inc. Cl.A (a) 11,400 527,963
ENTERTAINMENT & LEISURE-1.6%
Bally Total Fitness Holding Corp. (a) 22,100 482,056
Signature Resorts, Inc. (a) 22,400 491,400
------------
973,456
RESTAURANTS & LODGING-1.5%
Extended Stay America, Inc. (a) 20,035 249,186
Florida Panthers Holdings, Inc. Cl.A 16,700 288,075
Suburban Lodges of America, Inc. (a) 24,600 328,256
------------
865,517
RETAILING-11.4%
Avis Rent A Car, Inc. (a) 24,800 792,050
Brylane, Inc. (a) 8,800 433,400
Budget Group, Inc. (a) 35,400 1,223,512
Circuit City Stores, Inc. - Car Max Group (a) 62,500 562,500
Furniture Brands International, Inc. 27,900 571,950
Industrie Natuzzi SpA (ADR) (b) 27,800 573,375
Movado Group, Inc. 19,400 446,200
Pacific Sunwear of California (a) 16,950 504,262
Pep Boys - Manny, Moe & Jack 12,900 307,988
PETsMART, Inc. 14,800 106,838
The Finish Line, Inc. (a) 29,800 392,988
Tiffany & Co. (a) 18,600 670,762
United Rentals, Inc. (a) 10,100 195,056
------------
6,780,881
MISCELLANEOUS-0.4%
Central Garden & Pet Company (a) 9,800 258,475
------------
16,308,035
BASIC INDUSTRIES-18.9%
CONTAINERS-1.8%
Ivex Packaging Corp. 22,500 540,000
U.S. Can Corp. (a) 30,300 511,312
------------
1,051,312
ENVIRONMENTAL CONTROL-2.6%
American Disposal Services, Inc. (a) 15,300 559,406
Culligan Water Technologies, Inc. (a) 11,200 562,800
Superior Services, Inc. (a) 15,700 458,244
------------
1,580,450
METAL HARDWARE-2.3%
Bethlehem Steel Corp. (a) 141,000 1,216,125
Steel Dynamics, Inc. (a) 8,200 131,712
------------
1,347,837
METALS & MINING-0.6%
Royal Oak Mines, Inc. 226,200 353,438
TEXTILE PRODUCTS-3.6%
Mohawk Industries, Inc. (a) 83,550 1,832,878
Novel Denim Holdings, Ltd. (a) 17,100 337,725
------------
2,170,603
TRANSPORTATION & SHIPPING-8.0%
Consolidated Freightways Corp. (a) 77,400 1,064,250
Genesee & Wyoming, Inc. 8,600 207,475
Knightsbridge Tankers, Ltd. 23,900 670,694
OMI Corp. (a) 180,600 1,659,262
Roadway Express, Inc. 13,400 299,825
Teekay Shipping Corp. 24,600 825,638
------------
4,727,144
------------
11,230,784
B-35
QUASAR PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
TECHNOLOGY-16.3%
AEROSPACE & DEFENSE-1.2%
Gulfstream Aerospace Corp. 24,300 $ 710,775
COMMUNICATION EQUIPMENT-1.4%
Comverse Technology, Inc. (a) 21,800 847,475
COMPUTER HARDWARE-0.7%
Hadco Corp. 9,200 416,588
COMPUTER PERIPHERALS-0.5%
ENCAD, Inc. (a) 10,700 296,925
COMPUTER SOFTWARE & SERVICES-4.4%
CDW Computer Centers, Inc. (a) 17,900 933,037
Checkfree Corp. (a) 24,000 652,500
DBT Online, Inc. (a) 31,500 785,531
QAD, Inc. (a) 20,200 256,288
------------
2,627,356
NETWORKING SOFTWARE-1.2%
Registry, Inc. (a) 14,720 680,800
SEMI-CONDUCTOR EQUIPMENT-1.8%
Actel Corp. (a) 7,500 95,156
Applied Micro Circuits Corp. (a) 27,000 335,813
PMC-Sierra, Inc. (a) 19,400 605,037
------------
1,036,006
TELECOMMUNICATIONS-5.1%
Globecomm Systems, Inc. 20,900 236,431
GST Telecommunications, Inc 22,200 263,625
Millicom International Cellular, SA (a) (c) 28,100 1,050,238
Telephone and Data Systems, Inc. 31,800 1,480,687
------------
3,030,981
------------
9,646,906
HEALTH CARE-11.1%
BIOTECHNOLOGY-8.4%
AutoCyte, Inc. (a) 28,500 204,844
Centocor, Inc. (a) 36,700 1,224,862
Corixa Corp. (a) 20,300 183,334
GelTex Pharmaceuticals, Inc. 53,410 1,422,041
Gensia Sicor, Inc. 18,700 108,109
Inhale Therapeutic Systems 1,000 25,875
MedImmune, Inc. 21,300 915,900
Neurex Corp. (a) 59,400 822,319
Novoste Corp. (a) 3,500 78,313
------------
4,985,597
DRUGS, HOSPITAL SUPPLIES & MEDICAL SERVICES-2.7%
Mid Atlantic Medical Services, Inc. 34,900 444,975
National Surgery Centers, Inc. (a) 30,200 790,863
Synetic, Inc. (a) 10,400 384,150
------------
1,619,988
------------
6,605,585
ENERGY-7.0%
OIL & GAS SERVICES-7.0%
Costilla Energy, Inc. (a) 6,600 73,837
Oceaneering International, Inc. (a) 31,400 620,150
Parker Drilling Co. (a) 113,200 1,379,625
Rowan Companies, Inc. 19,400 591,700
Southern Union Co. (a) 28,025 669,097
Valero Energy Corp. 25,700 807,944
------------
4,142,353
FINANCIAL SERVICES-6.0%
REAL ESTATE-4.7%
CCA Prison Realty Trust 9,900 441,788
Chelsea GCA Realty, Inc. 23,200 885,950
Glenborough Realty Trust, Inc. 18,500 548,062
Security Capital Group, Inc. Cl.B (a) 27,900 906,750
------------
2,782,550
OTHER-1.3%
International Alliance
warrants, expiring 1/01/49 (a) 9,700 75,321
International Alliance Services, Inc. 38,800 669,300
------------
744,621
------------
3,527,171
CONSUMER MANUFACTURING-1.9%
AUTO & RELATED-1.9%
Miller Industries, Inc. (a) 61,450 660,588
Monaco Coach Corp. (a) 17,600 442,200
------------
1,102,788
B-36
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SHARES OR
PRINCIPAL
AMOUNT
COMPANY (000) U.S. $ VALUE
- -------------------------------------------------------------------------
UTILITIES-1.1%
TELEPHONE UTILITY-1.1%
ACC Corp. (a) 12,800 $ 648,000
Total Common Stocks & Other Investments
(cost $52,984,268) 53,211,622
SHORT-TERM INVESTMENT-9.4%
U.S. GOVERNMENT & AGENCY-9.4%
Federal Home Loan Mortgage Corp.
6.00%, 1/02/98
(amortized cost $5,599,067) $5,600 5,599,067
TOTAL INVESTMENTS-99.2%
(cost $58,583,335) $58,810,689
Other assets less liabilities-0.8% 466,479
NET ASSETS-100% $59,277,168
(a) Non-income producing security.
(b) Country of origin--Luxembourg.
(c) Country of origin--Italy.
See Glossary of Terms on page B-40.
See Notes to Financial Statements.
B-37
REAL ESTATE INVESTMENT PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON STOCKS & OTHER INVESTMENTS-97.1%
REAL ESTATE INVESTMENT TRUSTS-97.0%
APARTMENTS-12.5%
Ambassador Apartments, Inc. 4,100 $ 84,306
Avalon Properties, Inc. 10,300 318,656
Bay Apartment Communities, Inc. 7,900 308,100
Essex Property Trust, Inc. 17,300 605,500
Security Capital Pacific Trust 16,400 397,700
------------
1,714,262
DIVERSIFIED-6.8%
Glenborough Realty Trust, Inc. 20,500 607,312
Golf Trust of America, Inc. 10,900 316,100
------------
923,412
HOTELS & RESTAURANTS-16.8%
American General Hospitality Corp. 13,800 369,150
Innkeepers USA Trust 24,600 381,300
ITT Corp. 2,000 165,750
Patriot American Hospitality, Inc. 20,800 599,300
Starwood Lodging Trust 8,600 497,725
Sunstone Hotel Investors, Inc. 16,300 281,175
------------
2,294,400
OFFICE-19.2%
Arden Realty Group, Inc. 13,500 415,125
Crescent Real Estate Equities Co. 13,800 543,375
Equity Office Properties Trust 21,266 671,208
Great Lakes REIT, Inc. 6,800 132,175
Mack-Cali Realty Corp. 8,600 352,600
SL Green Realty Corp. 19,700 510,969
------------
2,625,452
OFFICE - INDUSTRIAL MIX-15.6%
Brandywine Realty Trust 18,800 472,350
Duke Realty Investments, Inc. 12,500 303,125
Highwoods Properties, Inc. 13,100 487,156
Reckson Associates Realty Corp. 16,200 411,075
Spieker Properties, Inc. 10,800 463,050
------------
2,136,756
SHARES OR
PRINCIPAL
AMOUNT
COMPANY (000) U.S. $ VALUE
- -------------------------------------------------------------------------
REGIONAL MALLS-5.7%
Macerich Co. 14,100 $ 401,850
Mills Corp. 15,200 372,400
------------
774,250
SHOPPING CENTERS-11.2%
Entertainment Properties Trust 12,500 242,188
Excel Realty Trust, Inc. 11,900 374,850
IRT Property Co. 14,100 166,556
Pacific Retail Trust Co. (a) 19,000 247,000
Pan Pacific Retail Properties, Inc. 23,800 508,725
------------
1,539,319
STORAGE-3.9%
Public Storage, Inc. 18,200 534,625
WAREHOUSE & INDUSTRIAL-5.3%
Meridian Industrial Trust, Inc. 13,500 344,250
Security Capital Industrial Trust 15,500 385,563
------------
729,813
------------
13,272,289
REAL ESTATE DEVELOPMENT & MANAGEMENT-0.1%
Crescent Operating, Inc. (a) 750 18,328
Security Capital Group, Inc.
warrants, expiring 9/18/98 (a) 498 2,615
------------
20,943
Total Common Stocks & Other Investments
(cost $12,260,771) 13,293,232
SHORT-TERM INVESTMENT-3.2%
TIME DEPOSIT-3.2%
State Street Bank and Trust Co.
5.25%, 1/02/98
(cost $443,000) $443 443,000
TOTAL INVESTMENTS-100.3%
(cost $12,703,771) 13,736,232
Other assets less liabilities-(0.3%) (42,175)
NET ASSETS-100% $13,694,057
(a) Non-income producing security.
See Notes to Financial Statements.
B-38
HIGH YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
CORPORATE DEBT OBLIGATIONS-77.6%
BUILDING PRODUCTS-0.9%
American Architectural Products Corp.
11.75%, 12/01/07 (a) $10 $ 10,150
BUSINESS SERVICES-3.5%
Dialog Corp. Plc
11.00%, 11/15/07 (a) 10 10,425
International Logistics, Ltd.
9.75%, 10/15/07 (a) 10 9,950
TSF Communications Corp.
10.375%, 11/01/07 (a) 20 19,900
------------
40,275
CABLE-0.9%
Northland Cable Television
10.25%, 11/15/07 (a) 10 10,575
CHEMICALS-1.8%
AEP Industries, Inc.
9.875%, 11/15/07 (a) 10 10,300
Climachem, Inc.
10.75%, 12/01/07 (a) 10 10,350
------------
20,650
COMMUNICATIONS-4.0%
Globalstar LP
10.75%, 11/01/04 (a) 10 9,800
Iridium Capital Corp. LLC
14.00%, 7/15/05 (b) 10 10,850
Telex Communications, Inc.
10.50%, 5/01/07 25 24,825
------------
45,475
CONSUMER MANUFACTURING-0.8%
Pen-Tab Industries
10.875%, 2/01/07 10 9,650
ENERGY-3.1%
Newpark Resources, Inc.
8.625%, 12/15/07 (a) 25 25,375
Transamerican Energy Corp.
11.50%, 6/15/02 (a) 10 9,850
------------
35,225
ENTERTAINMENT & LEISURE-0.9%
Livent, Inc.
9.375%, 10/15/04 (a) 10 10,050
FINANCIAL-8.9%
American Banknote Corp.
11.25%, 12/01/07 25 25,063
Emergent Group, Inc.
10.75%, 9/15/04 25 24,937
Metris Companies, Inc.
10.00%, 11/01/04 (a) 50 51,000
------------
101,000
FOOD/BEVERAGES-6.2%
Cuddy International Corp.
10.75%, 12/01/07 (a) 10 10,175
Imperial Holly Corp.
9.75%, 12/15/07 (a) 25 25,156
Iowa Select Farms
10.75%, 12/01/05 (a) 10 10,313
Richmont Marketing Specialist
10.125%, 12/15/07 (a) 25 25,375
------------
71,019
HEALTHCARE-4.5%
Kinetic Concepts, Inc.
9.625%, 11/01/07 (a) 50 51,062
INDUSTRIAL-7.1%
Bucyrus International, Inc.
9.75%, 9/15/07 20 20,200
Scotsman Industries, Inc.
8.625%, 12/15/07 25 25,000
Scovill Fasteners
11.25%, 11/30/07 (a) 10 10,250
Walbro Corp.
10.125%, 12/15/07 (a) 25 25,625
------------
81,075
MEDIA-3.2%
Perry-Judd, Inc.
10.625%, 12/15/07 (a) 25 26,000
Transwestern Publishing Co. LP
9.625%, 11/15/07 (a) 10 10,450
------------
36,450
METAL / MINERALS-4.3%
Acme Metals, Inc.
10.875%, 12/15/07 (a) 25 24,719
Wheeling-Pittsburgh Steel Corp.
9.25%, 11/15/07 (a) 25 24,250
------------
48,969
PAPER / PACKAGING-5.3%
Amscan Holdings, Inc.
9.875%, 12/15/07 (a) 25 25,500
Doman Industries, Ltd.
9.25%, 11/15/07 (a) 10 9,800
Stone Container Corp.
12.25%, 4/01/02 25 25,500
------------
60,800
B-39
HIGH YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
- -------------------------------------------------------------------------
RETAIL-3.9%
Big 5 Corp.
10.875%, 11/15/07 (a) $10 $ 10,000
Maxim Group, Inc.
9.25%, 10/15/07 (a) 25 24,938
United Auto Group, Inc.
11.00%, 7/15/07 (a) 10 9,900
------------
44,838
SUPERMARKET / DRUG-2.2%
Pueblo Xtra International
9.50%, 8/01/03 15 14,325
The Pantry, Inc.
10.25%, 10/15/07 (a) 10 10,250
------------
24,575
TECHNOLOGY-7.6%
Axiohm, Inc.
9.75%, 10/01/07 (a) 50 51,125
Concentric Network Corp.
12.75%, 12/15/07 25 25,687
Details, Inc.
10.00%, 11/15/05 (a) 10 10,275
------------
87,087
TEXTILE PRODUCTS-3.2%
Pillowtex Corp.
9.00%, 12/15/07 (a) 25 25,625
Worldtex, Inc.
9.625%, 12/15/07 (a) 10 10,350
------------
35,975
TRANSPORTATION-3.1%
Panoceanic Bulk Carriers, Ltd.
12.00%, 12/15/07 (a) $ 10 $9,900
Ryder TRS, Inc.
10.00%, 12/01/06 25 25,125
------------
35,025
UTILITY-2.2%
Trench Electric & Trench, Inc.
10.25%, 12/15/07 (a) 25 25,438
Total Corporate Debt Obligations
(cost $873,805) 885,363
SHORT-TERM INVESTMENT-18.4%
TIME DEPOSIT-18.4%
State Street Bank and Trust Co.
5.25%, 1/02/98
(cost $210,000) 210 210,000
TOTAL INVESTMENTS-96.0%
(cost $1,083,805) 1,095,363
Other assets less liabilities-4.0% 45,992
NET ASSETS-100% $1,141,355
(a) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At December 31,
1997, the aggregate market value of these securities amounted to $654,201 or
57.3% of net assets.
(b) Indicates a security that has a zero coupon that remains in effect until a
predetermined date at which time the stated coupon rate becomes effective until
final maturity.
Glossary of Terms:
ADR - American Depositary Receipts
FLIRB - Front Load Interest Reduction Bond
FNMA - Federal National Mortgage Association
FRN - Floating Rate Note
GDR - Global Depositary Receipts
GDS - Global Depositary Shares
IAN - Interest Arrears Note
IRB - Interest Reduction Bond
PDI - Past Due Interest
pfd. - Preferred Stock
RNC - Non Convertible Saving Share
See Notes to Financial Statements.
B-40
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
GROWTH SHORT-TERM
PREMIER GROWTH GLOBAL BOND AND INCOME MULTI-MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at value
(cost $379,845,622, $21,876,330,
$220,961,778 and $6,242,555,
respectively) $469,955,845 $ 21,763,934 $249,328,049 $ 5,961,640
Cash, at value (cost $668, $43,596,
$515 and $206,018, respectively) 668 43,141 515 206,018
Receivable for investment
securities sold 1,769,566 -0- 1,835,905 -0-
Receivable for capital stock sold 647,310 13,185 22,028 10
Dividends receivable 492,359 -0- 438,608 -0-
Interest receivable 195 419,697 27 175,486
Unrealized appreciation of forward
exchange currency contracts -0- 124,654 -0- 160,399
Total assets 472,865,943 22,364,611 251,625,132 6,503,553
LIABILITIES
Advisory fee payable 316,787 8,303 128,938 2,995
Payable for capital stock redeemed 89,007 147,985 86,517 7,121
Payable for investment securities
purchased -0- -0- 1,137,929 -0-
Accrued expenses 134,044 13,978 70,153 4,005
Total liabilities 539,838 170,266 1,423,537 14,121
NET ASSETS $472,326,105 $ 22,194,345 $250,201,595 $ 6,489,432
COMPOSITION OF NET ASSETS
Capital stock, at par $ 22,504 $ 1,999 $ 12,553 $ 614
Additional paid-in capital 389,213,455 21,846,305 191,694,750 7,269,654
Undistributed net investment income 594,942 229,154 2,192,351 473,715
Accumulated net realized gain
(loss) on investments and
foreign currency transactions (7,615,019) 108,075 27,935,659 (1,130,586)
Net unrealized appreciation
(depreciation) of investments
and foreign currency
denominated assets and liabilities 90,110,223 8,812 28,366,282 (123,965)
$472,326,105 $ 22,194,345 $250,201,595 $ 6,489,432
Shares of capital stock outstanding 22,504,318 1,999,231 12,552,817 613,666
Net asset value per share $ 20.99 $ 11.10 $ 19.93 $ 10.57
</TABLE>
See Notes to Financial Statements.
B-41
STATEMENTS OF ASSETS AND LIABILITIES
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
U.S. GOVERNMENT
/HIGH GRADE
SECURITIES TOTAL RETURN INTERNATIONAL MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at value
(cost $35,016,067, $39,116,803,
$58,656,226 and $67,142,921,
respectively) $35,677,712 $42,625,882 $59,500,779 $67,142,921
Cash, at value (cost $201, $182,
$644,199 and $55,023, respectively) 201 182 641,669 55,023
Interest receivable 563,570 253,530 507 54,094
Receivable for capital stock sold 11,946 11,707 8,007 901,623
Dividends receivable 1,181 44,916 87,258 -0-
Receivable for investment
securities sold -0- 162,908 226,457 -0-
Unrealized appreciation of forward
exchange currency contracts -0- -0- 698,285 -0-
Total assets 36,254,610 43,099,125 61,162,962 68,153,661
LIABILITIES
Payable for capital stock redeemed 21,990 14,023 357,794 198,635
Advisory fee payable 18,040 22,034 32,681 30,817
Payable for investment securities
purchased -0- 124,155 -0- -0-
Dividends payable -0- -0- -0- 316,379
Accrued expenses 16,802 18,944 62,089 24,009
Total liabilities 56,832 179,156 452,564 569,840
NET ASSETS $36,197,778 $42,919,969 $60,710,398 $67,583,821
COMPOSITION OF NET ASSETS
Capital stock, at par $ 3,034 $ 2,537 $ 4,042 $ 67,583
Additional paid-in capital 33,468,495 34,796,439 57,503,795 67,515,833
Undistributed net investment income 1,860,125 822,392 242,000 1,046
Accumulated net realized gain
(loss) on investments and
foreign currency transactions 204,479 3,789,522 1,419,480 (641)
Net unrealized appreciation of
investments and foreign
currency denominated assets
and liabilities 661,645 3,509,079 1,541,081 -0-
$36,197,778 $42,919,969 $60,710,398 $67,583,821
Shares of capital stock outstanding 3,033,854 2,536,298 4,042,053 67,584,219
Net asset value per share $ 11.93 $ 16.92 $ 15.02 $ 1.00
</TABLE>
See Notes to Financial Statements.
B-42
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
NORTH AMERICAN
GLOBAL DOLLAR GOVERNMENT
GOVERNMENT INCOME UTILITY INCOME GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at value
(cost $15,312,083, $29,501,391,
$15,967,299 and $189,215,765,
respectively) $15,239,598 $30,410,686 $20,305,384 $243,072,486
Cash, at value (cost $203, $675,
$22,476 and $363,513, respectively) 203 675 22,473 363,513
Receivable for investment
securities sold 400,240 57,355 -0- 88,393
Interest receivable 292,531 222,482 1,760 50,707
Deferred organization expenses 4,449 5,744 4,137 3,402
Unrealized appreciation of forward
exchange currency contracts -0- 4,138 -0- -0-
Dividends receivable -0- -0- 42,913 255,741
Receivable for capital stock sold -0- -0- 15,773 98,136
Total assets 15,937,021 30,701,080 20,392,440 243,932,378
LIABILITIES
Payable for investment securities
purchased 525,850 -0- -0- 7,660,848
Payable for capital stock redeemed 16,714 167,262 29,349 176,625
Advisory fee payable 3,553 5,322 11,927 146,116
Accrued expenses 12,460 21,995 4,158 73,804
Total liabilities 558,577 194,579 45,434 8,057,393
NET ASSETS $15,378,444 $30,506,501 $20,347,006 $235,874,985
COMPOSITION OF NET ASSETS
Capital stock, at par $ 1,050 $ 2,353 $ 1,298 $ 10,521
Additional paid-in capital 13,698,404 27,237,510 15,333,594 165,726,908
Undistributed net investment income 1,013,027 2,082,356 461,439 684,284
Accumulated net realized gain on
investments and foreign
currency transactions 738,448 271,275 212,592 15,596,551
Net unrealized appreciation
(depreciation) of investments
and foreign currency
denominated assets and liabilities (72,485) 913,007 4,338,083 53,856,721
$15,378,444 $30,506,501 $20,347,006 $235,874,985
Shares of capital stock outstanding 1,050,053 2,352,683 1,298,346 10,521,215
Net asset value per share $ 14.65 $ 12.97 $ 15.67 $ 22.42
</TABLE>
See Notes to Financial Statements.
B-43
STATEMENTS OF ASSETS AND LIABILITIES
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
WORLDWIDE CONSERVATIVE GROWTH
PRIVATIZATION INVESTORS INVESTORS TECHNOLOGY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at value
(cost $40,869,970, $28,753,388,
$15,407,619 and $63,250,321,
respectively) $41,769,107 $29,946,673 $16,483,770 $68,641,570
Cash, at value (cost $50,351,
$92,235, $74,516 and $52,750,
respectively) 50,029 91,849 74,531 52,750
Receivable for investment
securities sold 340,238 4,683 7,021 519,124
Dividends receivable 81,815 8,842 12,253 5,573
Receivable for capital stock sold 38,983 -0- 5,985 90,474
Deferred organization expenses 3,446 3,638 3,638 13,179
Interest receivable 792 182,360 34,776 -0-
Receivable from Adviser -0- 2,345 -0- -0-
Total assets 42,284,410 30,240,390 16,621,974 69,322,670
LIABILITIES
Payable for investment securities
purchased 416,006 50 -0- -0-
Advisory fee payable 8,844 -0- 2,490 45,391
Payable for capital stock redeemed 4,461 11,882 3,841 2,454
Accrued expenses 37,134 32,077 15,733 34,992
Total liabilities 466,445 44,009 22,064 82,837
NET ASSETS $41,817,965 $30,196,381 $16,599,910 $69,239,833
COMPOSITION OF NET ASSETS
Capital stock, at par $ 2,945 $ 2,305 $ 1,155 $ 5,910
Additional paid-in capital 38,366,241 26,776,245 13,976,715 66,298,024
Undistributed net investment income 502,310 973,022 202,165 86,270
Accumulated net realized gain
(loss) on investments and
foreign currency transactions 2,052,094 1,252,054 1,343,830 (2,541,620)
Net unrealized appreciation of
investments and foreign
currency denominated assets
and liabilities 894,375 1,192,755 1,076,045 5,391,249
$41,817,965 $30,196,381 $16,599,910 $69,239,833
Shares of capital stock outstanding 2,944,708 2,304,722 1,154,452 5,910,211
Net asset value per share $ 14.20 $ 13.10 $ 14.38 $ 11.72
</TABLE>
See Notes to Financial Statements.
B-44
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
REAL ESTATE
QUASAR INVESTMENT HIGH YIELD
PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- -------------
ASSETS
Investments in securities, at value
(cost $58,583,335, $12,703,771
and $1,083,805, respectively) $58,810,689 $13,736,232 $1,095,363
Cash, at value (cost $164,628,
$955 and $508, respectively) 164,628 955 508
Receivable for investment
securities sold 1,273,105 18,404 -0-
Receivable for capital stock sold 59,740 200 31,160
Deferred organization expenses 18,767 16,091 -0-
Dividends receivable 6,706 90,769 -0-
Receivable from Adviser -0- 1,853 6,521
Interest receivable -0- 65 12,085
Total assets 60,333,635 13,864,569 1,145,637
LIABILITIES
Payable for investment
securities purchased 1,003,660 120,361 -0-
Advisory fee payable 19,979 -0- -0-
Payable for capital stock redeemed 13,376 16,873 30
Accrued expenses 19,452 33,278 4,252
Total liabilities 1,056,467 170,512 4,282
NET ASSETS $59,277,168 $13,694,057 $1,141,355
COMPOSITION OF NET ASSETS
Capital stock, at par $ 4,701 $ 1,110 $ 110
Additional paid-in capital 53,776,345 12,293,375 1,121,749
Undistributed net investment
income 45,520 287,942 7,694
Accumulated net realized gain
on investments and foreign
currency transactions 5,223,248 79,169 244
Net unrealized appreciation of
investments and foreign
currency denominated assets
and liabilities 227,354 1,032,461 11,558
$59,277,168 $13,694,057 $1,141,355
Shares of capital stock
outstanding 4,700,876 1,110,131 110,466
Net asset value per share $ 12.61 $ 12.34 $ 10.33
See Notes to Financial Statements.
B-45
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
GROWTH SHORT-TERM
PREMIER GROWTH GLOBAL BOND AND INCOME MULTI-MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends (net of foreign tax
withheld of $18,235, $0,
$9,288 and $0, respectively) $ 2,517,129 $ -0- $ 3,122,096 $ -0-
Interest 769,879 1,116,903 425,839 463,113
Total investment income 3,287,008 1,116,903 3,547,935 463,113
EXPENSES
Advisory fee 2,833,207 126,392 1,180,305 39,511
Audit and legal 123,356 4,374 56,713 2,267
Custodian 82,134 60,967 69,869 54,874
Printing 73,187 3,567 38,936 946
Amortization of organization
expenses 2,657 -0- -0- -0-
Directors fees 1,764 1,396 1,452 1,396
Transfer agency 1,176 1,007 968 1,003
Miscellaneous 8,461 2,280 4,358 1,732
Total expenses 3,125,942 199,983 1,352,601 101,729
Less: expense reimbursement (434,465) (17,683) -0- (33,958)
Net expenses 2,691,477 182,300 1,352,601 67,771
Net investment income 595,531 934,603 2,195,334 395,342
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS
Net realized gain (loss) on
investment transactions (6,667,622) 509,828 27,935,671 (18,594)
Net realized gain (loss) on foreign
currency transactions -0- (1,061,111) -0- 130,313
Net change in unrealized
appreciation (depreciation) of
investments 72,666,731 (186,705) 15,634,977 (282,434)
Net change in unrealized
appreciation (depreciation) of
foreign currency denominated
assets and liabilities -0- (710) -0- 100,899
Net gain (loss) on investments 65,999,109 (738,698) 43,570,648 (69,816)
NET INCREASE IN NET ASSETS FROM
OPERATIONS $66,594,640 $ 195,905 $45,765,982 $ 325,526
</TABLE>
See Notes to Financial Statements.
B-46
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
U.S. GOVERNMENT
/HIGH GRADE
SECURITIES TOTAL RETURN INTERNATIONAL MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $2,119,415 $ 760,827 $ 193,058 $3,890,830
Dividends (net of foreign tax
withheld of $0, $1,062, $110,684
and $0, respectively) 4,725 354,398 807,702 -0-
Total investment income 2,124,140 1,115,225 1,000,760 3,890,830
EXPENSES
Advisory fee 189,543 209,008 550,231 345,313
Custodian 53,494 60,327 188,437 51,134
Audit and legal 6,340 8,674 18,615 20,859
Printing 6,155 5,773 11,302 11,858
Amortization of organization
expenses 3,464 4,826 4,941 4,969
Directors fees 1,396 1,438 1,444 1,453
Transfer agency 1,005 997 1,088 884
Miscellaneous 2,734 2,560 3,632 2,177
Total expenses 264,131 293,603 779,690 438,647
Less: expense reimbursement -0- (390) (256,970) -0-
Net expenses 264,131 293,213 522,720 438,647
Net investment income 1,860,009 822,012 478,040 3,452,183
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS
Net realized gain (loss) on
investment transactions 225,380 3,789,362 1,551,682 (298)
Net realized gain (loss) on foreign
currency transactions 17,596 -0- (248,359) -0-
Net change in unrealized
appreciation of investments 571,200 1,754,576 118,113 -0-
Net change in unrealized
appreciation (depreciation) of
foreign currency denominated
assets and liabilities (12,381) -0- (1,267) -0-
Net gain (loss) on investments 801,795 5,543,938 1,420,169 (298)
NET INCREASE IN NET ASSETS FROM
OPERATIONS $2,661,804 $6,365,950 $1,898,209 $3,451,885
</TABLE>
See Notes to Financial Statements.
B-47
STATEMENTS OF OPERATIONS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
NORTH AMERICAN
GLOBAL DOLLAR GOVERNMENT
GOVERNMENT INCOME UTILITY INCOME GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $1,139,769 $2,326,884 $ 63,761 $ 647,161
Dividends (net of foreign tax
withheld of $0, $0, $1,607 and
$4,004, respectively) 3,343 -0- 554,341 1,599,093
Total investment income 1,143,112 2,326,884 618,102 2,246,254
EXPENSES
Advisory fee 97,176 162,844 122,569 1,393,231
Custodian 55,709 74,016 37,975 74,475
Audit and legal 5,006 10,786 4,952 45,919
Amortization of organization expenses 3,343 4,314 3,059 2,000
Printing 2,248 4,555 3,515 38,877
Directors fees 1,396 1,384 1,762 1,444
Transfer agency 1,005 1,005 1,128 727
Miscellaneous 1,739 2,101 2,199 1,942
Total expenses 167,622 261,005 177,159 1,558,615
Less: expense reimbursement (44,532) (23,002) (21,907) -0-
Net expenses 123,090 238,003 155,252 1,558,615
Net investment income 1,020,022 2,088,881 462,850 687,639
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS
Net realized gain on investment
transactions 739,413 277,640 259,000 15,669,717
Net realized gain (loss) on foreign
currency transactions -0- 15,299 (986) -0-
Net change in unrealized appreciation
(depreciation) of investments (463,672) (227,280) 3,238,862 33,639,619
Net change in unrealized appreciation
(depreciation) of foreign currency
denominated assets and liabilities -0- (16,635) (2) -0-
Net gain on investments 275,741 49,024 3,496,874 49,309,336
NET INCREASE IN NET ASSETS FROM
OPERATIONS $1,295,763 $2,137,905 $3,959,724 $49,996,975
</TABLE>
See Notes to Financial Statements.
B-48
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
WORLDWIDE CONSERVATIVE GROWTH
PRIVATIZATION INVESTORS INVESTORS TECHNOLOGY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends (net of foreign tax
withheld of $79,217, $4,607,
$5,078 and $1,588, respectively) $ 707,801 $ 80,090 $ 94,064 $ 33,141
Interest 168,207 1,145,503 257,948 543,765
Total investment income 876,008 1,225,593 352,012 576,906
EXPENSES
Advisory fee 322,889 191,414 98,931 517,882
Custodian 149,110 130,212 107,458 59,014
Audit and legal 15,465 5,584 9,968 19,740
Printing 6,158 4,541 2,089 11,719
Amortization of organization
expenses 2,000 2,000 2,000 4,296
Directors fees 1,439 1,444 1,347 1,450
Transfer agency 1,006 1,005 1,394 1,006
Miscellaneous 2,457 2,897 1,514 2,140
Total expenses 500,524 339,097 224,701 617,247
Less: expense reimbursement (193,781) (96,640) (99,387) (125,260)
Net expenses 306,743 242,457 125,314 491,987
Net investment income 569,265 983,136 226,698 84,919
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
Net realized gain (loss) on
investment transactions 2,105,312 1,312,334 1,375,441 (2,186,460)
Net realized loss on foreign
currency transactions (74,322) (17,301) (28,035) -0-
Net change in unrealized
appreciation (depreciation)
of investments (433,990) 470,046 334,877 3,331,455
Net change in unrealized
appreciation (depreciation) of
foreign currency denominated
assets and liabilities (5,034) (386) 15 -0-
Net gain on investments 1,591,966 1,764,693 1,682,298 1,144,995
NET INCREASE IN NET ASSETS FROM
OPERATIONS $2,161,231 $2,747,829 $1,908,996 $1,229,914
</TABLE>
See Notes to Financial Statements.
B-49
STATEMENTS OF OPERATIONS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
REAL ESTATE
QUASAR INVESTMENT HIGH YIELD
PORTFOLIO PORTFOLIO(A) PORTFOLIO(B)
------------ ------------ ------------
INVESTMENT INCOME
Interest $ 284,496 $ 14,551 $ 8,698
Dividends (net of foreign
tax withheld of $514, $0
and $0, respectively) 102,551 323,414 -0-
Total investment income 387,047 337,965 8,698
EXPENSES
Advisory fee 345,030 47,390 793
Custodian 81,564 56,855 5,300
Printing 22,582 3,024 192
Audit and legal 14,768 7,142 1,320
Amortization of organization
expenses 5,216 3,909 -0-
Directors fees 1,375 1,442 278
Transfer agency 858 916 157
Miscellaneous 2,320 780 693
Total expenses 473,713 121,458 8,733
Less: expense reimbursement (145,934) (71,435) (7,729)
Net expenses 327,779 50,023 1,004
Net investment income 59,268 287,942 7,694
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS
Net realized gain on
investment transactions 5,195,196 79,169 244
Net change in unrealized
appreciation of investments 79,213 1,032,461 11,558
Net gain on investments 5,274,409 1,111,630 11,802
NET INCREASE IN NET ASSETS
FROM OPERATIONS $5,333,677 $1,399,572 $ 19,496
(a) Commencement of operations, January 9, 1997.
(b) Commencement of operations, October 27, 1997.
See Notes to Financial Statements.
B-50
STATEMENTS OF CHANGES
IN NET ASSETS ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
PREMIER GROWTH PORTFOLIO GLOBAL BOND PORTFOLIO
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income $ 595,531 $ 323,694 $ 934,603 $ 863,097
Net realized gain (loss) on
investments and foreign
currency transactions (6,667,622) (442,478) (551,283) 276,324
Net change in unrealized
appreciation (depreciation) of
investments and foreign
currency denominated assets
and liabilities 72,666,731 14,126,172 (187,415) (125,897)
Net increase in net assets from
operations 66,594,640 14,007,388 195,905 1,013,524
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (324,686) (316,135) (945,935) (1,035,617)
Net realized gain on investments -0- (17,322,907) (219,946) (309,324)
CAPITAL STOCK TRANSACTIONS
Net increase 309,621,843 70,787,668 5,047,231 6,895,530
Total increase 375,891,797 67,156,014 4,077,255 6,564,113
NET ASSETS
Beginning of year 96,434,308 29,278,294 18,117,090 11,552,977
End of year (including
undistributed net investment
income of $594,272, $323,427,
$909,235 and $920,567,
respectively) $472,326,105 $96,434,308 $22,194,345 $18,117,090
</TABLE>
See Notes to Financial Statements.
B-51
STATEMENTS OF CHANGES
IN NET ASSETS (CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
SHORT-TERM MULTI-
GROWTH AND INCOME PORTFOLIO MARKET PORTFOLIO
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income $ 2,195,334 $ 1,277,693 $ 395,342 $308,027
Net realized gain on investments
and foreign currency transactions 27,935,671 9,400,260 111,719 48,358
Net change in unrealized
appreciation (depreciation) of
investments and foreign
currency denominated assets
and liabilities 15,634,977 8,263,950 (181,535) 107,268
Net increase in net assets from
operations 45,765,982 18,941,903 325,526 463,653
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (1,272,246) (1,128,565) (412,899) (369,515)
Net realized gain on investments (9,150,387) (11,815,383) -0- -0-
CAPITAL STOCK TRANSACTIONS
Net increase (decrease) 88,128,841 78,738,622 (535,499) 3,866,088
Total increase (decrease) 123,472,190 84,736,577 (622,872) 3,960,226
NET ASSETS
Beginning of year 126,729,405 41,992,828 7,112,304 3,152,078
End of year (including
undistributed net investment
income of $2,192,336,
$1,269,248, $329,344 and
$346,901, respectively) $250,201,595 $126,729,405 $6,489,432 $7,112,304
</TABLE>
See Notes to Financial Statements.
B-52
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
U.S. GOVERNMENT/HIGH GRADE
SECURITIES PORTFOLIO TOTAL RETURN PORTFOLIO
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income $ 1,860,009 $ 1,425,623 $ 822,012 $ 480,735
Net realized gain (loss) on
investments and foreign
currency transactions 242,976 (5,171) 3,789,362 1,019,837
Net change in unrealized
appreciation (depreciation) of
investments and foreign currency
denominated assets and
liabilities 558,819 (477,962) 1,754,576 1,338,504
Net increase in net assets from
operations 2,661,804 942,490 6,365,950 2,839,076
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (1,409,036) (621,506) (480,826) (88,093)
Net realized gain on investments (54,796) (289,591) (1,019,434) (44,705)
CAPITAL STOCK TRANSACTIONS
Net increase 5,849,902 12,171,992 12,178,929 14,926,631
Total increase 7,047,874 12,203,385 17,044,619 17,632,909
NET ASSETS
Beginning of year 29,149,904 16,946,519 25,875,350 8,242,441
End of year (including
undistributed net investment
income of $1,821,509,
$1,370,536, $822,229
and $481,043, respectively) $36,197,778 $29,149,904 $42,919,969 $25,875,350
</TABLE>
See Notes to Financial Statements.
B-53
STATEMENTS OF CHANGES
IN NET ASSETS (CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
INTERNATIONAL PORTFOLIO MONEY MARKET PORTFOLIO
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income $ 478,040 $ 395,473 $ 3,452,183 $ 2,336,884
Net realized gain (loss) on
investments and foreign
currency transactions 1,303,323 906,640 (298) (343)
Net change in unrealized
appreciation of investments
and foreign currency
denominated assets and
liabilities 116,846 684,246 -0- -0-
Net increase in net assets from
operations 1,898,209 1,986,359 3,451,885 2,336,541
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (523,610) (155,834) (3,452,183) (2,336,884)
Net realized gain on investments (836,368) (244,881) -0- -0-
CAPITAL STOCK TRANSACTIONS
Net increase 15,848,071 26,196,817 2,814,828 36,677,326
Total increase 16,386,302 27,782,461 2,814,530 36,676,983
NET ASSETS
Beginning of year 44,324,096 16,541,635 64,769,291 28,092,308
End of year (including
undistributed net investment
income of $416,539, $462,109,
$1,046 and $1,046, respectively) $60,710,398 $44,324,096 $67,583,821 $64,769,291
</TABLE>
See Notes to Financial Statements.
B-54
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
GLOBAL DOLLAR NORTH AMERICAN GOVERNMENT
GOVERNMENT PORTFOLIO INCOME PORTFOLIO
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income $ 1,020,022 $ 481,784 $ 2,088,881 $ 1,243,424
Net realized gain (loss) on
investments and foreign
currency transactions 739,413 745,244 292,939 (165,830)
Net change in unrealized
appreciation of investments and
foreign currency denominated
assets and liabilities (463,672) 126,646 (243,915) 841,208
Net increase in net assets from
operations 1,295,763 1,353,674 2,137,905 1,918,802
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (489,948) (191,319) (1,103,754) (49,608)
Net realized gain on investments (742,125) (13,292) -0- (3,969)
CAPITAL STOCK TRANSACTIONS
Net increase 6,467,348 3,920,248 12,776,700 7,552,498
Total increase 6,531,038 5,069,311 13,810,851 9,417,723
NET ASSETS
Beginning of year 8,847,406 3,778,095 16,695,650 7,277,927
End of year (including
undistributed net investment
income of $1,013,027,
$482,953, $2,062,913 and
$1,077,786, respectively) $15,378,444 $ 8,847,406 $30,506,501 $16,695,650
</TABLE>
See Notes to Financial Statements.
B-55
STATEMENTS OF CHANGES
IN NET ASSETS (CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
UTILITY INCOME PORTFOLIO GROWTH PORTFOLIO
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income $ 462,850 $ 291,723 $ 687,639 $ 312,217
Net realized gain (loss) on
investments and foreign
currency transactions 258,014 (31,022) 15,669,717 6,454,479
Net change in unrealized
appreciation of investments and
foreign currency denominated
assets and liabilities 3,238,860 796,030 33,639,619 16,515,677
Net increase in net assets from
operations 3,959,724 1,056,731 49,996,975 23,282,373
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (289,532) (81,842) (265,892) (230,200)
Net realized gain on investments -0- (155,981) (6,564,799) (1,507,259)
CAPITAL STOCK TRANSACTIONS
Net increase 1,820,021 7,787,344 54,020,810 71,923,266
Total increase 5,490,213 8,606,252 97,187,094 93,468,180
NET ASSETS
Beginning of year 14,856,793 6,250,541 138,687,891 45,219,711
End of year (including
undistributed net investment
income of $462,346,
$289,028, $684,284 and
$262,537, respectively) $20,347,006 $14,856,793 $235,874,985 $138,687,891
</TABLE>
See Notes to Financial Statements.
B-56
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
WORLDWIDE PRIVATIZATION CONSERVATIVE INVESTORS
PORTFOLIO PORTFOLIO
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income $ 569,265 $ 260,056 $ 983,136 $ 611,534
Net realized gain (loss) on
investments and foreign
currency transactions 2,030,990 507,830 1,295,033 (55,570)
Net change in unrealized
appreciation of investments and
foreign currency denominated
assets and liabilities (439,024) 1,117,579 469,660 466,246
Net increase in net assets from
operations 2,161,231 1,885,465 2,747,829 1,022,210
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (348,486) (90,574) (608,412) (127,029)
Net realized gain on investments (421,270) -0- -0- (56,297)
CAPITAL STOCK TRANSACTIONS
Net increase 21,619,677 11,065,148 6,327,771 13,470,589
Total increase 23,011,152 12,860,039 8,467,188 14,309,473
NET ASSETS
Beginning of year 18,806,813 5,946,774 21,729,193 7,419,720
End of year (including
undistributed net investment
income of $529,226, $308,447,
$982,634 and $607,910,
respectively) $41,817,965 $18,806,813 $30,196,381 $21,729,193
</TABLE>
See Notes to Financial Statements.
B-57
STATEMENTS OF CHANGES
IN NET ASSETS (CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
GROWTH INVESTORS PORTFOLIO TECHNOLOGY PORTFOLIO
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income $ 226,698 $ 177,916 $ 84,919 $ 142,949
Net realized gain (loss) on
investments and foreign
currency transactions 1,347,406 175,340 (2,186,460) (355,160)
Net change in unrealized
appreciation of investments and
foreign currency denominated
assets and liabilities 334,892 507,668 3,331,455 2,059,794
Net increase in net assets from
operations 1,908,996 860,924 1,229,914 1,847,583
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (180,480) (55,626) (141,660) -0-
Net realized gain on investments (200,739) (16,764) -0- -0-
CAPITAL STOCK TRANSACTIONS
Net increase 4,362,797 4,942,686 40,068,148 26,235,848
Total increase 5,890,574 5,731,220 41,156,402 28,083,431
NET ASSETS
Beginning of period 10,709,336 4,978,116 28,083,431 -0-
End of period (including
undistributed net investment
income of $223,918, $177,700,
$86,218 and $142,959,
respectively) $16,599,910 $10,709,336 $69,239,833 $28,083,431
</TABLE>
(a) Commencement of operations, January 11, 1996.
See Notes to Financial Statements.
B-58
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
REAL ESTATE
INVESTMENT HIGH YIELD
QUASAR PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------- ------------- -------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS FROM
OPERATIONS
Net investment income $ 59,268 $ 11,162 $ 287,942 $ 7,694
Net realized gain on investment
transactions 5,195,196 25,330 79,169 244
Net change in unrealized
appreciation of investments
and foreign currency
denominated assets and
liabilities 79,213 148,141 1,032,461 11,558
Net increase in net assets from
operations 5,333,677 184,633 1,399,572 19,496
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income (22,104) -0- -0- -0-
CAPITAL STOCK TRANSACTIONS
Net increase 45,123,778 8,657,184 12,294,485 1,121,859
Total increase 50,435,351 8,841,817 13,694,057 1,141,355
NET ASSETS
Beginning of period 8,841,817 -0- -0- -0-
End of period (including
undistributed net investment
income of $48,326, $11,162,
$287,942 and $7,694,
respectively) $59,277,168 $ 8,841,817 $13,694,057 $ 1,141,355
</TABLE>
(a) Commencement of operations, August 5, 1996.
(b) Commencement of operations, January 9, 1997.
(c) Commencement of operations, October 27, 1997.
See Notes to Financial Statements.
B-59
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
Alliance Variable Products Series Fund, Inc. (the "Fund"), was incorporated in
the State of Maryland on November 17, 1987, as an open-end series investment
company. The Fund had no operations prior to November 28, 1990. The Fund offers
nineteen separately managed pools of assets which have differing investment
objectives and policies. The Fund currently issues shares of the Premier Growth
Portfolio, Global Bond Portfolio, Growth and Income Portfolio, Short-Term
Multi-Market Portfolio, U.S. Government/High Grade Securities Portfolio, Total
Return Portfolio, International Portfolio, Money Market Portfolio, Global
Dollar Government Portfolio, North American Government Income Portfolio,
Utility Income Portfolio, Growth Portfolio, Worldwide Privatization Portfolio,
Conservative Investors Portfolio, Growth Investors Portfolio, Technology
Portfolio, Quasar Portfolio, Real Estate Investment Portfolio and High Yield
Portfolio (the "Portfolios"). The investment objectives of each Portfolio are
as follows:
PREMIER GROWTH PORTFOLIO--seeks growth of capital employing aggressive
investment policies. Since investments will be made based upon their potential
for capital appreciation, current income will be incidental to the objective of
capital growth. The Portfolio is not intended for investors whose principal
objective is assured income or preservation of capital.
GLOBAL BOND PORTFOLIO--seeks a high level of return from a combination of
current income and capital appreciation by investing in a globally diversified
portfolio of high quality debt securities denominated in the U.S. Dollar and a
range of foreign currencies.
GROWTH AND INCOME PORTFOLIO--seeks to balance the objectives of reasonable
current income and reasonable opportunities for appreciation through
investments primarily in dividend-paying common stocks of good quality.
SHORT-TERM MULTI-MARKET PORTFOLIO--seeks the highest level of current income,
consistent with what the Fund's Adviser considers to be prudent investment
risk, that is available from a portfolio of high-quality debt securities having
remaining maturities of not more than three years.
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO--seeks a high level of current
income consistent with preservation of capital by investing principally in a
portfolio of U.S. Government securities and other high grade debt securities.
TOTAL RETURN PORTFOLIO--seeks to achieve a high return through a combination of
current income and capital appreciation by investing in a diversified portfolio
of common and preferred stocks, senior corporate debt securities, and U.S.
Government and agency obligations, bonds and senior debt securities.
INTERNATIONAL PORTFOLIO--seeks to obtain a total return on its assets from
long-term growth of capital principally through a broad portfolio of marketable
securities of established non-United States companies, companies participating
in foreign economies with prospects for growth, and foreign government
securities.
MONEY MARKET PORTFOLIO--seeks safety of principal, maintenance of liquidity and
maximum current income by investing in a broadly diversified portfolio of money
market securities.
GLOBAL DOLLAR GOVERNMENT PORTFOLIO--seeks a high level of current income
through investing substantially all of its assets in U.S. and non-U.S. fixed
income securities denominated only in U.S. Dollars. As a secondary objective,
the Portfolio seeks capital appreciation.
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO--seeks the highest level of current
income, consistent with what the Fund's Adviser considers to be prudent
investment risk, that is available from a portfolio of debt securities issued
or guaranteed by the governments of the United States, Canada and Mexico, their
political subdivisions (including Canadian Provinces but excluding the States
of the United States), agencies, instrumentalities or authorities. The
Portfolio seeks high current yields by investing in government securities
denominated in local currency and U.S. Dollars. Normally, the Portfolio expects
to maintain at least 25% of its assets in securities denominated in the U.S.
Dollar.
UTILITY INCOME PORTFOLIO--seeks current income and capital appreciation by
investing primarily in the equity and fixed-income securities of companies in
the utilities industry. The Portfolio's investment objective and policies are
designed to take advantage of the characteristics and historical performance of
securities of utilities companies.
GROWTH PORTFOLIO--seeks long-term growth of capital by investing primarily in
common stocks and other equity securities.
WORLDWIDE PRIVATIZATION PORTFOLIO--seeks long-term capital appreciation by
investing principally in equity securities issued by enterprises that are
undergoing, or have undergone, privatization. The balance of the Portfolio's
investment portfolio will include equity securities of companies that are
believed by the Fund's Adviser to be beneficiaries of the privatization process.
B-60
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
CONSERVATIVE INVESTORS PORTFOLIO--seeks the highest total return without, in
the view of the Fund's Adviser, undue risk to principal by investing in a
diversified mix of publicly traded equity and fixed-income securities.
GROWTH INVESTORS PORTFOLIO--seeks the highest total return consistent with what
the Fund's Adviser considers to be reasonable risk by investing in a
diversified mix of publicly traded equity and fixed-income securities.
TECHNOLOGY PORTFOLIO--seeks growth of capital through investment in companies
expected to benefit from advances in technology. The Portfolio invests
principally in a diversified portfolio of securities of companies which use
technology extensively in the development of new or improved products or
processes.
QUASAR PORTFOLIO--seeks growth of capital by pursuing aggressive investment
policies. The Portfolio invests principally in a diversified portfolio of
equity securities of any company and industry and in any type of security which
is believed to offer possibilities for capital appreciation.
REAL ESTATE INVESTMENT PORTFOLIO--seeks total return on its assets from
long-term growth of capital and from income principally through investing in a
portfolio of equity securities of issuers that are primarily engaged in or
related to the real estate industry.
HIGH YIELD PORTFOLIO--seeks the highest level of current income available
without assuming undue risk by investing principally in high-yielding
fixed-income securities.
The Fund offers and sells its shares only to separate accounts of certain life
insurance companies, for the purpose of funding variable annuity contracts and
variable life insurance policies. Sales are made without a sales charge, at
each Portfolio's net asset value per share.
The financial statements have been prepared in conformity with generally
accepted accounting principles which require management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities in the financial statements and amounts of income and expenses
during the reporting period. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the
Fund.
1. SECURITY VALUATION
Portfolio securities traded on a national securities exchange are valued at the
last sale price on such exchange on the day of valuation or, if there was no
sale on such day, the last bid price quoted on such day. Listed securities not
traded and securities traded in the over-the-counter market, including listed
debt securities whose primary market is believed to be over-the-counter, are
valued at the mean between the most recent quoted bid and asked prices provided
by the principal market makers. Publicly traded sovereign debt obligations are
typically traded internationally on the over-the-counter market. Readily
marketable sovereign debt obligations and fixed income securities may be valued
on the basis of prices provided by a pricing service when such prices are
believed by the Adviser to reflect the fair value of such securities. Options
are valued at market value or fair value using methods determined by the Board
of Directors. Restricted securities, illiquid securities and securities for
which market quotations are not readily available are valued in good faith at
fair value using methods determined by the Board of Directors. Securities which
mature in 60 days or less are valued at amortized cost, which approximates
market value, unless this method does not represent fair value.
Securities in which the Money Market Portfolio invests are valued at amortized
cost, under which method a portfolio instrument is valued at cost and any
premium or discount is amortized on a straight-line basis to maturity.
2. CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies and commitments under
forward exchange currency contracts are translated into U.S. dollars at the
mean of the quoted bid and asked prices of such currencies against the U.S.
dollar. Purchases and sales of portfolio securities are translated into U.S.
dollars at the rates of exchange prevailing when such securities were acquired
or sold. Income and expenses are translated into U.S. dollars at rates of
exchange prevailing when earned or accrued.
The Portfolios isolate that portion of the results of operations resulting from
changes in foreign exchange rates on investments from the fluctuations arising
from changes in market prices of securities held.
Net foreign exchange gains (losses) represent foreign exchange gains and losses
from sales and maturities of securities, closed forward exchange currency
contracts, holding of foreign currencies, options on foreign currencies,
exchange gains or losses realized between the trade and settlement dates on
security transactions, and the difference between the amounts of interest and
dividends recorded on the Portfolio's books and the U.S. dollar equivalent of
the amounts actually received or paid.
B-61
NOTES TO FINANCIAL STATEMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
Net currency gains and losses from valuing foreign currency denominated assets
and liabilities at year end exchange rates are reflected as a component of net
unrealized appreciation (depreciation) of investments and foreign currency
denominated assets and liabilities.
3. ORGANIZATION EXPENSES
Organization expenses of each Portfolio have been deferred and are being
amortized on a straight-line basis as follows: Premier Growth Portfolio $27,506
through June 1997; US Government/High Grade Securities Portfolio $24,384
through September 1997; Total Return Portfolio $24,384 through December 1997;
International Portfolio $24,983 through December 1997; Money Market Portfolio
$24,983 through December 1997; Global Dollar Government Portfolio $16,723
through April 1999; North American Government Income Portfolio $21,570 through
April 1999; Utility Income Portfolio $15,299 through April 1999; Growth
Portfolio $10,000 through September 1999; Worldwide Privatization Portfolio
$10,000 through September 1999; Conservative Investors Portfolio $10,000
through October 1999; Growth Investors Portfolio $10,000 through October 1999;
Technology Portfolio $21,500 through January 2001; Quasar Portfolio $26,098
through August 2001; Real Estate Investment Portfolio $20,000 through January
2002.
4. TAXES
It is the Fund's policy to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
investment company taxable income and net realized gains, if any, to
shareholders. Therefore, no provisions for federal income or excise taxes are
required.
5. INVESTMENT INCOME AND INVESTMENT TRANSACTIONS
Dividend income is recorded on the ex-dividend date. Interest income is accrued
daily. Investment transactions are accounted for on the date securities are
purchased or sold. The Fund accretes discounts as adjustments to interest
income and in the case of the Money Market Portfolio, amortizes premium as
well. Investment gains and losses are determined on the identified cost basis.
6. DIVIDENDS AND DISTRIBUTIONS
Each Portfolio declares and distributes dividends and distributions from net
investment income and net realized gains, respectively, if any, at least
annually, except for dividends on the Money Market Portfolio, which are
declared daily and paid monthly. Dividends and distributions to shareholders
are recorded on the ex-dividend date. Income and capital gains distributions
are determined in accordance with federal tax regulations and may differ from
those determined in accordance with generally accepted accounting principles.
To the extent these differences are permanent, such amounts are reclassified
within the capital accounts based on their federal tax basis treatment;
temporary differences, do not require such reclassification. During the current
fiscal year, certain portfolios had permanent differences, primarily due to
foreign exchange gains and losses and short-term capital gains which resulted
in reclassification of amounts within the composition of net assets. These
reclassifications had no affect on net assets.
NOTE B: ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of an investment advisory agreement, each Portfolio pays
Alliance Capital Management L.P. (the "Adviser") an investment advisory fee,
based on average net assets at the following annual rates: Premier Growth
Portfolio, 1%; Global Bond Portfolio, .65 of 1%; Growth and Income Portfolio,
.625 of 1%; Short-Term Multi-Market Portfolio, .55 of 1%; U.S. Government/High
Grade Securities Portfolio, .60 of 1%; Total Return Portfolio, .625 of 1%;
International Portfolio, 1%; Money Market Portfolio, .50 of 1%; Global Dollar
Government Portfolio, .75 of 1%; North American Government Income Portfolio,
.65 of 1%; Utility Income Portfolio, .75 of 1%; Growth Portfolio, .75 of 1%;
Worldwide Privatization Portfolio, 1%; Conservative Investors Portfolio, .75 of
1%; Growth Investors Portfolio, .75 of 1%; Technology Portfolio, 1%; Quasar
Portfolio, 1%; Real Estate Investment Portfolio, .90%; and High Yield
Portfolio, .75 of 1%. Such fee is accrued daily and paid monthly. For the
Global Bond Portfolio, the Adviser has retained, under a sub-advisory
agreement, a sub-adviser, AIGAM International Limited, an affiliate of American
International Group, Inc.
Each Portfolio compensates Alliance Fund Services, Inc., a wholly-owned
subsidiary of the Adviser, under a Transfer Agency Agreement for providing
personnel and facilities to perform transfer agency services for the Fund. Such
compensation amounted to $1,500 per month for the Premier Growth Portfolio, the
Global Bond Portfolio, the Growth and Income Portfolio, the Short-Term
Multi-Market Portfolio, the U.S. Government/High Grade Securities Portfolio,
the Total Return Portfolio, the International Portfolio, the Money Market
Portfolio, the Global Dollar Government Portfolio, the North American
Government Income Portfolio, the Utility Income Portfo-
B-62
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
lio, the Growth Portfolio, the Worldwide Privatization Portfolio, the
Conservative Investors Portfolio, the Growth Investors Portfolio, the
Technology Portfolio, the Quasar Portfolio, the Real Estate Investment
Portfolio and the High Yield Portfolio, respectively, for the year ended
December 31, 1997.
During the year ended December 31, 1997, the Adviser voluntarily agreed to
waive its fee and to reimburse the additional operating expenses of each
Portfolio so that expenses did not exceed .95% of average net assets. Expense
waivers/reimbursements, if any, are accrued daily and paid monthly. For the
year ended December 31, 1997, such waivers/reimbursements amounted to $434,465,
$17,683, $33,958, $390, $256,970, $44,532, $23,002, $21,907, $193,781, $96,640,
$99,387, $125,260, $145,934, $71,435 and $7,729 for the Premier Growth
Portfolio, the Global Bond Portfolio, the Short-Term Multi-Market Portfolio,
the Total Return Portfolio, the International Portfolio, the Global Dollar
Government Portfolio, the North American Government Income Portfolio, the
Utility Income Portfolio, the Worldwide Privatization Portfolio, the
Conservative Investors Portfolio, the Growth Investors Portfolio, the
Technology Portfolio, the Quasar Portfolio, the Real Estate Investment
Portfolio and the High Yield Portfolio, respectively.
Brokerage commissions paid for the year ended December 31, 1997, on securities
transactions amounted to $377,288, $409,972, $48,588, $355,055, $14,332,
$272,666, $110,817, $33,041, $43,551, $35,250, $231,416 and $26,891 for the
Premier Growth Portfolio, the Growth and Income Portfolio, the Total Return
Portfolio, the International Portfolio, the Utility Income Portfolio, the
Growth Portfolio, the Worldwide Privatization Portfolio, the Conservative
Investors Portfolio, the Growth Investors Portfolio, the Technology Portfolio,
the Quasar Portfolio and the Real Estate Investment Portfolio, respectively, of
which $820 was paid by the Growth Portfolio to Donaldson, Lufkin & Jenrette
Securities Corp. ("DLJ"), an affiliate of the Adviser.
NOTE C: INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding short-term investments)
for the year ended December 31, 1997, were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
---------------------------- ----------------------------
STOCKS U.S. STOCKS U.S.
AND DEBT GOVERNMENT AND DEBT GOVERNMENT
PORTFOLIO OBLIGATIONS AND AGENCIES OBLIGATIONS AND AGENCIES
- --------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Premier Growth $356,848,879 $ 6,945,071 $ 71,818,409 $ 130,886
Global Bond 43,400,048 10,280,023 39,170,477 8,975,203
Growth and Income 233,664,495 -0- 156,137,216 -0-
Short-Term Multi-Market 7,904,135 3,325,585 5,511,400 3,702,344
U.S. Government/High Grade Securities 8,868,413 23,641,752 14,770,869 17,289,292
Total Return 24,683,318 7,049,633 20,725,390 -0-
International 81,249,598 -0- 67,260,340 -0-
Global Dollar Government 33,314,188 -0- 26,223,120 -0-
North American Government Income 2,158,062 3,976,117 1,016,748 1,474,219
Utility Income 5,931,429 -0- 4,708,871 -0-
Growth 155,399,953 -0- 109,881,555 -0-
Worldwide Privatization 36,175,181 -0- 16,515,361 -0-
Conservative Investors 16,245,042 30,443,081 16,303,426 26,331,792
Growth Investors 17,122,167 4,983,068 15,022,933 4,023,095
Technology 56,873,659 -0- 19,097,172 -0-
Quasar 102,672,953 -0- 62,040,959 -0-
Real Estate Investment (a) 13,660,121 -0- 1,478,519 -0-
High Yield (b) 908,786 -0- 35,244 -0-
</TABLE>
(a) Commencement of operations, January 9, 1997.
(b) Commencement of operations, October 27, 1997.
B-63
NOTES TO FINANCIAL STATEMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
At December 31, 1997, the cost of investments for federal income tax purposes
and the tax basis gross unrealized appreciation, depreciation and net
unrealized appreciation (depreciation) were as follows:
<TABLE>
<CAPTION>
NET
GROSS UNREALIZED UNREALIZED
---------------------------- APPRECIATION
PORTFOLIO COST APPRECIATION DEPRECIATION (DEPRECIATION)
- --------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Premier Growth $380,071,358 $94,661,440 $(4,776,953) $89,884,487
Global Bond 21,882,611 213,452 (332,129) (118,677)
Growth and Income 221,131,766 35,057,829 (6,861,546) 28,196,283
Short-Term Multi-Market 6,242,555 3,538 (284,453) (280,915)
U.S. Government/High Grade Securities 35,016,344 770,806 (109,438) 661,368
Total Return 39,270,657 4,070,886 (715,661) 3,355,225
International 59,216,975 5,013,496 (4,729,692) 283,804
Global Dollar Government 15,312,083 255,298 (327,783) (72,485)
North American Government Income 29,501,391 1,033,337 (124,042) 909,295
Utility Income 15,967,311 4,643,936 (305,863) 4,338,073
Growth 189,231,061 57,257,356 (3,415,931) 53,841,425
Worldwide Privatization 41,120,962 4,802,213 (4,154,068) 648,145
Conservative Investors 28,771,580 1,412,718 (237,625) 1,175,093
Growth Investors 15,427,340 1,372,611 (316,181) 1,056,430
Technology 63,666,546 9,839,119 (4,864,095) 4,975,024
Quasar 58,758,348 3,993,110 (3,940,769) 52,341
Real Estate Investment 12,671,427 1,081,160 (16,355) 1,064,805
High Yield 1,083,805 12,666 (1,108) 11,558
</TABLE>
At December 31, 1997, for federal income tax purposes, the Premier Growth,
Money Market, North American Government Income and Technology Portfolios had
net capital loss carryforwards of $1,518,008 (of which $714,472 expires in the
year 2004 and $803,536 expires in the year 2005), $641 (of which $343 expires
in the year 2004 and $298 expires in the year 2005), $2,290 which expires in
the year 2004, $2,125,395 (of which $355,160 expires in the year 2004 and
$1,770,235 expires in the year 2005). During the year ended December 31, 1997,
the Conservative Investors and Utility Income utilized all of the capital loss
carryforward which amounted to $33,655 and $46,396. Short-Term Multi-Market had
net capital loss carryforward of $1,130,583 (of which $5,518 expires in the
year 2000, $150,822 expires in the year 2002, $941,593 expires in the year 2003
and $32,650 expires in the year 2005).
1. FORWARD EXCHANGE CURRENCY CONTRACTS
The Global Bond, Short-Term Multi-Market, International and North American
Government Income Portfolios enter into forward exchange currency contracts in
order to hedge their exposure to changes in foreign currency exchange rates on
their foreign portfolio holdings. A forward contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Portfolios may enter into contracts to deliver or receive foreign
currency it will receive from or require for its normal investment activities.
It may also use contracts in a manner intended to protect foreign currency
denominated securities from declines in value due to unfavorable exchange rate
movements. The gain or loss arising from the difference between the original
contract and the closing of such contract is included in realized gains or
losses from foreign currency transactions.
Fluctuations in the value of forward exchange currency contracts are recorded
for financial reporting purposes as unrealized gains or losses by the Portfolio.
Each Portfolio's custodian will place and maintain liquid assets in a separate
account of the Fund having a value equal to the aggregate amount of the
respective portfolios commitments under forward exchange currency contracts
entered into with respect to position hedges. Risks may arise from the
potential inability of a counterparty to meet the terms of a contract and from
unanticipated movements in the value of a foreign currency relative to the U.S.
dollar.
B-64
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
At December 31, 1997, the outstanding forward exchange currency contracts were
as follows:
GLOBAL BOND PORTFOLIO:
<TABLE>
<CAPTION>
U.S. $
CONTRACT VALUE ON U.S. $ UNREALIZED
AMOUNT ORIGINATION CURRENT APPRECIATION/
(000) DATE VALUE (DEPRECIATION)
---------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
FOREIGN EXCHANGE CURRENCY BUY CONTRACTS
Australian Dollar, expiring 1/30/98 1,500 $ 977,250 $ 978,278 $ 1,028
FOREIGN EXCHANGE CURRENCY SALE CONTRACTS
Australian Dollar, expiring 1/30/98 2,950 2,038,509 1,923,947 114,562
Deutsche Mark, expiring 1/20/98 1,900 1,071,841 1,057,418 14,423
Japanese Yen, expiring 1/20/98 290,000 2,222,110 2,227,469 (5,359)
-----------
$124,654
</TABLE>
SHORT-TERM MULTI-MARKET PORTFOLIO:
<TABLE>
<CAPTION>
U.S. $
CONTRACT VALUE ON U.S. $ UNREALIZED
AMOUNT ORIGINATION CURRENT APPRECIATION/
(000) DATE VALUE (DEPRECIATION)
---------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
FOREIGN EXCHANGE CURRENCY BUY CONTRACTS
Indonesian Rupiah, expiring 1/16/98 400,000 $ 158,541 $ 72,421 $(86,120)
FOREIGN EXCHANGE CURRENCY SALE CONTRACTS
Australian Dollar, expiring 1/12/98 285 198,695 185,579 13,116
Deutsche Mark, expiring 1/20/98 2,657 1,528,389 1,478,518 49,871
French Franc, expiring 1/14/98 1,769 307,858 294,106 13,752
Indonesian Rupiah, expiring 1/16/98 400,000 155,195 72,421 82,774
Italian Lira, expiring 1/26/98 1,004 588,928 567,154 21,774
New Zealand Dollar,
expiring 1/12/98-1/20/98 1,403 868,805 813,861 54,944
Spanish Peseta, expiring 1/14/98 3,000 20,661 19,698 963
Swedish Krona, expiring 2/4/98 3,438 442,757 433,432 9,325
-----------
$160,399
</TABLE>
INTERNATIONAL PORTFOLIO:
<TABLE>
<CAPTION>
U.S. $
CONTRACT VALUE ON U.S. $
AMOUNT ORIGINATION CURRENT UNREALIZED
(000) DATE VALUE APPRECIATION
---------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
FOREIGN EXCHANGE CURRENCY
SALE CONTRACTS
French Francs, expiring 3/05/98 29,234 $4,961,096 $4,875,541 $ 85,555
Japanese Yen, expiring 2/04/98 871,051 7,317,911 6,705,181 612,730
----------
$698,285
</TABLE>
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO:
<TABLE>
<CAPTION>
U.S. $
CONTRACT VALUE ON U.S. $
AMOUNT ORIGINATION CURRENT UNREALIZED
(000) DATE VALUE APPRECIATION
---------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
FOREIGN EXCHANGE CURRENCY SALE CONTRACTS
Canadian Dollars, expiring 1/08/98 1,100 $773,945 $769,807 $4,138
</TABLE>
B-65
NOTES TO FINANCIAL STATEMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
2. OPTION TRANSACTIONS
When a Portfolio writes an option, an amount equal to the premium received by
the Portfolio is recorded as a liability and is subsequently adjusted to the
current market value of the option written. Premiums received from writing
options which expire unexercised are recorded by the Portfolio on the
expiration date as realized gains. The difference between the premium and the
amount paid on effecting a closing purchase transaction, including brokerage
commissions, is also recorded as a realized gain, or if the premium is less
than the amount paid for the closing purchase transaction, as a realized loss.
If a call option is exercised, the premium is added to the proceeds from the
sale of the underlying security or currency in determining whether the
Portfolio has realized a gain or loss. If a put option is exercised, the
premium reduces the cost basis of the security or currency purchased by the
Portfolio. In writing an option, the Portfolio bears the market risk of
unfavorable changes in the price of the security or currency underlying the
written option. Exercise of an option written by the Portfolio could result in
the Portfolio selling or buying a security or currency at a price different
from the current market value.
NOTE D: CAPITAL STOCK
There are 900,000,000 shares of capital stock, $.001 par value per share of the
Fund authorized. Transactions in capital stock were as follows:
PREMIER GROWTH PORTFOLIO
SHARES AMOUNT
-------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ -------------- --------------
Shares sold 18,381,290 3,544,816 $348,392,336 $57,846,653
Shares issued in
reinvestment of
dividends and
distributions 17,344 1,261,734 324,686 17,639,042
Shares redeemed (2,038,212) (307,428) (39,095,179) (4,698,027)
Net increase 16,360,422 4,499,122 $309,621,843 $70,787,668
GLOBAL BOND PORTFOLIO
SHARES AMOUNT
-------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ -------------- --------------
Shares sold 615,554 542,902 $ 6,854,237 $6,400,878
Shares issued in
reinvestment of
dividends and
distributions 107,060 122,714 1,165,881 1,344,941
Shares redeemed (266,344) (73,483) (2,972,887) (850,289)
Net increase 456,270 592,133 $ 5,047,231 $6,895,530
GROWTH AND INCOME PORTFOLIO
SHARES AMOUNT
-------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ -------------- --------------
Shares sold 4,651,201 4,431,728 $85,220,780 $69,859,324
Shares issued in
reinvestment of
dividends and
distributions 585,541 897,017 10,422,633 12,943,948
Shares redeemed (411,208) (260,259) (7,514,572) (4,064,650)
Net increase 4,825,534 5,068,486 $88,128,841 $78,738,622
B-66
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SHORT-TERM MULTI-MARKET PORTFOLIO
SHARES AMOUNT
-------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ -------------- --------------
Shares sold 366,280 664,791 $ 3,882,391 $ 7,076,379
Shares issued in
reinvestment of
dividends 40,165 36,156 412,899 369,515
Shares redeemed (455,606) (336,158) (4,830,789) (3,579,806)
Net increase(decrease) (49,161) 364,789 $ (535,499) $ 3,866,088
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO
SHARES AMOUNT
-------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ -------------- --------------
Shares sold 870,507 1,420,578 $10,135,743 $16,046,280
Shares issued in
reinvestment of
dividends and
distributions 129,085 84,596 1,463,832 911,097
Shares redeemed (497,164) (426,894) (5,749,673) (4,785,385)
Net increase 502,428 1,078,280 $ 5,849,902 $12,171,992
TOTAL RETURN PORTFOLIO
SHARES AMOUNT
-------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ -------------- --------------
Shares sold 880,572 1,193,848 $14,008,071 $15,859,123
Shares issued in
reinvestment of
dividends and
distributions 97,356 10,076 1,500,260 132,799
Shares redeemed (210,529) (78,997) (3,329,402) (1,065,291)
Net increase 767,399 1,124,927 $12,178,929 $14,926,631
INTERNATIONAL PORTFOLIO
SHARES AMOUNT
-------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ -------------- --------------
Shares sold 5,433,762 2,116,357 $ 83,558,930 $30,825,850
Shares issued in
reinvestment of
dividends and
distributions 85,533 27,149 1,359,978 400,715
Shares redeemed (4,454,018) (342,716) (69,070,837) (5,029,748)
Net increase 1,065,277 1,800,790 $ 15,848,071 $26,196,817
B-67
NOTES TO FINANCIAL STATEMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
MONEY MARKET PORTFOLIO
SHARES AMOUNT
-------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ -------------- --------------
Shares sold 260,121,111 178,619,585 $ 260,121,111 $ 178,619,585
Shares issued in
reinvestment of
dividends 3,452,183 2,336,582 3,452,183 2,336,582
Shares redeemed (260,758,466) (144,278,841) (260,758,466) (144,278,841)
Net increase 2,814,828 36,677,326 $ 2,814,828 $ 36,677,326
GLOBAL DOLLAR GOVERNMENT PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ -------------- --------------
Shares sold 567,148 373,824 $ 8,477,375 $ 4,866,573
Shares issued in
reinvestment of
dividends and
distributions 90,285 17,037 1,232,073 204,610
Shares redeemed (225,116) (89,291) (3,242,100) (1,150,935)
Net increase 432,317 301,570 $ 6,467,348 $ 3,920,248
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO
SHARES AMOUNT
-------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ -------------- --------------
Shares sold 1,306,695 933,567 $16,666,170 $10,739,062
Shares issued in
reinvestment of
dividends and
distributions 88,019 4,805 1,103,754 53,576
Shares redeemed (391,062) (283,721) (4,993,224) (3,240,140)
Net increase 1,003,652 654,651 $12,776,700 $ 7,552,498
UTILITY INCOME PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ -------------- --------------
Shares sold 353,259 776,031 $ 4,795,124 $ 9,308,720
Shares issued in
reinvestment of
dividends and
distributions 22,136 20,206 289,532 237,823
Shares redeemed (247,410) (146,278) (3,264,635) (1,759,199)
Net increase 127,985 649,959 $ 1,820,021 $ 7,787,344
B-68
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
GROWTH PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ -------------- --------------
Shares sold 3,011,243 4,744,489 $ 58,667,838 $74,657,741
Shares issued in
reinvestment of
dividends and
distributions 359,699 111,233 6,830,691 1,737,459
Shares redeemed (589,726) (292,788) (11,477,719) (4,471,934)
Net increase 2,781,216 4,562,934 $ 54,020,810 $71,923,266
WORLDWIDE PRIVATIZATION PORTFOLIO
SHARES AMOUNT
-------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ -------------- --------------
Shares sold 1,621,182 977,499 $23,165,163 $12,011,656
Shares issued in
reinvestment of
dividends and
distributions 53,013 7,424 769,756 90,574
Shares redeemed (162,366) (84,263) (2,315,242) (1,037,082)
Net increase 1,511,829 900,660 $21,619,677 $11,065,148
CONSERVATIVE INVESTORS PORTFOLIO
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ -------------- --------------
Shares sold 780,780 1,387,334 $ 9,838,439 $15,999,200
Shares issued in
reinvestment of
dividends and
distributions 48,986 16,196 608,412 183,326
Shares redeemed (325,161) (234,084) (4,119,080) (2,711,937)
Net increase 504,605 1,169,446 $ 6,327,771 $13,470,589
GROWTH INVESTORS PORTFOLIO
SHARES AMOUNT
-------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ -------------- --------------
Shares sold 436,739 646,812 $ 6,003,204 $ 7,777,769
Shares issued in
reinvestment of
dividends and
distributions 28,259 6,038 381,219 72,389
Shares redeemed (150,934) (231,754) (2,021,626) (2,907,472)
Net increase 314,064 421,096 $ 4,362,797 $ 4,942,686
B-69
NOTES TO FINANCIAL STATEMENTS
(CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
TECHNOLOGY PORTFOLIO
SHARES AMOUNT
-------------------------- ------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996(A) 1997 1996(A)
------------ ------------ -------------- --------------
Shares sold 3,792,319 2,807,022 $45,101,686 $29,063,181
Shares issued in
reinvestment of
dividends and
distributions 12,276 -0- 141,660 -0-
Shares redeemed (437,863) (263,543) (5,175,198) (2,827,333)
Net increase 3,366,732 2,543,479 $40,068,148 $26,235,848
QUASAR PORTFOLIO
SHARES AMOUNT
-------------------------- ------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996(B) 1997 1996(B)
------------ ------------ -------------- --------------
Shares sold 4,114,230 832,347 $48,077,255 $8,673,741
Shares issued in
reinvestment of
dividends and
distributions 1,959 -0- 22,104 -0-
Shares redeemed (246,062) (1,598) (2,975,581) (16,557)
Net increase 3,870,127 830,749 $45,123,778 $8,657,184
REAL ESTATE INVESTMENT PORTFOLIO
SHARES AMOUNT
-------------------------- ------------------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1997(c) 1997(c)
------------ --------------
Shares sold 1,182,129 $13,064,224
Shares redeemed (71,998) (769,739)
Net increase 1,110,131 $12,294,485
HIGH YIELD PORTFOLIO
SHARES AMOUNT
-------------------------- ------------------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1997(D) 1997(D)
------------ --------------
Shares sold 110,513 $1,122,331
Shares redeemed (47) (472)
Net increase 110,466 $1,121,859
(a) Commencement of operations, January 11, 1996.
(b) Commencement of operations, August 5, 1996.
(c) Commencement of operations, January 9, 1997.
(d) Commencement of operations, October 27, 1997.
B-70
FINANCIAL HIGHLIGHTS ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
PREMIER GROWTH PORTFOLIO
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $15.70 $17.80 $12.37 $12.79 $11.38
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .04 .08 .09 .03 -0-
Net realized and unrealized gain (loss)
on investment transactions 5.27 3.29 5.44 (.41) 1.43
Net increase (decrease) in net asset
value from operations 5.31 3.37 5.53 (.38) 1.43
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.02) (.10) (.03) (.01) (.01)
Distributions from net realized gains -0- (5.37) (.07) (.03) (.01)
Total dividends and distributions (.02) (5.47) (.10) (.04) (.02)
Net asset value, end of year $20.99 $15.70 $17.80 $12.37 $12.79
TOTAL RETURN
Total investment return based on
net asset value (c) 33.86% 22.70% 44.85% (2.96)% 12.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $472,326 $96,434 $29,278 $37,669 $13,659
Ratio to average net assets of:
Expenses, net of waivers
and reimbursements .95% .95% .95% .95% 1.18%
Expenses, before waivers
and reimbursements 1.10% 1.23% 1.19% 1.40% 2.05%
Net investment income (a) .21% .52% .55% .42% .22%
Portfolio turnover rate 27% 32% 97% 38% 42%
Average commission rate paid (d) $.0541 $.0609 -0- -0- -0-
</TABLE>
<TABLE>
<CAPTION>
GLOBAL BOND PORTFOLIO
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.74 $12.15 $ 9.82 $11.33 $11.24
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .54 .67 .69 .57 .77
Net realized and unrealized gain (loss)
on investments and foreign
currency transactions (.48) .01 1.73 (1.16) .43
Net increase (decrease) in net
asset value from operations .06 .68 2.42 (.59) 1.20
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.57) (.84) (.09) (.62) (.85)
Distributions from net realized gains (.13) (.25) -0- (.30) (.26)
Total dividends and distributions (.70) (1.09) (.09) (.92) (1.11)
Net asset value, end of year $11.10 $11.74 $12.15 $ 9.82 $11.33
TOTAL RETURN
Total investment return based on
net asset value (c) .67% 6.21% 24.73% (5.16)% 11.15%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $22,194 $18,117 $11,553 $7,298 $6,748
Ratio to average net assets of:
Expenses, net of waivers
and reimbursements .94% .94% .95% .95% 1.50%
Expenses, before waivers
and reimbursements 1.03% 1.15% 1.77% 2.05% 1.50%
Net investment income (a) 4.81% 5.76% 6.22% 6.01% 4.85%
Portfolio turnover rate 257% 191% 262% 102% 125%
</TABLE>
See footnote summary on page B-79.
B-71
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<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 OPERATIONS
Net investment income (a)(b) .21 .24 .27 .10 .01
Net realized and unrealized gain (loss)
on investment transactions 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 DISTRIBUTIONS
Dividends from net investment income (.13) (.25) (.13) (.10) (.06)
Distributions from net realized gains (.94) (2.56) (.14) (.17) (.03)
Total dividends and distributions (1.07) (2.81) (.27) (.27) (.09)
Net asset value, end of year $19.93 $16.40 $15.79 $11.85 $12.18
TOTAL RETURN
Total investment return based
on net asset value (c) 28.80% 24.09% 35.76% (.35)% 11.69%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $250,202 $126,729 $41,993 $41,702 $22,756
Ratio to average net assets of:
Expenses, net of waivers
and reimbursements .72% .82% .79% .90% 1.18%
Expenses, before waivers
and reimbursements .72% .82% .79% .91% 1.28%
Net investment income (a) 1.16% 1.58% 1.95% 1.71% 1.76%
Portfolio turnover rate 86% 87% 150% 95% 69%
Average commission rate paid (d) $.0581 $.0602 -0- -0- -0-
</TABLE>
<TABLE>
<CAPTION>
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 OPERATIONS
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 DISTRIBUTIONS
Dividends from net investment income (.64) (.82) -0- (.46) (.41)
Return of capital -0- -0- -0- (.01) -0-
Total dividends and distributions (.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>
See footnote summary on page B-79.
B-72
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.52 $11.66 $ 9.94 $10.72 $ 9.89
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .68 .66 .65 .28 .43
Net realized and unrealized gain (loss)
on investment transactions .29 (.39) 1.25 (.71) .48
Net increase (decrease) in net
asset value from operations .97 .27 1.90 (.43) .91
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.54) (.28) (.18) (.21) (.08)
Distributions from net realized gains (.02) (.13) -0- (.14) -0-
Total dividends and distributions (.56) (.41) (.18) (.35) (.08)
Net asset value, end of year $11.93 $11.52 $11.66 $ 9.94 $10.72
TOTAL RETURN
Total investment return based
on net asset value (c) 8.68% 2.55% 19.26% (4.03)% 9.20%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $36,198 $29,150 $16,947 $5,101 $1,350
Ratio to average net assets of:
Expenses, net of waivers
and reimbursements .84% .92% .95% .95% 1.16%
Expenses, before waivers
and reimbursements .84% .98% 1.58% 3.73% 5.42%
Net investment income (a) 5.89% 5.87% 5.96% 5.64% 4.59%
Portfolio turnover rate 114% 137% 68% 32% 177%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN PORTFOLIO
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $14.63 $12.80 $10.41 $10.97 $10.01
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .39 .27 .36 .15 .15
Net realized and unrealized gain (loss)
on investment transactions 2.62 1.66 2.10 (.56) .81
Net increase (decrease) in net
asset value from operations 3.01 1.93 2.46 (.41) .96
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.23) (.07) (.07) (.09) -0-
Distributions from net realized gains (.49) (.03) -0- (.06) -0-
Total dividends and distributions (.72) (.10) (.07) (.15) -0-
Net asset value, end of year $16.92 $14.63 $12.80 $10.41 $10.97
TOTAL RETURN
Total investment return based
on net asset value (c) 21.11% 15.17% 23.67% (3.77)% 9.59%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $42,920 $25,875 $8,242 $750 $360
Ratio to average net assets of:
Expenses, net of waivers
and reimbursements .88% .95% .95% .95% 1.20%
Expenses, before waivers
and reimbursements .88% 1.12% 4.49% 19.49% 25.96%
Net investment income (a) 2.46% 2.76% 3.16% 2.29% 1.45%
Portfolio turnover rate 65% 57% 30% 83% 25%
Average commission rate paid (d) $.0577 $.0593 -0- -0- -0-
</TABLE>
See footnote summary on page B-79.
B-73
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
INTERNATIONAL PORTFOLIO
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $14.89 $14.07 $12.88 $12.16 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .13 .19 .18 .10 .03
Net realized and unrealized gain
on investments and foreign
currency transactions .39 .83 1.08 .72 2.13
Net increase in net asset
value from operations .52 1.02 1.26 .82 2.16
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.15) (.08) (.03) (.02) -0-
Distributions from net realized gains (.24) (.12) (.04) (.08) -0-
Total dividends and distributions (.39) (.20) (.07) (.10) -0-
Net asset value, end of year $15.02 $14.89 $14.07 $12.88 $12.16
TOTAL RETURN
Total investment return based
on net asset value (c) 3.33% 7.25% 9.86% 6.70% 21.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $60,710 $44,324 $16,542 $7,276 $688
Ratio to average net assets of:
Expenses, net of waivers
and reimbursements .95% .95% .95% .95% 1.20%
Expenses, before waivers
and reimbursements 1.42% 1.91% 2.99% 7.26% 39.28%
Net investment income (a) .87% 1.29% 1.41% .90% .26%
Portfolio turnover rate 134% 60% 87% 95% 85%
Average commission rate paid (d) $.0272 $.0431 -0- -0- -0-
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .05 .05 .05 .03 .22
Net realized and unrealized gain
on investment transactions -0- -0- -0- -0- -0-
Net increase in net asset
value from operations .05 .05 .05 .03 .22
LESS: DIVIDENDS
Dividends from net investment income (.05) (.05) (.05) (.03) (.22)
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
TOTAL RETURN
Total investment return based
on net asset value (c) 5.11% 4.71% 4.97% 3.27% 2.25%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $67,584 $64,769 $28,092 $6,899 $102
Ratio to average net assets of:
Expenses, net of waivers
and reimbursements .64% .69% .95% .95% 1.16%
Expenses, before waivers
and reimbursements .64% .69% 1.07% 4.46% 68.14%
Net investment income (a) 5.00% 4.64% 4.85% 3.98% 2.15%
Portfolio turnover rate 0% 0% 0% 0% 0%
</TABLE>
See footnote summary on page B-79.
B-74
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
GLOBAL DOLLAR GOVERNMENT PORTFOLIO
----------------------------------------------------
MAY 2, 1994(E)
YEAR ENDED DECEMBER 31, TO
--------------------------------------- DEC. 31,
1997 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $14.32 $11.95 $ 9.84 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) 1.17 1.10 .92 .36
Net realized and unrealized gain (loss)
on investments and foreign
currency transactions .70 1.78 1.32 (.52)
Net increase (decrease) in net
asset value from operations 1.87 2.88 2.24 (.16)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.61) (.48) (.13) -0-
Distributions from net realized gains (.93) (.03) -0- -0-
Total dividends and distributions (1.54) (.51) (.13) -0-
Net asset value, end of period $14.65 $14.32 $11.95 $ 9.84
TOTAL RETURN
Total investment return based
on net asset value (c) 13.23% 24.90% 22.98% (1.60)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $15,378 $8,847 $3,778 $1,146
Ratio to average net assets of:
Expenses, net of waivers
and reimbursements .95% .95% .95% .95%(f)
Expenses, before waivers
and reimbursements 1.29% 1.97% 4.82% 15.00%(f)
Net investment income (a) 7.87% 8.53% 8.65% 6.02%(f)
Portfolio turnover rate 214% 155% 13% 9%
</TABLE>
<TABLE>
<CAPTION>
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO
----------------------------------------------------
MAY 3, 1994(E)
YEAR ENDED DECEMBER 31, TO
--------------------------------------- DEC. 31,
1997 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $12.38 $10.48 $ 8.79 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) 1.07 1.26 1.13 .50
Net realized and unrealized gain (loss)
on investments and foreign
currency transactions .10 .69 .83 (1.71)
Net increase (decrease) in net asset
value from operations 1.17 1.95 1.96 (1.21)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.58) (.05) (.27) -0-
Distributions from net realized gains -0- -0- -0- -0-
Total dividends and distributions (.58) (.05) (.27) -0-
Net asset value, end of period $12.97 $12.38 $10.48 $ 8.79
TOTAL RETURN
Total investment return based
on net asset value (c) 9.62% 18.70% 22.71% (12.10)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $30,507 $16,696 $7,278 $3,848
Ratio to average net assets of:
Expenses, net of waivers
and reimbursements .95% .95% .95% .95%(f)
Expenses, before waivers
and reimbursements 1.04% 1.41% 2.57% 4.43%(f)
Net investment income (a) 8.34% 11.04% 12.24% 8.49%(f)
Portfolio turnover rate 20% 4% 35% 15%
</TABLE>
See footnote summary on page B-79.
B-75
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
UTILITY INCOME PORTFOLIO
----------------------------------------------------
MAY 10, 1994(E)
YEAR ENDED DECEMBER 31, TO
--------------------------------------- DEC. 31,
1997 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $12.69 $12.01 $9.96 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .38 .31 .30 .28
Net realized and unrealized gain (loss)
on investments and foreign
currency transactions 2.84 .62 1.83 (.32)
Net increase (decrease) in net asset
value from operations 3.22 .93 2.13 (.04)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.24) (.09) (.08) -0-
Distributions from net realized gains -0- (.16) -0- -0-
Total dividends and distributions (.24) (.25) (.08) -0-
Net asset value, end of period $15.67 $12.69 $12.01 $9.96
TOTAL RETURN
Total investment return based
on net asset value (c) 25.71% 7.88% 21.45% (.40)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $20,347 $14,857 $6,251 $1,254
Ratio to average net assets of:
Expenses, net of waivers
and reimbursements .95% .95% .95% .95%(f)
Expenses, before waivers
and reimbursements 1.08% 1.51% 3.79% 15.98%(f)
Net investment income (a) 2.83% 2.61% 2.73% 4.62%(f)
Portfolio turnover rate 30% 75% 138% 31%
Average commission rate paid (d) $.0541 $.0579 -0- -0-
</TABLE>
<TABLE>
<CAPTION>
GROWTH PORTFOLIO
----------------------------------------------------
SEPTEMBER 15,
1994(E)
YEAR ENDED DECEMBER 31, TO
--------------------------------------- DEC. 31,
1997 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $17.92 $14.23 $10.53 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .07 .06 .17 .03
Net realized and unrealized gain
on investment transactions 5.18 3.95 3.54 .50
Net increase in net asset
value from operations 5.25 4.01 3.71 .53
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.03) (.04) (.01) -0-
Distributions from net realized gains (.72) (.28) -0- -0-
Total dividends and distributions (.75) (.32) (.01) -0-
Net asset value, end of period $22.42 $17.92 $14.23 $10.53
TOTAL RETURN
Total investment return based
on net asset value (c) 30.02% 28.49% 35.23% 5.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $235,875 $138,688 $45,220 $5,492
Ratio to average net assets of:
Expenses, net of waivers
and reimbursements .84% .93% .95% .95%(f)
Expenses, before waivers
and reimbursements .84% .93% 1.27% 4.19%(f)
Net investment income (a) .37% .35% 1.31% 1.17%(f)
Portfolio turnover rate 62% 98% 86% 25%
Average commission rate paid (d) $.0548 $.0578 -0- -0-
</TABLE>
See footnote summary on page B-79.
B-76
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
WORLDWIDE PRIVATIZATION PORTFOLIO
----------------------------------------------------
SEPT. 23,
1994(E)
YEAR ENDED DECEMBER 31, TO
--------------------------------------- DEC. 31,
1997 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $13.13 $11.17 $10.10 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .25 .28 .32 .10
Net realized and unrealized gain
on investments and foreign
currency transactions 1.17 1.78 .78 -0-
Net increase in net asset
value from operations 1.42 2.06 1.10 .10
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.16) (.10) (.03) -0-
Distributions from net realized gains (.19) -0- -0- -0-
Total dividends and distributions (.35) (.10) (.03) -0-
Net asset value, end of period $14.20 $13.13 $11.17 $10.10
TOTAL RETURN
Total investment return based
on net asset value (c) 10.75% 18.51% 10.87% 1.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $41,818 $18,807 $5,947 $1,127
Ratio to average net assets of:
Expenses, net of waivers
and reimbursements .95% .95% .95% .95%(f)
Expenses, before waivers
and reimbursements 1.55% 1.85% 4.17% 18.47%(f)
Net investment income (a) 1.76% 2.26% 2.96% 4.27%(f)
Portfolio turnover rate 58% 47% 23% 0%
Average commission rate paid (d) $.0137 $.0148 -0- -0-
</TABLE>
<TABLE>
<CAPTION>
CONSERVATIVE INVESTORS PORTFOLIO
----------------------------------------------------
OCT. 28,
1994(E)
YEAR ENDED DECEMBER 31, TO
--------------------------------------- DEC. 31,
1997 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $12.07 $11.76 $10.07 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .48 .45 .51 .06
Net realized and unrealized gain (loss)
on investments and foreign
currency transactions .86 (.01) 1.20 .01
Net increase in net asset value
from operations 1.34 .44 1.71 .07
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.31) (.09) (.02) -0-
Distributions from net realized gains -0- (.04) -0- -0-
Total dividends and distributions (.31) (.13) (.02) -0-
Net asset value, end of period $13.10 $12.07 $11.76 $10.07
TOTAL RETURN
Total investment return based
on net asset value (c) 11.22% 3.79% 16.99% 0.70%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $30,196 $21,729 $7,420 $701
Ratio to average net assets of:
Expenses, net of waivers
and reimbursements .95% .95% .95% .95%(f)
Expenses, before waivers
and reimbursements 1.33% 1.40% 4.25% 20.35%(f)
Net investment income (a) 3.85% 3.93% 4.65% 3.55%(f)
Portfolio turnover rate 209% 211% 61% 2%
Average commission rate paid (d) $.0360 $.0578 -0- -0-
</TABLE>
See footnote summary on page B-79.
B-77
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
GROWTH INVESTORS PORTFOLIO
----------------------------------------------------
OCT. 28,
1994(E)
YEAR ENDED DECEMBER 31, TO
--------------------------------------- DEC. 31,
1997 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $12.74 $11.87 $ 9.86 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .23 .24 .35 .04
Net realized and unrealized gain (loss)
on investments and foreign
currency transactions 1.83 .72 1.67 (.18)
Net increase (decrease) in net asset
value from operations 2.06 .96 2.02 (.14)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.20) (.07) (.01) -0-
Distributions from net realized gains (.22) (.02) -0- -0-
Total dividends and distributions (.42) (.09) (.01) -0-
Net asset value, end of period $14.38 $12.74 $11.87 $ 9.86
TOTAL RETURN
Total investment return based
on net asset value (c) 16.34% 8.18% 20.48% (1.40)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $16,600 $10,709 $4,978 $321
Ratio to average net assets of:
Expenses, net of waivers
and reimbursements .95% .95% .95% .95%(f)
Expenses, before waivers
and reimbursements 1.70% 1.85% 6.17% 41.62%(f)
Net investment income (a) 1.72% 2.01% 3.21% 2.29%(f)
Portfolio turnover rate 164% 160% 50% 3%
Average commission rate paid (d) $.0379 $.0562 -0- -0-
</TABLE>
TECHNOLOGY PORTFOLIO
-------------------------------
JANUARY 11,
1996(E)
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1997 1996
-------------- --------------
Net asset value, beginning of period $11.04 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .02 .11
Net realized and unrealized gain
on investment transactions .69 .93
Net increase in net asset value
from operations .71 1.04
LESS: DIVIDENDS
Dividends from net investment income (.03) -0-
Net asset value, end of period $11.72 $11.04
TOTAL RETURN
Total investment return based
on net asset value (c) 6.47% 10.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $69,240 $28,083
Ratio to average net assets of:
Expenses, net of waivers
and reimbursements .95% .95%(f)
Expenses, before waivers
and reimbursements 1.19% 1.62%(f)
Net investment income (a) .16% 1.17%(f)
Portfolio turnover rate 46% 22%
Average commission rate paid $.0542 $.0553
See footnote summary on page B-79.
B-78
ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
REAL ESTATE HIGH
QUASAR INVESTMENT YIELD
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------ ----------- -----------
AUG. 5, JAN. 9, OCT. 27,
1996(E) 1997(E) 1997(E)
YEAR ENDED TO TO TO
DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1997 1996 1997 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.64 $10.00 $10.00 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)(b) .02 .04 .56 .13
Net realized and unrealized gain
on investment transactions 1.96 .60 1.78 .20
Net increase in net asset
value from operations 1.98 .64 2.34 .33
LESS: DIVIDENDS
Dividends from net investment income (.01) -0- -0- -0-
Net asset value, end of period $12.61 $10.64 $12.34 $10.33
TOTAL RETURN
Total investment return based
on net asset value (c) 18.60% 6.40% 23.40% 3.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $59,277 $8,842 $13,694 $1,141
Ratio to average net assets of:
Expenses, net of waivers
and reimbursements .95% .95%(f) .95%(f) .95%(f)
Expenses, before waivers
and reimbursements 1.37% 4.44%(f) 2.31%(f) 8.26%(f)
Net investment income (a) .17% .93%(f) 5.47%(f) 7.28%(f)
Portfolio turnover rate 210% 40% 26% 8%
Average commission rate paid $.0521 $.0511 $.0526 --
</TABLE>
Footnote Summary:
(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
redemption 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
required to disclose its average commission rate per share for trades on which
commissions are charged.
(e) Commencement of operations.
(f) Annualized.
B-79
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS ALLIANCE VARIABLE PRODUCTS SERIES FUND
_______________________________________________________________________________
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS ALLIANCE VARIABLE PRODUCTS SERIES
FUND, INC.
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of Alliance Variable Products Series
Fund, Inc. (the "Fund"), (comprising, respectively, Premier Growth, Global
Bond, Growth and Income, Short-Term Multi-Market, U.S. Government/High Grade
Securities, Total Return, International, Money Market, Global Dollar
Government, North American Government Income, Utility Income, Growth, Worldwide
Privatization, Conservative Investors, Growth Investors, Technology, Quasar,
Real Estate Investment and High Yield Portfolios), as of December 31, 1997, and
the related statements of operations for the year then ended, and the
statements of changes in net assets and the financial highlights for each of
the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1997, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective Portfolios constituting Alliance Variable Products Series
Fund, Inc. at December 31, 1997, the results of their operations for the year
then ended, and the changes in their net assets and the financial highlights
for each of the indicated periods, in conformity with generally accepted
accounting principles.
New York, New York
January 30, 1998
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The following Portfolios of the Fund hereby designate the respective amounts
per share as long-term capital gain distributions during the taxable year ended
December 31, 1997:
PER SHARE
---------
GLOBAL BOND $ .01
GROWTH AND INCOME $ .35
U.S. GOVERNMENT/HIGH GRADE SECURITIES $ .02
TOTAL RETURN $ .12
INTERNATIONAL $ .08
GLOBAL DOLLAR GOVERNMENT $ .38
GROWTH $ .24
GROWTH INVESTORS $ .09
WORLDWIDE PRIVATIZATION $ .04
B-80
<PAGE>
APPENDIX A
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED
BY U.S. GOVERNMENT AGENCIES OR INSTRUMENTALITIES
FEDERAL FARM CREDIT SYSTEM NOTES AND BONDS--are bonds
issued by a cooperatively owned nationwide system of banks and
associations supervised by the Farm Credit Administration, an
independent agency of the U.S. Government. These bonds are not
guaranteed by the U.S. Government.
MARITIME ADMINISTRATION BONDS--are bonds issued and
provided by the Department of Transportation of the U.S.
Government and are guaranteed by the U.S. Government.
FHA DEBENTURES--are debentures issued by the Federal
Housing Administration of the U.S. Government and are guaranteed
by the U.S. Government.
GNMA CERTIFICATES--are mortgage-backed securities which
represent a partial ownership interest in a pool of mortgage
loans issued by lenders such as mortgage bankers, commercial
banks and savings and loan associations. Each mortgage loan
included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration.
FHLMC BONDS--are bonds issued and guaranteed by the
Federal Home Loan Mortgage Corporation.
FNMA BONDS--are bonds issued and guaranteed by the
Federal National Mortgage Association.
FEDERAL HOME LOAN BANK NOTES AND BONDS--are notes and
bonds issued by the Federal Home Loan Bank System and are not
guaranteed by the U.S. Government.
STUDENT LOAN MARKETING ASSOCIATION (SALLIE MAE) NOTES
AND BONDS--are notes and bonds issued by the Student Loan
Marketing Association.
Although this list includes a description of the primary
types of U.S. Government agency or instrumentality obligations in
which certain Portfolios of the Fund intends to invest,
Portfolios may invest in obligations of U.S. Government agencies
or instrumentalities other than those listed above.
A-1
<PAGE>
APPENDIX B
FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS AND FOREIGN CURRENCIES
FUTURES CONTRACTS
Portfolios of the Fund may enter into contracts for the
purchase or sale for future delivery of fixed-income securities
or foreign currencies, or contracts based on financial or stock
indices including any index of U.S. Government Securities,
Foreign Government Securities, corporate debt securities or
common stock. U.S. futures contracts have been designed by
exchanges which have been designated contracts markets by the
Commodity Futures Trading Commission (CFTC), and must be executed
through a futures commission merchant, or brokerage firm, which
is a member of the relevant contract market. Futures contracts
trade on a number of exchange markets, and, through their
clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange.
At the same time a futures contract is purchased or
sold, a Portfolio must allocate cash or securities as a deposit
payment (initial deposit). It is expected that the initial
deposit would be approximately 1 1/2%-5% of a contracts face
value. Daily thereafter, the futures contract is valued and the
payment of variation margin may be required, since each day the
Portfolio would provide or receive cash that reflects any decline
or increase in the contracts value.
At the time of delivery of securities pursuant to such a
contract, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest
rate from that specified in the contract. In some (but not many)
cases, securities called for by a futures contract may not have
been issued when the contract was written.
Although futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the
contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical futures contract calling for
delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation
to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled
through a clearinghouse associated with the exchange on which the
B-1
<PAGE>
contracts are traded, a Portfolio will incur brokerage fees when
it purchases or sells futures contracts.
INTEREST RATE FUTURES
The purpose of the acquisition or sale of a futures
contract, in the case of a portfolio, such as a Portfolio of the
Fund, which holds or intends to acquire fixed-income securities,
is to attempt to protect the Portfolio from fluctuations in
interest or foreign exchange rates without actually buying or
selling fixed-income securities or foreign currency. For
example, if interest rates were expected to increase, the
Portfolio might enter into futures contracts for the sale of debt
securities. Such a sale would have much the same effect as
selling an equivalent value of the debt securities owned by the
Portfolio. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the
futures contracts to the Portfolio would increase at
approximately the same rate, thereby keeping the net asset value
of the Portfolio from declining as much as it otherwise would
have. The Portfolio could accomplish similar results by selling
debt securities and investing in bonds with short maturities when
interest rates are expected to increase. However, since the
futures market is more liquid than the cash market, the use of
futures contracts as an investment technique allows a Portfolio
to maintain a defensive position without having to sell its
portfolio securities.
Similarly, when it is expected that interest rates may
decline, futures contracts may be purchased to attempt to hedge
against anticipated purchases of debt securities at higher
prices. Since the fluctuations in the value of futures contracts
should be similar to those of debt securities, the Portfolio
could take advantage of the anticipated rise in the value of debt
securities without actually buying them until the market had
stabilized. At that time, the futures contracts could be
liquidated and the Portfolio could then buy debt securities on
the cash market. To the extent a Portfolio enters into futures
contracts for this purpose, the assets in the segregated asset
account maintained to cover the Portfolio's obligations with
respect to such futures contracts will consist of cash, cash
equivalents or high quality liquid debt securities (or, in the
case of the North American Government Income Portfolio, Global
Dollar Government Portfolio and Utility Income Portfolio, high
grade liquid debt securities) from its portfolio in an amount
equal to the difference between the fluctuating market value of
such futures contracts and the aggregate value of the initial and
variation margin payments made by the Portfolio with respect to
such futures contracts.
B-2
<PAGE>
The ordinary spreads between prices in the cash and
futures markets, due to differences in the nature of those
markets, are subject to distortions. First, all participants in
the futures market are subject to initial deposit and variation
margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts
through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the
liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus
[5~producing distortion. Third, from the point of view of
speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the
securities market. Therefore, increased participation by
speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct
forecast of general interest rate trends by the Adviser may still
not result in a successful transaction.
In addition, futures contracts entail risks. Although
the Portfolio believes that use of such contracts will benefit
the Portfolio, if the Advisers investment judgment about the
general direction of interest rates is incorrect, the Portfolio's
overall performance would be poorer than if it had not entered
into any such contract. For example, if a Portfolio has hedged
against the possibility of an increase in interest rates which
would adversely affect the price of debt securities held in its
portfolio and interest rates decrease instead, the Portfolio will
lose part or all of the benefit of the increased value of its
debt securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have
to sell debt securities from its portfolio to meet daily
variation margin requirements. Such sales of bonds may be, but
will not necessarily be, at increased prices which reflect the
rising market. The Portfolio may have to sell securities at a
time when it may be disadvantageous to do so.
STOCK INDEX FUTURES
A Portfolio may purchase and sell stock index futures as
a hedge against movements in the equity markets. There are
several risks in connection with the use of stock index futures
by a Portfolio as a hedging device. One risk arises because of
the imperfect correlation between movements in the price of the
stock index futures and movements in the price of the securities
which are the subject of the hedge. The price of the stock index
futures may move more than or less than the price of the
securities being hedged. If the price of the stock index futures
B-3
<PAGE>
moves less than the price of the securities which are the subject
of the hedge, the hedge will not be fully effective but, if the
price of the securities being hedged has moved in an unfavorable
direction, the Portfolio would be in a better position than if it
had not hedged at all. If the price of the securities being
hedged has moved in a favorable direction, this advantage will be
partially offset by the loss on the index future. If the price
of the future moves more than the price of the stock, the
Portfolio will experience either a loss or gain on the future
which will not be completely offset by movements in the price of
the securities which are subject to the hedge. To compensate for
the imperfect correlation of movements in the price of securities
being hedged and movements in the price of the stock index
futures, the Portfolio may buy or sell stock index futures
contracts in a greater dollar amount than the dollar amount of
securities being hedged if the volatility over a particular time
period of the prices of such securities has been greater than the
volatility over such time period of the index, or if otherwise
deemed to be appropriate by the Adviser. Conversely, the
Portfolio may buy or sell fewer stock index futures contracts if
the volatility over a particular time period of the prices of the
securities being hedged is less than the volatility over such
time period of the stock index, or it is otherwise deemed to be
appropriate by the Adviser It is also possible that, where the
Portfolio has sold futures to hedge its portfolio against a
decline in the market, the market may advance and the value of
securities held in the Portfolio may decline. If this occurred,
the Portfolio would lose money on the futures and also experience
a decline in value in its portfolio securities. However, over
time the value of a diversified portfolio should tend to move in
the same direction as the market indices upon which the futures
are based, although there may be deviations arising from
differences between the composition of the Portfolio and the
stocks comprising the index.
Where futures are purchased to hedge against a possible
increase in the price of stock before the Portfolio is able to
invest its cash (or cash equivalents) in stocks (or options) in
an orderly fashion, it is possible that the market may decline
instead. If the Portfolio then concludes not to invest in stock
or options at that time because of concern as to possible further
market decline or for other reasons, the Portfolio will realize a
loss on the futures contract that is not offset by a reduction in
the price of securities purchased.
In addition the possibility that there may be an
imperfect correlation, or no correlation at all, between
movements in the stock index futures and the portion of the
portfolio being hedged, the price of stock index futures may not
correlate perfectly with movement in the stock index due to
certain market distortions. Rather than meeting additional
B-4
<PAGE>
margin deposit requirements, investors may close futures
contracts through offsetting transactions which could distort the
normal relationship between the index and futures markets.
Secondly, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price
distortion in the futures market, and because of the imperfect
correlation between the movements in the stock index and
movements in the price of stock index futures, a correct forecast
of general market trends by the investment adviser may still not
result in a successful hedging transaction over a short time
frame.
Positions in stock index futures may be closed out only
on an exchange or board of trade which provides a secondary
market for such futures. Although the Portfolio's intend to
purchase or sell futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no
assurance that a liquid secondary market on any exchange or board
of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close
a futures investment position, and in the event of adverse price
movements, the Portfolio would continue to be required to make
daily cash payments of variation margin. However, in the event
futures contracts have been used to hedge portfolio securities,
such securities will not be sold until the futures contract can
be terminated. In such circumstances, an increase in the price
of the securities, if any, may partially or completely offset
losses on the futures contract. However, as described above,
there is no guarantee that the price of the securities will in
fact correlate with the price movements in the futures contract
and thus provide an offset on a futures contract.
The Adviser intends to purchase and sell futures
contracts on the stock index for which it can obtain the best
price with due consideration to liquidity.
OPTIONS ON FUTURES CONTRACTS
Portfolios of the Fund intend to purchase and write
options on futures contracts for hedging purposes. None of the
Portfolios is a commodity pool and all transactions in futures
contracts engaged in by a Portfolio must constitute bona fide
hedging or other permissible transactions in accordance with the
rules and regulations promulgated by the CFTC. The purchase of a
call option on a futures contract is similar in some respects to
the purchase of a call option on an individual security.
Depending on the pricing of the option compared to either the
price of the futures contract upon which it is based or the price
B-5
<PAGE>
of the underlying debt securities, it may or may not be less
risky than ownership of the futures contract or underlying debt
securities. As with the purchase of futures contracts, when a
Portfolio is not fully invested it may purchase a call option on
a futures contract to hedge against a market advance due to
declining interest rates.
The writing of a call option on a futures contract
constitutes a partial hedge against declining prices of the
security or foreign currency which is deliverable upon exercise
of the futures contract or securities comprising an index. If
the futures price at expiration of the option is below the
exercise price, the Portfolio will retain the full amount of the
option premium which provides a partial hedge against any decline
that may have occurred in the Portfolio's portfolio holdings.
The writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the security or
foreign currency which is deliverable upon exercise of the
futures contract or securities comprising an index. If the
futures price at expiration of the option is higher than the
exercise price, the Portfolio will retain the full amount of the
option premium which provides a partial hedge against any
increase in the price of securities which the Portfolio intends
to purchase. If a put or call option the Portfolio has written
is exercised, the Portfolio will incur a loss which will be
reduced by the amount of the premium it receives. Depending on
the degree of correlation between changes in the value of its
portfolio securities and changes in the value of its futures
positions, the Portfolio's losses from existing options on
futures may to some extent be reduced or increased by changes in
the value of portfolio securities.
The purchase of a put option on a futures contract is
similar in some respects to the purchase of protective put
options on portfolio securities. For example, the Portfolio may
purchase a put option on a futures contract to hedge the
Portfolio's portfolio against the risk of rising interest rates.
The amount of risk the Portfolio assumes when it
purchases an option on a futures contract is the premium paid for
the option plus related transaction costs. In addition to the
correlation risks discussed above, the purchase of an option also
entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the
option purchased.
OPTIONS ON FOREIGN CURRENCIES
Portfolios of the Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to
that in which futures contracts on foreign currencies, or forward
B-6
<PAGE>
contracts, will be utilized. For example, a decline in the
dollar value of a foreign currency in which portfolio dollar
value of a foreign currency in which portfolio securities are
denominated will reduce the dollar value of such securities, even
if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of
portfolio securities, the Portfolio may purchase put options on
the foreign currency. If the value of the currency does decline,
the Portfolio will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or in
part, the adverse effect on its portfolio which otherwise would
have resulted.
Conversely, where a rise in the dollar value of a
currency in which securities to be acquired are denominated is
projected, thereby increasing the cost of such securities, the
Portfolio may purchase call options thereon. The purchase of
such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to the Portfolio deriving
from purchases of foreign currency options will be reduced by the
amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the
direction or to the extent anticipated, the Portfolio could
sustain losses on transactions in foreign currency options which
would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
Portfolios of the Fund may write options on foreign
currencies for the same types of hedging purposes. For example,
where a Portfolio anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a
put option, write a call option on the relevant currency. If the
expected decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge
against an anticipated increase in the U.S. Dollar cost of
securities to be acquired, the Portfolio could write a put option
on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Portfolio to
hedge such increased cost up to the amount of the premium. As in
the case of other types of options, however, the writing of a
foreign currency option will constitute only a partial hedge up
to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be
exercised and the Portfolio would be required to purchase or sell
the underlying currency at a loss which may not be offset by the
amount of the premium. Through the writing of options on foreign
B-7
<PAGE>
currencies, the Portfolio also may be required to forego all or a
portion of the benefits which might otherwise have been obtained
from favorable movements in exchange rates.
Portfolios of the Fund intend to write covered call
options on foreign currencies. A call option written on a
foreign currency by a Portfolio is covered if the Portfolio owns
the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency
without additional cash consideration (or for additional cash
consideration held in a segregated account by the Fund's
Custodian) upon conversion or exchange of other foreign currency
held in its portfolio. A call option is also covered if the
Portfolio has a call on the same foreign currency and in the same
principal amount as the call written where the exercise price of
the call held (a) is equal to or less than the exercise price of
the call written or (b) is greater than the exercise price of the
call written if the difference is maintained by the Portfolio in
cash, U.S. Government Securities and other high grade liquid debt
securities in a segregated account with the Fund's Custodian.
Portfolios of the Fund also intend to write call options
on foreign currencies that are not covered for cross- hedging
purposes. A call option on a foreign currency is for cross-
hedging purposes if it is not covered, but is designed to provide
a hedge against a decline in the U.S. Dollar value of a security
which the Portfolio owns or has the right to acquire and which is
denominated in the currency underlying the option due to an
adverse change in the exchange rate. In such circumstances, the
Portfolio collateralizes the option by maintaining in a
segregated account with the Fund's Custodian, cash or U.S.
Government Securities or other high quality liquid debt
securities (or, in the case of the North American Government
Income Portfolio and the Utility Income Portfolio, high grade
liquid debt securities) in an amount not less than the value of
the underlying foreign currency in U.S. Dollars marked to market
daily.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS,
FORWARD CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
Unlike transactions entered into by a Portfolio in
futures contracts, options on foreign currencies and forward
contracts are not traded on contract markets regulated by the
CFTC or (with the exception of certain foreign currency options)
by the Commission. To the contrary, such instruments are traded
through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national
securities exchanges, such as the Philadelphia Stock Exchange and
the Chicago Board Options Exchange, subject to SEC regulation.
Similarly, options on currencies may be traded over-the-counter.
B-8
<PAGE>
In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation
limits, and adverse market movements could therefore continue to
an unlimited extent over a period of time. Although the
purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could
be lost. Moreover, the option writer and a trader of forward
contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral
requirements associated with such positions.
Options on foreign currencies traded on national
securities exchanges are within the jurisdiction of the SEC, as
are other securities traded on such exchanges. As a result, many
of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on
a national securities exchange are cleared and guaranteed by the
Options Clearing Corporation (OCC), thereby reducing the risk of
counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more
readily available than in the over-the-counter market,
potentially permitting a Portfolio to liquidate open positions at
a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign
currency options, however, is subject to the risks of the
availability of a liquid secondary market described above, as
well as the risks regarding adverse market movements, margining
of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects
of other political and economic events. In addition, exchange-
traded options on foreign currencies involve certain risks not
presented by the over-the-counter market. For example, exercise
and settlement of such options must be made exclusively through
the OCC, which has established banking relationships in
applicable foreign countries for this purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency
option exercises, or would result in undue burdens on the OCC or
its clearing member, impose special procedures on exercise and
settlement, such as technical changes in the mechanics of
delivery of currency, the fixing of dollar settlement prices or
prohibitions, on exercise.
In addition, futures contracts, options on futures
contracts, forward contracts and options on foreign currencies
may be traded on foreign exchanges. Such transactions are
subject to the risk of governmental actions affecting trading in
B-9
<PAGE>
or the prices of foreign currencies or securities. The value of
such positions also could be adversely affected by (i) other
complex foreign political and economic factors, (ii) lesser
availability than in the United States of data on which to make
trading decisions, (iii) delays in a Portfolio's ability to act
upon economic events occurring in foreign markets during
nonbusiness hours in the United States, (iv) the imposition of
different exercise and settlement terms and procedures and margin
requirements than in the United States, and (v) lesser trading
volume.
B-10
<PAGE>
APPENDIX C
OPTIONS
Portfolios of the Fund will only write covered put and
call options, unless such options are written for cross-hedging
purposes. The manner in which such options will be deemed
covered is described in the Prospectus under the heading Other
Investment Policies and Techniques -- Options.
The writer of an option may have no control over when
the underlying securities must be sold, in the case of a call
option, or purchased, in the case of a put option, since with
regard to certain options, the writer may be assigned an exercise
notice at any time prior to the termination of the obligation.
Whether or not an option expires unexercised, the writer retains
the amount of the premium. This amount, of course, may, in the
case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period.
If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. If a put option
is exercised, the writer must fulfill the obligation to purchase
the underlying security at the exercise price, which will usually
exceed the then market value of the underlying security.
The writer of a listed option that wishes to terminate
its obligation may effect a closing purchase transaction. This
is accomplished by buying an option of the same series as the
option previously written. The effect of the purchase is that
the writers position will be cancelled by the clearing
corporation. However, a writer may not effect a closing purchase
transaction after being notified of the exercise of an option.
Likewise, an investor who is the holder of a listed option may
liquidate its position by effecting a closing sale transaction.
This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that
either a closing purchase or a closing sale transaction can be
effected.
Effecting a closing transaction in the case of a written
call option will permit the Portfolio to write another call
option on the underlying security with either a different
exercise price or expiration date or both, or in the case of a
written put option will permit the Portfolio to write another put
option to the extent that the exercise price thereof is secured
by deposited cash or short-term securities. Also, effecting a
closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be
used for other Portfolio investments. If the Portfolio desires
to sell a particular security from its portfolio on which it has
C-1
<PAGE>
written a call option, it will effect a closing transaction prior
to or concurrent with the sale of the security.
A Portfolio will realize a profit from a closing
transaction if the price of the transaction is less than the
premium received from writing the option or is more than the
premium paid to purchase the option; the Portfolio will realize a
loss from a closing transaction if the price of the transaction
is more than the premium received from writing the option or is
less than the premium paid to purchase the option. Because
increases in the market price of a call option will generally
reflect increases in the market price of the underlying security,
any loss resulting from the repurchase of a call option is likely
to be offset in whole or in part by appreciation of the
underlying security owned by the Portfolio.
An option position may be closed out only where there
exists a secondary market for an option of the same series. If a
secondary market does not exist, it might not be possible to
effect closing transactions in particular options with the result
that the Portfolio would have to exercise the options in order to
realize any profit. If the Portfolio is unable to effect a
closing purchase transaction in a secondary market, it will not
be able to sell the underlying security until the option expires
or it delivers the underlying security upon exercise. Reasons
for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in
certain options, (ii) restrictions may be imposed by a national
securities exchange (Exchange) on opening transactions or closing
transactions or both, (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or
series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an
Exchange, (v) the facilities of an Exchange or the Options
Clearing Corporation may not at all times be adequate to handle
current trading volume, or (vi) one or more Exchanges could, for
economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or a particular class
or series of options), in which event the secondary market on
that Exchange (or in that class or series of options) would cease
to exist, although outstanding options on that Exchange that had
been issued by the Options Clearing Corporation as a result of
trades on that Exchange would continue to be exercisable in
accordance with their terms.
A Portfolio may write options in connection with buy-
and-write transactions; that is, the Portfolio may purchase a
security and then write a call option against that security. The
exercise price of the call the Portfolio determines to write will
depend upon the expected price movement of the underlying
security. The exercise price of a call option may be below (in-
C-2
<PAGE>
the-money), equal to (at-the-money) or above (out-of-the- money)
the current value of the underlying security at the time the
option is written. Buy-and-write transactions using in-the-
money call options may be used when it is expected that the price
of the underlying security will remain flat or decline moderately
during the option period. Buy-and-write transactions using at-
the-money call options may be used when it is expected that the
price of the underlying security will remain fixed or advance
moderately during the option period. Buy-and-write transactions
using out- of-the-money call options may be used when it is
expected that the premiums received from writing the call option
plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If
the call options are exercised in such transactions, the
Portfolio's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the
difference between the Portfolio's purchase price of the security
and the exercise price. If the options are not exercised and the
price of the underlying security declines, the amount of such
decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms
of risk/return characteristics to buy-and-write transactions. If
the market price of the underlying security rises or otherwise is
above the exercise price, the put option will expire worthless
and the Portfolio's gain will be limited to the premium received.
If the market price of the underlying security declines or
otherwise is below the exercise price, the Portfolio may elect to
close the position or take delivery of the security at the
exercise price and the Portfolio's return will be the premium
received from the put option minus the amount by which the market
price of the security is below the exercise price. Out-of-the-
money, at-the-money, and in-the-money put options may be used by
the Portfolio in the same market environments that call options
are used in equivalent buy- and-write transactions.
A portfolio may purchase put options to hedge against a
decline in the value of its portfolio. By using put options in
this way, the Portfolio will reduce any profit it might otherwise
have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs.
A Portfolio may purchase call options to hedge against
an increase in the price of securities that the Portfolio
anticipates purchasing in the future. The premium paid for the
call option plus any transaction costs will reduce the benefit,
if any, realized by the Portfolio upon exercise of the option,
and, unless the price of the underlying security rises
sufficiently, the option may expire worthless to the Portfolio.
C-3
<PAGE>
________________________________________________________________
APPENDIX D: ADDITIONAL INFORMATION ABOUT JAPAN
________________________________________________________________
The information in this section is based on material
obtained by the Fund from various Japanese governmental and other
sources believed to be accurate but has not been independently
verified by the Fund or the Adviser. It is not intended to be a
complete description of Japan, its economy or the consequences of
investing in Japanese securities.
Japan, located in eastern Asia, consists of four main
islands: Hokkaido, Honshu, Kyushu and Shikoku, and many small
islands. Its population is approximately 126 million.
GOVERNMENT
The government of Japan is a representative democracy
whose principal executive is the Prime Minister. Japan's
legislature (known as the Diet) consists of two houses, the House
of Representatives (the lower house) and the House of Councillors
(the upper house).
POLITICS
From 1955 to 1993, Japan's government was controlled by
the Liberal Democratic Party (the "LDP"), the major conservative
party. In August 1993, after a main faction left the LDP over
the issue of political reform, a non-LDP coalition government was
formed consisting of centrist and leftist parties and was headed
by Prime Minister Morihiro Hosokawa. In April 1994, Mr. Hosokawa
resigned due to allegations of personal financial irregularities.
The coalition members thereafter agreed to choose as prime
minister the foreign minister, Tsutomu Hata. As a result of the
formation of a center-right voting bloc, however, the Japan
Socialist Party (the "JSP"), a leftist party, withdrew from the
coalition. Consequently, Mr. Hata's government was a minority
coalition, the first since 1955, and was therefore unstable. In
June 1994, Mr. Hata and his coalition were replaced by a new
coalition made up of the JSP (since renamed the "Social
Democratic Party (the "SDP")), the LDP and the small New Party
Sakigake (the "Sakigake"). This coalition, which surprised many
because of the historic rivalries between the LDP and the SDP,
was led by Tomiichi Murayama, the first Socialist prime minister
in 47 years. Mr. Murayama stepped down in January 1996 and was
succeeded as Prime Minister by Liberal Democrat Ryutaro
Hashimoto. By September 1996, when Prime Minister Hashimoto
called for a general election on October 20, 1996, the stability
of the SDP-LDP-Sakigake coalition had become threatened. Both
D-1
<PAGE>
the SDP and the Sakigake had lost more than half their seats in
the lower house of the Diet when a faction of the Sakigake split
off to form the Democratic Party of Japan. Their strength was
further diminished as a result of the October 20, 1996 general
election. Although the LDP was 12 seats short of winning a
majority in the election (House of Representatives), it has been
able to reduce the margin to three seats and to achieve enough
support from its two former coalition parties, the SDP and the
Sakigake, as well as independents and other conservatives, to
return Japan to a single-party government for the first time
since 1993. Mr. Hashimoto was reappointed as Prime Minister on
November 7, 1996. By 1998 the popularity of the LDP had begun to
wane, due to dissatisfaction with Mr. Hashimotos leadership, and
in the July 12, 1998 House of Councillors election, the LDP's
representation fell to 103 seats from 120 seats. As a result of
the LDP's defeat, Mr. Hashimoto announced his resignation as
Prime Minister on July 13, 1998 and was replaced by Keizo Obuchi
on July 24, 1998. The opposition is dominated by the new
Minshuto (Democratic Party of Japan), which was established in
April 1998 by various opposition groups and parties. The next
general election (House of Representatives) is due by the end of
2000.
ECONOMY
The Japanese economy maintained an average annual growth
rate of 2.1% in real GDP terms from 1990 through 1994, compared
with 2.4% for the United States during the same period. In 1995
and 1996, Japan's real GDP growth was 1.4% and 4.1%,
respectively. In 1997, Japan's real GDP growth rate fell to
0.9%. In the first and second quarters of 1998, Japans real GDP
growth rate was -3.7% and -3.3%, respectively, compared to the
first and second quarters of 1997. The second quarter of 1998
was the third consecutive quarter in which Japan experienced a
negative real GDP growth rate, resulting in the longest
contraction of the economy since the Japanese government began
compiling this data in 1955. Inflation has remained low, 1.3% in
1993, 0.7% in 1994, -0.1% in 1995 and 0.1% in 1996, but increased
to 1.7% in 1997. In the first and second quarters of 1998, the
inflation rate was 2.1% and 0.6%, respectively. This downward
trend is expected to continue for the foreseeable future.
Private consumer demand has slowed due to uncertainty about the
economy and higher consumer taxes that went into effect in April
1997. Unemployment is still at its highest level since the end
of World War II, rising to 4.3% in June 1998, and is not expected
to fall appreciably in the foreseeable future.
Japan's post World War II reliance on heavy industries
has shifted to higher technology products assembly and, most
recently, to automobile, electrical and electronic production.
Japan's success in exporting its products has generated sizable
D-2
<PAGE>
trade surpluses. Since the early 1980's, Japan's relations with
its trading partners have been difficult, partly due to the
concentration of Japanese exports in products such as
automobiles, machine tools and semiconductors and the large trade
surpluses ensuing therefrom, and an overall trade imbalance as
indicated by Japan's balance of payments. Japan's overall trade
surplus for 1994 was the largest in its history, amounting to
almost $145 billion. Exports totaled $386 billion, up 9.3% from
1993, and imports were $242 billion, up 13.6% from 1993. The
current account surplus in 1994 was $130 billion, down 1.5% from
a record high in 1993. By 1996, Japan's overall trade surplus
had decreased to $83 billion. Exports had increased to a total
of $400 billion, up 3.6% from 1994, and imports had increased to
a total of $317 billion, up 31.0% from 1994. During 1997, the
overall trade surplus increased approximately 22% from 1996.
Exports increased to a total of $409 billion, up 2% from 1996,
and imports decreased to $308 billion, down 3% from 1996. In the
first six months of 1998, Japanese exports fell by 6.2%, due in
large part to the contraction of Japans Asian markets, and
Japanese imports continued to decline. As a result of these two
trends, the overall trade surplus is expected to continue on its
upward course, but at a slower pace. Japan remains the largest
creditor nation and a significant donor of foreign aid.
On October 1, 1994, the U.S. and Japan reached an
agreement with respect to insurance, glass and medical and
telecommunications equipment. In June 1995, the two countries
agreed in principal to increase Japanese imports of American
automobiles and automotive parts. These and other agreements,
however, have not been very successful. Other current sources of
tension between the two countries are disputes in connection with
trade in semiconductors and photographic supplies, deregulation
of the Japanese insurance market, a dispute over aviation rights
and access to Japanese ports. It is expected that the friction
between the United States and Japan with respect to trade issues
will continue for the foreseeable future.
In response to pressures caused by the slumping Japanese
economy, the fragile financial markets and the appreciating Yen,
the Japanese government, in April and June 1995, announced
emergency economic packages that focused on higher and
accelerated public works spending and increased aid for post-
earthquake reconstruction in the Kobe area. These measures
helped to increase public investment and lead to faster GDP
growth, but failed to produce fundamental changes. Subsequent
[5~stimulus packages that included increased public works
spending and tax cuts were announced by the government in 1997
and 1998. These measures have also been unsuccessful in boosting
Japans economy. In October 1998, Prime Minister Obuchi
instructed his cabinet to prepare another emergency economic
stimulus plan calling for even more public spending and further
D-3
<PAGE>
tax cuts. The Prime Minister anticipates bringing the plan
before the Diet in December 1998.
In addition to the government's emergency economic
packages announced in 1995, the Bank of Japan attempted to assist
the financial markets by lowering its official discount rate to a
record low in 1995. However, large amounts of bad debt have
prevented banks from expanding their loan portfolios despite low
discount rates. Japanese banks have suffered several years of
declining profits and many banks have required public funds to
avert insolvency. In June 1995, the Finance Ministry announced
an expansion of deposit insurance and restrictions on rescuing
insolvent banks. In June 1996, six bills designed to address the
large amount of bad debt in the banking system were passed by the
Diet, but the difficulties worsened. By the end of the 1997/98
fiscal year, the government estimated that the banking system's
bad loans totaled 87.5 trillion Yen (approximately $600 billion),
or 11% of outstanding loans.
On December 17, 1997, in the wake of the collapse in the
previous month of one of Japan's 20 largest banks, the government
announced a proposal to strengthen the banks by means of an
infusion of public funds and other measures. In addition, the
imposition of stricter capital requirements and other supervisory
reforms scheduled to go into effect in April 1998 were postponed.
Subsequent to the December 1997 proposals, the government put
forth a series of additional proposals, culminating, after
vigorous political debate, in a set of laws that was approved by
the Diet in October 1998. The new laws will make $508 billion in
public funds available to increase the capital of Japans banks,
to guarantee depositors accounts and to nationalize the weakest
banks. It is unclear whether these laws will achieve their
intended effect. In addition to bad domestic loans, Japanese
banks also have significant exposure to the current financial
turmoil in other Asian markets. The financial system's fragility
is expected to continue for the foreseeable future.
In November 1996, then Prime Minister Hashimoto
announced a set of initiatives to deregulate the financial sector
by the year 2001. Known as "Tokyo's Big Bang," the reforms
include changes in tax laws to favor investors, the lowering of
barriers between banking, securities and insurance, abolition of
foreign exchange restrictions and other measures designed to
revive Tokyo's status in the international capital The Big Bang
was formally launched in April 1998. Some of the measures that
have already been implemented include a liberalization of foreign
exchange restrictions, a repeal of the ban on holding companies,
and deregulation of fees on large transactions. Other reforms
that are scheduled to be implemented include allowing banks to
sell mutual funds (December 1998), eliminating fixed brokerage
commissions on all stock trades (by the end of 1999) and allowing
D-4
<PAGE>
trust bank subsidiaries of brokerage firms to manage pension
funds (by 2000).
For the past several years, a growing budget deficit and
the threat of a budget crisis have resulted in a tightening of
fiscal policy. In March 1997, Prime Minister Hashimoto announced
the first detailed plan for fiscal reform. The plan called for
the lowering of the budget deficit to below 3% of GDP by Fiscal
Year 2003/2004. In June 1997, specific proposals for spending
cuts were approved by the cabinet and a Fiscal Reform Law,
incorporating the proposals into binding targets, were to have
been presented to the Diet late in 1997. On November 18, 1997,
however, Prime Minister Hashimoto, facing growing pressure to
take steps to revitalize Japan's stagnant economy, announced a
new economic plan, the "Urgent Economic Policy Package Reforming
Japan for the 21st Century," which includes tax cuts and public
spending. The largest ever package of public spending and tax
cuts was announced in April 1998.
Between 1985 and 1995, the Japanese Yen generally
appreciated against the U.S. Dollar. Between 1990 and 1994 the
Yen's real effective exchange rate appreciated by approximately
36%. On April 19, 1995, the Japanese Yen reached an all time
high of 79.75 against the U.S. Dollar. Since its peak of April
19, 1995, the Yen has generally decreased in value against the
U.S. Dollar. In 1996 and 1997, the average exchange rate was
108.8 Yen per U.S. Dollar and 121.0 Yen per U.S. Dollar,
respectively. On October 28, 1998, the exchange rate was 117.88
Yen per U.S. Dollar.
JAPANESE STOCK EXCHANGES. Currently, there are eight
stock exchanges in Japan. The Tokyo Stock Exchange (the "TSE"),
the Osaka Securities Exchange and the Nagoya Stock Exchange are
the largest, together accounting for approximately 98.8% of the
share trading volume and for about 98.0% of the overall trading
value of all shares traded on Japanese stock exchanges during the
year ended December 31, 1997. The other stock exchanges are
located in Kyoto, Hiroshima, Fukuoka, Niigata and Sapporo. The
chart below presents annual share trading volume (in millions of
shares) and annual trading value (in billions of yen) information
with respect to each of the three major Japanese stock exchanges
for the years 1989 through 1997. Trading volume and the value of
foreign stocks are not included.
D-5
<PAGE>
All Exchanges TOKYO OSAKA NAGOYA
VOLUME VALUE VOLUME VALUE VOLUME VALUE VOLUME VALUE
________ ______ _____ _____ ______ _____ ______ _____
1989 256,296 386,395 222,599 332,617 25,096 41,679 7,263 10,395
1990 145,837 231,837 123,099 186,667 17,187 35,813 4,323 7,301
1991 107,844 134,160 93,606 110,897 10,998 18,723 2,479 3,586
1992 82,563 80,456 66,408 60,110 12,069 15,575 3,300 3,876
1993 101,173 106,123 86,935 86,889 10,440 14,635 2,780 3,459
1994 105,937 114,622 84,514 87,356 14,904 19,349 4,720 5,780
1995 120,149 115,840 92,034 83,564 21,094 24,719 5,060 5,462
1996 126,496 136,170 101,170 101,893 20,783 27,280 4,104 5,391
1997 130,657 151,445 107,566 108,500 15,407 27,024 6,098 12,758
Source: The Tokyo Stock Exchange 1994, 1995, 1996 and 1997 Fact
Books and December 1997 Monthly Statistics Report.
THE TOKYO STOCK EXCHANGE
OVERVIEW OF THE TOKYO STOCK EXCHANGE. The TSE is the
largest of the Japanese stock exchanges and as such is widely
regarded as the principal securities exchange for all of Japan.
In 1997, the TSE accounted for 71.6% of the market value and
82.3% of the share trading volume on all Japanese stock
exchanges. A foreign stock section on the TSE, consisting of
shares of non-Japanese companies, listed 60 (out of 1,805 total
companies listed on the TSE) non-Japanese companies at the end of
1996. The market for stock of Japanese issuers on the TSE is
divided into a First Section and a Second Section. The First
Section is generally for larger, established companies (in
existence for five years or more) that meet listing criteria
relating to the size and business condition of the issuing
company, the liquidity of its securities and other factors
pertinent to investor protection. The TSE's Second Section is
for smaller companies and newly listed issuers.
SECTOR ANALYSIS OF THE FIRST AND SECOND SECTIONS. The
TSE's domestic stocks include a broad cross-section of companies
involved in many different areas of the Japanese economy. At the
end of 1997, the three largest industry sectors, based on market
value, listed on the first section of the TSE were banking, with
100 companies representing 15.83% of all domestic stocks listed
on the TSE; electric appliances, with 133 companies representing
15.06% of all domestic stocks so listed; and transportation
equipment with 61 companies representing 10.99% of all domestic
stocks so listed. No other industry sector represented more than
5% of TSE listed domestic stocks.
MARKET GROWTH OF THE TSE. The First and Second Sections
of the TSE grew in terms of both average daily trading value and
aggregate year-end market value from 1982, when they were l28,320
D-6
<PAGE>
million yen and 98,090 billion yen, respectively, through the end
of 1989, when they were 1,335,810 million yen and 611,152 billion
yen, respectively. Following the peak in 1989, both average
daily trading value and aggregate year-end market value declined
through 1992 when they were 243,362 million yen and 289,483
billion yen, respectively. In 1993 and 1994, both average daily
trading value and aggregate year-end market value increased and
were 353,208 and 353,666 million yen, respectively, and 324,357
and 358,392 billion yen, respectively. In 1995, average daily
trading value decreased to 335,598 million yen and aggregate
year-end market value increased to 365,716 billion yen. In 1996,
average daily trading value increased to 412,521 million yen and
aggregate year-end market value decreased to 347,578 billion yen.
In 1997, average daily trading value increased to 442,858 million
Yen and aggregate year-end market value decreased to 280,930
billion Yen.
MARKET PERFORMANCE OF THE FIRST SECTION. As measured by
the TOPIX, a capitalization-weighted composite index of all
common stocks listed in the First Section, the performance of the
First Section reached a peak of 2,884.80 on December 18, 1989.
Thereafter, the TOPIX declined approximately 45% through
December 29, 1995. On December 30, 1996 the TOPIX closed at
1,470.94, down approximately 7% from the end of 1995. On
December 30, 1997, the TOPIX closed at 1,175.03, down
approximately 20% from the end of 1996. On October 28, 1998 the
TOPIX closed at 1028.61, down approximately 12% from the end of
1997.
JAPANESE FOREIGN EXCHANGE CONTROLS
Under Japan's Foreign Exchange and Foreign Trade Control
Law and cabinet orders and ministerial ordinances thereunder (the
"Foreign Exchange Controls"), prior notification to the Minister
of Finance of Japan (the "Minister of Finance") of the
acquisition of shares in a Japanese company from a resident of
Japan (including a corporation) by a non-resident of Japan
(including a corporation) is required unless the acquisition is
made from or through a securities company designated by the
Minister of Finance or if the yen equivalent of the aggregate
purchase price of shares is not more than 100 million Yen. Even
in these situations, if a foreign investor intends to acquire
shares of a Japanese corporation listed on a Japanese stock
exchange or traded on a Japanese over-the-counter market
(regardless of the person from or through whom the foreign
investor acquires such shares) and as a result of the acquisition
the foreign investor would directly or indirectly hold 10% or
more of the total outstanding shares of that corporation, the
foreign investor must file a report within 15 days from the day
of such acquisition with the Minister of Finance and any other
minister with proper jurisdiction. In instances where the
D-7
<PAGE>
acquisition concerns national security or meets certain other
conditions specified in the Foreign Exchange Controls, the
foreign investor must file a prior notification with respect to
the proposed acquisition with the Minister of Finance and any
other minister with proper jurisdiction. The ministers may make
a recommendation to modify or prohibit the proposed acquisition
if they consider that the acquisition would impair the safety and
maintenance of public order in Japan or harmfully influence the
smooth operation of the Japanese economy. If the foreign
investor does not accept the recommendation, the ministers may
issue an order modifying or prohibiting the acquisition. In
certain limited and exceptional circumstances, the Foreign
Exchange Controls give the Minister of Finance the power to
require prior approval for any acquisition of shares in a
Japanese company by a non-resident of Japan.
In general, the acquisition of shares by non-resident
shareholders by way of stock splits, as well as the acquisition
of shares of a Japanese company listed on a Japanese stock
exchange by non-residents upon exercise of warrants or conversion
of convertible bonds, are not subject to any of the foregoing
notification or reporting requirements. Under the Foreign
Exchange Controls, dividends paid on shares, held by non-
residents of Japan and the proceeds of any sales of shares within
Japan may, in general, be converted into any foreign currency and
remitted abroad.
Certain provisions of the Foreign Exchange Controls have
been repealed or liberalized beginning in April 1998, pursuant to
the revised Foreign Exchange and Foreign Trade Law, which was
approved in May 1997 as part of the plan to implement the Big
Bang. Under the new law, Japanese citizens are permitted to open
foreign exchange accounts at banks and any company or individual
is permitted to engage in foreign exchange activities without
prior government approval.
REGULATION OF THE JAPANESE EQUITIES MARKETS
The principal securities law in Japan is the Securities
and Exchange Law ("SEL") which provides overall regulation for
the issuance of securities in public offerings and private
placements and for secondary market trading. The SEL was amended
in 1988 in order to liberalize the securities market; to regulate
the securities futures, index, and option trade; to add
disclosure regulations; and to reinforce the prevention of
insider trading. Insider trading provisions are applicable to
debt and equity securities listed on a Japanese stock exchange
and to unlisted debt and equity securities issued by a Japanese
corporation that has securities listed on a Japanese stock
exchange or registered with the Securities Dealers Association
(the "SDA"). In addition, each of the eight stock exchanges in
D-8
<PAGE>
Japan has its own constitution, regulations governing the sale
and purchase of securities and standing rules for exchange
contracts for the purchase and sale of securities on the
exchange, as well as detailed rules and regulations covering a
variety of matters, including rules and standards for listing and
delisting of securities.
The loss compensation incidents involving preferential
treatment of certain customers by certain Japanese securities
companies, which came to light in 1991, provided the impetus for
amendments to the SEL, which took effect in 1992, as well as two
reform bills passed by the Diet in 1992. The amended SEL now
prohibits securities companies from the operation of
discretionary accounts, loss compensation or provision of
artificial gains in securities transactions, directly or
indirectly, to their customers and making offers or agreements
with respect thereto. Despite these amendments, there have been
certain incidents involving loss compensation. To ensure that
securities are traded at their fair value, the SDA and the TSE
have promulgated certain rules, effective in 1992, which, among
other things, explicitly prohibit any transaction undertaken with
the intent to provide loss compensation of illegal gains
regardless of whether the transaction otherwise technically
complies with the rules. The reform bill passed by the Diet,
which took effect in 1992 and 1993, provides for the
establishment of a new Japanese securities regulator and for a
variety of reforms designed to revitalize the Japanese financial
and capital markets by permitting banks and securities companies
to compete in each other's field of business, subject to various
regulations and restrictions.
Further reforms in the regulation of the securities
markets are anticipated over the next several years as the Big
Bang is implemented.
D-9
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits.
(a) FINANCIAL STATEMENTS
Included in the Prospectus:
Financial Highlights
Included in the Statement of Additional Information for
each of the Premier Growth Portfolio, Global Bond
Portfolio, Growth and Income Portfolio, Short-Term
Multi-Market Portfolio, U.S. Government/High Grade
Securities Portfolio, Total Return Portfolio,
International Portfolio, Money Market Portfolio, Global
Dollar Government Portfolio, North American Government
Income Portfolio, Utility Income Portfolio, Growth
Portfolio, Worldwide Privatization Portfolio,
Conservative Investors Portfolio, Growth Investors
Portfolio, Technology Portfolio, Quasar Portfolio, Real
Estate Investment Portfolio and High-Yield Portfolio:
Portfolio of Investments - June 30, 1998
(unaudited)
Statement of Assets and Liabilities - June 30, 1998
(unaudited)
Statement of Operations - six months ended June 30,
1998 (unaudited)
Statement of Changes in Net Assets - six months
ended June 30, 1998 (unaudited)
Notes to Financial Statements - June 30, 1998
(unaudited)
Financial Highlights - six months ended June 30,
1998 (unaudited)
Included in the Statement of Additional Information for
the Premier Growth Portfolio, Global Bond Portfolio,
Growth and Income Portfolio, Short-Term Multi-Market
Portfolio, U.S. Government/High Grade Securities
Portfolio, Total Return Portfolio, International
Portfolio and the Money Market Portfolio:
Portfolio of Investments - December 31, 1997.
Statement of Assets and Liabilities - December 31, 1997.
Statement of Operations - year ended December 31, 1997.
Statement of Changes in Net Assets - years ended
December 31, 1997 and December 31, 1996.
Notes to Financial Statements - December 31, 1997.
Financial Highlights - for the years ended December 31,
1997, December 31, 1996, December 31, 1995, December 31,
1994 and December 31, 1993.
C-1
<PAGE>
Report of Independent Auditors.
Included in the Statement of Additional Information for
the Global Dollar Government Portfolio, North American
Government Income Portfolio, Utility Income Portfolio,
Growth Portfolio, Worldwide Privatization Portfolio,
Conservative Investors Portfolio and Growth Investors
Portfolio:
Portfolio of Investments - December 31, 1997.
Statement of Assets and Liabilities - December 31, 1997.
Statement of Operations - year ended December 31, 1997.
Statement of Changes in Net Assets - years ended
December 31, 1997 and December 31, 1996.
Notes to Financial Statements - December 31, 1997.
Financial Highlights - for the years ended December 31,
1997, December 31, 1996, December 31, 1995 and for the
period ended December 31, 1994.
Report of Independent Auditors.
Included in the Statement of Additional Information for
the Technology Portfolio and Quasar Portfolio:
Portfolio of Investments - December 31, 1997.
Statement of Assets and Liabilities - December 31, 1997.
Statement of Operations - year ended December 31, 1997.
Statement of Changes in Net Assets - year ended
December 31, 1997 and period ended December 31, 1996.
Notes to Financial Statements - December 31, 1997.
Financial Highlights - for the year ended December 31,
1997 and period ended December 31, 1996.
Report of Independent Auditors.
Included in the Statement of Additional Information for
the Real Estate Investment Portfolio and High-Yield
Portfolio:
Portfolio of Investments - December 31, 1997.
Statement of Assets and Liabilities - December 31, 1997.
Statement of Operations - period ended December 31,
1997.
Statement of Changes in Net Assets - period ended
December 31, 1997.
Notes to Financial Statements - December 31, 1997.
Financial Highlights - for the period ended December 31,
1997.
Report of Independent Auditors.
All other schedules are either omitted because they are
not required under the related instructions, they are
inapplicable or the required information is presented in
C-2
<PAGE>
the financial statements or notes which are included in
the Statement of Additional Information of the
Registration Statement.
(b) EXHIBITS:
(1)(a) Articles of Incorporation of the Registrant -
Incorporated by reference to Exhibit (1)(a) to
Post-Effective Amendment No. 22 of Registrant's
Registration Statement on Form N-1A (File Nos. 33-
18647 and 811-5398) filed with the Securities and
Exchange Commission on April 29, 1998.
(b) Articles Supplementary to the Articles of
Incorporation of the Registrant dated September 26
1990 and filed September 28, 1990 - Incorporated by
reference to Exhibit (1)(b) to Post-Effective
Amendment No. 22 of Registrant's Registration
Statement on Form N-1A (File Nos. 33-18647 and 811-
5398) filed with the Securities and Exchange
Commission on April 29, 1998.
(c) Articles Supplementary to the Articles of
Incorporation of the Registrant dated June 25 1991
and filed June 26, 1991 - Incorporated by reference
to Exhibit (1)(c) to Post-Effective Amendment
No. 22 of Registrant's Registration Statement on
Form N-1A (File Nos. 33-18647 and 811-5398) filed
with the Securities and Exchange Commission on
April 29, 1998.
(d) Articles Supplementary to the Articles of
Incorporation of the Registrant dated February 16
1994 and filed February 22, 1994 - Incorporated by
reference to Exhibit (1)(d) to Post-Effective
Amendment No. 22 of Registrant's Registration
Statement on Form N-1A (File Nos. 33-18647 and 811-
5398) filed with the Securities and Exchange
Commission on April 29, 1998.
(e) Articles Supplementary to the Articles of
Incorporation of the Registrant dated August 23
1994 and filed August 24, 1994 - Incorporated by
reference to Exhibit 1(d) to Post-Effective
Amendment No. 13 of Registrant's Registration
Statement on Form N-1A (File Nos. 33-18647 and 811-
5398) with the Securities and Exchange Commission
filed on May 1, 1995.
(f) Articles of Amendment to the Articles of
Incorporation of the Registrant dated October 21,
C-3
<PAGE>
1994 and filed November 7, 1994 - Incorporated by
reference to Exhibit 1(e) to Post-Effective
Amendment No. 13 of Registrant's Registration
Statement on Form N-1A (File Nos. 33-18647 and 811-
5398) filed with the Securities and Exchange
Commission on May 1, 1995.
(g) Articles Supplementary to the Articles of
Incorporation dated December 26, 1995 and filed
December 28, 1995 - Incorporated by reference to
Exhibit 1(f) to Post-Effective Amendment No. 15 of
Registrant's Registration Statement on Form N-1A
(File Nos. 33-18647 and 811-5398) filed with the
Securities and Exchange Commission on April 30,
1996.
(h) Articles Supplementary to the Articles of
Incorporation dated March 29, 1996 and filed April
12, 1996 - Incorporated by reference to Exhibit
1(g) to Post-Effective Amendment No. 15 of
Registrant's Registration Statement on Form N-1A
(File Nos. 33-18647 and 811-5398) filed with the
Securities and Exchange Commission on April 30,
1996.
(i) Articles Supplementary to the Articles of
Incorporation dated July 18, 1996 and filed July
19, 1996 - Incorporated by reference to Exhibit
1(h) to Post-Effective Amendment No. 17 of
Registrant's Registration Statement on Form N-1A
(File Nos. 33-18647 and 811-5398) filed with the
Securities and Exchange Commission on July 22,
1996.
(j) Articles Supplementary to the Articles of
Incorporation dated December 26, 1996 and filed
December 30, 1996 - Incorporated by reference to
Exhibit 1(i) to Post-Effective Amendment No. 20 of
Registrant's Registration Statement on Form N-1A
(File Nos. 33-18647 and 811-5398) filed with the
Securities and Exchange Commission on February 18,
1997.
(k) Articles of Amendment to the Articles of
Incorporation of the Registrant dated January 6,
1999 and filed January 8, 1999 - Filed herewith.
(l) Articles Supplementary to the Articles of
Incorporation of the Registrant dated January 6,
1999 and filed January 8, 1999 - Filed herewith.
C-4
<PAGE>
(2) By-Laws of the Registrant - Incorporated by
reference to Exhibit (2) to Post-Effective
Amendment No. 22 of Registrant's Registration
Statement on Form N-1A (File Nos. 33-18647 and 811-
5398) filed with the Securities and Exchange
Commission on April 29, 1998.
(3) Not applicable.
(4) Not applicable.
(5)(a) Registrant and Alliance Capital Management L.P.
amended as of May 1, 1997 - Incorporated by
reference to Exhibit (5)(a) to Post-Effective
Amendment No. 21 of Registrant's Registration
Statement on Form N-1A (File Nos. 33-18647 and 811-
5398) filed with the Securities and Exchange
Commission on May 1, 1997.
(b) Sub-Advisory Agreement between Alliance Capital
Management L.P. and Law, Dempsey & Company Limited,
relating to the Global Bond Portfolio -
Incorporated by reference to Exhibit (5)(b) to
Post-Effective Amendment No. 22 of Registrant's
Registration Statement on Form N-1A (File Nos. 33-
18647 and 811-5398) filed with the Securities and
Exchange Commission on April 29, 1998.
(6)(a) Distribution Services Agreement between the
Registrant and Alliance Fund Distributors, Inc. -
Incorporated by reference to Exhibit (6) to Post-
Effective Amendment No. 22 of Registrant's
Registration Statement on Form N-1A (File Nos. 33-
18647 and 811-5398) filed with the Securities and
Exchange Commission on April 29, 1998.
(b) Form of Class B Distribution Services Agreement
between the Registrant and Alliance Fund
Distributors, Inc. - Filed herewith.
(7) Not applicable.
(8)(a) Custodian Contract between the Registrant and State
Street Bank and Trust Company - Incorporated by
reference to Exhibit (8)(a) to Post-Effective
Amendment No. 21 of Registrant's Registration
Statement on Form N-1A (File Nos. 33-18647 and 811-
5398) filed with the Securities and Exchange
Commission on May 1, 1997.
C-5
<PAGE>
(b) Amendment to Custodian Agreement dated June 4, 1996
- Incorporated by reference to Exhibit (8)(b) to
Post-Effective Amendment No. 21 of Registrant's
Registration Statement on Form N-1A (File Nos. 33-
18647 and 811-5398) filed with the Securities and
Exchange Commission on May 1, 1997.
(9) Transfer Agency Agreement between the Registrant
and Alliance Fund Services, Inc. - Incorporated by
reference to Exhibit (9) to Post-Effective
Amendment No. 22 of Registrant's Registration
Statement on Form N-1A (File Nos. 33-18647 and 811-
5398) filed with the Securities and Exchange
Commission on April 29, 1998.
(10) Not applicable.
(11) Consent of Independent Auditors - Filed herewith.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) Rule 12b-1 Distribution Plan - Filed herewith.
(16) Not Applicable.
(17) Financial Data Schedules - Incorporated by
reference to Post-Effective Amendment No. 23 to the
Registrant's Registration Statement on Form N-1A
(File Nos. 33-18647 and 811-5398) filed with the
Commission on November 4, 1998.
(18) Rule 18f-3 Plan - Filed herewith.
OTHER EXHIBITS:
Powers of Attorney of Ms. Block and Messrs. Carifa,
Dievler, Dobkin, Foulk, Hester, Michel and
Robinson. - Incorporated by reference to Post-
Effective Amendment No. 23 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-
18647 and 811-5398) filed with the Commission on
November 4, 1998.
ITEM 25. Persons Controlled by or under Common Control with
Registrant.
None.
C-6
<PAGE>
ITEM 26. Number of Holders of Securities.
Not Applicable.
ITEM 27. Indemnification.
It is the Registrants policy to indemnify its
directors and officers, employees and other agents
to the maximum extent permitted by Section 2-418 of
the General Corporation Law of the State of
Maryland and as set forth in Article EIGHTH of
Registrant's Articles of Incorporation, filed as
Exhibit 1, Article VII of the Registrants By-Laws
filed as Exhibit 2 and Section 9 of the
Distribution Services Agreement filed as
Exhibit 6(a) and Class B Distribution Services
Agreement filed as Exhibit 6(b). The Adviser's
liability for any loss suffered by the Registrant
or its shareholders is set forth in Section 4 of
the Advisory Agreement filed as Exhibit 5(a) in
response to Item 24.
Section 2-418 of the Maryland General Corporation Law
reads as follows:
2-418 INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND AGENTS.--(a) In this section the
following words have the meaning indicated.
(1) Directors means any person who is or was
a director of a corporation and any person who,
while a director of a corporation, is or was
serving at the request of the corporation as a
director, officer, partner, trustee, employee, or
agent of another foreign or domestic corporation,
partnership, joint venture, trust, other
enterprise, or employee benefit plan.
(2) Corporation includes any domestic or
foreign predecessor entity of a corporation in a
merger, consolidation, or other transaction in
which the predecessors existence ceased upon
consummation of the transaction.
(3) Expenses include attorneys fees.
(4) Official capacity means the following:
(i) When used with respect to a
director, the office of director in the
corporation; and
C-7
<PAGE>
(ii) When used with respect to a person
other than a director as contemplated in
subsection (i), the elective or appointive office
in the corporation held by the officer, or the
employment or agency relationship undertaken by the
employee or agent in behalf of the corporation.
(iii) Official capacity does not include
service for any other foreign or domestic
corporation or any partnership, joint venture,
trust, other enterprise, or employee benefit plan.
(5) Party includes a person who was, is, or
is threatened to be made a named defendant or
respondent in a proceeding.
(6) Proceeding means any threatened, pending
or completed action, suit or proceeding, whether
civil, criminal, administrative, or investigative.
(b)(1) A corporation may indemnify any
director made a party to any proceeding by reason
of service in that capacity unless it is
established that:
(i) The act or omission of the director
was material to the matter giving rise to the
proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and
deliberate dishonesty; or
(ii) The director actually received an
improper personal benefit in money, property, or
services; or
(iii) In the case of any criminal
proceeding, the director had reasonable cause to
believe that the act or omission was unlawful.
(2) (i) Indemnification may be against
judgments, penalties, fines, settlements, and
reasonable expenses actually incurred by the
director in connection with the proceeding.
(ii) However, if the proceeding was one
by or in the right of the corporation,
indemnification may not be made in respect of any
C-8
<PAGE>
proceeding in which the director shall have been
adjudged to be liable to the corporation.
(3) (i) The termination of any proceeding by
judgment, order or settlement does not create a
presumption that the director did not meet the
requisite standard of conduct set forth in this
subsection.
(ii) The termination of any proceeding by
conviction, or a plea of nolo contendere or its
equivalent, or an entry of an order of probation
prior to judgment, creates a rebuttable presumption
that the director did not meet that standard of
conduct.
(c) A director may not be indemnified
under subsection (b) of this section in respect of
any proceeding charging improper personal benefit
to the director, whether or not involving action in
the directors official capacity, in which the
director was adjudged to be liable on the basis
that personal benefit was improperly received.
(d) Unless limited by the charter:
(1) A director who has been
successful, on the merits or otherwise, in the
defense of any proceeding referred to in subsection
(b) of this section shall be indemnified against
reasonable expenses incurred by the director in
connection with the proceeding.
(2) A court of appropriate
jurisdiction upon application of a director and
such notice as the court shall require, may order
indemnification in the following circumstances:
(i) If it determines a director is
entitled to reimbursement under paragraph (1) of
this subsection, the court shall order
indemnification, in which case the director shall
be entitled to recover the expenses of securing
such reimbursement; or
(ii) If it determines that the director
is fairly and reasonably entitled to
indemnification in view of all the relevant
circumstances, whether or not the director has met
the standards of conduct set forth in subsection
(b) of this section or has been adjudged liable
C-9
<PAGE>
under the circumstances described in subsection (c)
of this section, the court may order such
indemnification as the court shall deem proper.
However, indemnification with respect to any
proceeding by or in the right of the corporation or
in which liability shall have been adjudged in the
circumstances described in subsection (c) shall be
limited to expenses.
(3) A court of appropriate jurisdiction
may be the same court in which the proceeding
involving the directors liability took place.
(e) (1) Indemnification under subsection (b)
of this section may not be made by the corporation
unless authorized for a specific proceeding after a
determination has been made that indemnification of
the director is permissible in the circumstances
because the director has met the standard of
conduct set forth in subsection (b) of this
section.
(2) Such determination shall be made:
(i) By the board of directors by a majority
vote of a quorum consisting of directors not, at
the time, parties to the proceeding, or, if such a
quorum cannot be obtained, then by a majority vote
of a committee of the board consisting solely of
two or more directors not, at the time, parties to
such proceeding and who were duly designated to act
in the matter by a majority vote of the full board
in which the designated directors who are parties
may participate;
(ii) By special legal counsel selected by the
board or a committee of the board by vote as set
forth in subparagraph (i) of this paragraph, or, if
the requisite quorum of the full board cannot be
obtained therefor and the committee cannot be
established, by a majority vote of the full board
in which directors who are parties may participate;
or
(iii) By the stockholders.
(3) Authorization of indemnification and
determination as to reasonableness of expenses
shall be made in the same manner as the
determination that indemnification is permissible.
However, if the determination that indemnification
C-10
<PAGE>
is permissible is made by special legal counsel,
authorization of indemnification and determination
as to reasonableness of expenses shall be made in
the manner specified in subparagraph (ii) of
paragraph (2) of this subsection for selection of
such counsel.
(4) Shares held by directors who are parties
to the proceeding may not be voted on the subject
matter under this subsection.
(f) (1) Reasonable expenses incurred by a
director who is a party to a proceeding may be paid
or reimbursed by the corporation in advance of the
final disposition of the proceeding, upon receipt
by the corporation of:
(i) A written affirmation by the
director of the directors good faith belief that
the standard of conduct necessary for
indemnification by the corporation as authorized in
this section has been met; and
(ii) A written undertaking by or on
behalf of the director to repay the amount if it
shall ultimately be determined that the standard of
conduct has not been met.
(2) The undertaking required by
subparagraph (ii) of paragraph (1) of this
subsection shall be an unlimited general obligation
of the director but need not be secured and may be
accepted without reference to financial ability to
make the repayment.
(3) Payments under this subsection shall
be made as provided by the charter, bylaws, or
contract or as specified in subsection (e) of this
section.
(g) The indemnification and advancement of
expenses provided or authorized by this section may
not be deemed exclusive of any other rights, by
indemnification or otherwise, to which a director
may be entitled under the charter, the bylaws, a
resolution of stockholders or directors, an
agreement or otherwise, both as to action in an
official capacity and as to action in another
capacity while holding such office.
C-11
<PAGE>
(h) This section does not limit the
corporations power to pay or reimburse expenses
incurred by a director in connection with an
appearance as a witness in a proceeding at a time
when the director has not been made a named
defendant or respondent in the proceeding.
(i) For purposes of this section:
(1) The corporation shall be deemed to
have requested a director to serve an employee
benefit plan where the performance of the directors
duties to the corporation also imposes duties on,
or otherwise involves services by, the director to
the plan or participants or beneficiaries of the
plan:
(2) Excise taxes assessed on a director
with respect to an employee benefit plan pursuant
to applicable law shall be deemed fines; and
(3) Action taken or omitted by the
director with respect to an employee benefit plan
in the performance of the directors duties for a
purpose reasonably believed by the director to be
in the interest of the participants and
beneficiaries of the plan shall be deemed to be for
a purpose which is not opposed to the best
interests of the corporation.
(j) Unless limited by the charter:
(1) An officer of the corporation shall
be indemnified as and to the extent provided in
subsection (d) of this section for a director and
shall be entitled, to the same extent as a
director, to seek indemnification pursuant to the
provisions of subsection (d);
(2) A corporation may indemnify and
advance expenses to an officer, employee, or agent
of the corporation to the same extent that it may
indemnify directors under this section; and
(3) A corporation, in addition, may
indemnify and advance expenses to an officer,
employee, or agent who is not a director to such
further extent, consistent with law, as may be
provided by its charter, bylaws, general or
specific action of its board of directors or
contract.
C-12
<PAGE>
(k) (1) A corporation may purchase and
maintain insurance on behalf of any person who is
or was a director, officer, employee, or agent of
the corporation, or who, while a director, officer,
employee, or agent of the corporation, is or was
serving at the request, of the corporation as a
director, officer, partner, trustee, employee, or
agent of another foreign or domestic corporation,
partnership, joint venture, trust, other
enterprise, or employee benefit plan against any
liability asserted against and incurred by such
person in any such capacity or arising out of such
persons position, whether or not the corporation
would have the power to indemnify against liability
under the provisions of this section.
(2) A corporation may provide similar
protection, including a trust fund, letter of
credit, or surety bond, not inconsistent with this
section.
(3) The insurance or similar protection
may be provided by a subsidiary or an affiliate of
the corporation.
(l) Any indemnification of, or advance of
expenses to, a director in accordance with this
section, if arising out of a proceeding by or in
the right of the corporation, shall be reported in
writing to the stockholders with the notice of the
next stockholders meeting or prior to the meeting.
Article EIGHTH of the Registrants Articles of
Incorporation reads as follows:
EIGHTH: To the maximum permitted by the General
Corporation Law of the State of Maryland as from time to
time amended, the Corporation shall indemnify its
currently acting and its former directors and officers
and those persons who, at the request of the
Corporation, serve or have served another Corporation,
partnership, joint venture, trust or other enterprise in
one or more of such Corporations.
The Advisory Agreement between the Registrant and
Alliance Capital Management L.P. provides that Alliance
Capital Management L.P. will not be liable under such
agreements for any mistake of judgment or in any event
whatsoever except for lack of good faith and that
nothing therein shall be deemed to protect, or purport
to protect, Alliance Capital Management L.P. against any
C-13
<PAGE>
liability to Registrant or its security holders to which
it would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the
performance of its duties thereunder, or by reason of
reckless disregard of its obligations or duties
thereunder.
The Distribution Services Agreement between the
Registrant and Alliance Fund Distributors, Inc. provides
that the Registrant will indemnify, defend and hold
Alliance Fund Distributors, Inc., and any person who
controls it within the meaning of Section 15 of the
Investment Company Act of 1940, free and harmless from
and against any and all claims, demands, liabilities and
expenses which Alliance Fund Distributors, Inc. or any
controlling person may incur arising out of or based
upon any alleged untrue statement of a material fact
contained in Registrants Registration Statement or
Prospectus or Statement of Additional Information or
arising out of, or based upon any alleged omission to
state a material fact required to be stated in either
thereof or necessary to make the statements in any
thereof not misleading, provided that nothing therein
shall be so construed as to protect Alliance Fund
Distributors against any liability to Registrant or its
security holders to which it would otherwise be subject
by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or be
reason of reckless disregard of its obligations or
duties thereunder. The foregoing summaries are
qualified by the entire text of Registrants Articles of
Incorporation, the Advisory Agreement between the
Registrant and Alliance Capital Management L.P. and the
Distribution Services Agreement between the Registrant
and Alliance Fund Distributors, Inc.
Insofar as indemnification for liabilities arising under
the Securities Act of 1933, as amended (the Securities
Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has
been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or
controlling person in connection with the securities
C-14
<PAGE>
being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such
indemnification by it is against public policy as
expressed in the Securities Act and will be governed by
the final adjudication of such issue.
In accordance with Release No. IC-11330 (September 2,
1980), the Registrant will indemnify its directors,
officers, investment manager and principal underwriters
only if (1) a final decision on the merits was issued by
the court or other body before whom the proceeding was
brought that the person to be indemnified (the
indemnitee) was not liable by reason or willful
misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his
office (disabling conduct) or (2) a reasonable
determination is made, based upon a review of the facts,
that the indemnitee was not liable by reason of
disabling conduct, by (a) the vote of a majority of a
quorum of the directors who are neither interested
persons of the Registrant as defined in section 2(a)(19)
of the Investment Company Act of 1940 nor parties to the
proceeding (disinterested, non-party directors), or
(b) an independent legal counsel in a written opinion.
The Registrant will advance attorneys fees or other
expenses incurred by its directors, officers, investment
adviser or principal underwriters in defending a
proceeding, upon the undertaking by or on behalf of the
indemnitee to repay the advance unless it is ultimately
determined that he is entitled to indemnification and,
as a condition to the advance, (1) the indemnitee shall
provide a security for his undertaking, (2) the
Registrant shall be insured against losses arising by
reason of any lawful advances, or (3) a majority of a
quorum of disinterested, non-party directors of the
Registrant, or an independent legal counsel in a written
opinion, shall determine, based on a review of readily
available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the
indemnitee ultimately will be found entitled to
indemnification.
ARTICLE VII, Section 1 through Section 6 of the
Registrants By-laws reads as follows:
Section 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Corporation shall indemnify its directors to the
fullest extent that indemnification of directors is
permitted by the Maryland General Corporation Law. The
C-15
<PAGE>
Corporation shall indemnify its officers to the same
extent as its directors and to such further extent as is
consistent with law. The Corporation shall indemnify
its directors and officers who while serving as
directors or officers also serve at the request of the
Corporation as a director, officer, partner, trustee,
employee, agent or fiduciary of another corporation,
partnership, joint venture, trust, other enterprise or
employee benefit plan to the fullest extent consistent
with law. The indemnification and other rights provided
by this Article shall continue as to a person who has
ceased to be a director or officer and shall inure to
the benefit of the heirs, executors and administrators
of such a person. This Article shall not protect any
such person against any liability to the Corporation or
any stockholder thereof to which such person would
otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office (disabling
conduct).
Section 2. ADVANCES. Any current or former director or
officer of the Corporation seeking indemnification
within the scope of this Article shall be entitled to
advances from the Corporation for payment of the
reasonable expenses incurred by him in connection with
the matter as to which he is seeking indemnification in
the manner and to the fullest extent permissible under
the Maryland General Corporation Law. The person
seeking indemnification shall provide to the Corporation
a written affirmation of his good faith belief that the
standard of conduct necessary for indemnification by the
Corporation has been met and a written undertaking to
repay any such advance if it should ultimately be
determined that the standard of conduct has not been
met. In addition, at least one of the following
additional conditions shall be met: (a) the person
seeking indemnification shall provide a security in form
and amount acceptable to the Corporation for his
undertaking; (b) the Corporation is insured against
losses arising by reason of the advance; or (c) a
majority of a quorum of directors of the Corporation who
are neither interested persons as defined in Section
2(a)(19) of the Investment Company Act of 1940, as
amended, nor parties to the proceeding (disinterested
non-party directors), or independent legal counsel, in a
written opinion, shall have determined, based on a
review of facts readily available to the Corporation at
the time the advance is proposed to be made, that there
is reason to believe that the person seeking
C-16
<PAGE>
indemnification will ultimately be found to be entitled
to indemnification.
Section 3. PROCEDURE. At the request of any person
claiming indemnification under this Article, the Board
of Directors shall determine, or cause to be determined,
in a manner consistent with the Maryland General
Corporation Law, whether the standards required by this
Article have been met. Indemnification shall be made
only following: (a) a final decision on the merits by a
court or other body before whom the proceeding was
brought that the person to be indemnified was not liable
by reason of disabling conduct or (b) in the absence of
such a decision, a reasonable determination, based upon
a review of the facts, that the person to be indemnified
was not liable by reason of disabling conduct by (i) the
vote of a majority of a quorum of disinterested non-
party directors or (ii) an independent legal counsel in
a written opinion.
Section 4. INDEMNIFICATION OF EMPLOYEES AND AGENTS.
Employees and agents who are not officers or directors
of the Corporation may be indemnified, and reasonable
expenses may be advanced to such employees or agents, as
may be provided by action of the Board of Directors or
by contract, subject to any limitations imposed by the
Investment Company Act of 1940.
Section 5. OTHER RIGHTS. The Board of Directors may
make further provision consistent with law for
indemnification and advance of expenses to directors,
officers, employees and agents by resolution, agreement
or otherwise. The indemnification provided by this
Article shall not be deemed exclusive of any other
right, with respect to indemnification or otherwise, to
which those seeking indemnification may be entitled
under any insurance or other agreement or resolution of
stockholders or disinterested directors or otherwise.
The rights provided to any person by this Article shall
be enforceable against the Corporation by such person
who shall be presumed to have relied upon it in serving
or continuing to serve as a director, officer, employee,
or agent as provided above.
Section 6. AMENDMENTS. References in this Article are
to the Maryland General Corporation Law and to the
Investment Company Act of 1940 as from time to time
amended. No amendment of these By-laws shall effect any
right of any person under this Article based on any
event, omission or proceeding prior to the amendment.
C-17
<PAGE>
The Registrant participates in a joint directors and
officers liability insurance policy issued by the ICI
Mutual Insurance Company. Coverage under this policy
has been extended to directors, trustees and officers of
the investment companies managed by Alliance Capital
Management L.P. Under this policy, outside trustees and
directors are covered up to the limits specified for any
claim against them for acts committed in their
capacities as trustee or director. A pro rata share of
the premium for this coverage is charged to each
investment company and to the Adviser.
ITEM 28. Business and Other Connections of Adviser.
The descriptions of Alliance Capital Management L.P.
under the caption Management of the Fund in the
Prospectus and in the Statement of Additional
Information constituting Parts A and B, respectively, of
this Registration Statement are incorporated by
reference herein.
The information as to the directors and executive
officers of Alliance Capital Management Corporation, the
general partner of Alliance Capital Management L.P., set
forth in Alliance Capital Management L.P.s Form ADV
filed with the Securities and Exchange Commission on
April 21, 1988 (File No. 801-32361) and amended through
the date hereof, is incorporated by reference herein.
ITEM 29. Principal Underwriters.
(a) Alliance Fund Distributors, Inc., the Registrant's
Principal Underwriter in connection with the sale of
shares of the Registrant. Alliance Fund Distributors,
Inc. also acts as Principal Underwriter or Distributor
for the following investment companies:
AFD Exchange Reserves
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
Alliance Bond Fund, Inc.
Alliance Capital Reserves
Alliance Global Dollar Government Fund, Inc.
Alliance Global Environment Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Global Strategic Income Trust, Inc.
Alliance Government Reserves
Alliance Greater China '97 Fund, Inc.
Alliance Growth and Income Fund, Inc.
Alliance High Yield Fund, Inc.
Alliance Institutional Funds, Inc.
C-18
<PAGE>
Alliance Institutional Reserves, Inc.
Alliance International Fund
Alliance International Premier Growth Fund, Inc.
Alliance Limited Maturity Government Fund, Inc.
Alliance Money Market Fund
Alliance Mortgage Securities Income Fund, Inc.
Alliance Multi-Market Strategy Trust, Inc.
Alliance Municipal Income Fund, Inc.
Alliance Municipal Income Fund II
Alliance Municipal Trust
Alliance New Europe Fund, Inc.
Alliance North American Government Income Trust, Inc.
Alliance Premier Growth Fund, Inc.
Alliance Quasar Fund, Inc.
Alliance Real Estate Investment Fund, Inc.
Alliance Select Investor Series, Inc.
Alliance Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
Alliance Worldwide Privatization Fund, Inc.
The Alliance Fund, Inc.
The Alliance Portfolios
(b) The following are the Directors and officers of Alliance
Fund Distributors, Inc., the principal place of business
of which is 1345 Avenue of the Americas, New York, New
York, 10105.
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME UNDERWRITER REGISTRANT
Michael J. Laughlin Director and Chairman
John D. Carifa Director
Robert L. Errico Director and President
Geoffrey L. Hyde Director and Senior
Vice President
Dave H. Williams Director
David Conine Executive Vice
President
Richard K. Saccullo Executive Vice
President
C-19
<PAGE>
Edmund P. Bergan, Jr. Senior Vice President, Secretary
General Counsel and
Secretary
Richard A. Davies Senior Vice President
and Managing Director
Robert H. Joseph, Jr. Senior Vice President
and Chief Financial
officer
Anne S. Drennan Senior Vice President
and Treasurer
Karen J. Bullot Senior Vice President
James S. Comforti Senior Vice President
James L. Cronin Senior Vice President
Daniel J. Dart Senior Vice President
Byron M. Davis Senior Vice President
Mark J. Dunbar Senior Vice President
Donald N. Fritts Senior Vice President
Bradley F. Hanson Senior Vice President
Richard E. Khaleel Senior Vice President
Stephen R. Laut Senior Vice President
Susan L. Matteson-King Senior Vice President
Daniel D. McGinley Senior Vice President
Ryne A. Nishimi Senior Vice President
Antonios G. Poleondakis Senior Vice President
Robert E. Powers Senior Vice President
Raymond S. Sclafani Senior Vice President
Gregory K. Shannahan Senior Vice President
Joseph F. Sumanski Senior Vice President
Peter J. Szabo Senior Vice President
C-20
<PAGE>
Nicholas K. Willett Senior Vice President
Richard A. Winge Senior Vice President
Gerard J. Friscia Vice President and
Controller
Jamie A. Atkinson Vice President
Benji A. Baer Vice President
Kenneth F. Barkoff Vice President
Casimir F. Bolanowski Vice President
Michael E. Brannan Vice President
Timothy W. Call Vice President
Kevin T. Cannon Vice President
John R. Carl Vice President
William W. Collins, Jr. Vice President
Leo H. Cook Vice President
Richard W. Dabney Vice President
Stephen J. Demetrovits Vice President
John F. Dolan Vice President
John C. Endahl Vice President
Sohaila S. Farsheed Vice President
Shawn C. Gage Vice President
Andrew L. Gangolf Vice President and Assistant
Assistant General Secretary
Counsel
Mark D. Gersten Vice President Treasurer and
Chief Financial
officer
John Grambone Vice President
George C. Grant Vice President
C-21
<PAGE>
Charles M. Greenberg Vice President
Alan Halfenger Vice President
William B. Hanigan Vice President
Scott F. Heyer Vice President
George R. Hrabovsky Vice President
Valerie J. Hugo Vice President
Scott Hutton Vice President
Richard D. Keppler Vice President
Donna M. Lamback Vice President
Henry Michael Lesmeister Vice President
James M. Liptrot Vice President
James P. Luisi Vice President
Jerry W. Lynn Vice President
Christopher J. MacDonald Vice President
Michael F. Mahoney Vice President
Shawn P. McClain Vice President
Jeffrey P. Mellas Vice President
Thomas F. Monnerat Vice President
Christopher W. Moore Vice President
Timothy S. Mulloy Vice President
Joanna D. Murray Vice President
Nicole Nolan-Koester Vice President
John C. O'Connell vice President
John J. O'Connor Vice President
James J. Posch Vice President
C-22
<PAGE>
Domenick Pugliese Vice President and Assistant
Assistant General Secretary
Counsel
Bruce W. Reitz Vice President
Karen C. Satterberg Vice President
John P. Schmidt Vice President
Robert C. Schultz Vice President
Richard J. Sidell Vice President
Teris A. Sinclair Vice President
Scott C. Sipple Vice President
Martine H. Stansbery, Jr. Vice President
Andrew D. Strauss Vice President
Michael J. Tobin Vice President
Joseph T. Tocyloski Vice President
Thomas J. Vaughn Vice President
Martha D. Volcker Vice President
Patrick E. Walsh Vice President
Mark E. Westmoreland Vice President
William C. White Vice President
David E. Willis Vice President
Emilie D. Wrapp Vice President and Assistant
Assistant General Secretary
Counsel
Patrick Look Assistant Vice
President & Assistant
Treasurer
Michael W. Alexander Assistant Vice
President
C-23
<PAGE>
Richard J. Appaluccio Assistant Vice
President
Charles M. Barrett Assistant Vice
President
Robert F. Brendli Assistant Vice
President
Maria L. Carreras Assistant Vice
President
John P. Chase Assistant Vice
President
Russell R. Corby Assistant Vice
President
Jean A. Cronin Assistant Vice
President
John W. Cronin Assistant Vice
President
Terri J. Daly Assistant Vice
President
Ralph A. DiMeglio Assistant Vice
President
Faith C. Deutsch Assistant Vice
President
John E. English Assistant Vice
President
Duff C. Ferguson Assistant Vice
President
Theresa Iosca Assistant Vice
President
Erik A. Jorgensen Assistant Vice
President
Eric G. Kalender Assistant Vice
President
C-24
<PAGE>
Edward W. Kelly Assistant Vice
President
Michael Laino Assistant Vice
President
Nicholas J. Lapi Assistant Vice
President
Kristine J. Luisi Assistant Vice
President
Kathryn Austin Masters Assistant Vice
President
Richard F. Meier Assistant Vice
President
Mary K. Moore Assistant Vice
President
Richard J. Olszewski Assistant Vice
President
Catherine N. Peterson Assistant Vice
President
Rizwan A. Raja Assistant Vice
President
Carol H. Rappa Assistant Vice
President
Clara Sierra Assistant Vice
President
Gayle S. Stamer Assistant Vice
President
Eileen Stauber Assistant Vice
President
Vincent T. Strangio Assistant Vice
President
Marie R. Vogel Assistant Vice
President
C-25
<PAGE>
Wesley S. Williams Assistant Vice
President
Matthew Witschel Assistant Vice
President
Christopher J. Zingaro Assistant Vice
President
Mark R. Manley Assistant Secretary
(c) Not Applicable.
ITEM 30. Location of Accounts and Records.
The accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company
Act of 1940 and the Rules thereunder are maintained as
follows: journals, ledgers, securities records and other
original records are maintained principally at the
offices of Alliance Fund Services, Inc., 500 Plaza
Drive, Secaucus, New Jersey 07094, and at the offices of
State Street Bank and Trust Company, the Registrants
Custodian, 225 Franklin Street, Boston, Massachusetts
02110. All other records so required to be maintained
are maintained at the offices of Alliance Capital
Management L.P., 1345 Avenue of the Americas, New York,
New York 10105.
ITEM 31. Management Services.
Not Applicable.
ITEM 32. Undertakings.
(b) The Registrant undertakes to furnish each person to whom
a prospectus is delivered with a copy of the Registrants
latest annual report to shareholders upon request and
without charge.
C-26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as
amended, the Registrant certifies that it meets all of the
requirements for effectiveness of this Amendment to its
Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York
and State of New York, on the 8th day of January, 1999.
ALLIANCE VARIABLE PRODUCTS
SERIES FUND, INC.
by /s/ John D. Carifa
_____________________
John D. Carifa
Chairman and President
Pursuant to the requirements of the Securities Act of
1933, as amended, this Amendment to the Registration Statement
has been signed below by the following persons in the capacities
and on the date indicated:
SIGNATURE TITLE DATE
1. Principal Executive Officer
by /s/ John D. Carifa Chairman and , January 8, 1999
____________________ President
John D. Carifa
2. Principal Financial and
Accounting Officer
by /s/ Mark D. Gersten Treasurer and , January 8, 1999
_____________________ Chief Financial
Mark D. Gersten Officer
C-27
<PAGE>
3. All of the Directors
Ruth Block
John D. Carifa
David H. Dievler
John H. Dobkin
William H. Foulk, Jr.
James M. Hester
Clifford L. Michel
Donald J. Robinson
by /s/ Edmund P. Bergan, Jr. January 8, 1999
____________________________
Edmund P. Bergan, Jr.
(Attorney-in-fact)
C-28
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO.
(1)(k) Articles of Amendment
(1)(l) Articles Supplementary
(6)(b) Form of Class B Distribution Services Agreement
(11) Consent of Independent Auditors
(15) Rule 12b-1 Distribution Plan
(18) Rule 18f-3 Plan
C-29
00250292.BP8
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
ARTICLES OF AMENDMENT
Alliance Variable Products Series Fund, Inc., a Maryland
corporation having its principal office in Maryland in the City
of Baltimore (hereinafter called the "Corporation"), certifies to
the State Department of Assessments and Taxation of Maryland
that:
FIRST: The charter of the Corporation is hereby amended
by changing the designations of all of the issued and unissued
shares of Common Stock of the Portfolios of the Corporation as
follows:
Current Name Amended Name
Money Market Portfolio Common Stock Money Market Portfolio Class A
Common Stock
Premier Growth Portfolio Common Stock Premier Growth Portfolio Class A
Common Stock
Growth and Income Portfolio Common Stock Growth and Income Portfolio
Class A Common Stock
U.S. Government/High Grade Securities U.S. Government/High Grade
Securities Portfolio Common Stock Class A Common Stock
High-Yield Portfolio Common Stock High-Yield Portfolio Class A
Common Stock
Total Return Portfolio Common Stock Total Return Portfolio Class A
Common Stock
International Portfolio Common Stock International Portfolio Class A
Common Stock
Short-Term Multi-Market Portfolio Common Short-Term Multi-Market Portfolio
Stock Class A Common Stock
Global Bond Portfolio Common Stock Global Bond Portfolio Class A
Common Stock
North American Government Income Portfolio North American Government Income
Common Stock Portfolio Class A Common Stock
Global Dollar Government Portfolio Common Global Dollar Government Portfolio
Stock Class A Common Stock
Utility Income Portfolio Common Stock Utility Income Portfolio Class A
Common Stock
Conservative Investors Portfolio Common Conservative Investors Portfolio
Stock Class A Common Stock
Growth Investors Portfolio Common Stock Growth Investors Portfolio Class A
Common Stock
Growth Portfolio Common Stock Growth Portfolio Class A Common
Stock
Worldwide Privatization Portfolio Common Worldwide Privatization Portfolio
Stock Class A Common Stock
Technology Portfolio Common Stock Technology Portfolio Class A
Common Stock
<PAGE>
Quasar Portfolio Common Stock Quasar Portfolio Class A Common
Stock
Real Estate Investment Portfolio Common Real Estate Investment Portfolio
Stock Class A Common Stock
SECOND: The amendment to the charter of the Corporation
as herein set forth was approved by a majority of the entire
Board of Directors of the Corporation. The charter amendment is
limited to changes expressly permitted by Section 2-605 of the
Maryland General Corporation Law to be made without action by the
stockholders of the Corporation. The Corporation is registered
as an open-end investment company under the Investment Company
Act of 1940.
IN WITNESS WHEREOF, Alliance Variable Products Series
Fund, Inc., has caused these Articles of Amendment to be executed
in its name and on its behalf by the Chairman of the Board of
Directors of the Corporation, John D. Carifa, and witnessed by
its Secretary, Edmund P. Bergan, Jr., as of the 6th day of
January, 1999. The undersigned Chairman of the Board of
Directors of the Corporation acknowledges these Articles of
Amendment to be the corporate act of the Corporation and states
that to the best of his knowledge, information and belief, the
matters and facts set forth in these Articles with respect to the
authorization and approval of the amendment of the Corporation's
charter are true in all material respects, and that this
statement is made under the penalties of perjury.
ALLIANCE VARIABLE PRODUCTS SERIES
FUND, INC.
By:/s/ John D. Carifa
John D. Carifa
Chairman
WITNESS:
/s/Edmund P. Bergan, Jr.
Edmund P. Bergan, Jr.
Secretary
2
00250292.BQ6
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
ARTICLES SUPPLEMENTARY
Alliance Variable Products Series Fund, Inc., a Maryland
corporation having its principal office in Maryland in the City
of Baltimore (hereinafter called the "Corporation"), certifies
that:
FIRST: The Board of Directors of the Corporation hereby
increases the aggregate number of shares of capital stock that
the Corporation has authority to issue by 10,000,000,000 shares
and classifies such additional shares as follows:
Designation Number of Shares
Money Market Portfolio Class B Common Stock 1,000,000,000
Premier Growth Portfolio Class B Common Stock 500,000,000
Growth and Income Portfolio Class B Common Stock 500,000,000
U.S. Government/High Grade Securities Portfolio Class B
Common Stock 500,000,000
High-Yield Portfolio Class B Common Stock 500,000,000
Total Return Portfolio Class B Common Stock 500,000,000
International Portfolio Class B Common Stock 500,000,000
Short-Term Multi-Market Portfolio Class B Common Stock 500,000,000
Global Bond Portfolio Class B Common Stock 500,000,000
North American Government Income Portfolio Class B
Common Stock 500,000,000
Global Dollar Government Portfolio Class B Common Stock 500,000,000
Utility Income Portfolio Class B Common Stock 500,000,000
Conservative Investors Portfolio Class B Common Stock 500,000,000
Growth Investors Portfolio Class B Common Stock 500,000,000
Growth Portfolio Class B Common Stock 500,000,000
Worldwide Privatization Portfolio Class B Common Stock 500,000,000
Technology Portfolio Class B Common Stock 500,000,000
Quasar Portfolio Class B Common Stock 500,000,000
Real Estate Investment Portfolio Class B Common Stock 500,000,000
Each portfolio of the Corporation is referred to herein as a
"Portfolio."
SECOND: The shares of the Class B Common Stock of the
Portfolios of the Corporation as so classified by the
Corporation's Board of Directors shall have the preferences,
conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and
conditions of redemption set forth in the Corporation's Charter
with respect to the applicable Portfolios (other than those
provisions of the Charter which by their terms are applicable
solely to one or more other classes of the Corporation's Common
<PAGE>
Stock) and shall be subject to all provisions of the Charter
relating to stock of the Corporation generally, and those set
forth as follows:
(1) The assets attributable to the Class B Common Stock
of a Portfolio shall be invested in the same investment
portfolio of the Corporation as the assets attributable to
the Class A Common Stock of that Portfolio.
(2) The dividends and distributions of investment
income and capital gains with respect to the Class B Common
Stock of a Portfolio shall be in such amount, which may vary
between the classes, as may be declared from time to time by
the Board of Directors of the Corporation, and such dividends
and distributions may vary from dividends and distributions
of investment income and capital gains with respect to each
of the other classes of that Portfolio to reflect differing
allocations of the expenses of the Corporation among the
holders of the classes of that Portfolio and any resultant
differences among the net asset values per share of the
classes, to such extent and for such purposes as the Board of
Directors of the Corporation may deem appropriate. The
allocation of investment income, realized and unrealized
capital gains and losses, expenses and liabilities of the
Corporation and amounts distributable in the event of
dissolution of the Corporation or liquidation of the
Corporation or of a Portfolio among the various classes of a
Portfolio shall be determined by the Board of Directors of
the Corporation in a manner that is consistent with the
Investment Company Act of 1940, the rules and regulations
thereunder, and the interpretations thereof, in each case as
from time to time amended, modified or superseded.
(3) Except as may otherwise be required by law pursuant
to any applicable order, rule or interpretation issued by the
Securities and Exchange Commission, or otherwise, the holders
of the Class B Common Stock of a Portfolio shall have
(i) exclusive voting rights with respect to any matter
submitted to a vote of stockholders that affects only holders
of the Class B Common Stock of that Portfolio and (ii) no
voting rights with respect to any other matter submitted to a
vote of stockholders which does not affect holders of the
Class B Common Stock of that Portfolio.
THIRD: The shares of the Class A Common Stock of the
Portfolios of the Corporation shall have the preferences,
conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and
conditions of redemption as heretofore set forth in the
Corporation's Charter with respect to such shares.
2
<PAGE>
FOURTH: A. Immediately before the increase in
authorized capital stock provided for herein, the total number of
shares of stock of all classes which the Corporation had
authority to issue was 10,000,000,000 shares, the par value of
each class of stock being $.001 per share, with an aggregate par
value of $10,000,000, classified as follows:
Designation Number of Shares
Money Market Portfolio Class A Common Stock 1,000,000,000
Premier Growth Portfolio Class A Common Stock 500,000,000
Growth and Income Portfolio Class A Common Stock 500,000,000
U.S. Government/High Grade Securities Portfolio Class A
Common Stock 500,000,000
High-Yield Portfolio Class A Common Stock 500,000,000
Total Return Portfolio Class A Common Stock 500,000,000
International Portfolio Class A Common Stock 500,000,000
Short-Term Multi-Market Portfolio Class A Common Stock 500,000,000
Global Bond Portfolio Class A Common Stock 500,000,000
North American Government Income Portfolio Class A
Common Stock 500,000,000
Global Dollar Government Portfolio Class A Common Stock 500,000,000
Utility Income Portfolio Class A Common Stock 500,000,000
Conservative Investors Portfolio Class A Common Stock 500,000,000
Growth Investors Portfolio Class A Common Stock 500,000,000
Growth Portfolio Class A Common Stock 500,000,000
Worldwide Privatization Portfolio Class A Common Stock 500,000,000
Technology Portfolio Class A Common Stock 500,000,000
Quasar Portfolio Class A Common Stock 500,000,000
Real Estate Investment Portfolio Class A Common Stock 500,000,000
B. Immediately after the increase in authorized capital
stock provided for herein, the total number of shares of stock of
all classes which the Corporation has authority to issue is
20,000,000,000 shares, the par value of each class of stock being
$.001 per share, with an aggregate par value of $20,000,000,
classified as follows:
Class A Class B
Name of Portfolio Common Stock Common Stock
Money Market Portfolio 1,000,000,000 1,000,000,000
Premier Growth Portfolio 500,000,000 500,000,000
Growth and Income Portfolio 500,000,000 500,000,000
3
<PAGE>
U.S. Government/High Grade
Securities Portfolio 500,000,000 500,000,000
High-Yield Portfolio 500,000,000 500,000,000
Total Return Portfolio 500,000,000 500,000,000
International Portfolio 500,000,000 500,000,000
Short-Term Multi-Market
Portfolio 500,000,000 500,000,000
Global Bond Portfolio 500,000,000 500,000,000
North American Government
Income Portfolio 500,000,000 500,000,000
Global Dollar Government
Portfolio 500,000,000 500,000,000
Utility Income Portfolio 500,000,000 500,000,000
Conservative Investors Portfolio 500,000,000 500,000,000
Growth Investors Portfolio 500,000,000 500,000,000
Growth Portfolio 500,000,000 500,000,000
Worldwide Privatization Portfolio 500,000,000 500,000,000
Technology Portfolio 500,000,000 500,000,000
Quasar Portfolio 500,000,000 500,000,000
Real Estate Investment Portfolio 500,000,000 500,000,000
FIFTH: The Corporation is registered as an open-end
company under the Investment Company Act of 1940.
SIXTH: The total number of shares that the Corporation
has authority to issue has been increased by the Board of
Directors of the Corporation in accordance with Section 2-105(c)
of the Maryland General Corporation Law.
SEVENTH: The shares aforesaid have been duly classified
by the Corporation's Board of Directors pursuant to authority and
power contained in the Corporation's Articles of Incorporation.
4
<PAGE>
IN WITNESS WHEREOF, Alliance Variable Products Series
Fund, Inc. has caused these Articles Supplementary to be executed
by the Chairman of the Board of Directors of the Corporation and
witnessed by its Secretary as of the day of January, 1999.
The Chairman of the Board of Directors of the Corporation who
signed these Articles Supplementary acknowledges them to be the
act of the Corporation and states under the penalties of perjury
that, to the best of his knowledge, information and belief, the
matters and facts set forth herein relating to authorization and
approval hereof are true in all material respects.
ALLIANCE VARIABLE PRODUCTS SERIES
FUND, INC.
By: /s/ John D. Carifa
John D. Carifa
Chairman
WITNESS:
/s/ Edmund P. Bergan, Jr.
Edmund P. Bergan, Jr.
Secretary
5
00250292.BQ5
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
CLASS B
DISTRIBUTION SERVICES AGREEMENT
AGREEMENT made as of the [ ] day of [ ],
between ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC., a Maryland
corporation (the "Fund") and ALLIANCE FUND DISTRIBUTORS, INC., a
Delaware corporation (the "Underwriter").
WITNESSETH
WHEREAS, the Fund is registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"),
as an open-end management investment company and it is in the
interest of the Fund to offer its shares for sale continuously to
the separate accounts ("Eligible Separate Accounts") of insurance
companies;
WHEREAS, variable insurance and annuity product
("Variable Products") net premiums, contributions and
considerations will be allocated to Eligible Separate Accounts
for investment in the Fund;
WHEREAS, the Underwriter is a securities firm engaged in
the business of selling shares of companies either directly to
purchasers or through other securities dealers;
WHEREAS, the Fund and the Underwriter wish to enter into
an agreement with each other with respect to the continuous
offering of the Fund's shares in order to promote the growth of
the Fund and facilitate the distribution of its shares;
WHEREAS, the Fund has adopted a distribution plan in
respect of its Class B shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940 ("Investment Company Act");
WHEREAS, the Fund desires that the Underwriter undertake
marketing activities with respect to Class B shares of the Fund's
constituent Portfolios and to compensate the Underwriter for
services rendered and expenses borne (including payments made to
third parties) in connection therewith;
NOW, THEREFORE, the parties agree as follows:
SECTION 1. Policy on Conflicts; Appointment of the
Underwriter.
(a) The Fund has ratified a Policy on Conflicts (the
"Policy"). This Agreement shall be subject to the provisions of
the Policy, the terms of which are incorporated herein by
<PAGE>
reference, made a part hereof and controlling. The Policy may be
amended or superseded, without prior notice, and this Agreement
shall be deemed amended to the extent the Policy is amended or
superseded. The Underwriter represents and warrants that it will
act in a manner consistent with such Policy as set forth and as
it may be amended or superseded, so long as it is a principal
underwriter of the Class B shares of the Fund. This provision
shall survive the termination of this Agreement.
(b) The Fund hereby appoints the Underwriter as the
principal underwriter and distributor of the Fund to sell Class B
shares of common stock of the Fund (sometimes herein referred to
as "shares") to the separate accounts of insurance companies and
hereby agrees during the term of this Agreement to sell shares of
the Fund to the Underwriter upon the terms and conditions herein
set forth.
SECTION 2. Exclusive Nature of Duties. The
Underwriter shall be the exclusive representative of the Fund to
act as principal underwriter and distributor except that the
rights given under this Agreement to the Underwriter shall not
apply to shares issued in connection with (a) the merger or
consolidation of any other investment company with the Fund, (b)
the Fund's acquisition by purchase or otherwise of all or
substantially all of the assets or stock of any other investment
company or (c) the reinvestment in shares by the Fund's
shareholders of dividends or other distributions.
SECTION 3. Purchase of Class B Shares from the Fund.
(a) The Fund will commence a continuous offering of its
Class B shares and, thereafter, the Underwriter shall have the
right to buy from the Fund the shares needed to fill
unconditional orders for shares of the Fund placed with the
Underwriter by the separate accounts of insurance companies. The
price which the Underwriter shall pay for the shares so purchased
from the Fund shall be the net asset value, determined as set
forth in Section 3(d) hereof, used in determining the public
offering price on which such orders are based.
(b) The shares are to be resold by the Underwriter to
the separate accounts of insurance companies at a public offering
price, as set forth in Section 3(c) hereof.
(c) The public offering price(s) of the shares, i.e.,
the price per share at which the Underwriter or selected dealers
or agents may sell shares to the separate accounts of insurance
companies, shall be the public offering price determined in
accordance with the current Class B Prospectus of the Fund (the
"Prospectus") under the Securities Act of 1933, as amended (the
"Securities Act"), relating to such shares. All payments to the
2
<PAGE>
Fund hereunder shall be made in the manner set forth in Section
3(f) hereof.
(d) The net asset value of shares of the Fund shall be
determined by the Fund, or any agent of the Fund, in accordance
with the method set forth in the Prospectus and Class B Statement
of Additional Information ("Statement of Additional Information")
and guidelines established by the Directors of the Fund.
(e) The Fund reserves the right to suspend the offering
of its shares at any time in the absolute discretion of its
Directors.
(f) The Fund, or any agent of the Fund designated in
writing to the Underwriter by the Fund, shall be promptly advised
by the Underwriter of all purchase orders for Class B shares
received by the Underwriter. Any order may be rejected by the
Fund; provided, however, that the Fund will not arbitrarily or
without reasonable cause refuse to accept or confirm orders for
the purchase of shares. The Fund (or its agent) will confirm
orders upon their receipt, will make appropriate book entries and
upon receipt by the Fund (or its agent) of payment thereof, will
deliver deposit receipts or stock certificates for such shares
pursuant to the instructions of the Underwriter. Payment shall
be made to the Fund in New York Clearing House funds. The
Underwriter agrees to cause such payment and such instructions to
be delivered promptly to the Fund (or its agent).
SECTION 4. Repurchase or Redemption of Class B
Shares by the Fund.
(a) Any of the outstanding Class B shares may be
tendered for redemption at any time, and the Fund agrees to
redeem or repurchase the shares so tendered in accordance with
its obligations as set forth in Section (3)(d) of ARTICLE FIFTH
of its Articles of Incorporation and in accordance with the
applicable provisions set forth in the Prospectus and Statement
of Additional Information. The price to be paid to redeem or
repurchase the shares shall be equal to the net asset value
calculated in accordance with the provisions of Section 3(d)
hereof. All payments by the Fund hereunder shall be made in the
manner set forth below.
The Fund (or its agent) shall pay the total amount of
the redemption price as defined in the above paragraph pursuant
to the instructions of the Underwriter in New York Clearing House
funds on or before the seventh business day subsequent to its
having the notice of redemption in proper form.
(b) Redemption of shares or payment may be suspended at
times when the New York Stock Exchange is closed, when trading on
3
<PAGE>
said Exchange is restricted, when an emergency exists as a result
of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for
the Fund fairly to determine the value of its net assets, or
during any other period when the Securities and Exchange
Commission, by order, so permits.
SECTION 5. Duties of the Fund.
(a) The Fund shall furnish to the Underwriter copies of
all information, financial statements and other papers which the
Underwriter may reasonably request for use in connection with the
distribution of Class B shares of the Fund, and this shall
include one certified copy, upon request by the Underwriter, of
all financial statements prepared for the Fund by independent
public accountants. The Fund shall make available to the
Underwriter such number of copies of the Prospectus and Statement
of Additional Information as the Underwriter shall reasonably
request.
(b) The Fund shall take, from time to time, but subject
to the necessary approval of its shareholders, all necessary
action to fix the number of authorized shares and such steps as
may be necessary to register the same under the Securities Act,
to the end that there will be available for sale such number of
shares as the Underwriter reasonably may be expected to sell.
(c) The Fund shall use its best efforts to qualify and
maintain the qualification of an appropriate number of its shares
under the securities laws of such states as the Underwriter and
the Fund may approve. Any such qualifications may be withheld,
terminated or withdrawn by the Fund at any time in its
discretion. As provided in Section 8(b) hereof, the expense of
qualification and maintenance of qualification shall be borne by
the Fund. The Underwriter shall furnish such information and
other material relating to its affairs and activities as may be
required by the Fund in connection with such qualifications.
(d) As compensation for services rendered and expenses
borne in connection with the distribution of Class B shares, each
Portfolio shall pay the Underwriter a monthly fee (payable on or
before the fifth business day of the following month) at a rate
equal to .25% per annum of the average daily net assets of the
Portfolio attributable to Class B shares.
(e) The Fund will furnish, in reasonable quantities
upon request by the Underwriter, copies of annual and interim
reports of the Fund.
4
<PAGE>
SECTION 6. Duties of the Underwriter.
(a) The Underwriter shall devote reasonable time and
effort to effect sales of Class B shares of the Fund, but shall
not be obligated to sell any specific number of shares. The
services of the Underwriter to the Fund hereunder are not to be
deemed exclusive and nothing herein contained shall prevent the
Underwriter from entering into like arrangements with other
investment companies so long as the performance of its
obligations hereunder is not impaired thereby.
(b) In selling shares of the Fund, the Underwriter
shall use its best efforts in all respects duly to conform with
the requirements of all federal and state laws relating to the
sale of such securities. Neither the Underwriter nor any
selected dealer nor any other person is authorized by the Fund to
give any information or to make any representations, other than
those contained in the Fund's Registration Statement (the
"Registration Statement"), as amended from time to time, under
the Securities Act and the Investment Company Act or the Fund's
Prospectus and Statement of Additional Information as from time
to time in effect, or any sales literature specifically approved
in writing by the Fund.
(c) The Underwriter shall adopt and follow procedures,
as approved by the officers of the Fund, for the confirmation of
sales to separate accounts of insurance companies, the collection
of amounts payable by investors on such sales, and the
cancellation of unsettled transactions, as may be necessary to
comply with the requirements of the National Association of
Securities Dealers, Inc. (the "NASD"), as such requirements may
from time to time exist.
SECTION 7. Sales Agreements.
(a) The Underwriter is hereby authorized, from time to
time, to enter into separate written agreements ("Sales
Agreements" or, individually, a "Sales Agreement"), on terms and
conditions not inconsistent with this Agreement, with insurance
companies that have Eligible Separate Accounts and that agree to
participate in the distribution of the Fund's Class B shares,
directly or through affiliated broker dealers (collectively with
the insurance companies, the "Participating Insurance Companies),
by means of distribution of Variable Products and to use their
efforts to solicit applications for Variable Products. The
Underwriter may not enter into any Sales Agreement with any
Participating Insurance Company that is more favorable than that
maintained with any other Participating Insurance Company and
Eligible Separate Account, except that not all portfolios of the
Fund need be made available for investment by all Participating
Insurance Companies, Eligible Separate Accounts or Variable
5
<PAGE>
Products. Each Sales Agreement shall be entered into jointly
with the Participating Insurance Company and the Eligible
Separate Accounts.
(b) Such Participating Insurance Companies and their
agents or representatives soliciting applications for Variable
Products shall be duly and appropriately licensed, registered or
otherwise qualified for the sale of Variable Products under any
applicable insurance laws and any applicable securities laws of
one or more states or other jurisdictions in which Variable
Products may be lawfully sold. Each such Participating Insurance
Company shall, when required by law, be both registered as a
broker dealer under the Securities Exchange Act of 1934, as
amended, and a member of the NASD. Each such Participating
Insurance Company shall agree to comply with all laws and
regulations, whether federal or state, and whether relating to
insurance, securities or other general areas, including but not
limited to the record-keeping and sales supervision requirements
of such laws and regulations.
SECTION 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the
Fund, including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of its
Registration Statement and Prospectus and Statement of Additional
Information, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy
materials to shareholders (including but not limited to the
expense of setting in type any such registration statements,
prospectuses, annual or interim reports or proxy materials).
(b) The Fund shall bear the cost of expenses of
qualification of Class B shares for sale, and, if necessary or
advisable in connection therewith, of qualifying the Fund (but
not the Underwriter) as an issuer or as a broker or dealer, in
such states of the United States or other jurisdictions as shall
be selected by the Fund and the Underwriter pursuant to Section
5(c) hereof and the cost and expenses payable to each such state
for continuing qualification therein until the Fund decides to
discontinue such qualification pursuant to Section 5(c) hereof.
SECTION 9. Indemnification.
(a) The Fund agrees to indemnify, defend and hold the
Underwriter, and any person who controls the Underwriter within
the meaning of Section 15 of the Securities Act, free and
harmless from and against any and all claims, demands,
liabilities and expenses (including the cost of investigating or
defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which the Underwriter or
6
<PAGE>
any such controlling person may incur, under the Securities Act,
or under common law or otherwise, arising out of or based upon
any alleged untrue statement of a material fact contained in the
Fund's Registration Statement or Prospectus or Statement of
Additional Information in effect from time to time under the
Securities Act or arising out of or based upon any alleged
omission to state a material fact required to be stated in either
thereof or necessary to make the statements in any thereof not
misleading, except insofar as such claims, demands liabilities or
expenses arise out of or are based upon either such untrue
statement or omission or alleged untrue statement or omission
made in reliance upon and in conformity with information
furnished in writing by the Underwriter to the Fund for use in
the Fund's Registration Statement, Prospectus or Statement of
Additional Information; provided, however, that in no event shall
anything herein contained be so construed as to protect the
Underwriter against any liability to the Fund or its security
holders to which the Underwriter would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in
the performance of its duties, or by reason of the Underwriter's
reckless disregard of its obligations and duties under this
agreement. The Fund's agreement to indemnify the Underwriter and
any such controlling person as aforesaid is expressly conditioned
upon the Fund's being notified of the commencement of any action
brought against the Underwriter or any such controlling person,
such notification to be given by letter or by telegram addressed
to the Fund at its principal office in New York, New York, and
sent to the Fund by the person against whom such action is
brought within ten days after the summons or other first legal
process shall have been served. The failure to so notify the
Fund of the commencement of any such action shall not relieve the
Fund from any liability which it may have to the person against
whom such action is brought by reason of any such alleged untrue
statement or omission otherwise than on account of the indemnity
agreement contained in this Section 9. The Fund will be entitled
to assume the defense of any suit brought to enforce any such
claim, and to retain counsel of good standing chosen by the Fund
and approved by the Underwriter. In the event the Fund does not
elect to assume the defense of any such suit and retain counsel
of good standing approved by the Underwriter, the defendant or
defendants in such suit shall bear the fees and expenses of any
additional counsel retained by any of them; but in case the Fund
does not elect to assume the defense of any such suit, or in case
the Underwriter does not approve of counsel chosen by the Fund,
the Fund will reimburse the Underwriter or the controlling person
or persons named as defendant or defendants in such suit, for the
fees and expenses of any counsel retained by the Underwriter or
such persons. The indemnification agreement contained in this
Section 9 shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of the
Underwriter or any controlling person and shall survive the sale
7
<PAGE>
of any of the Fund's shares made pursuant to subscriptions
obtained by the Underwriter. This agreement of indemnity will
inure exclusively to the benefit of the Underwriter, to the
benefit of its successors and assigns, and to the benefit of any
controlling persons and their successors and assigns. The Fund
agrees promptly to notify the Underwriter of the commencement of
any litigation or proceeding against the Fund in connection with
the issue and sale of any of its shares.
(b) The Underwriter agrees to indemnify, defend and
hold the Fund, its several officers and directors, and any person
who controls the Fund within the meaning of Section 15 of the
Securities Act, free and harmless from and against any and all
claims, demands, liabilities, and expenses (including the cost of
investigating or defending such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which the
Fund, its officers or directors, or any such controlling person
may incur under the Securities Act or under common law or
otherwise, but only to the extent that such liability, or expense
incurred by the Fund, its officers and directors or such
controlling person resulting from such claims or demands shall
arise out of or be based upon any alleged untrue statement of a
material fact contained in information furnished in writing by
the Underwriter to the Fund for use in its Registration Statement
or Prospectus or Statement of Additional Information in effect
from time to time under the Securities Act, or shall arise out of
or be based upon any alleged omission to state a material fact in
connection with such information required to be stated in the
Registration Statement, Prospectus or Statement of Additional
Information or necessary to make such information not misleading.
The Underwriter's agreement to indemnify the Fund, its officers
and directors, and any such controlling person as aforesaid is
expressly conditioned upon the Underwriter being notified of the
commencement of any action brought against the Fund, its officers
or directors or any such controlling person, such notification to
be given by letter or telegram addressed to the Underwriter at
its principal office in New York, and sent to the Underwriter by
the person against whom such action is brought, within ten days
after the summons or other first legal process shall have been
served. The Underwriter shall have a right to control the
defense of such action, with counsel of its own choosing,
satisfactory to the Fund, if such action is based solely upon
such alleged misstatement or omission on its part, and in any
other event the Underwriter and the Fund, and their officers and
directors or such controlling person, shall each have the right
to participate in the defense or preparation of the defense of
any such action. The failure so to notify the Underwriter of the
commencement of any such action shall not relieve the Underwriter
from any liability which it may have to the Fund, to its officers
and directors, or to such controlling person by reason of any
such untrue statement or omission on the part of the Underwriter
8
<PAGE>
otherwise than on account of the indemnity agreement contained in
this Section 9.
SECTION 10. Notification by the Fund.
The Fund agrees to advise the Underwriter immediately:
(a) of any request by the Securities and Exchange
commission for amendments to the Fund's Registration Statement,
Prospectus or Statement of Additional Information or for
additional information,
(b) in the event of the issuance by the Securities and
Exchange Commission of any stop order suspending the
effectiveness of the Fund's Registration Statement, Prospectus or
Statement of Additional Information or the initiation of any
proceeding for that purpose,
(c) of the happening of any material event which makes
untrue any statement made in the Fund's Registration Statement,
Prospectus or Statement of Additional Information or which
requires the making of a change in any thereof in order to make
the statements therein not misleading, and
(d) of all actions of the Securities and Exchange
Commission with respect to any amendments to the Fund's
Registration Statement, Prospectus or Statement of Additional
Information which may from time to time be filed with the
Securities and Exchange Commission under the Securities Act.
SECTION 11. Term of Agreement.
(a) This agreement shall become effective on the date
hereof and shall remain in effect as to the Class B shares of
each Portfolio until [December 31, 1999] and continue in effect
thereafter with respect to the Class B shares of a Portfolio only
so long as its continuance with respect to the Class B shares of
that Portfolio is specifically approved at least annually by the
Board of Directors of the Fund or by vote of a majority of the
outstanding voting securities (as defined in the Investment
Company Act) represented by the Class B shares of such Portfolio,
and, in either case, by a majority of the Board of Directors of
the Fund who are not parties to this Agreement or interested
persons, as defined in the Investment Company Act, of any such
party; provided, however, that if the continuation of this
agreement is not approved as to a Portfolio, the Underwriter may
continue to render to such Portfolio the services described
herein in the manner and to the extent permitted by the
Investment Company Act and the rules and regulations thereunder.
This agreement may be terminated (i) by the Fund with respect to
any Portfolio at any time, without the payment of any penalty, by
9
<PAGE>
the vote of a majority of the outstanding voting securities (as
so defined) represented by the Class B shares of such Portfolio,
or by a vote of a majority of the Board of Directors of the Fund
on sixty days' written notice to the Underwriter; or (ii) by the
Underwriter with respect to any Portfolio on sixty days' written
notice to the Fund.
(b) This agreement may be amended at any time with the
approval of the Directors of the Fund, provided, however, that
any material amendments of the terms hereof will become effective
only upon approval as provided in the first sentence of Section
11(a) hereof.
SECTION 12. No Assignment. This agreement may not be
transferred, assigned, sold or in any manner hypothecated or
pledged by either party hereto and this agreement shall terminate
automatically in the event of any such transfer, assignment,
sale, hypothecation or pledge. The terms "transfer",
"assignment" and "sale" as used in this paragraph shall have the
meanings ascribed thereto by governing law and any interpretation
thereof contained in rules or regulations promulgated by the
Securities and Exchange Commission thereunder.
SECTION 13. Notices. Any notice required or
permitted to be given hereunder by either party to the other
shall be deemed sufficiently given if sent by registered mail,
postage prepaid, addressed by the party giving such notice to the
other party at the last address furnished by such other party to
the party giving notice, and unless and until changed pursuant to
the foregoing provisions hereof addressed to the Fund or the
Underwriter.
SECTION 14. Governing Law. The provisions of this
agreement shall be, to the extent applicable, construed and
interpreted in accordance with the laws of the State of New York.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement.
ALLIANCE VARIABLE PRODUCTS SERIES
FUND, INC.
By_____________________________
ALLIANCE FUND DISTRIBUTORS, INC.
By_____________________________
11
00250292.BQ2
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the
captions "Financial Highlights" and "General Information -
Independent Auditors" and to the use of our report dated
January 30, 1998 in this Registration Statement (Form N-1A
33-18647 and 811-5398) of Alliance Variable Products Series
Fund, Inc.
/s/ ERNST & YOUNG LLP
New York, New York
January 7, 1999
00250292.BQ7
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES
FUND, INC.
CLASS B
DISTRIBUTION PLAN
WHEREAS, the Board of Directors of Alliance Variable
Products Series Fund, Inc. (the "Fund") including the Independent
Directors, have concluded in the exercise of their reasonable
business judgment and in light of their fiduciary duties under
the Investment Company Act of 1940 and state law that there is a
reasonable likelihood that this Plan (the "Plan") will benefit
each of the Fund's constituent Portfolios (each a "Portfolio")
and the Class B shareholders thereof;
NOW THEREFORE, in consideration of the foregoing, the
Fund's Class B Plan is hereby adopted as follows:
Section 1. The Fund is authorized to pay a fee (the
"Distribution Fee") for services rendered and expenses borne in
connection with the distribution of the Class B shares of the
Fund, at an annual rate with respect to each Portfolio not to
exceed .50% of the average daily net assets attributable to the
Portfolio's Class B shares. Some or all of such fee may be paid
to the distributor of the Fund's Class B shares (the "Class B
Distributor") pursuant to a distribution services agreement.
Subject to such limit and subject to the provisions of Section 9
hereof, the Distribution Fee shall be as approved from time to
time by (a) the Directors of the Fund and (b) the Independent
Directors of the Fund and may be paid in respect of services
rendered and expenses borne in the past in connection with the
Portfolio's Class B shares as to which no Distribution Fee was
paid on account of such limitation. The Fund is not obligated to
pay any distribution expense in excess of the Distribution Fee
described in this Section 1. If at any time this Plan shall not
be in effect with respect to the Class B shares of all Portfolios
of the Fund, the Distribution Fee shall be computed on the basis
of the net assets of the Class B shares of those Portfolios for
which the Plan is in effect. The Distribution Fee payable with
respect to a particular Portfolio may not be used to subsidize
the sale of shares of any class or series other than the Class B
shares of that Portfolio. The Distribution Fee shall be accrued
daily and paid monthly or at such other intervals as the
Directors shall determine.
Section 2. Some or all of the Distribution Fee paid to
the Class B Distributor may be spent on any activities or
expenses primarily intended to result in the sale of Class B
shares of the Fund, including, but not limited to the following:
<PAGE>
(a) compensation to and expenses of employees of
the Class B Distributor, including overhead and
telephone expenses, who engage in the distribution of
Class B shares;
(b) printing and mailing of prospectuses,
statements of additional information and reports for
prospective purchasers of variable annuity or variable
life insurance contracts ("Variable Contracts")
investing indirectly in Class B shares;
(c) compensation to financial intermediaries and
broker-dealers to pay or reimburse them for their
services or expenses in connection with the distribution
of Variable Contracts;
(d) expenses relating to the development,
preparation, printing and mailing of Fund
advertisements, sales literature and other promotional
materials describing and/or relating to the Fund;
(e) expenses of holding seminars and sales
meetings designed to promote the distribution of Fund
Class B shares;
(f) expenses of obtaining information and
providing explanations to Variable Contract owners
regarding Fund investment objectives and policies and
other information about the Fund and its Portfolios,
including the performance of the Portfolios;
(g) expenses of training sales personnel regarding
the Fund;
(h) expenses of compensating sales personnel in
connection with the allocation of cash values and
premiums of the Variable Contracts to the Fund; and
(i) expenses of personal services and/or
maintenance of Variable Contract owner accounts with
respect to Fund Class B shares attributable to such
accounts.
Section 3. Alliance Capital Management L.P., the Fund's
investment adviser, may, with respect to the Class B shares of
any Portfolio, make payments from its own resources for the
purposes described in Section 2.
Section 4. This Plan shall not take effect until it has
been approved by votes of the majority (or whatever greater
percentage may, from time to time, be required by Section 12(b)
2
<PAGE>
of the Investment Company Act of 1940 (the "Act") or the rules
and regulations thereunder) of both (a) the Directors of the
Fund, and (b) the Independent Directors of the Fund cast in
person at a meeting called for the purpose of voting on this
Plan.
Section 5. This Plan shall continue in effect for a
period of more than one year after it takes effect only so long
as such continuance is specifically approved at least annually in
the manner provided for approval of this Plan in Section 4.
Section 6. Any person authorized to direct the
disposition of monies paid or payable by the Class B shares of
any Portfolio pursuant to this Plan or any related agreement
shall provide to the Directors of the Fund, and the Directors
shall review, at least quarterly, a written report of the amounts
so expended and the purposes for which such expenditures were
made.
Section 7. This Plan may be terminated at any time with
respect to the Class B shares of any Portfolio by vote of a
majority of the Independent Directors, or by vote of a majority
of the outstanding voting securities representing the Class B
shares of that Portfolio.
Section 8. All agreements with any person relating to
implementation of this Plan with respect to the Class B shares of
any Portfolio shall be in writing, and any agreement related to
this Plan with respect to the Class B shares of any Portfolio
shall provide:
A. That such agreement shall continue in effect for a
period of more than one year after it takes effect only so long
as such continuance is specifically approved at least annually in
the manner provided for approval of this Plan in Section 4;
B. That such agreement may be terminated at any time,
without payment of any penalty, by vote of a majority of the
Independent Directors or by vote of a majority of the outstanding
voting securities representing the Class B shares of such
Portfolio, on not more than 60 days'' written notice to any other
party to the agreement; and
C. That such agreement shall terminate automatically
in the event of its assignment.
Section 9. This Plan may not be amended to increase
materially the amount of distribution fees permitted to be paid
by a Portfolio pursuant to Section 1 hereof without approval by a
vote of at least a majority of the outstanding voting securities
representing the Class B shares of that Portfolio, and all
3
<PAGE>
material amendments to this Plan shall be approved in the manner
provided for approval of this Plan in Section 4.
Section 10. While this Plan is in effect, the selection
and nomination of the Directors who are not interested persons of
the Fund will be committed to the discretion of such
disinterested Directors.
Section 11. As used in this Plan, (a) the term
"Independent Directors" shall mean those Directors of the Fund
who are not interested persons of the Fund, and have no direct or
indirect financial interest in the operation of this Plan or any
agreements related to it, and (b) the terms "assignment",
"interested person" and "majority of the outstanding voting
securities" shall have the respective meanings specified in the
Act and the rules and regulations thereunder, subject to such
exemptions or interpretations as may be granted or issued by the
Securities and Exchange Commission.
4
00250292.BQ1
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
PLAN PURSUANT TO RULE 18f-3 UNDER THE
INVESTMENT COMPANY ACT OF 1940
EFFECTIVE [ ]
This Plan (the "Plan") is adopted by Alliance Variable
Products Series Fund, Inc. (the "Fund") pursuant to Rule 18f-3
under the Investment Company Act of 1940, as amended (the "Act"),
and sets forth the general characteristics of, and the general
conditions under which the Fund may offer, multiple classes of
shares of its now existing and hereafter created portfolios.
This Plan is intended to allow the Fund to offer multiple classes
of shares to the full extent and in the manner permitted by Rule
18f-3 under the Act (the "Rule"), subject to the requirements and
conditions imposed by the Rule. This Plan may be revised or
amended from time to time as provided below.
CLASS DESIGNATIONS
Each of the Fund''s constituent portfolios (each, a
"Portfolio") may from time to time issue one or more of the
following classes of shares: Class A shares (constituting the new
designation for all shares having the same characteristics as
shares issued prior to the date hereof) and Class B shares. Each
of the two classes of shares will represent interests in the same
portfolio of investments of the Portfolio and, except as
described herein, shall have the same rights and obligations as
each other class. Each class shall be subject to such investment
minimums and other conditions of eligibility as are set forth in
the Fund''s prospectus or statement of additional information as
from time to time in effect (the "Prospectus").
CLASS CHARACTERISTICS
Class A shares are offered at a public offering price
that is equal to their net asset value ("NAV") without an initial
sales charge or a contingent deferred sales charge ("CDSC") and
without being subject to a Rule 12b-1 fee.
Class B shares are offered at their NAV, without an
initial sales charge or a CDSC, but may be subject to a Rule 12b-
1 fee, which may include a service fee, as described in the
Prospectus.
The Class A shares and Class B shares may subsequently
be offered pursuant to an initial sales charge and/or CDSC (each
of which may be subject to reduction or waiver) as permitted by
the Act, and as described in the Prospectus.
<PAGE>
ALLOCATIONS TO EACH CLASS
EXPENSE ALLOCATIONS
The following expenses shall be allocated, to the extent
practicable, on a class-by-class basis: (i) Rule 12b-1 fees
payable by the Fund to the distributor or principal underwriter
of the Fund''s Class B shares (the "Class B Distributor")1 and
(ii) transfer agency costs attributable to Class A shares and
Class B shares. Subject to the approval of the Fund''s Board of
Directors, including a majority of the independent Directors, the
following "Class Expenses" may, to the extent not required to be
borne by the Fund''s investment adviser (the "Adviser") pursuant
to the Fund''s Investment Advisory Agreement, be allocated on a
class-by-class basis: (a) printing and postage expenses related
to preparing and distributing materials such as shareholder
reports, prospectuses and proxy statements to current
shareholders of a specific class, (b) SEC registration fees
incurred with respect to a specific class, (c) blue sky and
foreign registration fees and expenses incurred with respect to a
specific class, (d) the expenses of administrative personnel and
services required to support shareholders of a specific class,
(e) litigation and other legal expenses relating to a specific
class of shares, (f) Directors'' fees or expenses incurred as a
result of issues relating to a specific class of shares,
(g) accounting and consulting expenses relating to a specific
class of shares, (h) any fees imposed pursuant to a non-Rule 12b-
1 shareholder services plan that relate to a specific class of
shares, and (i) any additional expenses, not including advisory
or custodial fees or other expenses related to the management of
the Fund''s assets, if these expenses are actually incurred in a
different amount with respect to a class or if these expenses
relate to services provided with respect to a class that are of a
different kind or to a different degree than with respect to one
or more other classes.
All expenses, other than Rule 12b-1 fees and transfer
agency costs, not now or hereafter designated as Class Expenses
("Portfolio Expenses") will be allocated to each class on the
basis of the net asset value of that class in relation to the net
asset value of the Portfolio.
However, notwithstanding the above, the Fund may
allocate all expenses other than Rule 12b-1 fees, transfer agency
costs and Class Expenses based on the settled shares method, as
permitted by rule 18f-3(c)(1)(iii) under the Act.
_________________________
1As of the date of this Plan, only Class B shareholders have
a Rule 12b-1 plan.
2
<PAGE>
WAIVERS AND REIMBURSEMENTS
The Adviser or Class B Distributor may choose to waive
or reimburse Rule 12b-1 fees, transfer agency fees or any Class
Expenses on a voluntary, temporary basis. Such waiver or
reimbursement may be applicable to some or all of the classes and
may be in different amounts for one or more classes.
INCOME, GAINS AND LOSSES
Income and realized and unrealized capital gains and
losses shall be allocated to each class on the basis of the net
asset value of that class in relation to the net asset value of
the Portfolio.
The Fund may allocate income and realized and unrealized
capital gains and losses to each share based on the settled
shares method, as permitted by Rule 18f-3(c)(1)(iii) under the
Act.
CONVERSION AND EXCHANGE
CONVERSION FEATURES
Neither Class A shares nor Class B shares shall convert
into the other. Subsequent classes of shares (each a "Converting
Class") may automatically convert into another class of shares
(the "Conversion Class"), subject to such terms as may be
approved by the Directors.
In the event of any material increase in payments
authorized under Rule 12b-1 plan (or, if presented to
shareholders, any material increase in payments authorized by a
non-Rule 12b-1 shareholder services plan) applicable to any
Conversion Class, existing Converting Class shares will stop
converting into the Conversion Class shares unless the Converting
Class shareholders, voting separately as a class, approve the
increase in such payments. Pending approval of such increase, or
if such increase is not approved, the Directors shall take such
action as is necessary to ensure that existing Converting Class
shares are exchanged or converted into a new class of shares
("New Conversion Class") identical in all material respects to
the Conversion Class shares as existed prior to the
implementation of the increase in payments, no later than such
shares were previously scheduled to convert to the Conversion
Class shares. If deemed advisable by the Directors to implement
the foregoing, such action may include the exchange of all
existing Converting Class shares for a new class of shares ("New
Converting Class"), identical to existing Converting Class
shares, except that New Converting Class shares shall convert to
New Conversion Class shares. Converting Class shares sold after
3
<PAGE>
the implementation of the fee increase may convert into
Conversion Class shares subject to the higher maximum payment,
provided that the material features of the Conversion Class plan
and the relationship of such plan to the Converting Class shares
are disclosed in an effective registration statement.
EXCHANGE FEATURES
Shares of each class generally will be permitted to be
exchanged only for shares of a class with similar characteristics
in another Portfolio; Class A shares may be exchanged for Class A
shares of another Portfolio; Class B shares may be exchanged for
Class B shares of another Portfolio. All exchange features
applicable to each class will be described in the Prospectus.
DIVIDENDS
Dividends paid by the Fund with respect to its Class A
and Class B shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time and will be in
the same amount, except that any Rule 12b-1 fee payments relating
to a class of shares will be borne exclusively by that class and
any incremental transfer agency costs or, if applicable, Class
Expenses relating to a class, shall be borne exclusively by that
class.
VOTING RIGHTS
Each share of each Portfolio entitles the shareholder of
record to one vote. Each class of shares of the Portfolio will
vote separately as a class with respect to any Rule 12b-1 plan
applicable to that class and on other matters for which class
voting is required under applicable law. Class B shareholders
will vote separately as a class to approve any material increase
in payments authorized under the Rule 12b-1 plan applicable to
Class B shares.
RESPONSIBILITIES OF THE DIRECTORS
On an ongoing basis, the Directors will monitor the Fund
and each Portfolio for the existence of any material conflicts
among the interests of the two classes of shares. The Directors
shall further monitor on an ongoing basis the use of waivers or
reimbursement by the Adviser or the Class B Distributor of
expenses to guard against cross-subsidization between classes.
The Directors, including a majority of the independent Directors,
shall take such action as is reasonably necessary to eliminate
any such conflict that may develop. If a conflict arises, the
Adviser and the Class B Distributor and the distributor of the
Class A shares (together with the Class B Distributor, the
"Distributors"), at their own cost, will remedy such conflict up
4
<PAGE>
to and including establishing one or more new registered
management investment companies.
REPORTS TO THE DIRECTORS
The Adviser and the Distributors will be responsible for
reporting any potential or existing conflicts among the two
classes of shares to the Directors. In addition, the Directors
will receive quarterly and annual statements concerning
distributions and shareholder servicing expenditures complying
with paragraph (b)(3)(ii) of Rule 12b-1. In the statements, only
expenditures properly attributable to the direct or indirect sale
or servicing of a particular class of shares shall be used to
justify any distribution or service fee charged to that class.
The statements, including the allocations upon which they are
based, will be subject to the review of the independent Directors
in the exercise of their fiduciary duties. At least annually,
the Directors shall receive a report from an expert, acceptable
to the Directors, (the "Expert"), with respect to the methodology
and procedures for calculating the net asset value, dividends and
distributions for the classes, and the proper allocation of
income and expenses among the classes. The report of the Expert
shall also address whether the Fund has adequate facilities in
place to ensure the implementation of the methodology and
procedures for calculating the net asset value, dividends and
distributions for the classes, and the proper allocation of
income and expenses among the classes. The Fund and the Adviser
will take immediate corrective measures in the event of any
irregularities reported by the Expert.
AMENDMENTS
The Plan may be amended from time to time in accordance
with the provisions and requirements of Rule 18f-3 under the Act.
Adopted by action of the Board of
Directors this day of
By: ________________________
Edmund P. Bergan, Jr.
Secretary
5
00250292.BQ3
