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This is filed pursuant to Rule 497(e).
File Nos.: 33-18647 and 811-05398
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Class A Prospectus
ALLIANCE VARIABLE PRODUCTS
SERIES FUND, INC.
May 1, 2000
Real Estate Investment Portfolio
This Prospectus describes the Portfolio that is available as an underlying
investment through your variable contract. For information about your
variable contract, including information about insurance-related
expenses, see the prospectus for your variable contract which
accompanies this Prospectus.
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy of this
Prospectus. Any representation to the contrary is a
criminal offense.
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Investment Products Offered
. Are Not FDIC Insured
. May Lose Value
. Are Not Bank Guaranteed
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TABLE OF CONTENTS
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Page
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RISK/RETURN SUMMARY........................................................ 4
Summary of Principal Risks............................................... 6
GLOSSARY................................................................... 7
DESCRIPTION OF THE PORTFOLIO............................................... 9
Investment Objectives and Principal Policies and Risks................... 9
Description of Additional Investment Practices........................... 11
Additional Risk Considerations........................................... 18
MANAGEMENT OF THE PORTFOLIO................................................ 19
PURCHASE AND SALE OF SHARES................................................ 20
How The Portfolio Values Its Shares...................................... 20
How To Purchase and Sell Shares.......................................... 20
DIVIDENDS, DISTRIBUTIONS AND TAXES......................................... 20
FINANCIAL HIGHLIGHTS....................................................... 21
APPENDIX A................................................................. 22
</TABLE>
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Alliance Variable Products Series Fund's investment adviser is Alliance Capital
Management L.P., a global investment manager providing diversified services to
institutions and individuals through a broad line of investments including more
than 100 mutual funds.
RISK/RETURN SUMMARY
The following is a summary of certain key information about Alliance Variable
Products Series Fund. You will find additional information about the Portfolio
of the Fund, including a detailed description of the risks of an investment in
the Portfolio, after this summary.
The Risk/Return Summary describes the Portfolio's objectives, principal
investment strategies and principal risks. The Portfolio's summary includes a
discussion of some of the principal risks of investing in the Portfolio. A
further discussion of these and other risks starts on page 6.
More detailed descriptions of the Portfolio, including the risks associated
with investing in the Portfolio, can be found further back in this Prospectus.
Please be sure to read this additional information BEFORE you invest.
The Risk/Return Summary includes a table for the Portfolio showing its average
annual returns and a bar chart showing its annual returns. The table and the
bar chart provide an indication of the historical risk of an investment in the
Portfolio by showing:
. how the Portfolio's average annual returns for one, five, and 10 years
(or over the life of the Portfolio if the Portfolio is less than 10
years old) compare to those of a broad based securities market index;
and
. changes in the Portfolio's performance from year to year over 10 years
(or over the life of the Portfolio if the Portfolio is less than 10
years old).
If the Portfolio's returns reflected fees charged by your variable contract,
the returns shown in the table and bar charts for the Portfolio would be lower.
The Portfolio's past performance, of course, does not necessarily indicate how
it will perform in the future. As with all investments, you may lose money by
investing in the Portfolio.
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Real Estate Investment Portfolio
Objective: The Portfolio's investment objective is to seek a total return
on its assets from long-term growth of capital and from income principally
through investing in equity securities of companies that are primarily
engaged in or related to the real estate industry.
Principal Investment Strategies and Risks: The Portfolio invests primarily
in equity securities of real estate investment trusts or "REITs" and other
real estate industry companies. The Portfolio invests in real estate
companies that Alliance believes have strong property fundamentals and
management teams. The Portfolio seeks to invest in real estate companies
whose underlying portfolios are diversified geographically and by property
type. The Portfolio may invest up to 35% of its total assets in mortgage-
backed securities, which are securities that directly or indirectly
represent participations in or are collateralized by and payable from,
mortgage loans secured by real property.
Among the principal risks of investing in the Portfolio are market risk,
interest rate risk, and credit risk. Because the Portfolio invests a
substantial portion of its assets in the real estate market, it has many of
the same risks as direct ownership of real estate including the risk that
the value of real estate could decline due to a variety of factors
affecting the real estate market. In addition, REITs are dependent on the
capability of their managers, may have limited diversification, and could
be significantly affected by changes in tax laws. Because the Portfolio
invests in mortgage-backed securities, it is subject to the risk that
mortgage loans will be prepaid when interest rates decline, forcing the
Portfolio to reinvest in securities with lower interest rates. For this and
other reasons, mortgage-backed securities may have significantly greater
price and yield volatility than traditional fixed-income securities.
The table and bar chart provide an indication of the historical risk of an
investment in the Portfolio.
Performance Information and Bar Chart
Performance Table
<TABLE>
<CAPTION>
Since
1 Year Inception
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Portfolio................................................ -5.11% -1.79%
S&P 500 Index............................................ 21.05% 27.56%
</TABLE>
The average annual total returns in the performance table are for periods ended
December 31, 1999. Since Inception return information is from January 9, 1997
for the Portfolio and December 31, 1996 for the Index.
Bar Chart
[BAR CHART]
90 91 92 93 94 95 96 97 98 99
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
N/A N/A N/A N/A N/A N/A N/A N/A -19.1 -5.1
You should consider an investment in the Portfolio as a long-term investment.
The Portfolio's returns will fluctuate over long and short periods. For
example, during the period shown in the bar chart, the Portfolio's:
Best quarter was up 14.84%, 3rd quarter, 1997; and
Worst quarter was down -11.5%, 3rd quarter, 1998.
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SUMMARY OF PRINCIPAL RISKS
The value of your investment in the Portfolio will change with changes in the
values of the Portfolio's investments. Many factors can affect those values. In
this Summary, we describe the principal risks that may affect the Portfolio's
investments as a whole. The Portfolio could be subject to additional principal
risks because the types of investments made by the Portfolio can change over
time. This Prospectus has additional descriptions of the types of investments
that appear in bold type in the discussions under "Description of Additional
Investment Practices" or "Additional Risk Considerations." These sections also
include more information about the Portfolio, its investments, and related
risks.
. Interest Rate Risk This is the risk that changes in interest rates will
affect the value of the Portfolio's investments in debt securities,
such as bonds, notes, and asset-backed securities, or other income-
producing securities. Debt securities are obligations of the issuer to
make payments of principal and/or interest in future dates. Interest
rate risk is particularly applicable to the Portfolio's investments in
fixed-income securities. Increases in interest rates may cause the
value of the Portfolio's investments to decline.
Interest rate risk is generally greater for investments in debt
securities with longer maturities. This risk may be greater for the
Portfolio because it invests a substantial portion of its assets in
mortgage-related securities. The value of these securities is affected
more by changes in interest rates because when interest rates rise, the
maturities of these types of securities tend to lengthen and the value
of the securities decreases more significantly. In addition, these
types of securities are subject to prepayment when interest rates fall,
which generally results in lower returns because the Portfolio must
reinvest its assets in debt securities with lower interest rates.
Increased interest rate risk also is likely for debt securities paying
no current interest, such as zero coupon, principal-only, and interest-
only securities, or paying non-cash interest in the form of other debt
securities (payment-in-kind securities).
. Credit Risk This is the risk that the issuer or the guarantor of a debt
security, or the counterparty to a derivatives contract, will be unable
or unwilling to make timely payments of interest or principal, or to
otherwise honor its obligations. The degree of risk for a particular
security may be reflected in its credit rating.
. Market Risk This is the risk that the value of the Portfolio's
investments will fluctuate as the stock or bond markets fluctuate and
that prices overall will decline over shorter or longer-term periods.
. Industry/Sector Risk This is the risk of investments in a particular
industry/sector. Market or economic factors affecting that industry
sector or group of related industries could have a major effect on the
value of the Portfolio's investments.
. Management Risk The Portfolio is subject to management risk because it
is an actively managed investment portfolio. Alliance will apply its
investment techniques and risk analyses in making investment decisions
for the Portfolio, but there can be no guarantee that its decisions
will produce the desired results. In some cases, derivative and other
investment techniques may be unavailable or Alliance may determine not
to use them, possibly even under market conditions where their use
could benefit the Portfolio.
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GLOSSARY
This Prospectus uses the following terms.
Types of Securities
Bonds are fixed, floating, and variable rate debt obligations.
Convertible securities are fixed-income securities that are convertible into
common and preferred stock.
Debt securities are bonds, debentures, notes, and bills.
Equity securities include (i) common stocks, partnership interests, business
trust shares and other equity or ownership interests in business enterprises,
and (ii) securities convertible into, and rights and warrants to subscribe for
the purchase of, such stocks, shares and interests.
Fixed-income securities are debt securities and preferred stocks, including
floating rate and variable rate instruments.
Interest-only or IO securities are debt securities that receive only the
interest payments on an underlying debt that has been structured to have two
classes, one of which is the IO class and the other of which is the principal-
only or PO class, that receives only the principal payments on the underlying
debt obligation. POs are similar to, and are sometimes referred to as, zero
coupon securities, which are debt securities issued without interest coupons.
Mortgage-related securities are pools of mortgage loans that are assembled for
sale to investors (such as mutual funds) by various governmental, government-
related, and private organizations. These securities include:
. ARMS, which are adjustable-rate mortgage securities;
. SMRS, which are stripped mortgage-related securities;
. CMOs, which are collateralized mortgage obligations;
. GNMA certificates, which are securities issued by the Government
National Mortgage Association or GNMA;
. FNMA certificates, which are securities issued by the Federal National
Mortgage Association or FNMA; and
. FHLMC certificates, which are securities issued by the Federal Home Loan
Mortgage Corporation or FHLMC.
Qualifying bank deposits are certificates of deposit, bankers' acceptances, and
interest-bearing savings deposits of banks that have total assets of more than
$1 billion and are members of the Federal Deposit Insurance Corporation.
Rule 144A securities are securities that may be resold under Rule 144A of the
Securities Act.
U.S. Government securities are securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
Rating Agencies, Rated Securities and Indexes
Duff & Phelps is Duff & Phelps Credit Rating Company.
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Fitch is Fitch IBCA, Inc.
Moody's is Moody's Investors Service, Inc.
Prime commercial paper is commercial paper rated Prime 1 by Moody's or A-1 or
higher by S&P or, if not rated, issued by companies that have an outstanding
debt issue rated Aa or higher by Moody's or AA or higher by S&P.
S&P is Standard & Poor's Ratings Services.
S&P 500 Index is S&P's 500 Composite Stock Price Index, a widely recognized
unmanaged index of market activity.
Other
1940 Act is the Investment Company Act of 1940, as amended.
Code is the Internal Revenue Code of 1986, as amended.
Commission is the Securities and Exchange Commission.
Duration is a measure that relates the price volatility of a security to
changes in interest rates. The duration of a debt security is the weighted
average term to maturity, expressed in years, of the present value of all
future cash flows, including coupon payments and principal repayments. Thus, by
definition, duration is always less than or equal to full maturity.
Exchange is the New York Stock Exchange.
Securities Act is the Securities Act of 1933, as amended.
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DESCRIPTION OF THE PORTFOLIO
This section of the Prospectus provides a more complete description of the
Portfolio's investment objectives, principal strategies and risks. Of course,
there can be no assurance that the Portfolio will achieve its investment
objective.
Please note that:
. Additional discussion of the Portfolio's investments, including the
risks of the investments, can be found in the discussion under
Description of Additional Investment Practices following this section.
. The description of the principal risks for the Portfolio may include
risks described in the Summary of Principal Risks above. Additional
information about the risks of investing in the Portfolio can be found
in the discussion under Additional Risk Considerations.
. Additional descriptions of the Portfolio's strategies, investments and
risks can be found in the Fund's Statement of Additional Information or
SAI.
. Except as noted, (i) the Portfolio's investment objectives are
"fundamental" and cannot be changed without a shareholder vote, and
(ii) the Portfolio's investment policies are not fundamental and thus
can be changed without a shareholder vote.
INVESTMENT OBJECTIVES AND PRINCIPAL POLICIES AND RISKS
Real Estate Investment Portfolio
The Portfolio's investment objective is to seek a total return on its assets
from long-term growth of capital and from income principally through investing
in equity securities of companies that are primarily engaged in or related to
the real estate industry.
The Portfolio normally invests at least 65% of its total assets in equity
securities of real estate investment trusts, or 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 in these properties. The
Portfolio invests in equity securities that include 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 CMOs and (b) short-term
investments. These instruments are described below. The Portfolio will not
invest in the lowest tranche of CMOs and REMIC certificates.
In selecting Real Estate Equity Securities, Alliance's analysis will focus on
determining the degree to which the company involved can achieve sustainable
growth in cash flow and dividend paying capability. Alliance 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 Alliance, their
market price does not adequately reflect this potential. In making this
determination, Alliance 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 Alliance
9
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may determine from time to time to be relevant. Alliance 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 that 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 will indirectly bear 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's investment strategy with respect to Real Estate Equity
Securities is based on the premise that property market fundamentals are the
primary determinant of growth underlying the performance of Real Estate Equity
Securities. Value and 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
research, specific property inspection, and securities analysis. Alliance
believes 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.
To implement the Portfolio's research and investment process, Alliance has
retained the consulting services of CB Richard Ellis, Inc. ("CBRE"), a publicly
held company and the largest real estate services company in the United States.
CBRE business includes real estate brokerage, property and facilities
management, and real estate finance and investment advisory activities. The
universe of property-owning real estate industry firms consists of
approximately 142 companies of sufficient size and quality to merit
consideration for investment by the Portfolio. As consultant to Alliance, CBRE
provides access to its proprietary model, REIT-Score, which analyzes the
approximately 18,000 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 1,000 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.
Once the universe of real estate industry companies has been distilled through
the market research process, CBRE's local market presence provides the
capability to perform site specific inspections of key properties. This
analysis examines specific location, condition, and sub-market trends. CBRE's
use of locally based real estate professionals provides Alliance with a window
on the operations of the portfolio companies as information can immediately be
put in the context of local market events. Only those companies whose specific
property portfolios reflect the promise of their general markets will be
considered for initial and continued investment by the Portfolio.
Alliance further screens the universe of real estate industry companies by
using rigorous financial models and by engaging in regular contact with
management of targeted companies. Each management's strategic plan and ability
to execute the plan are determined and analyzed. Alliance makes extensive use
of CBRE'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.
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The Portfolio may invest in short-term investments including: corporate
commercial paper and other short-term commercial obligations, in each case
rated or issued by companies with similar securities outstanding that are rated
Prime-1, Aa or better by Moody's or A-1, AA or better by S&P; obligations
(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 or A-1, AA or better by S&P; and obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities with
remaining 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 rated, of equivalent credit quality as
determined by Alliance. The Portfolio expects that it will not retain a debt
security that is downgraded below BBB or Baa or, if unrated, determined by
Alliance to have undergone similar credit quality deterioration, subsequent to
purchase by the Portfolio.
The Portfolio also may:
. invest up to 10% of its net assets in rights or warrants;
. invest up to 15% of its net assets in convertible securities of
companies whose common stocks are eligible for purchase by the
Portfolio;
. enter into forward commitments for up to 30% of its total assets;
. enter into standby commitment agreements;
. make short sales of securities or maintain a short position provided
that not more than 25% of the Portfolio's net assets are held as
collateral for such sales;
. invest up to 15% of its net assets in illiquid securities;
. make secured loans of portfolio securities of up to 25% of its total
assets; and
. enter into repurchase agreements of up to seven days' duration.
Because the Portfolio invests a substantial portion of its assets in the real
estate market, it has many of the same risks as direct ownership of real
estate. For example, the value of real estate could decline due to a variety of
factors affecting the real estate market generally, such as overbuilding,
increases in interest rates, or declines in rental rates. In addition, REITs
are dependent on the capability of their managers, may have limited
diversification, and could be significantly affected by changes in tax laws.
The Portfolio's investments in mortgage-backed securities have prepayment risk,
which is the risk that mortgage loans will be repaid when interest rates
decline and the Portfolio will have to reinvest in securities with lower
interest rates. This risk causes mortgage-backed securities to have
significantly greater price and yield volatility than traditional fixed-income
securities. The Portfolio's investments in REMICs, CMOs and other types of
mortgage-backed securities may be subject to special risks that are described
under "Description of Additional Investment Practices."
DESCRIPTION OF ADDITIONAL INVESTMENT PRACTICES
This section describes the Portfolio's investment practices and associated
risks. Unless otherwise noted, the Portfolio's use of any of these practices
was specified in the previous section.
Derivatives. The Portfolio may use derivatives to achieve its investment
objectives. Derivatives are financial contracts whose value depends on, or is
derived from, the value of an underlying asset, reference rate or index. These
assets, rates, and indices may include bonds, stocks, mortgages, commodities,
interest rates, currency exchange rates, bond indices, and stock indices.
Derivatives can be used to earn income or protect against risk, or both. For
example, one party with unwanted risk may agree to pass that risk to another
party who is willing to accept the risk, the second party being motivated, for
example, by the desire either to earn income in the form of a fee or premium
from the first party, or to reduce its own unwanted risk by attempting to pass
all or part of that risk to the first party.
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Derivatives can be used by investors such as the Portfolio to earn income and
enhance returns, to hedge or adjust the risk profile of a portfolio, and either
to replace more traditional direct investments or to obtain exposure to
otherwise inaccessible markets. The Portfolio is permitted to use derivatives
for one or more of these purposes. Each of these uses entails greater risk than
if derivatives were used solely for hedging purposes. Derivatives are a
valuable tool, which, when used properly, can provide significant benefits to
Portfolio shareholders. The Portfolio may take a significant position in those
derivatives that are within its investment policies if, in Alliance's judgment,
this represents the most effective response to current or anticipated market
conditions. Alliance's use of derivatives is subject to continuous risk
assessment and control from the standpoint of the Portfolio's investment
objectives and policies.
Derivatives may be (i) standardized, exchange-traded contracts or (ii)
customized, privately-negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments--options, futures,
forwards, and swaps--from which virtually any type of derivative transaction
can be created.
. Options--An option, which may be standardized and exchange-traded, or
customized and privately negotiated, is an agreement that, for a
premium payment or fee, gives the option holder (the buyer) the right
but not the obligation to buy or sell the underlying asset (or settle
for cash an amount based on an underlying asset, rate or index) at a
specified price (the exercise price) during a period of time or on a
specified date. A call option entitles the holder to purchase, and a
put option entitles the holder to sell, the underlying asset (or settle
for cash an amount based on an underlying asset, rate or index).
Likewise, when an option is exercised the writer of the option is
obligated to sell (in the case of a call option) or to purchase (in the
case of a put option) the underlying asset (or settle for cash an
amount based on an underlying asset, rate or index).
. Futures--A futures contract is an agreement that obligates the buyer to
buy and the seller to sell a specified quantity of an underlying asset
(or settle for cash the value of a contract based on an underlying
asset, rate or index) at a specific price on the contract maturity
date. Futures contracts are standardized, exchange-traded instruments
and are fungible (i.e., considered to be perfect substitutes for each
other). This fungibility allows futures contracts to be readily offset
or cancelled through the acquisition of equal but opposite positions,
which is the primary method in which futures contracts are liquidated.
A cash-settled futures contract does not require physical delivery of
the underlying asset but instead is settled for cash equal to the
difference between the values of the contract on the date it is entered
into and its maturity date.
. Forwards--A forward contract is an obligation by one party to buy, and
the other party to sell, a specific quantity of an underlying commodity
or other tangible asset for an agreed upon price at a future date.
Forward contracts are customized, privately negotiated agreements
designed to satisfy the objectives of each party. A forward contract
usually results in the delivery of the underlying asset upon maturity
of the contract in return for the agreed upon payment.
. Swaps--A swap is a customized, privately negotiated agreement that
obligates two parties to exchange a series of cash flows at specified
intervals (payment dates) based upon or calculated by reference to
changes in specified prices or rates (interest rates in the case of
interest rate swaps, currency exchange rates in the case of currency
swaps) for a specified amount of an underlying asset (the "notional"
principal amount). The payment flows are netted against each other,
with the difference being paid by one party to the other. Except for
currency swaps, the notional principal amount is used solely to
calculate the payment streams but is not exchanged. With respect to
currency swaps, actual principal amounts of currencies may be exchanged
by the counterparties at the initiation, and again upon the
termination, of the transaction.
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Debt instruments that incorporate one or more of these building blocks for the
purpose of determining the principal amount of and/or rate of interest payable
on the debt instruments are often referred to as "structured securities." An
example of this type of structured security is indexed commercial paper. The
term is also used to describe certain securities issued in connection with the
restructuring of certain foreign obligations. The term "derivative" also is
sometimes used to describe securities involving rights to a portion of the cash
flows from an underlying pool of mortgages or other assets from which payments
are passed through to the owner of, or that collateralize, the securities.
These securities are described below under Mortgage-Related Securities.
While the judicious use of derivatives by highly-experienced investment
managers such as Alliance can be quite beneficial, derivatives involve risks
different from, and, in certain cases, greater than, the risks presented by
more traditional investments. The following is a general discussion of
important risk factors and issues relating to the use of derivatives that
investors should understand before investing in the Portfolio.
. Market Risk--This is the general risk of all investments that the value
of a particular investment will change in a way detrimental to the
Portfolio's interest based on changes in the bond market generally.
. Management Risk--Derivative products are highly specialized instruments
that require investment techniques and risk analyses different from
those associated with stocks and bonds. The use of a derivative
requires an understanding not only of the underlying instrument but
also of the derivative itself, without the benefit of observing the
performance of the derivative under all possible market conditions. In
particular, the use and complexity of derivatives require the
maintenance of adequate controls to monitor the transactions entered
into, the ability to assess the risk that a derivative adds to the
Portfolio, and the ability to forecast price, interest rate, or
currency exchange rate movements correctly.
. Credit Risk--This is the risk that a loss may be sustained by the
Portfolio as a result of the failure of a derivative counterparty to
comply with the terms of the derivative contract. The credit risk for
exchange-traded derivatives is generally less than for privately
negotiated derivatives, since the clearing house, which is the issuer
or counterparty to each exchange-traded derivative, provides a
guarantee of performance. This guarantee is supported by a daily
payment system (i.e., margin requirements) operated by the clearing
house in order to reduce overall credit risk. For privately negotiated
derivatives, there is no similar clearing agency guarantee. Therefore,
the Portfolio considers the creditworthiness of each counterparty to a
privately negotiated derivative in evaluating potential credit risk.
. Liquidity Risk--Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is
particularly large or if the relevant market is illiquid (as is the
case with many privately negotiated derivatives), it may not be
possible to initiate a transaction or liquidate a position at an
advantageous price.
. Leverage Risk--Since many derivatives have a leverage component,
adverse changes in the value or level of the underlying asset, rate or
index can result in a loss substantially greater than the amount
invested in the derivative itself. In the case of swaps, the risk of
loss generally is related to a notional principal amount, even if the
parties have not made any initial investment. Certain derivatives have
the potential for unlimited loss, regardless of the size of the initial
investment.
. Other Risks--Other risks in using derivatives include the risk of
mispricing or improper valuation of derivatives and the inability of
derivatives to correlate perfectly with underlying assets, rates and
indices. Many derivatives, in particular privately negotiated
derivatives, are complex and often valued subjectively. Improper
valuations can result in increased cash payment requirements to
counterparties or a loss of value to the Portfolio. Derivatives do not
always perfectly or even highly correlate or track the value of the
assets, rates or indices they are designed to closely track.
Consequently, the Portfolio's use of derivatives may not always be an
effective means of, and sometimes could be counterproductive to,
furthering the Portfolio's investment objective.
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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 equity security,
although the higher yield tends to make the convertible security less volatile
than the underlying equity security. As with debt securities, the market value
of convertible securities tends to decrease as interest rates rise and increase
as interest rates decline. While convertible securities generally offer lower
interest or dividend yields than non-convertible debt securities of similar
quality, they enable investors 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 may share some or all of the risks of debt securities with
those ratings.
Illiquid Securities. Illiquid securities generally include (i) direct
placements or other securities that are subject to legal or contractual
restrictions on resale or for which there is no readily available market (e.g.,
when trading in the security is suspended or, in the case of unlisted
securities, when market makers do not exist or will not entertain bids or
offers), including many currency swaps and any assets used to cover currency
swaps, (ii) over the counter options and assets used to cover over the counter
options, and (iii) repurchase agreements not terminable within seven days.
The Portfolio invests in illiquid securities and may not be able to sell such
securities and may not be able to realize their full value upon sale. Alliance
will monitor the Portfolio's investments in illiquid securities. Rule 144A
securities will not be treated as "illiquid" for the purposes of the limit on
investments so long as the securities meet liquidity guidelines established by
the Board of Directors.
Mortgage-Related Securities. The Portfolio's investments in mortgage-related
securities typically are securities representing interests in pools of mortgage
loans made to home owners. The mortgage loan pools may be assembled for sale to
investors (such as the Portfolio) by governmental or private organizations.
Mortgage-related securities bear interest at either a fixed rate or an
adjustable rate determined by reference to an index rate. Mortgage-related
securities frequently provide for monthly payments that consist of both
interest and principal, unlike more traditional debt securities, which normally
do not provide for periodic repayments of principal.
Securities representing interests in pools created by private issuers generally
offer a higher rate of interest than securities representing interests in pools
created by governmental issuers because there are no direct or indirect
governmental guarantees of the underlying mortgage payments. Private issuers
sometimes obtain committed loan facilities, lines of credit, letters of credit,
surety bonds or other forms of liquidity and credit enhancement to support the
timely payment of interest and principal with respect to their securities if
the borrowers on the underlying mortgages fail to make their mortgage payments.
The ratings of such non-governmental securities are generally dependent upon
the ratings of the providers of such liquidity and credit support and would be
adversely affected if the rating of such an enhancer were downgraded. The
Portfolio may buy mortgage-related securities without credit enhancement if the
securities meet the Portfolio's investment standards.
One type of mortgage-related security is of the "pass-through" variety. The
holder of a pass-through security is considered to own an undivided beneficial
interest in the underlying pool of mortgage loans and receives a pro rata share
of the monthly payments made by the borrowers on their mortgage loans, net of
any fees paid to the issuer or guarantor of the securities. Prepayments of
mortgages resulting from the sale, refinancing, or foreclosure of the
underlying properties are also paid to the holders of these securities, which,
as discussed below, frequently causes these securities to experience
significantly greater price and yield volatility than experienced by
traditional fixed-income securities. Some mortgage-related securities, such as
securities issued by GNMA, are referred to as "modified pass-through"
securities. The holders of these securities are entitled to the full and timely
payment of principal and interest, net of certain fees, regardless of whether
payments are actually made on the underlying mortgages.
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<PAGE>
Another form of mortgage-related security is a "pay-through" security, which is
a debt obligation of the issuer secured by a pool of mortgage loans pledged as
collateral that is legally required to be paid by the issuer, regardless of
whether payments are actually made on the underlying mortgages. CMOs are the
predominant type of "pay-through" mortgage-related security. In a CMO, a series
of bonds or certificates is issued in multiple classes. Each class of a CMO,
often referred to as a "tranche," is issued at a specific coupon rate and has a
stated maturity or final distribution date. Principal prepayments on collateral
underlying a CMO may cause one or more tranches of the CMO to be retired
substantially earlier than the stated maturities or final distribution dates of
the collateral. The principal and interest on the underlying mortgages may be
allocated among several classes of a series of a CMO in many ways. CMOs may be
issued by a U.S. Government instrumentality or agency or by a private issuer.
Although payment of the principal of, and interest on, the underlying
collateral securing privately issued CMOs may be guaranteed by GNMA, FNMA or
FHLMC, these CMOs represent obligations solely of the private issuer and are
not insured or guaranteed by GNMA, FNMA, FHLMC, any other governmental agency
or any other person or entity.
Another type of mortgage-related security, known as ARMS, bears interest at a
rate determined by reference to a predetermined interest rate or index. There
are two main categories of rates or indices: (i) rates based on the yield on
U.S. Treasury securities; and (ii) indices derived from a calculated measure
such as a cost of funds index or a moving average of mortgage rates. Some rates
and indices closely mirror changes in market interest rate levels, while others
tend to lag changes in market rate levels and tend to be somewhat less
volatile.
ARMS may be secured by fixed-rate mortgages or adjustable-rate mortgages. ARMS
secured by fixed-rate mortgages generally have lifetime caps on the coupon
rates of the securities. To the extent that general interest rates increase
faster than the interest rates on the ARMS, these ARMS will decline in value.
The adjustable-rate mortgages that secure ARMS will frequently have caps that
limit the maximum amount by which the interest rate or the monthly principal
and interest payments on the mortgages may increase. These payment caps can
result in negative amortization (i.e., an increase in the balance of the
mortgage loan). Since many adjustable-rate mortgages only reset on an annual
basis, the values of ARMS tend to fluctuate to the extent that changes in
prevailing interest rates are not immediately reflected in the interest rates
payable on the underlying adjustable-rate mortgages.
SMRS are mortgage-related securities that are usually structured with two
classes of securities collateralized by a pool of mortgages or a pool of
mortgaged-backed bonds or pass-through securities, with each class receiving
different proportions of the principal and interest payments from the
underlying assets. A common type of SMRS has one class of interest-only
securities or IOs receiving all of the interest payments from the underlying
assets; while the other class of securities, principal-only securities or POs,
receives all of the principal payments from the underlying assets. IOs and POs
are extremely sensitive to interest rate changes and are more volatile than
mortgage-related securities that are not stripped. IOs tend to decrease in
value as interest rates decrease, while POs generally increase in value as
interest rates decrease. If prepayments of the underlying mortgages are greater
than anticipated, the amount of interest earned on the overall pool will
decrease due to the decreasing principal balance of the assets. Changes in the
values of IOs and POs can be substantial and occur quickly, such as occurred in
the first half of 1994 when the value of many POs dropped precipitously due to
increases in interest rates. For this reason, the Portfolio does not rely on
IOs and POs as the principal means of furthering its investment objective.
The value of mortgage-related securities is affected by a number of factors.
Unlike traditional debt securities, which have fixed maturity dates, mortgage-
related securities may be paid earlier than expected as a result of prepayments
of underlying mortgages. Such prepayments generally occur during periods of
falling mortgage interest rates. If property owners make unscheduled
prepayments of their mortgage loans, these prepayments will result in the early
payment of the applicable mortgage-related securities. In that event, the
Portfolio may be unable to invest the proceeds from the early payment of the
mortgage-related securities in investments that provide as high a yield as the
mortgage-related securities. Early payments associated with mortgage-related
securities cause these securities to experience significantly greater price and
yield volatility than is experienced by traditional fixed-income securities.
The occurrence of mortgage prepayments is affected by the level of
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<PAGE>
general interest rates, general economic conditions, and other social and
demographic factors. During periods of falling interest rates, the rate of
mortgage prepayments tends to increase, thereby tending to decrease the life of
mortgage-related securities. Conversely, during periods of rising interest
rates, a reduction in prepayments may increase the effective life of mortgage-
related securities, subjecting them to greater risk of decline in market value
in response to rising interest rates. If the life of a mortgage-related
security is inaccurately predicted, the Portfolio may not be able to realize
the rate of return it expected.
Although the market for mortgage-related securities is becoming increasingly
liquid, those issued by certain private organizations may not be readily
marketable. In particular, the secondary markets for CMOs, IOs, and POs may be
more volatile and less liquid than those for other mortgage-related securities,
thereby potentially limiting the Portfolio's ability to buy or sell those
securities at any particular time.
As with fixed-income securities generally, the value of mortgage-related
securities also can be adversely affected by increases in general interest
rates relative to the yield provided by such securities. Such an adverse effect
is especially possible with fixed-rate mortgage securities. If the yield
available on other investments rises above the yield of the fixed-rate mortgage
securities as a result of general increases in interest rate levels, the value
of the mortgage-related securities will decline. Although the negative effect
could be lessened if the mortgage-related securities were to be paid earlier
(thus permitting the Portfolio to reinvest the prepayment proceeds in
investments yielding the higher current interest rate), as described above the
rates of mortgage prepayments and early payments of mortgage-related securities
generally tend to decline during a period of rising interest rates.
Although the values of ARMS may not be affected as much as the values of fixed-
rate mortgage securities by rising interest rates, ARMS may still decline in
value as a result of rising interest rates. Although, as described above, the
yields on ARMS vary with changes in the applicable interest rate or index,
there is often a lag between increases in general interest rates and increases
in the yield on ARMS as a result of relatively infrequent interest rate reset
dates. In addition, adjustable-rate mortgages and ARMS often have interest rate
or payment caps that limit the ability of the adjustable-rate mortgages or ARMS
to fully reflect increases in the general level of interest rates.
Repurchase Agreements. 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 a day or a few days later. The resale price is greater
than the purchase price, reflecting an agreed-upon interest rate for the period
the buyer's money is invested in the security. 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 of collateral in an amount equal to, or in
excess of, the resale price. If a vendor defaults on its repurchase obligation,
the Portfolio would suffer a loss to the extent that the proceeds from the sale
of the collateral were less than the repurchase price. If a vendor goes
bankrupt, the Portfolio might be delayed in, or prevented from, selling the
collateral for its benefit.
Rights and Warrants. Warrants are option securities permitting their holders to
subscribe for other securities. Rights are similar to warrants except that they
have a substantially shorter duration. Rights and warrants do not carry with
them dividend or voting rights with respect to the underlying securities, or
any rights in the assets of the issuer. As a result, an investment in rights
and warrants may be considered more speculative than certain other types of
investments. In addition, the value of a right or a warrant does not
necessarily change with the value of the underlying securities, and a right or
a warrant ceases to have value if it is not exercised prior to its expiration
date.
Secured Loans of Portfolio Securities. The Portfolio may make secured loans of
portfolio securities to brokers, dealers and financial institutions, provided
that cash, liquid high grade debt securities or bank letters of credit equal to
at least 100% of the market value of the securities loaned is deposited and
maintained by the borrower with the Portfolio's Custodian. The risks in lending
portfolio securities, as with other secured extensions of credit, consist of
possible loss of rights in the collateral should the borrower fail financially.
In
16
<PAGE>
determining whether to lend securities to a particular borrower, Alliance will
consider all relevant facts and circumstances, including the creditworthiness
of the borrower. While securities are on loan, the borrower will pay the
Portfolio any income earned from the securities. The Portfolio may invest any
cash collateral in portfolio securities and earn additional income or receive
an agreed-upon amount of income from a borrower who has delivered equivalent
collateral.
Short Sales. A short sale is effected by selling a security that the Portfolio
does not own, or if the Portfolio owns the security, is not to be delivered
upon consummation of the sale. A short sale is "against the box" if the
Portfolio owns or has the right to obtain without payment securities identical
to those sold short.
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 Portfolio's
gain is limited to the price at which it sold the security short, its potential
loss is theoretically unlimited.
Standby Commitment Agreements. Standby commitment agreements are similar to put
options that commit the Portfolio, for a stated period of time, to purchase a
stated amount of a security that 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 the security
ultimately is issued. The Portfolio will enter into such agreements only for
the purpose of investing in the security underlying the commitment at a yield
and price considered advantageous and unavailable on a firm commitment basis.
The Portfolio will not enter into a standby commitment with a remaining term in
excess of 45 days. The Portfolio will limit its investments in standby
commitments so that the aggregate purchase price of the securities subject to
the commitments does not exceed 20% of its assets.
There is no guarantee that the security subject to a standby commitment will be
issued. In addition, 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
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.
Zero Coupon and Principal-Only Securities. Zero coupon securities and
principal-only (PO) securities are debt securities that have been issued
without interest coupons or stripped of their unmatured interest coupons, and
include receipts or certificates representing interests in such stripped debt
obligations and coupons. Such a security pays no interest to its holder during
its life. Its value to an investor consists of the difference between its face
value at the time of maturity and the price for which it was acquired, which is
generally an amount significantly less than its face value. Such securities
usually trade at a deep discount from their face or par value and are subject
to greater fluctuations in market value in response to changing interest rates
than debt obligations of comparable maturities and credit quality that make
current distributions of interest. On the other hand, because there are no
periodic interest payments to be reinvested prior to maturity, these securities
eliminate reinvestment risk and "lock in" a rate of return to maturity.
Zero coupon Treasury securities are U.S. Treasury bills issued without interest
coupons. Principal-only Treasury securities are U.S. Treasury notes and bonds
that have been stripped of their unmatured interest coupons, and receipts or
certificates representing interests in such stripped debt obligations.
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 from the
coupon portions of U.S. Treasury bonds and notes and sold them separately in
the form of receipts or certificates representing undivided interests in these
instruments (which are generally held by a bank in a custodial or trust
account).
17
<PAGE>
Future Developments. The Portfolio may, following written notice to its
shareholders, take advantage of other investment practices that are not
currently contemplated for use by the Portfolio, or are not available but may
yet be developed, to the extent such investment practices are consistent with
the Portfolio's investment objective and legally permissible for the Portfolio.
Such investment practices, if they arise, may involve risks that are different
from or exceed those involved in the practices described above.
Portfolio Turnover. The portfolio turnover rate for the Portfolio is included
in the Financial Highlights section. The Portfolio is actively managed and, in
some cases in response to market conditions, the Portfolio's turnover may
exceed 100%. A higher rate of portfolio turnover increases brokerage and other
expenses, which must be borne by the Portfolio and its shareholders.
Temporary Defensive Position. For temporary defensive purposes, the Portfolio
may invest in certain types of short-term, liquid, high-grade or high-quality
debt securities. These securities may include U.S. Government securities,
qualifying bank deposits, money market instruments, prime commercial paper and
other types of short-term debt securities, including notes and bonds. While the
Portfolio is investing for temporary defensive purposes, it may not meet its
investment objective.
ADDITIONAL RISK CONSIDERATIONS
Investment in the Portfolio involves the special risk considerations described
below.
Fixed-Income Securities. The value of the Portfolio's shares will fluctuate
with the value of its investments. The value of the Portfolio's investments
will change as the general level of interest rates fluctuates. During periods
of falling interest rates, the values of the Portfolio's securities will
generally rise, although if falling interest rates are viewed as a precursor to
a recession, the values of the Portfolio's securities may fall along with
interest rates. Conversely, during periods of rising interest rates, the values
of the Portfolio's securities will generally decline. Changes in interest rates
have a greater effect on fixed-income securities with longer maturities and
durations than those with shorter maturities and durations.
In seeking to achieve the Portfolio's investment objective, there will be
times, such as during periods of rising interest rates, when depreciation and
realization of capital losses on securities in the Portfolio 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 will be reflected in the net asset value of the
Portfolio.
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 described 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.
U.S. and Foreign Taxes. The Portfolio's investment in foreign securities may be
subject to taxes withheld at the source on dividend or interest payments.
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
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.
18
<PAGE>
MANAGEMENT OF THE PORTFOLIO
Investment Adviser
The Portfolio's Adviser is Alliance Capital Management, L.P., 1345 Avenue of
the Americas, New York, New York 10105. Alliance is a leading international
investment manager supervising client accounts with assets as of December 31,
1999, totaling more than $368 billion (of which more than $169 billion
represented the assets of investment companies). As of December 31, 1999,
Alliance managed retirement assets for many of the largest public and private
employee benefit plans (including 31 of the nation's FORTUNE 100 companies),
for public employee retirement funds in 31 states, for investment companies and
for foundations, endowments, banks and insurance companies worldwide. The 53
registered investment companies managed by Alliance, comprising 119 separate
portfolios currently have more than 5 million shareholder accounts.
Alliance provides investment advisory services and order placement facilities
for the Portfolio. For these advisory services, for the fiscal year ended
December 31, 1999 the Portfolio paid Alliance .49% as a percentage of average
net assets, net of waivers and/or reimbursements in effect during the Fund's
fiscal year. Absent fee waivers and/or reimbursements, the fee paid to Alliance
by the Portfolio as a percentage of average net assets, would have been .90%.
In connection with investments in real estate securities, Alliance has, at its
expense retained as a consultant CB Richard Ellis, Inc. ("CBRE"). CBRE is a
publicly held company and the largest real services company in the United
States, comprised of real estate brokerage, property, and facilities
management, and real estate finance, and investment advisory services.
Portfolio Managers
Daniel G. Pine and David Kruth are the persons who are primarily responsible
for the day-to-day management of the Portfolio. Mr. Pine has held such position
since inception of the Portfolio and Mr. Kruth has held such position since
1997. Mr. Pine is a Senior Vice President of Alliance Capital Management
Corporation ("ACMC"), the sole general partner of Alliance, with which he has
been associated since 1996. Prior thereto, he was associated with Desai Capital
Management since prior to 1995. Mr. Kruth is a Vice President of ACMC, with
which he has been associated since 1997. Prior thereto, he was Senior Vice
President of Yarmouth Group.
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PURCHASE AND SALE OF SHARES
How The Portfolio Values Its Shares
The Portfolio's net asset value or NAV is calculated at 4:00 p.m., Eastern
time, each day the Exchange is open for business. To calculate NAV, the
Portfolio's assets are valued and totaled, liabilities are subtracted, and the
balance, called net assets, is divided by the number of shares outstanding. The
Portfolio values its securities at their current market value determined on the
basis of market quotations or, if such quotations are not readily available,
such other methods as the Portfolio's Directors or Trustees believe accurately
reflect fair market value.
Your order for purchase or sale of shares is priced at the next NAV calculated
after your order is received by the Portfolio.
How To Purchase and Sell Shares
The Portfolio offers its shares through the separate accounts of life insurance
companies. You may only purchase and sell shares through these separate
accounts. See the prospectus of the separate account of the participating
insurance company for information on the purchase and sale of the Portfolio's
shares.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Portfolio declares dividends on its shares at least annually. The income
and capital gains distribution will be made in shares of the Portfolio.
See the prospectus of the separate account of the participating insurance
company for federal income tax information.
Investment income received by the Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source.
Provided that certain code requirements are met, the Portfolio may "pass-
through" to its shareholders credits or deductions to foreign income taxes
paid.
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FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Portfolio's financial performance for the period of the Portfolio's operations.
Certain information reflects financial results for a single share of the
Portfolio. The total returns in the table represent the rate that an investor
would have earned (or lost) on an investment in the Portfolio (assuming
reinvestment of all dividends and distributions). The information has been
audited by Ernst & Young LLP, the Fund's independent auditors, whose report,
along with the Portfolio's financial statements, is included in the SAI, which
is available upon request.
Real Estate Investment Portfolio
<TABLE>
<CAPTION>
January 9,
Year Ended December 31, 1997(e) to
------------------------- December 31,
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Net asset value, beginning of
period............................. $ 9.78 $ 12.34 $ 10.00
----------- ----------- -------
Income From Investment Operations
Net investment income(a)(b)......... .56 .54 .56
Net realized and unrealized gain
(loss) on investment transactions.. (1.01) (2.87) 1.78
----------- ----------- -------
Net increase (decrease) in net asset
value from operations.............. (.45) (2.33) 2.34
----------- ----------- -------
Less: Dividends and Distributions
Dividends from net investment
income............................. (.46) (.16) -0-
Distributions from net realized
gains.............................. -0- (.07) -0-
----------- ----------- -------
Total dividends and distributions... (.46) (.23) -0-
----------- ----------- -------
Net asset value, end of period...... $ 8.87 $ 9.78 $ 12.34
=========== =========== =======
Total Return
Total investment return based on net
asset value(c)..................... (5.11)% (19.07)% 23.40%
Ratios/Supplemental Data
Net assets, end of period (000's
omitted)........................... $ 17,852 $ 17,080 $13,694
Ratios to average net assets of:
Expenses, net of waivers and
reimbursements................... .95% .95% .95%(d)
Expenses, before waivers and
reimbursements................... 1.72% 1.77% 2.31%(d)
Net investment income(a).......... 5.96% 4.98% 5.47%(d)
Portfolio turnover rate............. 37% 27% 26%
</TABLE>
- --------
Footnotes:
(a) Net of expenses reimbursed or waived by Alliance.
(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.
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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 standards.
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
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than the Aaa
securities.
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 payments
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
characterizes 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
shortcomings.
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.
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 unrated 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.
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<PAGE>
Suspension or withdrawal may occur if: new and material circumstances arise,
the effects of which preclude satisfactory analysis; there is no longer
available reasonable up-to-date data to permit a judgment to be formed; or 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
modifier 1 indicates that the security ranks in the higher end of its generic
rating 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 Ratings Services
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
principal 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
although 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. However,
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
significant speculative characteristics. BB indicates the lowest degree of
speculation and C the highest. While such debt will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
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, financial 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
conditions, 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
continued.
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
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR--Not rated.
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Duff & Phelps Credit Rating Co.
AAA--Highest credit quality. The 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
sufficient 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
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B- --Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential 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 quality.
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,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, 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
considered 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 assist the
obligor in satisfying its debt service requirements.
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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 throughout
the life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic 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
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents 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
indicate 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.
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For more information about the Portfolio, the following documents are available
upon request:
Annual/Semi-annual Reports to Shareholders
The Portfolio's annual and semi-annual reports to shareholders contain
additional information on the Portfolio's investments. In the annual report,
you will find a discussion of the market conditions and investment strategies
that significantly affected the Portfolio's performance during its last fiscal
year.
Statement of Additional Information (SAI)
The Fund has an SAI, which contains more detailed information about the
Portfolio, including its operations and investment policies. The SAI is
incorporated by reference into (and is legally part of) this Prospectus.
You may request a free copy of the current annual/semi-annual report or the
SAI, or make shareholder inquiries of the Portfolio, by contacting your broker
or other financial intermediary, or by contacting Alliance:
By mail: c/o Alliance Fund Services, Inc.
P.O. Box 1520
Secaucus, NJ 07096-1520
By phone: For Information: (800) 221-5672
For Literature: (800) 227-4618
Or you may view or obtain these documents from the Commission:
. Call the Commission at 1-202-942-8090 for information on the operation
of the Public Reference Room.
. Reports and other information about the Portfolio are available on the
EDGAR Database on the Commission's Internet site at http://www.sec.gov.
. Copies of the information may be obtained, after paying a fee, by
electronic request at [email protected], or by writing the Commission's
Public Reference Section, Washington, DC 20549-0102.
You also may find more information about Alliance and the Portfolio on the
internet at: www.Alliancecapital.com.
File No: 811-05398
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