-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SYWaPeFbNY1TqdayX9HD6rCPdm8Kl5KvTCqADzc5jbdpFdMzT0pd43nUUYuaRPxk bTw9HHi7Bd91Z0HpFcUpyQ== 0000919574-98-000525.txt : 19980430 0000919574-98-000525.hdr.sgml : 19980430 ACCESSION NUMBER: 0000919574-98-000525 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 31 FILED AS OF DATE: 19980429 EFFECTIVENESS DATE: 19980429 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE VARIABLE PRODUCTS SERIES FUND INC CENTRAL INDEX KEY: 0000825316 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 033-18647 FILM NUMBER: 98603347 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-05398 FILM NUMBER: 98603348 BUSINESS ADDRESS: STREET 1: C/O ALLIANCE CAPITAL MANAGEMENT LP STREET 2: 1345 AVENUE OF THE AMERICAS 31ST FL CITY: NEW YORK STATE: NY ZIP: 10105 BUSINESS PHONE: 2125544623 MAIL ADDRESS: STREET 1: ALLIANCE CAPITAL MANAGEMENT LP STREET 2: 1345 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10105 485BPOS 1 As filed with the Securities and Exchange Commission on April 28, 1998 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. 22 X and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 23 X ____________________________________________ 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) Registrants 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 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) on (date) pursuant to paragraph (a) of rule 485. 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 Purchase and Redemp- Offered tion of Shares; General Information Item 8. Redemption or Repurchase Purchase and Redemption of Shares; General Information Item 9. Pending Legal Proceedings Not Applicable PART B Location in Statement of Additional Information (Caption) Item 10. Cover Page Item 11. Table of Contents. Cover Page Item 12. General Information and History Management of the Fund; General Information Item 13. Investment Objectives and Investment Policies Policies and 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 [LOGO OF ALLIANCE CAPITAL APPEARS HERE] ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. - ------------------------------------------------------------------------------- P.O. BOX 1520, SECAUCUS, NEW JERSEY 07096-1520 TOLL FREE (800) 221-5672 - ------------------------------------------------------------------------------- Alliance Variable Products Series Fund, Inc. (the "Fund") is an open-end se- ries investment company designed to fund variable annuity contracts and vari- able life insurance policies to be offered by the separate accounts of certain life insurance companies. The Fund currently offers an opportunity to choose among the separately managed pools of assets (the "Portfolios") described be- low which have differing investment objectives and policies. - ------------------------------------------------------------------------------- A DIVERSIFIED SELECTION OF INVESTMENT ALTERNATIVES - ------------------------------------------------------------------------------- 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/May 1, 1998 Investors are advised to carefully read this Prospectus and to retain it for future reference. 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" dated May 1, 1998, which provides a further discussion of certain areas in this Prospectus and other matters which may be of interest to some investors, has been filed with the Securities and Exchange Commission and is incorporated herein by reference. For a free copy, call or write Alliance Fund Services, Inc. at the address or telephone number shown above. 2 EXPENSE INFORMATION SHAREHOLDER TRANSACTION EXPENSES The Fund has no sales load on purchases or reinvested dividends, deferred sales load, redemption fee or exchange fee.
U.S. GROWTH GOVERNMENT/ MONEY PREMIER AND HIGH GRADE HIGH- TOTAL MARKET GROWTH INCOME SECURITIES YIELD RETURN PORTFOLIO PORTFOLIO* PORTFOLIO PORTFOLIO PORTFOLIO(1)+@ PORTFOLIO --------- ---------- --------- ----------- -------------- --------- ANNUAL PORTFOLIO OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS) Management Fees........ .50% 1.00% .63% .60% 0% .63% Other Expenses......... .14% .08% .09% .24% .95% .25% --- ---- --- --- --- --- Total Portfolio Operating Expenses.... .64% 1.08% .72% .84% .95% .88% === ==== === === === ===
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@ ---------- ---------- ---------- ----------- ---------- ---------- ------------ ANNUAL PORTFOLIO OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS) Management Fees........ .53% .07% .56% .56% .62% .41% .37% Other Expenses......... .42% .87% .38% .39% .33% .54% .58% --- --- --- --- --- --- --- Total Portfolio Operating Expenses.... .95% .94% .94% .95% .95% .95% .95% === === === === === === ===
GROWTH WORLDWIDE REAL ESTATE INVESTORS GROWTH PRIVATIZATION TECHNOLOGY QUASAR INVESTMENT PORTFOLIO@ PORTFOLIO PORTFOLIO@ PORTFOLIO@ PORTFOLIO@ PORTFOLIO(2)+@ ---------- --------- ------------- ---------- ---------- -------------- ANNUAL PORTFOLIO OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS) Management Fees........ 0% .75% .40% .76% .58% 0% Other Expenses......... .95% .09% .55% .19% .37% .95% --- --- --- --- --- --- Total Portfolio Operating Expenses.... .95% .84% .95% .95% .95% .95% === === === === === ===
- -------- * Alliance Capital Management L.P. (the "Adviser") discontinued the expense re- imbursement with respect to the Premier Growth Portfolio effective May 1, 1998. + Annualized. @ Shareholder transaction expenses shown are net of expense reimbursement. (1) Inception (10/27/97) through 12/31/97. (2) Inception (1/9/97) through 12/31/97. 3 EXAMPLE You would pay the following expenses on a $1,000 investment, assuming a 5% annual return (cumulatively through the end of each time period).
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- Money Market Portfolio.......................... $ 7 $20 $36 $ 80 Premier Growth Portfolio........................ $11 $34 $60 $132 Growth and Income Portfolio..................... $ 7 $23 $40 $ 89 U.S. Government/High Grade Securities Portfolio. $ 9 $27 $47 $104 High-Yield Portfolio............................ $10 $30 $53 $117 Total Return Portfolio.......................... $ 9 $28 $49 $108 International Portfolio......................... $10 $30 $53 $117 Short-Term Multi-Market Portfolio............... $10 $30 $52 $115 Global Bond Portfolio........................... $10 $30 $52 $115 North American Government Income Portfolio...... $10 $30 $53 $117 Utility Income Portfolio........................ $10 $30 $53 $117 Global Dollar Government Portfolio.............. $10 $30 $53 $117 Conservative Investors Portfolio................ $10 $30 $53 $117 Growth Investors Portfolio...................... $10 $30 $53 $117 Growth Portfolio................................ $ 9 $27 $47 $104 Worldwide Privatization Portfolio............... $10 $30 $53 $117 Technology Portfolio............................ $10 $30 $53 $117 Quasar Portfolio................................ $10 $30 $53 $117 Real Estate Investment Portfolio................ $10 $30 $53 $117
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 Adviser discontinued the expense reim- bursement with respect to the Premier Growth Portfolio effective May 1, 1998. The expenses (as a percentage of average net assets) of the following Portfo- lios, before expense reimbursements, would be: International Portfolio: Man- agement Fees --1.00%, Other Expenses -- .42% and Total Portfolio Operating Ex- penses -- 1.42%; Short-Term Multi-Market Portfolio: Management Fees -- .55%, Other Expenses -- .87% and Total Portfolio Operating Expenses -- 1.42%; Global Bond Portfolio: Management Fees -- .65%, Other Expenses -- .38% and Total Portfolio Operating Expenses -- 1.03%; North American Government Income Port- folio: Management Fees -- .65%, Other Expenses -- .39% and Total Portfolio Op- erating Expenses -- 1.04%; Global Dollar Government Portfolio: Management Fees --.75%, Other Expenses -- .54% and Total Portfolio 4 Operating Expenses -- 1.29%; Utility Income Portfolio: Management Fees -- .75%, Other Expenses -- .33% and Total Portfolio Operating Expenses -- 1.08%; World- wide Privatization Portfolio: Management Fee -- 1.00%, Other Expenses -- .55% and Total Portfolio Operating Expenses -- 1.55%; Conservative Investors Portfo- lio: Management Fees -- .75%, Other Expenses -- .58% and Total Portfolio Oper- ating Expense -- 1.33%; Growth Investors Portfolio: Management Fees -- .75%, Other Expenses -- .95% and Total Portfolio Operating Expenses --1.70%; Technol- ogy Portfolio: Management Fees -- 1.00%, Other Expenses -- .19% and Total Oper- ating Expenses -- 1.19%; Quasar Portfolio: Management Fees -- 1.00%, Other Ex- penses -- .37% and Total Operating Expenses -- 1.37%. The estimated expenses of the Real Estate Investment Portfolio before expense reimbursement would be: Management Fees -- .90%, Other Expenses -- 1.41% and Total Operating Ex- penses -- 2.31%. The estimated expenses of High-Yield Portfolio before expense reimbursements would be: Management Fees -- .75%, Other Expenses -- 7.51% and Total Operating Expenses --8.26%. The example should not be considered repre- sentative of future expenses; actual expenses may be greater or less than those shown. 5 FINANCIAL HIGHLIGHTS The following information as to net asset value, ratios and certain supple- mental data for each of the periods shown below has been audited by Ernst & Young LLP, the Fund's independent auditors, whose unqualified report thereon (referring to Financial Highlights) appears in the Statement of Additional In- formation. The following information should be read in conjunction with the financial statements and related notes included in the Statement of Additional Information. Further information about the Fund's performance is contained in the Fund's annual report, which is available without charge upon request.
PREMIER GROWTH PORTFOLIO --------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------- 1997 1996 1995 1994 1993 -------- ------- ------- ------- ------- Net asset value, beginning of year........................... $ 15.70 $ 17.80 $ 12.37 $ 12.79 $ 11.38 -------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERA- TIONS Net investment income(a)(b).... .04 .08 .09 .03 -0- Net realized and unrealized gain (loss) on investments.... 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 DISTRIBU- TIONS Dividends from net investment income........................ (.02) (.10) (.03) (.01) (.01) Distributions from net realized gains......................... -0- (5.37) (.07) (.03) (.01) -------- ------- ------- ------- ------- Total dividends and distribu- tions......................... (.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- GLOBAL BOND PORTFOLIO --------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------- 1997 1996 1995 1994 1993 -------- ------- ------- ------- ------- Net asset value, beginning of year........................... $ 11.74 $ 12.15 $ 9.82 $ 11.33 $ 11.24 -------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERA- TIONS 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 DISTRIBU- TIONS Dividends from net investment income........................ (.57) (.84) (.09) (.62) (.85) Distributions from net realized gains......................... (.13) (.25) -0- (.30) (.26) -------- ------- ------- ------- ------- Total dividends and distribu- tions......................... (.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%
- ------- (a) Net of expenses reimbursed or waived by the Adviser. (b) Based on average shares outstanding. (c) Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, and re- demption on the last day of the period. Total investment return calculated for a period of less than one year is not annualized. (d) For fiscal years beginning on or after September 1, 1995, a fund is re- quired to disclose its average commission rate per share for trades on which commissions are charged. 6 FINANCIAL HIGHLIGHTS
GROWTH AND INCOME PORTFOLIO ---------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- ------- ------- ------- Net asset value, beginning of year.......................... $ 16.40 $ 15.79 $ 11.85 $ 12.18 $ 10.99 -------- -------- ------- ------- ------- INCOME FROM INVESTMENT OPERA- TIONS Net investment income(a)(b)... .21 .24 .27 .10 .01 Net realized and unrealized gain (loss) on investments... 4.39 3.18 3.94 (.16) 1.27 -------- -------- ------- ------- ------- Net increase (decrease) in net asset value from operations.. 4.60 3.42 4.21 (.06) 1.28 -------- -------- ------- ------- ------- LESS: DIVIDENDS AND DISTRIBU- TIONS Dividends from net investment income....................... (.13) (.25) (.13) (.10) (.06) Distributions from net real- ized gains................... (.94) (2.56) (.14) (.17) (.03) -------- -------- ------- ------- ------- Total dividends and distribu- tions........................ (1.07) (2.81) (.27) (.27) (.09) -------- -------- ------- ------- ------- Net asset value, end of year.. $ 19.93 $ 16.40 $ 15.79 $ 11.85 $ 12.18 ======== ======== ======= ======= ======= TOTAL RETURN Total investment return based on net asset value(c)........ 28.80% 24.09% 35.76% (.35)% 11.69% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's omitted)..................... $250,202 $126,729 $41,993 $41,702 $22,756 Ratio to average net assets of: Expenses, net of waivers and reimbursements............... .72% .82% .79% .90% 1.18% Expenses, before waivers and reimbursements............... .72% .82% .79% .91% 1.28% Net investment income(a)...... 1.16% 1.58% 1.95% 1.71% 1.76% Portfolio turnover rate....... 86% 87% 150% 95% 69% Average commission rate paid(d)...................... $ .0581 $ .0602 -0- -0- -0- SHORT-TERM MULTI-MARKET PORTFOLIO ---------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- ------- ------- ------- Net asset value, beginning of year.......................... $ 10.73 $ 10.58 $ 9.91 $ 11.07 $ 10.77 -------- -------- ------- ------- ------- INCOME FROM INVESTMENT OPERA- TIONS Net investment income(a)(b)... .59 .64 .82 .47 .28 Net realized and unrealized gain (loss) on investments and foreign currency transactions................. (.11) .33 (.15) (1.16) .43 -------- -------- ------- ------- ------- Net increase (decrease) in net asset value from operations.. .48 .97 .67 (.69) .71 -------- -------- ------- ------- ------- LESS: DIVIDENDS AND DISTRIBU- TIONS Dividends from net investment income....................... (.64) (.82) -0- (.46) (.41) Return of capital............. -0- -0- -0- (.01) -0- -------- -------- ------- ------- ------- Total dividends and distribu- tions........................ (.64) (.82) -0- (.47) (.41) -------- -------- ------- ------- ------- Net asset value, end of year.. $ 10.57 $ 10.73 $10.58 $ 9.91 $ 11.07 ======== ======== ======= ======= ======= TOTAL RETURN Total investment return based on net asset value(c)........ 4.59% 9.57% 6.76% (6.51)% 6.62% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's omitted)..................... $ 6,489 $ 7,112 $3,152 $20,921 $23,560 Ratio to average net assets of: Expenses, net of waivers and reimbursements............... .94% .95% .95% .94% 1.17% Expenses, before waivers and reimbursements............... 1.42% 2.09% 1.30% .99% 1.24% Net investment income(a)...... 5.50% 6.03% 8.22% 6.52% 6.39% Portfolio turnover rate....... 222% 159% 379% 134% 210%
- ------- (a) Net of expenses reimbursed or waived by the Adviser. (b) Based on average shares outstanding. (c) Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, and re- demption on the last day of the period. Total investment return calculated for a period of less than one year is not annualized. (d) For fiscal years beginning on or after September 1, 1995, a fund is re- quired to disclose its average commission rate per share for trades on which commissions are charged. 7 FINANCIAL HIGHLIGHTS
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO ----------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- Net asset value, begin- ning 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 investments......... .29 (.39) 1.25 (.71) .48 --------- --------- --------- -------- -------- Net increase (decrease) in net asset value from operations............. .97 .27 1.90 (.43) .91 --------- --------- --------- -------- -------- LESS: DIVIDENDS AND DIS- TRIBUTIONS Dividends from net in- vestment income........ (.54) (.28) (.18) (.21) (.08) Distributions from net realized gains......... (.02) (.13) -0- (.14) -0- --------- --------- --------- -------- -------- Total dividends and dis- tributions............. (.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 as- sets 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%
HIGH-YIELD PORTFOLIO ------------ OCTOBER 27, 1997(d) TO DECEMBER 31, 1997 ------------ Net asset value, beginning of period............................. $10.00 ------ INCOME FROM INVESTMENT OPERATIONS Net investment income(a)(b)..................................... .13 Net realized and unrealized gain (loss) on investments and foreign currency transactions.................................. .20 ------ Net increase (decrease) in net asset value from operations...... .33 ------ LESS: DISTRIBUTIONS Dividends from net investment income............................ -0- ------ Net asset value, end of period.................................. $10.33 ====== TOTAL RETURN Total investment return based on net asset value(c)............. 3.30% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)....................... $1,141 Ratio to average net assets of: Expenses, net of waivers and reimbursements..................... .95%(e) Expenses, before waivers and reimbursements..................... 8.26%(e) Net investment income(a)........................................ 7.28%(e) Portfolio turnover rate......................................... 8%
- -------- (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 FINANCIAL HIGHLIGHTS
TOTAL RETURN PORTFOLIO ----------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------ ------ ------ 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 investments ............ 2.62 1.66 2.10 (.56) .81 ------- ------- ------ ------ ------ Net increase (decrease) in net as- set value from operations......... 3.01 1.93 2.46 (.41) .96 ------- ------- ------ ------ ------ LESS: DIVIDENDS AND DISTRIBUTIONS Dividends from net investment in- come.............................. (.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 reim- bursements........................ .88% .95% .95% .95% 1.20% Expenses, before waivers and reim- bursements........................ .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-
INTERNATIONAL PORTFOLIO ----------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------ ------ Net asset value, beginning of year.. $ 14.89 $ 14.07 $ 12.88 $12.16 $10.00 ------- ------- ------- ------ ------ INCOME FROM INVESTMENT OPERATIONS Net investment income(a)(b)........ .13 .19 .18 .10 .03 Net realized and unrealized gain on investments and foreign currency transactions...................... .39 .83 1.08 .72 2.13 ------- ------- ------- ------ ------ Net increase in net asset value from operations................... .52 1.02 1.26 .82 2.16 ------- ------- ------- ------ ------ LESS: DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income............................ (.15) (.08) (.03) (.02) -0- Distributions from net realized gains............................. (.24) (.12) (.04) (.08) -0- ------- ------- ------- ------ ------ Total dividends and distributions.. (.39) (.20) (.07) (.10) -0- ------- ------- ------- ------ ------ Net asset value, end of year....... $ 15.02 $ 14.89 $ 14.07 $12.88 $12.16 ======= ======= ======= ====== ====== TOTAL RETURN Total investment return based on net asset value(c)................ 3.33% 7.25% 9.86% 6.70% 21.60% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's omitted).......................... $60,710 $44,324 $16,542 $7,276 $ 688 Ratio of average net assets of: Expenses, net of waivers and reim- bursements....................... .95% .95% .95% .95% 1.20% Expenses, before waivers and reim- bursements....................... 1.42% 1.91% 2.99% 7.26% 39.28% Net investment income(a).......... .87% 1.29% 1.41% .90% .26% Portfolio turnover rate............ 134% 60% 87% 95% 85% Average commission rate paid(d).... $.0272 $.0431 -0- -0- -0-
- -------- (a) Net of expenses reimbursed or waived by the Adviser. (b) Based on average shares outstanding. (c) Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, and re- demption on the last day of the period. Total investment return calculated for a period of less than one year is not annualized. (d) For fiscal years beginning on or after September 1, 1995, a fund is re- quired to disclose its average commission rate per share for trades on which commissions are charged. 9 FINANCIAL HIGHLIGHTS
MONEY MARKET PORTFOLIO ---------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------ ----- 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 ------- ------- ------- ------ ----- LESS: DIVIDENDS AND DISTRIBUTIONS 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 of average net assets of: Expenses, net of waivers and reim- bursements........................ .64% .69% .95% .95% 1.16% Expenses, before waivers and reim- bursements........................ .64% .69% 1.07% 4.46% 68.14% Net investment income(a)........... 5.00% 4.64% 4.85% 3.98% 2.15%
GLOBAL DOLLAR NORTH AMERICAN GOVERNMENT GOVERNMENT PORTFOLIO INCOME PORTFOLIO ------------------------------------- ---------------------------------------- MAY 2, YEAR ENDED 1994(e) YEAR ENDED MAY 3, 1994(e) DECEMBER 31, TO DECEMBER 31, TO ----------------------- DECEMBER 31, ------------------------ DECEMBER 31, 1997 1996 1995 1994 1997 1996 1995 1994 ------- ------ ------ ------------ ------- ------- ------ -------------- Net asset value, beginning of period.... $ 14.32 $11.95 $ 9.84 $10.00 $ 12.38 $ 10.48 $ 8.79 $10.00 ------- ------ ------ ------ ------- ------- ------ ------ INCOME FROM INVESTMENT OPERATIONS Net investment income(a)(b).......... 1.17 1.10 .92 .36 1.07 1.26 1.13 .50 Net realized and unrealized gain (loss) on investments and foreign currency transactions.......... .70 1.78 1.32 (.52) .10 .69 .83 (1.71) ------- ------ ------ ------ ------- ------- ------ ------ Net increase (decrease) in net asset value from operations....... 1.87 2.88 2.24 (.16) 1.17 1.95 1.96 (1.21) ------- ------ ------ ------ ------- ------- ------ ------ LESS: DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income..... (.61) (.48) (.13) -0- (.58) (.05) (.27) -0- Distributions from net realized gains ....... (.93) (.03) -0- -0- -0- -0- -0- -0- ------- ------ ------ ------ ------- ------- ------ ------ Total dividends and distributions ........ (1.54) (.51) (.13) -0- (.58) (.05) (.27) -0- ------- ------ ------ ------ ------- ------- ------ ------ Net asset value, end of period................ $ 14.65 $14.32 $11.95 $ 9.84 $ 12.97 $ 12.38 $10.48 $ 8.79 ======= ====== ====== ====== ======= ======= ====== ====== TOTAL RETURN Total investment return based on net asset value(c).............. 13.23% 24.90% 22.98% (1.60)% 9.62% 18.70% 22.71% (12.10)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted).............. $15,378 $8,847 $3,778 $1,146 $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) .95% .95% .95% .95%(f) Expenses, before waivers and reimbursements........ 1.29% 1.97% 4.82% 15.00%(f) 1.04% 1.41% 2.57% 4.43%(f) Net investment income(a)............. 7.87% 8.53% 8.65% 6.02%(f) 8.34% 11.04% 12.24% 8.49%(f) Portfolio turnover rate.................. 214% 155% 13% 9% 20% 4% 35% 15%
- -------- (a) Net of expenses reimbursed or waived by the Adviser. (b) Based on average shares outstanding. (c) Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, and re- demption on the last day of the period. Total investment return calculated for a period of less than one year is not annualized. (d) For fiscal years beginning on or after September 1, 1995, a fund is re- quired to disclose its average commission rate per share for trades on which commissions are charged. (e) Commencement of operations. (f) Annualized. 10 FINANCIAL HIGHLIGHTS
UTILITY GROWTH INCOME PORTFOLIO PORTFOLIO ----------------------------------------- -------------------------------------------------- YEAR ENDED MAY 10, 1994(e) YEAR ENDED SEPTEMBER 15, 1994(e) DECEMBER 31, TO DECEMBER 31, TO ------------------------ DECEMBER 31, --------------------------- DECEMBER 31, 1997 1996 1995 1994 1997 1996 1995 1994 ------- ------- ------ --------------- -------- -------- ------- --------------------- Net asset value, beginning of period.... $ 12.69 $ 12.01 $ 9.96 $10.00 $ 17.92 $ 14.23 $ 10.53 $10.00 ------- ------- ------ ------ -------- -------- ------- ------ INCOME FROM INVESTMENT OPERATIONS Net investment income(a)(b).......... .38 .31 .30 .28 .07 .06 .17 .03 Net realized and unrealized gain (loss) on investments and foreign currency transactions.......... 2.84 .62 1.83 (.32) 5.18 3.95 3.54 .50 ------- ------- ------ ------ -------- -------- ------- ------ Net increase (decrease) in net asset value from operations....... 3.22 .93 2.13 (.04) 5.25 4.01 3.71 .53 ------- ------- ------ ------ -------- -------- ------- ------ LESS: DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income..... (.24) (.09) (.08) -0- (.03) (.04) (.01) -0- Distributions from net realized gains ....... -0- (.16) -0- -0- (.72) (.28) -0- -0- ------- ------- ------ ------ -------- -------- ------- ------ Total dividends and distributions ........ (.24) (.25) (.08) -0- (.75) (.32) (.01) -0- ------- ------- ------ ------ -------- -------- ------- ------ Net asset value, end of period................ $ 15.67 $ 12.69 $12.01 $ 9.96 $ 22.42 $ 17.92 $ 14.23 $10.53 ======= ======= ====== ====== ======== ======== ======= ====== TOTAL RETURN Total investment return based on net asset value(c).............. 25.71% 7.88% 21.45% (.40)% 30.02% 28.49% 35.23% 5.30% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted).............. $20,347 $14,857 $6,251 $1,254 $235,875 $138,688 $45,220 $5,492 Ratio to average net assets of: Expenses, net of waivers and reimbursements........ .95% .95% .95% .95%(f) .84% .93% .95% .95%(f) Expenses, before waivers and reimbursements........ 1.08% 1.51% 3.79% 15.98%(f) .84% .93% 1.27% 4.19%(f) Net investment income(a)............. 2.83% 2.61% 2.73% 4.62%(f) .37% .35% 1.31% 1.17%(f) Portfolio turnover rate.................. 30% 75% 138% 31% 62% 98% 86% 25% Average commission rate paid (d).............. $ .0541 $.0579 -0- -0- $ .0548 $.0578 -0- -0-
WORLDWIDE PRIVATIZATION PORTFOLIO CONSERVATIVE INVESTORS PORTFOLIO ---------------------------------------------------- --------------------------------------------------- SEPTEMBER 23, OCTOBER 28, 1994(e) 1994(e) YEAR ENDED YEAR ENDED YEAR ENDED TO YEAR ENDED YEAR ENDED YEAR ENDED TO DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1995 1994 1997 1996 1995 1994 ------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------ Net asset value, beginning of period.......... $ 13.13 $ 11.17 $10.10 $10.00 $ 12.07 $ 11.76 $10.07 $10.00 ------- ------- ------ ------ ------- ------- ------ ------ INCOME FROM INVESTMENT OPERATIONS Net investment income(a)(b)... .25 .28 .32 .10 .48 .45 .51 .06 Net realized and unrealized gain (loss) on investments and foreign currency transactions... 1.17 1.78 .78 -0- .86 (.01) 1.20 .01 ------- ------- ------ ------ ------- ------- ------ ------ Net increase in net asset value from operations..... 1.42 2.06 1.10 .10 1.34 .44 1.71 .07 ------- ------- ------ ------ ------- ------- ------ ------ LESS: DISTRIBU- TIONS Dividends from net investment income......... (.16) (.10) (.03) -0- (.31) (.09) (.02) -0- Distributions from net real- ized gains..... (.19) -0- -0- -0- -0- (.04) 0 -0- ------- ------- ------ ------ ------- ------- ------ ------ Total dividends and distribu- tions.......... (.35) (.10) (.03) -0- (.31) (.13) (.02) -0- ------- ------- ------ ------ ------- ------- ------ ------ Net asset value, end of period.. $ 14.20 $ 13.13 $11.17 $10.10 $ 13.10 $ 12.07 $11.76 $10.07 ======= ======= ====== ====== ======= ======= ====== ====== TOTAL RETURN Total investment return based on net asset value(c)....... 10.75% 18.51% 10.87% 1.00% 11.22% 3.79% 16.99% 0.70% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)....... $41,818 $18,807 $5,947 $1,127 $30,196 $21,729 $7,420 $ 701 Ratio to average net assets of: Expenses, net of waivers and reimbursements. .95% .95% .95% .95%(f) .95% .95% .95% .95%(f) Expenses, before waivers and reimbursements. 1.55% 1.85% 4.17% 18.47%(f) 1.33% 1.40% 4.25% 20.35%(f) Net investment income(a)...... 1.76% 2.26% 2.96% 4.27%(f) 3.85% 3.93% 4.65% 3.55%(f) Portfolio turn- over rate...... 58% 47% 23% 0% 209% 211% 61% 2% Average commis- sion rate paid(d)........ $.0137 $.0148 -0- -0- $.0360 $.0578 -0- -0-
- -------- (a) Net of expenses reimbursed or waived by the Adviser. (b) Based on average shares outstanding. (c) Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, and re- demption on the last day of the period. Total investment return calculated for a period of less than one year is not annualized. (d) For fiscal years beginning on or after September 1, 1995, a fund is re- quired to disclose its average commission rate per share for trades on which commissions are charged. (e) Commencement of operations. (f) Annualized. 11 FINANCIAL HIGHLIGHTS
GROWTH INVESTORS PORTFOLIO TECHNOLOGY PORTFOLIO --------------------------------------------------- ------------------------- OCTOBER 28, JANUARY 11, 1994(e) 1996(e) YEAR ENDED YEAR ENDED YEAR ENDED TO YEAR ENDED TO DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1995 1994 1997 1996 ------------ ------------ ------------ ------------ ------------ ------------ Net asset value, beginning of period.... $ 12.74 $ 11.87 $ 9.86 $10.00 $ 11.04 $ 10.00 ------- ------- ------ ------ ------- ------- INCOME FROM INVESTMENT OPERATIONS Net investment income(a)(b).......... .23 .24 .35 .04 .02 .11 Net realized and unrealized gain (loss) on investments and foreign currency transactions.......... 1.83 .72 1.67 (.18) .69 .93 ------- ------- ------ ------ ------- ------- Net increase (decrease) in net asset value from operations....... 2.06 .96 2.02 (.14) .71 1.04 ------- ------- ------ ------ ------- ------- LESS: DISTRIBUTIONS Dividends from net investment income..... (.20) (.07) (.01) -0- (.03) -0- Distributions from net realized gains........ (.22) (.02) -0- -0- -0- -0- ------- ------- ------ ------ ------- ------- Total dividends and distributions......... (.42) (.09) (.01) -0- (.03) -0- ------- ------- ------ ------ ------- ------- Net asset value, end of period................ $ 14.38 $ 12.74 $11.87 $ 9.86 $ 11.72 $ 11.04 ======= ======= ====== ====== ======= ======= TOTAL RETURN Total investment return based on net asset value(c).............. 16.34% 8.18% 20.48% (1.40)% 6.47% 10.40% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted).............. $16,600 $10,709 $4,978 $ 321 $69,240 $28,083 Ratio to average net assets of: Expenses, net of waivers and reimbursements........ .95% .95% .95% .95%(f) .95% .95%(f) Expenses, before waivers and reimbursements........ 1.70% 1.85% 6.17% 41.62%(f) 1.19% 1.62%(f) Net investment income(a)............. 1.72% 2.01% 3.21% 2.29%(f) .16% 1.17%(f) Portfolio turnover rate.................. 164% 160% 50% 3% 46% 22% Average commission rate paid(d)............... $.0379 $.0562 -0- -0- $.0542 $.0553
REAL ESTATE QUASAR PORTFOLIO INVESTMENT PORTFOLIO ------------------------- -------------------- AUGUST 5, JANUARY 9, 1996(e) 1997(e) YEAR ENDED TO TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1997 ------------ ------------ -------------------- Net asset value, beginning of period........................ $ 10.64 $10.00 $ 10.00 ------- ------ ------- INCOME FROM INVESTMENT OPERA- TIONS Net investment income(a)(b)... .02 .04 .56 Net realized and unrealized gain (loss) on investments and foreign currency transactions................. 1.96 .60 1.78 ------- ------ ------- Net increase (decrease) in net asset value from operations.. 1.98 .64 2.34 ------- ------ ------- LESS: DISTRIBUTIONS Dividends from net investment income....................... (.01) -0- -0- ------- ------ ------- Net asset value, end of peri- od........................... $ 12.61 $10.64 $ 12.34 ======= ====== ======= TOTAL RETURN Total investment return based on net asset value(c)........ 18.60% 6.40% 23.40% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted).............. $59,277 $8,842 $13,694 Ratio to average net assets of: Expenses, net of waivers and reimbursements............... .95% .95%(f) .95%(f) Expenses, before waivers and reimbursements............... 1.37% 4.44%(f) 2.31%(f) Net investment income(a)...... .17% .93%(f) 5.47%(f) Portfolio turnover rate....... 210% 40% 26% Average commission rate paid(d)...................... $.0521 $.0511 $.0526
- -------- (a) Net of expenses reimbursed or waived by the Adviser. (b) Based on average shares outstanding. (c) Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, and re- demption on the last day of the period. Total investment return calculated for a period of less than one year is not annualized. (d) For fiscal years beginning on or after September 1, 1995, a fund is re- quired to disclose its average commission rate per share for trades on which commissions are charged. (e) Commencement of operations. (f) Annualized. 12 DESCRIPTION OF THE PORTFOLIOS INTRODUCTION TO THE FUND The Fund was established as a corporation in Maryland. The Fund is an open-end management investment company commonly known as a "mutual fund" whose shares are offered in separate series each referred to as a "Portfolio." Because the Fund offers multiple Portfolios, it is known as a "series fund." Each Portfo- lio is a separate pool of assets constituting, in effect, a separate fund with its own investment objectives and policies. A shareholder in a Portfolio will be entitled to his or her pro rata share of all dividends and distributions arising from that Portfolio's assets and, upon redeeming shares of that Portfolio, the shareholder will receive the then cur- rent net asset value of that Portfolio represented by the redeemed shares. (See "Purchase and Redemption of Shares"). While the Fund has no present in- tention of doing so, the Fund is empowered to establish, without shareholder approval, additional portfolios which may have different investment objec- tives. The Fund currently has 19 Portfolios: 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 Portfo- lio, 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 Conser- vative Investors Portfolio, the Growth Investors Portfolio, the Growth Portfo- lio, the Worldwide Privatization Portfolio, the Technology Portfolio, the Qua- sar Portfolio and the Real Estate Investment Portfolio. The Fund is intended to serve as the investment medium for variable annuity contracts and variable life insurance policies to be offered by the separate accounts of certain life insurance companies. It is conceivable that in the future it may be disadvantageous for variable annuity and variable life insurance separate accounts to invest simultaneously in the Fund. Currently, however, the Fund does not foresee any disadvantage to the holders of variable annuity contracts and variable life insurance policies arising from the fact that the interests of the holders of such contracts and policies may differ. Nevertheless, the Fund's Directors intend to monitor events in order to identify any material irreconcilable conflicts which may possibly arise and to determine what action, if any, should be taken in re- sponse thereto. The investment objectives and policies of each Portfolio are set forth below. There can be, of course, no assurance that any of the Portfolios will achieve its respective investment objectives. INVESTMENT OBJECTIVES AND POLICIES GENERAL Each Portfolio has different investment objectives which it pursues through separate investment policies as described herein. The differences in objec- tives and policies among the Portfolios determine the types of portfo- 13 lio securities in which each Portfolio invests, and can be expected to affect the degree of risk to which each Portfolio is subject and each Portfolio's yield or return. Each Portfolio's investment objectives cannot be changed with- out approval by the holders of a majority of such Portfolio's outstanding vot- ing securities, as defined in the Investment Company Act of 1940, as amended (the "Act"). The Fund may change each Portfolio's investment policies that are not designated "fundamental policies" within the meaning 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. Gov- ernment. As a matter of fundamental policy, the Money Market Portfolio pursues its objectives by maintaining a portfolio of high quality money market securi- ties, 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) market- able obligations of, or guaranteed by, the United States Government, its agen- cies or instrumentalities (collectively, the "U.S. Government"); (2) certifi- cates of deposit, bankers' acceptances and interest bearing savings deposits issued or guaranteed by banks or savings and loan associations having total as- sets of more than $1 billion and which are members of the Federal Deposit In- surance 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 compa- nies 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 loans ex- tended by banks to such companies; and (4) repurchase agreements that are col- lateralized 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 14 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 Adviser 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 inci- dental to the objective of capital growth. Because of the market risks inher- ent in any investment, the selection of securities on the basis of their ap- preciation 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 prin- cipal 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 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 accumu- late capital over time with less volatility than that associated with invest- ment in smaller companies. 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 defines 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 concern- ing all of the companies followed, an in-depth understanding of the products, services, markets and competition of these companies and a good knowledge of the managements of most of the companies in its research universe. 15 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 created through the dynamics of changing company, industry and economic funda- mentals. Research emphasis is placed on the identification of companies whose substantially 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 re- lies 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 prospec- tive 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 eq- uity securities and will not take significant cash positions for market timing purposes. Rather, during a market decline, while adding to positions in fa- vored stocks, the Portfolio will tend to become somewhat more aggressive, gradually reducing somewhat the number of companies represented in the Portfo- lio's portfolio. Conversely, in rising markets, while reducing or eliminating fully valued positions, the Portfolio will tend to become somewhat more con- servative, gradually increasing the number of companies represented 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 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 stocks, including monthly adjustments to reflect the reinvestment of dividends and distribu- tions. The Portfolio intends to invest in special situations from time to time. A special situation arises when, in the opinion of the Portfolio's management, the securities of a 16 particular company will, within a reasonably estimable period of time, be ac- corded market recognition at an appreciated value solely by reason of a devel- opment 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, ex- cept 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 con- temporaneously 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 op- tion, 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 securities. 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 securi- ties 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 op- tions written by the Portfolio, which, at the time of sale by the Portfolio, 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 17 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 cur-rent income and reasonable opportunity for appreciation through invest- ments primarily in dividend-paying common stocks of good quality. Whenever the economic outlook is unfavorable for investment in common stock, investments in other types of securities, such as bonds, convertible bonds, preferred stock and convertible preferred stocks may be made by the Portfolio. Purchases and sales of portfolio securities are made at such times and in such amounts as are deemed advisable in light of market, economic and other conditions. 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 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 18 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., 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 the Statement of Additional Information of the Fund for a description 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 emphasizes 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 obligations), (ii) certificates of de- posit, bankers' acceptances and interest-bearing savings deposits of banks hav- ing total assets of more than $1 billion and which are members of the Federal Deposit Insurance Corporation, and (iii) put and call options, futures con- tracts and options on futures contracts. Investment grade debt securities de- scribed 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 in- vestment 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 Poli- cies 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 ob- jective, the High-Yield Portfolio will seek capital appreciation, 19 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-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 20 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 mortgage-re- lated securities is becoming increasingly liquid, those issued by certain pri- vate 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 potentially limiting a Fund's ability to buy or sell those securities at any particular time. The High-Yield Portfolio will not purchase mortgage-related securities 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 illiquid. 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 in- struments whose principal or interest payments may vary or whose terms to ma- turity may differ from customary long-term fixed rate mortgages. As new types of mortgage-related securities are developed and offered to investors, the Ad- viser will, consistent with the High-Yield Portfolio's investment objective and policies, consider making investments in such new types of securities. 21 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 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 increase 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, during the option period, the price of the underlying security or currency decreased 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 22 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 there- on. If the Adviser anticipates that interest rates will rise, the Portfolio may sell a futures contract or a call option thereon or purchase a put option on such futures contracts as a hedge against a decrease in the value of the Port- folio's securities. If the Adviser anticipates that interest rates will de- cline, 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 in- tends 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 as- sets. The Portfolio may not purchase or sell futures contracts or related op- tions thereon if immediately thereafter more than 30% of its net assets would be hedged. See "Other Investment Policies and Techniques -- Hedging Tech- niques -- Futures Contracts and Options on Futures Contracts." TOTAL RETURN PORTFOLIO The investment objective of the Total Return Portfolio is to achieve a high re- turn through a combination of current income and capital appreciation. The To- tal Return Portfolio's assets are invested in U.S. Government and agency obli- gations, bonds, fixed-income senior securities (including short and long-term debt securities and preferred stocks to the extent their value is attributable 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 invested 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 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., companies incorporated outside the United States), com- panies participating in foreign 23 economies with prospects for growth, and foreign government securities. As a secondary objective, the Portfolio attempts to increase its current income without assuming undue risk. The Adviser considers it consistent with these objectives to acquire securities of companies incorporated in the United States and having their principal activities and interests outside of the United States. The International Portfolio intends to be invested primarily in such issuers and under normal circumstances more than 80% of its assets will be so invested. In seeking its objective, the International Portfolio invests its assets primarily in common stocks of established non-United States companies which in the opinion of the Adviser have potential for growth of capital or income or both. There is no requirement, however, that the Portfolio invest exclusively in common stocks or other equity securities, and, if deemed advisable, the In- ternational Portfolio may invest in any other type of security including, but not limited to, convertible securities preferred stocks, bonds, notes and other debt securities of foreign issuers (Euro-dollar securities), as well as warrants, or obligations of the United States or foreign governments and their political subdivisions. When the Adviser believes that the total return on debt securities will equal or exceed the return on common stocks, the Interna- tional Portfolio may, in seeking its objective of total return, substantially increase its holdings in such debt securities. The International Portfolio may establish and maintain temporary balances for defensive purposes or to enable it to take advantage of buying opportunities. The International Portfolio's temporary cash balances may be invested in United States as well as foreign short-term money-market instruments, including, but not limited to, government obligations, certificates of deposit, bankers' acceptances, commercial paper, short-term corporate debt securities and repurchase agreements. The International Portfolio diversifies investments broadly among countries and normally has represented in its portfolio, business activities of not less than three different countries excluding the United States. The Portfolio may invest all or a substantial portion of its assets in one or more of such coun- tries. The Portfolio may purchase securities of companies, wherever organized, which, in the judgment of the Adviser, have their principal activities and in- terests outside the United States determined on the basis of such factors as location of the company's assets, or personnel, or sales and earnings. See "Other Investment Policies and Techniques -- Foreign Securities." The Portfolio may purchase or sell forward foreign currency exchange contracts ("forward contracts") to attempt to minimize the risk to the Portfolio from adverse changes in the relationship between the U.S. Dollar and other curren- cies. A forward contract is an obligation to purchase or sell a specific cur- rency for an agreed price at a future date which is individually negotiated and privately traded by currency traders and their 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 24 the sale of forward contracts with respect to portfolio security positions de- nominated or quoted in such foreign currency. The Portfolio does not speculate in forward contracts and, therefore, the Adviser believes that the Portfolio is not subject to the risks frequently associated with the speculative use of such transactions. The Portfolio may not position hedge with respect to the currency of a particular country to an extent greater than the aggregate mar- ket value (at the time of making such sale) of the securities held in its portfolio denominated or quoted in that particular foreign currency. If the Portfolio enters into a position hedging transaction, 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 committed to the consummation of such forward contract. If the value of the securities 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 com- mitment with respect to such contracts. Hedging against a decline in the value of a currency does not eliminate fluctuations in the prices of portfolio secu- rities or prevent losses if the prices of such securities decline. Such trans- actions also preclude the opportunity for gain if the value of the hedge cur- rency should rise. Moreover, it may not be possible for the Portfolio to hedge against a devaluation that is so generally anticipated that the Portfolio is not able to contract to sell the currency at a price above the devaluation level it anticipates. The Portfolio will not enter into a forward contract with a term of more than one year or if, as a result thereof, more than 50% of the Portfolio's total assets would be committed to such contracts. The Portfolio may also invest in warrants which entitle the holder to buy eq- uity securities at a specific price for a specific period of time. It is the present intention of the Adviser to invest the Portfolio's assets in companies based in (or governments of or within) East Asia (Japan, Hong Kong, Singapore and Malaysia), Western Europe (the United Kingdom, Germany, The Netherlands, France and Switzerland), Australia, Canada, and such other areas and countries as the Adviser may determine from time to time. However, invest- ments may be made from time to time in companies in, or governments of, devel- oping countries as well as developed countries. Shareholders should be aware that investing in the equity and fixed-income markets of developing countries involves exposure to economic structures that are generally less diverse and mature, and to political systems which can be expected to have less stability than those of developed countries. The Adviser at present does not intend to invest more than 10% of the International Portfolio's total assets in compa- nies in, or governments of, developing countries. For a description of certain risks associated with investing in foreign securities, see "Other Investment Policies and Techniques -- Foreign Securities." 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 consid- ers 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 25 yields by investing in a portfolio of debt securities denominated in the U.S. Dollar and selected foreign currencies. Accordingly, the Portfolio seeks in- vestment 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 Portfo- lio 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. 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 Portfo- lio in accordance 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 mar- kets and issuers. In this regard, the percentage of assets invested in securi- ties of a particular country or denominated in a particular currency varies in accordance with the Adviser's assessment of the relative yield and apprecia- tion 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 invest more than 25% of its net assets in debt securities denominated in a single currency other than the U.S. Dollar. The Portfolio invests in debt securities denominated in the currencies of countries whose governments are considered stable by the Adviser. In addition to the U.S. Dollar, such currencies include, among others, the Australian Dol- lar, Austrian Schilling, British Pound Sterling, Canadian Dollar, Danish Kro- ne, 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 securities 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 Rat- ings") or, if unrated, determined by the Adviser to be of equivalent quality; (iii) corporate debt securities having at least one High Quality Rating 26 or, if unrated, determined by the Adviser to be of equivalent quality; (iv) certificates of deposit and bankers' acceptances issued or guaranteed by, or time deposits maintained at, banks (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) com- mercial 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 outstand- ing 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. 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. How- ever, 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 Securities 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 27 related to the banking industry. Sustained increases in interest rates can ad- versely affect the availability and cost of funds for a bank's lending activi- ties, and a deterioration in general economic conditions could increase the ex- posure 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 technology-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 several foreign countries are subject to additional risks due to the combination in such banks of commercial banking and diversi- fied 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 portfolio primarily invested in debt securities can be expected to rise. Conversely, when interest rates rise, the value of a portfolio primarily invested in debt secu- rities can be expected to decline. However, a shorter average maturity is gen- erally associated with a lower level of market value volatility and, according- ly, 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 Investment Policies and Tech- niques -- 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 de- nominated 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 rela- tive 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 28 a portfolio invested exclusively in foreign debt securities, and provides in- vestors with more opportunities for attractive total return than a portfolio invested exclusively 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 determination that a particular country should be considered stable depends on their evalua- tion of political and economic developments affecting the country as well as recent experience in the markets for foreign government securities of the coun- try. Examples of foreign governments which the Adviser and Sub-Adviser cur- rently consider to be stable, among others, are the governments of Australia, 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 obligations of such stable foreign governments is significantly greater than that of U.S. gov- ernment debt securities. The Portfolio intends to spread investment risk among the capital markets of a number of countries and will invest in securities of the governments of, and companies based in, at least three, and normally con- siderably more, such countries. The percentage of the Portfolio's assets in- vested 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' curren- cies to the U.S. Dollar. Currency is judged on the basis of fundamental eco- nomic criteria (e.g., relative inflation levels and trends, growth rate fore- casts, balance of payments status, and economic policies) as well as technical and political data. Under normal market conditions, it is expected that approx- imately 25% of the Portfolio's net assets will be invested in debt securities denominated 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 su- pranational organizations, high-quality U.S. or foreign corporate debt securi- ties, including commercial paper and high-quality debt obligations of banks and bank holding companies. The Portfolio's investments consist only of debt secu- rities 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 Reconstruc- 29 tion and Development (commonly referred to as the "World Bank"), which was chartered to finance development 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 eco- nomic cooperative whose members are various European nations' steel and coal industries; and the Asian Development Bank, which is an international develop- ment bank established to lend portfolios, promote investment and provide tech- nical 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 political subdivisions (including Canadian Provinces but excluding States of the United States), agencies, instrumentalities or au- thorities ("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 denomi- nated 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 Argen- tina ("Argentine Government Securities"). 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 circum- stances, 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 con- sidering all the circumstances, would conclude that it is in the best interests of the shareholders to retain its holdings in securities of that is- suer. The average weighted maturity of the Portfolio's investment 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 Securi- ties." The Portfolio utilizes certain other investment techniques, including options and futures. 30 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 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 subdi- visions, agencies, instrumentalities or authorities, provided that such securi- ties 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 to- tal assets in Argentine Government Securities. Under normal market conditions, the Portfolio invests at least 65% of its total assets in income-producing se- curities. 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 31 which are backed by the full faith and credit of the United States (ii) obliga- tions 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 Administration, the Department of Housing and Urban Development, the Export-Import Bank, the General Services Administration and the Small Busi- ness Administration; and (iii) obligations issued or guaranteed by U.S. Govern- ment 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 Na- tional Mortgage Association and the Federal Home Loan Mortgage Corporation, and governmental collateralized mortgage obligations. See the Statement of Addi- tional Information 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 comparable securities that do pay periodic interest. Cur- rent 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 pur- chased 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 distribu- tions 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 or borrowings if necessary, greater than the total amount of cash that the Portfo- lio has actually received as interest during the year. The Adviser believes, however, that it is highly unlikely that it would be necessary to liquidate portfolio securities or borrow money in order to make such required distribu- tions 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 bro- kerage firms have separated ("stripped") the principal portions from the coupon portions of the U.S. Treasury bonds and notes 32 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 consid- ered as securities issued by the bank or brokerage firm involved and, there- fore, should not be included in the Portfolio's categorization of U.S. Govern- ment Securities. The Portfolio disagrees with the staff's interpretation but will not treat such securities as U.S. Government Securities until final reso- lution 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 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 corpora- tions. Each new issue yield is based upon a spread from an outstanding Govern- ment of Canada issue of comparable term and coupon. Spreads in the marketplace are determined by various factors, including the relative supply and the rat- ing assigned 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 ben- efit 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 33 Canada whose guarantee (similar to that of GNMA in the United States) is an un- conditional 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"), which are obligations of the Argentine Treasury, and (ii) Bonos de Consolidacion Economica ("BOCON"), which are economic consolida- tion bonds issued directly by the Argentine Government with maturities of up to ten years. Although not all Argentine Government Securities are rated invest- ment grade quality by S&P, Moody's, Duff & Phelps or Fitch, the Adviser be- lieves that there are unrated Argentine Government Securities that are of in- vestment 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 Provincial governments. The Parliament of Canada has jurisdiction over all areas not as- signed 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 multinational corporations. Manufacturing and resource industries are large contributors to the country's economic output, but as in many other 34 highly developed countries, there has been a gradual shift from a largely goods-producing economy to a predominantly service-based one. Agriculture and other primary production 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 sig- nificant mineral resources. 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 separation 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 econ- 35 omy 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 weakening economy and unsettling political and social develop- ments caused investors to lose confidence in the Mexican economy. This re- sulted in a large decline in foreign reserves followed by a sharp and rapid devaluation of the Mexican Peso. The ensuing economic and financial crisis re- sulted 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 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 assurance 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 devalu- ations continued until December 1994. On December 22, 1994 the Mexican govern- ment announced that it would permit the Peso to float against other curren- cies, 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 approxi- 36 mately 55% from 1994 through 1996, in 1997, the average annual Peso-Dollar ex- change 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, 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 investment reformed. As a result of the economic stabilization reforms, gross domestic product increased for four consecutive years before de- clining in 1995. During 1996, however, gross domestic product increased 4.3% from 1995. Preliminary data for 1997 indicate that gross domestic product in- creased 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 37 strengthen the financial 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 currencies or contracts based on financial indices or common stocks and purchase and write put and call options on such futures con- tracts or on foreign currencies and purchase or sell forward foreign currency exchange contracts. In furtherance 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 repurchase agreements, standby commitments and make se- cured 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 investments in the securities of Canadian issuers or investments denominated in 38 Canadian 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 involve certain special risks. See "Other Investment Policies and Tech- niques -- 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 39 denominated securities. The Adviser expects that, based upon current market conditions, the Portfolio's investment portfolio of U.S. fixed-income securi- ties will have an average maturity 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 Portfolio's investment portfolio of sovereign debt obli- gations 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 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 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 Ad- viser'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 securities 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 40 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 Port- folio 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 securi- ties, convertible securities and preferred stocks of corporate issuers. The Portfolio will not be subject to restrictions on the maturities of the securi- ties 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," "--Investment in Lower-Rated Fixed-Income Securities" and "Appendix A." 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 discount" pre- viously 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 41 generally collateralized in full as to principal due at maturity by U.S. Trea- sury 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 de- fault with respect to Collateralized Brady Bonds as a result of which the pay- ment obligations of the issuer are accelerated, the U.S. Treasury zero coupon obligations held as collateral for the payment of principal will not be dis- tributed to investors, nor will such obligations be sold and the proceeds dis- tributed. 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 pay- ments 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 fac- tors, 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. 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 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 un- derlying 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. Certain issuers of Structured Securities may be deemed to be "investment compa- nies" as defined in the 1940 Act. As a result, the 42 Portfolio's investments in these Structured Securities may be limited by the restrictions contained 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 certain Sovereign Debt Obliga- tions is restricted by the governing documentation as to the nature of the as- signee 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 As- signments 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 Portfo- lio to assign a value to these securities for purposes of valuing the Portfo- lio's portfolio and calculating its net asset 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, includ- 43 ing the relative financial strength of the issuers. Higher yields are gener- ally 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 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 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 invested in the securities of any investment company. If the Portfolio acquired shares in investment companies, shareholders would bear both their proportionate share of expenses in the Portfolio (including management and advisory fees) and, in- directly, 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 44 of its investment strategy. 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 re- verse repurchase agreement period, the Portfolio continues to receive princi- pal and interest payments 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 in- terest 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 restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Portfolio's obligation to re- purchase the securities. 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 "In- 45 vestment Restrictions" 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. 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 46 have come due. Obligations arising from past restructuring agreements may af- fect the economic performance and political and social stability of those is- suers. 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 different from those applica- ble 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 gov- ernments 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. 47 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 number of factors, including historical growth rates and rates of return on capital, financial condition and resources, management skills and such indus- try factors as regulatory environment and energy sources. With respect to in- vestments 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 appre- ciation 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 portfo- lio structure for achieving the Portfolio's investment objective under pre- vailing 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 fluctuate. When interest 48 rates decline, the values of fixed income securities can be expected to in- crease, and when interest rates rise, the values of fixed income securities can be expected to decrease. The Adviser expects that the average weighted ma- turity 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 Advis- er. 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 Pol- icies 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. Convertible securities include bonds, debentures, corporate notes and pre- ferred 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 nor- mally vary with changes in the price of the underlying stock, although the higher yield tends to make the convertible security less volatile than the un- derlying common stock. As with debt securities, the market value of convert- ible securities tends to decrease as interest rates rise and, conversely, to increase as interest rates decline. While convertible securities generally of- fer lower interest 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. 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. 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 eq- uity 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 vot- ing 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, al- though the value of a right or warrant may decline because of a decrease in the value of the underlying security, the passage of 49 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. 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 changes. Gas utilities have been ad- versely 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 & Tele- graph Company, including increased competition and rapidly developing technolo- gies with which traditional telephone companies now compete. Although there can be no assurance that increased competition and other struc- tural changes will not adversely affect the profitability 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 autho- rize increased rates. Because of the Portfolio's pol- 50 icy of concentrating its investments in securities of utility companies, the Portfolio may be more susceptible than most other mutual funds to economic, po- litical 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 addi- tion, because many foreign utility companies use fuels that cause more pollu- tion 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 compa- nies currently are government-owned, thereby limiting current investment oppor- tunities for the Portfolio, the Adviser believes that, in order to attract sig- nificant capital for growth, some foreign governments may engage in a program of privatization of their utilities industry, and that the securities issued by privatized utility companies may offer attractive investment opportunities with the potential for long-term growth. Privatization, which refers to the trend toward investor ownership, rather than government ownership, of assets is expected to occur both in newer, faster- growing economies and in mature economies. In addition, efforts toward moderni- zation in Eastern Europe, as well as the potential of economic unification of European markets, in the view of the Adviser, may improve economic growth, re- duce costs and increase competition in Europe, which could result in opportuni- ties for investment 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." 51 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 repur- chase agreements pertaining thereto, as discussed below, (ii) foreign govern- ment securities, as discussed below, (iii) corporate fixed-income securities of domestic issuers of quality comparable to the fixed-income securities de- scribed above, (iv) certificates of deposit, bankers' acceptances and inter- est-bearing savings deposits of banks having total assets of more than $1 bil- lion 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 is- suers, 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 inter- est 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 se- curities issued by the Government National Mortgage Association, the Farmers Home Administration, the Department of Housing and Urban Development, the Ex- port-Import Bank, the General Services Administration 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 securities issued by Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, and govern- mental Collateralized Mortgage Obligations. See Appendix A to the Statement of Additional Information for a further description 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. 52 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-gov- ernmental entities, governmental agencies or other governmental entities (col- lectively, "Government Entities") and (ii) of foreign corporate issuers, denom- inated in foreign currencies or in U.S. Dollars (including fixed-income securi- ties of a Government Entity or foreign corporate issuer in a country denomi- nated in the currency of another country). The Portfolio may also invest in eq- uity securities of foreign corporate issuers. See "Investment Objective and Policies -- Utilities Industry -- Foreign Utilities." For a description of cer- tain risks associated with investment in foreign securities, see "Other Invest- ment 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 "De- positary Receipts"). Depositary Receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be convert- ed. In addition, the issuers of the stock of unsponsored Depositary Receipts are not obligated to disclose material information in the United States and, therefore, there may not be a correlation between such information and the mar- ket value of the Depositary Receipts. ADRs are Depositary Receipts typically issued by a United States bank or trust company which evidence ownership of un- derlying securities issued by a foreign corporation. GDRs and other types of Depositary Receipts are typically issued by foreign banks or trust companies, although they also may be issued by United States banks or trust companies, and evidence ownership of underlying securities issued by either a foreign or a United States corporation. Generally, Depositary Receipts in registered form are designed for use in the U.S. securities markets 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 issued 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 underlying securities. The Portfolio is also authorized to invest in securities of supranational enti- ties denominated in the currency of any country. A supranational entity is an entity designated or supported by the national government of one or more coun- tries to promote economic reconstruction or development. Examples of suprana- tional 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 Currency 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 further authorized to invest in "semi-governmental securities," which are securities issued by enti- ties owned by either a national, state or equivalent government or are obliga- tions of one of such 53 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 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 securi- ties 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 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." 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 security, the Port- folio 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. 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 securi- ties, each pursuant to a different asset allocation strategy, as described be- low. 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. 54 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 appropriate in- vestor 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 return po- tential for each asset class. The Portfolios are permitted to use a variety of hedging techniques to attempt to reduce market interest rate and currency risks. INVESTMENT POLICIES Conservative Investors Portfolio. The investment objective of the Conservative Investors Portfolio is to achieve a high total return without, in the view of the Adviser, undue risk of principal. The Conservative Investors Portfolio at- tempts to achieve its investment objective by allocating varying portions of its assets among investment grade, publicly traded fixed-income securities, money market instruments and publicly traded common stocks and other equity securities of United States and non-United States issuers. The average weighted maturity of the Portfolio's portfolio of fixed-income securities is expected to vary between less than one year to 30 years. See "Other Investment Policies and Techniques -- Fixed Income Securities." All fixed-income securities owned by the Portfolio will be investment grade at the time of purchase. This means that they will be in one of the top four rat- ing categories assigned by S&P, Moody's, Duff & Phelps or Fitch or will be unrated securities of compa- 55 rable quality as determined by the Adviser. Securities in the fourth such rat- ing category (rated Baa by Moody's or BBB by S&P, Duff & Phelps or Fitch) have speculative characteristics, and changes in economic conditions or other cir- cumstances are more likely to lead to a weakened capacity to make principal and interest payments on such obligations than in the case of higher-rated se- curities. See "Other Investment Policies and Techniques -- Securities Rat- ings," "-- Investment in Fixed-Income Securities Rated Baa and BBB" and Appen- dix A. In the event that the rating of any security held by the Conservative Investors Portfolio falls below investment grade (or, in the case of an unrated security, the Adviser determines that it is no longer of investment grade), the Portfolio will not be obligated to dispose of such security and may continue to hold the obligation if, in the opinion of the Adviser, such investment is considered appropriate in the circumstances. Equity securities invested in by the Conservative Investors Portfolio consists of common stocks and securities convertible into common stocks, such as con- vertible bonds, convertible preferred stocks and warrants, issued by companies with a favorable outlook for earnings and whose rate of growth is expected to exceed that of the United States' economy over time. The Conservative Investors Portfolio holds at all times at least 40% of its total assets in investment grade fixed-income securities, each having a dura- tion less than that of a 10-year Treasury bond (the "Fixed Income Core"). The duration of a fixed-income security is the weighted average maturity, ex- pressed in years, of the present value of all future cash flows, including coupon payments and principal repayments. The Conservative Investors Portfolio is generally expected to hold approxi- mately 70% of its total assets in fixed-income securities (including the Fixed Income Core cash and money market instruments) and 30% in equity securities. Actual asset mixes will be adjusted in response to economic and credit market cycles. The fixed-income asset class always comprises at least 50%, but never more than 90%, of the Portfolio's total assets. The equity class always com- prises at least 10%, but never more than 50%, of the Portfolio's total assets. For temporary defensive purposes, the Portfolio may invest in money market in- struments. Growth Investors Portfolio. The investment objective of the Growth Investors Portfolio is to achieve the highest total return consistent with the Adviser's determination of reasonable risk. The Portfolio attempts to achieve its in- vestment objective by allocating varying portions of its assets among a number of asset classes. Equity investments will include publicly traded common stocks and other equity securities of the type in which the Conservative In- vestors Portfolio may invest but may also include equity securities issued by intermediate- and small-sized companies with favorable growth prospects, com- panies in cyclical industries, companies whose securities are temporarily un- dervalued, companies in special situations and less widely known companies. Fixed-income investments will include investment grade fixed-income securities (including cash and money market instruments) and may include securities that are rated in the lower rating categories by recognized ratings agencies (i.e., Ba or lower 56 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 securities deemed to be of comparable quality by the Adviser. See "Other Investment Policies and Tech- niques -- Securities Ratings," "-- Investment in Lower-Rated Fixed-Income Secu- rities" and Appendix A. The Growth Investors Portfolio holds at all times at least 40% of its total as- sets 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). Actual 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 com- prise at least 40%, but never more than 90%, of the Portfolio's total assets. The average weighted maturity of the Portfolio's portfolio of fixed-income se- curities is expected to vary between less than one year to 30 years. See "Other Investment Policies and Techniques -- Fixed Income Securities." For temporary defensive purposes, the Portfolio may invest in money market instruments. ADDITIONAL INVESTMENT POLICIES AND TECHNIQUES Foreign Securities. Each of the Conservative Investors Portfolio and Growth In- vestors Portfolio may invest without limit in securities which are not publicly traded in the United States, although the Conservative Investors Portfolio gen- erally will not invest more than 15% of its total assets, and the Growth In- vestors Portfolio generally will not invest more than 30% of its total assets, in such securities. The Growth Investors Portfolio may invest a portion of its assets in developing countries or in countries with new or developing capital markets. The risks as- sociated with investment in foreign securities are generally intensified for these investments. These countries may have relatively unstable governments, economies based on only a few industries or securities markets that trade a small number of securities. Securities of issuers located in these countries tend to have volatile prices and may offer significant potential for loss. The value of foreign investments measured in U.S. dollars will rise or fall be- cause of decreases or increases, respectively, in the value of the U.S. dollar in comparison to the value of the currency in which the foreign investment is denominated. The Portfolios may buy or sell foreign currencies, options on for- eign currencies, foreign currency futures contracts (and related options) and deal in forward foreign currency exchange contracts in connection with the pur- chase and sale of foreign investments. 57 For a description of certain risks associated with investing in foreign secu- rities, see "Other Investment Policies and Techniques--Foreign Securities," below. 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 quo- tations 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 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 are not treated as "illiquid" for purposes of the foregoing restriction so long as such securities meet liquidity guidelines es- tablished by the Board of Directors. See "Other Investment Policies and Tech- niques -- Illiquid Securities," 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 mort- gage prepays the remaining principal before the mortgage's scheduled maturity 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 58 liquid than those for other mortgage-related securities, thereby potentially limiting a Fund's ability to buy or sell those securities 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 in- dex 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 mar- ket interest rates or changes in the issuer's creditworthiness. Because the in- terest rate is reset only periodically, changes in the interest rate on adjust- able 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 during 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 assets are generally held by a trust and payments of principal and interest or inter- est 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 originator of the trust. Underlying automobile sales contracts or credit card receivables are subject to prepayment, which may reduce the overall return to certificate holders. Certif- icate 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 invest 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 compa- rable quality at the time of purchase. However, from time to time, the Portfo- lio 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 re- 59 ferred to as "junk bonds." Securities rated D by S&P and Fitch or DD by Duff & Phelps are in default. As of December 31, 1997, 1.11% of the Portfolio's as- sets were invested in fixed-income securities rated (or considered by the Ad- viser to be of equivalent 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 Tech- niques -- Securities Ratings," "-- Investment in Lower-Rated Fixed-Income Se- curities" 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 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 60 futures or on stock indices in addition to, or as an alternative to, purchasing or selling index futures or, to the extent permitted by applicable law, to earn additional income. The Portfolios may also, for hedging purposes, purchase and sell futures contracts, options thereon and options with respect to U.S. Trea- sury 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 Portfo- lio receives a premium from writing a call or put option, which increases the Portfolio's return if the option expires unexercised or is closed out at a net profit. When the Portfolio writes a call option, it gives up the opportunity to profit from any increase in the price of a security above the exercise price of the option; when it writes a put option, the 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 transaction in which it purchases an option having the same terms as the option written. A Portfolio may also buy and sell put and call options for hedging purposes. A Portfolio may also from time to time buy and sell combinations of put and call options on the same 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 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 assets. These transactions must be fully collateralized at all times, but involve 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 Portfo- lio 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 se- curities declines prior to the settlement date. 61 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 secu- rities 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 se- curities are expected to vary inversely with changes in interest rates general- ly, 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 comparable quality. For a description of the ratings referred to above, see Appendix A. For tempo- rary 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 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 Fund may buy or sell foreign currencies, options on foreign currencies, foreign currency futures contracts (and related options) and deal in forward foreign currency exchange contracts in connection with the purchase and sale of foreign investments. For a description of certain risks associated with investing 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 quotations 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 regis- tered under applicable Federal and state securities laws, or may have to sell them at less than fair market value. Investment in these securities is re- stricted 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 es- tablished by the Board 62 of Directors. See "Other Investment Policies and Techniques -- Illiquid Secu- rities," below. Investments in High-Yield Securities. The Growth Portfolio may invest in high- yield, high-risk, fixed-income and convertible securities rated at the time of purchase Ba or lower by Moody's BB or lower by S&P, Duff & Phelps or Fitch, or, if unrated, judged by the Adviser to be of comparable quality ("high-yield securities"). The Portfolio generally invests in securities with a minimum rating of Caa- by Moody's or CCC- by S&P, Duff & Phelps or Fitch or in unrated securities judged by the Adviser to be of comparable quality. However, from time to time, the Portfolio may invest in securities rated in the lowest grades of Moody's, S&P or Fitch (C) or Duff & Phelps (CC) or in unrated secu- rities judged by the Adviser to be of comparable quality, if the Portfolio's management determines that there are prospects for an upgrade or a favorable conversion into equity securities (in the case of convertible securities). Se- curities rated Ba or BB or lower (and comparable unrated securities) are com- monly referred to as "junk bonds." Securities rated D by S&P and Fitch or DD by Duff & Phelps are in default. See "Other Investment Policies and Tech- niques -- Securities Ratings," "Investment in Lower-Rated Fixed-Income Securi- ties" and Appendix A. As of December 31, 1997, the percentages of the Portfo- lio's assets invested in securities rated (or considered by the Adviser to be of equivalent quality to securities rated) in particular rating categories were 0% in A and above, 0% in Ba or BB, .53% in B, 0% in CCC or Caa and .30% in unrated securities. The Fund did not invest in securities rated below Caa by Moody's or CCC by each of S&P, Duff & Phelps and Fitch or, if not rated, considered by the Adviser to be of equivalent quality to securities so rated. In the event that the credit rating of a high-yield security held by the Port- folio falls below its rating at the time of purchase (or, in 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. 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- 63 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 currently. Both zero-coupon and payment-in-kind bonds al- low an issuer to avoid the need to generate cash to meet current interest pay- ments. 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 nonetheless required to accrue interest income on such investments and to distribute such amounts at least annually to shareholders. Thus, the Fund could be required at times to liquidate other investments in order to satisfy its dividend requirements. Futures and Options. The Portfolio may buy and sell stock index futures con- tracts ("index futures") and may buy options on index futures and on stock in- dices for hedging purposes. The Portfolio may buy and sell call and put op- tions on index futures or on stock indices in addition to, or as an alterna- tive to, purchasing or selling index futures or, to the extent permitted by applicable law, to earn additional income. The Portfolio may also, for hedging purposes, purchase and sell futures contracts, options thereon and options with respect to the U.S. Treasury securities, including U.S. Treasury bills, notes and bonds. The Portfolio may also seek to increase its current return by writing covered call and put options on securities its owns or in which it may invest. The use of futures and options involves certain special risks. Futures and op- tions transactions involve costs and may result in losses. Certain risks arise because of the possibility of imperfect correlations between movements in the prices of futures and 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 strate- gies described above further depends on the Adviser's ability to forecast mar- ket movements correctly. Other risks arise from the Portfolio's potential in- ability 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 Revenue Code and certain regulatory requirements may limit the Portfolio's ability to en- gage 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. 64 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. Investments of this type may be structured, for example, as privately negotiated sales of stock or other equity interests in joint ventures, cooper- atives or partnerships. 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 enterprise rationalizes its manage- ment structure, operations and business strategy to position itself to compete efficiently 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 for- 65 eign country, except that the Portfolio may invest up to 30% of its total as- sets 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 generally tend to enjoy dominant market posi- tions in their local markets. Because of the relaxation of government controls upon privatization, these enterprises typically have the potential for signif- icant 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. 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 objective as Western European countries attempt to meet the directives of the European Commission regarding debt and achieve the target budget deficit lev- els established by the Maastricht Treaty. In developing market countries, in- cluding 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 International Bank for Reconstruction and Development (the World Bank) and the International Monetary Fund regarding desirable debt levels. Within Eastern and Central Europe, 66 privatization is also being used as a means of achieving structural 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 mar- kets. Another approach is the formation of an investment fund owned by employ- ees 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 become 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 total assets in the securities of issuers whose primary business activity is that of national commercial banking. Prior to concentrating in the securities of national commercial banks, the Portfolio's Board of Directors would have to determine that the Portfolio's ability to achieve its investment objective would be adversely affected if the Portfolio were not permitted to concen- trate. The staff of the Securities and Exchange Commission is of the view that registered investment companies may not, absent shareholder approval, change between concentration and non-concentration in the securities of issuers in a single industry. The Portfolio disagrees with the staff's position but has un- dertaken that it will not concentrate in the securities 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 Port- folio's performance could be significantly influenced 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 67 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 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. 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, deben- tures, 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 con- vertible 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 securities of similar quality, they do enable the investor to benefit from increases 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 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 Secu- rities" 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. Government 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 con- tracts, enter into forward commitments for the purchase or sale of securities, enter into repurchase agreements, standby commitment agreements and currency swaps, make short sales 68 of securities and make secured loans of its portfolio securities. Certain of these investment strategies may not currently be available in many of the coun- tries 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 strategies become available or permissible in the future. Except with regard to those investment strategies discussed immediately below, each of these investment strategies is discussed under the caption "Other Investment Policies and Techniques," below. Currency Swaps. The Portfolio may enter into currency swaps for hedging purpos- es. Currency swaps involve the exchange by the Portfolio with another party of a series of payments in specified currencies. Since currency swaps are individ- ually negotiated, the Portfolio expects to achieve an acceptable degree of cor- relation between its portfolio investments and its currency swaps positions. A currency swap may involve the delivery at the end of the exchange period of a substantial amount of one designated currency in exchange for the other desig- nated currency. Therefore the entire principal value of a currency swap is sub- ject to the risk that the other party to the swap will default on its contrac- tual delivery obligations. The net amount of the excess, if any, of the Portfo- lio's obligations over its entitlements with respect to each currency swap will be accrued on a daily basis and an amount of cash or high-grade liquid debt se- curities having an aggregate net asset value at least equal to the accrued ex- cess will be maintained in a segregated account by the Portfolio's custodian. The Portfolio will not enter into any currency swap unless 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 rec- ognized rating organization at the time of entering into the transaction. If there is a default by the other party to such a transaction, the Portfolio will have contractual remedies pursuant to the agreements related to the transac- tions. 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 security, the Port- folio 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 69 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 may no longer 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 experi- ence bankruptcy due to such competition. In addition, the privatization of an enterprise by its government may occur over a number of years, with the gov- ernment 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 distri- butions, the Portfolio may be required to liquidate securities in order to make distributions if the Portfolio 70 has insufficient cash in U.S. dollars to meet distribution requirements. 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 Port- folio may engage in certain currency hedging transactions, which themselves in- volve 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 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 Custodi- 71 an. 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. 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 market 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 op- tions (valued at the lower of the option price or market value of such securi- ties) would exceed 15% of the Portfolio's total assets or more than 10% of the Portfolio'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 out- standing 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 "Illiq- uid Securities." See Appendix C in the Statement of Additional Information for a further 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 72 of the underlying security, although the value of a right or warrant may de- cline because of a decrease in the value of the underlying security, the pas- sage 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 expira- tion 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. 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 and unlisted U.S. and foreign securities. The Portfolio pe- riodically 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 condi- tions or movements of the market 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 predeter- 73 mined price. A call option written by the Portfolio is "covered" if the Port- folio owns the underlying security, has an absolute and immediate right to ac- quire 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 Portfolio holds a put option on the un- derlying 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 dis- posing of the option prior to its exercise). The Portfolio retains the premium received from writing a call option whether or not the option is exercised. The writing of covered call options could result in increases in the Portfo- lio'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 (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 Portfolio'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 con- 74 trol regulations, application of foreign tax laws, including withholding tax- es, changes in governmental administration or economic, taxation or monetary policy (in the United States and abroad) or changed circumstances in dealings between nations. Foreign securities markets may also be less liquid, more vol- atile, and less subject to governmental supervision than in the United States. Investments in foreign countries could be affected by other factors not pres- ent in the United States, including expropriation, confiscatory taxation, lack of uniform accounting and auditing standards and potential difficulties in en- forcing 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"). 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 under- 75 lying property markets as determined by proprietary models, site visits con- ducted by individuals knowledgeable in local real estate markets, price-earn- ings ratios (as defined for real estate companies), cash flow growth and sta- bility, the relationship between asset value and market price of the securi- ties, dividend payment history, and such other factors which the Adviser may determine from time to time to be relevant. The Adviser will attempt to pur- chase for the Portfolio Real Estate Equity Securities of companies whose un- derlying 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 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 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 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 manage- ment teams. This process is comprised of real estate market research, specific property inspection and securities analysis. The Adviser believes that this process will result in a portfolio that will consist of Real Estate Equity Se- curities 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 propri- 76 etary 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 com- piling 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. 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 regular contact with man- agement of targeted companies. Each management's strategic plan and ability to execute the plan are determined and analyzed. The Adviser 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 com- bined with property market trends and used to project future earnings poten- tial. Mortgage-Backed Securities and Associated Risks. Mortgage-Backed Securities include mortgage pass-through certificates and multiple-class pass-through se- curities, 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 inter- ests in pools of residential mortgage loans and are issued by U.S. governmen- tal or private lenders and guaranteed by the U.S. Government or one of its agencies or instrumentalities, including but not limited to the Government Na- tional Mortgage Association ("Ginnie Mae"), the Federal National Mortgage As- sociation ("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 in- terest on the certificates. Fannie Mae certificates are guaran- 77 teed by Fannie Mae, a federally chartered and privately-owned corporation for full and timely payment of principal 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 Obliga- tions. Mortgage-Backed Securities also include CMOs and REMIC pass-through or participation certificates, which may be issued by, among others, U.S. Govern- ment agencies and instrumentalities as well as private lenders. CMOs and REMIC certificates 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 interest 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 certificates 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 certain mortgages primarily secured by interests in real property and other permitted investments. Investors may purchase "regular" and "residu- al" interest shares of beneficial interest in REMIC trusts although the Port- folio 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 po- tentially limiting a Fund's ability to buy or sell those securities at any particular time. Risks. Investing in Mortgage-Backed Securities involves certain unique risks in addition to those generally associated with investing in the real estate industry in general. These unique risks include the failure of a counterparty to meet its commitments, adverse interest rate changes and the effects of pre- payments on mortgage cash flows. See "Certain Risk Considerations--Mortgage- Backed Securities" below for a more complete description of the characteris- tics 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 bank- 78 ers' 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 guaranteed by the U.S. Government or its agencies or instrumentalities with remaining matu- rities 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. Sus- tained periods of deteriorating economic conditions or rising interest rates are more likely to lead to a weakening in the issuer's capacity to pay inter- est and repay principal than in the case of higher-rated securities. The Port- folio expects that it will not retain a debt security which is downgraded be- low 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 com- panies 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 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 collateral 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 under- 79 lying equity securities are themselves 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 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 war- rant does not necessarily change with the value of the underlying security, al- though 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. Short Sales. A short sale is a transaction in which the Portfolio sells a secu- rity 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 security 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 particular se- curities and is often obligated to pay over any payments received on such bor- rowed securities. The 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 remittance of any payments received by the Portfolio on such securi- ty, the Portfolio may not receive any payments (including interest) on its col- lateral deposited 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 real- ize a short-term capital gain. Any gain will be decreased, and any loss in- creased, 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. 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 acquire 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 80 primarily in Real Estate Equity Securities and does have a policy of concen- tration of its investments in the real estate industry. Therefore, an invest- ment in the Portfolio is subject to certain risks associated with the direct ownership of real estate and with the real estate industry in general. These risks include, among others: possible declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds; overbuilding; extended vacancies of proper- ties; increases in competition, property taxes and operating expenses; changes in zoning laws; costs resulting from the clean-up of, and liability to third parties for damages resulting from, environmental problems; casualty or con- demnation losses; uninsured 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 ex- tent. 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 associated 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 extended. 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. 81 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 lesser rate of principal prepay- ments in an increasing interest rate environment. Early payment associated with Mortgage-Backed Securities causes these securities to experience signifi- cantly greater price and yield volatility than that experienced by traditional fixed-income securities. Under certain interest rate and prepayment rate sce- narios, the Portfolio may fail to recoup fully its investment in Mortgage- Backed Securities notwithstanding any direct or indirect 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 adjustable rate mortgage pass-through securities in particular, may be less effective 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: 82 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 an agreed-upon interest rate. Such agreements permit the Portfolio to keep all of its assets at work while retaining "overnight" flexibility in pursuit of investment of a longer-term nature. If a vendor de- faults on its repurchase obligation, the Portfolio would suffer a loss to the extent that the proceeds from the sale of the collateral were less than the repurchase price. If a vendor goes bankrupt, the Portfolio might be delayed in, or prevented from, selling the collateral for its benefit. The Fund's Board of Directors has established procedures, which are periodically reviewed by the Board, pursuant to which the Adviser monitors the creditworthiness of the vendors with which the Portfolios enter into repurchase agreement transac- tions. WRITING COVERED CALL OPTIONS The 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. 83 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 in- creases 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 asset value, the North American Government Income Portfolio, the Global Dollar Gov- ernment 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 permit- ted 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 option the right to deliver to the writer of the option, and in the case of a call option, the right to call upon the writer to deliver, a specified amount of a security on or before a fixed date at a predetermined price. A call option written by a Portfolio is "covered" if the Portfolio (i) owns the under- lying security covered by the call (ii) has an absolute and immediate right to acquire that security without additional cash consideration (or for additional cash consideration held in a segregated account by the Fund's Custodian) upon conversion or exchange of other portfolio securities, or (iii) holds a call on the same security in the same principal amount as the call written where the exercise price of the call held (i) is equal to or less than the exercise price of the call written or (ii) is greater than the exercise price of the call written if the difference is maintained by the Portfolio in cash and liquid high-grade debt securities in a segregated account with the Fund's Custodian. A put option written by a Portfolio is "covered" if the Portfolio maintains liq- uid assets with a value equal to the exercise price in a segregated account with the Fund's Custodian, or else holds a put on the same security in the same principal amount as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written. The premium paid by the purchaser of an option will reflect, among other things, the rela- tionship of the exercise price to the market price and volatility of the under- lying security, the remaining term of the option, supply and demand and inter- est rates. A call option is written for cross-hedging purposes if a Portfolio does not own the underlying security, but seeks to provide a 84 hedge against a decline in value in another security which the Portfolio owns or has the right to acquire. In such circumstances, the Portfolio collateralizes its obligation under the option (which is not covered) by main- taining in a segregated account with the Fund's Custodian liquid assets in an amount not less than the market value of the underlying security, marked to market daily. In purchasing a call option, a Portfolio would be in a position to realize a gain if, during the option period, the price of the underlying security in- creased by an amount in excess of the premium paid. It would realize a loss if the price of the underlying security declined or remained the same or did not increase during the period by more than the amount of the premium. In purchas- ing a put option, a Portfolio would be in a position to realize a gain if, during the option period, the price of the underlying security declined by an amount in excess of the premium paid. It would realize a loss if the price of the underlying security increased or remained the same or did not decrease during that period by more than the amount of the premium. If a put or call option purchased by a Portfolio were permitted to expire without being sold or exercised, its premium would be lost by the Portfolio. The risk involved in writing a put option is that there could be a decrease in the market value of the underlying security. If this occurred, the option could be exercised and the underlying security would then be sold by the op- tion holder to the Portfolio at a higher price than its current market value. The risk involved in writing a call option is that there could be an increase in the market value of the underlying security. If this occurred, the option could be exercised and the underlying security would then be sold by the Port- folio at a lower price than its current market value. These risks could be re- duced by entering into a closing transaction. See Appendix C to the Statement of Additional Information. A Portfolio retains the premium received from writ- ing a put or call option whether or not the option is exercised. A Portfolio may purchase or write options on securities of the types in which it is permitted to invest in privately negotiated transactions. A Portfolio will effect such transactions only with investment dealers and other financial institutions (such as commercial banks or savings and loan institutions) deemed creditworthy by the Adviser, and the Adviser has adopted procedures for monitoring the creditworthiness of such entities. Options purchased or written by a Portfolio in negotiated transactions are illiquid and it may not be pos- sible for the Portfolio to effect a closing transaction at a time when the Ad- viser believes it would be advantageous to do so. See "Illiquid Securities." See Appendix C to the Statement of Additional Information for a further dis- cussion of the use, risks and costs of option trading. 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 85 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, deal- ers and financial institutions provided that cash, U.S. Government securities, other liquid high-quality debt securities or bank letters of credit equal to at least 100% of the market value of the securities loaned is deposited and main- tained 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 Portfolio 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 de- livered 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', administrative 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 Government 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 Adviser. 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 Invest- ment Portfolio, may invest in listed and unlisted foreign securities subject to the limitation that the International Portfolio may invest only in the securi- ties of foreign issuers or U.S. companies having their principal activities and interests outside the United States. The other Portfolios of the Fund may in- vest in foreign securities without limitation, although the Total Return Port- folio has no intention of so investing in the future, the Premier Growth Port- folio 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 in- tends to restrict its investment in foreign securities to issues of high qual- ity and 86 the Money Market Portfolio is limited to investing in those foreign securities described above in "Investment Objectives and Policies -- Money Market Portfo- lio." 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 securities. The High Yield Portfolio may purchase foreign securities, provided the value of issues denom- inated in foreign currency shall not exceed 20% of the Portfolio's total as- sets 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 for- eign 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 or economic, taxation or monetary policy (in the United States and abroad) or changed cir- cumstances in dealings between nations. Currency exchange rate movements will increase or reduce the U.S. dollar value of the Portfolio's net assets and in- come 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 ac- counting, auditing and financial reporting standards and requirements compara- ble to those of domestic issuers. Foreign issuers are subject to accounting, auditing and financial standards and requirements that differ, in some cases significantly, from those applicable to U.S. issuers. In particular, the as- sets and profits appearing on the financial statements of a foreign issuer may not reflect its financial position or results of operations in the way they would be reflected had the financial statements been prepared in accordance with U.S. generally accepted accounting principles. In addition, for an issuer that keeps accounting records in local currency, inflation accounting rules in some of the countries in which a Portfolio will invest require, for both tax and accounting purposes, that certain assets and liabilities be restated on the issuer's balance sheet in order to express items in terms of currency of constant purchasing power. Inflation accounting may indirectly generate losses or profits. Consequently, financial data may be materially affected by re- statements for inflation and may not accurately reflect the real condition of those issuers and securities markets. Securities of some foreign issuers are less liquid and more volatile than securities of comparable domestic issuers, and foreign 87 brokerage commissions are generally higher than in the United States. Foreign securities markets may also be less liquid, more volatile, and less subject to governmental supervision than in the United States. Investments in foreign countries could be affected by other factors not present in the United States, including expropriation, confiscatory taxation, lack of uniform accounting and auditing standards and potential difficulties in enforcing contractual obliga- tions 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 1,559.09, up approximately 8% from the end of 1993; in 1995, the TOPIX closed at 1,577.70, up approximately 1% from the end of 1994; and in 1996, the TOPIX closed at 1,470.94, down approximately 7% from the end of 1995. On December 31, 1997, the TOPIX closed at 1,175.03, down approximately 20% from the end of 1996. Certain valuation measures, such as price-to-book value and price-to-cash flow ratios, indicate that the Japanese stock market is near its lowest level in the last twenty years relative to other world markets. In recent years, Japan has consistently recorded large current account trade surpluses with the U.S. that have caused difficulties in the relations between the two countries. On October 1, 1994, the U.S. and Japan reached an agreement that may lead to more open Japanese markets with respect to trade in certain goods and services. In June, 1995, the two countries agreed in principle to increase Japanese imports of American automobiles and automotive parts. Never- theless, it is expected that the continuing friction between the U.S. and Ja- pan with respect to trade issues will thus continue for the foreseeable fu- ture. Each Portfolio's investments in Japanese issuers also will be subject to un- certainty resulting from the instability of recent Japanese ruling coalitions. From 1955 to 1993, Japan's government was controlled by a single political party. Between August 1993, and October 1996 Japan was ruled by a series of four coalition governments. As a result of a general election on October 20, 1996, however, Japan returned to a single party government led by Prime Minis- ter Ryutaro Hashimoto. While Mr. Hashimoto's party does not control a majority of the seats in the parliament, it is only three seats short of the 251 seats required to attain a 88 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 financial turmoil in other Asian markets. On December 17, 1997 the Japanese government proposed to strengthen Japan's banks by means of an infusion of public funds and other mea- sures. It is unclear whether these proposals, which are under consideration by Japan's parliament, would, if implemented, achieve their intended effect. For further information regarding Japan, see the Fund's Statement of Additional In- formation. WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS Forward commitments for the purchase or sale of securities may include pur- chases on a "when-issued" basis or purchases or sales on a "delayed delivery" basis. In some cases, a forward commitment may be conditioned upon the occur- rence of a subsequent event, such as approval and consummation of a debt re- structuring (i.e., a "when, as and if issued" trade). When forward commitment transactions are negotiated, the price, which generally is expressed in yield terms, is fixed at the time the commitment is made, but delivery and payment for the securities take place at a later date, normally within two months after the transaction, delayed settlements beyond two months may be negotiated. Securities purchased or sold under a forward commitment are subject to market fluctuation, and no interest accrues to the purchaser prior to the settlement date. At the time a Portfolio enters into a forward commit- ment, it will record the transaction and thereafter reflect the value of the security purchased or, if a sale, the proceeds to be received, in determining its net asset value. Any unrealized appreciation or depreciation reflected in such valuation of a "when, as and if issued" security would be cancelled in the event that the required condition did not occur and the trade was cancelled. The use of forward commitments enables a Portfolio to protect against antici- pated changes in interest rates and prices. How- ever, if the Adviser were to forecast incorrectly the direction of interest rate movements, the Portfolio might be required to complete such when-issued or forward transactions at prices less favorable than current market values. 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, 89 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 in- cur a gain or loss. In the event the other party to a forward commitment trans- action 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 commitments 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 Port- folio, 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 Portfo- 90 lio, the Global Bond Portfolio, the North American Government Income Portfolio and the Utility Income Portfolio. In addition, (High-Yield Portfolio may uti- lize futures contracts and options on futures contracts subject to the re- strictions 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 as- set 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 the currency in which the position being hedged is denominated. It is the Adviser's belief that cross-hedges can therefore provide significant pro- tection of net asset value in the event of a general rise in the U.S. Dollar against foreign currencies. However, a cross-hedge cannot protect against ex- change rate risks perfectly, and if the Adviser is incorrect in its judgment of future exchange rate relationships, a Portfolio could be in a less advanta- geous 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 outstanding. The Portfolio purchases such debt instruments with the currency in which they are denominated and, at maturity, receives interest and princi- pal 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 in- strument 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 invest- ments denominated in foreign currencies while providing an attractive money market rate of return. The Portfolio purchases such debt instruments for hedg- ing purposes only, not for speculation. The staff of the Securities and Ex- change Commission (the "Commission") is currently considering whether the Portfolio's purchase of this type of security would 91 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 undertaken, 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. Government Securities or other liquid high quality debt securities having a value equal to the ag- gregate 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 Portfolio to deliver the securities or foreign currencies called for by the contract at a specified price on a specified date. A "purchase" of a futures contract means the incurring of a contractual obligation to acquire the secu- rities or foreign currencies called for by the contract at a specified price on a specified date. The specific securities delivered or taken, respectively, at settlement date, would not be determined until at or near that date. The determination would be in accordance with the rules of the exchange on which the futures contract sale or purchase was effected. Although the terms of futures contracts specify actual delivery or receipt of securities, in most instances the contracts are closed out before the settle- ment date without the making or taking of delivery of the securities. Closing out of a futures contract is effected 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. 92 These investment techniques will be used only to hedge against anticipated fu- ture changes in market conditions and interest or exchange rates which other- wise might either adversely affect the value of the Portfolio's securities or adversely affect the prices of securities which the Portfolio intends to pur- chase at a later date. See Appendix B to the Fund's Statement of Additional Information for further discussion of the use, risks and costs of futures con- tracts and options on futures contracts. The Portfolio will not (i) enter into any futures contracts or options on futures contracts if immediately thereafter the aggregate of margin deposits on all the outstanding futures contracts of the Portfolio and premiums paid on outstanding options on futures contracts would exceed 5% of the market value of the total assets of the Portfolio or (ii) enter into any futures contracts or options on futures contracts if the aggregate of the market value of the outstanding futures contracts of the Portfolio and the market value of the currencies and futures contracts subject to outstanding options written by the Portfolio would exceed 50% of the market value of the total assets of the Portfolio. Options on Foreign Currencies. The Portfolio may purchase and write put and call options on foreign currencies for the purpose of protecting against de- clines in the U.S. Dollar value of foreign currency-denominated portfolio se- curities and against increases in the U.S. Dollar cost of such securities to be acquired. As in the case of other kinds of options, however, the writing of an option on a foreign currency constitutes only a partial hedge, up to the amount of the premium received, and a Portfolio could be required to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incur- ring losses. The purchase of an option on a foreign currency 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 en- tire amount of the premium plus related transaction costs. Options on foreign currencies to be written or purchased by the Portfolio are traded on U.S. and foreign exchanges or over-the-counter. There is no specific percentage limita- tion 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. 93 Interest Rate Transactions. In order to attempt to protect the value of the Portfolio's investments from interest rate or currency cross-rate fluctua- tions, the Portfolio may enter into various hedging transactions, such as in- terest rate swaps and may purchase or sell (i.e. write) interest rate caps and floors. The Portfolio expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its port- folio. The Portfolio may also enter into these transactions to protect against any increase in the price of securities the Portfolio anticipates purchasing at a later date. The Portfolio does not intend to use these transactions in a speculative manner. Interest rate swaps involve the exchange by the Portfolio with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments. Interest rate swaps are entered into on a net basis, i.e., the two payment streams are netted out, with the Portfolio receiving or paying, as the case may be, only the net amount of the two payments. The purchase of an interest rate cap enti- tles the purchaser, to the extent that a specified index exceeds a predeter- mined interest rate, to receive payments on a contractually-based principal amount from the party selling such interest rate cap. The purchase of an in- terest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate to receive payments on a contractu- ally-based principal amount from the party selling such interest rate floor. The Portfolio may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, depending on whether the Portfolio is hedging its assets or its liabilities. The net amount of the excess, if any, of the Portfolio's obligations over its 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 94 obligations with respect to the caps or floors. General. The successful use of the foregoing investment practices draws upon the Adviser's special skills and experience with respect to such instruments and usually depends on the Adviser's ability to forecast interest rate and currency exchange rate movements correctly. Should interest or exchange rates move in an unexpected manner, the Portfolio may not achieve the anticipated benefits of futures contracts, options, interest rate transactions or forward contracts or may realize losses and thus be in a worse position than if such strategies had not been used. Unlike many exchange-traded futures contracts and options on futures contracts, there are no daily price fluctuation limits with respect to options on currencies and forward contracts, and adverse mar- ket movements could therefore continue to an unlimited extent over a period of time. In addition, the correlation between movements in the price of the secu- rities and currencies hedged or used for cover will not be perfect and could produce unanticipated losses. The Portfolio's ability to dispose of its positions in futures contracts, op- tions, interest rate transactions and forward contracts will depend on the availability of liquid markets in such instruments. Markets in options and futures with respect to a number of fixed-income securities and currencies are relatively new and still developing. It is impossible to predict the amount of trading interest that may exist in various types of futures contracts, options and forward contracts. If a secondary market does not exist with respect to an option purchased or written by the Portfolio over-the-counter, it might not be possible to effect a closing transaction in the option (i.e., dispose of the option) with the result that (i) an option purchased by the Portfolio would have to be exercised in order for the Portfolio to realize any profit and (ii) the Portfolio may not be able to sell currencies or portfolio securities cov- ering an option written by the Portfolio until the option expires or it deliv- ers 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 in- vestment restrictions, illiquid securities include, among others, (a) direct placements or other securities which are subject to legal or contractual re- strictions on resale or for which there is no readily available market (e.g., trading in the security is suspended or, in the case of unlisted securities, market makers do not exist or will not entertain bids or offers), (b) options purchased by the Portfolio over-the-counter and the cover for options written by the Portfolio over-the-counter, and (c) repurchase agreements not termina- ble within seven days. Securities eligible for resale under Rule 144A under the Securities Act of 1933, as amended, that have legal or contractual re- strictions on resale but have a readily available market are not deemed illiq- uid for purposes of this limitation. The Adviser monitors the liquidity of such securities under the supervision of the Board of Directors. See "Certain Fundamental Investment Poli- 95 cies." See the Statement of Additional Information for further discussion of illiquid securities. FIXED-INCOME SECURITIES The value of the shares of each Portfolio that invests in fixed-income securi- ties will fluctuate with the value of such investments. The value of each Portfolio's investments will change as the general level of interest rates fluctuates. During periods of falling interest rates, the values of a Portfo- lio's securities 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 reali- zation of capital losses on securities in a Portfolio's portfolio will be un- avoidable. Moreover, medium- and lower-rated securities and non-rated securi- ties of comparable quality may be subject to wider fluctuations in yield and market values than higher-rated securities under certain market conditions. Such fluctuations after a security is acquired do not affect the cash income received from that security but are reflected in the net asset value of a Portfolio. 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 96 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 specula- tive 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 se- curities may have small assurance of interest and principal payments. Securi- ties rated Baa by Moody's are also judged to have speculative characteristics. The market for lower-rated securities may be thinner and less active than that for higher-rated securities, which can adversely affect the prices at which these securities can be sold. To the extent that there is no established sec- ondary market for lower-rated securities, a Portfolio's may experience diffi- culty in valuing such securities and, in turn, the Portfolio's assets. The Adviser will try to reduce the risk inherent in investment in lower-rated securities through credit analysis, diversification and attention to current developments and trends in interest rates and economic and political condi- tions. However, there can be no assurance that losses will not occur. Since the risk of default is higher for lower-rated securities, the Adviser's re- search and credit analysis are a correspondingly more important aspect of its program for managing a Portfolio's securities than would be the case if a Portfolio did not invest in lower-rated securities. In considering investments for the Portfolio, the Adviser will attempt to identify those high-yielding securities whose financial condition is adequate to meet future obligations, has improved, or is expected to improve in the future. The Adviser's analysis focuses on relative values based on such factors as interest or dividend cov- erage, asset coverage, earnings prospects, and the experience and managerial strength of the issuer. 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, 97 North American Government Income Portfolio and Global Dollar Government Port- folio 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 poli- cies. 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 individual issuers than a diversified port- folio, an investment in these Portfolios may, under certain circumstances, present greater risk to an investor than an investment in a diversified port- folio. 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 Portfolio will limit its invest- ments 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 mar- ket value of its total assets, not more than 5% of the market value of its to- tal assets will be invested in the securities of a single issuer and the Port- folio 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 manner which would not be necessary if the Portfolio had made similar invest- ments 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 sav- ings deposits of banks having total assets of more than $1 billion and which are members of the Federal Deposit Insurance Corporation, and (iii) commercial paper of prime quality rated A-1 or higher by S&P, D-1 or higher by Duff & Phelps, F1 or higher by Fitch or Prime-1 by Moody's or, if not rated, issued by companies which have an outstanding debt issue rated AA or higher by S&P, Duff & Phelps or Fitch or Aa or higher by Moody's. For temporary defensive purposes, the Global Dollar Government Portfolio may 98 vary from its investment policies during periods in which economic or politi- cal conditions warrant. Under such circumstances, the Portfolio may invest without limit in (i) Government Securities and (ii) the following U.S. dollar- denominated investments: (a) indebtedness rated Aa or better by Moody's or AA or better by S&P, Duff & Phelps or Fitch, or if not so rated, of equivalent investment quality as determined by the Adviser, (b) certificates of deposit, bankers' acceptances and interest-bearing savings deposits of banks having to- tal assets of more than $1 billion and which are members of the Federal De- posit Insurance Corporation and (c) commercial paper of prime quality rated A- 1 or better 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 out- standing debt issue rated AA or better by S&P, Duff & Phelps or Fitch or Aa or better by Moody's. The Global Dollar Government Portfolio may also at any time, with respect to up to 35% of its total assets, temporarily invest funds awaiting reinvestment or held for reserves for dividends and other distribu- tions to shareholders 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 instru- mentalities ("U.S. Government Securities"), bank deposits, money market in- struments, 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 investments in foreign currency denominated debt securities to secu- rities 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 instru- ments 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 State- ment of Additional Information. 99 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 Many computer software systems in use today cannot properly process date-re- lated information from and after January 1, 2000. Should any of the computer systems employed by the Fund's major service providers fail to process this type of information properly, that could have a negative impact on the Fund's operations and the services that are provided to the Fund's shareholders. The Adviser, as well as Alliance Fund Distributors, Inc., the principal underwriter of the Fund's shares, and Alliance Fund Services, Inc., the Fund's registrar, dividend disbursing agent, and transfer agent, have advised the Fund that they are reviewing all of their computer systems with the goal of modifying or re- placing such systems prior to January 1, 2000, to the extent necessary to fore- close any such negative impact. In addition, the Adviser has been advised by the Fund's custodian that it is also in the process of reviewing its systems with the same goal. As of the date of this Prospectus, the Fund and the Adviser have no reason to believe that these goals will not be achieved. Similarly, the values of certain of the portfolio securities held by the Fund may be adversely affected by the inability of the securities' issuers or of third parties to process this type of information properly. CERTAIN FUNDAMENTAL INVESTMENT POLICIES The Fund has adopted certain fundamental investment policies applicable to the Portfolios which may not be changed with respect to a Portfolio without the ap- proval of the shareholders of a Portfolio. Certain of those fundamental invest- ment policies are set forth below. For a complete listing of such fundamental investment policies, see the Statement of Additional Information. Briefly, with respect to the Money Market Portfolio, the Premier Growth Portfo- lio, the Growth and Income Portfolio, the U.S. Government/High Grade Securities Portfolio, the High-Yield Portfolio, the Total Return Portfolio and the Inter- national Portfolio, these fundamental investment policies provide that a Port- folio may not: (i) invest in securities of any one issuer (including repurchase agreements with any one entity) other than securities issued or guaranteed by the United States Government, if immediately after such purchases more than 5% of the value of its total assets would be invested in such issuer, except that 25% of the value of the total assets of a Portfolio may be invested without re- gard to such 5% limitation; (ii) acquire more than 10% of any class of the out- standing securities of any issuer (for this purpose, all preferred stock of an issuer shall be deemed a single class, and all indebtedness of an issuer shall be deemed a single class); (iii) invest more than 25% of the value of its total assets at the time an investment is made in the securities of issuers con- ducting their principal business activities in any one industry, except that there is no such limitation with respect to U.S. Govern- 100 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 the Short- Term Multi-Market Portfolio only, the banking industry) except that this re- striction does not apply to U.S. Government Securities; (ii) borrow money ex- cept from banks for temporary or emergency purposes, including the meeting of redemption requests which might require the untimely disposition of securi- ties; borrowing in the aggregate may not exceed 15%, and borrowing for pur- poses 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 101 of redemption requests which might require the untimely disposition of securi- ties; 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 Portfo- lio'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 other- wise 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 ex- cept 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 as- sets in the securities of issuers conducting their principal business activi- ties 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 meet- ing of redemption requests which might require the untimely disposition of se- curities; borrowing in the aggregate may not exceed 15%, and borrowing for pur- poses 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 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 security if, as a result (unless the security is acquired pursuant to a plan of reorga- nization 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 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 re- purchase agreements relating thereto), although up to 25% of the Portfolio's total assets may be invested without regard to this restriction; or (ii) invest 25% or more of its total assets in the securities of any one industry. (Obliga- tions of a foreign government and its agencies or instrumentalities constitute a separate "industry" from those of another foreign government.) 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 com- 102 mercial banking industry, so long as the Fund's Board of Directors determines, on the basis of factors such as liquidity, availability of investments and an- ticipated returns, that the Portfolio's ability to achieve its investment ob- jective would be adversely affected if the Portfolio were not permitted to in- vest more than 25% of its total 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 to- tal assets in those securities, such notice to include a discussion of any in- creased investment risks to which the Portfolio may be subjected as a result of the Board's determination; (ii) borrow money except from banks for tempo- rary or emergency purposes, including the meeting of redemption requests which might require the untimely disposition of securities; borrowing in the aggre- gate may not exceed 15%, and borrowing for purposes other than meeting redemp- tions may not exceed 5% of the value of the Portfolio's total assets (includ- ing the amount borrowed) less liabilities (not 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 invest- ments 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 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 out- standing voting securities of such issuer; (ii) purchase the securities of any one issuer, other than the U.S. Government and its agencies or instrumentali- ties, if as a result (a) the value of the holdings of the Technology Portfolio in the securities of such issuer exceeds 25% of its total assets, 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 in- vest 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 predecessor) if such pur- chase would cause 10% or more of its total assets to be invested in the secu- rities 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. 103 With respect to the Real Estate Investment Portfolio these fundamental policies provide that the Portfolio may not: (i) with respect to 75% of its total as- sets, 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 outstand- ing 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 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 Portfolio owns more than 25% of the outstanding securities of any one class of securities of such issuer; (iii) invest 25% or more of its total assets in the securities of is- suers conducting their principal business activities in any one industry, other than the real estate industry, in which the Portfolio will invest 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 estate, except that it may purchase and sell securities of companies which deal in real estate or in- terests therein, including Real Estate Equity Securities; or (v) borrow money except for temporary or emergency purposes or to meet redemption requests, in an amount not exceeding 5% of the value of its total assets at the time the borrowing is made. In addition, the Fund has adopted an investment policy, which is not designated a "fundamental policy" within the meaning of the Act, of intending to have each Portfolio comply at all times with the diversification requirements prescribed in Section 817(h) of the Internal Revenue Code or any successor thereto and the applicable Treasury Regulations thereunder. This policy may be changed upon no- tice to shareholders of the Fund, but without their approval. MANAGEMENT OF THE FUND DIRECTORS John D. Carifa, Chairman and President, is President and Chief Operating Offi- cer and a Director of Alliance Capital Management Corporation ("ACMC"), the sole general partner of the Adviser, with which he has been associated since prior to 1993. Ruth Block was formerly an Executive Vice President and the Chief Insurance Of- ficer of The Equitable Life Assurance Society of the United States since prior to 1993. She is a Director of Ecolab Incorporated (specialty chemicals) and Amoco Corporation (oil and gas) David H. Dievler was formerly a Senior Vice President of ACMC, with which he had been associated since prior to 1993. He is currently an independent consul- tant. John H. Dobkin has been the President of Historic Hudson Valley (historic pres- ervation) since prior to 1993. Previously, he was Director of the National Academy of Design. William H. Foulk, Jr. is an investment advisor and an independent consultant. He was formerly Senior Manager of Barrett Associates, Inc., a registered in- vestment adviser, 104 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. 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.
FUND PRINCIPAL OCCUPATION ---- EMPLOYEE; YEAR; TITLE DURING THE PAST FIVE YEARS --------------------- -------------------------- 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- since prior to 1993 Vice Chairman of ACMC Growth and Income Paul C. Rissman since Associated with the Adviser Portfolio inception- since prior to 1993 Senior Vice President of ACMC U.S. Government/High Paul J. DeNoon since Associated with the Adviser Grade Securities inception- since prior to 1993 Portfolio Vice President 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- since prior to 1993 Senior Vice 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
105
FUND PRINCIPAL OCCUPATION ---- EMPLOYEE; YEAR; TITLE DURING THE PAST FIVE YEARS --------------------- -------------------------- North American Wayne D. Lyski since Associated with the Adviser Government Income inception- since prior to 1993 Portfolio Executive Vice 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 Associated with the Adviser Portfolio 1997- since 1997; prior thereto, Chief Vice President of ACMC Investment Officer and Portfolio Manager of Draycott Partners since prior to 1993 Growth Investors Nicholas D.P. Carn since (see above) Portfolio 1997- (see above) Growth Portfolio Tyler J. Smith since Associated with the Adviser inception- since July, 1993; prior thereto, Senior Vice President of associated with Equitable ACMC Capital Management Corporation** Worldwide Privatization Mark H. Breedon since Associated with the Adviser Portfolio inception- since prior to 1993 Senior Vice 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- since prior to 1993 Senior Vice President of ACMC Real Estate Investment Daniel G. Pine since Associated with the Adviser Portfolio inception- since May, 1996; prior thereto Senior Vice President of associated with Desai Capital ACMC Management since prior to 1993 High-Yield Portfolio Nelson R. Jantzen since Associated with the Adviser inception- since July, 1993** Senior Vice President of ACMC Wayne C. Tappe since Associated with the Adviser inception- since July, 1993** Senior Vice President of ACMC
* 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. 106 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 institutional specialty funds, investment companies, and dedicated institutional portfolios. The address of the Sub-Adviser is Unit 1/11, Harbour Yard, Chelsea, London, England. In providing advisory services to the Real Estate Investment Portfolio and other clients investing in real estate securities, the Adviser has retained as a consultant CB Commercial Real Estate Group, Inc. ("CBC"), 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 (CBC in August of 1997 acquired Koll, which previously provided these consulting services to Alli- ance). 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. CBC will make available to Alli- ance the CBC National Real Estate Index, which gathers, analyzes and publishes targeted research data for the 65 largest U.S. markets, based on a variety of public-sector and private-sector sources as well as CBC's proprietary database of approximately 60,000 property transactions representing over $400 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, CBC provides to the Adviser, at the Adviser's expense, such in-depth informa- tion regarding the real-estate market, the factors influencing regional valua- tions and analysis of recent transactions in office, retail, industrial and multi-family properties as the Adviser shall from time to time request. CBC will not furnish investment advice or make recommendations regarding the pur- chase or sale of securities by the Portfolio nor will it be responsible for making investment decisions involving Portfolio assets. CBC 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 6,000 employees nationwide. CBC will provide the Adviser with exclusive access to its REIT . Score model which ranks approximately 130 REITs based on the relative attractiveness of the property markets in which they own real es- tate. This model scores the approximately 12,000 individual properties owned by these companies. REIT . Score is in turn based on CBC's Na- 107 tional Real Estate Index which gathers, analyzes and publishes targeted re- search data for the 65 largest U.S. real estate markets based on a variety of public- and private-sector sources as well as CBC's proprietary database of 60,000 commercial property transactions representing over $400 billion of in- vestment property and over 3,000 tracked properties which report rent and ex- pense data quarterly. CBC 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 Portfolio and another mutual fund managed by the Adviser are currently the only mutual funds available to retail investors that have access to CBC's REIT . Score model. The Adviser is a leading international investment manager supervising client accounts with assets as of December 31, 1997 totaling more than $218 billion (of which approximately $85 billion represented the assets of investment com- panies). The Adviser's clients are primarily major corporate employee benefit funds, public employee retirement systems, investment companies, foundations and endowment funds. The 58 registered investment companies managed by the Ad- viser comprising 122 separate investment portfolios currently have over three million shareholder accounts. As of December 31, 1997, the Adviser was re- tained as an investment manager for employee benefit plan assets of 31 of the Fortune 100 companies. ACMC, the sole general partner of, and the owner of a 1% general partnership interest in, the Adviser, is an indirect wholly-owned subsidiary of The Equi- table Life Assurance Society of the United States ("Equitable"), one of the largest life insurance companies in the United States and a wholly owned sub- sidiary of the Equitable Companies Incorporated, a holding company which is controlled by AXA-UAP, a French insurance holding company. Certain information concerning the ownership and control of Equitable by AXA-UAP is set forth in the Statement of Additional Information under "Management of the Fund." The Adviser provides investment advisory services and order placement facili- ties for each of the Fund's Portfolios and pays all compensation of Directors and officers of the Fund who are affiliated persons of the Adviser. The Ad- viser or its affiliates also furnish the Fund, without charge, management su- pervision and assistance and office facilities and provide persons satisfac- tory to the Fund's Board of Directors to serve as the Fund's officers. EXPENSES OF THE FUND In addition to the payments to the Adviser under the Investment Advisory Agreement described above, the Fund pays certain other costs including (a) custody, transfer and dividend disbursing expenses, (b) fees of Directors who are not affiliated with the Adviser, (c) legal and auditing expenses, (d) clerical, accounting and other office costs, (e) costs 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 108 of certain personnel of the Adviser or its affiliates rendering clerical, ac- counting and other services to the Fund. As to the obtaining of clerical and accounting services not required to be provided to the Fund by the Adviser under the Investment Advisory Agreement, the Fund may employ its own personnel. For such services, it may also utilize personnel employed by the Adviser or by its affiliates; in such event, the services are provided to the Fund at cost and the payments specifically ap- proved in advance by the Fund's Board of Directors. PURCHASE AND REDEMPTION OF SHARES PURCHASE OF SHARES Shares of each Portfolio of the Fund are offered on a continuous basis di- rectly by the Fund and by Alliance Fund Distributors, Inc., the Fund's Princi- pal Underwriter, to the separate accounts of certain life insurance companies without any sales or other charge, at each Portfolio's net asset value, as de- scribed below. The separate accounts of insurance companies place orders to purchase shares of each Portfolio based on, among other things, the amount of premium payments to be invested and surrendered and transfer requests to be effected on that day pursuant to variable annuity contracts and variable life insurance policies which are funded by shares of the Portfolios. The Fund re- serves the right to suspend the sale of the Fund's shares in response to con- ditions in the securities markets or for other reasons. Individuals may not place orders directly with the Fund. See the Prospectus of the separate ac- count of the participating insurance company for more information on the pur- chase of Portfolio shares. The public offering price of each Portfolio's shares is their net asset value. The per share net asset value of each Portfolio is computed in accordance with the Fund's Articles of Incorporation and By-Laws, at the next close of regular trading on the New York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time), following receipt of a purchase or redemption order by the Fund, on each Fund business day on which such an order is received and trading in the types of securities in which the Fund invests might materially affect the value of Fund shares. The Fund's per share net asset value is computed by dividing the value of the Fund's total assets, less its liabilities, by the total number of its shares then outstanding. A Fund business day is any week- day exclusive of days on which the Exchange is closed (most national holidays and Good Friday). For purposes of this computation, the securities in each Portfolio are valued at their current market value (in the case of the Money Market Portfolio, amortized 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 securities. In the case of the Money Market Portfo- lio, per share net asset value is expected to be constant at $1.00 per share, although this price is not guaranteed. 109 REDEMPTION OF SHARES An insurance company separate account may redeem all or any portion of the shares of any Portfolio in its account at any time at the net asset value per share of that Portfolio next determined after a redemption request in proper form is furnished to the Fund or the Principal Underwriter. Any certificates representing shares being redeemed must be submitted with the redemption re- quest. Shares redeemed are entitled to earn dividends, if any, up to and in- cluding the day redemption is effected. There is no redemption charge. Payment of the redemption price will normally be made within seven days after receipt of such tender for redemption. The right of redemption may be suspended or the date of payment may be post- poned for any period during which the Exchange is closed (other than customary weekend and holiday closings) or during which the Commission determines that trading thereon is restricted, or for any period during which an emergency (as determined by the Commission) exists as a result of which disposal by the Fund of securities owned by a Portfolio is not reasonably practicable or as a re- sult of which it is not reasonably practicable for the Fund fairly to deter- mine the value of a Portfolio's net assets, or for such other periods as the Commission may by order permit for the protection of security holders of the Fund. For information regarding how to redeem shares in the Fund please see your insurance company separate account prospectus. DIVIDENDS, DISTRIBUTIONS AND TAXES 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 110 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 cur- rently taxable when left to accumulate within a variable annuity (other than an annuity interest owned by a person who is not a natural person) or variable life insurance contract. Distributions of net investment income and net short- term capital gain will be treated as ordinary income and 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 Pre- 111 mier Growth Portfolio, the Growth and Income Portfolio, the International Port- folio, the Growth Portfolio, the Worldwide Privatization Portfolio, the Tech- nology Portfolio and the Quasar Portfolio are normally effected by brokers, and transactions for the Conservative Investors, the Growth Investors, Total Return Portfolio and the Real Estate Investment Portfolio are normally 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 solely of 10,000,000,000 shares of Common Stock having a par value of $.001 per share, which may, without share- holder approval, be divided into an unlimited number of series. Such shares are currently divided into 19 series, one underlying each Portfolio. Shares of each Portfolio are normally entitled to one vote for all purposes. Generally, shares of all Portfolios vote as a single series on matters, such as the election of Directors, that affect all Portfolios in substantially the same manner. Mary- land law does not require a registered investment company to hold annual meet- ings 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 Port- folio 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. Share- 112 holders have no preference, pre-emptive or conversion rights. In accordance with current law, it is anticipated that an insurance company issuing a vari- able annuity contract or variable life insurance policy that participates in the Fund will request voting instructions from contract or policyholders and will vote shares in the separate account in accordance with the voting in- structions received. PRINCIPAL UNDERWRITER Alliance Fund Distributors, Inc., 1345 Avenue of the Americas, New York, New York 10105, an indirect wholly-owned subsidiary of the Adviser, is the Princi- pal Underwriter of shares of the Fund. CUSTODIAN State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachu- setts 02110, acts as Custodian for the securities and cash of the Fund and as its dividend disbursing agent, but plays no part in deciding on the purchase or sale of portfolio securities. REGISTRAR, DIVIDEND-DISBURSING AGENT AND TRANSFER AGENT Alliance Fund Services, Inc., an indirect wholly-owned subsidiary of the Ad- viser, located at 500 Plaza Drive, Secaucus, New Jersey, 07094, acts as the Fund's registrar, dividend-disbursing agent and transfer agent. PERFORMANCE INFORMATION From time to time the Fund advertises its "total return." The Fund's "total return" is its average annual compounded total return for its most recently completed one, five, and ten-year periods (or the period since the Fund's in- ception). The Fund's total return for such a period is computed by finding, through the use of a formula prescribed by the Commission, the average annual compounded rate of return over the period that would equate an assumed initial amount invested to the value of such investment at the end of the period. For purposes of computing total return, income dividends and capital gains distri- butions paid on shares of the Fund are assumed to have been reinvested when paid and the maximum sales charge applicable to purchases of Fund shares is assumed to have been paid. The Fund's total return is not fixed and will fluctuate in response to pre- vailing market conditions or as a function of the type and quality of the se- curities in the Fund's portfolio and the Fund's expenses. Total return infor- mation is useful in reviewing the Fund's performance but such information may not provide a basis for comparison with bank deposits or other investments which pay a fixed yield for a stated period of time. An investor's principal invested in the Fund is not fixed and will fluctuate in response to prevailing market conditions. Advertisements quoting performance rankings of the Fund as measured by finan- cial publications or by independent organizations such as Lipper Analytical Services, Inc. and Morningstar, Inc., and advertisements presenting the his- torical record of payments of income dividends by the Fund may also from time to time be sent to investors or placed in newspapers, magazines such as the Wall Street Journal, The New York Times, Barrons, Investor's Daily, 113 Money Magazine, Changing Times, Business Week and Forbes or other media on be- half 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. 114 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 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 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 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 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 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 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 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 May 1, 1998 _________________________________________________________________ This Statement of Additional Information is not a prospectus but supplements and should be read in conjunction with the Fund's current Prospectus dated May 1, 1998. 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...................... Net Asset Value........................................ Portfolio Transactions................................. Dividends, Distributions and Taxes..................... General Information.................................... Financial Statements and Report of Independent 1 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. 2 _________________________________________________________________ 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 may extend to 397 days). Accordingly, the Portfolio may make the following investments diversified by maturities and issuers: 3 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 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 4 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, 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 5 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 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: 6 (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 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 7 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 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 8 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. 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 9 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 & Poors 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 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. 10 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 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 by the Portfolio to defer the realization of gain or loss for federal income tax purposes on securities then owned by the Portfolio. Gains or losses will be short- or long- term for federal income tax purposes depending upon the length of time the securities are held by the Portfolio before closing out the short sales by delivery to the lender. The Portfolio may, in certain instances, realize short-term gains or losses on short sales against the box by covering the short position through a subsequent purchase. 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 11 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 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. 12 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; 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 13 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 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 14 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. 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 15 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. 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 16 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- 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. 17 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 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 18 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 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; 19 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 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. 20 OTHER SECURITIES. While the Portfolio's investment strategy emphasizes U.S. Government Securities and high grade 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, or by any other person or entity. The issuers of CMOs typically 21 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. 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 22 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. 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 23 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 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 24 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 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 25 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 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 26 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. 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); 27 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 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. 28 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 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 29 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 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 30 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. 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 31 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 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. 32 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 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 33 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 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. 34 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 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 35 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 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; 36 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 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 37 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 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 assuming undue risk. There is no limitation on the percent or amount of the Portfolio's assets which may be invested for growth 38 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% 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 39 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 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 40 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. 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. 41 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 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 42 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; 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 43 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 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 44 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 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 45 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 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. 46 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); 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 47 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 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. 48 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. 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 49 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 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 50 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 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 51 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 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 52 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 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, 53 risks and costs of options in U.S. Government Securities and foreign government securities, see Appendix C. 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 54 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. 55 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 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. 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 56 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 two years. 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 was the 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. Because of the closeness of the vote, it is possible that there will be federally-sponsored legislation or the proposal of constitutional amendments with regard to the relationship between the federal government and the provinces. In addition, the Parti Quebecois has indicated that if it wins a second term in the provincial elections that must be held by the end of 1999, it will call another referendum. In the meantime, the federal government has initiated a legal action in Canada's Supreme Court to determine the legality of Quebec's secession. Court hearings in that case were held in mid-February 1998 and a decision is anticipated during the summer of 1998. Also, Canada's provincial leaders (other than Quebec's) met in September 1997 to formulate a seven-point framework for discussion on national unity. It is expected that Quebec's position within Canada will continue to be a matter of political debate. 57 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, 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. 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 58 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 February 24, 1998 the government announced that the 1998 Budget would be balanced for the first time in almost 30 years and that the 1999 and 2000 Budgets would be balanced as well. 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. 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. Canada's real GDP growth rate slipped to 2.3% in 1995 and 1.5% in 1996 from 4.1% in 1994. In the first, second and third quarters of 1997, real GDP grew 0.9%, 5.4% and 4.1% at an annual rate, respectively, and is estimated to have grown 3.5% overall in 1997. Canada is forecast to experience real GDP growth of 3.3% in 1998. 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. According to preliminary data, however, in the first five months of 1997 the trade surplus was reduced as the rate of import growth 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 0.702 against the U.S. Dollar, which at that time represented a nine-year low and was close to its then record low of 0.692. 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 0.702 to 0.724 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 0.683 against the U.S. Dollar on January 29, 1998. 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%. 59 The Bank Rate was raised several more times, most recently on January 30, 1998, to 5%. 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 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. 60 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 1996 and for the twelve months January-December 1997 (1986=100) 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 January . . . . . . . . . . . . 2.2 February . . . . . . . . . . . . 2.2 March . . . . . . . . . . . . . 2.0 April . . . . . . . . . . . . . 1.7 May . . . . . . . . . . . . . . 1.5 June . . . . . . . . . . . . . . 1.8 July . . . . . . . . . . . . . . 1.8 August . . . . . . . . . . . . . 1.8 September . . . . . . . . . . . 1.6 October . . . . . . . . . . . . 1.5 November . . . . . . . . . . . . 0.9 December . . . . . . . . . . . . 0.7 Source: BANK OF CANADA REVIEW Winter 1996-1997; BANK OF CANADA WEEKLY FINANCIAL STATISTICS, February 20, 1998. 61 CANADIAN GROSS DOMESTIC PRODUCT. The following table sets forth Canada's GDP for the years 1981 through the second quarter of 1997 at historical and constant prices. Gross Domestic Change from Gross Domestic Product at 1986 Prior Year at Product Prices Constant 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 4.8 1986 505,666 505,666 3.3 1987 551,597 526,730 4.2 1988 605,906 552,958 5.0 1989 650,748 566,486 2.4 1990 669,467 565,155 (0.2) 1991 676,477 555,052 (1.8) 1992 690,122 559,305 0.8 1993 712,855 571,722 2.2 1994 747,260 594,990 4.1 1995 776,299 608,835 2.3 1996 797,789 617,795 1.5 1997 1st Quarter 821,040 629,940 3.7 2nd Quarter 828,036 637,568 4.9 Source: BANK OF CANADA REVIEW Autumn 1997. 62 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 1997. 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 Source: BANK OF CANADA REVIEW Summer 1997. 63 _________________________________________________________________ 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. 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. 64 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, 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 with respect to the passage of constitutional amendments. The PRI also failed to win the election for mayor of Mexico City. More than 40% of Mexico's population is now 65 governed by an opposition party at the state or municipal level. Elections will next be held by 2000 (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 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 paramilitary group went on a rampage in Chiapas that resulted in the massacre of 45 civilians, 66 mostly women and children. The government is investigating the incident and has also announced measures to alleviate some of the conditions that have made Chiapas susceptible to violence and unrest. It is widely believed, however, that violence and unrest will continue to plague Chiapas as well as surrounding regions. 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 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 67 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 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 (General Agreement on Tariffs and Trade) 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, in 1992 Mexico signed an agreement providing for a framework for a free trade agreement 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 with 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 took effect in January 1995. In addition, Mexico is expected to begin trade negotiations in 1998 with the European Union. 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 68 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." 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. 69 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 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 have been and will be used to refinance public sector short-term debt, primarily Tesobonos, to restore the country's international reserves and to support the banking 70 sector. The largest component of the international support package is 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 which were used by Mexico to refinance maturing short-term debt, including Tesobonos and $1 billion of short-term swaps under the NAFA. 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 71 discipline in order to encourage an environment of greater price stability and lower interest rates. 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. Recent trade figures show a reversal of Mexico's trade deficit during 1995. The value of imports (including in-bond industries) decreased 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 registered a surplus in its trade balance of $6.531 billion during 1996, down approximately 7.9% from 1995, and in 1997 Mexico registered an estimated trade surplus of $582 million, down approximately 90% from 1996. During 1996, Mexico's current account balance registered a deficit of $1.922 billion, as compared with a deficit of $1.577 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 5.1% for 1996 and 7.3% for 1997. The Government currently projects a 5.0% increase in the GDP for 1998. 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 72 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. 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. . . . . . . 8.070 7.918 -- -- * Through November 10, 1991. Source: Banco de Mexico; Federal Reserve Bulletin 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 73 reduction of import tariffs. After substantive increases in 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. 74 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. 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 Source: Banco de Mexico. 75 MEXICAN GROSS DOMESTIC PRODUCT. The following table sets forth certain information concerning Mexico's GDP for the years 1990 through 1996 at current and constant prices. Gross Gross Change from Domestic Product Domestic Product Prior Year at at Current Prices at 1993 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. . . . 1,420,159 1,311,661 4.4 1995. . . . 1,837,776 1,230,994 (6.2) 1996(2) . . 2,544,290 1,293,675 5.1 (1) Constant peso with purchasing power at December 31, 1993, expressed in new pesos. (2) Preliminary. Source: Banco de Mexico. 76 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 plans to issue medium-term CETES for the first time in 1998. 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: January 23.6 24.6 24.1 25.9 26.0 February 19.8 22.0 21.1 22.2 22.1 March 21.7 22.3 21.1 24.0 24.0 April 21.4 22.4 21.1 23.8 24.0 May 18.4 20.6 18.7 20.6 20.7 June 20.2 21.4 18.8 22.5 22.5 (1) February-June average. (2) Average for the last two weeks of March. Source: Banco de Mexico. 77 ________________________________________________________________ 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 scheduled to take place in 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 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. 78 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. 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 79 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 a large 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. 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. 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, GDP increased 4.3% in 1996. During the third quarter of 1997, GDP increased 8.6% compared to the third quarter of 1996, and preliminary estimates indicate the GDP grew by more than 8% in 1997. The basis for Argentina's recent economic growth has been an increase in investment and exports. 80 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, 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 81 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 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. 82 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 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 83 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. 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. 84 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. 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 4.3%), in 1995 (to 3.3%), in 1996 (to 0.4%) and for the twelve months ended November 30, 1997 (to -0.1%). 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. 85 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, 1989-96, and for the twelve months ended November 30, 1997. 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............................................ 4.3 1995(1)......................................... 3.3 1996(1)......................................... 0.4 1997(2)......................................... (0.1) (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. (2) For the twelve months ended November 30, 1997. ___________________ Source: Banco Central de la Republica Argentina. 86 ARGENTINE GROSS DOMESTIC PRODUCT. The following table sets forth Argentina's GDP for the years 1991 through 1996 and the first quarter of 1997 at historical and constant prices. Gross Domestic Change from Prior Gross Product at Year at Domestic Product Constant 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 1st Qtr N/A N/A 8.2 2nd Qtr N/A N/A 8.2 3rd Qtr N/A N/A 8.6 _______________ Source: Banco Central de la Republica Argentina. 1996 and 1997 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. 87 corporate fixed-income securities to U.S. Dollar denominated securities. 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 88 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 factors, the history of defaults with respect to commercial bank loans by public and private entities of countries issuing Brady 89 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. 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 90 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). 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 91 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 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 92 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 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 93 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 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. 94 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). 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." 95 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. 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 96 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 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 97 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. 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 98 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 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. 99 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 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 100 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 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. 101 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 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 102 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. 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 103 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. 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. 104 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 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 105 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 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. 106 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. 107 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 (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. 108 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 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 109 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 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. 110 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 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 111 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). 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 112 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 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 113 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. 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. 114 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. 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 115 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 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. 116 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 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. 117 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 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 118 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 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 119 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 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. 120 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 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 121 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. 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 122 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 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 123 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 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 124 primary dealers, the formula will generally be based on a multiple of the premium received by the Portfolio for writing the 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 option, plus related transaction costs. In order to profit from 125 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 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 126 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. 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 127 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 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 128 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 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. 129 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 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. 130 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.) 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, 131 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 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 132 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. (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. 133 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 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 134 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 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. 135 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 AppendixC. 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 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 136 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 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 137 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 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 138 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, 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 139 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. 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. 140 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 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 141 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 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, 142 financial or economic conditions, and/or to be in default or not current in the payment of interest or principal. 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: 143 (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. However, subject to the limitations referred to under Options below, the Portfolio may seek to earn income through the writing 144 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 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 145 (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 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. 146 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. 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 147 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 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 148 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 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 149 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 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 150 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: (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 151 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 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 152 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 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. 153 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 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 154 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. 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 155 desirable in order to achieve the Portfolio's investment objective. SHORT SALES. The Portfolios may only make short sales of securities against the box. A short sale is effected by selling a security which the Portfolio's does not own, or if the Portfolios 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 Portfolios contemporaneously owns or has the right to obtain securities identical to those sold short without payment. Short sales may be used by the Portfolio to defer the realization of gain or loss for Federal income tax purposes on securities then owned by the Portfolio. Gains or losses are short- or long-term for Federal income tax purposes depending upon the length of the period the securities are held by the Portfolio before closing out the short sales by delivery to the lender. The Portfolio may, in certain instances, realize short- term gain on short sales against the box by covering the short position through a subsequent purchase. 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 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 156 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 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. 157 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 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; 158 (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; (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. 159 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 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 160 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 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. 161 Convertible securities are 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 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. 162 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 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 163 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 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. 164 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, 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 165 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; (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; 166 (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 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. 167 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. 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. 168 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 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 169 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 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, 170 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,1 53, Chairman and President, is the President, Chief Operating Officer and a Director of Alliance Capital Management Corporation (ACMC),2 the sole general partner of the Adviser, with which he has been associated since prior to 1993. RUTH BLOCK, 67, 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). Her address is P.O. Box 4653, Stamford, Connecticut 06903. DAVID H. DIEVLER, 68, was formerly a Senior Vice President of ACMC with which he had been associated since prior to 1993 . 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., 65, is an investment adviser and an independent consultant. He was formerly Senior Manager of Barrett Associates, Inc., a registered investment adviser, with _________________________ 1An interested person of the Fund as defined in the 1940 Act. 2For 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. 171 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, 58, 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). His address is 80 Pine Street, New York, New York 10005. DONALD J. ROBINSON, 63, 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. 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 Corporations Fixed Income Management Department since prior to 1993. ALFRED L. HARRISON, SENIOR VICE PRESIDENT, 59, is a Vice Chairman of ACMC with which he has been associated since prior to 1993. 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, 51, is an Executive Vice President of ACMC since July 1993. Previously, he was associated with ECMC since prior to 1993. EDMUND P. BERGAN, JR., SECRETARY, 47, is a Senior Vice President and the General Counsel of Alliance Fund Distributors, 172 Inc. (AFD) with which he has been associated since prior to 1993. MARK D. GERSTEN, TREASURER AND CHIEF FINANCIAL OFFICER, 47, is a Senior Vice President of Alliance Fund Services, Inc. (AFS) with which he has been associated since prior to 1993. ANDREW GANGOLF, ASSISTANT SECRETARY, 43, has been a Vice President and Assistant General Counsel of AFD 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. CARLA LAROSE, ASSISTANT CONTROLLER, 34, is a Manager of AFS with which she has been associated since 1993. VINCENT S. NOTO, 33, ASSISTANT CONTROLLER, is a Vice President of AFS with which he has been associated since prior to 1993. JUAN J. RODRIGUEZ, 40, ASSISTANT CONTROLLER, is an Assistant Vice President of AFS with which he has been associated since prior to 1993. STEVE YU, ASSISTANT CONTROLLER, 37, has been an Assistant Vice President of ACMC since 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. 173 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- 54 118 Ruth Block $ 3,577 $164,000 40 80 David H. Dievler $ 3,557 $188,500 47 83 John H. Dobkin $ 3,617 $126,500 44 80 William H. Foulk, Jr. $ 3,699 $176,250 47 107 Dr. James M. Hester $ 3,507 $156,500 40 76 Clifford L. Michel $ 3,507 $194,500 41 92 Donald J. Robinson $ 3,473 $235,500 38 91 As of April 3, 1998 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., 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 December 31, 1997 of more than $218 billion (of which more than $85 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. As of December 31, 1997, the Adviser managed employee benefit assets for 31 of the FORTUNE 100 companies. As of that date, the Adviser and its subsidiaries employed approximately 1,500 employees who operated out of five domestic offices and the offices of subsidiaries in Bahrain, Bangalore, Chennai, Istanbul, London, Madrid, Mumbai, New Delhi, Paris, Singapore, Tokyo, Toronto and the affiliate offices located in Hong Kong, Moscow, Sao Paulo, Vienna and Warsaw. Fifty-eight registered investment companies comprising 122 separate investment portfolios managed by the Adviser currently have more than three million shareholder accounts. Alliance Capital Management Corporation ("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, a French insurance holding company which at March 1, 1998, beneficially owned approximately 59% of the outstanding voting shares of ECI. As of March 1, 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-UAP is a holding company for an international group of insurance and related financial services companies. AXA-UAP'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-UAP 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-UAP, on March 1, 1998, approximately 21.4% of the issued ordinary shares (representing 30.2% of the voting power) of AXA-UAP were controlled directly and indirectly by Finaxa, a French holding company. As of March 1, 1998, 62.0% of the shares (representing 74.0% of the voting power) of Finaxa were owned by four French mutual insurance companies (the "Mutuelles AXA"), one of which, AXA Assurances I.A.R.D. Mutuelle, owned 35.5% of the shares (representing 42.2% of the voting power), and 23.1% of the shares of Finaxa (representing 14.4% of the voting power), were owned by Banque Paribas, a French bank ("Paribas"). Including the ordinary shares owned by Finaxa, on March 1, 1998, the Mutuelles AXA directly or indirectly controlled approximately 24.7% of the issued ordinary shares (representing 34.8% of the voting power) of AXA-UAP. Acting as a group, the Mutuelles AXA controls AXA-UAP 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 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: 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% 174 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 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 175 $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 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 176 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, 1998 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 December 9, 1997. The Adviser may act as an investment adviser to other persons, firms or corporations, including investment companies, and is investment adviser to ACM Institutional Reserves, Inc., AFD Exchange Reserves, The Alliance Fund, Inc., Alliance All-Asia Investment Fund, Inc., Alliance Balanced Shares, Inc., Alliance Bond Fund, Inc., Alliance Capital Reserves, Alliance Developing Markets Fund, Inc., 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 Income Builder Fund, Inc., Alliance Institutional Funds, 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, 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 Short-Term Multi-Market Trust, Inc., Alliance Technology Fund, Inc., Alliance Utility Income Fund, Inc., Alliance World Income Trust, Inc., Alliance Worldwide Privatization Fund, The Alliance Portfolios, Fiduciary Management Associates 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 177 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 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, 1998 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 December 9, 1997. In providing advisory services to the Fund and other clients investing in real estate securities, Alliance has access to the research services of CB Commercial Real Estate Group, Inc. (CBC), which acts as a consultant to Alliance with respect to the real estate market. As a consultant, CBC provides to Alliance, 178 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. CBC 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. CBC 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 (CBC in August of 1997 acquired Koll Management Services (Koll), which previously provided these consulting services to Alliance). 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 Alliance, CBC provides access to its 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 attractiveness of these real estate industry companies is similarly ranked based on the composite rankings of the properties they own. CBC 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 CBCs REIT?Score model. _________________________________________________________________ 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 179 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, 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 180 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 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 181 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. B. With respect to the Growth & Income Portfolio, International Portfolio, Utility Income Portfolio, Conservative 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 182 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 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 183 is believed that these prices do not reflect current market 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. 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. 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 184 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. 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 185 (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. 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. 186 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 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. 187 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 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 188 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. 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). 189 _________________________________________________________________ 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 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 190 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 December 31, 1995, 1996 and 1997 $-0-, $-0-, and $8203 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. _________________________ 3Paid by the Growth Portfolio. 191 _________________________________________________________________ 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 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 192 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 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 April 3, 1998 consisted of 76,204,311 193 shares of common stock of the Money Market Portfolio, 26,821,058 shares of common stock of the Premier Growth Portfolio, 13,582,991 shares of common stock of the Growth and Income Portfolio, 3,225,961 shares of common stock of the U.S. Government/High Grade Securities Portfolio, 4,047,635 shares of common stock of the International Portfolio, 2,686,774 shares of common stock of the Total Return Portfolio, 618,551 shares of common stock of the Short-Term Multi-Market Portfolio, 2,067,370 shares of common stock of the Global Bond Portfolio, 2,558,029 shares of common stock of the North American Government Income Portfolio,1,102,517 shares of common stock of the Global Dollar Government Portfolio, 1,438,036 shares of common stock the Utility Income Portfolio, 2,476,734 shares of common stock of the Conservative Investors Portfolio, 1,182,041 shares of common stock of the Growth Investors Portfolio, 10,862,758 shares of common stock of the Growth Portfolio, 2,918,823 shares of common stock of the Worldwide Privatization Portfolio, 5,905,370 shares of common stock of the Technology Portfolio, 5,188,607 shares of common stock of the Quasar Portfolio, 1,253,048 shares of common stock of the Real Estate Investment Portfolio and 773,917 shares of common stock of the High-Yield Portfolio. Set forth and discussed below is certain information as to all persons who owned of record or beneficially 5% of more of the outstanding shares of the Fund's Portfolios at April 3, 1998. NUMBER OF % OF PORTFOLIO NAME AND ADDRESS SHARES SHARES Money Market AIG Life Insurance 56,685,079 74% Company ("AIG") One ALICO Plaza 600 N. King Street Wilmington, DE 19801 American International 10,671,630 14% Life Assurance Company of New York ("American") 80 Pine Street New York, NY 10005 Fortis Financial Group 7,557,390 9% ("Fortis") P.O. Box 64284 St. Paul, MN 55164 Premier Growth AIG 8,050,153 30% American 1,781,831 6% Merrill Lynch Life 13,957,265 52% Insurance Company 800 Scudders Mill Road Plainsboro, NJ 08536 194 Growth and Income AIG 9,581,927 70% American 2,421,526 17% U.S. Government/ AIG 2,339,360 72% High Grade American 668,901 20% American Skandia 215,813 6% Life Assurance Corp. ("Skandia") 1 Corporate Drive Shelton, CT 06484 Total Return AIG 1,850,987 68% Skandia 251,352 9% American 582,620 21% International AIG 3,066,495 75% America 534,485 13% Skandia 208,101 5% Fortis 225,065 5% Short-Term American 79,860 12% Multi-Market AIG 450,401 72% Reliastar/Bankers Security Insurance 50,616 8% Company 20 Washington Avenue S. Minneapolis, MN 55401 Global Bond American 213,026 10% AIG 784,464 37% National Union Fire 737,188 35% Insurance Co. c/o American Attn: Bill Tucker 80 Pine Street New York, NY 10005 Keyport Life 290,831 14% Insurance Co. 125 High Street Boston, MA 02110 195 North American AIG 2,014,727 78% Government Income American 515,961 20% Global Dollar AIG 844,778 76% Government American 204,267 18% Utility Income AIG 1,025,840 71% America 354,233 24% Conservative AIG 1,722,146 69% Investors American 562,135 22% Growth Investors AIG 904,770 76% America 168,826 14% Skandia 84,682 7% Growth AIG 8,427,295 77% American 1,739,731 16% Worldwide AIG 2,352,592 80% Privatization American 477,412 16% Technology AIG 4,844,116 82% American 822,976 13% Quasar AIG 4,349,130 83% American 658,957 12% Real Estate AIG 1,018,591 81% American 199,548 15% High-Yield AIG 746,532 96% 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. 196 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. Under the Distribution Services Agreement between the Fund and the Principal Underwriter, 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. 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. 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 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 197 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 for the seven days ended December 31, 1997 was 5.30%. The U.S. Government/High Grade Securities Portfolio's yield for the month ended December 31, 1997 was 5.38%. The Short-Term Multi-Market Portfolio's yield for the month ended December 31, 1997 was 6.17%. The Global Bond Portfolio's yield for the month ended December 31, 1997 was 3.20%. The North American Government Income Portfolio's yield for the month ended December 31, 1997 was 6.94%. The Global Dollar Government Portfolio's yield for the month ended December 31, 1997 was 6,72%. The High-Yield Portfolio's yield for the month ended December 31, 1997 was 10.02%. The Money Market Portfolio's average annual total returns for the period December 30, 1992 (commencement of operations) through December 31, 1997 and for the fiscal year ended December 31, 1997 were 5.30% and 5.11%, respectively. The Premier Growth Portfolio's average annual total returns for the period June 26, 1992 (commencement of operations) through December 31, 1997, for the five years ended December 31, 1997 and for the fiscal year ended December 31, 1997 were 21.72%, 21.06% and 33.86%, respectively. The Growth and Income Portfolio's average annual total returns for the period January 14, 1991 (commencement of operations) through December 31, 1997, for the five years ended December 31, 1997 and for the fiscal year ended December 31, 1997 were 15.30%, 19.28% and 28.80%, respectively. The U.S. Government/High Grade Securities Portfolio's average annual total returns for the period September 17, 1992 (commencement of operations) through December 31, 1997, for the five years ended December 31, 1997 and for the fiscal year ended December 31, 1997 were 6.24%, 6.85% and 8.68%, respectively. The Total Return Portfolio's average annual total returns for the period December 28, 1992 (commencement of operations) through December 31, 1997, for the five years ended December 31, 1997 and for the fiscal year ended December 31, 1997 were 12.71%, 12.74% and 21.11%, respectively. The International Portfolio's average annual total returns for the period December 28, 1992 (commencement of operations) through December 31, 1997, for the five years ended December 31, 1997 and for the fiscal year ended December 31, 1997 were 9.55%, 9.57% and 3.33%, respectively. The Short-Term Multi-Market Portfolio's average annual total returns for the period November 28, 1990 (commencement of operations) through December 31, 1997, for the five years ended December 31, 198 1997 and for the fiscal year ended December 31, 1997 were 3.99%, 4.05% and 4.59%, respectively. The Global Bond Portfolio's average annual total returns for the period July 15, 1991 (commencement of operations) through December 31, 1997, for the five years ended December 31, 1997 and for the fiscal year ended December 31, 1997 were 7.91%, 7.05% and .67%, respectively. The North American Government Income Portfolio's average annual total return for the period May 3, 1994 (commencement of operations) through December 31, 1997 and for the fiscal year ended December 31, 1997 were 9.68% and 9.62%, respectively. The Global Dollar Government Portfolio's average annual total return for the period May 2, 1994 (commencement of operations) through December 31, 1997 and for the fiscal year ended December 31, 1997 were 15.77% and 13.23%, respectively. The Utility Income Portfolio's average annual total return for the period May 10, 1994 (commencement of operations) through December 31, 1997 and for the fiscal year ended December 31, 1997 were 14.52% and 25.71%, respectively. The Conservative Investors Portfolio's average annual total return for the period October 28, 1994 (commencement of operations) through December 31, 1997 and for the fiscal year ended December 31, 1997 were 10.15% and 11.22%, respectively. The Growth Investors Portfolio's average annual total return for the period October 28, 1994 (commencement of operations) through December 31, 1997 and for the fiscal year ended December 31, 1997 were 13.48% and 16.34%, respectively. The Growth Portfolio's average annual total return for the period September 15, 1994 (commencement of operations) through December 31, 1997 and for the fiscal year ended December 31, 1997 were 30.03% and 30.02%, respectively. The Worldwide Privatization Portfolio's average annual total return for the period September 23, 1994 (commencement of operations) through December 31, 1997 and for the fiscal year ended December 31, 1997 were 12.50% and 10.75%, respectively. The Technology Portfolio's average annual total return for the period January 11, 1996 (commencement of operations) through December 31, 1997 and for the fiscal year ended December 31, 1997 were 8.55% and 6.47%, respectively. The Quasar Portfolio's average annual total return for the period August 5, 1996 through December 31, 1997 and for the fiscal year ended December 31, 1997 were 17.94% and 18.60%, respectively. The Real Estate Investment Portfolio's average annual total return for the period January 9, 1997 (commencement of operations) through December 31, 1997 was 23.83%. The High- Yield Portfolio's average annual total return for the period October 27, 1997 (commencement of operations) through December 31, 1997 was 3.30%. 199 _________________________________________________________________ FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT AUDITORS _________________________________________________________________ Financial Statements and Report of Independent Auditors- - -The Fund's "Portfolios of Investments," "Statements of Assets and Liabilities," "Statements of Operations," Statements of Changes in Net Assets," "Notes to Financial Statements," "Financial Highlights" and "Report of Ernst & Young LLP, Independent Auditors, dated January 30, 1998" are incorporated by reference to the Fund's Annual Report on Form N-30D, for the fiscal year ended December 31, 1997, filed on March 5, 1998. 200 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 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 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. 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 B-2 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 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 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 B-3 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 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 B-4 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 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 B-5 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 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 B-6 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 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 B-7 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. 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 B-8 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 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-9 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 written a call option, it will effect a closing transaction prior to or concurrent with the sale of the security. C-1 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- 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- C-2 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 _____________________________________________________________ APPENDIX D: 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 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 D-1 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, 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. The opposition is dominated by the New Frontier Party, which was established in December 1994 by various opposition groups and parties. 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 3.6%, respectively. A growth rate of approximately 2.0% had been forecast for 1997; however, in September 1997 the government announced that GDP shrank by 2.9% in the second quarter, the largest quarterly drop in 25 years. In December 1997 the government announced that GDP grew by 0.8% in the third quarter. The current official government estimate is a real GDP growth rate of 0.1% for the fiscal year that ends in March 1998 and 1.9% for the fiscal year that ends in March 1999. Inflation has remained low, 1.3% in 1993, 0.7% in 1994, -0.1% in 1995 and 0.1% in 1996. It is estimated that inflation for the fiscal year that ends in March 1998 will be about 2%. Private consumer demand has slowed due to uncertainty about the economy and higher consumer taxes that went into effect in 1997. Unemployment is still at its highest level in forty years 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 trade surpluses. Japan is in a difficult phase in its relations with its trading partners that is partly due to the concentration of Japanese exports in products such as automobiles, machine tools and semiconductors and the large trade surpluses ensuing therefrom, recent large and visible Japanese real estate investments in the United States and an overall trade imbalance as indicated by Japan's balance of payments. It is probable that the recent improvement of the United States economy and an increased competitiveness and success in manufacturing, such as with the U.S. automobile industry, has had a negative effect on Japan's growth. 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 from a record high in 1993. By 1996, Japan's overall trade surplus had decreased to $83 billion. D-2 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 the first nine months of 1997, the trade surplus reversed course and increased approximately 37% from the same period in 1996. This upward trend of the trade surplus is expected to continue in the near future. 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 that may lead to more open Japanese markets 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. The final wording of the agreement is ambiguous, and therefore it is likely that this issue will continue to be a source of tension between the two countries. 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. 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. On January 12, 1998 the government estimated that the banking system's bad loans totaled $577.5 billion, almost three times more than previous government estimates. 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 D-3 imposition of stricter capital requirements and other supervisory reforms scheduled to go into effect in April 1998 have been postponed. It is unclear whether these proposals, which are under consideration by the Diet, would, if implemented, 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, Prime Minister Hashimoto announced a set of initiatives to deregulate the financial sector by the year 2001. Known as "Tokyo's Big Bang," the proposed 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 markets and to stimulate the economy. In June 1997, the government announced a detailed blueprint for implementing the Big Bang. Legislation to implement certain reforms has already been approved. These include a liberalization of foreign exchange restrictions and a repeal of the ban on holding companies. 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 calls 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. 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. On December 31, 1997, the exchange rate reached a low of 130.57 Yen per U.S. Dollar, the lowest the exchange rate had been in over five years. 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 D-4 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. 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 120,148 115,840 92,034 83,564 21,094 24,719 5,060 5,462 1996 126,496 136,170 100,170 101,893 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 annual trading value and 82.3% of the annual 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 1997. 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. D-5 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 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 volume increased to 412,521 million yen and aggregate year-end market value decreased to 347,578 billion yen. In 1997, average daily trading volume increased to 442,858 million yen and aggregate year end market value decreased to 280,930,040 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. 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 acquisition concerns national security or meets certain other D-6 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 share, 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 are scheduled to be repealed or liberalized beginning in April 1998, pursuant to legislation that was approved in May 1997 as part of the plan to implement the Big Bang. 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 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. D-7 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-8 00250292.BK7 D-9 00250292.BK7 PART C OTHER INFORMATION ITEM 24. Financial Statements and Exhibits. (a) FINANCIAL STATEMENTS Included in the Prospectus: Financial Highlights Incorporated into the Statement of Additional Information by reference to the Fund's Annual Report on Form N-30D for the fiscal year ended December 31, 1997, filed on March 5, 1998 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. Report of Independent Auditors. Incorporated into the Statement of Additional Information by reference to the Fund's Annual Report on Form N-30D for the fiscal year ended December 31, 1997, filed on March 5, 1998 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. Incorporated into the Statement of Additional Information by reference to the Fund's Annual Report on Form N-30D for the fiscal year ended December 31, 1997, C-1 filed on March 5, 1998 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. Incorporated into the Statement of Additional Information by reference to the Fund's Annual Report on Form N-30D for the fiscal year ended December 31, 1997, filed on March 5, 1998 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 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 dated November 17, 1987 - filed herewith. (b) Articles Supplementary to the Articles of Incorporation of the Registrant dated September 28, 1990 - filed herewith. (c) Articles Supplementary to the Articles of Incorporation of the Registrant dated June 26, 1991 - filed herewith. (d) Articles Supplementary to the Articles of Incorporation of the Registrant dated February 22, 1994 - filed herewith. C-2 (e) Articles Supplementary to the Articles of Incorporation of the Registrant dated August 24, 1994 - Incorporated by reference to Exhibit 1(d) to Post-Effective Amendment No. 13 to Registration Statement on Form N-1A, filed on May 1, 1995. (f) Articles of Amendment to the Articles of Incorporation of the Registrant dated November 7, 1994 - Incorporated by reference to Exhibit 1(e) to Post-Effective Amendment No. 13 to Registration Statement on Form N-1A, filed on May 1, 1995. (g) Articles Supplementary to the Articles of Incorporation dated December 28, 1995 - Incorporated by reference to Exhibit 1(f) to Post-Effective Amendment No. 15 to Registration Statement on Form N-1A, filed on April 30, 1996. (h) Articles Supplementary to the Articles of Incorporation dated April 12, 1996 - Incorporated by reference to Exhibit 1(g) to Post-Effective Amendment No. 15 to Registration Statement on Form N-1A, filed on April 30, 1996. (i) Articles Supplementary to the Articles of Incorporation dated July 19, 1996 - Incorporated by reference to Exhibit 1(h) to Post-Effective Amendment No. 17 to Registration Statement on Form N-1A, filed July 22, 1996. (j) Articles Supplementary to the Articles of Incorporation dated December 30, 1996 - Incorporated by reference to Exhibit 1(i) to Post- Effective Amendment No. 20 to Registration Statement on Form N-1A, filed on February 18, 1997. (2) By-Laws of the Registrant - filed herewith. (3) Not applicable. (4) Not applicable. (5)(a) Investment Advisory Agreement dated July 22, 1992 amended as of May 1, 1997 between the Registrant and Alliance Capital Management L.P.- Incorporated by reference to Exhibit (5)(a) to Post-Effective Amendment No. 21 of the Registration Statement on Form N-1A filed on May 1, 1997. (b) Sub-Advisory Agreement dated July 22, 1992 between Alliance Capital Management L.P. and Law, Dempsey & C-3 Company Limited, relating to the Global Bond Portfolio - filed herewith. (6) Distribution Services Agreement dated July 22, 1992 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 dated March 26, 1993 - Incorporated by reference to Exhibit (8)(a) to Post-Effective Amendment No. 21 of the Registration Statement on Form N-1A filed on May 1, 1997. (b) Amendment to Custodian Agreement dated June 4, 1996 - Incorporated by reference to Exhibit (8)(b) to Post-Effective Amendment No. 21 of the Registration Statement on Form N-1A filed on May 1, 1997. (9) Transfer Agency Agreement between the Registrant and Alliance Fund Services, Inc. dated December 13, 1995 - filed herewith. (10) Not applicable. (11) Consent of Independent Auditors - filed herewith. (12) Not applicable. (13) Not applicable. (14) Not applicable. (15) Not applicable. (16)(a) Schedule for computation of Yield and Total Return Performance Quotation - filed herewith. (b) Schedule for computation of Yield Quotation for the Money Market Portfolio - Incorporated by reference to Exhibit 16(b) to Post-Effective Amendment No. 13 of Registration Statement on Form N-1A, filed May 1, 1995. OTHER EXHIBITS: Powers of Attorney of Ms. Block and Messrs. Carifa, Dievler, Dobkin, Foulk, Hester, Michel and Robinson - filed herewith. ITEM 25. Persons Controlled by or under Common Control with Registrant. C-4 None. ITEM 26. Number of Holders of Securities. NUMBER OF RECORD HOLDERS TITLE OF CLASS April 3, 1998 Common Stock: Short-Term Multi-Market Portfolio 10 Growth and Income Portfolio 19 Global Bond Portfolio 15 Money Market Portfolio 9 Premier Growth Portfolio 29 U.S. Government/High Grade Portfolio 10 High-Yield Portfolio 11 International Portfolio 10 Total Return Portfolio 10 North American Government Income Portfolio 8 Global Dollar Government Portfolio 11 Utility Income Portfolio 9 Conservative Investors Portfolio 12 Growth Investors Portfolio 13 Worldwide Privatization Portfolio 10 Growth Portfolio 15 Technology Portfolio 13 Quasar Portfolio 13 Real Estate Investment Portfolio 11 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 Registrants 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, all as set forth below. Registrants Articles of Incorporation and Article VII, Section 1 through Section 6 of the Registrants By-Laws, as set forth below. The Advisers 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, as set forth below. 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. C-5 (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 (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 C-6 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 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 C-7 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 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 C-8 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 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. C-9 (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. (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 C-10 (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. (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 C-11 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 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 C-12 controlling person in connection with the securities 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 Corporation shall indemnify its officers to the same extent as its directors and to such further extent as is C-13 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 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, C-14 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. 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 C-15 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 Registrants Principal Underwriter in connection with the sale of shares of the Registrant, also acts as Principal Underwriter or Distributor for the following investment companies: ACM Institutional Reserves, Inc. AFD Exchange Reserves The Alliance Fund, Inc. Alliance All-Asia Investment Fund, Inc. Alliance Balanced Shares, Inc. Alliance Bond Fund, Inc. Alliance Capital Reserves Alliance Developing Markets Fund, Inc. 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 Income Builder Fund, Inc. Alliance Institutional Funds, 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 C-16 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 Short-Term Multi-Market Trust, Inc. Alliance Technology Fund, Inc. Alliance Utility Income Fund, Inc. Alliance World Income Trust, Inc. Alliance Worldwide Privatization Fund, Inc. Fiduciary Management Associates 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 OFFICES POSITIONS AND OFFICES NAME WITH UNDERWRITER WITH REGISTRANT Michael J. Laughlin Chairman Robert L. Errico President David C. Conine Executive Vice President Richard K. Saccullo Executive Vice President Edmund P. Bergan, Jr. Senior Vice President, Secretary General Counsel and Secretary Karen J. Bullot Senior Vice President James S. Comforti Senior Vice President James L. Cronin Senior Vice President Daniel J. Dart Senior Vice President Richard A. Davies Senior Vice President Byron M. Davis Senior Vice President Anne S. Drennan Senior Vice President and Treasurer Mark J. Dunbar Senior Vice President Donald N. Fritts Senior Vice President C-17 Bradley F. Hanson Senior Vice President Geoffrey L. Hyde Senior Vice President Robert H. Joseph, Jr. Senior Vice President and Chief Financial Officer Richard E. Khaleel Senior Vice President Stephen R. Laut 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 Gregory K. Shannahan Senior Vice President Joseph F. Sumanski Senior Vice President Peter J. Szabo Senior Vice President Nicholas K. Willett Senior Vice President Richard A. Winge Senior Vice President 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 John F. Dolan Vice President C-18 John C. Endahl Vice President Sohaila S. Farsheed Vice President William C. Fisher Vice President Gerard J. Friscia Vice President & Controller Andrew L. Gangolf Vice President and Assistant Secretary Assistant General Counsel Mark D. Gersten Vice President Treasurer and Chief Financial Officer Joseph W. Gibson Vice President John Grambone Vice President Charles M. Greenberg Vice President Alan Halfenger Vice President William B. Hanigan Vice President Daniel M. Hazard Vice President Scott F. Heyer Vice President George R. Hrabovsky Vice President Valerie J. Hugo Vice President Scott Hutton Vice President Thomas K. Intoccia Vice President Larry P. Johns Vice President Richard D. Keppler Vice President Gwenn M. Kessler Vice President Donna M. Lamback Vice President James M. Liptrot Vice President James P. Luisi Vice President Christopher J. MacDonald Vice President Michael F. Mahoney Vice President Shawn P. McClain Vice President C-19 Jeffrey P. Mellas Vice Presiden Thomas F. Monnerat Vice President Christopher W. Moore 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 Domenick Pugliese Vice President and Assistant Secretary Assistant General Counsel Bruce W. Reitz Vice President Dennis A. Sanford Vice President Karen C. Satterberg Vice President Robert C. Schultz Vice President Raymond S. Sclafani Vice President Richard J. Sidell Vice President Teris A. Sinclair 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 William C. White Vice President Emilie D. Wrapp Vice President and Assistant Secretary Special Counsel Michael W. Alexander Assistant Vice President Richard J. Appaluccio Assistant Vice President C-20 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. Dunn Assistant Vice President John C. English Assistant Vice President Duff C. Ferguson Assistant Vice President Brian S. Hanigan Assistant Vice President James J. Hill Assistant Vice President Eric G. Kalender Assistant Vice President Edward W. Kelly Assistant Vice President Robin L. Kraebel Assistant Vice President Michael Laino Assistant Vice President Nicholas J. Lapi Assistant Vice President Patrick Look Assistant Vice President and Assistant Treasurer Kristine J. Luisi Assistant Vice President Richard F. Meier 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 C-21 Clara Sierra Assistant Vice President Gayle S. Stamer Assistant Vice President Vincent T. Strangio Assistant Vice President Marie R. Vogel Assistant Vice President 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) Registrant undertakes to file a Post-Effective Amendment, using financial statements pertaining to the High Yield Portfolio, which need not be certified, within four to six months from the effective date of the amendment to its Securities Act of 1933 Registration Statement. (c) 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-22 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 24th day of April, 1998. 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 April 24, 1998 _____________________ President John D. Carifa 2. Principal Financial and Accounting Officer by /s/ Mark D. Gersten Treasurer and April 24, 1998 ______________________ Chief Financial Mark D. Gersten Officer C-23 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. April 24, 1998 ____________________________ (Attorney-in-fact) Edmund P. Bergan, Jr. C-24 INDEX TO EXHIBITS EXHIBIT NO. (1) (a) Articles of Incorporation Dated November 17, 1987 (1) (b) Articles Supplementary Dated September 28, 1990 (1) (c) Articles Supplementary Dated June 26, 1991 (1) (d) Articles Supplementary Dated February 22, 1994 (2) By-Laws (5) (b) Sub-Advisory Agreement Dated July 22, 1992 (6) Distribution Services Agreement Dated July 22, 1992 (9) Transfer Agency Agreement Dated December 13, 1995 (11) Consent of Independent Auditors (16) (a) Schedule for Computation of Yield and Total Return Performance Quotation Other Exhibits: Powers of Attorney of Ms. Block and Messrs. Carifa, Dieuler, Dobkin, Foulk, Hester, Michel and Robinson C-25 00250292.BK7 EX-99.1A 2 ARTICLES OF INCORPORATION OF ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. ___________________________________ FIRST: (1) The name of the incorporator is David R. Nuzzo. (2) The incorporator's post office address is Wall Street Plaza, New York, New York 10005. (3) The incorporator is over eighteen years of age. (4) The incorporator is forming the corporation named in these Articles of Incorporation under the general laws of the State of Maryland. SECOND: The name of the corporation (hereinafter called the "Corporation") is Alliance Variable Products Series Fund, Inc. THIRD: The purposes for which the Corporation is formed are: (a) to conduct, operate and carry on the business of an investment company; (b) to subscribe for, invest in, reinvest in, purchase or otherwise acquire, hold, pledge, sell, assign, transfer, exchange, distribute or otherwise dispose of notes, bills, bonds, debentures and other negotiable or non-negotiable instruments, obligations and evidences of indebtedness issued or guaranteed as to principal and interest by foreign governments, any agencies or instrumentalities thereof, the United States Government, or any agencies or instrumentalities thereof, any State or local government, or any agencies or instrumentali- ties thereof, or any other securities or other obligations of any kind issued by any corporation or other issuer organized under the laws of any foreign country, the United States or any State, territory or possession or subdivision thereof or otherwise, or commodities (including foreign currencies, financial instruments, indexes and any other securities or items which are now, or may hereinafter be, the subject of futures contract trading) commodity futures, forward contracts, and futures rate agreements, or options on any of the foregoing, to enter into investment contracts with any person or entity, to pay for the same in cash or by the issue of stock, including treasury stock, bonds or notes of the Corporation or otherwise; and to exercise any and all rights, powers and priv- ileges of ownership or interest in respect of any and all such investments of every kind and descrip- tion, including, without limitation, the right to consent and otherwise act with respect thereto, with power to designate one or more persons, firms, associations or corporations to exercise any of said rights, powers and privileges in respect of any said investments; (c) to conduct research and investigations in respect of securities, organizations, business and general business and financial conditions through- out the world for the purpose of obtaining informa- tion pertinent to the investment and employment of the assets of the Corporation and to procure any or all of the foregoing to be done by others as inde- pendent contractors and to pay compensation there- for; (d) to borrow money or otherwise obtain credit and to secure the same by mortgaging, pledging or otherwise subjecting as security the assets of the Corporation, and to endorse, guaran- tee or undertake the performance of any obligation, contract or engagement of any other person, firm, association or corporation; (e) to issue, sell, distribute, repurchase, redeem, retire, cancel, acquire, hold, resell, reissue, dispose of, transfer and otherwise deal in, shares of stock of the Corporation, including shares of stock of the Corporation in fractional denominations, and to apply to any such repurchase, redemption, retirement, cancellation or acquisi- tion of shares of stock of the Corporation, any funds or property of the Corporation, whether capi- tal or surplus or otherwise, to the full extent now or hereafter permitted by the laws of the State of Maryland and by these Articles of Incorporation; 2 (f) to conduct its business, promote its purposes, and carry on its operations in any and all of its branches and maintain offices both within and without the State of Maryland, in any and all foreign countries, in any and all States of the United States of America, in the District of Columbia, and in any or all commonwealths, terri- tories, dependencies, colonies, possessions, agencies or instrumentalities of the United States of America and of foreign governments; (g) to carry out all or any part of the fore- going purposes or objects as principal or agent, or in conjunction with any other person, firm, asso- ciation, corporation or other entity, or as a part- ner or member of a partnership, syndicate or joint venture or otherwise, and in any part of the world to the same extent and as fully as natural persons might or could do; (h) to have and exercise all of the powers and privileges conferred by the laws of the State of Maryland upon corporations formed under the laws of such State; and (i) to do any and all such further acts and things and to exercise any and all such further powers and privileges as may be necessary, inciden- tal, relative, conducive, appropriate or desirable for the foregoing purposes. The enumeration herein of the objects and purposes of the Corporation shall be construed as powers as well as objects and purposes and shall not be deemed to exclude by inference any powers, objects or purposes which the Corporation is empowered to exercise, whether expressly by force of the laws of the State of Maryland now or hereafter in effect, or impliedly by the reasonable construction of the said laws. FOURTH: The post office address of the principal office of the Corporation within the State of Maryland is 32 South Street, Baltimore, Maryland 21202 in care of The Corporation Trust, Incorporated. The resident agent of the Corporation in the State of Maryland is The Corporation Trust, Incorporated, 32 South Street, Baltimore, Maryland 21202. FIFTH: (1) The total number of shares of stock of all classes which the Corporation shall have authority to issue is Seven Hundred Million (700,000,000), all of which stock shall 3 have a par value of One Tenth of One Cent ($.001) per share. The aggregate par value of all authorized shares of stock of the Corporation is Seven Hundred Thousand Dollars ($700,000.00). (2)(a) The Board of Directors of the Corporation is authorized to classify or to reclassify, from time to time, any unissued shares of stock of the Corporation, whether now or hereafter authorized, by setting, changing or eliminating the prefer- ences, conversion or other rights, voting powers, restrictions, limitations as to dividends, and qualifications or terms and conditions of or rights to require redemption of the stock and, pursuant to such classification or reclassification, to increase or decrease the number of authorized shares of any class, but the number of shares of any class shall not be reduced by the Board of Directors below the number of shares thereof then outstanding. (b) Without limiting the generality of the foregoing, the dividends and distributions of investment income and capital gains with respect to the stock of the Corporation, and with respect to each class that hereafter may be created, shall be in such amount as may be declared from time to time by the Board of Directors, and such dividends and distributions may vary from class to class to such extent and for such purposes as the Board of Direc- tors may deem appropriate, including, but not lim- ited to, the purpose of complying with requirements of regulatory or legislative authorities. (c) Without limiting the generality of the foregoing, the Board of Directors may designate, from time to time, any unissued shares of stock of the Corporation, whether now or hereafter author- ized, as a class or classes or a number of series of preferred or special stock that is excluded from the definition of "senior security" set forth in Section 18(g) of the Investment Company Act of 1940, as amended (or in a successor statute), by virtue of Section 18(f)(2) of said Act (or a suc- cessor statute). (3) Until such time as the Board of Directors shall provide otherwise in accordance with section (2) of this Article FIFTH, One Hundred Million (100,000,000) of the authorized shares of stock of the Corporation are designated as Money Market Portfolio Common Stock, One Hundred Million (100,000,000) of such shares are designated as Growth Portfolio 4 Common Stock, One Hundred Million (100,000,000) of such shares are designated as Growth and Income Portfolio Common Stock, One Hundred Million (100,000,000) of such shares are designated as High Yield Portfolio Common Stock, One Hundred Million (100,000,000) of such shares are designated as Managed Income Portfolio Common Stock, One Hundred Million (100,000,000) of such shares are designated as Total Return Portfolio Common Stock and One Hundred Million (100,000,000) of such shares are designated as International Portfolio Common Stock, and the holders thereof, and shares of any additional class or series of the type referred to in subsection (c) of section 2 of this Article FIFTH and the holders thereof, shall be subject to the following provisions: (a) As more fully set forth hereafter, the assets and liabilities and the income and expenses of each class of the Corporation's stock shall be determined separately and accordingly, the net asset value, the dividends payable to holders, and the amounts distributable in the event of dissolu- tion of the Corporation to holders, of shares of the Corporation's stock may vary from class to class. Except for these differences and certain other differences hereafter set forth, each class of the Corporation's stock shall have the same preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of and rights to require redemption. (b) All consideration received by the Corpo- ration for the issue or sale of shares of a class of the Corporation's stock, together with all income, earnings, profits, and proceeds thereof, including any proceeds derived from the sale, exchange or liquidation thereof, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall irrevocably belong to that class for all purposes, subject only to the rights of creditors, and shall be so recorded upon the books of account of the Corporation. Such consideration, income, earnings, profits, and proceeds thereof, including any pro- ceeds derived from the sale, exchange or liquida- tion thereof, and any funds or payments derived from any reinvestment of such proceeds, in whatever form the same may be, are herein referred to as "assets belonging to" that class. (c) The assets belonging to a class of the Corporation's stock shall be charged with the liabilities of the Corporation with respect to that 5 class and with that class' share of the liabilities of the Corporation not attributable to any particu- lar class, in the latter case in the proportion that the net asset value of that class (determined without regard to such liabilities) bears to the net asset value of all classes of the Corporation's stock (determined without regard to such liabili- ties) as determined in accordance with Article NINTH of these Articles of Incorporation. The determination of the Board of Directors shall be conclusive as to the allocation of liabilities, including accrued expenses and reserves, and assets to a particular class or classes. (d) Each holder of stock of the Corporation, upon request to the Corporation (accompanied by surrender of the appropriate stock certificate or certificates in proper form for transfer, if any certificates have been issued to represent such shares) shall be entitled to require the Corpora- tion to redeem, to the extent that the Corporation may lawfully effect such redemption under the laws of the State of Maryland, all or any part of the shares of stock standing in the name of such holder on the books of the Corporation at a price per share equal to the net asset value per share computed in accordance with Article NINTH hereof. (e)(i) The term "Minimum Amount" when used herein shall mean Two Hundred Dollars ($200) unless otherwise fixed by the Board of Directors from time to time, provided that the Minimum Amount may not in any event exceed Twenty-Five Thousand Dollars ($25,000). The Board of Directors may establish differing Minimum Amounts for each class of the Corporation's stock and for categories of holders of shares of any class of stock based on such criteria as the Board of Directors may deem appro- priate. (ii) If the net asset value of the shares of a class of the Corporation's stock held by a stockholder shall be less than the Minimum Amount then in effect with respect to shares of that class, or with respect to the category of holders, in which the stockholder is included, of shares of that class, the Corporation may redeem all of those shares, upon notice given to the holder in accordance with paragraph (iii) of this subsection (e), to the extent that the Corporation 6 may lawfully effect such redemption under the laws of the State of Maryland. (iii) The notice referred to in para- graphs (i) and (ii) of this subsection (e) shall be in writing personally delivered or deposited in the mail, at least thirty days (or such other number of days as may be specified from time to time by the Board of Directors) prior to such redemption. If mailed, the notice shall be addressed to the stock- holder at his post office address as shown on the books of the Corporation, and sent by first class mail, postage prepaid. The price for shares acquired by the Corporation pursuant to this sub- section (e) shall be an amount equal to the net asset value of such shares, computed in accordance with Article NINTH hereof. (f) Payment by the Corporation for shares of stock of the Corporation surrendered to it for redemption shall be made by the Corporation within seven business days of such surrender out of the funds legally available therefor, provided that the Corporation may suspend the right of the holders of stock of the Corporation to redeem shares of stock and may postpone the right of such holders to receive payment for any shares when permitted or required to do so by applicable statutes or regula- tions. Payment of the aggregate price of shares surrendered for redemption may be made in cash or, at the option of the Corporation, wholly or partly in such portfolio securities of the Corporation as the Corporation shall select. (g) The right of any holder of stock of the Corporation redeemed by the Corporation as provided in subsections (d) or (e) of this section (3) to receive dividends thereon and all other rights of such holder with respect to such shares shall ter- minate at the time as of which the purchase or redemption price of such shares is determined, except the right of such holder to receive (i) the redemption price of such shares from the Corpora- tion or its designated agent and (ii) any dividend or distribution to which such holder has previously become entitled as the record holder of such shares on the record date for such dividend or distribu- tion. If shares of stock are redeemed by the Cor- poration pursuant to subsection (e) of this section (3) and certificates representing the redeemed shares have been issued, the redemption price need 7 not be paid by the Corporation until the certifi- cates have been received by the Corporation or its agent duly endorsed for transfer. (h) The Corporation shall be entitled to purchase shares of its stock, to the extent that the Corporation may lawfully effect such purchase under the laws of the State of Maryland, upon such terms and conditions and for such consideration as the Board of Directors shall deem advisable, by agreement with the stockholder at a price not exceeding the net asset value per share computed in accordance with Article NINTH hereof. (i) The net asset value of each share of a class of the Corporation's stock issued and sold or redeemed or purchased at net asset value shall be the net asset value per share of the shares of that class determined in accordance with Article NINTH hereof based on the assets belonging to that class less the liabilities charged to that class. (j) In the absence of any specification as to the purpose for which shares of stock of the Corpo- ration are redeemed or purchased by it, all shares so redeemed or purchased shall be deemed to be retired in the sense contemplated by the laws of the State of Maryland and the number of the author- ized shares of stock of the Corporation shall not be reduced by the number of any shares redeemed or purchased by it. Until their classification is changed in accordance with section (2) of this Article FIFTH, all shares so redeemed or purchased shall continue to belong to the same class or series to which they belonged at the time of their redemption or purchase. (k) Shares of each class of stock shall be entitled to such dividends or distributions, in stock or in cash or both, as may be declared from time to time by the Board of Directors, acting in its sole discretion, with respect to such class, provided that dividends or distributions shall be paid on shares of a class of stock only out of lawfully available assets belonging to that class. (l) For the purpose of allowing the net asset value per share of a class of the Corporation's stock to remain constant, the Corporation shall be entitled to declare, pay and credit as dividends daily the net income (which may include or give 8 effect to realized and unrealized gains and losses, as determined in accordance with the Corporation's accounting and portfolio valuation policies) of the Corporation allocated to that class. If the amount so determined in accordance with the Corporation's accounting and portfolio valuation policies) of the Corporation allocated to that class. If the amount so determined for any day is negative, the Corpora- tion shall be entitled, without the payment of monetary compensation but in consideration of the interest of the Corporation and its stockholders in maintaining a constant net asset value per share of the class, to redeem pro rata from all the stock- holders of record of shares of the class at the time of such redemption (in proportion to their respective holdings thereof) such number of out- standing shares of the class, or fractions thereof, as shall be required to permit the net asset value per share of the class to remain constant. (m) In the event of the liquidation or dis- solution of the Corporation, the stockholders of a class of the Corporation's stock shall be entitled to receive, as a class, out of the assets of the Corporation available for distribution to stock- holders, the assets belonging to that class. The assets so distributable to the stockholders of a class shall be distributed among such stockholders in proportion to the number of shares of that class held by them and recorded on the books of the Cor- poration. In the event that there are any assets available for distribution that are not attribut- able to any particular class of stock, such assets shall be allocated to all classes in proportion to the net asset value of the respective classes and then distributed to the holders of stock of each class in proportion to the net asset value of the shares of that class held by the respective holders. (n) On each matter submitted to a vote of the stockholders, each holder of a share of stock shall be entitled to one vote for each such share stand- ing in his name on the books of the Corporation irrespective of the class thereof; provided, how- ever, that to the extent class voting is required by the Investment Company Act of 1940 or regula- tions thereunder, as from time to time amended, or the laws of the State of Maryland as to any such matter, those requirements shall apply. 9 (o) The Corporation may issue shares of stock in fractional denominations to the same extent as its whole shares, and shares in fractional denomin- ations shall be shares of stock having proportion- ately to the respective fractions represented thereby all the rights of whole shares, including without limitation, the right to vote, the right to receive dividends and distributions, and the right to participate upon liquidation of the Corporation, but excluding the right to receive a stock certifi- cate representing fractional shares. (4) No holder of any shares of stock of the Corporation shall be entitled as of right to subscribe for, purchase, or otherwise acquire any such shares which the Corporation shall issue or propose to issue; and any and all of the shares of stock of the Corporation, whether now or hereafter authorized, may be issued, or may be reissued or transferred if the same have been reacquired and have treasury status, by the Board of Directors to such persons, firms, corporations and associations, and for such lawful consideration, and on such terms as the Board of Directors in its discretion may determine, without first offering same, or any thereof, to any said holder. (5) All persons who shall acquire stock or other securities of the Corporation shall acquire the same subject to the provisions of these Articles of Incorporation, as from time to time amended. SIXTH: The number of directors of the Corporation, until such number shall be increased pursuant to the By-Laws of the Corporation, shall be one. The number of directors shall never be less than the number prescribed by the General Corporation Law of the State of Maryland and shall never be more than twenty. The name of the person who shall act as director of the Corporation until the first annual meeting or until his successor is duly chosen and qualifies is J. Hamilton Crawford, Jr. SEVENTH: The following provisions are inserted for the purpose of defining, limiting and regulating the powers of the Corporation and of the Board of Directors and stockholders. (a) The business and affairs of the Corpora- tion shall be managed under the direction of the Board of Directors which shall have and may exer- cise all powers of the Corporation except those powers which are by law, by these Articles of Incorporation or by the By-Laws conferred upon or reserved to the stockholders. In furtherance and 10 not in limitation of the powers conferred by law, the Board of Directors shall have power: (i) to make, alter and repeal by-laws of the Corporation; (ii) to issue and sell, from time to time, shares of any class of the Corporation's stock in such amounts and on such terms and condi- tions, and for such amount and kind of con- sideration, as the Board of Directors shall determine; (iii) from time to time to set apart out of any assets of the Corporation otherwise avail- able for dividends a reserve or reserves for working capital or for any other proper pur- pose or purposes, and to reduce, abolish or add to any such reserve or reserves from time to time as said Board of Directors may deem to be in the best interests of the Corporation; and to determine in its discretion what part of the assets of the Corporation available for dividends in excess of such reserve or reserves shall be declared in dividends and paid to the stockholders of the Corporation; and (iv) from time to time to determine to what extent and at what times and places and under what conditions and regulations the accounts, books and records of the Corporation, or any of them, shall be open to the inspection of the stockholders; and no stockholder shall have any right to inspect any account or book or document of the Corporation, except as conferred by the laws of the State of Maryland, unless and until authorized to do so by resolution of the Board of Directors or of the stockholders of the Corporation. (b) Notwithstanding any provision of the General Corporation Law of the State of Maryland requiring a greater proportion than a majority of the votes of all classes or of any class of the Corporation's stock entitled to be cast in order to take or authorize any action, any such action may be taken or authorized upon the concurrence of a majority of the aggregate number of votes entitled to be cast thereon subject to any applicable requirements of the Investment Company Act of 1940, 11 as from time to time in effect, or rules or orders of the Securities and Exchange Commission or any successor thereto. (c) The presence in person or by proxy of the holders of one-third of the shares of stock of the Corporation entitled to vote (without regard to class) shall constitute a quorum at any meeting of the stockholders, except with respect to any matter which, under applicable statutes or regulatory requirements, requires approval by a separate vote of one or more classes of stock, in which case the presence in person or by proxy of the holders of one-third of the shares of stock of each class required to vote as a class on the matter shall constitute a quorum. (d) Any determination made in good faith and, so far as accounting matters are involved, in accordance with generally accepted accounting prin- ciples by or pursuant to the direction of the Board of Directors, as to the amount of the assets, debts, obligations, or liabilities of the Corpora- tion, as to the amount of any reserves or charges set up and the propriety thereof, as to the time of or purpose for creating such reserves or charges, as to the use, alteration or cancellation of any reserves or charges (whether or not any debt, obli- gation, or liability for which such reserves or charges shall have been created shall be then or thereafter required to be paid or discharged), as to the value of or the method of valuing any investment owned or held by the Corporation, as to market value or fair value of any investment or fair value of any other asset of the Corporation, as to the allocation of any asset of the Corpora- tion to a particular class or classes of the Corpo- ration's stock, as to the charging of any liability of the Corporation to a particular class or classes of the Corporation's stock, as to the number of shares of the Corporation outstanding, as the estimated expense to the Corporation in connection with purchases of its shares, as to the ability to liquidate investments in orderly fashion, or as to any other matters relating to the issue, sale, purchase or other acquisition or disposition of investments or shares of the Corporation, shall be final and conclusive and shall be binding upon the Corporation and all holders of its shares, past, present and future, and shares of the Corporation are issued and sold on the condition and under- 12 standing that any and all such determinations shall be binding as aforesaid. (e) Except to the extent prohibited by the Investment Company Act of 1940, as amended, or rules, regulations or orders thereunder promulgated by the Securities and Exchange Commission or any successor thereto or by the By-Laws of the Corpora- tion, a director, officer or employee of the Corpo- ration shall not be disqualified by his position from dealing or contracting with the Corporation, nor shall any transaction or contract of the Corpo- ration be void or voidable by reason of the fact that any director, officer or any firm of which any director, officer or employee is a member or any corporation of which any director officer or employee is a stockholder, officer or director, is in any way interested in such transaction or contract; provided that in case a director, or a firm or corporation of which a director is a member, stockholder, officer or director, is so interested, such fact shall be disclosed to or shall have been known by the Board of Directors or a majority thereof; and any director of the Corpo- ration who is so interested, or who is a member, stockholder, officer or director of such firm or corporation, may be counted in determining the existence of a quorum at any meeting of the Board of Directors of the Corporation which shall author- ized any such transaction or contract, with like force and effect as if he were not such director, or member, stockholder, officer or director of such firm or corporation. (f) Specifically and without limitation of subsection (e) of this Article Seventh but subject to the exception therein prescribed, the Corpora- tion may enter into management or advisory, under- writing, distribution and administration contracts and other contracts, and may otherwise do business, with Alliance Capital Management Corporation, and any parent, subsidiary or affiliate of such firm or any affiliate of any such affiliate, or the stock- holders, directors, officers and employees thereof, and may deal freely with one another notwith- standing that the Board of Directors of the Corpo- ration may be composed in part of directors, officers or employees of such firm and/or its parents, subsidiaries or affiliates and that officers of the Corporation may have been, be or become directors, officers, or employees of such 13 firm and/or its parents, subsidiaries or affil- iates, and neither such management or advisory, underwriting, distribution or administration contracts nor any other contract or transaction between the Corporation and such firm and/or its parents, subsidiaries or affiliates shall be invalidated or in any way affected thereby, nor shall any director or officer of the Corporation be liable to the Corporation or to any stockholder or creditor thereof or to any person for any loss incurred by it or him under or by reason of such contract or transaction; provided that nothing herein shall protect any director or officer of the Corporation against any liability to the Corporation or to its security holders to which he 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; and provided always that such contract or transaction shall have been on terms that were not unfair to the Corporation at the time at which it was entered into. 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 capacities. NINTH: For the purposes of the computation of net asset value referred to in these Articles of Incorporation, the following rules shall apply: (a) The net asset value of each share of a class of the Corporation's stock issued or sold at its net asset value shall be the net asset value per share of that class next determined, as pro- vided in subsection (d) of this Article NINTH, following acceptance by the Corporation of the purchase order, subscription or other agreement with respect to the issue or sale of such share. (b) The net asset value of each share of a class of the Corporation's stock redeemed by the Corporation at the request of its holder shall be the net asset value per share of that class next determined, as provided in subsection (d) of this Article NINTH, following the time the Corporation receives a request for redemption of such share in 14 good order with all appropriate documentation, including stock certificates, if any, duly endorsed for transfer. (c) The net asset value of each share of a class of the Corporation's stock purchased or redeemed by it otherwise than upon request for redemption by the holder of the share shall be (i) the net asset value per share of that class of the Corporation's stock next determined, as provided in subsection (d) of this Article NINTH, following the Corporation's determination or agreement to pur- chase or redeem such share, the expiration of any notice period and fulfillment of any other condi- tions precedent to such purchase or redemption, or (ii) such lower price per share as may be specified in the agreement, if any, with the stockholder for the purchase or redemption of his shares. (d) The net asset value of a share of a class of the Corporation's stock as at the time of a particular determination shall be the quotient obtained by dividing the value at such time of the net assets of that class (i.e., the value of the assets of belonging to that class less the liabili- ties charged to that class exclusive of capital stock and surplus) by the total number of shares of that class outstanding at such time, all determined and computed as provided in the Corporation's By- Laws or by or pursuant to the direction of the Board of Directors. (e) The Corporation shall determine the net asset value per share of a class of its stock on such days and at such times as may be determined by the Board of Directors subject to any applicable rules and regulations of the Securities and Exchange Commission or any successor thereto. (f) The Corporation may suspend the determi- nation of the net asset value of a class of its stock during any period when it may suspend the right of the holders of shares of that class to require the Corporation to redeem their shares. TENTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation or in any amendment hereto in the manner now or hereafter prescribed by the laws of the State of Maryland, including any amendment which alters the contract rights, as expressly set forth in these articles, of any outstanding stock, 15 and all rights conferred upon stockholders herein are granted subject to this reservation. IN WITNESS WHEREOF, the undersigned, being the incorporator of the Corporation, has adopted and signed these Articles of Incorporation for the purpose of forming the corporation described herein pursuant to the General Corporation Law of the State of Maryland and does hereby acknowledge that said adoption and signing are his act. /s/ David R. Nuzzo ----------------------- David R. Nuzzo Dated: November 16, 1987 16 00250292.AA3 EX-99.1B 3 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. ARTICLES SUPPLEMENTARY ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC., a Maryland corporation having its principal office in the City of Baltimore (hereinafter called the "Corporation"), certifies that: FIRST: The total number of shares of capital stock that the Corporation has authority to issue has been increased to Eight Hundred Million (800,000,000) shares of Common Stock of the Corporation, par value $.001 per share, by the Corporation's Board of Directors in accordance with Section 2-105(c) of the Maryland General Corporation Law. SECOND: Immediately before the increase, the Corporation was authorized to issue Seven Hundred Million (700,000,000) shares of Common Stock, par value $.001 per share, such shares having the following designations: Number of Shares Designations 100,000,000 Money Market Portfolio Common Stock 100,000,000 Growth Portfolio Common Stock 100,000,000 Growth and Income Portfolio Common Stock 100,000,000 High Yield Portfolio Common Stock 100,000,000 Managed Income Portfolio Common Stock 100,000,000 Total Return Portfolio Common Stock 100,000,000 International Portfolio Common Stock and having an aggregate par value of Seven Hundred Thousand Dollars ($700,000.00). As increased, the Corporation is authorized to issue a total of Eight Hundred Million (800,000,000) shares of Common Stock, par value $.001 per share, having an aggregate par value of Eight Hundred Thousand Dollars ($800,000.00). Immediately after the increase and without giving effect to the classification and reclassification of shares set forth in Articles FOURTH and FIFTH hereof, such shares were classified as follows: Number of Shares Designations 100,000,000 Money Market Portfolio Common Stock 100,000,000 Growth Portfolio Common Stock 100,000,000 Growth and Income Portfolio Common Stock 100,000,000 High Yield Portfolio Common Stock 100,000,000 Managed Income Portfolio Common Stock 100,000,000 Total Return Portfolio Common Stock 100,000,000 International Portfolio Common Stock 100,000,000 (Not designated) THIRD: The Corporation is registered as an open-end investment company under the Investment Company Act of 1940, as amended. FOURTH: The Corporation's Board of Directors classified the One Hundred Million (100,000,000) unissued shares of Common Stock, par value $.001 per share, resulting from the increase in the number of shares of capital stock that the Corporation is authorized to issue as Short-Term Multi-Market Portfolio Common Stock by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms or conditions of redemption thereof as hereinafter set forth. FIFTH: The Corporation's Board of Directors reclassified the One Hundred Million (100,000,000) unissued shares of Common Stock, par value $.001 per share, previously all designated as Managed Income Portfolio Common Stock as One Hundred Million (100,000,000) shares of U.S. Government/High Grade Securities Portfolio Common Stock, par value $.001 per share, by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms or conditions of redemption thereof as hereinafter set forth. SIXTH: The shares of Short-Term Multi-Market Portfolio Common Stock and the shares of U.S. Government/High Grade Securities Portfolio Common Stock as so classified or reclassified 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 Article FIFTH, Paragraph 3, 2 of the Corporation's Articles of Incorporation and shall be subject to all provisions of the Articles of Incorporation relating to stock of the Corporation generally. SEVENTH: The shares aforesaid have been duly classified or reclassified by the Corporation's Board of Directors pursuant to authority and power contained in the Corporation's Articles of Incorporation. IN WITNESS WHEREOF, Alliance Variable Products Series Fund, Inc. has caused these Articles Supplementary to be executed by its President and attested by its Assistant Secretary and its corporate seal to be affixed on this 26th day of September, 1990. The President 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 relating to approval hereof are true in all material respects. ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. [CORPORATE SEAL] By: /s/ David H. Dievler ______________________________ President Attested: /s/ George O. Martinez _______________________ Assistant Secretary 3 00250292.AC4 EX-99.1C 4 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. ARTICLES SUPPLEMENTARY ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC., a Maryland corporation having its principal office in the City of Baltimore (hereinafter called the "Corporation"), certifies that: FIRST: The total number of shares of capital stock that the Corporation has authority to issue has been increased to Nine Hundred Million (900,000,000) shares of Common Stock of the Corporation, par value $.001 per share, by the Corporation's Board of Directors in accordance with Section 2-105(c) of the Maryland General Corporation Law. SECOND: Immediately before the increase, the Corporation was authorized to issue Eight Hundred Million (800,000,000) shares of Common Stock, par value $.001 per share, such shares having the following designations: Number of Shares Designations 100,000,000 Money Market Portfolio Common Stock 100,000,000 Growth Portfolio Common Stock 100,000,000 Growth and Income Portfolio Common Stock 100,000,000 U.S. Government/High Grade Securities Portfolio Common Stock 100,000,000 High Yield Portfolio Common Stock 100,000,000 Total Return Portfolio Common Stock 100,000,000 International Portfolio Common Stock 100,000,000 Short-Term Multi-Market Portfolio Common Stock and having an aggregate par value of Eight Hundred Thousand Dollars ($800,000.00). As increased, the Corporation is authorized to issue a total of Nine Hundred Million (900,000,000) shares of Common Stock, par value $.001 per share, having an aggregate par value of Nine Hundred Thousand Dollars ($900,000.00). Immediately after the increase and without giving effect to the classification and reclassification of shares set forth in Articles FOURTH and FIFTH hereof, such shares were classified as follows: Number of Shares Designations 100,000,000 Money Market Portfolio Common Stock 100,000,000 Growth Portfolio Common Stock 100,000,000 Growth and Income Portfolio Common Stock 100,000,000 U.S. Government/High Grade Securities Portfolio Common Stock 100,000,000 High Yield Portfolio Common Stock 100,000,000 Total Return Portfolio Common Stock 100,000,000 International Portfolio Common Stock 100,000,000 Short-Term Multi-Market Portfolio Common Stock 100,000,000 (Not designated) THIRD: The Corporation is registered as an open-end investment company under the Investment Company Act of 1940, as amended. FOURTH: The Corporation's Board of Directors classified the One Hundred Million (100,000,000) unissued shares of Common Stock, par value $.001 per share, resulting from the increase in the number of shares of capital stock that the Corporation is authorized to issue as Global Bond Portfolio Common Stock by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms or conditions of redemption thereof as hereinafter set forth. FIFTH: The shares of Global Bond Portfolio Common Stock 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 Article FIFTH, Paragraph 3, of the Corporation's Articles of Incorporation and shall be subject to all provisions of the Articles of Incorporation relating to stock of the Corporation generally. SIXTH: 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. 2 IN WITNESS WHEREOF, Alliance Variable Products Series Fund, Inc. has caused these Articles Supplementary to be executed by its President and attested by its Secretary and its corporate seal to be affixed on this 25th day of June, 1991. The President 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 relating to approval hereof are true in all material respects. ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. [CORPORATE SEAL] By: /s/ David H. Dievler ______________________________ President Attested: /s/ Edmund P. Bergan _______________________ Secretary 3 00250292.AE0 EX-99.1D 5 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. ARTICLES SUPPLEMENTARY ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC., a Maryland corporation, having its principal office in the State of Maryland in Baltimore City (hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: the aggregate number of shares of capital stock of the Corporation is increased by the three hundred million (300,000,000) shares, which are as follows: one hundred million (100,000,000) shares as North American Government Income Portfolio Common Stock, one hundred million (100,000,000) shares as Global Dollar Government Portfolio Common Stock, and one hundred million (100,000,000) shares as Utility Income Portfolio Common Stock. The shares of North American Government Income Portfolio Common Stock, Global Dollar Government Portfolio Common Stock and Utility Income Portfolio Common Stock as so classified by the 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 as set forth in ARTICLE FIFTH, paragraph (3) of the Corporation's Articles of Incorporation and shall be subject to all provisions of the Articles of Incorporation relating to stock of the Corporation generally. SECOND: Immediately before the increase, the Corporation was authorized to issue Nine Hundred Million (900,000,000) shares of capital stock, par value $.001 per share, such shares having the following designation: Number of Shares Designations 100,000,000 Money Market Portfolio Common Stock 100,000,000 Growth Portfolio Common Stock 100,000,000 Growth and Income Portfolio Common Stock 100,000,000 U.S. Government/High Grade Securities Portfolio Common Stock 100,000,000 High Yield Portfolio Common Stock 100,000,000 Total Return Portfolio Common Stock 100,000,000 International Portfolio Common Stock 100,000,000 Short-Term Multi-Market Portfolio Common Stock 100,000,000 Global Bond Portfolio Common Stock and having an aggregate par value of Nine Hundred Thousand Dollars ($900,000,000). As increased, the Corporation is authorized to issue a total of One Billion Two Hundred Million (1,200,000,000) shares of capital stock, par value $.001 per share, having an aggregate par value of One Million Two Hundred Thousand Dollars ($1,200,000). Immediately after the increase and giving effect to the classification of shares set forth in Article FIRST hereof, such shares were classified as follows: Number of Shares Designations 100,000,000 Money Market Portfolio Common Stock 100,000,000 Growth Portfolio Common Stock 100,000,000 Growth and Income Portfolio Common Stock 100,000,000 U.S. Government/High Grade Securities Portfolio Common Stock 100,000,000 High Yield Portfolio Common Stock 100,000,000 Total Return Portfolio Common Stock 100,000,000 International Portfolio Common Stock 100,000,000 Short-Term Multi-Market Portfolio Common Stock 100,000,000 Global Bond Portfolio Common Stock 100,000,000 North American Government Income Portfolio Common Stock 100,000,000 Global Dollar Government Portfolio Common Stock 100,000,000 Utility Income Portfolio Common Stock THIRD: The Corporation is registered as an open-end investment company under the Investment Company Act of 1940, as amended. FOURTH: The Board of Directors of the Corporation increased the total number of shares of capital stock that the Corporation has authority to issue pursuant to Section 2-105(c) of the Maryland General Corporation Law and classified the shares of North American Government Income Portfolio Common Stock, Global Dollar Government Portfolio Common Stock and Utility Income Portfolio Common Stock under authority contained in the Charter of the Corporation. IN WITNESS WHEREOF, Alliance Variable Product Series Fund, Inc. has caused these Articles Supplementary to be executed by its President and witnessed by its Assistant Secretary on this 16th day of February, 1994. The President 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 2 set forth herein relating to authorization and approval hereof are true in all material respects. ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. By: /s/ David H. Dievler ___________________________ David H. Dievler Chairman and President WITNESS: /s/ Robert J. Grosso ________________________ Robert J. Grosso Assistant Secretary 3 00250292.BL0 EX-99.2 6 BY-LAWS OF ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. _____________________ ARTICLE I Offices Section 1. Principal Office in Maryland. The Corporation shall have a principal office in the City of Baltimore, State of Maryland. Section 2. Other Offices. The Corporation may have offices also in such other places within and without the State of Maryland as the Board of Directors may from time to time determine or as the business of the Corporation may require. ARTICLE II Meetings of Stockholders Section 1. Place of Meeting. Meetings of stockholders shall be held at such place, either within the State of Maryland or at such other place within the United States, as shall be fixed from time to time by the Board of Directors. Section 2. Annual Meetings. Annual meetings of stockholders shall be held on a date fixed from time to time by the Board of Directors not less than ninety nor more than one hundred twenty days following the end of each fiscal year of the Corporation, for the election of directors and the transaction of any other business within the powers of the Corporation; provided, however, that the Corporation shall not be required to hold an annual meeting in any year in which none of the following is required to be acted on by stockholders under the Investment Company Act of 1940: (1) election of directors; (2) approval of an investment advisory agreement; (3) ratification of the selection of independent public accountants; and (4) approval of a distribution agreement. Section 3. Notice of Annual Meeting. Written or printed notice of the annual meeting, stating the place, date and hour thereof, shall be given to each stockholder entitled to vote thereat not less than ten nor more than ninety days before the date of the meeting. Section 4. Special Meetings. Special meetings of stockholders may be called by the chairman, the president or by the Board of Directors and shall be called by the secretary upon the written request of holders of shares entitled to cast not less than twenty-five percent of all the votes entitled to be cast at such meeting. Such request shall state the purpose or purposes of such meeting and the matters proposed to be acted on thereat. In the case of such request for a special meeting, upon payment by such stockholders to the Corporation of the estimated reasonable cost of preparing and mailing a notice of such meeting, the secretary shall give the notice of such meeting. The secretary shall not be required to call a special meeting to consider any matter which is substantially the same as a matter 2 acted upon at any special meeting of stockholders held within the preceding twelve months unless requested to do so by holders of shares entitled to cast not less than a majority of all votes entitled to be cast at such meeting. Notwithstanding the foregoing, to the extent required by the Investment Company Act of 1940, special meetings of stockholders for the purpose of voting upon the question of removal of any director or directors of the Corporation shall be called by the secretary upon the written request of holders of shares entitled to cast not less than ten percent of all the votes entitled to be cast at such meeting. Section 5. Notice of Special Meeting. Written or printed notice of a special meeting of stockholders, stating the place, date, hour and purpose thereof, shall be given by the secretary to each stockholder entitled to vote thereat not less than ten nor more than ninety days before the date fixed for the meeting. Section 6. Business of Special Meetings. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice thereof. Section 7. Quorum. The holders of one-third of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except with respect to any matter which, under applicable statutes or regulatory requirements, requires approval by a 3 separate vote of one or more classes of stock, in which case the presence in person or by proxy of the holders of one-third of the shares of stock of each class required to vote as a class on the matter shall constitute a quorum. Section 8. Voting. When a quorum is present at any meeting, the affirmative vote of a majority of the votes cast, or, with respect to any matter requiring a class vote, the affirmative vote of a majority of the votes cast of each class entitled to vote as a class on the matter, shall decide any question brought before such meeting (except that directors may be elected by the affirmative vote of a plurality of the votes cast), unless the question is one upon which by express provision of the Investment Company Act of 1940, as from time to time in effect, or other statutes or rules or orders of the Securities and Exchange Commission or any successor thereto or of the Articles of Incorporation a different vote is required, in which case such express provision shall govern and control the decision of such question. Section 9. Proxies. Each stockholder shall at every meeting of stockholders be entitled to one vote in person or by proxy for each share of the stock having voting power held by such stockholders, but no proxy shall be voted after eleven months from its date, unless otherwise provided in the proxy. Section 10. Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote 4 at any meeting of stockholders or any adjournment thereof, to express consent to corporate action in writing without a meeting, or to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date which shall be not more than ninety days and, in the case of a meeting of stockholders, not less than ten days prior to the date on which the particular action requiring such determination of stockholders is to be taken. In lieu of fixing a record date, the Board of Directors may provide that the stock transfer books shall be closed for a stated period, but not to exceed, in any case, twenty days. If the stock transfer books are closed for the purpose of determining stockholders entitled to notice of or to vote at a meeting of stockholders, such books shall be closed for at least ten days immediately preceding such meeting. If no record date is fixed and the stock transfer books are not closed for the determination of stockholders: (1) The record date for the determination of stockholders entitled to notice of, or to vote at, a meeting of stockholders shall be at the close of business on the day on which notice of the meeting of stockholders is mailed or the day thirty days before the meeting, whichever is the closer date to the meeting; and (2) The record date for the determination of stockholders entitled to receive payment of a 5 dividend or an allotment of any rights shall be at the close of business on the day on which the resolution of the Board of Directors, declaring the dividend or allotment of rights, is adopted, provided that the payment or allotment date shall not be more than sixty days after the date of the adoption of such resolution. Section 11. Inspectors of Election. The directors, in advance of any meeting, may, but need not, appoint one or more inspectors to act at the meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors, if any, shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such 6 acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting or any stockholder, the inspector or inspectors, if any, shall make a report in writing of any challenge, question or matter determined by him or them and execute a certificate of any fact found by him or them. Section 12. Informal Action by Stockholders. Except to the extent prohibited by the Investment Company Act of 1940, as from time to time in effect, or rules or orders of the Securities and Exchange Commission or any successor thereto, any action required or permitted to be taken at any meeting of stockholders may be taken without a meeting if a consent in writing, setting forth such action, is signed by all the stockholders entitled to vote on the subject matter thereof and any other stockholders entitled to notice of a meeting of stockholders (but not to vote thereat) have waived in writing any rights which they may have to dissent from such action, and such consent and waiver are filed with the records of the Corporation. ARTICLE III Board of Directors Section 1. Number of Directors. The number of directors constituting the entire Board of Directors (which initially was fixed at one in the Corporations Articles of Incorporation) may be increased or decreased from time to time by the vote of a majority of the entire Board of Directors within the limits 7 permitted by law but at no time may be more than twenty as provided in the Articles of Incorporation, but the tenure of office of a director in office at the time of any decrease in the number of directors shall not be affected as a result thereof. The directors shall be elected to hold offices at the annual meeting of stockholders, except as provided in Section 2 of this Article, and each director shall hold office until the next annual meeting of stockholders or until his successor is elected and qualified. Any director may resign at any time upon written notice to the Corporation. Any director may be removed, either with or without cause, at any meeting of stockholders duly called and at which a quorum is present by the affirmative vote of the majority of the votes entitled to be cast thereon, and the vacancy in the Board of Directors caused by such removal may be filled by the stockholders at the time of such removal. Directors need not be stockholders. Section 2. Vacancies and Newly-Created Directorships. Any vacancy occurring in the Board of Directors for any cause other than by reason of an increase in the number of directors may be filled by a majority of the remaining members of the Board of Directors although such majority is less than a quorum. Any vacancy occurring by reason of an increase in the number of directors may be filled by a majority of the directors then in office. A director elected by the Board of Directors to fill a vacancy shall be elected to hold office until the next annual 8 meeting of stockholders or until his successor is elected and qualifies. Section 3. Powers. The business and affairs of the Corporation shall be managed under the direction of the Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these By-Laws conferred upon or reserved to the stockholders. Section 4. Meetings. The Board of Directors of the Corporation or any committee thereof may hold meetings, both regular and special, either within or without the State of Maryland. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the chairman, the president or by two or more directors. Notice of special meetings of the Board of Directors shall be given by the secretary to each director at least three days before the meeting if by mail or at least 24 hours before the meeting if given in person or by telephone or by telegraph. The notice need not specify the business to be transacted. Section 5. Quorum and Voting. During such times when the Board of Directors shall consist of more than one director, a quorum for the transaction of business at meetings of the Board of Directors shall consist of two of the directors in office at 9 the time but in no event shall a quorum consists of less than one-third of the entire Board of Directors. The action of a majority of the directors present at a meeting at which a quorum is present shall be the action of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 6. Committees. The Board of Directors may appoint from among its members an executive committee and other committees of the Board of Directors, each committee to be composed of two or more of the directors of the Corporation. The Board of Directors may, to the extent provided in the resolution, delegate to such committees, in the intervals between meetings of the Board of Directors, any or all of the powers of the Board of Directors, except those powers which may not by law be delegated to a committee. Such committee or committees shall have the name or names as may be determined from time to time by resolution adopted by the Board of Directors. Unless the Board of Directors designates one or more directors as alternate members of any committee, who may replace an absent or disqualified member at any meeting of the committee, the members of any such committee present at any meeting and not disqualified from voting may, whether or not they constitute a quorum, unanimously appoint another member of the Board of Directors to act at the meeting in 10 the place of any absent or disqualified member of such committee. At meetings of any such committee, a majority of the members or alternate members of such committee shall constitute a quorum for the transaction of business and the act of a majority of the members or alternate members present at any meeting at which a quorum is present shall be the act of the committee. Section 7. Minutes of Committee Meetings. The committees shall keep regular minutes of their proceedings. Section 8. Informal Action by Board of Directors and Committees. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board of Directors or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or committee. Section 9. Meetings by Conference Telephone. The members of the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time and such participation shall constitute presence in person at such meeting. Section 10. Fees and Expenses. The directors may be paid their expenses of attendance at each meeting of the Board of 11 Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like reimbursement and compensation for attending committee meetings. ARTICLE IV Notices Section 1. General. Notices to directors and stockholders mailed to them at their post office addresses appearing on the books of the Corporation shall be deemed to be given at the time when deposited in the United States mail. Section 2. Waiver of Notice. Whenever any notice is required to be given under the provisions of the statutes, of the Articles of Incorporation or of these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed the equivalent of notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. 12 ARTICLE V Officers Section 1. General. The officers of the Corporation shall be chosen by the Board of Directors and shall be a president, a secretary and a treasurer. The Board of Directors may also choose a chairman of the Board of Directors, and such vice presidents and additional officers or assistant officers as it may deem advisable. Any number of offices, except the offices of president and vice president, may be held by the same person. No officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required by law to be executed, acknowledged or verified by two or more officers. Section 2. Other Officers and Agents. The Board of Directors may appoint such other officers and agents as it desires who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. Section 3. Tenure of Officers. The officers of the Corporation shall hold office at the pleasure of the Board of Directors. Each officer shall hold his office until his successor is elected and qualifies or until his earlier resignation or removal. Any officer may resign at any time upon written notice to the Corporation. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors when, in its judgment, the best interests 13 of the Corporation will be served thereby. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise shall be filled by the Board of Directors. Section 4. Chairman of the Board of Directors. The chairman of the Board of Directors shall preside at all meetings of the stockholders and of the Board of Directors. He shall execute on behalf of the Corporation, and may affix the seal or cause the seal to be affixed to, all instruments requiring such execution except to the extent that signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. Section 5. President. The president shall, in the absence of the chairman of the Board of Directors, preside at all meetings of the stockholders or of the Board of Directors. He shall be the chief executive officer and shall have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall be ex officio a member of all committees designated by the Board of Directors. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. 14 Section 6. Vice Presidents. The vice presidents shall act under the direction of the president and in the absence or disability of the president shall perform the duties and exercise the powers of the president. They shall perform such other duties and have such other powers as the president or the Board of Directors may from time to time prescribe. The Board of Directors may designate one or more executive vice presidents or may otherwise specify the order of seniority of the vice presidents and, in that event, the duties and powers of the president shall descend to the vice presidents in the specified order of seniority. Section 7. Secretary. The secretary shall act under the direction of the president. Subject to the direction of the president he shall attend all meetings of the Board of Directors and all meetings of stockholders and record the proceedings in a book to be kept for that purpose and shall perform like duties for the committees designated by the Board of Directors when required. He shall give, or cause to be given, notice of all meetings of stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the president or the Board of Directors. He shall keep in safe custody the seal of the Corporation and shall affix the seal or cause it to be affixed to any instrument requiring it. 15 Section 8. Assistant Secretaries. The assistant secretaries in the order of their seniority, unless otherwise determined by the president or the Board of Directors, shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary. They shall perform such other duties and have such other powers as the president or the Board of Directors may from time to time prescribe. Section 9. Treasurer. The treasurer shall act under the direction of the president. Subject to the direction of the president he shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the president or the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as treasurer and of the financial condition of the Corporation. Section 10. Assistant Treasurers. The assistant treasurers in the order of their seniority, unless otherwise determined by the president or the Board of Directors, shall, in the absence or disability of the treasurer, perform the duties 16 and exercise the powers of the treasurer. They shall perform such other duties and have such other powers as the president or the Board of Directors may from time to time prescribe. ARTICLE VI Certificates of Stock Section 1. General. Every holder of stock of the Corporation who has made full payment of the consideration for such stock shall be entitled upon request to have a certificate, signed by, or in the name of the Corporation by, the chairman of the Board of Directors, the president or a vice president and countersigned by the treasurer or an assistant treasurer or the secretary or an assistant secretary of the Corporation, certifying the number and class of whole shares of stock owned by him in the Corporation. Section 2. Fractional Share Interests. The Corporation may issue fractions of a share of stock. Fractional shares of stock shall have proportionately to the respective fractions represented thereby all the rights of whole shares, including the right to vote, the right to receive dividends and distributions and the right to participate upon liquidation of the Corporation, excluding, however, the right to receive a stock certificate representing such fractional shares. Section 3. Signatures on Certificates. Any of or all the signatures on a certificate may be a facsimile. In case any officer who has signed or whose facsimile signature has been 17 placed upon a certificate shall cease to be such officer before such certificate is issued, it may be issued with the same effect as if he were such officer at the date of issue. The seal of the Corporation or a facsimile thereof may, but need not, be affixed to certificates of stock. Section 4. Lost, Stolen or Destroyed Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of any affidavit of that fact by the person claiming the certificate or certificates to be lost, stolen or destroyed. When authorizing such issue if a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate or certificates alleged to have been lost, stolen or destroyed. Section 5. Transfer of Shares. Upon request by the registered owner of shares, and if a certificate has been issued to represent such shares upon surrender to the Corporation or a transfer agent of the Corporation of a certificate for shares of stock duly endorsed or accompanied by proper evidence of 18 succession, assignment or authority to transfer, subject to the Corporations rights to redeem or purchase such shares, it shall be the duty of the Corporation, if it is satisfied that all provisions of the Articles of Incorporation, of the By-Laws and of the law regarding the transfer of shares have been duly complied with, to record the transaction upon its books, issue a new certificate to the person entitled thereto upon request for such certificate, and cancel the old certificate, if any. Section 6. Registered Owners. The Corporation shall be entitled to recognize the person registered on its books as the owner of shares to be the exclusive owner for all purposes including redemption, voting and dividends, and the Corporation shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Maryland. ARTICLE VII Indemnification 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 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 19 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 20 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 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 21 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. 22 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. ARTICLE VIII Miscellaneous Section 1. Reserves. There may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for such other purpose as the Board of Directors shall think conducive to the interest of the Corporation, and the Board of Directors may modify or abolish any such reserve. Section 2. Dividends. Dividends or distributions upon the shares of each class of stock by the Corporation may, subject to the provisions of the Articles of Incorporation and of the provisions of applicable law, be declared by the Board of Directors, acting in its sole discretion, with respect to each class, provided that the dividends or distributions shall be paid on shares of a class of stock out of the lawfully available assets belonging to that class. Dividends may be paid in stock 23 in cash or both subject to the provisions of the Articles of Incorporation and of applicable law. Section 3. Capital Gains Distributions. The amount and number of capital gains distributions paid to the stockholders during each fiscal year shall be determined by the Board of Directors. Each such payment shall be accompanied by a statement as to the source of such payment, to the extent required by law. Section 4. Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 5. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. Section 6. Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words Corporate Seal, Maryland. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in another manner reproduced. ARTICLE IX Amendments The Board of Directors shall have the power to make, alter and repeal by-laws of the Corporation. wit-mit\by-laws.avp 24 00250292.BK8 EX-99.5B 7 Exhibit 5(b) SUB-ADVISORY AGREEMENT AGREEMENT made as of the 22nd day of July, 1992, by and between Alliance Capital Management L.P., a Delaware limited partnership having its principal office at 1345 Avenue of the Americas, New York, New York (the "Investment Adviser"), and Dempsey & Company International Limited, a corporation having its principal office at Unit 1/11, Harbour Yard, Chelsea, London, England (the "Sub-Adviser"). WITNESSETH: WHEREAS, the Investment Adviser has established a U.S. registered investment company named Alliance Variable Products Series Fund, Inc. (the "Fund") and has entered into an investment advisory agreement (hereinafter called the "Investment Advisory Agreement"), a copy of which has been furnished to the Sub- Adviser, pursuant to which the Fund has engaged the Investment Adviser to manage the investment and reinvestment of its assets; and WHEREAS, as permitted under the Investment Advisory Agreement, the Investment Adviser desires to employ the Sub- Adviser to provide the investment management and other services specified below with respect to the assets of the Global Bond Portfolio of the Fund (the "Portfolio"); and WHEREAS, the Sub-Adviser is willing to perform such services on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual agreements herein contained, it is agreed as follows: 10. (a) The Sub-Adviser agrees to develop and supervise a continuous investment program for the Portfolio. The Sub- Adviser agrees to make decisions with respect to all purchases and sales of the Portfolio's portfolio securities and other investment assets and the placement of such transactions with issuers, brokers and dealers. The Sub-Adviser's activities under this Agreement will at all times be subject to the supervision of the Investment Adviser. (b) The Sub-Adviser will keep the Investment Adviser in touch with important developments affecting the Portfolio and will on its own initiative furnish the Investment Adviser from time to time with such information as the Sub-Adviser may believe appropriate for this purpose, whether concerning the individual companies whose securities are included in the Portfolio, the industries in which they engage, or the economic, social or political conditions prevailing in each country in which the Portfolio maintains investments. The Sub-Adviser will also furnish the Investment Adviser with such statistical and analytical information with respect to the Portfolio's portfolio positions as the Sub-Adviser may believe appropriate or as the Investment Adviser reasonably may request. (c) The Sub-Adviser will carry out reviews of the investment portfolio of the Portfolio whenever the Sub-Adviser shall deem necessary or the Investment Adviser shall reasonably require and the Sub-Adviser will obtain for the Investment Adviser from time to time valuations of such investments held in the Portfolio as the Investment Adviser may require. 11. In consideration of the services to be performed by the Sub-Adviser hereunder, the Investment Adviser will pay the Sub-Adviser a monthly fee at the annual rate of .40 of 1% of the average daily value of the net assets of the Portfolio. Such fee shall be accrued by the Investment Adviser daily and shall be payable in arrears for services performed during each calendar month within fifteen days following the end of such month. In the event this Agreement is not in effect during an entire calendar month, such fee shall be pro-rated accordingly. 12. The Sub-Adviser will bear all of its expenses in connection with the performance of its services hereunder and will from time to time at its sole expense employ or associate with itself such persons as it believes to be particularly fitted to assist it in the execution of its duties. If in any fiscal year the net expenses of the Portfolio (except interest, taxes, brokerage, fees paid in accordance with an effective plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, expenditures which are capitalized in accordance with generally acceptable accounting principles and extraordinary expenses, all to the extent permitted by applicable state law and regulation) exceed the limits applicable to the Portfolio under the laws or regulations of any state in which the Portfolio's shares are qualified for sale, or in the event the net expenses of the Portfolio exceed any expense limitation imposed voluntarily by the Investment Adviser in its sole discretion, the Sub-Adviser shall reimburse the Investment Adviser for that portion of such excess which bears the same relation to the total of such excess as the Sub-Adviser's fee hereunder bears to the total fee paid for the fiscal year with respect to the Portfolio pursuant to the Investment Advisory Agreement between the investment adviser and the Fund (reduced pro rata for any portion of less than a year). 2 13. The Investment Adviser and the Sub-adviser will jointly form an investment committee, comprised of an equal number of representatives of the Investment Adviser and the Sub- Adviser, to exchange opinions on the portfolio's basic investment policy, including the balance between investments in various geographic areas and of various maturities as well as anticipated currency relationships. Such investment committee shall meet at least semi-annually. 14. The Sub-Adviser agrees that it will be in full compliance with any provisions of the Investment Company Act of 1940 and the investment advisers act of 1940 applicable to it and its directors, officers or employees, and to interested persons with respect to it. 15. The Sub-Adviser's services to the investment adviser are not to be deemed exclusive, and the Sub-Adviser is free to render similar services to others. 16. Nothing herein shall be construed as constituting the Sub-Adviser an agent of the Investment Adviser or of the Fund. 17. The Investment Adviser agrees that the Sub-adviser may rely on information reasonably believed by it to be accurate and reliable. The Investment Adviser further agrees that, except as may otherwise be provided by the Investment Company Act of 1940, neither the Sub-Adviser nor its officers, directors, employees or agents shall be subject to any liability for any mistake of judgment or in any event whatsoever, except for lack of good faith, provided that nothing herein shall be deemed to protect, or purport to protect, the Sub-Adviser against any liability to the Investment Adviser, the Fund or the Fund's securityholders to which it would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties hereunder, or by reason of its reckless disregard of its obligations and duties hereunder. 18. This agreement shall become effective on the date hereof and shall continue in effect until December 31, 1992 and thereafter for successive twelve month periods (computed from each January 1) provided that such continuance is specifically approved at least annually by the affirmative vote of (i) a majority of the members of the Fund's Board of Directors who are not interested persons of the Fund, the Sub-Adviser or the Investment Adviser, cast in person at a meeting called for the purpose of voting on such approval and (ii) a majority of the Fund's Directors or the holders of a majority of the outstanding voting securities of the portfolio. This agreement may nevertheless be terminated at any time, without penalty, by the Investment Adviser or by the Fund's Board of Directors or by vote 3 of holders of a majority of the outstanding voting securities of the portfolio, upon sixty (60) days' written notice delivered or sent by registered mail, postage prepaid, to the Sub-Adviser, at its address given above or at any other address of which the Sub- Adviser shall have notified the investment adviser in writing, or by the Sub-Adviser upon sixty (60) days' written notice to the Investment Adviser and to the Portfolio, and shall automatically be terminated in the event of its assignment or of the assignment of the investment advisory agreement. Any such notice shall be deemed given when received by the addressee. 19. 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. It may be amended by mutual agreement, but only after authorization of such amendment by the affirmative vote of (i) the holders of a majority of the outstanding voting securities of the portfolio and (ii) a majority of the members of the fund's board of directors who are not interested persons of the fund, the Sub-Adviser or the Investment Adviser, cast in person at a meeting called for the purpose of voting on such approval. 20. This Agreement shall be construed in accordance with the laws of the state of New York, provided, however, that nothing herein shall be construed as being inconsistent with the Investment Company act of 1940. As used herein the terms "interested person", "assignment" and "vote of a majority of the outstanding voting securities" shall have the meanings set forth in the Investment Company act of 1940. 4 IN WITNESS WHEREOF, this Agreement has been entered into the day and year first above written. Alliance Capital Management L.P. By Alliance Capital Management Corporation, General Partner By /s/ John D. Carifa -------------------------------- Title: Executive Vice President Dempsey & Company International Limited By /s/ I.P. Butler -------------------------------- Title: Director Approved: Alliance Variable Products Series Fund, Inc. /s/ David H. Dievler - ------------------------------- Title: Chairman 5 00250292.BH7 EX-99.6 8 Exhibit 6 DISTRIBUTION SERVICES AGREEMENT AGREEMENT made as of the 22nd day of July, 1992, 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 of insurance companies; 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; NOW, THEREFORE, the parties agree as follows: SECTION 1. Appointment of the Underwriter. The Fund hereby appoints the Underwriter as the principal underwriter and distributor of the Fund to sell 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 Shares from the Fund. (a) The Fund will commence a continuous offering of its 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(c) 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 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 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 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 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). 2 SECTION 4. Repurchase or Redemption of Shares by the Fund. (a) Any of the outstanding 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 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 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. 3 (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) The Fund will furnish, in reasonable quantities upon request by the Underwriter, copies of annual and interim reports of the Fund. SECTION 6. Duties of the Underwriter. (a) The Underwriter shall devote reasonable time and effort to effect sales of 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 investors, 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. 4 SECTION 7. Selected Dealer Agreements. (a) The Underwriter shall have the right to enter into selected dealer agreements with securities dealers of its choice ("selected dealers") for the sale of shares; provided, that the Fund shall approve the forms of agreements with dealers and shall evidence such approval by filing said forms and amendments thereto as exhibits to its then currently effective Registration Statement. Shares sold to selected dealers shall be for resale by such dealers only at the public offering price(s) set forth in the Prospectus and Statement of Additional Information. (b) Within the United States, the Underwriter shall offer and sell shares only to such selected dealers as are members in good standing of the NASD. 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 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 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 5 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 Funds 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 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 6 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 otherwise than on account of the indemnity agreement contained in this Section 9. 7 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 each Portfolio until December 31, 1992 and thereafter for successive twelve-month periods (computed from each January 1) with respect to each such Portfolio; provided, however, that such continuance is specifically approved at least annually by the Board of Directors of the Fund or by majority vote of the holders of the outstanding voting securities (as defined in the Investment Company Act) 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 further, 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 the vote of a majority of the outstanding voting securities (as so defined) 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 8 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 proviso 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. IN WITNESS WHEREOF, the parties hereto have executed this Agreement. ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. By /s/ David H. Dievler ----------------------------- David H. Dievler Chairman ALLIANCE FUND DISTRIBUTORS, INC. By /s/ Robert L. Errico ----------------------------- Robert L. Errico President 9 00250292.BH8 EX-99.9 9 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. TRANSFER AGENCY AGREEMENT AGREEMENT, dated as of December 13, 1995, between Alliance Variable Products Series Fund, Inc., a Maryland Corporation and an open-end investment company registered with the Securities and Exchange Commission (the SEC) under the Investment Company Act of 1940 (the Investment Company Act), having its principal place of business at 1345 Avenue of Americas, New York, New York 10105 (the Fund), and ALLIANCE FUND SERVICES, INC., a Delaware corporation registered with the SEC as a transfer agent under the Securities Exchange Act of 1934, having its principal place of business at 500 Plaza Drive, Secaucus, New Jersey 07094 (Fund Services), provides as follows: WHEREAS, Fund Services has agreed to act as transfer agent to the Fund for the purpose of recording the transfer, issuance and redemption of shares of each series of the shares of beneficial interest of the Fund (Shares or Shares of a Series), transferring the Shares, disbursing dividends and other distributions to shareholders of the Fund, and performing such other services as may be agreed to pursuant hereto; NOW THEREFORE, for and in consideration of the mutual covenants and agreements contained herein, the parties do hereby agree as follows: SECTION 1. The Fund hereby appoints Fund Services as its transfer agent, dividend disbursing agent and shareholder servicing agent for the Shares, and Fund Services agrees to act in such capacities upon the terms set forth in this Agreement. Capitalized terms used in this Agreement and not otherwise defined shall have the meanings assigned to them in SECTION 30. SECTION 2. (a) The Fund shall provide Fund Services with copies of the following documents: (1) Specimens of all forms of certificates for Shares; (2) Specimens of all documents relating to Shareholders accounts; (3) Copies of each Prospectus; (4) Copies of all exemptive orders obtained by the Fund from the SEC; and (5) Specimens of all amendments to any of the foregoing documents. (b) The Fund shall furnish to Fund Services a supply of blank Share Certificates for the Shares and, from time to time, will renew such supply upon Fund Services request. Blank Share Certificates shall be signed manually or by facsimile signatures of officers of the Fund authorized to sign by law or pursuant to the by-laws of the Fund and, if required by Fund Services, shall bear the Funds seal or a facsimile thereof. 2 SECTION 3. Fund Services shall make original issues of Shares in accordance with SECTIONS 13 and 14 and the Prospectus upon receipt of (i) Written Instructions requesting the issuance, (ii) a certified copy of a resolution of the Funds Directors authorizing the issuance, (iii) necessary funds for the payment of any original issue tax applicable to such Shares, and (iv) an opinion of the Funds counsel as to the legality and validity of the issuance, which opinion may provide that it is contingent upon the filing by the Fund of an appropriate notice with the SEC, as required by Rule 24f-2 under the Investment Company Act, as amended from time to time. SECTION 4. Transfers of Shares shall be registered and, subject to the provisions of SECTION 10 in the case of Shares evidenced by Share Certificates, new Share Certificates shall be issued by Fund Services upon surrender of outstanding Share Certificates in the form deemed by Fund Services to be properly endorsed for transfer, which form shall include (i) all necessary endorsers signatures guaranteed by a member firm of a national securities exchange or a domestic commercial bank or through other procedures mutually agreed to between the Fund and Fund Services, (ii) such assurances as Fund Services may deem necessary to evidence the genuineness and effectiveness of each endorsement and (iii) satisfactory evidence of compliance with all applicable laws relating to the payment or collection of taxes. 3 SECTION 5. Fund Services shall forward Share Certificates in non-negotiable form by first-class or registered mail, or by whatever means Fund Services deems equally reliable and expeditious. While in transit to the addressee, all deliveries of Share Certificates shall be insured by Fund Services as it deems appropriate. Fund Services shall not mail Share Certificates in negotiable form, unless requested in writing by the Fund and fully indemnified by the Fund to Fund Services satisfaction. SECTION 6. In registering transfers of Shares, Fund Services may rely upon the Uniform Commercial Code as in effect from time to time in the State in which the Fund is incorporated or organized or, if appropriate, in the State of New Jersey; provided, that Fund Services may rely in addition or alternatively on any other statutes in effect in the State of New Jersey or in the state under the laws of which the Fund is incorporated or organized that, in the opinion of Fund Services counsel, protect Fund Services and the Fund from liability arising from (i) not requiring complete documentation in connection with an issuance or transfer, (ii) registering a transfer without an adverse claim inquiry, (iii) delaying registration for purposes of an adverse claim inquiry or (iv) refusing registration in connection with an adverse claim. SECTION 7. Fund Services may issue new Share Certificates in place of those lost, destroyed or stolen, upon 4 receiving indemnity satisfactory to Fund Services; and may issue new Share Certificates in exchange for, and upon surrender of, mutilated Share Certificates as Fund Services deems appropriate. SECTION 8. Unless otherwise directed by the Fund, Fund Services may issue or register Share Certificates reflecting the signature, or facsimile thereof, of an officer who has died, resigned or been removed by the Fund. The Fund shall file promptly with Fund Services approval, adoption or ratification of such action as may be required by law or by Fund Services. SECTION 9. Fund Services shall maintain customary stock registry records for Shares of each Series noting the issuance, transfer or redemption of Shares and the issuance and transfer of Share Certificates. Fund Services may also maintain for Shares of each Series an account entitled Unissued Certificate Account, in which Fund Services will record the Shares, and fractions thereof, issued and outstanding from time to time for which issuance of Share Certificates has not been requested. Fund Services is authorized to keep records for Shares of each Series containing the names and addresses of record of Shareholders, and the number of Shares, and fractions thereof, from time to time owned by them for which no Share Certificates are outstanding. Each Shareholder will be assigned a single account number for Shares of each Series, even though Shares for which Certificates have been issued will be accounted for separately. 5 SECTION 10. Fund Services shall issue Share Certificates for Shares only upon receipt of a written request from a Shareholder and as authorized by the Fund. If Shares are purchased or transferred without a request for the issuance of a Share Certificate, Fund Services shall merely note on its stock registry records the issuance or transfer of the Shares and fractions thereof and credit or debit, as appropriate, the Unissued Certificate Account and the respective Shareholders accounts with the Shares. Whenever Shares, and fractions thereof, owned by Shareholders are surrendered for redemption, Fund Services may process the transactions by making appropriate entries in the stock transfer records, and debiting the Unissued Certificate Account and the record of issued Shares outstanding; it shall be unnecessary for Fund Services to reissue Share Certificates in the name of the Fund. SECTION 11. Fund Services shall also perform the usual duties and function required of a stock transfer agent for a corporation, including but not limited to (i) issuing Share Certificates as treasury Shares, as directed by Written Instructions, and (ii) transferring Share Certificates from one Shareholder to another in the usual manner. Fund Services may rely conclusively and act without further investigation upon any list, instruction, certification, authorization, Share Certificate or other instrument or paper reasonably believed by it in good faith to be genuine and unaltered, and to have been 6 signed, countersigned or executed or authorized by a duly- authorized person or persons, or by the Fund, or upon the advice of counsel for the Fund or for Fund Services. Fund Services may record any transfer of Share Certificates which it reasonably believes in good faith to have been duly authorized, or may refuse to record any transfer of Share Certificates if, in good faith, it reasonably deems such refusal necessary in order to avoid any liability on the part of either the Fund or Fund Services. SECTION 12. Fund Services shall notify the Fund of any request or demand for the inspection of the Funds share records. Fund Services shall abide by the Funds instructions for granting or denying the inspection; provided, however, Fund Services may grant the inspection without such instructions if it is advised by its counsel that failure to do so will result in liability to Fund Services. SECTION 13. Fund Services shall observe the following procedures in handling funds received: (a) Upon receipt at the office designated by the Fund of any check or other order drawn or endorsed to the Fund or otherwise identified as being for the account of the Fund, and, in the case of a new account, accompanied by sufficient information to establish an account as provided in the Prospectus, Fund Services shall stamp the transmittal document accompanying such check or other order with the name of the Fund 7 and the time and date of receipt and shall forthwith deposit the proceeds thereof in the custodial account of the Fund. (b) In the event that any check or other order for the purchase of Shares is returned unpaid for any reason, Fund Services shall, in the absence of other instructions from the Fund, advise the Fund of the returned check and prepare such documents and information as may be necessary to cancel promptly any Shares purchased on the basis of such returned check and any accumulated income dividends and capital gains distributions paid on such Shares. (c) As soon as possible after 4:00 p.m., Eastern time or at such other times as the Fund may specify in Written or Oral Instructions for any Series (the Valuation Time) on each Business Day Fund Services shall obtain from the Funds Adviser a quotation (on which it may conclusively rely) of the net asset value, determined as of the Valuation Time on that day. On each Business Day Fund Services shall use the net asset value(s) determined by the Funds Adviser to compute the number of Shares and fractional Shares to be purchased and the aggregate purchase proceeds to be deposited with the Custodian. As necessary but no more frequently than daily (unless a more frequent basis is agreed to by Fund Services), Fund Services shall place a purchase order with the Custodian for the proper number of Shares and fractional Shares to be purchased and promptly thereafter shall 8 send written confirmation of such purchase to the Custodian and the Fund. SECTION 14. Having made the calculations required by SECTION 13, Fund Services shall thereupon pay the Custodian the aggregate net asset value of the Shares purchased. The aggregate number of Shares and fractional Shares purchased shall then be issued daily and credited by Fund Services to the Unissued Certificate Account. Fund Services shall also credit each Shareholders separate account with the number of Shares purchased by such Shareholder. Fund Services shall mail written confirmation of the purchase to each Shareholder or the Shareholders representative and to the Fund if requested. Each confirmation shall indicate the prior Share balance, the new Share balance, the Shares for which Stock Certificates are outstanding (if any), the amount invested and the price paid for the newly-purchased Shares. SECTION 15. Prior to the Valuation Time on each Business Day, as specified in accordance with SECTION 13, Fund Services shall process all requests to redeem Shares and, with respect to each Series, shall advise the Custodian of (i) the total number of Shares available for redemption and (ii) the number of Shares and fractional Shares requested to be redeemed. Upon confirmation of the net asset value by the Funds Adviser, Fund Services shall notify the Fund and the Custodian of the redemption, apply the redemption proceeds in accordance with 9 SECTION 16 and the Prospectus, record the redemption in the stock registry books, and debit the redeemed Shares from the Unissued Certificates Account and the individual account of the Shareholder. In lieu of carrying out the redemption procedures described in the preceding paragraph, Fund Services may, at the request of the Fund, sell Shares to the Fund as repurchases from Shareholders, provided that the sale price is not less than the applicable redemption price. The redemption procedures shall then be appropriately modified. SECTION 16. Fund Services will carry out the following procedures with respect to Share redemptions: (a) As to each request received by the Fund from or on behalf of a Shareholder for the redemption of Shares, and unless the right of redemption has been suspended as contemplated by the Prospectus, Fund Services shall, within seven days after receipt of such redemption request, either (i) mail a check in the amount of the proceeds of such redemption to the person designated by the Shareholder or other person to receive such proceeds or, (ii) in the event redemption proceeds are to be wired through the Federal Reserve Wire System or by bank wire pursuant to procedures described in the Prospectus, cause such proceeds to be wired in Federal funds to the bank or trust company account designated by the Shareholder to receive such proceeds. Funds Services shall also prepare and send a confirmation of such 10 redemption to the Shareholder. Redemptions in kind shall be made only in accordance with such Written Instructions as Fund Services may receive from the Fund. The requirements as to instruments of transfer and other documentation, the determination of the appropriate redemption price and the time of payment shall be as provided in the Prospectus, subject to such additional requirements consistent therewith as may be established by mutual agreement between the Fund and Fund Services. In the case of a request for redemption that does not comply in all respects with the requirements for redemption, Fund Services shall promptly so notify the Shareholder and shall effect such redemption at the price in effect at the time of receipt of documents complying with such requirements. Fund Services shall notify the Funds Custodian and the Fund on each Business Day of the amount of cash required to meet payments made pursuant to the provisions of this paragraph and thereupon the Fund shall instruct the Custodian to make available to Fund Services in timely fashion sufficient funds therefor. (b) Procedures and standards for effecting and accepting redemption orders from Shareholders by telephone or by such check writing service as the Fund may institute may be established by mutual agreement between Fund Services and the Fund consistent with the Prospectus. (c) For purposes of redemption of Shares that have been purchased by check within fifteen (15) days prior to receipt of 11 the redemption request, the Fund shall provide Fund Services with Written Instructions concerning the time within which such requests may be honored. (d) Fund Services shall process withdrawal orders duly executed by Shareholders in accordance with the terms of any withdrawal plan instituted by the Fund and described in the Prospectus. Payments upon such withdrawal orders and redemptions of Shares held in withdrawal plan accounts in connection with such payments shall be made at such times as the Fund may determine in accordance with the Prospectus. (e) The authority of Fund Services to perform its responsibilities under SECTIONS 15 and 16 with respect to the Shares of any Series shall be suspended if Fund Services receives notice of the suspension of the determination of the net asset value of the Series. SECTION 17. Upon the declaration of each dividend and each capital gains distribution by the Funds Directors, the Fund shall notify Fund Services of the date of such declaration, the amount payable per Share, the record date for determining the Shareholders entitled to payment, the payment and the reinvestment date price. SECTION 18. Upon being advised by the Fund of the declaration of any income dividend or capital gains distribution on account of its Shares, Fund Services shall compute and prepare for the Fund records crediting such distributions to 12 Shareholders. Fund Services will, on the designated payment date, reinvest all dividends in additional shares and promptly mail to each Shareholder at his address of record a statement showing the number of full and fractional Shares (rounded to three decimal places) then owned by the Shareholder and the net asset value of such Shares. SECTION 19. Fund Services shall prepare and maintain for the Fund records showing for each Shareholders account the following: A. The name, address and tax identification number of the Shareholder; B. The number of Shares of each Series held by the Shareholder; C. Historical information including dividends paid and date and price for all transactions; D. Any stop or restraining order placed against such account; E. Information with respect to the withholding of any portion of income dividends or capital gains distributions as are required to be withheld under applicable law; F. Any correspondence relating to the current maintenance of the account; G. The certificate numbers and denominations of any Share Certificates issued to the Shareholder; and 13 H. Any additional information required by Fund Services to perform the services contemplated by this Agreement. Fund Services agrees to make available upon request by the Fund or the Funds Adviser and to preserve for the periods prescribed in Rule 31a-2 of the Investment Company Act any records related to services provided under this Agreement and required to be maintained by Rule 31a-1 of that Act, including: (i) Copies of the daily transaction register for each Business Day of the Fund; (ii) Copies of all dividend, distribution and reinvestment blotters; (iii) Schedules of the quantities of Shares of each Series distributed in each state for purposes of any states laws or regulations as specified in Oral or Written Instructions given to Fund Services from time to time by the Fund or its agents; and (iv) Such other information, including Shareholder lists, and statistical information as may be agreed upon from time to time by the Fund and Fund Services. SECTION 20. Fund Services shall maintain those records necessary to enable the Fund to file, in a timely manner, Form N-SAR (Semi-Annual Report) or any successor report required by the Investment Company Act or rules and regulations thereunder. SECTION 21. Fund Services shall cooperate with the Funds independent public accountants and shall take reasonable 14 action to make all necessary information available to such accountants for the performance of their duties. SECTION 22. In addition to the services described above, Fund Services will perform other services for the Fund as may be mutually agreed upon in writing from time to time, which may include preparing and filing Federal tax forms with the Internal Revenue Service, and, subject to supervisory oversight by the Funds Adviser, mailing Federal tax information to Shareholders, mailing semi-annual Shareholder reports, preparing the annual list of Shareholders, mailing notices of Shareholders meetings, proxies and proxy statements and tabulating proxies. Fund Services shall answer the inquiries of certain Shareholders related to their share accounts and other correspondence requiring an answer from the Fund. Fund Services shall maintain dated copies of written communications from Shareholders, and replies thereto. SECTION 23. Nothing contained in this Agreement is intended to or shall require Fund Services, in any capacity hereunder, to perform any functions or duties on any day other than a Business Day. Functions or duties normally scheduled to be performed on any day which is not a Business Day shall be performed on, and as of, the next Business Day, unless otherwise required by law. SECTION 24. For the services rendered by Fund Services as described above, the Fund shall pay to Fund Services $18,000 15 per annum. Such fee shall be prorated for the months in which this Agreement becomes effective or is terminated. In addition, the Fund shall pay, or Fund Services shall be reimbursed for, all out-of-pocket expenses incurred in the performance of this Agreement, including but not limited to the cost of stationery, forms, supplies, blank checks, stock certificates, proxies and proxy solicitation and tabulation costs, all forms and statements used by Fund Services in communicating with Shareholders of the Fund or especially prepared for use in connection with its services hereunder, specific software enhancements as requested by the Fund, costs associated with maintaining withholding accounts (including non-resident alien, Federal government and state), postage, telephone, telegraph (or similar electronic media) used in communicating with Shareholders or their representatives, outside mailing services, microfiche/microfilm, freight charges and off-site record storage. It is agreed in this regard that Fund Services, prior to ordering any form in such supply as it estimates will be adequate for more than two years use, shall obtain the written consent of the Fund. All forms for which Fund Services has received reimbursement from the Fund shall be the property of the Fund. All payments made by the Fund hereunder shall be shared by the Funds Series equally. SECTION 25. Fund Services shall not be liable for any taxes, assessments or governmental charges that may be levied or assessed on any basis whatsoever in connection with the Fund or 16 any Shareholder, excluding taxes assessed against Fund Services for compensation received by it hereunder. SECTION 26. (a) Fund Services shall at all times act in good faith and with reasonable care in performing the services to be provided by it under this Agreement, but shall not be liable for any loss or damage unless such loss or damage is caused by the negligence, bad faith or willful misconduct of Fund Services or its employees or agents. (b) The Fund shall indemnify and hold Fund Services harmless from all loss, cost, damage and expense, including reasonable expenses for counsel, incurred by it resulting from any claim, demand, action or suit in connection with the performance of its duties hereunder, or as a result of acting upon any instruction reasonably believed by it to have been properly given by a duly authorized officer of the Fund, or upon any information, data, records or documents provided to Fund Services or its agents by computer tape, telex, CRT data entry or other similar means authorized by the Fund; provided that this indemnification shall not apply to actions or omissions of Fund Services in cases of its own bad faith, willful misconduct or negligence, and provided further that if in any case the Fund may be asked to indemnify or hold Fund Services harmless pursuant to this Section, the Fund shall have been fully and promptly advised by Fund Services of all material facts concerning the situation 17 in question. The Fund shall have the option to defend Fund Services against any claim which may be the subject of this indemnification, and in the event that the Fund so elects it will so notify Fund Services, and thereupon the Fund shall retain competent counsel to undertake defense of the claim, and Fund Services shall in such situations incur no further legal or other expenses for which it may seek indemnification under this paragraph. Fund Services shall in no case confess any claim or make any compromise in any case in which the Fund may be asked to indemnify Fund Services except with the Funds prior written consent. Without limiting the foregoing: (i) Fund Services may rely upon the advice of the Fund or counsel to the Fund or Fund Services, and upon statements of accountants, brokers and other persons believed by Fund Services in good faith to be expert in the matters upon which they are consulted. Fund Services shall not be liable for any action taken in good faith reliance upon such advice or statements; (ii) Fund Services shall not be liable for any action reasonably taken in good faith reliance upon any Written Instructions or certified copy of any resolution of the Funds Directors, including a Written Instruction authorizing Fund Services to make payment upon redemption of Shares without a signature guarantee; provided, however, that upon receipt of a Written Instruction countermanding a prior Instruction that has 18 not been fully executed by Fund Services, Fund Services shall verify the content of the second Instruction and honor it, to the extent possible. Fund Services may rely upon the genuineness of any such document, or copy thereof, reasonably believed by Fund Services in good faith to have been validly executed; (iii) Fund Services may rely, and shall be protected by the Fund in acting, upon any signature, instruction, request, letter of transmittal, certificate, opinion of counsel, statement, instrument, report, notice, consent, order, or other paper or document reasonably believed by it in good faith to be genuine and to have been signed or presented by the purchaser, the Fund or other proper party or parties; and (d) Fund Services may, with the consent of the Fund, subcontract the performance of any portion of any service to be provided hereunder, including with respect to any Shareholder or group of Shareholders, to any agent of Fund Services and may reimburse the agent for the services it performs at such rates as Fund Services may determine; provided that no such reimbursement will increase the amount payable by the Fund pursuant to this Agreement; and provided further, that Fund Services shall remain ultimately responsible as transfer agent to the Fund. SECTION 27. The Fund shall deliver or cause to be delivered over to Fund Services (i) an accurate list of Shareholders, showing each Shareholders address of record, number of Shares of each Series owned and whether such Shares are 19 represented by outstanding Share Certificates or by non- certificated Share accounts and (ii) all Shareholder records, files, and other materials necessary or appropriate for proper performance of the functions assumed by the under this Agreement (collectively referred to as the Materials). The Fund shall indemnify Fund Services and hold it harmless from any and all expenses, damages, claims, suits, liabilities, actions, demands and losses arising out of or in connection with any error, omission, inaccuracy or other deficiency of such Materials, or out of the failure of the Fund to provide any portion of the Materials or to provide any information in the Funds possession needed by Fund Services to knowledgeably perform its functions; provided the Fund shall have no obligation to indemnify Fund Services or hold it harmless with respect to any expenses, damages, claims, suits, liabilities, actions, demands or losses caused directly or indirectly by acts or omissions of Fund Services or the Funds Adviser. SECTION 28. This Agreement may be amended from time to time by a written supplemental agreement executed by the Fund and Fund Services and without notice to or approval of the Shareholders; provided this Agreement may not be amended in any manner which would substantially increase the Funds obligations hereunder unless the amendment is first approved by the Funds Directors, including a majority of the Directors who are not a party to this Agreement or interested persons of any such party, 20 at a meeting called for such purpose, and thereafter is approved by the Funds Shareholders if such approval is required under the Investment Company Act or the rules and regulations thereunder. The parties hereto may adopt procedures as may be appropriate or practical under the circumstances, and Fund Services may conclusively rely on the determination of the Fund that any procedure that has been approved by the Fund does not conflict with or violate any requirement of its Articles of Incorporation or Declaration of Trust, By-Laws or Prospectus, or any rule, regulation or requirement of any regulatory body. SECTION 29. The Fund shall file with Fund Services a certified copy of each operative resolution of its Directors authorizing the execution of Written Instructions or the transmittal of Oral Instructions and setting forth authentic signatures of all signatories authorized to sign on behalf of the Fund and specifying the person or persons authorized to give Oral Instructions on behalf of the Fund. Such resolution shall constitute conclusive evidence of the authority of the person or persons designated therein to act and shall be considered in full force and effect, with Fund Services fully protected in acting in reliance therein, until Fund Services receives a certified copy of a replacement resolution adding or deleting a person or persons authorized to give Written or Oral Instructions. If the officer certifying the resolution is authorized to give Oral 21 Instructions, the certification shall also be signed by a second officer of the Fund. SECTION 30. The terms, as defined in this Section, whenever used in this Agreement or in any amendment or supplement hereto, shall have the meanings specified below, insofar as the context will allow. (a) Business Day: Any day on which the Fund is open for business as described in the Prospectus. (b) Custodian: The term Custodian shall mean the Funds current custodian or any successor custodian acting as such for the Fund. (c) Funds Adviser: The term Funds Adviser shall mean Alliance Capital Management L.P. or any successor thereto who acts as the investment adviser or manager of the Fund. (d) Oral Instructions: The term Oral Instructions shall mean an authorization, instruction, approval, item or set of data, or information of any kind transmitted to Fund Services in person or by telephone, vocal telegram or other electronic means, by a person or persons reasonably believed in good faith by Fund Services to be a person or persons authorized by a resolution of the Directors of the Fund to give Oral Instructions on behalf of the Fund. Each Oral Instruction shall specify whether it is applicable to the entire Fund or a specific Series of the Fund. 22 (e) Prospectus: The term Prospectus shall mean a prospectus and related statement of additional information forming part of a currently effective registration statement under the Investment Company Act and, as used with the respect to Shares or Shares of a Series, shall mean the prospectuses and related statements of additional information covering the Shares or Shares of the Series. (f) Securities: The term Securities shall mean bonds, debentures, notes, stocks, shares, evidences of indebtedness, and other securities and investments from time to time owned by the Fund. (g) Series: The term Series shall mean any series of Shares of the common stock of the Fund that the Fund may establish from time to time. (h) Share Certificates: The term Share Certificates shall mean the stock certificates for the Shares. (i) Shareholders: The term Shareholders shall mean the registered owners from time to time of the Shares, as reflected on the stock registry records of the Fund. (j) Written Instructions: The term Written Instructions shall mean an authorization, instruction, approval, item or set of data, or information of any kind transmitted to Fund Services in original writing containing original signatures, or a copy of such document transmitted by telecopy, including transmission of such signature, or other mechanical or 23 documentary means, at the request of a person or persons reasonably believed in good faith by Fund Services to be a person or persons authorized by a resolution of the Directors of the Fund to give Written Instruction shall specify whether it is applicable to the entire Fund or a specific Series of the Fund. SECTION 31. Fund Services shall not be liable for the loss of all or part of any record maintained or preserved by it pursuant to this Agreement or for any delays or errors occurring by reason of circumstances beyond its control, including but not limited to acts of civil or military authorities, national emergencies, fire, flood or catastrophe, acts of God, insurrection, war, riot, or failure of transportation, communication or power supply, except to the extent that Fund Services shall have failed to use its best efforts to minimize the likelihood of occurrence of such circumstances or to mitigate any loss or damage to the Fund caused by such circumstances. SECTION 32. The Fund may give Fund Services sixty (60) days and Fund Services may give the Fund (90) days written notice of the termination of this Agreement, such termination to take effect at the time specified in the notice. Upon notice of termination, the Fund shall use its best efforts to obtain a successor transfer agent. If a successor transfer agent is not appointed within ninety (90) days after the date of the notice of termination, the Directors of the Fund shall, by resolution, designate the Fund as its own transfer agent. Upon receipt of 24 written notice from the Fund of the appointment of the successor transfer agent and upon receipt of Oral or Written Instructions Fund Services shall, upon request of the Fund and the successor transfer agent and upon payment of Fund Services reasonable charges and disbursements, promptly transfer to the successor transfer agent the original or copies of all books and records maintained by Fund Services hereunder and cooperate with, and provide reasonable assistance to, the successor transfer agent in the establishment of the books and records necessary to carry out its responsibilities hereunder. SECTION 33. Any notice or other communication required by or permitted to be given in connection with this Agreement shall be in writing, and shall be delivered in person or sent by first-class mail, postage prepaid, to the respective parties. Notice to the Fund shall be given as follows until further notice: Alliance Variable Products Series Fund, Inc. 1345 Avenue of the Americas New York, New York 10105 Attention: Secretary Notice to Fund Services shall be given as follows until further notice: Alliance Fund Services, Inc. 500 Plaza Drive Secaucus, New Jersey 07094 SECTION 34. The Fund represents and warrants to Fund Services that the execution and delivery of this Agreement by the undersigned officer of the Fund has been duly and validly 25 authorized by resolution of the Funds Directors. Fund Services represents and warrants to the Fund that the execution and delivery of this Agreement by the undersigned officer of Fund Services has also been duly and validly authorized. SECTION 35. This Agreement may be executed in more than one counterpart, each of which shall be deemed to be an original, and shall become effective as of the date set forth above. Unless sooner terminated pursuant to SECTION 32, this Agreement will continue until December 31, 1996 and will continue in effect thereafter for successive 12 month periods only if such continuance is specifically approved at least annually by the Directors or by a vote of the stockholders of the Fund and in either case by a majority of the Directors who are not parties to this Agreement or interested persons of any such party, at a meeting called for the purpose of voting on this Agreement. SECTION 36. This Agreement shall extend to and shall bind the parties hereto and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by the Fund without the written consent of Fund Services or by Fund Services without the written consent of the Fund, authorized or approved by a resolution of the Funds Directors. Notwithstanding the foregoing, either party may assign this Agreement without the consent of the other party so long as the assignee is an affiliate, parent or subsidiary of the 26 assigning party and is qualified to act under the Investment Company Act, as amended from time to time. SECTION 38. This Agreement shall be governed by the laws of the State of New Jersey. 27 WITNESS the following signatures: ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. BY: /s/ John D. Carifa NAME: John D. Carifa __________________________ TITLE: Chairman and President __________________________ ALLIANCE FUND SERVICES, INC. BY: /s/ George R. Hrabovsky NAME: George R. Hrabovsky __________________________ TITLE: President __________________________ 28 00250292.BK9 EX-99.11 10 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 April 28, 1998 00250292.BK1 EX-99.16A 11 EXHIBIT 16 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. COMPUTATION OF AVERAGE ANNUAL COMPOUNDED TOTAL RETURN n ERV=P(1+T) Definitions: P=Initial investment by shareholder T=Average annual total return ERV=Ending redeemable value of shareholder investment n=Number of periods Formula to solve for "T" ------------------------ ERV For year one T= --- -1 P *For subsequent years T = nth root of ((ERV/P)-1) To solve for ERV: 1. Take an initial shareholder investment of $1,000 on 12/31/86 at maximum offering price of $10.31. The result is 96.993 shares. 2. Assume that all dividends and distributions by the Fund are reinvested on reinvest date for the creation of additional shares. (11.313 shares created). 3. Add initial share balance to additional shares created due to reinvestment and multiply by ending net asset value (12/31/87) to obtain ending redeemable value (ERV). (96.993+11.313 = 108.306 x $9.03 = $978) (ERV) 978 T = ----- -1 1,000 T = .978 -1 T = (.022) T = (2.2%) T=Average annual total return *For subsequent years repeat steps 1 through 3 for the required periods and apply to formula shown above. 2 00250292.BH9 EXHIBIT 16 ALLIANCE VARIABLE PRODUCT SERIES FUND, INC. COMPUTATION OF STANDARDIZED YIELD a-b 6 Formula: Yield = 2[(-----+1) -1] cd Where a=dividends and interest earned during the period. b=expenses accrued for the period (net of reimbursements). c=the average daily number of shares outstanding during the period that were entitled to receive dividends. d=the maximum offering price per share on the last day of the period. (a)=Interest earned for 30 days or one month. MORTGAGE BACKED SECURITIES Current principal amount per debt obligation multiplied by coupon rate divided by 360 multiplied by 30 minus losses due to payment of principal ("paydowns"). No amortization of discounts or premiums on mortgage backed securities. NON-MORTGAGE BACKED SECURITIES 1. Determine the yield to maturity (YTM) per debt obligation as follows: (i) Using the market value per security at the end of the period plus accrued interest; (ii) Compute the YTM on each obligation by analyzing the cash flow from the beginning of the period until maturity or call date utilizing the Internal Rate of Return function of Lotus 123. 2. Divide the YTM by 360 and multiply the quotient by the market value of each obligation including accrued interest, and multiply by 30 to derive a monthly income accrual. (b)=Expenses accrued for the period (net of reimbursement). (c)=The average daily numbers of shares outstanding during the period that were entitled to receive dividends. (d)=The maximum offering price per share on the last day of the period. 3 00250292.BH9 5,797,073 - 655,368 6 Example: Yield = 2 [(-------------------+1) -1 74,730,965 x 9.81 5,141,705 6 2 [(-----------+1) -1] 733,110,767 6 2[(1.00701354588) -1] 2 [(1.04282605894) -1] 2 [ .04282605894 ] 8.57 4 00250292.BH9 EX-99.27.1 12 [ARTICLE] 6 [CIK] 0000825316 [NAME] ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. [SERIES] [NUMBER] 01 [NAME] SHORT TERM MULTI MARKET PORTFOLIO [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] JAN-01-1997 [PERIOD-END] DEC-31-1997 [INVESTMENTS-AT-COST] 6,242,555 [INVESTMENTS-AT-VALUE] 5,961,640 [RECEIVABLES] 175,496 [ASSETS-OTHER] 366,417 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 6,503,553 [PAYABLE-FOR-SECURITIES] 0 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 14,121 [TOTAL-LIABILITIES] 14,121 [SENIOR-EQUITY] 614 [PAID-IN-CAPITAL-COMMON] 7,269,654 [SHARES-COMMON-STOCK] 613,666 [SHARES-COMMON-PRIOR] 662,827 [ACCUMULATED-NII-CURRENT] 473,715 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] (1,130,586) [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] (123,965) [NET-ASSETS] 6,489,432 [DIVIDEND-INCOME] 0 [INTEREST-INCOME] 463,113 [OTHER-INCOME] 0 [EXPENSES-NET] (67,771) [NET-INVESTMENT-INCOME] 395,342 [REALIZED-GAINS-CURRENT] 111,719 [APPREC-INCREASE-CURRENT] (181,535) [NET-CHANGE-FROM-OPS] 325,526 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (412,899) [DISTRIBUTIONS-OF-GAINS] 0 [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 366,280 [NUMBER-OF-SHARES-REDEEMED] (455,606) [SHARES-REINVESTED] 40,165 [NET-CHANGE-IN-ASSETS] (622,872) [ACCUMULATED-NII-PRIOR] 346,901 [ACCUMULATED-GAINS-PRIOR] (1,097,934) [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 40,000 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 102,000 [AVERAGE-NET-ASSETS] 7,183,874 [PER-SHARE-NAV-BEGIN] 10.73 [PER-SHARE-NII] 0.59 [PER-SHARE-GAIN-APPREC] (0.11) [PER-SHARE-DIVIDEND] (0.64) [PER-SHARE-DISTRIBUTIONS] 0.00 [RETURNS-OF-CAPITAL] 0.00 [PER-SHARE-NAV-END] 10.57 [EXPENSE-RATIO] 0.94 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
00250292.BI2 EX-99.27.2 13 [ARTICLE] 6 [CIK] 0000825316 [NAME] ALLIANCE VARIABLE PRODUCT SERIES FUND, INC. [SERIES] [NUMBER] 02 [NAME] GROWTH AND INCOME PORTFOLIO [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] JAN-01-1997 [PERIOD-END] DEC-31-1997 [INVESTMENTS-AT-COST] 220,961,778 [INVESTMENTS-AT-VALUE] 249,328,049 [RECEIVABLES] 2,296,568 [ASSETS-OTHER] 515 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 251,625,132 [PAYABLE-FOR-SECURITIES] 1,137,929 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 285,608 [TOTAL-LIABILITIES] 1,423,537 [SENIOR-EQUITY] 12,553 [PAID-IN-CAPITAL-COMMON] 191,694,750 [SHARES-COMMON-STOCK] 12,552,817 [SHARES-COMMON-PRIOR] 7,727,283 [ACCUMULATED-NII-CURRENT] 2,192,351 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] 27,935,656 [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 28,366,282 [NET-ASSETS] 250,201,595 [DIVIDEND-INCOME] 3,122,096 [INTEREST-INCOME] 425,839 [OTHER-INCOME] 0 [EXPENSES-NET] (1,352,601) [NET-INVESTMENT-INCOME] 2,195,334 [REALIZED-GAINS-CURRENT] 27,933,671 [APPREC-INCREASE-CURRENT] 15,634,977 [NET-CHANGE-FROM-OPS] 45,765,982 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (1,272,246) [DISTRIBUTIONS-OF-GAINS] (9,150,387) [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 4,651,201 [NUMBER-OF-SHARES-REDEEMED] (411,208) [SHARES-REINVESTED] 585,541 [NET-CHANGE-IN-ASSETS] 123,472,190 [ACCUMULATED-NII-PRIOR] 1,269,248 [ACCUMULATED-GAINS-PRIOR] 9,149,428 [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 1,180,000 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 1,353,000 [AVERAGE-NET-ASSETS] 188,848,790 [PER-SHARE-NAV-BEGIN] 16.40 [PER-SHARE-NII] 0.21 [PER-SHARE-GAIN-APPREC] 4.39 [PER-SHARE-DIVIDEND] (0.13) [PER-SHARE-DISTRIBUTIONS] (0.94) [RETURNS-OF-CAPITAL] 0 [PER-SHARE-NAV-END] 19.93 [EXPENSE-RATIO] .72 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
00250292.BI3 EX-99.27.3 14 [ARTICLE] 6 [CIK] 0000825316 [NAME] ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. [SERIES] [NUMBER] 03 [NAME] GLOBAL BOND PORTFOLIO [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] JAN-01-1997 [PERIOD-END] DEC-31-1997 [INVESTMENTS-AT-COST] 21,876,330 [INVESTMENTS-AT-VALUE] 21,763,934 [RECEIVABLES] 432,882 [ASSETS-OTHER] 167,795 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 22,364,611 [PAYABLE-FOR-SECURITIES] 0 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 170,266 [TOTAL-LIABILITIES] 170,266 [SENIOR-EQUITY] 1,999 [PAID-IN-CAPITAL-COMMON] 21,846,305 [SHARES-COMMON-STOCK] 1,999,231 [SHARES-COMMON-PRIOR] 1,542,961 [ACCUMULATED-NII-CURRENT] 229,154 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] 108,075 [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 8,812 [NET-ASSETS] 22,194,345 [DIVIDEND-INCOME] 0 [INTEREST-INCOME] 1,116,903 [OTHER-INCOME] 0 [EXPENSES-NET] (182,300) [NET-INVESTMENT-INCOME] 934,603 [REALIZED-GAINS-CURRENT] (551,283) [APPREC-INCREASE-CURRENT] (187,415) [NET-CHANGE-FROM-OPS] 195,905 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (945,935) [DISTRIBUTIONS-OF-GAINS] (219,946) [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 615,554 [NUMBER-OF-SHARES-REDEEMED] (266,344) [SHARES-REINVESTED] 107,060 [NET-CHANGE-IN-ASSETS] 4,077,255 [ACCUMULATED-NII-PRIOR] 920,567 [ACCUMULATED-GAINS-PRIOR] 199,223 [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 126,000 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 200,000 [AVERAGE-NET-ASSETS] 19,444,855 [PER-SHARE-NAV-BEGIN] 11.74 [PER-SHARE-NII] 0.54 [PER-SHARE-GAIN-APPREC] (0.48) [PER-SHARE-DIVIDEND] (0.57) [PER-SHARE-DISTRIBUTIONS] (0.13) [RETURNS-OF-CAPITAL] 0.00 [PER-SHARE-NAV-END] 11.10 [EXPENSE-RATIO] 0.94 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
00250292.BI4 EX-99.27.4 15 [ARTICLE] 6 [CIK] 0000825316 [NAME] ALLIANCE VARIABLE PRODUCT SERIES FUND, INC. [SERIES] [NUMBER] 04 [NAME] PREMIER GROWTH PORTFOLIO [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] JAN-01-1997 [PERIOD-END] DEC-31-1997 [INVESTMENTS-AT-COST] 379,845,622 [INVESTMENTS-AT-VALUE] 469,955,845 [RECEIVABLES] 2,909,430 [ASSETS-OTHER] 668 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 472,865,943 [PAYABLE-FOR-SECURITIES] 0 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 539,838 [TOTAL-LIABILITIES] 539,838 [SENIOR-EQUITY] 22,504 [PAID-IN-CAPITAL-COMMON] 389,213,455 [SHARES-COMMON-STOCK] 22,504,318 [SHARES-COMMON-PRIOR] 6,143,896 [ACCUMULATED-NII-CURRENT] 594,942 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] (7,615,019) [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 90,110,223 [NET-ASSETS] 472,326,105 [DIVIDEND-INCOME] 2,517,129 [INTEREST-INCOME] 769,879 [OTHER-INCOME] 0 [EXPENSES-NET] (2,691,477) [NET-INVESTMENT-INCOME] 595,531 [REALIZED-GAINS-CURRENT] (6,667,622) [APPREC-INCREASE-CURRENT] 72,666,731 [NET-CHANGE-FROM-OPS] 66,594,640 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (324,686) [DISTRIBUTIONS-OF-GAINS] 0 [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 18,381,290 [NUMBER-OF-SHARES-REDEEMED] (2,038,212) [SHARES-REINVESTED] 17,344 [NET-CHANGE-IN-ASSETS] 375,891,797 [ACCUMULATED-NII-PRIOR] 323,427 [ACCUMULATED-GAINS-PRIOR] (947,397) [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 2,833,000 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 3,126,000 [AVERAGE-NET-ASSETS] 283,320,677 [PER-SHARE-NAV-BEGIN] 15.70 [PER-SHARE-NII] 0.04 [PER-SHARE-GAIN-APPREC] 5.27 [PER-SHARE-DIVIDEND] (0.02) [PER-SHARE-DISTRIBUTIONS] (0.00) [RETURNS-OF-CAPITAL] 0 [PER-SHARE-NAV-END] 20.99 [EXPENSE-RATIO] .95 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
00250292.BI5 EX-99.27.5 16 [ARTICLE] 6 [CIK] 0000825316 [NAME] ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. [SERIES] [NUMBER] 05 [NAME] U.S. GOVERNMENT/HIGH GRADE PORTFOLIO [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] JAN-01-1997 [PERIOD-END] DEC-31-1997 [INVESTMENTS-AT-COST] 35,016,067 [INVESTMENTS-AT-VALUE] 35,677,712 [RECEIVABLES] 576,697 [ASSETS-OTHER] 201 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 36,254,610 [PAYABLE-FOR-SECURITIES] 0 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 56,832 [TOTAL-LIABILITIES] 56,832 [SENIOR-EQUITY] 3,034 [PAID-IN-CAPITAL-COMMON] 33,468,495 [SHARES-COMMON-STOCK] 3,033,854 [SHARES-COMMON-PRIOR] 2,531,426 [ACCUMULATED-NII-CURRENT] 1,821,509 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] 204,479 [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 661,645 [NET-ASSETS] 36,197,778 [DIVIDEND-INCOME] 4,725 [INTEREST-INCOME] 2,119,415 [OTHER-INCOME] 0 [EXPENSES-NET] (264,131) [NET-INVESTMENT-INCOME] 1,860,009 [REALIZED-GAINS-CURRENT] 242,976 [APPREC-INCREASE-CURRENT] 558,819 [NET-CHANGE-FROM-OPS] 2,661,804 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (1,409,036) [DISTRIBUTIONS-OF-GAINS] (54,796) [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 870,507 [NUMBER-OF-SHARES-REDEEMED] (497,164) [SHARES-REINVESTED] 129,085 [NET-CHANGE-IN-ASSETS] 7,047,874 [ACCUMULATED-NII-PRIOR] 1,370,536 [ACCUMULATED-GAINS-PRIOR] 54,933 [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 190,000 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 264,000 [AVERAGE-NET-ASSETS] 31,590,513 [PER-SHARE-NAV-BEGIN] 11.52 [PER-SHARE-NII] 0.68 [PER-SHARE-GAIN-APPREC] 0.29 [PER-SHARE-DIVIDEND] (0.54) [PER-SHARE-DISTRIBUTIONS] (0.02) [RETURNS-OF-CAPITAL] 0.00 [PER-SHARE-NAV-END] 11.93 [EXPENSE-RATIO] 0.84 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
00250292.BI6 EX-99.27.6 17 [ARTICLE] 6 [CIK] 0000825316 [NAME] ALLIANCE VARIABLE PRODUCT SERIES FUND, INC. [SERIES] [NUMBER] 06 [NAME] TOTAL RETURN PORTFOLIO [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] JAN-01-1997 [PERIOD-END] DEC-31-1997 [INVESTMENTS-AT-COST] 39,116,803 [INVESTMENTS-AT-VALUE] 42,625,882 [RECEIVABLES] 473,061 [ASSETS-OTHER] 182 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 43,099,125 [PAYABLE-FOR-SECURITIES] 124,155 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 55,001 [TOTAL-LIABILITIES] 179,156 [SENIOR-EQUITY] 2,537 [PAID-IN-CAPITAL-COMMON] 34,796,439 [SHARES-COMMON-STOCK] 2,536,298 [SHARES-COMMON-PRIOR] 1,768,899 [ACCUMULATED-NII-CURRENT] 822,392 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] 3,789,522 [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 3,509,079 [NET-ASSETS] 42,919,969 [DIVIDEND-INCOME] 354,398 [INTEREST-INCOME] 760,827 [OTHER-INCOME] 0 [EXPENSES-NET] (293,213) [NET-INVESTMENT-INCOME] 822,012 [REALIZED-GAINS-CURRENT] 3,789,362 [APPREC-INCREASE-CURRENT] 1,754,576 [NET-CHANGE-FROM-OPS] 6,365,950 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (480,826) [DISTRIBUTIONS-OF-GAINS] (1,019,434) [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 880,572 [NUMBER-OF-SHARES-REDEEMED] (210,529) [SHARES-REINVESTED] 97,356 [NET-CHANGE-IN-ASSETS] 17,044,619 [ACCUMULATED-NII-PRIOR] 481,043 [ACCUMULATED-GAINS-PRIOR] 1,019,757 [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 209,000 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 294,000 [AVERAGE-NET-ASSETS] 33,441,362 [PER-SHARE-NAV-BEGIN] 14.63 [PER-SHARE-NII] 0.39 [PER-SHARE-GAIN-APPREC] 2.62 [PER-SHARE-DIVIDEND] (0.23) [PER-SHARE-DISTRIBUTIONS] (0.49) [RETURNS-OF-CAPITAL] 0 [PER-SHARE-NAV-END] 16.92 [EXPENSE-RATIO] .88 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
00250292.BI7 EX-99.27.7 18 [ARTICLE] 6 [CIK] 0000825316 [NAME] ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. [SERIES] [NUMBER] 07 [NAME] INTERNATIONAL PORTFOLIO [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] JAN-01-1997 [PERIOD-END] DEC-31-1997 [INVESTMENTS-AT-COST] 58,656,226 [INVESTMENTS-AT-VALUE] 59,500,779 [RECEIVABLES] 322,229 [ASSETS-OTHER] 1,339,954 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 61,162,962 [PAYABLE-FOR-SECURITIES] 0 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 452,564 [TOTAL-LIABILITIES] 452,564 [SENIOR-EQUITY] 4,042 [PAID-IN-CAPITAL-COMMON] 57,503,795 [SHARES-COMMON-STOCK] 4,042,053 [SHARES-COMMON-PRIOR] 2,976,776 [ACCUMULATED-NII-CURRENT] 242,000 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] 1,419,480 [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 1,541,081 [NET-ASSETS] 60,710,398 [DIVIDEND-INCOME] 807,702 [INTEREST-INCOME] 193,058 [OTHER-INCOME] 0 [EXPENSES-NET] (522,720) [NET-INVESTMENT-INCOME] 478,040 [REALIZED-GAINS-CURRENT] 1,303,323 [APPREC-INCREASE-CURRENT] 116,846 [NET-CHANGE-FROM-OPS] 1,898,209 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (523,610) [DISTRIBUTIONS-OF-GAINS] (836,368) [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 5,433,762 [NUMBER-OF-SHARES-REDEEMED] (4,454,018) [SHARES-REINVESTED] 85,533 [NET-CHANGE-IN-ASSETS] 16,386,302 [ACCUMULATED-NII-PRIOR] 462,109 [ACCUMULATED-GAINS-PRIOR] 776,481 [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 550,000 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 780,000 [AVERAGE-NET-ASSETS] 55,023,128 [PER-SHARE-NAV-BEGIN] 14.89 [PER-SHARE-NII] 0.13 [PER-SHARE-GAIN-APPREC] 0.39 [PER-SHARE-DIVIDEND] (0.15) [PER-SHARE-DISTRIBUTIONS] (0.24) [RETURNS-OF-CAPITAL] 0.00 [PER-SHARE-NAV-END] 15.02 [EXPENSE-RATIO] 0.95 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
00250292.BI8 EX-99.27.8 19 [ARTICLE] 6 [CIK] 0000825316 [NAME] ALLIANCE VARIABLE PRODUCT SERIES FUND, INC. [SERIES] [NUMBER] 08 [NAME] MONEY MARKET PORTFOLIO [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] JAN-01-1997 [PERIOD-END] DEC-31-1997 [INVESTMENTS-AT-COST] 67,142,921 [INVESTMENTS-AT-VALUE] 67,142,921 [RECEIVABLES] 955,717 [ASSETS-OTHER] 55,023 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 68,153,661 [PAYABLE-FOR-SECURITIES] 0 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 569,840 [TOTAL-LIABILITIES] 569,840 [SENIOR-EQUITY] 67,583 [PAID-IN-CAPITAL-COMMON] 67,515,833 [SHARES-COMMON-STOCK] 67,584,219 [SHARES-COMMON-PRIOR] 64,769,391 [ACCUMULATED-NII-CURRENT] 1,046 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] (641) [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 0 [NET-ASSETS] 67,583,821 [DIVIDEND-INCOME] 0 [INTEREST-INCOME] 3,890,830 [OTHER-INCOME] 0 [EXPENSES-NET] (438,647) [NET-INVESTMENT-INCOME] 3,452,183 [REALIZED-GAINS-CURRENT] (298) [APPREC-INCREASE-CURRENT] 0 [NET-CHANGE-FROM-OPS] 3,451,885 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (3,452,183) [DISTRIBUTIONS-OF-GAINS] 0 [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 260,121,111 [NUMBER-OF-SHARES-REDEEMED] (260,758,466) [SHARES-REINVESTED] 3,452,183 [NET-CHANGE-IN-ASSETS] 2,814,530 [ACCUMULATED-NII-PRIOR] 1,046 [ACCUMULATED-GAINS-PRIOR] (343) [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 345,000 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 439,000 [AVERAGE-NET-ASSETS] 69,062,655 [PER-SHARE-NAV-BEGIN] 1.00 [PER-SHARE-NII] 0.05 [PER-SHARE-GAIN-APPREC] 0 [PER-SHARE-DIVIDEND] (0.05) [PER-SHARE-DISTRIBUTIONS] 0 [RETURNS-OF-CAPITAL] 0 [PER-SHARE-NAV-END] 1.00 [EXPENSE-RATIO] .64 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
00250292.BI9 EX-99.27.9 20 [ARTICLE] 6 [CIK] 0000825316 [NAME] ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. [SERIES] [NUMBER] 09 [NAME] NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] JAN-01-1997 [PERIOD-END] DEC-31-1997 [INVESTMENTS-AT-COST] 29,501,391 [INVESTMENTS-AT-VALUE] 30,410,686 [RECEIVABLES] 279,837 [ASSETS-OTHER] 10,557 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 30,701,080 [PAYABLE-FOR-SECURITIES] 0 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 194,579 [TOTAL-LIABILITIES] 194,579 [SENIOR-EQUITY] 2,353 [PAID-IN-CAPITAL-COMMON] 27,237,510 [SHARES-COMMON-STOCK] 2,352,683 [SHARES-COMMON-PRIOR] 1,349,031 [ACCUMULATED-NII-CURRENT] 2,082,356 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] 271,275 [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 913,007 [NET-ASSETS] 30,506,501 [DIVIDEND-INCOME] 0 [INTEREST-INCOME] 2,326,884 [OTHER-INCOME] 0 [EXPENSES-NET] (238,003) [NET-INVESTMENT-INCOME] 2,088,881 [REALIZED-GAINS-CURRENT] 292,939 [APPREC-INCREASE-CURRENT] (243,915) [NET-CHANGE-FROM-OPS] 2,137,905 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (1,103,754) [DISTRIBUTIONS-OF-GAINS] 0 [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 1,306,695 [NUMBER-OF-SHARES-REDEEMED] (391,062) [SHARES-REINVESTED] 88,019 [NET-CHANGE-IN-ASSETS] 13,810,851 [ACCUMULATED-NII-PRIOR] 1,077,786 [ACCUMULATED-GAINS-PRIOR] (2,290) [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 163,000 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 261,000 [AVERAGE-NET-ASSETS] 25,052,913 [PER-SHARE-NAV-BEGIN] 12.38 [PER-SHARE-NII] 1.07 [PER-SHARE-GAIN-APPREC] 0.10 [PER-SHARE-DIVIDEND] (0.58) [PER-SHARE-DISTRIBUTIONS] 0.00 [RETURNS-OF-CAPITAL] 0.00 [PER-SHARE-NAV-END] 12.97 [EXPENSE-RATIO] 0.95 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
00250292.BJ0 EX-99.27.10 21 [ARTICLE] 6 [CIK] 0000825316 [NAME] ALLIANCE VARIABLE PRODUCT SERIES FUND, INC. [SERIES] [NUMBER] 10 [NAME] UTILITY INCOME PORTFOLIO [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] JAN-01-1997 [PERIOD-END] DEC-31-1997 [INVESTMENTS-AT-COST] 15,967,299 [INVESTMENTS-AT-VALUE] 20,305,384 [RECEIVABLES] 60,446 [ASSETS-OTHER] 26,610 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 20,392,440 [PAYABLE-FOR-SECURITIES] 0 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 45,434 [TOTAL-LIABILITIES] 45,434 [SENIOR-EQUITY] 1,298 [PAID-IN-CAPITAL-COMMON] 15,333,594 [SHARES-COMMON-STOCK] 1,298,346 [SHARES-COMMON-PRIOR] 1,170,361 [ACCUMULATED-NII-CURRENT] 461,439 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] 212,592 [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 4,338,083 [NET-ASSETS] 20,347,006 [DIVIDEND-INCOME] 554,341 [INTEREST-INCOME] 63,761 [OTHER-INCOME] 0 [EXPENSES-NET] (155,252) [NET-INVESTMENT-INCOME] 462,850 [REALIZED-GAINS-CURRENT] 258,014 [APPREC-INCREASE-CURRENT] 3,238,860 [NET-CHANGE-FROM-OPS] 3,959,724 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (289,532) [DISTRIBUTIONS-OF-GAINS] 0 [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 4,795,124 [NUMBER-OF-SHARES-REDEEMED] (3,264,635) [SHARES-REINVESTED] 289,532 [NET-CHANGE-IN-ASSETS] 5,490,213 [ACCUMULATED-NII-PRIOR] 289,028 [ACCUMULATED-GAINS-PRIOR] (46,408) [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 123,000 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 177,000 [AVERAGE-NET-ASSETS] 16,342,451 [PER-SHARE-NAV-BEGIN] 12.69 [PER-SHARE-NII] 0.38 [PER-SHARE-GAIN-APPREC] 2.84 [PER-SHARE-DIVIDEND] (0.24) [PER-SHARE-DISTRIBUTIONS] (0.00) [RETURNS-OF-CAPITAL] 0 [PER-SHARE-NAV-END] 15.67 [EXPENSE-RATIO] .95 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
00250292.BJ1 EX-99.27.11 22 [ARTICLE] 6 [CIK] 0000825316 [NAME] ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. [SERIES] [NUMBER] 11 [NAME] GLOBAL DOLLAR GOVERNMENT PORTFOLIO [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] JAN-01-1997 [PERIOD-END] DEC-31-1997 [INVESTMENTS-AT-COST] 15,312,083 [INVESTMENTS-AT-VALUE] 15,239,598 [RECEIVABLES] 692,771 [ASSETS-OTHER] 4,652 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 15,937,021 [PAYABLE-FOR-SECURITIES] 525,850 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 32,727 [TOTAL-LIABILITIES] 558,577 [SENIOR-EQUITY] 1,050 [PAID-IN-CAPITAL-COMMON] 13,698,404 [SHARES-COMMON-STOCK] 1,050,053 [SHARES-COMMON-PRIOR] 617,736 [ACCUMULATED-NII-CURRENT] 1,013,027 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] 738,448 [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] (72,485) [NET-ASSETS] 15,378,444 [DIVIDEND-INCOME] 3,343 [INTEREST-INCOME] 1,139,769 [OTHER-INCOME] 0 [EXPENSES-NET] (123,090) [NET-INVESTMENT-INCOME] 1,020,022 [REALIZED-GAINS-CURRENT] 739,413 [APPREC-INCREASE-CURRENT] (463,672) [NET-CHANGE-FROM-OPS] 1,295,763 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (489,948) [DISTRIBUTIONS-OF-GAINS] (742,125) [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 567,148 [NUMBER-OF-SHARES-REDEEMED] (225,116) [SHARES-REINVESTED] 90,285 [NET-CHANGE-IN-ASSETS] 6,531,038 [ACCUMULATED-NII-PRIOR] 482,953 [ACCUMULATED-GAINS-PRIOR] 741,160 [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 97,000 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 168,000 [AVERAGE-NET-ASSETS] 12,956,576 [PER-SHARE-NAV-BEGIN] 14.32 [PER-SHARE-NII] 1.17 [PER-SHARE-GAIN-APPREC] 0.70 [PER-SHARE-DIVIDEND] (0.61) [PER-SHARE-DISTRIBUTIONS] (0.93) [RETURNS-OF-CAPITAL] 0.00 [PER-SHARE-NAV-END] 14.65 [EXPENSE-RATIO] 0.95 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
00250292.BJ2 EX-99.27.12 23 [ARTICLE] 6 [CIK] 0000825316 [NAME] ALLIANCE VARIABLE PRODUCT SERIES FUND, INC. [SERIES] [NUMBER] 12 [NAME] GROWTH PORTFOLIO [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] JAN-01-1997 [PERIOD-END] DEC-31-1997 [INVESTMENTS-AT-COST] 189,215,765 [INVESTMENTS-AT-VALUE] 243,072,486 [RECEIVABLES] 492,977 [ASSETS-OTHER] 366,915 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 243,932,378 [PAYABLE-FOR-SECURITIES] 7,660,848 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 396,545 [TOTAL-LIABILITIES] 8,057,393 [SENIOR-EQUITY] 10,521 [PAID-IN-CAPITAL-COMMON] 165,726,908 [SHARES-COMMON-STOCK] 10,521,215 [SHARES-COMMON-PRIOR] 7,739,999 [ACCUMULATED-NII-CURRENT] 684,284 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] 15,596,551 [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 53,856,721 [NET-ASSETS] 235,874,985 [DIVIDEND-INCOME] 1,599,093 [INTEREST-INCOME] 647,161 [OTHER-INCOME] 0 [EXPENSES-NET] (1,558,615) [NET-INVESTMENT-INCOME] 687,639 [REALIZED-GAINS-CURRENT] 15,669,717 [APPREC-INCREASE-CURRENT] 33,639,619 [NET-CHANGE-FROM-OPS] 49,996,975 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (265,892) [DISTRIBUTIONS-OF-GAINS] (6,564,799) [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 3,011,243 [NUMBER-OF-SHARES-REDEEMED] (589,726) [SHARES-REINVESTED] 359,699 [NET-CHANGE-IN-ASSETS] 97,187,094 [ACCUMULATED-NII-PRIOR] 262,537 [ACCUMULATED-GAINS-PRIOR] 6,484,948 [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 1,393,000 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 1,559,000 [AVERAGE-NET-ASSETS] 185,764,161 [PER-SHARE-NAV-BEGIN] 17.92 [PER-SHARE-NII] 0.07 [PER-SHARE-GAIN-APPREC] 5.18 [PER-SHARE-DIVIDEND] (0.03) [PER-SHARE-DISTRIBUTIONS] (0.72) [RETURNS-OF-CAPITAL] 0 [PER-SHARE-NAV-END] 22.42 [EXPENSE-RATIO] .84 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
00250292.BJ3 EX-99.27.13 24 [ARTICLE] 6 [CIK] 0000825316 [NAME] ALLIANCE VARIABLE PRODUCT SERIES FUND, INC. [SERIES] [NUMBER] 13 [NAME] WORLDWIDE PRIVATIZATION PORTFOLIO [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] JAN-01-1997 [PERIOD-END] DEC-31-1997 [INVESTMENTS-AT-COST] 40,869,970 [INVESTMENTS-AT-VALUE] 41,769,107 [RECEIVABLES] 461,828 [ASSETS-OTHER] 53,475 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 42,284,410 [PAYABLE-FOR-SECURITIES] 416,006 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 50,439 [TOTAL-LIABILITIES] 466,445 [SENIOR-EQUITY] 2,945 [PAID-IN-CAPITAL-COMMON] 38,366,321 [SHARES-COMMON-STOCK] 2,944,708 [SHARES-COMMON-PRIOR] 1,432,879 [ACCUMULATED-NII-CURRENT] 502,310 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] 2,052,094 [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 894,375 [NET-ASSETS] 41,817,965 [DIVIDEND-INCOME] 707,801 [INTEREST-INCOME] 168,207 [OTHER-INCOME] 0 [EXPENSES-NET] (306,743) [NET-INVESTMENT-INCOME] 569,265 [REALIZED-GAINS-CURRENT] 2,030,990 [APPREC-INCREASE-CURRENT] (439,024) [NET-CHANGE-FROM-OPS] 2,161,231 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (348,486) [DISTRIBUTIONS-OF-GAINS] (421,270) [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 1,621,182 [NUMBER-OF-SHARES-REDEEMED] (162,366) [SHARES-REINVESTED] 53,013 [NET-CHANGE-IN-ASSETS] 23,011,152 [ACCUMULATED-NII-PRIOR] 308,447 [ACCUMULATED-GAINS-PRIOR] 415,378 [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 323,000 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 501,000 [AVERAGE-NET-ASSETS] 32,288,842 [PER-SHARE-NAV-BEGIN] 13.13 [PER-SHARE-NII] 0.25 [PER-SHARE-GAIN-APPREC] 1.17 [PER-SHARE-DIVIDEND] (0.16) [PER-SHARE-DISTRIBUTIONS] (0.19) [RETURNS-OF-CAPITAL] 0 [PER-SHARE-NAV-END] 14.20 [EXPENSE-RATIO] .95 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
00250292.BJ4 EX-99.27.14 25 [ARTICLE] 6 [CIK] 0000825316 [NAME] ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. [SERIES] [NUMBER] 14 [NAME] CONSERVATIVE INVESTORS PORTFOLIO [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] JAN-01-1997 [PERIOD-END] DEC-31-1997 [INVESTMENTS-AT-COST] 28,753,388 [INVESTMENTS-AT-VALUE] 29,946,673 [RECEIVABLES] 198,230 [ASSETS-OTHER] 95,487 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 30,240,390 [PAYABLE-FOR-SECURITIES] 50 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 43,959 [TOTAL-LIABILITIES] 44,009 [SENIOR-EQUITY] 2,305 [PAID-IN-CAPITAL-COMMON] 26,776,245 [SHARES-COMMON-STOCK] 2,304,722 [SHARES-COMMON-PRIOR] 1,800,117 [ACCUMULATED-NII-CURRENT] 973,022 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] 1,252,054 [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 1,192,755 [NET-ASSETS] 30,196,381 [DIVIDEND-INCOME] 80,090 [INTEREST-INCOME] 1,145,503 [OTHER-INCOME] 0 [EXPENSES-NET] (242,457) [NET-INVESTMENT-INCOME] 983,136 [REALIZED-GAINS-CURRENT] 1,295,033 [APPREC-INCREASE-CURRENT] 469,660 [NET-CHANGE-FROM-OPS] 2,747,829 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (608,412) [DISTRIBUTIONS-OF-GAINS] 0 [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 780,780 [NUMBER-OF-SHARES-REDEEMED] (325,161) [SHARES-REINVESTED] 48,986 [NET-CHANGE-IN-ASSETS] 8,467,188 [ACCUMULATED-NII-PRIOR] 607,910 [ACCUMULATED-GAINS-PRIOR] (52,673) [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 191,000 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 339,000 [AVERAGE-NET-ASSETS] 25,521,911 [PER-SHARE-NAV-BEGIN] 12.07 [PER-SHARE-NII] 0.48 [PER-SHARE-GAIN-APPREC] 0.86 [PER-SHARE-DIVIDEND] (0.31) [PER-SHARE-DISTRIBUTIONS] 0.00 [RETURNS-OF-CAPITAL] 0.00 [PER-SHARE-NAV-END] 13.10 [EXPENSE-RATIO] 0.95 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
00250292.BJ5 EX-99.27.15 26 [ARTICLE] 6 [CIK] 0000825316 [NAME] ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. [SERIES] [NUMBER] 15 [NAME] GROWTH INVESTORS PORTFOLIO [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] JAN-01-1997 [PERIOD-END] DEC-31-1997 [INVESTMENTS-AT-COST] 15,407,619 [INVESTMENTS-AT-VALUE] 16,483,770 [RECEIVABLES] 60,035 [ASSETS-OTHER] 78,169 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 16,621,974 [PAYABLE-FOR-SECURITIES] 0 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 22,064 [TOTAL-LIABILITIES] 22,064 [SENIOR-EQUITY] 1,155 [PAID-IN-CAPITAL-COMMON] 13,976,715 [SHARES-COMMON-STOCK] 1,154,452 [SHARES-COMMON-PRIOR] 840,388 [ACCUMULATED-NII-CURRENT] 202,165 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] 1,343,830 [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 1,076,045 [NET-ASSETS] 16,599,910 [DIVIDEND-INCOME] 94,064 [INTEREST-INCOME] 257,948 [OTHER-INCOME] 0 [EXPENSES-NET] (125,314) [NET-INVESTMENT-INCOME] 226,698 [REALIZED-GAINS-CURRENT] 1,347,406 [APPREC-INCREASE-CURRENT] 334,892 [NET-CHANGE-FROM-OPS] 1,908,996 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (180,480) [DISTRIBUTIONS-OF-GAINS] (200,739) [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 436,739 [NUMBER-OF-SHARES-REDEEMED] (150,934) [SHARES-REINVESTED] 28,259 [NET-CHANGE-IN-ASSETS] 5,890,574 [ACCUMULATED-NII-PRIOR] 177,700 [ACCUMULATED-GAINS-PRIOR] 175,410 [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 99,000 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 225,000 [AVERAGE-NET-ASSETS] 13,190,645 [PER-SHARE-NAV-BEGIN] 12.74 [PER-SHARE-NII] 0.23 [PER-SHARE-GAIN-APPREC] 1.83 [PER-SHARE-DIVIDEND] (0.20) [PER-SHARE-DISTRIBUTIONS] (0.22) [RETURNS-OF-CAPITAL] 0.00 [PER-SHARE-NAV-END] 14.38 [EXPENSE-RATIO] 0.95 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
00250292.BJ6 EX-99.27.16 27 [ARTICLE] 6 [CIK] 0000825316 [NAME] ALLIANCE VARIABLE PRODUCT SERIES FUND, INC. [SERIES] [NUMBER] 16 [NAME] TECHNOLOGY PORTFOLIO [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] JAN-01-1997 [PERIOD-END] DEC-31-1997 [INVESTMENTS-AT-COST] 63,250,321 [INVESTMENTS-AT-VALUE] 68,641,570 [RECEIVABLES] 615,171 [ASSETS-OTHER] 65,929 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 69,322,670 [PAYABLE-FOR-SECURITIES] 0 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 82,837 [TOTAL-LIABILITIES] 82,837 [SENIOR-EQUITY] 5,910 [PAID-IN-CAPITAL-COMMON] 66,298,076 [SHARES-COMMON-STOCK] 5,910,211 [SHARES-COMMON-PRIOR] 2,543,479 [ACCUMULATED-NII-CURRENT] 86,218 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] (2,541,620) [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 5,391,249 [NET-ASSETS] 69,239,833 [DIVIDEND-INCOME] 33,141 [INTEREST-INCOME] 543,765 [OTHER-INCOME] 0 [EXPENSES-NET] (491,987) [NET-INVESTMENT-INCOME] 84,919 [REALIZED-GAINS-CURRENT] (2,186,460) [APPREC-INCREASE-CURRENT] 3,331,455 [NET-CHANGE-FROM-OPS] 1,229,914 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (141,660) [DISTRIBUTIONS-OF-GAINS] 0 [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 3,792,319 [NUMBER-OF-SHARES-REDEEMED] (437,863) [SHARES-REINVESTED] 12,276 [NET-CHANGE-IN-ASSETS] 41,156,402 [ACCUMULATED-NII-PRIOR] 142,959 [ACCUMULATED-GAINS-PRIOR] (355,160) [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 518,000 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 617,000 [AVERAGE-NET-ASSETS] 51,788,136 [PER-SHARE-NAV-BEGIN] 11.04 [PER-SHARE-NII] 0.02 [PER-SHARE-GAIN-APPREC] 0.69 [PER-SHARE-DIVIDEND] (0.03) [PER-SHARE-DISTRIBUTIONS] (0.00) [RETURNS-OF-CAPITAL] 0 [PER-SHARE-NAV-END] 11.72 [EXPENSE-RATIO] .95 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
00250292.BJ7 EX-99.27.17 28 [ARTICLE] 6 [CIK] 0000825316 [NAME] ALLIANCE VARIABLE PRODUCT SERIES FUND, INC. [SERIES] [NUMBER] 17 [NAME] QUASAR PORTFOLIO [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] JAN-01-1997 [PERIOD-END] DEC-31-1997 [INVESTMENTS-AT-COST] 58,583,335 [INVESTMENTS-AT-VALUE] 58,810,689 [RECEIVABLES] 1,339,551 [ASSETS-OTHER] 183,395 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 60,333,635 [PAYABLE-FOR-SECURITIES] 1,003,660 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 52,807 [TOTAL-LIABILITIES] 1,056,467 [SENIOR-EQUITY] 4,701 [PAID-IN-CAPITAL-COMMON] 53,776,345 [SHARES-COMMON-STOCK] 4,700,876 [SHARES-COMMON-PRIOR] 830,749 [ACCUMULATED-NII-CURRENT] 45,520 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] 5,223,248 [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 227,354 [NET-ASSETS] 59,277,168 [DIVIDEND-INCOME] 102,551 [INTEREST-INCOME] 284,496 [OTHER-INCOME] 0 [EXPENSES-NET] (327,779) [NET-INVESTMENT-INCOME] 59,268 [REALIZED-GAINS-CURRENT] 5,195,196 [APPREC-INCREASE-CURRENT] 79,213 [NET-CHANGE-FROM-OPS] 5,333,677 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (22,104) [DISTRIBUTIONS-OF-GAINS] 0 [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 4,114,230 [NUMBER-OF-SHARES-REDEEMED] (246,062) [SHARES-REINVESTED] 1,959 [NET-CHANGE-IN-ASSETS] 50,435,351 [ACCUMULATED-NII-PRIOR] 11,162 [ACCUMULATED-GAINS-PRIOR] 25,330 [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 345,000 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 474,000 [AVERAGE-NET-ASSETS] 34,503,052 [PER-SHARE-NAV-BEGIN] 10.64 [PER-SHARE-NII] 0.02 [PER-SHARE-GAIN-APPREC] 1.96 [PER-SHARE-DIVIDEND] (0.01) [PER-SHARE-DISTRIBUTIONS] (0.00) [RETURNS-OF-CAPITAL] 0 [PER-SHARE-NAV-END] 12.61 [EXPENSE-RATIO] .95 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
00250292.BJ8 EX-99.27.18 29 [ARTICLE] 6 [CIK] 0000825316 [NAME] ALLIANCE VARIABLE PRODUCT SERIES FUND, INC. [SERIES] [NUMBER] 18 [NAME] REAL ESTATE INVESTMENT PORTFOLIO [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] JAN-09-1997 [PERIOD-END] DEC-31-1997 [INVESTMENTS-AT-COST] 12,703,771 [INVESTMENTS-AT-VALUE] 13,736,232 [RECEIVABLES] 111,291 [ASSETS-OTHER] 17,046 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 13,864,569 [PAYABLE-FOR-SECURITIES] 120,361 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 50,151 [TOTAL-LIABILITIES] 170,512 [SENIOR-EQUITY] 1,110 [PAID-IN-CAPITAL-COMMON] 12,293,375 [SHARES-COMMON-STOCK] 1,110,131 [SHARES-COMMON-PRIOR] 0 [ACCUMULATED-NII-CURRENT] 287,942 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] 79,169 [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 1,032,461 [NET-ASSETS] 13,694,057 [DIVIDEND-INCOME] 323,414 [INTEREST-INCOME] 14,551 [OTHER-INCOME] 0 [EXPENSES-NET] (50,023) [NET-INVESTMENT-INCOME] 287,942 [REALIZED-GAINS-CURRENT] 79,169 [APPREC-INCREASE-CURRENT] 1,032,461 [NET-CHANGE-FROM-OPS] 1,399,572 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] 0 [DISTRIBUTIONS-OF-GAINS] 0 [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 1,182,129 [NUMBER-OF-SHARES-REDEEMED] (71,998) [SHARES-REINVESTED] 0 [NET-CHANGE-IN-ASSETS] 13,694,057 [ACCUMULATED-NII-PRIOR] 0 [ACCUMULATED-GAINS-PRIOR] 0 [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 47,000 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 121,000 [AVERAGE-NET-ASSETS] 5,398,699 [PER-SHARE-NAV-BEGIN] 10.00 [PER-SHARE-NII] 0.56 [PER-SHARE-GAIN-APPREC] 1.78 [PER-SHARE-DIVIDEND] (0.00) [PER-SHARE-DISTRIBUTIONS] (0.00) [RETURNS-OF-CAPITAL] 0 [PER-SHARE-NAV-END] 12.34 [EXPENSE-RATIO] .95 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
00250292.BJ9 EX-99.27.19 30 [ARTICLE] 6 [CIK] 0000825316 [NAME] ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. [SERIES] [NUMBER] 19 [NAME] HIGH YIELD PORTFOLIO [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] OCT-27-1997 [PERIOD-END] DEC-31-1997 [INVESTMENTS-AT-COST] 1,083,805 [INVESTMENTS-AT-VALUE] 1,095,363 [RECEIVABLES] 49,766 [ASSETS-OTHER] 508 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 1,145,637 [PAYABLE-FOR-SECURITIES] 0 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 4,282 [TOTAL-LIABILITIES] 4,282 [SENIOR-EQUITY] 110 [PAID-IN-CAPITAL-COMMON] 1,121,749 [SHARES-COMMON-STOCK] 110,466 [SHARES-COMMON-PRIOR] 0 [ACCUMULATED-NII-CURRENT] 7,694 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] 244 [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 11,558 [NET-ASSETS] 1,141,355 [DIVIDEND-INCOME] 0 [INTEREST-INCOME] 8,698 [OTHER-INCOME] 0 [EXPENSES-NET] (1,004) [NET-INVESTMENT-INCOME] 7,694 [REALIZED-GAINS-CURRENT] 244 [APPREC-INCREASE-CURRENT] 11,558 [NET-CHANGE-FROM-OPS] 19,496 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] 0 [DISTRIBUTIONS-OF-GAINS] 0 [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 110,513 [NUMBER-OF-SHARES-REDEEMED] (47) [SHARES-REINVESTED] 0 [NET-CHANGE-IN-ASSETS] 1,141,355 [ACCUMULATED-NII-PRIOR] 0 [ACCUMULATED-GAINS-PRIOR] 0 [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 1,000 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 9,000 [AVERAGE-NET-ASSETS] 602,663 [PER-SHARE-NAV-BEGIN] 10.00 [PER-SHARE-NII] 0.13 [PER-SHARE-GAIN-APPREC] 0.20 [PER-SHARE-DIVIDEND] 0.00 [PER-SHARE-DISTRIBUTIONS] 0.00 [RETURNS-OF-CAPITAL] 0.00 [PER-SHARE-NAV-END] 10.33 [EXPENSE-RATIO] 0.95 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
00250292.BK0 EX-99 31 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below hereby revokes all prior powers granted by the undersigned to the extent inconsistent herewith and constitutes and appoints John D. Carifa, Edmund P. Bergan, Jr., Domenick Pugliese, Andrew L. Gangolf and Emilie D. Wrapp and each of them, to act severally as attorneys-in-fact and agents, with power of substitution and resubstitution, for the undersigned in any and all capacities, solely for the purpose of signing the respective Registration Statements, and any amendments thereto, on Form N-1A of ACM Institutional Reserves, Inc., AFD Exchange Reserves, Alliance Balanced Shares, Inc., Alliance Bond Fund, Inc., Alliance Global Dollar Government Fund, Inc., Alliance Global Small Cap Fund, Inc., Alliance Global Strategic Income Trust, Inc., Alliance Growth and Income Fund, Inc., Alliance High Yield Fund, Inc., Alliance Income Builder Fund, Inc., Alliance Limited Maturity Government Fund, Inc., Alliance Mortgage Securities Income Fund, Inc., Alliance Multi-Market Strategy Trust, Inc., Alliance Municipal Income Fund, Inc., Alliance Municipal Income Fund II, 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 Short-Term Multi-Market Trust, Inc., Alliance Utility Income Fund, Inc., Alliance Variable Products Series Fund, Inc., Alliance World Income Trust, Inc., Alliance Worldwide Privatization Fund, Inc., Fiduciary Management Associates, The Alliance Fund, Inc. and The Alliance Portfolios, and filing the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. /s/ Ruth Block ___________________________ Ruth Block Dated: September 9, 1997 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below hereby revokes all prior powers granted by the undersigned to the extent inconsistent herewith and constitutes and appoints John D. Carifa, Edmund P. Bergan, Jr., Domenick Pugliese, Andrew L. Gangolf and Emilie D. Wrapp and each of them, to act severally as attorneys-in-fact and agents, with power of substitution and resubstitution, for the undersigned in any and all capacities, solely for the purpose of signing the respective Registration Statements, and any amendments thereto, on Form N-1A of ACM Institutional Reserves, Inc., AFD Exchange Reserves, Alliance All-Asia Fund, Inc., Alliance Balanced Shares, Inc., Alliance Bond Fund, Inc., Alliance Capital Reserves, Alliance Developing Markets Fund, Inc. 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 Income Builder Fund, Inc., Alliance International Fund, 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/Regent Sector Opportunity Fund, Inc., Alliance Short-Term Multi-Market Trust, Inc., Alliance Technology Fund, Inc., Alliance Utility Income Fund, Inc., Alliance Variable Products Series Fund, Inc., Alliance World Income Trust, Inc., Alliance Worldwide Privatization Fund, Inc., Fiduciary Management Associates, The Alliance Fund, Inc., The Alliance Portfolios, and The Hudson River Trust, and filing the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. /s/ John D. Carifa ___________________________ John D. Carifa Dated: September 9, 1997 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below hereby revokes all prior powers granted by the undersigned to the extent inconsistent herewith and constitutes and appoints John D. Carifa, Edmund P. Bergan, Jr., Domenick Pugliese, Andrew L. Gangolf and Emilie D. Wrapp and each of them, to act severally as attorneys-in-fact and agents, with power of substitution and resubstitution, for the undersigned in any and all capacities, solely for the purpose of signing the respective Registration Statements, and any amendments thereto, on Form N-1A of ACM Institutional Reserves, Inc., AFD Exchange Reserves, Alliance All-Asia Fund, Inc., Alliance Balanced Shares, Inc., Alliance Bond Fund, Inc., Alliance Developing Markets Fund, Inc. Alliance Global Dollar Government Fund, Inc., Alliance Global Environment Fund, Inc., Alliance Global Small Cap Fund, Inc., Alliance Global Strategic Income Trust, Inc., Alliance Greater China 97 Fund, Inc., Alliance Growth and Income Fund, Inc., Alliance High Yield Fund, Inc., Alliance Income Builder Fund, Inc., Alliance International Fund, Alliance Limited Maturity Government Fund, Inc., Alliance Mortgage Securities Income Fund, Inc., Alliance Multi-Market Strategy Trust, Inc., Alliance Municipal Income Fund, Inc., Alliance Municipal Income Fund II, 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 Short-Term Multi-Market Trust, Inc., Alliance Technology Fund, Inc., Alliance Utility Income Fund, Inc., Alliance Variable Products Series Fund, Inc., Alliance World Income Trust, Inc., Alliance Worldwide Privatization Fund, Inc., Fiduciary Management Associates and The Alliance Fund, Inc. and filing the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. /s/ David H. Dievler ___________________________ David H. Dievler Dated: September 9, 1997 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below hereby revokes all prior powers granted by the undersigned to the extent inconsistent herewith and constitutes and appoints John D. Carifa, Edmund P. Bergan, Jr., Domenick Pugliese, Andrew L. Gangolf and Emilie D. Wrapp and each of them, to act severally as attorneys-in-fact and agents, with power of substitution and resubstitution, for the undersigned in any and all capacities, solely for the purpose of signing the respective Registration Statements, and any amendments thereto, on Form N-1A of ACM Institutional Reserves, Inc., AFD Exchange Reserves, Alliance All-Asia Fund, Inc., Alliance Balanced Shares, Inc., Alliance Bond Fund, Inc., Alliance Developing Markets Fund, Inc., Alliance Global Dollar Government Fund, Inc., Alliance Global Environment Fund, Inc., Alliance Global Small Cap Fund, Inc., Alliance Global Strategic Income Trust, Inc., Alliance Growth and Income Fund, Inc., Alliance High Yield Fund, Inc., Alliance Income Builder Fund, Inc., Alliance International Fund, Alliance Limited Maturity Government Fund, Inc., Alliance Mortgage Securites Incoem Fund, Inc., Alliance Multi-Market Strategy Trust, Inc., Alliance Municipal Income Fund, Inc., Alliance Municipal Income Fund II, 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 Short-Term Multi-Market Trust, Inc., Alliance Utility Income Fund, Inc., Alliance Variable Products Series Fund, Inc., Alliance World Income Trust, Inc., Alliance Worldwide Privatization Fund, Inc., Fiduciary Management Associates, The Alliance Fund, Inc., and filing the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. /s/ John H. Dobkin ___________________________ John H. Dobkin Dated: September 9, 1997 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below hereby revokes all prior powers granted by the undersigned to the extent inconsistent herewith and constitutes and appoints John D. Carifa, Edmund P. Bergan, Jr., Domenick Pugliese, Andrew L. Gangolf and Emilie D. Wrapp and each of them, to act severally as attorneys-in-fact and agents, with power of substitution and resubstitution, for the undersigned in any and all capacities, solely for the purpose of signing the respective Registration Statements, and any amendments thereto, on Form N-1A of ACM Institutional Reserves, Inc., AFD Exchange Reserves, Alliance Balanced Shares, Inc., Alliance Bond Fund, Inc., Alliance Capital Reserves, Alliance Global Dollar Government 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 Income Builder 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 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 Short-Term Multi-Market Trust, Inc., Alliance Technology Fund, Inc., Alliance Utility Income Fund, Inc., Alliance Variable Products Series Fund, Inc., Alliance World Income Trust, Inc., Alliance Worldwide Privatization Fund, Inc., Fiduciary Management Associates, The Alliance Fund, Inc., The Alliance Portfolios and the Hudson River Trust, and filing the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. /s/ William H. Foulk, Jr. ___________________________ William H. Foulk, Jr. Dated: September 9, 1997 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below hereby revokes all prior powers granted by the undersigned to the extent inconsistent herewith and constitutes and appoints John D. Carifa, Edmund P. Bergan, Jr., Domenick Pugliese, Andrew L. Gangolf and Emilie D. Wrapp and each of them, to act severally as attorneys-in-fact and agents, with power of substitution and resubstitution, for the undersigned in any and all capacities, solely for the purpose of signing the respective Registration Statements, and any amendments thereto, on Form N-1A of ACM Institutional Reserves, Inc., AFD Exchange Reserves, Alliance Balanced Shares, Inc., Alliance Bond Fund, Inc., Alliance Global Dollar Government Fund, Inc., Alliance Global Small Cap Fund, Inc., Alliance Global Strategic Income Trust, Inc., Alliance Growth and Income Fund, Inc., Alliance High Yield Fund, Inc., Alliance Income Builder Fund, Inc., Alliance Limited Maturity Government Fund, Inc., Alliance Mortgage Securities Income Fund, Inc., Alliance Multi- Market Strategy Trust, Inc., Alliance Municipal Income Fund, Inc., Alliance Municipal Income Fund II, 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 Short-Term Multi-Market Trust, Inc., Alliance Utility Income Fund, Inc., Alliance Variable Products Series Fund, Inc., Alliance World Income Trust, Inc., Alliance Worldwide Privatization Fund, Inc., Fiduciary Management Associates and The Alliance Fund, Inc., and filing the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. /s/ Dr. James M. Hester ___________________________ Dr. James M. Hester Dated: September 9, 1997 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below hereby revokes all prior powers granted by the undersigned to the extent inconsistent herewith and constitutes and appoints John D. Carifa, Edmund P. Bergan, Jr., Domenick Pugliese, Andrew L. Gangolf and Emilie D. Wrapp and each of them, to act severally as attorneys-in-fact and agents, with power of substitution and resubstitution, for the undersigned in any and all capacities, solely for the purpose of signing the respective Registration Statements, and any amendments thereto, on Form N-1A of ACM Institutional Reserves, Inc., AFD Exchange Reserves, Alliance Balanced Shares, Inc., Alliance Bond Fund, Inc., Alliance Global Dollar Government Fund, Inc., Alliance Global Small Cap Fund, Inc., Alliance Global Strategic Income Trust, Inc., Alliance Growth and Income Fund, Inc., Alliance High Yield Fund, Inc., Alliance Income Builder 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 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 Short-Term Multi-Market Trust, Inc., Alliance Utility Income Fund, Inc., Alliance Variable Products Series Fund, Inc., Alliance World Income Trust, Inc., Alliance Worldwide Privatization Fund, Inc., Fiduciary Management Associates, The Alliance Fund, Inc. and The Hudson River Trust, and filing the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. /s/ Clifford L. Michel ___________________________ Clifford L. Michel Dated: September 9, 1997 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below hereby revokes all prior powers granted by the undersigned to the extent inconsistent herewith and constitutes and appoints John D. Carifa, Edmund P. Bergan, Jr., Domenick Pugliese, Andrew L. Gangolf and Emilie D. Wrapp and each of them, to act severally as attorneys-in-fact and agents, with power of substitution and resubstitution, for the undersigned in any and all capacities, solely for the purpose of signing the respective Registration Statements, and any amendments thereto, on Form N-1A of ACM Institutional Reserves, Inc., AFD Exchange Reserves, Alliance Balanced Shares, Inc., Alliance Bond Fund, Inc., Alliance Capital Reserves, Alliance Global Dollar Government Fund, Inc., Alliance Global Small Cap Fund, Inc., Alliance Global Strategic Income Trust, Inc., Alliance Government Reserves, Alliance Growth and Income Fund, Inc., Alliance High Yield Fund, Inc., Alliance Income Builder Fund, Inc., Alliance Limited Maturity Government Fund, Inc., 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 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 Short-Term Multi-Market Trust, Inc., Alliance Utility Income Fund, Inc., Alliance Variable Products Series Fund, Inc., Alliance World Income Trust, Inc., Alliance Worldwide Privatization Fund, Inc., Fiduciary Management Associates, The Alliance Fund, Inc., The Alliance Portfolios and The Hudson River Trust, and filing the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. /s/ Donald J. Robinson ___________________________ Donald J. Robinson Dated: September 9, 1997 00250292.BK6 -----END PRIVACY-ENHANCED MESSAGE-----