-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, sv+mOOSW35LL53yN0pVm53sTkjn1wsU2vKz/j1+le6h1J/kDqkTu3MUX7HfunHvS 6sfRobrEDQUoVPKOK6a2ug== 0000919574-95-000101.txt : 19950511 0000919574-95-000101.hdr.sgml : 19950511 ACCESSION NUMBER: 0000919574-95-000101 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950509 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: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-18647 FILM NUMBER: 95535743 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 497 1 This is filed pursuant to Rule 497(c) File Nos. 33-18647 and 811-5398. [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 - ------------------------------------------------------------------------------- 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. 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. (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, 1995 Investors are advised to carefully read this Prospectus and to retain it for future reference. - -------------------------------------------------------------------------------- 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 contracts 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 ob- tained from Alliance Fund Services, Inc. at the address or telephone number 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 of- fered 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, 1995, 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. High Yield Portfolio is an inac- tive portfolio of the Fund.
U.S. GROWTH GOVERNMENT/ PREMIER AND HIGH GRADE TOTAL GROWTH INCOME SECURITIES RETURN PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO --------- --------- ----------- --------- ANNUAL PORTFOLIO OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS) Management Fees..................... .55%* .62%* 0%* 0%* Other Expenses...................... .40%* .28%* .95%* .95%* --- --- --- --- Total Portfolio Operating Expenses.. .95% .90% .95% .95% === === === ===
- -------- * Net of expense reimbursement.
SHORT- TERM INTER- MULTI- NATIONAL MARKET PORTFOLIO PORTFOLIO --------- --------- ANNUAL PORTFOLIO OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS) Management Fees........................................... 0%* .50%* Other Expenses............................................ .95%* .44%* --- --- Total Portfolio Operating Expenses........................ .95% .94% === ===
- -------- * Net of expense reimbursement. EXAMPLE You would pay the following expenses on a $1,000 investment, assuming a 5% annual return (cumulatively through the end of each time period).
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- Premier Growth Portfolio....................... $10 $30 $52 $116 Growth and Income Portfolio.................... $10 $30 $52 $116 U.S. Government/High Grade Securities Portfo- lio........................................... $10 $30 $52 $116 Total Return Portfolio......................... $10 $30 $52 $116 International Portfolio........................ $10 $30 $52 $116 Short-Term Multi-Market Portfolio.............. $10 $30 $52 $116
3 The purpose of the foregoing table is to assist the investor in understanding the various costs and expenses that an investor in the Fund will bear directly and indirectly. Expense Information for the Premier Growth Portfolio, U.S. Government/High Grade Securities Portfolio, Total Return Portfolio, Interna- tional Portfolio, Growth and Income Portfolio and Short-Term Multi-Market Port- folio have been restated to reflect current fees. The expenses listed in the table for the Premier Growth Portfolio, Growth and Income Portfolio, U.S. Government/High Grade Securities Portfolio, Total Return Portfolio, Interna- tional Portfolio and Short-Term Multi-Market Portfolio, are net of voluntary expense reimbursements, which are not required to be continued indefinitely; however, the Adviser intends to continue such reimbursements for the foresee- able future. The expenses of the following Portfolios, before expense reim- bursements, would be: Premier Growth Portfolio: Management Fees -- 1.00%, Other Expenses -- .40% and Total Portfolio Operating Expenses -- 1.40%; Growth and Income Portfolio: Management Fees -- .63%, Other Expenses -- .28% and Total Portfolio Operating Expenses -- .91%; U.S. Government/High Grade Securities Portfolio: Management Fees -- .60%, Other Expenses -- 3.13% and Total Portfolio Operating Expenses -- 3.73%; Total Return Portfolio: Management Fees -- .63%, Other Expenses -- 18.86% and Total Portfolio Operating Expenses -- 19.49%; In- ternational Portfolio: Management Fees -- 1.00%, Other Expenses -- 6.26% and Total Portfolio Operating Expenses -- 7.26%; Short-Term Multi-Market Portfolio: Management Fees -- .55%, Other Expenses -- .44% and Total Portfolio Operating Expenses -- .99%. The example should not be considered representative of future expenses; actual expenses may be greater or less than those shown. 4 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, -------------------------- JUNE 26, 1992(a) TO 1994 1993 DECEMBER 31, 1992 ----------- ----------- ----------------- Net asset value, beginning of period........................ $ 12.79 $ 11.38 $10.00 ----------- ----------- ------ INCOME FROM INVESTMENT OPERA- TIONS Net investment income(b)...... .03(c) -0-(c) .06(c) Net realized and unrealized gain (loss) on investments... (.41) 1.43 1.32 ----------- ----------- ------ Net increase (decrease) in net asset value from operations.. (.38) 1.43 1.38 ----------- ----------- ------ LESS: DISTRIBUTIONS Dividends from net investment income....................... (.01) (.01) -0- Distributions from net real- ized gains................... (.03) (.01) -0- ----------- ----------- ------ Total dividends and distribu- tions........................ (.04) (.02) -0- ----------- ----------- ------ Net asset value, end of peri- od........................... $ 12.37 $ 12.79 $11.38 =========== =========== ====== TOTAL RETURN Total investment return based on net asset value(d)........ (2.96)% 12.63% 13.80%(e) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted).............. $ 37,669 $ 13,659 $3,760 Ratio to average net assets of: Expenses, net of waivers and reimbursements............... .95% 1.18% .95%(f) Expenses, before waivers and reimbursements............... 1.40% 2.05% 4.20%(f) Net investment income......... .42% .22% .96%(f) Portfolio turnover rate....... 38% 42% 14%
GROWTH AND INCOME PORTFOLIO ------------------------------------------------------- YEAR ENDED DECEMBER 31, JANUARY 14, 1991(a) -------------------------------- TO 1994 1993 1992 DECEMBER 31, 1991 -------- -------- ------- ------------------- Net asset value, begin- ning of period......... $ 12.18 $ 10.99 $ 10.35 $10.00 -------- -------- ------- ------ INCOME FROM INVESTMENT OPERATIONS Net investment income(b)............. .10 (c) .01(c) .10(c) .35(c) Net realized and unrealized gain (loss) on investments........ (.16) 1.27 .71 -0- -------- -------- ------- ------ Net increase (decrease) in net asset value from operations....... (.06) 1.28 .81 .35 -------- -------- ------- ------ LESS: DISTRIBUTIONS Dividends from net in- vestment income....... (.10) (.06) (.17) -0- Distributions from net realized gains........ (.17) (.03) -0- -0- -------- -------- ------- ------ Total dividends and distributions......... (.27) (.09) (.17) -0- -------- -------- ------- ------ Net asset value, end of period................ $ 11.85 $ 12.18 $ 10.99 $10.35 ======== ======== ======= ====== TOTAL RETURN Total investment return based on net asset value(d).............. (.35)% 11.69% 7.92% 3.50%(e) RATIOS/SUPPLEMENTAL DATA Net assets, end of pe- riod (000's omitted).. $ 41,702 $ 22,756 $ 7,803 $1,431 Ratio to average net assets of: Expenses, net of waiv- ers and reimburse- ments................. .90% 1.18% .99% 1.79%(f) Expenses, before waiv- ers and reimburse- ments................. .91% 1.28% 2.09% 9.43%(f) Net investment income.. 1.71% 1.76% 2.42% 3.59%(f) Portfolio turnover rate.................. 95% 69% 49% 0%
- ------- (a) Commencement of operations. (b) Net of expenses reimbursed or waived by investment adviser. (c) Based on average shares outstanding. (d) 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. (e) Total investment return calculated for a period of less than one year is not annualized. (f) Annualized. 5 FINANCIAL HIGHLIGHTS
SHORT-TERM MULTI-MARKET PORTFOLIO ------------------------------------------------------------- YEAR ENDED DECEMBER 31, NOVEMBER 28, 1990(a) --------------------------------------- TO 1994 1993 1992 1991 DECEMBER 31, 1990 ------- ------- ------- ------ -------------------- Net asset value, begin- ning of period......... $ 11.07 $ 10.77 $ 10.68 $10.03 $10.00 ------- ------- ------- ------ ------ INCOME FROM INVESTMENT OPERATIONS Net investment income(b)............. .47(c) .28(c) .63(c) .36 .03 Net realized and unrealized gain (loss) on investments and foreign currency transactions.......... (1.16) .43 (.54) .34 -0- ------- ------- ------- ------ ------ Net increase (decrease) in net asset value from operations....... (.69) .71 .09 .70 .03 ------- ------- ------- ------ ------ LESS: DISTRIBUTIONS Dividends from net in- vestment income....... (.46) (.41) -0- (.03) -0- Distributions from net realized gains........ -0- -0- -0- (.02) -0- Return of capital...... (.01) -0- -0- -0- -0- ------- ------- ------- ------ ------ Total dividends and distributions......... (.47) (.41) -0- (.05) -0- ------- ------- ------- ------ ------ Net asset value, end of period................ $ 9.91 $ 11.07 $ 10.77 $10.68 $10.03 ======= ======= ======= ====== ====== TOTAL RETURN Total investment return based on net asset value(d).............. (6.51)% 6.62% .84% 7.01% .30%(e) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted).............. $20,921 $23,560 $14,841 $5,858 $296 Ratio to average net assets of: Expenses, net of waiv- ers and reimburse- ments................. .94% 1.17% .99% 1.79% 2.50%(f) Expenses, before waiv- ers and reimburse- ments................. .99% 1.24% 1.66% 4.40% 10.62%(f) Net investment income.. 6.52% 6.39% 7.18% 7.53% 5.76%(f) Portfolio turnover rate.................. 134% 210% 153% 51% 0%
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO ----------------------------------------------------------------- YEAR ENDED DECEMBER 31, SEPTEMBER 17, 1992(a) ----------------------- TO 1994 1993 DECEMBER 31, 1992 --------------- --------------- --------------------------- Net asset value, begin- ning of period......... $10.72 $ 9.89 $10.00 --------------- --------------- --------------- INCOME FROM INVESTMENT OPERATIONS Net investment income(b)............. .28(c) .43(c) .14(c) Net realized and unrealized gain (loss) on investments........ (.71) .48 (.25) --------------- --------------- --------------- Net increase (decrease) in net asset value from operations....... (.43) .91 (.11) --------------- --------------- --------------- LESS: DISTRIBUTIONS Dividends from net in- vestment income....... (.21) (.08) -0- Distributions from net realized gains........ (.14) -0- -0- --------------- --------------- --------------- Total dividends and distributions......... (.35) (.08) -0- --------------- --------------- --------------- Net asset value, end of period................ $ 9.94 $10.72 $ 9.89 =============== =============== =============== TOTAL RETURN Total investment return based on net asset value(d).............. (4.03)% 9.20% (1.10)%(e) RATIOS/SUPPLEMENTAL DATA Net assets, end of pe- riod (000's omitted).. $ 5,101 $ 1,350 $785 Ratio to average net assets of: Expenses, net of waiv- ers and reimburse- ments................. .95% 1.16% .95%(f) Expenses, before waiv- ers and reimburse- ments................. 3.73% 5.42% 11.56%(f) Net investment income.. 5.64% 4.59% 4.82%(f) Portfolio turnover rate.................. 32% 177% 13%
- -------- (a) Commencement of operations. (b) Net of expenses reimbursed by investment adviser. (c) Based on average shares outstanding. (d) 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. (e) Total investment return calulated for a period of less than one year is not annualized. (f) Annualized. 6 FINANCIAL HIGHLIGHTS
TOTAL RETURN PORTFOLIO -------------------------------------------------- YEAR ENDED DECEMBER 31, DECEMBER 28, 1992(a) ----------------------- TO 1994 1993 DECEMBER 31, 1992 ----------- ----------- -------------------- Net asset value, beginning of period.................. $10.97 $10.01 $10.00 ----------- ----------- ------ INCOME FROM INVESTMENT OPER- ATIONS Net investment income(b)... .15(c) .15(c) .01 Net realized and unrealized gain (loss) on investments .......................... (.56) .81 -0- ----------- ----------- ------ Net increase (decrease) in net asset value from oper- ations.................... (.41) .96 .01 ----------- ----------- ------ LESS: DISTRIBUTIONS Dividends from net invest- ment income............... (.09) -0- -0- Distributions from net re- alized gains ............. (.06) -0- -0- ----------- ----------- ------ Total dividends and distri- butions................... (.15) -0- -0- ----------- ----------- ------ Net asset value, end of pe- riod...................... $10.41 $10.97 $10.01 =========== =========== ====== TOTAL RETURN Total investment return based on net asset value(d).................. (3.77)% 9.59% .10%(e) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)........... $750 $360 $95 Ratio to average net assets of: Expenses, net of waivers and reimbursements........ .95% 1.20% 0% Expenses, before waivers and reimbursements........ 19.49% 25.96% 0% Net investment income...... 2.29% 1.45% 2.21%(f) Portfolio turnover rate.... 83% 25% 0%
INTERNATIONAL PORTFOLIO ---------------------------------------- YEAR ENDED DECEMBER 31, DECEMBER 28, 1992(a) ---------------- TO 1994 1993 DECEMBER 31, 1992 ------ ------ -------------------- Net asset value, beginning of period.. $12.16 $10.00 $10.00 ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS Net investment income(b)............. .10(c) .03(c) -0- Net realized and unrealized gain on investments and foreign currency transactions........................ .72(d) 2.13 -0- ------ ------ ------ Net increase in net asset value from operations.......................... .82 2.16 -0- ------ ------ ------ LESS: DISTRIBUTIONS Dividends from net investment income. (.02) -0- -0- Distributions from net realized gains............................... (.08) -0- -0- ------ ------ ------ Total dividends and distributions.... (.10) -0- -0- ------ ------ ------ Net asset value, end of period....... $12.88 $12.16 $10.00 ====== ====== ====== TOTAL RETURN Total investment return based on net asset value(e)...................... 6.70% 21.60% 0% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)............................ $7,276 $688 $79 Ratio of average net assets of: Expenses, net of waivers and reim- bursements......................... .95% 1.20% 0% Expenses, before waivers and reim- bursements......................... 7.26% 39.28% 0% Net investment income............... .90% .26% 2.07%(f) Portfolio turnover rate.............. 95% 85% 0%
- -------- (a) Commencement of operations. (b) Net of expenses reimbursed or waived by investment adviser. (c) Based on average share outstanding. (d) 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. (e) Total investment return calculated for a period of less than one year is not annualized. (f) Annualized. 7 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 Portfolio 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 intention of doing so, the Fund is empowered to establish, without shareholder approval, additional portfolios which may have different investment objectives. The Fund currently has 16 Portfolios, 6 of which are offered by this Prospec- tus: the Premier Growth Portfolio, the Growth and Income Portfolio, the U.S. Government/High Grade Securities Portfolio, the Total Return Portfolio, the International Portfolio and the Short-Term Multi-Market 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 an- nuity 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 objectives and policies among the Portfolios determine the types of portfolio 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 without approval 8 by the holders of a majority of such Portfolio's outstanding voting securi- ties, 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 port- folio securities in which each Portfolio may invest are described in greater detail below. PREMIER GROWTH PORTFOLIO General. The investment objective of the Premier Growth Portfolio is growth of capital by pursuing aggressive investment policies. Since investments will be made based upon their potential for capital appreciation, current income will be incidental to the objective of capital growth. Because of the market risks inherent in any investment, the selection of securities on the basis of their appreciation possibilities cannot ensure against possible loss in value, and there is, of course, no assurance that the Portfolio's investment objective will be met. The Portfolio is therefore not intended for investors whose prin- cipal objective is assured income and conservation of capital. The Portfolio will invest 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, care- fully selected, high-quality U.S. companies that, in the judgment of Alliance Capital Management L.P. (the "Adviser"), are likely to achieve superior earn- ings growth. The Portfolio investments in the 25 such companies most highly regarded at any point in time by the Adviser will usually constitute approxi- mately 70% of the Portfolio's net assets. Normally, approximately 40 companies will be represented in the Portfolio's investment portfolio. 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. The Portfolio will, under normal circumstances, invest 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. The Adviser depends heavily upon the fundamental analysis and research of its large internal research staff in making investment decisions for the Portfolio. The research staff generally follows a primary research universe of approximately 600 companies which are considered by the Adviser to have strong management, superior industry posi- tions, excellent balance sheets and the ability to demonstrate superior earn- ings growth. As one of the largest multi-national investment firms, the Ad- viser has access to con- 9 siderable information concerning all of the companies followed, an in-depth understanding of the products, services, markets and competition of these com- panies and a good knowledge of the managements of most of the companies in its research universe. The Adviser's analysts prepare their own earnings estimates and financial mod- els for each company followed. While each analyst has responsibility for fol- lowing companies in one or more identified sectors and/or industries, the lat- eral structure of the Adviser's research organization and constant communica- tion among the analysts result in decision-making based on the relative at- tractiveness 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 fundamentals. Research emphasis is placed on the identification of companies whose substan- tially above average prospective earnings growth is not fully reflected in current market valuations. The Adviser continually reviews its primary research universe of approximately 600 companies to maintain a list of favored securities, the "Alliance 100," considered by the Adviser to have the most clearly superior earnings potential and valuation attraction. The Adviser's concentration on a limited universe of companies allows it to devote its extensive resources to constant intensive research of these companies. Companies are constantly added to and deleted from the Alliance 100 as fundamentals and valuations change. The Adviser's Large Cap Growth Group, in turn, further refines, on a weekly basis, the se- lection process for the Portfolio with each portfolio manager in the Group se- lecting the 25 such companies which appear to the manager to be most attrac- tive at their current prices. These individual ratings are then aggregated and ranked to produce a composite list of the 25 most highly regarded stocks, the "Favored 25." As noted above, approximately 70% of the Portfolio's net assets will usually be invested in the Favored 25 with the balance of the Fund's in- vestment portfolio consisting principally of other stocks in the Alliance 100. Portfolio emphasis upon particular industries or sectors is a by-product of the stock selection process rather than the result of assigned targets or ranges. In the management of the Portfolio's investment portfolio, the Adviser will seek to utilize market volatility judiciously (assuming no change in company fundamentals) to adjust the Portfolio's positions. The Portfolio will strive to capitalize on apparently unwarranted price fluctuations, both to purchase or increase positions on weaknesses and to sell or reduce overpriced holdings. Under normal circumstances, the Portfolio will remain substantially fully in- vested in equity securities and will not take significant cash positions for market timing purposes. Rather, during a market decline, while adding to posi- tions in favored stocks, the Portfolio will tend to become somewhat more aggressive, gradually reducing somewhat the number of companies represented in the Portfolio's portfolio. Conversely, in rising markets, while reducing or eliminating fully valued positions, the Portfolio will tend to become somewhat more conservative, gradually increasing the number of companies represented in the Portfolio's 10 portfolio. Through this "buying into declines" and "selling into strength," the Adviser seeks to gain positive returns in good markets while providing some measure of protection in poor markets. The Adviser expects the average weighted market capitalization of companies represented in the Portfolio's portfolio (i.e., the number of a company's shares outstanding multiplied by the price per share) to normally be in the range of or exceed the average weighted market capitalization of companies com- prising the Standard & Poor's 500 Composite Stock Price Index, a widely recog- nized unmanaged index of market activity based upon the aggregate performance of a selected portfolio of publicly traded stocks, including monthly adjust- ments to reflect the reinvestment of dividends and distributions. The Portfolio intends to invest in special situations from time to time. A spe- cial situation arises when, in the opinion of the Portfolio's management, the securities of a particular company will, within a reasonably estimable period of time, be accorded market recognition at an appreciated value solely by rea- son of a development particularly or uniquely applicable to that company and regardless of general business conditions or movements of the market as a whole. Short Sales. The Premier Growth Portfolio may not sell securities short, except that it may make short sales "against the box." A short sale is effected by selling a security which the Portfolio does not own, or if the Portfolio does own such security, it is not to be delivered upon consummation of the sale. A short sale is "against the box" to the extent that the Portfolio contem- poraneously owns or has the right to obtain securities identical to those sold short without payment. Not more than 15% of the value of the Portfolio's net assets will be in deposits on short sales "against the box." Puts and Calls. The Premier Growth Portfolio may write call options and may purchase and sell put and call options written by others, combinations thereof or similar options. The Portfolio may not write put options. The buyer of an option, upon payment of a premium obtains, in the case of a put option, the right to deliver to the writer of the option and, in the case of a call option, the right to call upon the writer to deliver, a specified number of shares of a specified stock on or before a fixed date at a predetermined price. Writing, purchasing and selling call options are highly specialized activities and entail greater than ordinary investment risks. When calls written by the Portfolio are exercised, the Portfolio will be obligated to sell stocks below the current market price. A call written by the Portfolio will not be sold un- less the Portfolio at all times during the option period owns either (a) the optioned securities, or securities convertible into or carrying rights to acquire 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 securities subject to outstanding call options (valued at the lower of the option price or market value of such 11 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 Portfo- lio, 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. 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. 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 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. 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 will invest principally in a portfo- lio of: (i) obligations issued or guaranteed by the U.S. Government and repur- chase agreements pertaining to U.S. Government Securities, and (ii) other high grade debt securities rated AAA, AA or A by Standard & Poor's Corporation ("S&P") or Aaa, Aa or A by Moody's Investors Service, Inc. ("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 will invest at least 65% of its total assets in these types of securities, including the se- curities held subject to repurchase agreements. The average weighted maturing of the Portfolio's portfolio of U.S. Government securities is expected to vary between one year or less and 30 years. See "Other Investment Policies and Techniques --Fixed-Income Securities." The Portfolio will utilize certain other investment techniques, including options and futures contracts, intended to enhance income and re- 12 duce 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 prescribed by the U.S. Treasury Department 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 are con- sidered a single investment. Accordingly, the U.S. Government/High Grade Secu- rities Portfolio will limit its purchases of U.S. Government Securities to 55% of the total assets of the Portfolio. Consistent with this limitation, the Portfolio will, as a matter of fundamental policy, invest at least 45% of its total assets in U.S. Government Securities. Nevertheless, the Portfolio re- serves the right to modify the percentage of its investments in U.S. Govern- ment Securities in order to comply with all applicable tax requirements. U.S. Government Securities. Securities issued or guaranteed by the U.S. Gov- ernment include: (i) U.S. Treasury obligations, which differ only in their in- terest rates, maturities and times of issuance: U.S. Treasury bills (maturity of one year or less), U.S. Treasury notes (maturities of one to 10 years), and U.S. Treasury bonds (generally maturities of greater than 10 years), all of which are backed by the full faith and credit of the United States; and (ii) obligations issued or guaranteed by the U.S. Government, including government guaranteed mortgage-related securities, some of which are backed by the full faith and credit of the U.S. Treasury, e.g., direct pass-through certificates of the Government National Mortgage Association; some of which are supported by the right of the issuer to borrow from the U.S. Government, e.g., obliga- tions of Federal Home Loan Banks; and some of which are backed only by the credit of the issuer itself, e.g., obligations of the Student Loan Marketing Association. See the Statement of Additional Information of the Fund for a de- scription of obligations issued or guaranteed by the U.S. Government. High Grade Securities. High grade debt securities which, together with U.S. Government Securities, will constitute at least 65% of the Portfolio's assets, include: 1. Debt securities which are rated AAA, AA or A by S&P 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 Investors Services, Inc. ("Fitch"); 3. Commercial paper rated A-1+, A-1, A-2 or A-3 by S&P 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. Other Securities. While the Portfolio's investment strategy normally empha- sizes U.S. Government Securities and high grade debt securities, the Portfolio may, where consistent with its investment objective, invest up to 35% of its total assets in other types of securities, including (i) Foreign Government Securities (see "Other In- 13 vestment Policies and Techniques -- Foreign Securities," below), (ii) invest- ment grade corporate debt securities of a type other than the high grade debt securities described above (including collateralized mortgage obligations), (iii) 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 (iv) put and call options, futures contracts and options on futures contracts, options on Foreign Government Securities, options on foreign currencies, and forward cur- rency exchange contracts. Investment grade debt securities described in (ii) above are those rated BBB or higher by S&P or Baa or higher by Moody's or, if not so rated, are of equivalent investment quality in the opinion of the Ad- viser. Securities rated BBB by S&P or Baa by Moody's normally provide higher yields but may be considered to have speculative characteristics. See "Other Investment Policies and Techniques -- Securities Ratings." " -- Investment in Securities Rated Baa and BBB" and Appendix A. TOTAL RETURN PORTFOLIO The investment objective of the Total Return Portfolio is to achieve a high return through a combination of current income and capital appreciation. The Total Return Portfolio's assets are invested in U.S. Government and agency ob- ligations, bonds, fixed-income senior securities (including short and long- term debt securities and preferred stocks to the extent their value is attrib- utable to their fixed-income characteristics), preferred and common stocks in such proportions and of such type as are deemed best adapted to the current economic and market outlooks. The percentage of the Portfolio's assets in- vested in each type of security at any time shall be in accordance with the judgment of the Adviser. INTERNATIONAL PORTFOLIO The International Portfolio's primary investment objective is to seek to ob- tain a total return on its assets from long-term growth of capital principally through a broad portfolio of marketable securities of established non-United States companies (e.g., companies incorporated outside the United States), companies participating in foreign economies with prospects for growth, and foreign government securities. As a secondary objective, the Portfolio will attempt to increase its current income without assuming undue risk. The Ad- viser considers it consistent with these objectives to acquire securities of companies incorporated in the United States and having their principal activi- ties and interests outside of the United States. The International Portfolio intends to be invested primarily in such issuers and under normal circum- stances more than 80% of its assets will be so invested. In seeking its objective, the International Portfolio expects to invest 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 advis- able, the International Portfolio may invest in any other type of security in- cluding, but not limited to, preferred stocks, 14 bonds, notes and other debt securities of foreign issuers (Euro-dollar securi- ties), 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 Inter- national 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 intends to diversify investments broadly among coun-tries and normally to have represented in the portfolio, business activi- ties of not less than three different countries. The Portfolio may invest all or a substantial portion of its assets in one or more of such countries. The Portfolio may purchase securities of companies, wherever organized, which, in the judgment of the Adviser, have their principal activities and interests out- side 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 Invest- ment 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 ad- verse changes in the relationship between the U.S. Dollar and other 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. The Portfolio's dealings in forward contracts will be limited to hedging involving either specific transac- tions or portfolio positions. Transaction hedging is the purchase or sale of forward contracts with respect to specific receivables or payables of the Port- folio accruing in connection with the purchase and sale of its portfolio secu- rities or the payment of dividends and distributions by the Portfolio. Position hedging is the sale of forward contracts with respect to portfolio security po- sitions denominated or quoted in such foreign currency. The Portfolio will not speculate in forward contracts and, therefore, the Adviser believes that the Portfolio will not be subject to the risks frequently associated with the spec- ulative use of such transactions. The Portfolio may not position hedge with re- spect to the currency of a particular country to an extent greater than the ag- gregate market 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 cash or liquid securities 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 se- 15 curities will be placed in the account so that the value of the account will equal the amount of the Portfolio's commitment with respect to such contracts. Hedging against a decline in the value of a currency does not eliminate fluctu- ations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedge currency should rise. Moreover, it may not be possible for the Portfolio to hedge against a devaluation that is so generally anticipated that the Portfolio is not able to contract to sell the currency at a price above the devaluation level it anticipates. The Portfolio will not en- ter into a forward contract with a term of more than one year or if, as a re- sult 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 Neth- erlands, France and Switzerland), Australia, Canada, and such other areas and countries as the Adviser may determine from time to time. However, investments may be made from time to time in companies in, or governments of, developing countries as well as developed countries. Shareholders should be aware that in- vesting 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 companies in, or govern- ments of, developing countries. On December 31, 1994, 39.7% of the Portfolio's net assets were invested in debt securities of Japanese issuers. For a descrip- tion of certain risks associated with investing in foreign securities, see "Other Investment Policies and Techniques -- Foreign Securities," "-- Invest- ment in Japanese Issuers" and (for a further description of Japan)Appendix E to the Statement of Additional Information. SHORT-TERM MULTI-MARKET PORTFOLIO The investment objective of the Short-Term Multi-Market Portfolio is to seek the highest level of current income, consistent with what the Adviser considers to be prudent investment risk, that is available from a portfolio of high-qual- ity debt securities having remaining maturities of not more than three years. The Portfolio seeks high current yields by investing in a portfolio of debt se- curities denominated in the U.S. Dollar and selected foreign currencies. Ac- cordingly, the Portfolio will seek investment opportunities in foreign, as well as domestic, securities markets. While the Portfolio normally will maintain a substantial portion of its assets in debt securities denominated in foreign currencies, the Portfolio will invest 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 16 and less fluctuation in net asset value than a longer-term bond fund. In pursuing its investment objective, the Portfolio seeks to minimize credit risk and fluctuations in net asset value by investing only in shorter-term debt securities. Normally, a high proportion of the Portfolio's investments consist of money market instruments. The Adviser actively manages the Portfolio in ac- cordance with a multi-market investment strategy, allocating the Portfolio's investments among securities denominated in the U.S. Dollar and the currencies of a number of foreign countries and, within each such country, among different types of debt securities. The Adviser adjusts the Portfolio's exposure to each currency based on its perception of the most favorable markets and issuers. In this regard, the percentage of assets invested in securities of a particular country or denominated in a particular currency will vary in accordance with the Adviser's assessment of the relative yield and appreciation potential of such securities and the relationship of a country's currency to the U.S. Dollar. Fundamental economic strength, credit quality and interest rate trends are the principal factors considered by the Adviser in determining whether to increase or decrease the emphasis placed upon a particu-lar type of security or industry sector within the Portfolio's investment portfolio. The Portfolio will 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 coun- tries whose governments are considered stable by the Adviser. In addition to the U.S. Dollar, such currencies include, among others, the Australian Dollar, Austrian Schilling, British Pound Sterling, Canadian Dollar, Danish Krone, Dutch Guilder, European Currency Unit ("ECU"), French Franc, German Mark, Irish Pound, Italian Lira, Japanese Yen, 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. gov-ernment, 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 or Aaa or Aa by Moody's ("High Quality Ratings") or, if unrated, deter- mined by the Adviser to be of equivalent quality; (iii) corporate debt securi- ties having at least one High Quality Rating or, if unrated, determined by the Adviser to be of equivalent quality; (iv) certificates of deposit and bankers' acceptances issued or guaranteed by, or time deposits maintained at, banks (in- cluding foreign branches of U.S. banks or U.S. or foreign branches of foreign banks) having total assets of more than $500 million and determined by the Ad- viser to be of high quality; and (v) commercial paper rated A-1 by S&P, Prime-1 by 17 Moody's, Fitch-1 by Fitch Investors Service, Inc., or Duff 1 by Duff & Phelps Inc. or, if not rated, issued by U.S. or foreign companies having outstanding debt securities rated AAA, AA or A by S&P, or Aaa, Aa or A by Moody's and de- termined 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 Community, which is a twelve-nation organization engaged in cooperative economic activities; the European Coal and Steel Community, which is an economic cooperative whose mem- bers are various European nations' steel and coal industries; and the Asian De- velopment 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 twelve member states of the European Community. The specific amounts of curren- cies comprising the ECU may be adjusted by the Council of Ministers of the Eu- ropean Community to reflect changes in relative values of the underlying cur- rencies. The Adviser does not believe that such adjustments will adversely af- fect holders of ECU-denominated obligations or the marketability of such secu- rities. European governments and supranationals, in particular, issue ECU- denominated obligations. Under normal circumstances, and as a matter of fundamental policy, the Portfo- lio "concentrates" at least 25% of its total assets in debt instruments issued by domestic and foreign companies engaged in the banking industry, including bank holding companies. Such investments may include certificates of deposit, time deposits, bankers' acceptances, and obligations issued by bank holding companies, as well as repurchase agreements entered into with banks (as dis- tinct from non-bank dealers) in accordance with the policies set forth in "Other Investment Policies and Techniques -- Repurchase Agreements" below. 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 related to the banking industry. Sustained in- creases in interest rates can adversely affect the availability and cost of funds for a bank's lending activities, and a deterioration in general economic conditions could increase the exposure to credit losses. The banking industry is also subject to the effects of: the concentration of loan portfolios in par- ticular businesses such as real es- 18 tate, 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 invest- ments in commercial banks located in several foreign countries are subject to additional risks due to the combination in such banks of commercial banking and diversified securities activities. As discussed above, however, the Port- folio will seek 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 will change as the general lev- els of interest rates fluctuate. When interest rates decline, the value of a portfolio primarily invested in debt securities can be expected to rise. Con- versely, when interest rates rise, the value of a portfolio primarily invested in debt securities can be expected to decline. However, a shorter average ma- turity is generally associated with a lower level of market value volatility and, accordingly, it is expected that the net asset value of the Portfolio's shares normally will fluc- tuate 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 will utilize certain investment strate- gies, including the purchase and sale of forward foreign currency exchange contracts and other currency hedging techniques. For a discussion of these in- vestment policies of the Portfolio, see "Other Investment Policies and Tech- niques -- Hedging Techniques," below. For a description of certain risks asso- ciated with investing in foreign securities, see "Other Investment Policies and Techniques -- Foreign Securities," below. OTHER INVESTMENT POLICIES AND TECHNIQUES Except as otherwise noted below, the following description of other investment policies is applicable to all of the Fund's Portfolios: REPURCHASE AGREEMENTS Any Portfolio, except the Total Return Portfolio, may enter into agreements pertaining to U.S. Government Securities with member banks of the Federal Re- serve System or "primary dealers" (as designated by the Federal Reserve Bank of New York). A repurchase agreement arises when a buyer purchases a security and simultane- ously agrees to resell it to the vendor at an agreed-upon future date, 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. Each Portfolio requires continual maintenance 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 vendor's bankruptcy, the Portfolio might be delayed in, or prevented from, selling the collateral for its benefit. The Fund's Board of Directors 19 has established procedures, which are periodically reviewed by the Board, pur- suant to which the Adviser monitors the creditworthiness of the dealers with which the Portfolios enter into repurchase agreement transactions. WRITING COVERED CALL OPTIONS The Premier Growth Portfolio, the Growth and Income Portfolio, the U.S. Government/High Grade Securities Portfolio 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 specified security on or before a fixed date, at a predetermined price. A Portfolio permitted to write call op- tions 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 additional cost. None of the above listed Portfolios may write covered call options in excess of 25% of such Portfolio's assets. A Portfolio may terminate its obligation to the holder of an option written by the Portfolio through a "closing purchase transaction." The Portfolio may not, however, effect a closing purchase transaction with respect to such an option after it has been notified of the exercise of such option. The Portfolio real- izes a profit or loss from a closing purchase transaction if the cost of the transaction is more or less than the premium received by the Portfolio from writing the option. Although the writing of covered call options only on na- tional securities exchanges increases the likelihood of a Portfolio being able to make closing purchase transactions, there is no assurance that a Portfolio will be able to effect closing purchase transactions at any particular time or at an acceptable price. The writing of covered call options could result in in- creases in the portfolio turnover of a Portfolio, especially during periods when market prices of the underlying securities appreciate. LOANS OF PORTFOLIO SECURITIES Each Portfolio may make secured loans of its portfolio securities to brokers, dealers and financial institutions provided that cash, U.S. Government securi- ties, other liquid high-quality debt securities or bank letters of credit equal to at least 100% of the market value of the securities loaned is deposited and maintained by the borrower with the Portfolio. The risks in lending portfolio securities, as with other extensions of credit, consist of possible loss of rights in the collateral should the borrower fail financially. In determining whether to lend securities to a particular borrow- er, the Adviser (subject to review by the Directors) will consider all relevant facts and circumstances, including the creditworthiness of the borrower. While securities are on loan, the borrower will pay the Portfolio any income earned thereon and the Portfolio may invest any cash collateral in portfolio securi- ties, thereby earning additional income, or receive an agreed upon amount of income from a borrower who has delivered equivalent collateral. Each Portfolio will have the right to regain record ownership of loaned 20 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. The Directors will monitor the lending of securities by each Port- folio. No more than 30% of the value of the assets (20% in the case of the Short-Term Multi-Market 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, with respect to foreign securities, see above. Each of the other Portfolios may invest in listed and unlisted foreign securities subject to the limitation that the International Portfolio may invest only in the securities of foreign issuers or U.S. companies having their principal activities and in- terests outside the United States. The other Portfolios of the Fund may invest in foreign securities without limitation, although the Total Return Portfolio has no intention of so investing in the future, the Premier Growth Portfolio intends to invest at least 85% of the value of its total assets in the equity securities of American companies, the Growth and Income Portfolio intends to restrict its investment in foreign securities to issues of high quality and the U.S. Government/High Grade Securities Portfolio may invest up to 25% of the value of its total assets at the time of investment in debt securities of for- eign issuers meeting the rating criteria of that Portfolio and up to 35% of its total assets in Foreign Government Securities (as described below) of issuers considered stable by the Adviser. The Portfolios may convert U.S. Dollars into foreign currency, but only to effect securities transactions on a foreign secu- rities exchange and not to hold such currency as an investment. Each Portfolio may enter into forward foreign currency exchange contracts in order to protect against uncertainty in the level of future foreign exchange rates. The Foreign Government Securities in which the U.S. Government/High Grade Secu- rities Portfolio may invest are obligations issued or guaranteed by a foreign government or any of its political subdivisions, authorities, agencies, or in- strumentalities. The Adviser's determination that a particular country should be considered stable de- pends on the Adviser's evaluation of political and economic developments affecting the country as well as recent experience in the markets for Foreign Government Securities of the country. Examples of foreign governments which the Adviser currently considers to be stable, among others, are the governments of Canada, Germany, Japan, Sweden 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. Government Securities. The percentage of assets of the U.S. Government/High Grade Securities Portfolio invested in Foreign Government Securities will vary depending on the relative yields of such securities, the economies of the coun- tries in which the investments are made and such countries' financial markets, the interest rate climate of such countries and the relationship of such coun- tries' currencies to the U.S. Dollar. 21 Currency is judged on the basis of fundamental economic criteria (e.g., rela- tive inflation levels and trends, growth rate forecasts, balance of payments status, and economic policies) as well as technical and political data. In- vestment of Foreign Government Securities may include those of a number of foreign countries or, depending upon market conditions, those of a single country. The U.S. Government/High Grade Securities Portfolio may also hold foreign currency for hedging purposes. To the extent a Portfolio, including the Short-Term Multi-Market Portfolio, invests in foreign securities, consideration is given to certain factors com- prising both risk and opportunity. The values of foreign securities invest- ments are affected by changes in currency rates or exchange control regula- tions, application of foreign tax laws, including withholding taxes, changes in governmental administration or economic, taxation or monetary policy (in the United States and abroad) or changed circumstances in dealings between na- tions. Currency exchange rate movements will increase or reduce the U.S. dol- lar value of the Portfolio's net assets and income attributable to foreign se- curities. Costs are incurred in connection with conversions between various currencies held by a Portfolio. In addition, there may be substantially less publicly available information about foreign issuers than about domestic issuers, and foreign issuers may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those of domestic issuers. Foreign issuers are subject to accounting, auditing and financial standards and requirements that differ, in some cases significantly, from those applicable to U.S. issuers. In particular, the assets and profits ap- pearing on the financial statements of a foreign issuer may not reflect its financial position or results of operations in the way they would be reflected had the financial statements been prepared in accordance with U.S. generally accepted accounting principles. In addition, for an issuer that keeps account- ing records in local currency, inflation accounting rules in some of the coun- tries in which a Portfolio will invest require, for both tax and accounting purposes, that certain assets and liabilities be restated on the issuer's bal- ance sheet in order to express items in terms of currency of constant purchas- ing power. Inflation accounting may indirectly generate losses or profits. Consequently, financial data may be materially affected by restatements for inflation and may not accurately reflect the real condition of those issuers and securities markets. Securities of some foreign issuers are less liquid and more volatile than securities of comparable domestic issuers, and foreign bro- kerage commissions are generally higher than in the United States. Foreign se- curities markets may also be less liquid, more volatile, and less subject to governmental supervision than in the United States. Investments in foreign countries could be affected by other factors not present in the United States, including expropriation, confiscatory taxation, lack of uniform accounting and auditing standards and potential difficulties in enforcing contractual obliga- tions and could be subject to extended settlement periods. 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 22 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. The Japanese Yen has generally been appreciating against the U.S. Dollar for the past decade and is currently trad- ing at or about a post-World War II high against the U.S. 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 46% through the beginning of 1993. In 1993, the TOPIX increased by approximately 9% from the end of 1992, and by the end of the third quarter of 1994 increased by approximately 8% from the end of 1993. 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. The average price/earnings ratio of Japanese companies, however, are high in comparison with other major stock 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. The two countries failed to agree, however, with respect to Japanese imports of American automobiles and automotive parts. In response to this failure, the U.S. has initiated the process of imposing limited trade sanctions on Japan. It is unlikely that any such sanctions will be imposed be- fore late 1995, and it is expected that the continuing friction between the U.S. and Japan with respect to trade issues will thus continue for the foresee- able future. Each Portfolio's investments in Japanese issuers also will be subject to uncer- tainty resulting from the instability of recent Japanese ruling coalitions. From 1955 to 1993, Japan's government was controlled by a single political par- ty. In August 1993, following a split in that party, a coalition government was formed. That coalition government collapsed in April 1994, and was replaced by a minority coalition that, in turn, collapsed in June 1994. The stability of the current ruling coalition, the third since 1993, and the first in 47 years led by a socialist, is not assured. For further information regarding Japan, see the Fund's Statement of Additional Information. WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The Total Return Portfolio and the U.S. Government/High Grade Securities Port- folio may enter into forward commitments for the purchase or sale of securi- ties. Such transactions may include purchases on a "when-issued" basis or pur- chases or sales on a "delayed delivery" basis. In some cases, a forward commit- ment may be conditioned upon the occurrence of a subsequent event, such as ap- proval and consummation of a debt restructuring (i.e., a "when, as and if is- sued" trade). 23 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. To the extent a Portfolio sells (i.e., writes) caps and floors it will maintain in a segregated account with the Fund's Custodian cash or liquid securities having an aggregate net asset value at least equal to the full amount accrued daily of the portfolio's obligations with respect to any caps and floors. 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. 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 less favorable than current market values. No forward commitments will be made by a 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, or, in the case of the Total Return Portfolio and the High Yield Portfolio, more than 20% of the then current value of such Portfo- lio's total assets. A Portfolio's right to receive or deliver a security under a forward commitment may be sold prior to the settlement date, but the Portfolio will enter into forward commitments only with the intention of actually receiving or delivering the securities, as the case may be. If the Portfolio, however, chooses to dis- pose of the right to receive or deliver a security subject to a forward commit- ment prior to the settlement date of the transaction, it may incur a gain or loss. In the event the other party to a forward commitment transaction were to default, the Portfolio might lose the opportunity to invest money at favorable rates or to dispose of securities at favorable prices. HEDGING TECHNIQUES The following hedging techniques are utilized by the Short-Term Multi-Market Portfolio. Cross Hedges. The attractive returns currently available from foreign currency denominated debt instruments can be adversely affected by changes in exchange rates. The Adviser believes that the use of foreign currency hedging tech- niques, including "cross-hedges" (see "Forward Foreign Currency Exchange Con- tracts," below), can help protect against declines in the U.S. Dollar value of income available for distribution to shareholders and declines in the net asset value of a Portfolio's shares resulting from adverse changes in 24 currency exchange rates. For example, the return available from securities de- nominated 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 in- volving a forward exchange contract to sell a different foreign currency, where such contract is available on terms more advantageous to a Portfolio than a contract to sell the currency in which the position being hedged is de- nominated. It is the Adviser's belief that cross-hedges can therefore provide significant protection of net asset value in the event of a general rise in the U.S. Dollar against foreign currencies. However, a cross-hedge cannot pro- tect against exchange rate risks perfectly, and if the Adviser is incorrect in its judgment of future exchange rate relationships, a Portfolio could be in a less advantageous position than if such a hedge had not been established. Indexed Debt Securities. The Portfolios may invest without limitation in debt instruments that are indexed to certain specific foreign currency exchange rates. The terms of such securities provide that their principal amount is ad- justed upwards or downwards (but not below zero) at maturity to reflect changes in the exchange rate between two currencies while the obligation is outstanding. The Portfolio will purchase such debt instruments with the cur- rency in which they are denominated and, at maturity, will receive interest and principal payments thereon in that currency, but the amount of principal payable by the issuer at maturity will change in proportion to the change (if any) in the exchange rate between the two specified currencies between the date the instrument is issued and the date the instrument matures. While such securities entail the risk of loss of principal, the potential for realizing gains as a result of changes in foreign currency exchange rates enables the Portfolio to hedge (or cross-hedge) against a decline in the U.S. Dollar value of investments denominated in foreign currencies while providing an attractive money market rate of return. The Portfolio will purchase such debt instruments for hedging purposes only, not for speculation. The staff of the Securities and Exchange Commission (the "Commission") is currently considering whether the Portfolio's purchase of this type of security would result in the issuance of a "senior security" within the meaning of the Act. The Portfolio believes that such investments do not involve the creation of such a senior security, but nevertheless the Portfolio has undertaken, pending the resolution of this issue by the staff, to establish a segregated account with respect to its in- vestments 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 aggregate principal amount of outstanding commercial paper of this type. Futures Contracts and Options on Futures Contracts. A Portfolio may enter into contracts for the purchase or sale for future delivery of fixed-income securi- ties or foreign currencies, or contracts based on financial indices including any index of U.S. Government Securities, foreign government securities or cor- porate debt securities and may purchase and write put and call options to buy or sell futures contracts ("options on futures contracts"). A "sale" of a futures 25 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 securities or foreign currencies called for by the contract at a specified price on a specified date. The specific securities delivered or taken, respectively, at settlement date, would not be determined until at or near that date. The determination would be in accordance with the rules of the exchange on which the futures contract sale or purchase was effected. Although the terms of futures contracts specify actual delivery or receipt of securities, in most instances the contracts are closed out before the settle- ment date without the making or taking of delivery of the securities. Closing out of a futures contract is effected 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 Portfo- lio. The ability to establish and close out positions in options on futures will be subject to the development and maintenance of a liquid secondary market. It is not certain that this market will develop or be maintained. Options on futures contracts to be written or purchased by the Portfolio will be traded on U.S. or foreign exchanges or over-the-counter. These investment techniques will be used only to hedge against anticipated fu- ture changes in market conditions and interest or exchange rates which other- wise might either adversely affect the value of the Portfolio's securities or adversely affect the prices of securities which the Portfolio intends to pur- chase at a later date. See Appendix C 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 26 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 cash not available for investment, U.S. Gov- ernment securities or other liquid high-grade debt securities in a segregated account having a value equal to the aggregate amount of each Portfolio's com- mitments under forward contracts entered into with respect to position hedges and cross-hedges. Interest Rate Transactions. In order to attempt to protect the value of the Portfolio's investments from interest rate or currency cross-rate fluctua- tions, the Portfolio may enter into various hedging transactions, such as in- terest rate swaps and may purchase or sell (i.e. write) interest rate caps and floors. The Portfolio expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its port- folio. The Portfolio may also enter into these transactions to protect against any increase in the price of securities the Portfolio anticipates purchasing at a later date. The Portfolio does not intend to use these transactions in a speculative manner. Interest rate 27 swaps involve the exchange by the Portfolio with another party of their re- spective 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 pay- ments. The purchase of an interest rate cap entitles the purchaser, to the ex- tent that a specified index exceeds a predetermined interest rate, to receive payments on a contractually-based principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the pur- chaser, to the extent that a specified index falls below a predetermined in- terest rate to receive payments on a contractually-based principal amount from the party selling such interest rate floor. The Portfolio may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, depending on whether the Portfolio is hedging its assets or its liabilities. The net amount of the excess, if any, of the Portfolio's obligations over its entitlements with respect to each in- terest rate swap will be accrued on a daily basis and an amount of cash or liquid high-grade debt securities 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 Portfo- lio's obligations with respect to the swap. The Portfolio will not enter into any interest rate swap, cap or floor transaction unless the unsecured senior debt or the claims-paying ability of the other party thereto is rated in the highest rating category of at least one nationally recognized statistical rat- ing organization at the time of entering into the transaction. The Adviser will monitor 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 will have contractual remedies. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and agents utilizing standardized swap documentation. The Adviser has determined that, as a result, the swap market has become relatively liquid. Caps and floors are more recent innovations for which standardized documentation has not yet been developed and, accordingly, they are less liquid than swaps. To the extent that the Portfolio sells (i.e., writes) caps and floors, it will maintain in a segregated account with the Fund's Custodian cash and/or liquid high grade debt securities having an aggregate net asset value at least equal to the full amount, accrued on a daily basis, of the Portfolio's obligations with respect to the caps or floors. General. The successful use of the foregoing investment practices draws upon the Adviser's special skills and experience with respect to such instruments and usually depends on the Adviser's ability to forecast interest rate and currency exchange rate movements correctly. Should interest or exchange rates move in an unexpected manner, the Portfolio may not achieve the anticipated benefits of futures contracts, op- 28 tions, 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. Un- like many exchange-traded futures contracts and options on futures contracts, there are no daily price fluctuation limits with respect to options on curren- cies and forward contracts, and adverse market movements could therefore con- tinue to an unlimited extent over a period of time. In addition, the correla- tion between movements in the price of the securities 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 in- struments effectively for the purposes set forth above. Furthermore, the Port- folio's ability to engage in options and futures transactions may be limited by tax considerations. ILLIQUID SECURITIES Subject to any more restrictive applicable investment policies, none of the Portfolios will maintain more than 15% of its net assets in illiquid securi- ties. For purposes of each Portfolio's investment objectives and policies and investment restrictions, illiquid securities include, among others, (a) direct placements or other securities which are subject to legal or contractual 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 will monitor the liquidity of such securities under the supervision of the Board of Directors. See the Statement of Additional Information for further discussion of illiquid securi- ties. 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 invest- 29 ments will change as the general level of interest rates fluctuates. During periods of falling interest rates, the values of a Portfolio's securities gen- erally 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. 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 that is that of issuers of higher-rated securities in times of deteriorating economic conditions or rising interest rates. In addi- tion, lower-rated securities may be more susceptible to real or perceived ad- verse economic conditions than investment grade securities, although the mar- ket values of securities rated below investment grade and comparable unrated securities tend to react less to fluctuations in interest rate levels than do those of higher-rated securities. Securities rated Ba or BB are judged to have speculative elements or to be predominantly speculative with respect to the issuer's ability to pay interest and repay principal. Securities rated B are judged to have highly speculative elements or to be predominantly speculative. Such securities may have small assurance of interest and principal payments. Securities rated Baa by Moody's are also judged to have speculative character- istics. The market for lower-rated securities may be thinner and less active than that for 30 higher-rated securities, which can adversely affect the prices at which these securities can be sold. To the extent that there is no established secondary market for lower-rated securities, a Portfolio's may experience difficulty in valuing such securities and, in turn, the Portfolio's assets. Under the Finan- cial Institutions Reform, Recovery, and Enforcement Act of 1989, federally-in- sured savings and loan associations were required to have divested their in- vestments in non-investment grade corporate debt securities by July 1, 1994. Such divestiture and continuing restrictions on the ability of such associa- tions to acquire lower-rated securities could have a material adverse effect on the market and prices of such securities. 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. NON-DIVERSIFIED STATUS The Short-Term Multi-Market Portfolio is "non-diversified", which means the Portfolio is not limited in the proportion of its assets that may be invested in the securities of a single issuer. However, because the Portfolio may in- vest in a smaller number of individual issuers than a diversified portfolio, an investment in this Portfolio may, under certain circumstances, present greater risk to an investor than an investment in a diversified portfolio. The Portfolio intends to conduct its operations so as to qualify as a "regulated investment company" for purposes of the Internal Revenue Code. To so qualify, among other requirements, the Portfolio will limit its investments so that, at the close of each quarter of the taxable year, (i) not more than 25% of the market value of the Portfolio's total assets will be invested in the securi- ties of a single issuer, and (ii) with respect to 50% of the market value of its total assets, not more than 5% of the market value of its total assets will be invested in the securities of a single issuer and the Portfolio will not own more than 10% of the outstanding voting securities of a single issuer. The Portfolio's investments in U.S. Government Securities are not subject to these limitations. DEFENSIVE POSITION When business or financial conditions warrant, the Premier Growth Portfolio and the Growth and Income Portfolio may assume a temporary defensive position and invest without limit in high grade fixed income securities or hold their assets in cash equivalents, including (i) short-term obligations of the U.S. Government and its agencies or instrumentalities, (ii) certificates of depos- it, 31 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 (iii) commercial paper of prime quality rated A-1 or higher by S&P or Prime-1 or higher by Moody's or, if not rated, issued by companies which have an outstanding debt issue rated AA or higher by S&P or Aa or higher by Moody's. PORTFOLIO TURNOVER Generally, the Fund's policy with respect to turnover of securities held in the Portfolios is to purchase securities for investment purposes and not for the purpose of realizing short-term trading profits or for the purpose of ex- ercising control. When circumstances warrant, however, securities may be sold without regard to the length of time held. The annual portfolio turnover rate of the Premier Growth Portfolio may be in excess of 100%. Although the Fund cannot accurately predict its annual portfo- lio turnover rate, the Adviser does not expect the annual portfolio turnover of the Growth and Income Portfolio, the Total Return Portfolio and the Inter- national Portfolio to exceed 100%. A 100% annual portfolio turnover rate would occur, for example, if all of the stocks in a portfolio were replaced in a pe- riod of one year. A 100% turnover rate is greater than that of most other in- vestment companies, including those which emphasize capital appreciation as a basic policy, and may result in correspondingly greater brokerage commissions being paid by the Portfolio and a higher incidence of short-term capital gain taxable as ordinary income. It is anticipated that the annual portfolio rate of the Growth and Income Portfolio may be in excess of 50% but less than 100%. See "Dividends, Distributions and Taxes." The U.S. Government/High Grade Securities Portfolio will actively use trading to benefit from yield disparities among different issues of fixed-income secu- rities or otherwise to achieve their investment objectives and policies. Al- though management cannot accurately predict its portfolio turnover rate, it is anticipated that the annual turnover rate for the U.S. Government/ High Grade Securities Portfolio generally will not exceed 400% (excluding turnover of se- curities having a maturity of one year or less). The annual turnover rate of 400% occurs, for example, when all of the securities in the Portfolio are re- placed four times in a period of one year. A 400% turnover rate is greater than that of most other investment companies. These Portfolios may be subject to a greater degree of turnover and, thus, a higher incidence of short-term capital gain taxable as ordinary income than might be expected from investment companies which invest substantially all of their funds on a long-term basis and correspondingly larger mark-up charges can be expected to be borne by the Portfolios. See "Dividends, Distributions and Taxes." The Short-Term Multi-Market 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 each Portfolio's rate of turnover and the incidence of short-term capital gain taxable as ordinary income. 32 Management anticipates that the annual turnover in the Short-Term Multi-Market Portfolio will not be in excess of 500%. An annual turnover rate of 500% oc- curs, for example, when all of the securities in the portfolio are replaced five 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. In order to continue to qualify as a regulated investment company for Federal tax purposes, less than 30% of the annual gross income of a Portfolio must be derived from the sale of securities held by the Portfolio for less than three months. See "Dividends, Distribu- tions and Taxes." CERTAIN FUNDAMENTAL INVESTMENT POLICIES The Fund has adopted certain fundamental investment policies applicable to the Portfolios which may not be changed with respect to a Portfolio without the approval of the shareholders of a Portfolio. Certain of those fundamental in- vestment policies are set forth below. For a complete listing of such funda- mental investment policies, see the Statement of Additional Information. Briefly, with respect to the Premier Growth Portfolio, the Growth and Income Portfolio, the U.S. Government/High Grade Securities Portfolio, the Total Re- turn Portfolio and the International Portfolio, these fundamental investment policies provide that a Portfolio may not: (i) invest in securities of any one issuer (including repurchase agreements with any one entity) other than secu- rities 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 regard to such 5% limitation; (ii) acquire more than 10% of any class of the outstanding securities of any issuer (for this purpose, all preferred stock of an issuer shall be deemed a single class, and all indebtedness of an issuer shall be deemed a single class); (iii) in- vest more than 25% of the value of its total assets at the time an investment is made in the securities of issuers conducting their principal business ac- tivities in any one industry, except that there is no such limitation with re- spect to U.S. Government securities or certificates of deposit, bankers' acceptances and interest-bearing deposits. For purposes of this investment re- striction, the electric, gas, telephone and water business shall each be con- sidered as a separate industry; (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 hypothecate any of its assets, except as may be necessary in connection with permissible borrowings described in paragraph (iv) above (in an aggregate amount not to exceed 15% of total assets of a Portfolio); (vi) 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; or (vii) invest more than 10% of the value of its total assets in repurchase agreements not terminable within seven days. 33 With respect to the Short-Term Multi-Market Portfolio, these fundamental in- vestment policies provide that a Portfolio may not: (i) invest 25% or more of its total assets in securities of companies engaged principally in any one in- dustry (other than the banking industry) except that this restriction does not apply to U.S. Government Securities; (ii) borrow money except from banks for temporary or emergency purposes, including the meeting of redemption requests which might require the untimely disposition of securities; borrowing in the aggregate may not exceed 15%, and borrowing for purposes other than meeting redemptions may not exceed 5% of the value of the Portfolio's total assets (including the amount borrowed) less liabilities (not including the amount borrowed) at the time the borrowing is made; securities will not be purchased while borrowings in excess of 5% of the value of the Portfolio's total assets are outstanding; (iii) pledge, hypothecate, mortgage or otherwise encumber its assets, except to secure permitted borrowings; or (iv) invest in illiquid se- curities if immediately after such investment more than 10% of the Portfolio's total assets (taken at market value) would be invested in such securities. In addition, the Fund has adopted an investment policy, which is not desig- nated a "fundamental policy" within the meaning of the Act, of intending to have each Portfolio comply at all times with the diversification requirements prescribed in Section 817(h) of the Internal Revenue Code or any successor thereto and the applicable Treasury Regulations thereunder. This policy may be changed upon notice to shareholders of the Fund, but without their approval. MANAGEMENT OF THE FUND DIRECTORS John D. Carifa, Chairman of the Board and President, is President of Alliance Capital Management Corporation ("ACMC"), the sole general partner of the Ad- viser, with which he has been associated since prior to 1990. Ruth Block is a Director of Ecolab Incorporated (specialty chemicals) and Amoco Corporation (oil and gas). She was formerly an Executive Vice President and the Chief Insurance Officer of The Equitable Life Assurance Society of the United States since prior to 1990. David H. Dievler was formerly President of the Fund, and a Senior Vice Presi- dent of ACMC, with which he had been associated since prior to 1990. John H. Dobkin is President of Historic Hudson Valley (historic preservation) since 1990. Previously, he was Director of the National Academy of Design. From 1987 to 1992, he was a Director of ACMC. William H. Foulk, Jr. was formerly a Senior Manager of Barrett Associates, Inc., a registered investment adviser, with which he had been associated since prior to 1990. Dr. James M. Hester is President of the Harry Frank Guggenheim Foundation and a Director of Union Carbide Corporation since prior to 1990. He was formerly Presi- 34 dent of New York University, The New York Botanical Garden and Rector of the United Nations University. Clifford L. Michel is a member of the law firm of Cahill Gordon & Reindel, with which he has been associated since prior to 1990. Robert C. White is a Vice President and the Chief Financial Officer of the Howard Hughes Medical Institute, with which he has been associated since prior to 1990. ADVISER Alliance Capital Management L.P. (the "Adviser"), a Delaware limited partner- ship with principal offices at 1345 Avenue of the Americas, New York, New York 10105 has been retained under an investment advisory agreement (the "Invest- ment Advisory Agreement") to provide investment advice and, in general, to conduct the management and investment program of each of the Fund's Portfolios subject to the general supervision and control of the Board of Directors of the Fund. The employee of the Adviser principally responsible for the Premier Growth Portfolio's investment program since its inception is Alfred Harrison, who is Vice Chairman of ACMC, with which he has been associated since prior to 1990. The employee of the Adviser principally responsible for the Growth and Income Portfolio's investment program since its inception is Paul Rissman, who is a Vice President of ACMC with which he has been associated since prior to 1990. The employee of the Adviser principally responsible for the U.S. Government/High Grade Securities Portfolio's investment program since its in- ception is Paul J. DeNoon, who is a Vice President of ACMC, with which he has been associated since 1991. Prior to that, Mr. DeNoon was Vice President of Manufacturers Hanover Trust since prior to 1990. The employee of the Adviser principally responsible for the Total Return Portfolio's investment program since its inception is Debra Gordon Ackerman, who is a Vice President of ACMC, with which she has been associated since prior to 1990. The employee of the Adviser principally responsible for the International Portfolio's investment program since its inception is Kelly Morgan, a Vice President of ACMC with which she has been associated since prior to 1990. The employee of the Adviser principally responsible for the Short-Term Multi-Market Portfolio's investment program since its inception is Douglas J. Peebles, who is a Vice President of ACMC, with which he has been associated since prior to 1990. The Adviser is a leading international investment manager supervising client accounts with assets as of December 31, 1994 totaling more than $121 billion (of which more than $36 billion represented the assets of investment compa- nies). The Adviser's clients are primarily major corporate employee benefit funds, public employee retirement systems, investment companies, foundations and endowment funds. The 51 registered investment companies managed by the Ad- viser comprising 103 separate investment portfolios currently have over one million shareholders. As of December 31, 1994, the Adviser was retained as an investment manager by 29 of the Fortune 100 companies. ACMC, the sole general partner of, and the owner of a 1% general partnership in- 35 terest in, the Adviser, is an indirect wholly- owned subsidiary of The Equita- ble 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, a French insurance holding company. Certain information concerning the ownership and control of Equitable by AXA 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. Each of the Portfolios pays the Adviser at the following annual percentage rate of its average daily net asset value: Premier Growth Portfolio 1.000% Growth and Income Portfolio .625% U.S. Government/High Grade Securities Portfolio .600% Total Return Portfolio .625% International Portfolio 1.000% Short-Term Multi-Market Portfolio .550%
The fees are accrued daily and paid monthly. For the year ended December 31, 1994, the Adviser received no net advisory fees from the U.S. Government/High Grade Securities Portfolio, the Total Return Portfolio and the International Portfolio. For the year ended December 31, 1994 the Adviser received an advi- sory fee from each of the Premier Growth Portfolio, the Growth and Income Portfolio and the Short-Term Multi-Market Portfolio so that each such Portfo- lio paid an advisory fee equal to .55%, .62% and .50% of each such Portfolio's average net assets, respectively. The Commission takes the position that the rates of fees applicable to the Premier Growth Portfolio and the International Portfolio, higher than those paid by most other investment companies; however, the Adviser believes the fees are comparable to those paid by investment companies of similar invest- ment orientation. EXPENSES OF THE FUND In addition to the payments to the Adviser under the Investment Advisory Agreement described above, the Fund pays certain other costs including (a) custody, transfer and dividend disbursing expenses, (b) fees of Directors who are not affiliated with the Adviser, (c) legal and auditing expenses, (d) clerical, accounting and other office costs, (e) costs of printing the Fund's prospectuses and shareholder reports, (f) cost of maintaining the Fund's ex- istence, (g) interest charges, taxes, brokerage fees and commissions, (h) costs of stationery and supplies, (i) expenses and fees related to registra- tion and filing with the Commission and with state regulatory authorities, and (j) cost of certain personnel of the Adviser or its affiliates rendering cler- ical, accounting and other services to the Fund. 36 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. For the year ended December 31, 1994, the ordinary operating expenses of the Growth and Income Portfolio were .90%, the Short-Term Multi-Market Portfolio were .94%, the Premier Growth Portfolio were .95%, the U.S. Government/High Grade Portfolio were .95%, the Total Return Portfolio were .95% and the Inter- national Portfolio were .95%, of each such Portfolio's average net assets, all net of voluntary expense reimbursements. 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 surrender and transfer requests to be ef- fected 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. New York 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 national holidays on which the Exchange is closed and Good Friday. For purposes of this computation, the securities in each Portfolio are valued at their current market value determined on the basis of market quota- tions or, if such quotations are not readily available, such other methods as 37 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 mar- ket value of such securities. REDEMPTION OF SHARES An insurance company separate account may redeem all or any portion of the shares of any Portfolio in its account at any time at the net asset value per share of that Portfolio next determined after a redemption request in proper form is furnished to the Fund or the Principal Underwriter. Any certificates representing shares being redeemed must be submitted with the redemption re- quest. Shares redeemed are entitled to earn dividends, if any, up to and in- cluding the day redemption is effected. There is no redemption charge. Payment of the redemption price will normally be made within seven days after receipt of such tender for redemption. The right of redemption may be suspended or the date of payment may be post- poned for any period during which the Exchange is closed (other than customary weekend and holiday closings) or during which the Commission determines that trading thereon is restricted, or for any period during which an emergency (as determined by the Commission) exists as a result of which disposal by the Fund of securities owned by a Portfolio is not reasonably practicable or as a 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. DIVIDENDS, DISTRIBUTIONS AND TAXES Each of the Portfolios will declare and distribute dividends from net invest- ment income and will distribute its net capital gains, if any, at least annu- ally. Such income and capital gains distributions will be made in shares of such Portfolios. Each Portfolio of the Fund qualified and intends to continue to qualify to be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code (the "Code"). If so qualified, each Portfolio will not be subject to Federal income or excise taxes on its investment company taxable income and net capital gains to the extent such investment company taxable income and net capital gains are distributed to the separate accounts of insurance companies which hold its shares. Under current tax law, capital gains or dividends from any Portfolio are not currently taxable when left to accumulate within a vari- able annuity (other than an annuity interest owned by a person who is not a natural person) or variable life in surance contract. Distributions of net in- vestment 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. Section 817(h) of the Code requires that the investments of a segregated asset ac- 38 count of an insurance company be "adequately diversified," in accordance with Treasury Regulations promulgated there- under, 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 in- vestments in a regulated investment company for purposes of the applicable di- versification 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 pro- portionate share of each of the assets of the regulated investment company. Each Portfolio plans to satisfy these conditions at all times so that the shares of each Portfolio owned by a segregated asset account of a life insur- ance 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 U.S. Government/High Grade Securities Portfolio and the Short-Term Multi-Mar- ket Portfolio occur primarily with issuers,underwriters or major dealers act- ing as principals while transactions for the Premier Growth Portfolio, the Growth andIncome Portfolio and the International Portfolio are normally ef- fected by brokers, and transactions for the Total Return Portfolio are nor- mally effected through any one or more of the foregoing entities. The Fund has no obligation to enter into transactions in portfolio securities with any broker, dealer, issuer, underwriter or other entity. In placing or- ders, it is the policy of the Fund to obtain the best price and execution for its transactions. Consistent with the objective of obtaining best execution, the Fund may use brokers and dealers who provide research, statistical and other information to the Adviser. There may be occasions where the transaction cost charged by a broker may be greater than that which another broker may charge if the Fund determines in good faith that the amount of such transaction cost is reasonable in relation to the value of the brokerage and research and statistical services provided by the executing broker. Consistent with the Rules of Fair 39 Practice of the National Association of Securities Dealers, Inc., and subject to seeking best price and execution, the Fund may consider sales of shares of the Fund as a factor in the selection of brokers and dealers to enter into portfolio transactions with the Fund. The Fund may from time to time place orders for the purchase or sale of secu- rities on an agency basis with Donaldson, Lufkin & Jenrette Securities Corpo- ration, an affiliate of the Adviser, and with brokers which may have their transactions cleared or settled, or both, by the Pershing Division of Donald- son, Lufkin and Jenrette Securities Corporation, for which Donaldson, Lufkin and Jenrette Securities Corporation may receive a portion of the brokerage commission. In such instances, the placement of orders with such brokers would be consistent with the Fund's objective of obtaining best execution and would not be dependent upon the fact that Donaldson, Lufkin & Jenrette Securities Corporation is an affiliate of the Adviser. ORGANIZATION The Fund is a Maryland corporation organized on November 17, 1987. The autho- rized capital stock of the Fund consists solely of 1,600,000,000 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 16 series, one underlying each Portfolio. Shares of each Portfolio are normally entitled to one vote for all purposes. Generally, shares of all Portfolios vote as a single series on matters, such as the elec- tion of Directors, that affect all Portfolios in substantially the same man- ner. Maryland law does not require a registered investment company to hold an- nual meetings of shareholders and it is anticipated that shareholder meetings will be held only when specifically required by federal or state law. Share- holders have available certain procedures for the removal of Directors. Shares of each Portfolio are freely transferable, are entitled to dividends as deter- mined by the Board of Directors and, in liquidation of the Fund, are entitled to receive the net assets of that Portfolio. Shareholders have no preference, pre-emptive or conversion rights. In accordance with current law, it is antic- ipated that an insurance company issuing a variable annuity contract or vari- able life insurance policy that participates in the Fund will request voting instructions from contract or policyholders and will vote shares in the sepa- rate account in accordance with the voting instructions received. PRINCIPAL UNDERWRITER Alliance Fund Distributors, Inc., 1345 Avenue of the Americas, New York, New York 10105, an indirect wholly-owned subsidiary of the Adviser, is the Princi- pal Underwriter of shares of the Fund. CUSTODIAN State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachu- setts 02110, acts as Custodian for the securities and cash of the Fund and as its dividend disbursing agent, but plays no part in deciding on the purchase or sale of portfolio securities. 40 REGISTRAR AND DIVIDEND-DISBURSING AGENT Alliance Fund Services, Inc., an indirect wholly-owned subsidiary of the Advis- er, located at 500 Plaza Drive, Secaucus, New Jersey, 07094, acts as the Fund's registrar and dividend-disbursing agent. 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. 41 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 mod- ifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modi- fier 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 although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB: Debt rated BBB is regarded as having an adequate capacity to pay inter- est and repay principal. Whereas it normally exhibits adequate protection pa- rameters, 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 and C is regarded as having predominantly speculative characteristics with respect to capacity to pay in- terest and repay principal. BB indicates the least degree of speculation and CCC the highest. While such debt will A-2 likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. C1: The rating C1 is reserved for income bonds on which no interest is being paid. D: Debt rated D is in payment default. The D rating category is used when interest payments or principal payments 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 if debt service payments are jeopar- dized. 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 claims paying ability. Risk factors are negligible. AA+, AA, AA-: Very high claims paying ability. Protection factors are strong. Risk is modest, but may vary slightly over time due to economic and/or underwriting conditions. A+, A, A-: High claims paying ability. Protection factors are average and there is an expectation of variability in risk over time due to economic and/or underwriting conditions. BBB+, BBB, BBB-: Adequate claims paying ability. Protection factors are ade- quate. There is considerable variability in risk over time due to economic and/or underwriting conditions. BB+, BB, BB-: Uncertain claims paying ability and less than investment-grade quality. However, the company is deemed likely to meet these obligations when due. Protection factors will vary widely with changes in economic and/or un- derwriting conditions. B+, B, B-: Possessing risk that policy holder and contract-holder obliga- tions will not be paid when due. Protection factors will vary widely with changes in economic and/or underwriting conditions or company fortunes. CCC: There is substantial risk that policy holder and contract holder obli- gations will not be paid when due. Company has been or is likely to be placed under state insurance department supervision. DD: Company is under an order of liquidation. A-3 FITCH INVESTORS SERVICE, INC. AAA: Bonds considered to be investment grade and of the highest credit quali- ty. 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 devel- opments, 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 qual- ity. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. BB: Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. How- ever, business and financial alternatives can be identified which could assist 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 throughout the life of the issue. CCC: Bonds have certain identifiable characteristics which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and 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 recov- A-4 ery value in liquidation or reorganization of the obligor. DDD represents the highest potential for recovery on these bonds, and D represents the lowest po- tential 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. A-5 This is filed pursuant to Rule 497(c) File Nos. 33-18647 and 811-5398. ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. _________________________________________________________________ P. O. Box 1520, Secaucus, New Jersey 07096-1520 Toll Free (800) 221-5672 _________________________________________________________________ STATEMENT OF ADDITIONAL INFORMATION May 1, 1995 _________________________________________________________________ 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, 1995. 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......................................... 3 Investment Policies and Restrictions................. 3 Money Market Portfolio.......................... 3 Premier Growth Portfolio........................ 9 Growth and Income Portfolio..................... 14 U.S. Government/High Grade Securities Portfolio.......................... 15 High-Yield Portfolio............................ 33 Total Return Portfolio.......................... 41 International Portfolio......................... 43 Short-Term Multi-Market Portfolio and Global Bond Portfolio..................... 49 North American Government Income Portfolio..................................... 53 Global Dollar Government Portfolio.............. 90 Utility Income Portfolio........................ 104 Conservative Investors Portfolio, Growth Investors Portfolio and Growth Portfolio.............................. 111 Worldwide Privatization Portfolio............... 139 Other Investment Policies....................... 151 Management of the Fund............................... 155 Purchase and Redemption of Shares.................... 164 Net Asset Value...................................... 165 Portfolio Transactions............................... 167 Dividends, Distributions and Taxes................... 168 General Information.................................. 169 Report of Independent Accountants and Financial Statements........................ 176 Appendix A - Bond and Commercial Paper Ratings....... A-1 Appendix B - Description of Obligations Issued or Guaranteed by U.S. Government Agencies or Instrumentalities............................ B-1 Appendix C - Futures Contracts and Options on Futures Contracts and Foreign Currencies........ C-1 Appendix D - Options................................. D-1 Appendix E - Japan................................... E-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 sixteen 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 3 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: 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") or Prime-1 by Moody's Investors Service, Inc. ("Moody's") or, if not rated, issued by domestic and foreign companies which have an outstanding debt issue rated AAA or AA by S&P, or Aaa or Aa by Moody's. For a description of such ratings see Appendix A. Commercial paper consists of short- term (usually from 1 to 270 days) unsecured promissory notes 4 issued by corporations in order to finance their current operations. A variable amount master demand note represents a direct borrowing arrangement involving periodically fluctuating rates of interest under a letter agreement between a commercial paper issuer and an institutional lender pursuant to which the lender may determine to invest varying amounts. 4. Repurchase agreements that are collateralized in full each day by liquid securities of the types listed above. 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 issuer's 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 5 notes. These instruments are often restricted securities because they are sold in transactions not requiring registration. For example, commercial paper issues in which the Portfolio may invest include, among others, securities issued by major corporations without registration under the Securities Act in reliance on the exemption from registration afforded by Section 3(a)(3) of such Act and commercial paper issued in reliance on the private placement exemption from registration which is afforded by Section 4(2) of the Securities Act ("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition under the Federal securities laws in that any resale must also be made in an exempt transaction. Section 4(2) paper is normally resold to other institutional investors through or with the assistance of investment dealers who make a market in Section 4(2) paper, thus providing liquidity. Institutional investors, rather than selling these instruments to the general public, often depend on an efficient institutional market in which such restricted securities can be readily resold in transactions not involving a public offering. In many instances, therefore, the existence of contractual or legal restrictions on resale to the general public does not, in practice, impair the liquidity of such investments from the perspective of institutional holders. In 1990, in part to enhance the liquidity in the institutional markets for restricted securities, the Securities and Exchange Commission (the "Commission") adopted Rule 144A under the Securities Act to establish a safe harbor from the Securities Act's 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 Fund's Directors have the ultimate responsibility for determining whether specific securities are liquid or illiquid. The Directors have delegated the function of making 6 day-to-day determinations of liquidity to the Adviser, pursuant to guidelines approved by the Directors. The Adviser takes into account a number of factors in determining whether a restricted security being considered for purchase is liquid, including at least the following: (i) the frequency of trades and quotations for the security; (ii) the number of dealers making quotations to purchase or sell the security; (iii) the number of other potential purchasers of the security; (iv) the number of dealers undertaking to make a market in the security; (v) the nature of the security (including its unregistered nature) and the nature of the marketplace for the security (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer); and (vi) any applicable Securities and Exchange Commission interpretation or position with respect to such types of securities. Following the purchase of a restricted security by the Portfolio, the Adviser monitors continuously the liquidity of such security and reports to the Directors regarding purchases of liquid restricted securities. MONEY MARKET REQUIREMENTS. While there are many kinds of short-term securities used by money market investors, the Portfolio, in keeping with its primary investment objective of safety of principal, restricts its portfolio to the types of investments listed above. Of note, the Portfolio does not invest in issues of savings and loan associations, letters of credit, or issues of foreign banks. The Portfolio may make investments in certificates of deposit issued by, and time deposits maintained at, foreign branches of domestic banks specified above, prime quality dollar-denominated commercial paper issued by foreign companies meeting the rating criteria specified above, and in 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 7 given to their domestic marketability, the lower reserve requirements generally mandated for overseas banking operations, the possible impact of interruptions in the flow of international currency transactions, potential political and social instability or expropriation, imposition of foreign taxes, less government supervision of issuers, difficulty in enforcing contractual obligations and lack of uniform accounting standards. As even the safest of securities involve some risk, there can be no assurance, as is true with all investment companies, that the Portfolio's objective will be achieved. The market value of the Portfolio's investments tends to decrease during periods of rising interest rates and to increase during intervals of falling rates. The Money Market Portfolio intends to comply with Rule 2a-7 under the Investment Company Act of 1940, as amended (the "1940 Act"), as amended from time to time, including the diversity, 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 "eligible securities," as that term is defined in the Rule. Generally, an eligible security is a security that (i) is denominated in U.S. Dollars and has a remaining maturity of 397 days or less; (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; and (iii) has been determined by the Adviser to present minimal credit risks pursuant to procedures approved by the Board of Directors. 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 attached hereto. Under Rule 2a-7, the Money Market Portfolio may not invest more than 5% of its assets in the securities of any one issuer other than the United States Government, its agencies and instrumentalities. 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 8 have invested more than (A) the greater of 1% of its total assets or one million dollars in securities issued by that issuer which are second tier securities, or (B) five percent of its total assets in second tier securities. INVESTMENT RESTRICTIONS. The following restrictions, which are applicable to the Money Market Portfolio, supplement those set forth above and in the Prospectus and may not be changed without Shareholder Approval, as defined under the caption "General Information," below. The Portfolio may not: 1. Purchase any security which has a maturity date more than one year from the date of the Portfolio's purchase; 2. Make investments for the purpose of exercising control; 3. Purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization; 4. Invest in real estate (other than money market securities secured by real estate or interests therein or money market securities issued by companies which invest in real estate or interests therein), commodities or commodity contracts, interests in oil, gas and other mineral exploration or other development programs; 5. Make short sales of securities or maintain a short position or write, purchase or sell puts, calls, straddles, spreads or combinations thereof; or 6. Purchase or retain securities of any issuers if those officers and directors of the Fund and officers and directors of the Adviser who own individually more than 1/2% of the outstanding securities of such issuer together own more than 5% of the securities of such issuer. PREMIER GROWTH PORTFOLIO GENERAL. The objective of the Premier Growth Portfolio is capital growth rather than current income. Since investments will be made based upon their potential for capital appreciation, current income will be incidental to the objective of capital growth. The Portfolio will seek to achieve its objective through aggressive investment policies and, therefore, is not intended for investors whose principal objective is assured income or 9 conservation of capital. Ordinarily, the annual portfolio turnover rate may be in excess of 100%. For the fiscal period June 26, 1992 (commencement of operations) to December 31, 1992, the portfolio turnover rate was 14%. For the fiscal years ended December 31, 1993 and December 31, 1994, the portfolio turnover rates were 42% and 38%, respectively. In seeking its investment goal, the Portfolio will invest 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. The Portfolio's investments in the 25 of these companies most highly regarded at any point in time by the Adviser will usually constitute approximately 70% of the Portfolio's net assets. Normally, approximately 40 companies will be represented in the Portfolio's investment portfolio. 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. 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 Standard & Poor's 500 Composite Stock Price Index, a widely recognized unmanaged index of market activity based upon the aggregate performance of a selected portfolio of publicly traded common stocks, including monthly adjustments to reflect the reinvestment of dividends and other 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 will be 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. 10 The Portfolio may invest in both listed and unlisted domestic and foreign securities, and in restricted securities, and in other assets having no ready market, but not more than 10% of the Portfolio's total assets may be invested in all such restricted or not readily marketable assets at any one time. Restricted securities may be sold only in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the Securities Act, or pursuant to Rule 144 promulgated under such Act. Where registration is required, the Portfolio may be obligated to pay all or part of the registration expense, and a considerable period may elapse between the time of the decision to sell and the time the Portfolio may be permitted to sell a security under an effective registration statement. If during such a period adverse market conditions were to develop, the Portfolio might obtain a less favorable price than that which prevailed when it decided to sell. Restricted securities and other not readily marketable assets will be valued in such a manner as the Board of Directors of the Fund in good faith deems appropriate to reflect their fair market value. See "Other Investment Policies -- Illiquid Securities" below, for a more detailed discussion of the Portfolio's investment policy on restricted securities and securities with legal or contractual restrictions on resale. SPECIAL SITUATIONS. The Portfolio will invest in special situations from time to time. A special situation arises when, in the opinion of the Adviser, the securities of a particular company will, within a reasonably estimable period of time, be accorded market recognition at an appreciated value solely by reason of a development particularly or uniquely applicable to that company, and regardless of general business 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. 11 OPTIONS. The Portfolio may write call options and may purchase and sell put and call options written by others, combinations thereof, or similar options. The Portfolio may not write put options. A put option gives the buyer of such option, upon payment of a premium, the right to deliver a specified number of shares of a stock to the writer of the option on or before a fixed date at a predetermined price. A call option gives the purchaser of the option, upon payment of a premium, the right to call upon the writer to deliver a specified number of shares of a specified stock on or before a fixed date, at a predetermined price, usually the market price at the time the contract is negotiated. A call option written by the Portfolio is "covered" if the Portfolio owns the underlying security covered by the call or has an absolute and immediate right to acquire that security without additional cash consideration (or for additional cash, U.S. Government Securities or other liquid high grade debt obligation held in a segregated account by the Fund's Custodian) upon conversion or exchange of other securities held in its portfolio. A call option is also covered if the Portfolio holds a call on the same security and in the same principal amount as the call written where the exercise price of the call held (a) is equal to or less than the exercise price of the call written or (b) is greater than the exercise price of the call written if the difference is maintained by the Portfolio in cash in a segregated account with the Fund's Custodian. The premium paid by the purchaser of an option will reflect, among other things, the relationship of the exercise price to the market price and volatility of the underlying security, the remaining term of the option, supply and demand and interest rates. The writing of call options will, therefore, involve a potential loss of opportunity to sell securities at high prices. In exchange for the premium received by it, the writer of a fully 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 12 either on a national securities exchange or through put and call dealers, most, if not all, of which are members of a national securities exchange on which options are traded, and will in such case be endorsed or guaranteed by a member of a national securities exchange or qualified broker-dealer, which may be Donaldson, Lufkin & Jenrette Securities Corporation, an affiliate of the Adviser. The endorsing or guaranteeing firm requires that the option writer (in this case the Portfolio) maintain a margin account containing either corresponding stock or other equity as required by the endorsing or guaranteeing firm. The Portfolio will not sell a call option written or guaranteed by it if, as a result of such sale, the aggregate of the Portfolio's securities subject to outstanding call options (valued at the lower of the option price or market value of such securities) would exceed 15% of the Portfolio's total assets. The Portfolio will not sell any call option if such sale would result in more than 10% of the Portfolio's assets being committed to call options written by the Portfolio which, at the time of sale by the Portfolio, have a remaining term of more than 100 days. INVESTMENT RESTRICTIONS. The following restrictions, which are applicable to the Growth Portfolio, supplement those set forth above and in the Prospectus and may not be changed without Shareholder Approval, as defined under the caption "General Information," below. The Portfolio may not: 1. Write put options; 2. Make investments for the purpose of exercising control; 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. 13 GROWTH AND INCOME PORTFOLIO GENERAL. The Growth and Income Portfolio's objective is reasonable current income and reasonable opportunity for appreciation through investments primarily in dividend-paying common stocks of good quality. It may invest whenever the economic outlook is unfavorable for common stock investments in other types of securities, such as bonds, convertible bonds, preferred stocks and convertible preferred stocks. The Portfolio may also write covered call options listed on domestic securities exchanges. The Portfolio engages primarily in holding securities for investment and not for trading purposes. Purchases and sales of portfolio securities are made at such times and in such amounts as are deemed advisable in the light of market, economic and other conditions, irrespective of the volume of portfolio turnover. Ordinarily the annual portfolio turnover rate will not exceed 100%. The portfolio turnover rate for the fiscal year ended December 31, 1992 was 49%. The portfolio turnover rates for the fiscal years ended December 31, 1993 and December 31, 1994 were 69% and 95%, 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 14 Portfolio will realize a profit or loss from a closing purchase transaction if the amount paid to purchase a call option is less or more than the amount received as a premium for the writing thereof. A closing purchase transaction cannot be made if trading in the option has been suspended. The premium received by the Portfolio upon writing a call option will increase the Portfolio's assets, and a corresponding liability will be recorded and subsequently adjusted from day to day to the current value of the option written. For example, if the current value of the option exceeds the premium received, the excess would be an unrealized loss and, conversely, if the premium exceeds the current value, such excess would be an unrealized gain. The current value of the option will be the last sales price on the principal exchange on which the option is traded or, in the absence of any transactions, the mean between the closing bid and asked price. INVESTMENT RESTRICTIONS. The following investment restrictions, which are applicable to the Growth and Income Portfolio, supplement those set forth above and in the Prospectus and may not be changed without shareholder approval, as defined under the caption "General Information," below. The Portfolio may not: 1. Purchase the securities of any other investment company except in a regular transaction on the open market; 2. Purchase the securities of any issuer if directors or officers of the Fund or certain other interested persons own more than 5% of such securities; or 3. Invest in the securities of any company for the purpose of exercising control of management. 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 will invest 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 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 will invest at 15 least 65% of its total assets in these types of securities, including the securities held subject to repurchase agreements. The Portfolio will 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 prescribed by the U.S. Treasury Department 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 will limit its purchases of U.S. Government Securities to 55% of the total assets of the Portfolio. Consistent with this limitation, the Portfolio will, as a matter of fundamental policy, invest 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 B hereto for a description of obligations issued or guaranteed by U.S. Government agencies or instrumentalities. 16 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 mortgage's scheduled maturity date. As a result of the pass-through of prepayments of principal on the underlying securities, mortgage- backed securities are often subject to more rapid prepayment of principal than their stated maturity would indicate. Because the prepayment characteristics of the underlying mortgages vary, it is not possible to predict accurately the realized yield or average life of a particular issue of pass-through certificates. Prepayment rates are important because of their effect on the yield and price of the securities. Accelerated prepayments adversely impact yields for pass-throughs purchased at a premium (i.e., a price in excess of principal amount) and may involve additional risk of loss of principal because the premium may not be fully amortized at the time the obligation is repaid. The opposite is true for pass-throughs purchased at a discount. The Portfolio may purchase mortgage-related securities at a premium or at a discount. Principal and interest payments on the mortgage-related securities are government guaranteed to the extent described below. Such guarantees do not extend to the value or yield of the mortgage-related securities themselves or of the Portfolio's shares of Common Stock. GNMA CERTIFICATES. Certificates of the Government National Mortgage Association ("GNMA Certificates") are mortgage- 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 17 empowered to borrow without limitation from the U.S. Treasury if necessary to make any payments required under its guarantee. The average life of a GNMA Certificate is likely to be substantially shorter than the original maturity of the mortgages underlying the securities. Prepayments of principal by mortgagors and mortgage foreclosures will usually result in the return of the greater part of principal investment long before the maturity of the mortgages in the pool. Foreclosures impose no risk to principal investment because of the GNMA guarantee, except to the extent that the Portfolio has purchased the certificates above par in the secondary market. FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation ("FHLMC") was created in 1970 through enactment of Title III of the Emergency Home Finance Act of 1970. Its purpose is to promote development of a nationwide secondary market in conventional residential mortgages. The FHLMC issues two types of mortgage-related pass- through securities ("FHLMC Certificates"), mortgage participation certificates ("PCs") and guaranteed mortgage securities ("GMCs"). PCs resemble GNMA Certificates in that each PC represents a pro rata share of all interest and principal payments made and owed on the underlying pool. The FHLMC guarantees timely monthly payment of interest on PCs and the ultimate payment of principal. GMCs also represent a PRO RATA interest in a pool of mortgages. However, these instruments pay interest semi-annually and return principal once a year in guaranteed minimum payments. The expected average life of these securities is approximately ten years. The FHLMC guarantee is not backed by the full faith and credit of the United States. FNMA SECURITIES. The Federal National Mortgage Association ("FNMA") was established in 1938 to create a secondary market in mortgages insured by the FHA. FNMA issues guaranteed 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 18 not entitle the holder to any periodic payments prior to maturity but; instead, is issued and traded at a discount from its face amount. The discount varies depending on the time remaining until maturity, prevailing interest rates, liquidity of the security and perceived credit quality of the issuer. The market prices of zero coupon securities are generally more volatile than those of interest-bearing securities, and are likely to respond to changes in interest rates to a greater degree than otherwise comparable securities that do pay periodic interest. Current federal tax law requires that a holder (such as the Portfolio) of a zero coupon security accrue a portion of the discount at which the security was purchased as income each year, even though the holder receives no interest payment on the security during the year. As a result, in order to make the distributions necessary for the Portfolio not to be subject to federal income or excise taxes, the Portfolio might be required to pay out as an income distribution each year an amount, obtained by liquidation of portfolio securities if necessary, greater than the total amount of cash that the Portfolio has actually received as interest during the year. The Adviser believes, however, that it is highly unlikely that it would be necessary to liquidate any portfolio securities for this purpose. Currently the only U.S. Treasury security issued without coupons is the Treasury bill. Although the U.S. Treasury does not itself issue treasury notes and bonds without coupons, under the U.S. Treasury STRIPS program interest and principal on certain long term treasury securities may be maintained separately in the Federal Reserve book entry system and may be separately traded and owned. However, in the last few years a number of banks and brokerage firms have separated ("stripped") the principal portions ("corpus") from the coupon portions of the U.S. Treasury bonds and notes and sold them separately in the form of receipts or certificates representing undivided interests in these instruments (which instruments are generally held by a bank in a custodial or trust account). The staff of the Commission has indicated that these receipts or certificates representing 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 staff's 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. 19 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, will constitute at least 65% of the Portfolio's assets include: 1. Debt securities which are rated AAA, AA, or A by S&P 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 Investors Services, Inc. ("Fitch"); 3. Commercial paper rated A-1+, A-1, A-2 or A-3 by S&P 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, it will 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 20 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. FOREIGN SECURITIES. The Portfolio may invest up to 25% of the value of its total assets at the time of investment in debt securities of foreign issuers meeting the rating criteria set forth above. Investment in foreign debt securities may involve risks greater than those ordinarily associated with investment in domestic debt securities: debt obligations of foreign government issuers may be affected by political or economic instabilities; financial information published by foreign corporations may be less reliable or complete than information disclosed by domestic corporations pursuant to U.S. securities laws; and fluctuations in foreign exchange rates may affect the value of foreign securities not denominated in U.S. currency. 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. 21 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) Foreign Government Securities (see "Foreign Government Securities" below), (ii) investment grade corporate debt securities of a type other than the high grade debt securities described above (including collateralized mortgage obligations), (iii) 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 (iv) put and call options, futures contracts and options thereon, options on Foreign Government Securities, options on foreign currencies and forward currency exchange contracts. Investment grade debt securities are those rated Baa or higher by Moody's or BBB or higher by S&P 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 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 issuer's capacity to pay interest and repay principal than in the case of higher-rated securities. See Appendix A hereto for a description of corporate debt ratings. FOREIGN GOVERNMENT SECURITIES. As described above, the Portfolio may invest up to 35% of its total assets in Foreign Government Securities of issuers considered stable by the Adviser. Foreign Government Securities are obligations issued or guaranteed by a foreign government or any of its political subdivisions, authorities, agencies, or instrumentalities. The Adviser's determination that a particular country should be considered stable depends on the Adviser's evaluation of political and economic developments affecting the country as well as recent experience in the markets for Foreign Government Securities of the country. Examples of foreign governments which the Adviser currently considers to be stable, among others, are the governments of Canada, Japan, Sweden, West Germany 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. Government Securities. The percentage of the Portfolio's assets invested in Foreign Government Securities will vary depending on the relative yields of such securities, the economies of the countries in which the investments are made and such countries' financial markets, the interest rate climate of such countries and the relationship of such countries' currencies to the U.S. dollar. Currency is judged on the basis of fundamental economic criteria (e.g., relative inflation levels and trends, growth rate 22 forecasts, balance of payments status, and economic policies) as well as technical and political data. The Portfolio's investments in Foreign Government Securities may include those of a number of foreign countries or, depending upon market conditions, those of a single country. The Portfolio may also hold foreign currency for hedging purposes. Investing in Foreign Government Securities involves considerations and possible risks not typically associated with investing in U.S. Government Securities. The value of Foreign Government Securities investments will be affected by changes in currency rates or exchange control regulations, application of foreign tax laws, including withholding taxes, changes in governmental administration or economic or monetary policy (in this country or abroad) or changed circumstances in dealings between nations. Costs may be incurred in connection with conversions between various currencies. Foreign brokerage commissions are generally higher than in the United States, and foreign securities markets may 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 and potential difficulties in enforcing contractual obligations and could be subject to extended settlement periods. 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 will depend 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 23 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 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 Act's limitation on acquiring interests in other investment companies. In order to be able to rely on the staff's 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. AND FOREIGN 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 and Foreign Government Securities that are traded on United States and foreign 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 24 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 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 and Foreign Government Securities that are traded on United States and foreign securities exchanges and over the counter. The Portfolio also intends to write call options that are not covered for cross-hedging purposes. 25 For additional information on the use, risks and costs of options, see Appendix D. 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 foreign currencies, or contracts based on financial indices including any index of U.S. Government Securities or Foreign 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. or foreign exchanges or over the counter. These investment techniques will be used only to hedge against anticipated future changes in interest or exchange rates which otherwise might either adversely affect the value of the Portfolio's securities or adversely affect the prices of securities which the Portfolio intends to purchase at a later date. The successful use of such instruments draws upon the Adviser's special skills and experience with respect to such instrumentalities 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 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 and currencies 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 or foreign currencies 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 or foreign currencies 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 will enter 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. 26 The Portfolio's ability to engage in the options and futures strategies described above will depend 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 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 C. OPTIONS ON FOREIGN CURRENCIES. The Portfolio may purchase and write put and call options on foreign currencies for the purpose of protecting against declines in the dollar value of foreign currency-denominated securities and against increases in the 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 will constitute only a partial hedge, up to the amount of the premium received, and the Portfolio could be required to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on a foreign 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 entire amount of the premium plus related transaction costs. Options on foreign currencies to be written or purchased by the Portfolio will be traded on U.S. and foreign exchanges or over the counter. There is no specific 27 percentage limitation on the Portfolio's investment in options on foreign currencies. For additional information on the use, risks and costs of options on foreign currencies, see Appendix D. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The 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. 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. The Portfolio 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. Additionally, for example, when the Adviser believes that a foreign currency may suffer a substantial decline against the U.S. dollar, it may cause the Portfolio to enter into a forward contract to sell an amount of that foreign currency approximating the value of some or all of the Portfolio's securities denominated in such foreign currency, or when the Adviser believes that the U.S. dollar may suffer a substantial decline against a foreign currency, it may cause the Portfolio to enter into a forward contract to buy that foreign currency for a fixed dollar amount. The Custodian will place cash not available for investment or liquid debt securities in a separate account of the Portfolio having a value equal to the aggregate amount of the Portfolio's commitments under forward contracts entered into under the second circumstance, 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. As an alternative to maintaining all or part of the separate account, the Portfolio may purchase a call option permitting the Portfolio 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 Portfolio may purchase a put option permitting the Portfolio 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 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 above may be restricted. Forward contracts may limit potential gain from a positive change in the relationship between the U.S. dollar and foreign currencies. Unanticipated changes in currency prices may 28 result in poorer overall performance for the Portfolio than if it had not entered into such contracts. 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 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 29 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 arise, may involve risks which exceed those involved in the options and futures activities described above. PORTFOLIO TURNOVER. Because the Portfolio will actively use 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 30 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 of 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 period ended December 31, 1992 the portfolio turnover rate was 13%. For the fiscal years ended December 31, 1993 and December 31, 1994 the portfolio turnover rates were 177% and 32% 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); 31 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 32 delivery of fixed income securities and related options) and other similar contracts; or 12. Purchase securities on margin, except for such short-term credits as may be necessary for the clearance of transactions. HIGH YIELD PORTFOLIO GENERAL. As discussed in the Prospectus for the High Yield Portfolio, the Portfolio will invest principally in fixed- income securities rated Baa or lower by Moody's or BBB or lower by S&P. The ratings of fixed-income securities by Moody's and S&P are a generally accepted barometer of credit risk. They are, however, subject to certain limitations from an investor's 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 will attempt 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 will evaluate those factors it considers relevant and will make portfolio changes when it deems it appropriate in seeking to reduce the risk of depreciation in the value of the Portfolio. 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 33 generation, there is the possibility that Federal, State or municipal governmental authorities may from time to time impose additional regulations or take other governmental action which might cause delays in the licensing, construction, or operation of nuclear power plants, or suspension of operation of such plants which have been or are being financed by proceeds of the fixed income securities in the Portfolio. MORTGAGE-RELATED SECURITIES. The mortgage-related securities in which the High-Yield Portfolio may invest provide funds for mortgage loans made to residential home buyers. These include securities which represent interests on pools of mortgage loans made by lenders such as savings and loan institutions, mortgage bankers, commercial banks and others. Pools of mortgage loans are assembled for sale to investors (such as the Portfolio) by various governmental, government-related and private organizations. Government-related (i.e., not backed by the full faith and credit of the United States Government) guarantors include FNMA and FHLMC. For a description of FNMA and FHLMC and the securities they issue see above, U.S. Government/ High Grade Securities Portfolio -- U.S. Government Securities, FHLMC Securities and FNMA Securities." Yields on mortgage-related securities are typically quoted by investment dealers and vendors based on the maturity of 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 34 agent for the purchaser with respect to, among other things, the receipt of principal and interest payments. (Such investments are also referred to as "whole loans"). The vendor of such mortgages receives a fee from the Portfolio for acting a servicing agent. The vendor does not provide any insurance or guarantees covering the repayment of principal or interest on the mortgages. At present, such investments are considered to be illiquid by the Adviser. The Portfolio will invest in such mortgages only if the Adviser has determined through an examination of the mortgage loans and their originators (which may include an examination of such factors as percentage of family income dedicated to loan service and relationship between loan value and market value) that the purchase of the mortgages should not present a significant risk of loss to the Portfolio. The Portfolio has no present intention of making direct investments in mortgages. WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The High-Yield Portfolio may purchase securities offered on a "when- issued" basis and may purchase or sell securities on a "forward commitment" basis. For a general description of when-issued securities and forward commitments, see above, "U.S. Government/High Grade Portfolio-Investment Practices-When-Issued Securities and Forward Commitments." No when-issued or forward commitments will be made by the Portfolio if, as a result, more than 20% of the value of the Portfolio's total assets would be committed to such transactions. 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 35 the Directors of the Fund do not believe that the net asset value of the Portfolio will be adversely affected by its purchase of securities on such basis. FUTURES CONTRACTS AND OPTIONS ON FUTURES. The High- Yield Portfolio may invest in financial futures contracts ("futures contracts") and related options thereon. The Portfolio may sell a futures contract or a call option thereon or purchase a put option on such futures contract if the Adviser anticipates that interest rates will rise, as a hedge against a decrease in the value of the Portfolio's securities. If the Adviser anticipates that interest rates will decline, the Portfolio may purchase a futures contract or a call option thereon to protect against an increase in the price of the securities the Portfolio intends to purchase. These futures contracts and related options thereon will be used only as a hedge against anticipated interest rate changes. For a general discussion of futures contracts and options thereon, including their risks, see "U.S. Government/High Grade Securities Portfolio-Investment Practices-Futures Contracts and Options on Futures Contracts" above and Appendix C. 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, 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 36 Portfolio may invest. For a description of put and call options, including their risks, see above, "U.S. Government/High Grade Securities Portfolio-Investment Practices-Options on U.S. and Foreign Government Securities." The Portfolio will not purchase any option if, immediately thereafter, the aggregate cost of all outstanding options purchased by the Portfolio would exceed 2% of the value of its total assets; the Portfolio will not write any option (other than options on futures contracts) if, immediately thereafter, the aggregate value of its portfolio securities subject to outstanding options would exceed 15% of its total assets. FOREIGN SECURITIES. The portfolio may invest in debt securities of foreign issuers without limitation. 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 will 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 will conduct its foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forward contracts to purchase or sell foreign currencies. 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 37 amount of dollars, of the amount of foreign currency involved in the underlying security transactions, the Portfolio will be able to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the subject foreign currency during the period between the date the security is purchased or sold and the date on which payment is made or received. Second, when the Adviser believes that the currency of a particular foreign country may suffer a substantial decline against the U.S. dollar, the Portfolio may enter into a forward contract to sell for a fixed amount of dollars the amount of foreign currency approximating the value of some or all of the Portfolio's 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 38 contract when it determines that the best interest of the Portfolio will be served. The Fund's custodian bank will place cash not available for investment or liquid equity (denominated in the foreign currency subject to the forward contract) or other liquid high grade debt securities in a separate account of the Portfolio in an amount equal to the value of the Portfolio's total assets committed to the consummation of forward foreign currency exchange contracts entered into under the second set of circumstances, as set forth above. If the value of the securities placed in the separate account declines, additional cash or securities will be placed in the account on a daily basis so that the value of the account will equal the amount of the Portfolio's commitments with respect to such contracts. The Portfolio's dealing in forward foreign currency exchange contracts will be 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 39 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 Agreement," below. LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory requirements, the Portfolio may loan its portfolio securities where such loans are continuously secured by cash collateral equal to no less than the market value, determined daily, of the securities loaned. In loaning its portfolio securities, the Portfolio will require 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 will follow 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 40 (ii) may purchase financial futures as described in the Prospectus and above; 3. Engage in the purchase or sale of real estate, except that the Portfolio may invest in securities secured by real estate or interests therein or issued by companies, including real estate investment trusts, which deal in real estate or interests therein; 4. Invest in companies for the purpose of exercising control of management; 5. Issue any senior securities as defined in the 1940 Act (except to the extent that when-issued securities transactions, forward commitments or stand-by commitments may be considered senior securities); 6. Participate on a joint, or on a joint and several, basis in any trading account in securities; 7. Effect a short sale of any security; 8. Purchase securities on margin, but it may obtain such short-term credits as may be necessary for the clearance of purchases and sales of securities; or 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 shall be 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. Ordinarily, the annual portfolio turnover rate will not exceed 100%. For the fiscal period December 28, 1992 (commencement of operations) through December 31, 1992 the portfolio turnover rate was 0%. For the fiscal years ended December 31, 1993 and December 31, 1994 the portfolio turnover rates were 25% and 83%, respectively. 41 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 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. Except as stated above, the Portfolio may not purchase or sell puts or calls or combinations thereof. 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 of either the equity or the fixed income securities will not exceed 100%, respectively. Although the Portfolio may invest in foreign securities, it has no present intention to do so. INVESTMENT RESTRICTIONS. The following restrictions, which are applicable to the Total Return Portfolio, supplement those set forth above and in the Prospectus and may not be 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; 42 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 will attempt 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 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 period December 28, 1992 (commencement of operations) through December 31, 1992 the portfolio turnover rate was 0%. For the fiscal years ended December 31, 1993 and December 31, 1994 the portfolio turnover rates were 85% and 95%, respectively. 43 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 will consider 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, 1994, 39.70% of the Portfolio's net assets were invested in Japanese issuers. For a description of Japan, see Appendix E. The Adviser will, in analyzing individual companies for investment, look for one or more of the following characteristics: an above average earnings growth per share; high return on invested capital; healthy balance sheet; sound financial and accounting policies and overall financial strength;strong competitive advantages; effective research and product development and marketing; efficient service; pricing flexibility; strength of management; and general operating 44 characteristics which will enable 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 will have a record of paying dividends for at least one year, and will generally be expected to increase the amounts of such dividends in future years as earnings increase. Foreign securities such as those purchased by the Portfolio may be subject to foreign government taxes which could reduce the yield on such securities, although a shareholder otherwise subject to U.S. federal income taxes will, 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. 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 will have 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 will 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 45 value of the securities loaned will not exceed 30% of the value of the Portfolio's total assets. WARRANTS. The Portfolio may invest in warrants which entitle the holder to buy equity securities at a specific price for a specific period of time. Warrants may be considered more speculative than certain other types of investments in that they do not entitle a holder to dividends or voting rights with respect to the securities which may be purchased nor do they represent any rights in the assets of the issuing company. Also, the value of the warrant does not necessarily change with the value of the underlying securities and a warrant ceases to have value if it is not exercised prior to the expiration date. SPECIAL RISK CONSIDERATIONS. Investors should understand and consider carefully the substantial risks involved in securities of foreign companies and governments of foreign nations, some of which are referred to below, and which are in addition to the usual risks inherent in domestic investments. There is generally less publicly available information about foreign companies comparable to reports and ratings that are published about companies in the United States. Foreign companies are also generally not subject to uniform accounting and auditing and financial reporting standards, practices and requirements comparable to those applicable to United States companies. It is contemplated that foreign securities will be purchased in over-the-counter markets or on stock exchanges located in the countries in which the respective principal offices of the issuers of the various securities are located, if that is the best available market. Foreign securities markets are generally not as developed or efficient as those in the United States. While growing in volume, they usually have substantially less volume than the New York Stock Exchange, and securities of some foreign companies are less liquid and more volatile than securities of comparable United States companies. Similarly, volume and liquidity in most foreign bond markets is less than in the United States and, at times, volatility of price can be greater than in the United States. Fixed commissions on foreign stock exchanges are generally higher than negotiated commissions on United States exchanges, although the Portfolio will endeavor to achieve the most favorable net results on its portfolio transactions. There is generally less government supervision and regulation of foreign stock exchanges, brokers and listed companies than in the United States. 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 46 taxation, limitations on the removal of funds or other assets of the Portfolio, political or social instability, or diplomatic developments which could affect United States investments in those countries. Moreover, individual foreign economies may differ favorably or unfavorably from the United States' economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. The dividends and interest payable on certain of the Portfolio's foreign securities may be subject to foreign withholding taxes, thus reducing the net amount of income available for distribution to the Portfolio's shareholders. A shareholder otherwise subject to United States federal income taxes will, 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. 47 FOREIGN CURRENCY TRANSACTIONS. Since investments in foreign companies will usually involve currencies of foreign countries, and since the Portfolio may temporarily hold funds in bank deposits in foreign currencies during the completion of investment programs, the value of the assets of the Portfolio as measured in United States dollars may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations, and the Portfolio may incur costs in connection with conversions between various currencies. The Portfolio will conduct its foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forward contracts to purchase or sell foreign currencies. For a discussion of forward foreign currency exchange contracts which also apply to the International Portfolio, see "High Yield Portfolio -- Foreign Currency Transactions," above. INVESTMENT RESTRICTIONS. The following restrictions, which are applicable to the International Portfolio, supplement those set forth above and in the Prospectus, and may not be changed without Shareholder Approval, as defined under the caption "General Information," below. The Portfolio may not: 1. Purchase a security if, as a result, the Portfolio would own any securities of an open-end investment company or more than 3% of the total outstanding voting stock of any closed-end investment company, or more than 5% of the value of the Portfolio's total assets would be invested in securities of any closed-end investment company or more than 10% of such value in closed-end investment companies in general, unless the security is acquired pursuant to a plan of reorganization or an offer of exchange; 2. Purchase or sell real estate (although it may purchase securities secured by real estate or interest therein, or issued by companies or investment trusts which invest in real estate or interest therein); 3. Purchase or sell commodity contracts, provided, however, that this policy does not prevent the Portfolio from entering into forward foreign currency exchange contracts; 4. Purchase securities on margin, except for use of the short-term credit necessary for clearance of purchases of portfolio securities; 5. Effect short sales of securities; 48 6. Act as an underwriter of securities, except insofar as it might be deemed to be such for purposes of the Securities Act with respect to the disposition of certain portfolio securities acquired within the limitations of restriction 4 above; 7. Purchase or retain the securities of any issuer if, to the knowledge of the Adviser, the officers and directors of the Fund and of the Adviser, who each owns beneficially more than 1/2 of 1% of the outstanding securities of such issuer, and together own beneficially more than 5% of the securities of such issuer; 8. Invest in companies for the purpose of exercising management or control; or 9. Issue senior securities except as permitted by the 1940 Act. SHORT-TERM MULTI-MARKET PORTFOLIO AND GLOBAL BOND PORTFOLIO GENERAL. The objective of the Short-Term Multi-Market Portfolio is to seek the highest level of current income, consistent with what the Adviser considers to be prudent investment risk, that is available from a portfolio of high- quality debt securities having remaining maturities of not more than three years. The Portfolio seeks high current yields by investing in debt securities denominated in the U.S. dollar and a range of foreign currencies. Accordingly, the Portfolio will seek investment opportunities in foreign, as well as domestic, securities markets. While the Portfolio normally will maintain a substantial portion of its assets in debt securities denominated in foreign currencies, the Portfolio will invest 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 will 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. On December 31, 1994, 27.0% of the Portfolio's net assets were invested in Japanese issuers. For a description of Japan, see Appendix E. 49 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 B 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 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, 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 50 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 C. OPTIONS ON FOREIGN CURRENCIES. For additional information on the use, risks and costs of options on foreign currencies, see Appendix C. 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 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 a Portfolio than if it had not entered into such contracts. The use of foreign currency forward contracts will not eliminate fluctuations in the underlying U.S. Dollar equivalent value of the prices of or rates of return on a Portfolio's foreign currency-denominated portfolio securities and the use of such techniques will subject the Portfolio to certain risks. The matching of the increase in value of a forward contract and the decline in the U.S Dollar equivalent value of the foreign currency-denominated asset that is the subject of the hedge generally will not be precise. In addition, a Portfolio may not always be able to enter into foreign currency forward contracts at attractive prices and this will limit the Portfolio's ability to use such contracts to hedge or cross-hedge its assets. Also, with regard to a Portfolio's use of cross- hedges, there can be no assurance that historical correlations between the movement of certain foreign currencies relative to the U.S. Dollar will continue. Thus, at any time poor correlation may exist between movements in the exchange rates of the foreign currencies underlying the Portfolio's cross-hedges and the movements in the exchange rates of the foreign currencies in which the Portfolio's assets that are the subject of such cross-hedges are denominated. PORTFOLIO TURNOVER. Since the Short-Term Multi-Market Portfolio and the Global Bond Portfolio may engage in active trading, their rates of portfolio turnover may be higher than that of many other investment companies. The Portfolios cannot 51 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 Portfolios. The annual portfolio turnover rates of securities of the Short- Term Multi-Market Portfolio for the fiscal years ended December 31, 1992, December 31, 1993 and December 31, 1994 were 153%, 210% and 134%, respectively. The annual portfolio turnover rates of securities of the Global Bond Portfolio for the fiscal years ended December 31, 1992, December 31, 1993 and December 31, 1994 were 78%, 125% and 102%, respectively. INVESTMENT RESTRICTIONS. The following restrictions, which are applicable to the Short-Term Multi-Market Portfolio and the Global Bond Portfolio, supplement those set forth above and in the Prospectus, and may not be changed without Shareholder Approval, as defined under the caption "General Information," below. A Portfolio may not: 1. Make loans except through (i) the purchase of debt obligations in accordance with its investment objectives and policies; (ii) the lending of portfolio securities; or (iii) the use of repurchase agreements; 2. Participate on a joint or joint and several basis in any securities trading account; 3. Invest in companies for the purpose of exercising control; 4. Make short sales of securities or maintain a short position, unless at all times when a short position is open it owns an equal amount of such securities or securities convertible into or exchangeable for, without payment of any further consideration, securities of the same issue as, and equal in amount to, the securities sold short ("short sales against the box"), and unless not more than 10% of the Portfolio's net assets (taken at market value) is held as collateral for such sales at any one time (it is 52 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, 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 seeks high current yields by 53 investing in Government Securities denominated in the U.S. Dollar, the Canadian Dollar and the Mexican Peso (including the Mexican New Peso). Normally, the Portfolio expects to maintain at least 25% of its assets in securities denominated in the U.S. Dollar. The Portfolio will utilize 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 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 or Baa by Moody's are considered to have speculative characteristics. Sustained periods of deteriorating economic conditions or rising interest rates are more likely to lead to a weakening in the issuer's capacity to pay interest and 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 will actively manage the Portfolio's assets in relation to market conditions and general economic conditions in the United States, Canada and Mexico and elsewhere, and will adjust 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 will vary in accordance with the assessment of the Portfolio's Adviser of the relative yield and appreciation potential of such securities and the relationship of the country's currency to the U.S. Dollar. The Adviser anticipates that, under the conditions appertaining at the date of this Prospectus, not more than approximately 25% of the Portfolio's assets would be invested in securities denominated in the Mexican Peso. The Portfolio will invest 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 54 the Portfolio's Adviser. The Portfolio will 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 debt securities issued by governmental entities of Argentina ("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 A. U.S. GOVERNMENT GUARANTEED MORTGAGE-RELATED SECURITIES-- GENERAL. For information regarding U.S. Government guaranteed mortgage-related securities, see "U.S. Government/High Grade Securities Portfolio -- U.S. Government Guaranteed Mortgage- Related Securities -- General," above. GNMA CERTIFICATES. For information regarding GNMA Certificates, see "U.S. Government/High Grade Securities Portfolio -- GNMA Certificates," above. FHLMC SECURITIES. For information regarding FHLMC Securities, see "U.S. Government/High Grade Securities Portfolio - -- FHLMC Securities," above. FNMA SECURITIES. For information regarding FNMA Securities, see "U.S. Government/High Grade Securities Portfolio - -- FNMA Securities," above. ZERO COUPON TREASURY SECURITIES. The Portfolio may invest in "zero coupon" Treasury securities. Currently the only U.S. Treasury security issued without coupons is the Treasury bill. Although the U.S. Treasury does not itself issue Treasury notes and bonds without coupons, under the U.S. Treasury STRIPS program interest and principal payments on certain long term treasury securities may be maintained separately in the Federal Reserve book entry system and may be separately traded and owned. In addition, in the last few years a number of banks and brokerage firms have separated ("stripped") the principal portions ("corpus") from the coupon portions of the U.S. Treasury bonds and notes and sold them separately in the form of receipts or certificates representing undivided interests in these instruments (which instruments are generally held by a bank in a custodial or trust account). The staff of the Commission has indicated that in its view, these receipts or certificates should be considered as securities issued by the bank or brokerage firm involved and, therefore, should not be included in the Portfolio's categorization of U.S. Government Securities. The Portfolio disagrees with the staff's interpretation, but until 55 final resolution of the issue will include the Portfolio's purchases of such securities in the non-U.S. Government security portion of the Portfolio's investments. However, if such securities are deemed to be U.S. Government Securities the Portfolio will not be subject to any limitations on their purchase. 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 56 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. 57 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 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 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 C. OPTIONS ON FOREIGN CURRENCIES. For additional information on the use, risks and costs of options on foreign currencies, see Appendix C. 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 58 this situation the Fund may, in the alternative, enter into a forward contract to sell a different foreign currency for a fixed U.S. Dollar amount where the Fund believes that the U.S. Dollar value of the currency to be sold pursuant to the forward contract will fall whenever there is a decline in the U.S. Dollar value of the currency in which portfolio securities of the Fund are denominated ("cross-hedge"). The Fund's Custodian will place cash not available for investment or liquid high-grade Government Securities in a segregated account of the Fund having a value equal to the aggregate amount of the Fund's commitments under forward contracts entered into with respect to position hedges and cross-hedges. If the value of the securities placed in the 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. 59 Dollar will continue. Thus, at any time poor correlation may exist between movements in the exchange rates of the foreign currencies underlying the Portfolio's cross-hedges and the movements in the exchange rates of the foreign currencies in which the Portfolio's assets that are the subject of such cross- hedges are denominated. OPTIONS ON U.S. GOVERNMENT SECURITIES AND FOREIGN GOVERNMENT SECURITIES. For additional information on the use, risks and costs of options in U.S. Government Securities and foreign government securities, see Appendix D. 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 rate of securities of the Portfolio for the fiscal period ended December 31, 1994 was 15%. 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; 60 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. 61 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. 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 9.97 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 29 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. Its Parliament consists of a House of Commons and a 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 62 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. Legislative authority resides in the federal parliament and the ten provincial legislative assemblies. Provinces have extensive power with specific areas of jurisdiction. The federal government has defined areas of jurisdiction and the power to act in areas declared by Parliament to be for the general advantage of Canada. This general power has been used to justify federal action in certain areas of provincial jurisdiction. Concurrent federal and provincial jurisdiction exists in certain matters, including agriculture, immigration and pensions. The power- sharing issue between the federal government and provincial governments has been contentious and has proven to be a central issue in the process of constitutional reform. Politics Since World War II, the federal government has been formed by either the Liberal Party or the Progressive Conservative Party. In October 1993, the Liberal Party under the leadership of Mr. Jean Chretien, won 178 of the 295 seats in the Canadian House of Commons ending nine years of rule by the Progressive Conservative Party. He remains popular and unless the Liberal Party calls for an earlier election, the next general election will take place in October 1998. Canada has had three major developments regarding unity and constitutional reform in four years. The first two major developments were the rejection of the Meech Lake Agreement in 1990 and the Charlottetown Accord in 1992. Those reforms would have given Quebec constitutional recognition as a distinct society, transferred powers from the federal to the provincial governments and reformed the Senate by providing for more equal representation among the provinces. The third major development is the 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 the provincial election with 44.7% of the vote. The Liberal Party won 47 seats with 44.3% of the vote. The Parti Quebecois' agenda includes a call for a referendum, sometime in 1995, supporting independence. On February 6, 1995, the first of 15 regional commissions started a month of consultations with regard to a draft law regarding independence. The commissions are expected to produce a joint-report which will provide the basis for amendments to the draft law. This would be followed by the referendum campaign and vote. In 1980, Quebec voted against independence by a margin of 60% to 40%. Polls 63 indicate that there is not enough support to pass a referendum for independence. Furthermore, on February 13, 1995, in what had been seen as a preview to the referendum Liberal Party candidates defeated Parti Quebecois candidates in two parliamentary by-elections in Quebec. Mr. Parizeau has also suggested that he might introduce a series of referendums until separatism wins, instead of one all-encompassing referendum. The Quebec Government's proposals suggest that Quebec would be able to keep the Canadian dollar as its currency, share its armed forces with Canada and be a partner of Canada with regard to international agreements and alliances. The actual mechanics of separation, if it were to occur, and the possible effects on Canada's economy are still not clear. Prime Minister Chretien has stated that the national government would prevail in a vote on separatism. Still, until the vote on the referendum, and for the foreseeable future, Quebec's position within Canada will continue to dominate political debate. Monetary and Banking System The central bank of Canada is the Bank of Canada. Its main functions are to advise on the formulation and execution of monetary policy, supervising commercial bank acting as a fiscal agent to the federal government 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. North American Free Trade Agreement 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 1993, was larger than between any other two countries in the world. On January 2, 1988, Canada and the United States signed the Free Trade Agreement (the "FTA"), which was ratified by the Canadian Parliament and the United States Senate. 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. 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. As a result, NAFTA effectively replaced the FTA. When fully-implemented, NAFTA is designed to create a North America Free Trade Area, expand the flow of goods, services and investment, and eventually eliminate tariff barriers, import 64 quotas and technical barriers among Canada, the United States and Mexico. Economic Information Regarding Canada Canada experienced rapid economic expansion during most of the 1980's. Its economy, like many other industrialized nations fell into a recession from late 1990 through 1992. The 1990-1992 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. In its first budget, presented in February 1994, the Liberal Party introduced new spending cuts to reduce Canada's budget deficit. Canada's budget deficit is one of the largest for any of the OECD members. For the fiscal year 1994-95, its budget deficit is estimated to be 5.5% of GDP compared to 2.5% for the United States. The Government has stated its commitment to reduce the deficit to approximately 4.2% of GDP in the 1995-1996 fiscal year and to 3% of GDP in the 1996- 1997 fiscal year. While the Government's budget deficit objectives can be achieved with continued economic growth and lower interest rates, they also indicate a further rise in the debt-to-GDP ratio which would continue to grow until the 1996- 1997 fiscal year. In addition to the growth of the federal government deficit, provincial government debt has risen rapidly. Developments, including increased spending on social services at the provincial level, were responsible for a significant amount of the growth of public debt from 1990-1992. In response to the increase in provincial debt, a number of rating agencies downgraded some provincial debt ratings. All provinces now have plans to balance their respective budgets. This may prove to be difficult considering the increase in interest rates and the federal government's plan to reduce certain transfers to the provinces. During 1994, despite growing output and low inflation, concern over the country's deficit and the uncertainty associated with Quebec's status within Canada has lead to a weakening of its currency and higher interest rates. These higher interest rates have threatened the federal deficit reduction target. In December 1994, the Canadian Parliament proposed legislation increasing taxes by C$1.1 billion and reducing spending by C$8.7 billion over the next two years. It is still not clear whether these measures, if enacted, will have the effect of meeting the federal deficit reduction targets. Through January 31, 1995, the Canadian Dollar decreased in value compared to the U.S. Dollar by 65 approximately 21% from October 1991 and approximately 5% from September 1994. On January 20, 1995, the Canadian dollar fell to 70.2, its lowest rate in almost nine years and close to its record low of 69.2. The Bank of Canada responded by increasing rates on Treasury bills and selling U.S. dollars. The Canadian dollar has increased in value against the U.S. dollar from 70.2 on January 20, 1995 to 70.8 on February 16, 1995. 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 gross domestic product and information concerning yields on certain Canadian Government Securities. Historical figures are not necessarily indicative of future fluctuations. 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. Despite the recent drop in value of the Canadian dollar, 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 occurred in the past is not necessarily indicative of fluctuations in that rate that may occur over time which may be wider or more confined than the range that occurred over an historic period of comparable length. Future rates of exchange cannot be predicted, particularly over extended periods of time. The following table sets forth, for each year indicated, the annual average of the daily noon buying rates in New York for cable transfers in U.S. Dollars for one Canadian Dollar as certified by the Federal Reserve Bank of New York: 66 U.S. Dollars ____________ 1981 . . . . . . . . . . . . . . 0.83 1982 . . . . . . . . . . . . . . 0.81 1983 . . . . . . . . . . . . . . 0.81 1984 . . . . . . . . . . . . . . 0.77 1985 . . . . . . . . . . . . . . 0.73 1986 . . . . . . . . . . . . . . 0.72 1987 . . . . . . . . . . . . . . 0.75 1988 . . . . . . . . . . . . . . 0.81 1989 . . . . . . . . . . . . . . 0.84 1990 . . . . . . . . . . . . . . 0.86 1991 . . . . . . . . . . . . . . 0.87 1992 . . . . . . . . . . . . . . 0.83 1993 . . . . . . . . . . . . . . 0.78 1994 . . . . . . . . . . . . . . 0.73 Source: Federal Reserve Bulletin INFLATION RATE OF THE CANADIAN CONSUMER PRICE INDEX. Inflation has remained below 2% since 1991 and the Government and the Bank of Canada have reaffirmed the target of holding inflation inside a band of 1-3% for 1995. 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, of such year (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 Source: BANK OF CANADA REVIEW Winter 1994-1995; Statistics Canada. 67 CANADIAN GROSS DOMESTIC PRODUCT. The following table sets forth Canada's gross domestic product ("GDP") for the years 1981 through 1993 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 . . . . . 674,766 554,735 (1.8) 1992 . . . . . 688,391 558,165 0.6 1993 . . . . . 711,658 570,541 2.2 Source: BANK OF CANADA REVIEW Winter 1994-1995; Statistics Canada. 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 for 1994. 68 Treasury Bills Benchmark Bonds 1994 3 Months 6 Months 5 Years 10 Years ____ ___________________ __________________ January 3.63% 3.71% 5.40% 6.39% February 3.84 4.17 6.12 6.94 March 5.47 6.04 7.47 7.95 April 5.86 6.28 7.44 7.95 May 6.14 6.55 8.01 8.41 June 6.38 7.29 8.82 9.11 July 5.76 6.64 8.96 9.36 August 5.52 5.79 8.32 8.74 September 5.20 5.69 8.36 8.88 October 5.39 6.04 8.55 9.14 November 5.86 6.52 8.81 9.16 December 7.14 8.12 8.99 9.07 Source: BANK OF CANADA REVIEW Winter 1994-1995; Statistics Canada. 69 ADDITIONAL INFORMATION ABOUT THE UNITED MEXICAN STATES Territory and Population The United Mexican States ("Mexico") occupies a territory of 1.96 million square kilometers (756 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 million. Mexico's three largest cities are Mexico City, Guadalajara and Monterrey, with estimated populations in 1990 of 14.9 million, 2.8 million and 2.5 million, respectively. Due to improved economic and social conditions and better medical care, the annual rate of population growth averaged 3.5% in the 1960s and 1970s and 2.2% in the 1980s. In recent years, Government efforts concerning family planning and birth control, together with declining birth rates among women under 35 and those living in urban areas (where approximately 70% of the population lives) have resulted in a reduction of such rate to an estimated 2.1% at December 31, 1990. Government The present form of government was established by the Constitution, which took effect on May 1, 1917. The Constitution established 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 18 Ministries, the Attorney General, the Federal District Department and the Attorney General of Mexico City. 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, two for each state and two for 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 selected 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. Judicial authority is vested in the Supreme Court of Justice, circuit and 70 district courts. The Supreme Court has 21 members who, subject to ratification by the Senate, are appointed for life by the President. Politics The Partido Revolucionario Instituctional ("PRI") is the dominant political party in Mexico. Since 1929 the PRI has won all presidential elections and has held a majority in General 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 50.2% of the votes, the candidate of the PAN was second with 26.7% of the votes and the PRD candidate was third with 17.1% of the votes. With respect to the Congressional elections, the PRI maintained its majority in both chambers, with 93 seats in the Senate and 300 seats in the Chamber of Deputies. The PAN has the second largest representation with 25 seats in the Senate and 119 seats in the Chamber of Deputies and the PRD the third largest representation with 10 seats in the Senate and 71 seats in the Chamber of Deputies. In January 1994, an area in the southern state of Chiapas experienced civil unrest, including armed attacks on several villages. The Federal Government responded immediately by providing support to the local authorities, agreeing to accelerate the disbursement of expenditures in connection with social programs that were provided for in the 1994 budget and publicly offering to negotiate a peaceful resolution that would address the underlying concerns of the local population. Despite the Federal Government's attempt to resolve the situation, sporadic attacks have continued and the area of conflict expanded in December 1994. In addition, in December 1994, the PRI candidate, Mr. Eduardo Robledo Rincon, became the Governor of Chiapas amid speculations of election fraud. His election and subsequent actions, before his resignation in February 1995, led to more tension between the rebels and the Government. The Mexican military, in early February 1995, conducted an operation to restore order in Chiapas. After restoring order, President Zedillo ordered the military to halt its offensive, offered amnesty to the rebels and urged them to return to negotiating a peaceful settlement. 71 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 were 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. Continuing the reform of the political system, and in response to the civil unrest in Chiapas and the economic turmoil facing Mexico resulting from the devaluation of the Peso (as described below), the Mexican Government and leaders of the PRI signed an agreement with the opposition parties on January 17, 1995, to continue to democratize the country's political system. Changes would include controls on fund-raising and campaign spending, full access to the media for the opposition parties and the complete independence of the federal elections agency. This pact may also lead to new elections in Tabasco and Chiapas, where disputed elections were held last year. On February 13, 1995, the PRI suffered its worst election defeat in sixty years when the PAN won almost every major elective office in the state of Jalisco. It is only the third time in the PRI's history that it has accepted a defeat in a state-wide election. Additional state-wide elections are scheduled throughout 1995, the effect of this recent election result on the upcoming elections is not clear. Money and Banking Banco de Mexico, chartered in 1925, is the central bank of Mexico. It is the Federal Government's primary instrument for the execution of monetary policy and the regulation of currency and credit. It is authorized by law to regulate interest rates payable on time deposits, to establish minimum reserve requirements for credit institutions and to provide discount facilities for certain types of bank loans. The currency unit of Mexico is the Peso. Mexico repealed its exchange control rules in 1991 and now maintains only a market exchange rate. A constitutional amendment relating to Banco de Mexico's activities and role within the Mexican economy became effective on August 23, 1993. The amendment's purpose was to reinforce the independence of Banco de Mexico, which may in the future act as a counterbalance to the executive and legislative branches in fiscal 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 72 amendment described above and also established a Foreign Exchange Commission charged with determining the nation's exchange rate policies. Trade Reform Mexico has been a member of the General Agreement on Tariffs and Trade ("GATT") since 1986. Mexico has also entered into NAFTA with the United States and Canada. In addition, Mexico signed a framework for a free trade agreement in 1992 with Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua and entered into a definitive free trade agreement with Costa Rica in April 1994. A free trade agreement between Mexico and Chile went into effect on January 1, 1992. A free trade agreement with Colombia and Venezuela was signed in June 1994 and a similar agreement with Bolivia was signed in September 1994; both agreements entered into force in January 1995. In 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 economy suffered a set back in 1981 because of a severe drop in oil prices and high interest rates that substantially increased the country's external debt service obligations. With no new lending from international creditors, the Peso was devalued and inflation again rose sharply. 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." As part of the Brady Plan, commercial banks and Mexico agreed to debt reduction and new financing in a set of agreements comprising the 1989-1992 Financing Package. The implementation of this package resulted in a substantial reduction in Mexico's foreign debt and debt service obligations. The value of 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 73 "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) funds used for 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. Under economic policy initiatives implemented since December 1987, the Mexican government introduced a schedule of gradual devaluations of the Mexican Peso that initially amounted to an average depreciation of the Mexican Peso against the U.S. Dollar of one Mexican Peso per day. On May 28, 1990, the Mexican Peso began devaluing by an average of .80 Mexican Pesos per day instead of one Mexican Peso per day. On November 12, 1990 this average was decreased to .40 Mexican Pesos per day and on November 11, 1991 the daily devaluation rate was lowered to .20 Mexican Pesos per day. On January 1, 1993, the Mexican Government introduced a new currency, the New Peso. Each New Peso is worth 1,000 old Mexican Pesos. The New Pesos and old Mexican Pesos were to continue to be circulated for at least a year with Mexican businesses being required to post prices in both pesos. At that time, the Mexican government stated that the New Peso (hereinafter, the "Peso") was not a devaluation but a move to simplify the Mexican currency. Throughout 1993 and most of 1994, the U.S. Dollar exchange rate was allowed to fluctuate within a band that widened daily. The ceiling of the band, which is the maximum selling rate, depreciated at a daily rate of 0.0004 Pesos (equal to approximately 4.5% per year), while the minimum buying rate remained fixed. RECENT DEVELOPMENTS. On December 20, 1994, the Mexican Government announced a new policy that would allow a more substantial yet still controlled devaluation of the Mexican Peso. On December 22, 1994 the Mexican Government announced that it would not continue with the policy announced two days earlier and it would instead permit the Peso to float against other currencies, resulting in a continued decline against the U.S. Dollar. On December 23, 1994 the exchange rate was 4.67 Pesos to the U.S. Dollar, and on January 4, 1995 it had fallen further to 5.57 to the U.S. Dollar. 74 On January 12, 1995, President Clinton proposed a plan to help stabilize the Mexican economy. Under terms of the proposal, the United States would guarantee $40 billion in new loans to Mexico to be used in the event of a default on outstanding bonds or loans. In response to President Clinton's plan, the Peso gained approximately 8% in one day against the U.S. Dollar. During the next two weeks as it appeared the plan would not be approved by Congress, the Peso fell again, reaching a new low on January 31, 1995 of 6.35 Pesos to the U.S. Dollar or an effective devaluation of approximately 40% since December 20, 1994. With foreign exchange reserves down from an estimated $30 billion in February 1994 to $6 billion in December 1994 and $3.5 billion at the end of January 1995, there existed significant concern about the possibility of a Mexican government default on the approximately $11 billion in Tesobonos maturing from February to April 1995. Tesobonos are U.S. dollar- denominated Mexican Government bonds with a face value of $1,000. The purchase price of a Tesobono is the Peso equivalent of $1,000 on the day the bond is acquired. On the date the bond matures, an amount equal to the principal plus interest will be paid in Pesos at the exchange rate in effect on the date the bond matures. During January 1995, with foreign investors estimated to be holding 70% of outstanding Cetes and 80% of outstanding Tesobonos, it became imperative that Mexico restore foreign investor confidence. The obligation to repay the Tesobonos was a significant cause of Mexico's economic turmoil, both because of the size of the debt and the continuing devaluation of the Peso. On January 24, 1995, demand for Tesobonos fell dramatically from the previous week, with interest rates rising to more than 26%. During this same time, the prices of Mexican Brady Bonds had decreased by approximately 23%. On January 31, 1995, President Clinton announced a new plan that would not require Congressional approval in order to be implemented. Under the plan, the United States will exchange up to $20 billion in foreign exchange reserves for Dollars, which, in turn, will be swapped for Pesos. Mexico has an obligation to return the Dollars within three to five years. The Federal Reserve will make available to Mexico up to $6 billion in short- term loans. The International Monetary Fund will provide $17.8 billion in five-year loans and the Bank for International Settlements will provide $10 billion in credit to Mexico. In addition, Canada pledged $1 billion and Latin American nations pledged $1 billion in credit to Mexico. Under the terms of the plan, Mexico has an obligation to pay fees for the use of the loan guarantees and has pledged oil revenues as collateral for loan guarantees from the United States. In addition, Mexico will 75 be required to adhere to a program of economic reform, which will include a reduction in government spending, slowing the growth of the money-supply and the privatization of more industries. It is unclear what effect, if any, these recent developments will have on the value of the Peso or on the Mexican economy. Statistical and Related Information Concerning Mexico The following provides certain statistical and related information regarding historical rates of exchange between the U.S. Dollar and the Mexican Peso, information concerning inflation rates, historical information regarding the Mexican gross domestic product 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 would 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 1994 and the months of January and February 1995. 76 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 5.075 -- -- January 1995. . . 6.500 -- -- -- February 1995 . . 6.078 -- -- -- * Through November 10, 1991. Source: Banco de Mexico. 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 the surge in wages and prices. The Pacto de Solidaridad Economica (Pact for Economic Solidarity, the "PSE") was announced in December 1987 and included the implementation of restrictive fiscal and monetary policies, the elimination of trade barriers and the reduction of import tariffs. The PSE was renamed the Pacto para las Estabilidad y el Crecimiento Economica (Pact for Stability and Economic Growth, the "PECE") in November 1988. The PECE has been extended on five occasions. After substantive increases in public sector prices and utility rates, price controls were introduced. These policies lowered the consumer inflation rate from 159.2% in 1987, to 19.7% in 1989, 29.9% in 1990, 18.8% in 1991, 11.9% in 1992, and 8.0% in 1993. Under the PECE, the prices of certain goods and services provided by the public sector (particularly gasoline, energy for 77 industrial use and utility services) were increased. The private sector agreed to accept the increases without increasing private sector prices. Furthermore, the government committed itself to implementing measures to reduce agricultural sector costs. On October 3, 1993, the 1993-94 PECE went into effect. The purposes of that PECE, which was effective through December 31, 1994, were essentially the same as those of its predecessor pacts. The Government promised to maintain fiscal discipline and a balanced budget. Mexico's foreign exchange policy remains unchanged. The 1993-94 PECE set an inflation target of 5% for 1994. In addition, the Government agreed to reduce the highest income tax rate from 35% to 34% and to reduce (for the next two years) the withholding tax applicable to interest payments on external debt payable to certain financial institutions and on publicly issued external debt from 15% to 4.9%. In order to assure industry of stable prices for certain factors of production, the government has agreed to limit annual increases in the price of gasoline (except in the border region with the United States) to a maximum of 5% annually. Commercial and residential electricity rate increases were also limited to 5%. As the Mexican economy stabilized, there has been a gradual reduction in the number of goods and services whose prices are covered by the original PECE, the 1992-93 PECE and the 1993-94 PECE. On September 24, 1994, the government, together with the business and labor sectors, entered into a new agreement that extends the 1993-94 PECE for 1995. That agreement became effective on January 1, 1995. Its main points are as follows: (i) an inflation target of 4% for 1995; (ii) a 4% GDP growth target for 1995; (iii) an increase in salaries by 4%, together with a productivity increase, the terms of which are yet to be determined; (iv) the maintenance of the current foreign exchange policy; (v) the creation of an investment fund to be financed with the proceeds of privatizations in order to encourage the participation of the private sector in infrastructure projects; (vi) gradual increases in the prices of gasoline and electricity, in amounts not to exceed a 4% increase in 1995; (vii) the creation of tax benefits for workers receiving certain minimum salaries; and (viii) a reduction of asset taxes to 1.8% (together with other benefits relating to asset taxes). On January 3, 1995, in response to the economic turmoil following the devaluation of the Peso, President Zedillo announced an emergency economic plan. The plan reiterates most of the projections contained in the 1993-94 PECE, but modifies the inflation projection (increased to 20%) and lowers GDP growth target (to approximately 1%) for 1995. In addition, President Zedillo reiterated that taxes would not be increased, Government spending would decrease by approximately 1.3% of GDP, wages would 78 be allowed to increase by no more than 7% and a Fiscal Advisory Committee would be created to examine Mexico's fiscal legislation. It is unclear what effect, if any, these policies will have on the Mexican economy. CONSUMER PRICE INDEX. The following table sets forth the changes in the Mexican consumer price index for each of the thirteen years ended December 31, 1994. 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 Source: Banco de Mexico. MEXICAN GROSS DOMESTIC PRODUCT. The following table sets forth certain information concerning Mexico's GDP for the years 1981 through 1993 at historical and constant prices. 79 Gross Change from Prior Gross Domestic Product Year at Domestic Product at 1985 Prices Constant Prices ________________ _______________ _______________ (billions of Mexican Old Pesos) (percentage) 1981 . . . . 6,128 46,795 7.9% 1982 . . . . 9,798 46,538 (0.5) 1983 . . . . 17,879 44,548 (4.3) 1984 . . . . 29,472 46,195 3.7 1985 . . . . 47,392 47,392 2.6 1986 . . . . 79,191 45,613 (3.8) 1987 . . . . 193,312 46,460 1.9 1988 . . . . 390,451 47,039 1.2 1989 . . . . 507,618 48,613 3.3 1990 . . . . 686,406 50,774 4.4 1991 . . . . 865,166 52,615 3.6 1992 . . . . 1,019,156 54,010 2.6 1993 . . . . 1,122,928 54,337 0.4 Source: Banco de Mexico. 80 INTEREST RATES. The following table sets forth the average yield as of the date of issuance on 28-day and 91-day Cetes and Tesobonos for the periods listed below: Average Cetes and Tesobonos Rates _________________________________ 28-Day 91-Day 28-Day 91-Day Cetes Cetes Tesobonos Tesobonos _____ _____ _________ _________ 1989: Jan.-June ............. 51.1% 51.5% --- --- July-Dec. ............. 38.9 38.0 --- 15.1% 1990: Jan.-June ............. 41.2 40.7 --- --- July-Dec. ............. 28.3 29.4 12.0% --- 1991: Jan.-June ............. 21.2 21.7 --- --- July-Dec. ............. 17.3 18.0 9.1 --- 1992: Jan.-June ............. 13.8 13.8 7.5 --- July-Dec. ............. 17.4 18.0 4.9 4.0 1993: Jan.-June ............. 16.4 17.3 4.1 5.8 July-Dec. ............. 13.4 13.6 4.0 5.1 1994: Jan.-Oct. ............. 14.7 15.1 7.0 6.6 November ............. 13.9 14.8 --- 7.3 December ............. 31.0 32.0 --- 10.5 1995: January ............. 37.0 38.0 --- 25.0 February ............. 59.0 57.0 --- 17.0 Source: Banco de Mexico 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. It has a population of approximately 34 million. 81 The most densely inhabited areas and the traditional agricultural wealth are on the wide temperate belt that stretches from east to west in central Argentina. About one-third of the population lives in the greater Buenos Aires area. Five other urban centers, Cordoba, Rosario, Mendoza, San Miguel de Tucuman and La Plata, have a population of over 500,000 each. Approximately 80% of the country's population is urban. During the past two decades, Argentina's population grew at a 1.2% average annual rate. Government The 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 is the highest body of authority. The President is elected by an electoral college and may now serve for consecutive four- year terms. The next election for the Presidency is scheduled to take place in May 1995. 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 Senate consists of three Senators selected by each provincial legislature and by the electoral college in the case of the federal capital of Buenos Aires. Senators are elected for nine-year terms, and serve in staggered terms so that one-third of the Senate's seats are subject to elections every three years. The Chamber of Deputies consists of 257 seats which are allocated according to each province's population and elected by popular vote. 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 of Justice, which has nine members who are appointed for life by the President (subject to ratification by the Senate). Each province has its own constitution, and elects its own governor, legislators and judges, without the intervention of the federal government. 82 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 at the end of the nineteenth century. 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. Since the 1930's, Argentina's political parties have had difficulty in resolving the inter-group conflicts arising 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 62 years. Poor economic management by the military in the early 1960's and 1970's 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 reestablished civilian rule, including a functioning Congress. The current president, Carlos Menem, won the presidential election in May 1989 and took office in July 1989, several months ahead of the scheduled inauguration, in the midst of an economic crisis. President Menem, the leader of the PJ, was 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. The next presidential election is scheduled for May 1995. 83 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. There is a unified foreign exchange market free of government intervention and regulations. The unified floating exchange rate is determined by supply and demand. 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. 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, the initial steps were taken to liberalize industrial and consumer prices previously subject to various restrictions as a consequence of hyperinflation, and to encourage international trade by the elimination of controls. 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. In the fall of 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 84 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 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 gross domestic product ("GDP") and information concerning interest rates on certain Argentine Government Securities. Historical figures are not necessarily indicative of future fluctuations. 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. 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. 85 Official Rate 1986 . . . . . . . . . . . . .00013 1987 . . . . . . . . . . . . .00038 1988 . . . . . . . . . . . . .00134 1989 . . . . . . . . . . . . .17950 1990 . . . . . . . . . . . . .55850 1991 . . . . . . . . . . . . .99850 1992 . . . . . . . . . . . . .99050 1993 . . . . . . . . . . . . .99850 1994 . . . . . . . . . . . . .99850 Source: Banco Central de la Republica Argentina WAGES AND PRICES. Prior to the appointment of Economy Minister Domingo F. Cavallo and the announcement of his new economic plan 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. Due to the lag which typically occurs between the accrual and receipt of taxes, inflation tended to reduce the value of tax collections and increase 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 86 (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. $1000 from their accounts, and the balance was made payable only in 10-year U.S. Dollar denominated government bonds (Bonex 89). The plan also provided for the compulsory exchange of certain domestic currency denominated bonds for Bonex 89. The stabilization effort succeeded in ending temporarily the period of hyperinflation, but not in ending the Argentine economy's susceptibility to inflation. In late 1990, a deterioration in the finances of the social security system and provincial governments led to an expansion of Central Bank credit. The Central Bank loaned funds to the social security system to allow it to meet year-end payments and also funded provincial banks suffering deposit runs. The provincial banks continued to lend to finance provincial government deficits. The credit expansion led to downward market pressure on the Austral, and a resurgence of price inflation. During 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 growth by addressing underlying structural problems that had distorted fiscal and monetary policy through reforms relating to the tax system, privatizations and the opening of the economy. 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 87 when backed by increases in the level of international reserves, and not whenever the public sector deficit or the financial sector needs to be financed. Gross international assets include the Central Bank's holdings of gold, foreign exchange (including short-term investments), U.S. Dollar denominated Argentine government bonds (in an amount not to exceed 30% of total assets) and its net Asociacion Latinoamericana de Integraction ("ALADI") claims (except overdue claims) all freely available and valued at market prices. Under this arrangement, in which the Argentine Peso is fully convertible into the U.S. Dollar, no increase in the domestic monetary base can occur without an equivalent increase in gross international assets at the one Argentine Peso per U.S. Dollar rate; and (2) the elimination of the fiscal deficit and the achievement of a surplus in the primary balance to provide funds for the government to service its debt and thereby eliminate the need for further borrowings. The International Monetary Fund ("IMF") has supported the implementation of the Convertibility Plan and designed a financial program for the Argentine public sector. Argentina has attained or surpassed the targets set by the IMF with respect to primary balances for 1992, the first half of 1993 and met targets for the third quarter of 1993. 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. 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 17.5% annual rate for 1992. Inflation has continued to decrease to 7.2% in 1993 and 3.9% in 1994. There is no assurance, however, that in the future, the Convertibility Plan will not be modified or abandoned. CONSUMER PRICE INDEX. The following table sets forth for each year indicated the change in Argentine Consumer Prices for the twelve months ended December 31, of such year. 88 1985 . . . . . . . . . . . . 385.4% 1986 . . . . . . . . . . . . 81.9 1987 . . . . . . . . . . . . 174.8 1988 . . . . . . . . . . . . 387.7 1989 . . . . . . . . . . . . 4,923.6 1990 . . . . . . . . . . . . 1,343.9 1991 . . . . . . . . . . . . 84.0 1992 . . . . . . . . . . . . 17.5 1993 . . . . . . . . . . . . 7.2 1994 . . . . . . . . . . . . 3.9 ___________________ Source: Banco Central de la Republica Argentina ARGENTINE GROSS DOMESTIC PRODUCT. The following table sets forth Argentina's gross domestic product for the years 1980 through 1993 at historical and constant prices. Gross Change from Prior Gross Domestic Product Year at Domestic Product at 1986 Prices Constant Prices ________________ _______________ _______________ (thousands of Argentine Pesos) (percent) 1980 . . . . 3,840 10,331.2 - 1981 . . . . 7,474 9,737.8 (5.7) 1982 . . . . 21,852 9,431.2 (3.1) 1983 . . . . 109,500 9,783.3 3.7 1984 . . . . 790,920 9,962.2 1.8 1985 . . . . 5,305,000 9,303.3 (6.6) 1986 . . . . 9,984,100 9,984.1 7.3 1987 . . . . 23,332,000 10,241.8 2.6 1988 . . . . 111,062,000 10,049.1 (1.9) 1989 . . . . 3,244,045,000 9,424.3 (6.2) 1990 . . . . 68,922,274,000 9,430.4 .1 1991 . . . . 180,897,972,000 10,270.0 8.9 1992 . . . . 226,637,398,000 11,158.7 8.7 1993 . . . . 255,326,365,000 11,832.0 6.0 Source: Banco Central de la Republica Argentina 89 INTEREST RATES. The following table sets forth the average price for BICs and Bocrexs for the periods listed below. (In Pesos) 1994 BOCREX BIC January 180.8 100.3 February 181.7 96.5 March 181.1 86.9 April 182.0 78.7 May 183.5 83.4 June 185.7 80.0 July 187.2 78.0 August 188.9 79.6 September 190.4 79.1 October --- 77.1 November --- 70.6 December --- 68.5* *Through December 16, 1994 Source: Banco Central de la Republica Argentina 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 will invest 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 will 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 will limit its investments in Sovereign Debt Obligations, U.S. and non-U.S. corporate fixed-income securities to U.S. dollar denominated securities. 90 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 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 will develop a long-term view of those countries and will analyze 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 will consider the relative financial strength of issuers and expects to emphasize investments in securities of issuers that, in the Adviser'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 issuers located in any particular country. Sovereign Debt Obligations held by the Portfolio will 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 will not be traded on a securities exchange. The U.S. and non-U.S. corporate fixed income securities held by the Portfolio will include debt securities, convertible securities and preferred stocks of corporate issuers. Substantially all of the Portfolio's assets will be invested in high yield, high risk debt securities that are low- rated (i.e., rated below Baa by Moody's or below BBB by S&P), or of comparable quality as determined by the Adviser and unrated, and that are considered to be predominantly speculative as regards the issuer's capacity to pay interest and repay principal. INVESTMENT POLICIES BRADY BONDS. As noted above, a significant portion of the Portfolio's 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 91 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. 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 which 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 three or four valuation components: (i) the collateralized repayment of principal at final maturity; (ii) the collateralized interest payments; (iii) the 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 which 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 Bonds, investments in Brady Bonds are to be viewed as speculative. Brady Plan debt restructurings totaling more than $80 billion have been implemented to date in Argentina, Bolivia, Costa Rica, Mexico, Nigeria, the Philippines, Uruguay and Venezuela with the largest proportion of Brady Bonds having been issued to date by Argentina, Mexico and Venezuela. Brazil has announced plans to issue Brady Bonds in respect of approximately $44 billion of bank debt. On the basis of current information, 92 the Adviser anticipates that Brady Bonds may be issued by Brazil in early 1994. There can be no assurance that the circumstances regarding the issuance of Brady Bonds by Brazil will not change. Most Argentine 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. While the Adviser anticipates that Collateralized Brady Bonds will be issued by Brazil, there can be no assurance that any such obligations will be issued or, if so, when. Thus, at the present time Argentina, Bolivia, 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 93 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 Lender's insolvency, the Lender's 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). 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 94 between potential assignees and potential assignors, however, the rights and obligations acquired by the Portfolio as the purchaser of an assignment may differ from, and be more limited than, those held by the assigning Lender. The assignability of certain Sovereign Debt Obligations is restricted by the governing documentation as to the nature of the assignee such that the only way in which the Portfolio may acquire an interest in a Loan is through a Participation and not an Assignment. The Portfolio may have difficulty disposing of Assignments and Participations because to do so it will have to assign such securities to a third party. Because there is no liquid market for such securities, the Portfolio anticipates that such securities could be sold only to a limited number of institutional investors. The lack of a liquid secondary market may have an adverse impact on the value of such securities and the Portfolio's ability to dispose of particular Assignments or Participations when necessary to meet the Portfolio's liquidity needs in response to a specific economic event such as a deterioration in the creditworthiness of the borrower. The lack of a liquid secondary market for Assignments and Participations also may make it more difficult for the Portfolio to assign a value to these securities for purposes of valuing the Portfolio's portfolio and calculating its asset value. U.S. AND NON-U.S. CORPORATE FIXED INCOME SECURITIES. U.S. and non-U.S. corporate fixed income securities include debt securities, convertible securities and preferred stocks of corporate issuers. Differing yields on fixed income securities of the same maturity are a function of several factors, including the relative financial strength of the issuers. Higher yields are generally available from securities in the lower rating categories. When the spread between the yields of lower rated obligations and those of more highly rated issues is relatively narrow, the Portfolio may invest in the latter since they may provide attractive returns with somewhat less risk. The Portfolio expects to invest in investment grade securities (i.e. securities rated Baa or better by Moody's or BBB or better by S&P) and in high yield, high risk lower rated securities (i.e., securities rated lower than Baa by Moody's or BBB by S&P) and in unrated securities of comparable credit quality. Unrated securities will be 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. 95 INTEREST RATE TRANSACTIONS. The Portfolio may enter into interest rate swaps and may purchase or sell interest rate caps and floors. The use of interest rate swaps is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. If the Adviser is incorrect in its forecasts of market values, interest rates and other applicable factors, the investment performance of the Portfolio would diminish compared with what it would have been if these investment techniques were not used. Moreover, even if the Adviser is correct in its forecasts, there is a risk that the swap position may correlate imperfectly with the price of the asset or liability being hedged. There is no limit on the amount of interest rate swap transactions that may be entered into by the Portfolio. These transactions do not involve the delivery of securities or other underlying assets of principal. Accordingly, the risk of loss with respect to interest rate swaps is limited to the net amount of interest payments that the Portfolio is contractually obligated to make. If the other party to an interest rate swap defaults, the Portfolio's risk of loss consists of the net amount of interests payments that the Portfolio contractually is entitled to receive. The Portfolio may purchase and sell (i.e., write) caps and floors without limitation, subject to the segregated account requirement described in the Prospectus under "-- Other Investment Policies and Techniques -- Interest Rate Transactions." FORWARD COMMITMENTS. The Portfolio may enter into forward commitments for the purchase or sale of securities. Such transactions may include purchases on a "when-issued" basis or purchases or sales on a "delayed delivery" basis. In some cases, a forward commitment may be conditioned upon the occurrence of a subsequent event, such as approval and consummation of a merger, corporate reorganization or debt restructuring (i.e., a "when, as and if issued" trade). OPTIONS. The Portfolio may write covered put and call options and purchase put and call options on securities of the types in which it is permitted to invest that are traded on U.S. and foreign securities exchanges. The Portfolio may also write call options for cross-hedging purposes. There are no specific limitations on the Fund's writing and purchasing of options. If a put option written by the Portfolio were exercised, the Portfolio would be obligated to purchase the underlying security at the exercise price. If a call option written by the Portfolio were exercised, the Portfolio would be obligated to sell the underlying security at the exercise price. For 96 additional information on the use, risks and costs of options, see Appendix D. The Portfolio may purchase or write options on securities of the types in which it is permitted to invest in privately negotiated (i.e., over-the-counter) transactions. The Portfolio will effect such transactions only with investment dealers and other financial institutions (such as commercial banks or savings and loan institutions) deemed creditworthy by the Adviser, and the Adviser has adopted procedures for monitoring the creditworthiness of such entities. Options purchased or written by the Portfolio in negotiated transactions are illiquid and it may not be possible for the Portfolio to effect a closing transaction at a time when the Adviser believes it would be advantageous to do so. See "Description of the Fund - -- Additional Investment Policies and Practices -- Illiquid Securities" in the Fund's Prospectus. OPTIONS ON SECURITIES INDICES. The Portfolio may purchase and sell exchange-traded index options on any securities index composed of the types of securities in which it may invest. An option on a securities index is similar to an option on a security except that, rather than the right to take or make delivery of a security at a specified price, an option on a securities index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the chosen index is greater than (in the case of a call) or less than (in the case of a put) the exercise price of the option. There are no specific limitations on the Portfolio's purchasing and selling of options on securities indices. Through the purchase of listed index options, the Portfolio could achieve many of the same objectives as through the use of options on individual securities. Price movements in the Portfolio's 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. 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. 97 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 rate of securities of the Portfolio for the fiscal period ended December 31, 1994 was 9%. Management anticipates that the annual turnover in the Fund will not be in excess of 300%. An annual turnover rate of 300% occurs, for example, when all of the securities in the Portfolio's portfolio are replaced three 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." 98 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 will invest require, for both tax and accounting purposes, that certain assets and liabilities be restated on the issuer's balance sheet in order to express items in terms of currency of constant purchasing power. Inflation accounting may indirectly generate losses or profits. Consequently, financial data may be materially affected by restatements for inflation and may not accurately reflect the real condition of those issuers and securities markets. 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 will invest and could adversely affect the Portfolio's assets should these conditions or events recur. Foreign investment in certain foreign securities is restricted or controlled to varying degrees. These restrictions or controls may at times limit or preclude foreign investment in certain foreign securities and increase the costs and expenses of the Portfolio. Certain countries in which the Portfolio will 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 will focus it 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 99 governmental approval for repatriation of capital, as well as by the application to the Portfolio of any restrictions on investments. Investing in local markets may require the portfolio to adopt special procedures, seek local governmental approvals or take other actions, each of which may involve additional costs to the Portfolio. Income from certain investments held by the Portfolio could be reduced by foreign income taxes, including withholding taxes. It is impossible to determine the effective rate of foreign tax in advance. The Portfolio's net asset value may also be affected by changes in the rates or methods of taxation applicable to the Portfolio or to entities in which the Portfolio has invested. The Adviser generally will consider 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 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 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, will also affect the government's 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 100 inflation, wage and price controls have been imposed in certain countries. Investing in Sovereign Debt Obligations involves economic and political risks. The Sovereign Debt Obligations in which the Portfolio will invest in most cases pertain to countries that are among the world's 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 issuer's 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 101 currencies other than dollars, its ability to make debt payments denominated in dollars could be adversely affected. To the extent that a country develops a trade deficit, it will need to depend on continuing loans from foreign governments, multilateral organizations or private commercial banks, aid payments from foreign governments and on inflows of foreign investment. The access of a country to these forms of external funding may not be certain, and a withdrawal of external funding could adversely affect the capacity of a government to make payments on its obligations. In addition, the cost of servicing debt obligations can be affected by a change in international interest rates since the majority of these obligations carry interest rates that are adjusted periodically based upon international rates. Another factor bearing on the ability of a country to repay Sovereign Debt Obligations is the level of the country's international reserves. Fluctuations in the level of these reserves can affect the amount of foreign exchange readily available for external debt payments and, thus, could have a bearing on the capacity of the country to make payments in its Sovereign Debt Obligations. The Portfolio is permitted to invest in Sovereign Debt Obligations that are not current in the payment of interest or principal or are in default, so long as the Adviser believes it to be consistent with the Portfolio's investment objectives. The Portfolio may have limited legal recourse in the event of a default with respect to certain Sovereign Debt Obligations it 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 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 corporate restructuring may have special credit risks due to the highly 102 leveraged conditions of the issuer. In addition, such issuers may lose experienced management as a result of the restructuring. Finally, the market price of such securities may be more volatile to the extent that expected benefits from the restructuring do not materialize. The Portfolio may also invest in U.S. corporate fixed income securities that are not current in the payment of interest or principal or are in default, so long as the Adviser believes such investment is consistent with the Portfolio's investment objectives. The Portfolio's rights with respect to defaults on such securities will be subject to applicable U.S. bankruptcy, moratorium and other similar laws. INVESTMENT RESTRICTIONS. The following restrictions, which are applicable to the Global Dollar Government Portfolio, supplement those set forth above and in the Prospectus, and may not be changed without Shareholder Approval, as defined under the caption "General Information," below. The Portfolio may not: 1. Make loans except through (i) the purchase of debt obligations in accordance with its investment objectives and policies; (ii) the lending of portfolio securities; or (iii) the use of repurchase agreements; 2. Invest in companies for the purpose of exercising control; 3. Make short sales of securities or maintain a short position, unless at all times when a short position is open it 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); 103 (iii) invest in interests in oil, gas, or other mineral exploration or development programs; (iv) purchase securities on margin, except for such short-term credits as may be necessary for the clearance of transactions; and (v) act as an underwriter of securities, except that the Portfolio may acquire restricted securities under circumstances in which, if such securities were sold, the Portfolio might be deemed to be an underwriter for purposes of the Securities Act. UTILITY INCOME PORTFOLIO GENERAL. The objective of the Utility Income Portfolio is to seek current income and capital appreciation by investing primarily in equity and fixed-income securities of companies in the utilities industry. The Portfolio may invest in securities of both United States and foreign issuers, although no more than 15% of the Portfolio's total assets will be invested in issuers of any one foreign country. The utilities industry consists of companies engaged in (i) the manufacture, production, generation, provision, transmission, sale and distribution of gas and electric energy, and communications equipment and services, including telephone, telegraph, satellite, microwave and other companies providing communication facilities for the public, or (ii) the provision of other utility or utility related goods and services, including, but not limited to, entities engaged in water provision, cogeneration, waste disposal system provision, solid waste electric generation, independent power producers and non-utility generators. As a matter of fundamental policy, the Portfolio will, under normal circumstances, invest 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 will consider 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 will consider the prospective growth in earnings and dividends in relation to price/earnings ratios, yield and risk. The Adviser believes that 104 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 will invest 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 Adviser's evaluation as to the appropriate portfolio structure for achieving the Portfolio's investment objective under prevailing market, economic and financial conditions. Certain securities (such as fixed-income securities) will be selected on the basis of their current yield, while other securities may be purchased for their growth potential. 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. As with all debt securities, the market value of convertible securities tends to decline as interest rates increase 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 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 on an issuer's capital structure. They are consequently of higher quality and entail less risk than the issuer's 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. 105 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 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. U.S. GOVERNMENT SECURITIES. For a general description of obligations issued or guaranteed by U.S. Government agencies or instrumentalities, see Appendix B. OPTIONS. For additional information on the use, risks and costs of options, see Appendix D. 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. 106 For additional information on the use, risks and costs of futures contracts and options on futures contracts, see Appendix C. OPTIONS ON FOREIGN CURRENCIES. For additional information on the use, risks and costs of options on foreign currencies, see Appendix C. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Portfolio may purchase or sell forward foreign currency exchange contracts ("forward contracts"). For a discussion regarding forward foreign currency exchange contracts, see "North American Government Income Portfolio -- Forward Foreign Currency Exchange Contracts," above. REPURCHASE AGREEMENTS. The Portfolio may invest in repurchase agreements pertaining to the types of securities in which it invests. For additional information regarding repurchase agreements, see "Other Investment Policies -- Repurchase Agreements," below. 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 107 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 rate of the securities of the Portfolio for the fiscal period ended December 31, 1994 was 31%. 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 and may result in the Portfolio realizing most short-term capital gains or losses than would a lower rate. See "Dividends, Distributions and Taxes." 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 will take 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 108 purchase or sale of gas at fixed prices, which prices have since changed significantly in the open market. In many cases, such price changes have been to the disadvantage of the gas utility. Gas utilities are particularly susceptible to supply and demand imbalances due to unpredictable climate conditions and other factors and are subject to regulatory risks as well. Electric utilities that utilize coal in connection with the production of electric power are particularly susceptible to environmental regulation, including the requirements of the federal Clean Air Act and of similar state laws. Such regulation may necessitate large capital expenditures in order for the utility to achieve compliance. Due to the public, regulatory and governmental concern with the cost and safety of nuclear power facilities in general, certain electric utilities with uncompleted nuclear power facilities may have problems completing and licensing such facilities. Regulatory changes with respect to nuclear and conventionally fueled generating facilities could increase costs or impair the ability of such electric utilities to operate such facilities, thus reducing their ability to service dividend payments with respect to the securities they issue. 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 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 conditions. 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 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 will attempt 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 Adviser's analysis focuses on relative values based on such factors as interest or 109 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. 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. 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 110 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. CONSERVATIVE INVESTORS PORTFOLIO GROWTH INVESTORS PORTFOLIO GROWTH PORTFOLIO For a general description of the Portfolios' 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 111 the seller may fail to repurchase the underlying security, whether because of the seller's 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 during the period while the Portfolios seek to enforce their rights thereto, (b) possible reduced levels of income and lack of access to income during this period and (c) inability to enforce rights and the expenses involved in the attempted enforcement. 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. 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). Texas regulatory authorities have informed the Fund that, as of the date of this Statement of Additional Information, Texas securities laws preclude each of the Portfolios from investing more than 15% of the value of its total assets in illiquid securities which, under Texas law and/or regulatory positions, include Rule 144A Securities; as a consequence, each 112 Portfolio will so limit its investments in Rule 144A Securities until such time as Texas regulatory authorities permit additional investments in Rule 144A Securities or there is a change in Texas law. 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 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 113 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 Portfolios' 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. A description of Moody's and S&P's short-term note ratings is included as Appendix A to this Statement of Additional Information. 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 114 as Certificates for Automobiles Receivables or "CARS") and unsecured (such as Credit Care Receivables Securities or "CARDS"). These assets are generally held by a trust and payments of principal and interest or interest only are passed through monthly or quarterly to certificate holders and may be guaranteed up to certain amounts by letters of credit issued by a financial institution affiliated or unaffiliated with the trustee or originator of the trust. Like mortgages underlying mortgage-backed securities, underlying automobile sales contracts or credit card receivables are subject to prepayment, which may reduce the overall return to certificate holders. Nevertheless, principal repayment rates tend not to vary too much with interest rates, and the short-term nature of the underlying car loans or receivables tends to dampen the impact of any change in the prepayment level. Certificate holders may also experience delays in payment if the full amounts due on underlying sales contracts or receivables are not realized by the trust holding the obligations because of unanticipated legal or administrative costs of enforcing the contracts or because of depreciation or damage to the collateral (usually automobiles) securing certain contracts, or other factors. If consistent with their investment objectives and policies, the Portfolios may invest in other asset-backed securities that may be developed in the future. 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 115 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 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 will enter 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 116 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 deliverable under the call option. A Portfolio will be 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 will partially offset declines in the value of portfolio securities or increases in the cost of securities to be acquired. 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 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. 117 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 o the underlying security, any loss resulting from the repurchase of a call option previously written by a Portfolio is likely to be offset in whole or in part by appreciation of the underlying security owned by the Portfolio A Portfolio may purchase a security and then write a call option against that security or may purchase a security and concurrently write an option on it. The exercise price of the call a Portfolio determines to write will depend upon the expected price movement of the underlying security. The exercise price of a call option may be below ("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the current value of the underlying security at the time the option is written. In-the-money call options may be used when it is expected that the price of the underlying security will decline moderately during the option period. Out-of-the-money call options may be written when it is expected that the premiums received from writing the call option plus the appreciation in the market price of the underlying security up to the exercise price will be greater than the appreciation in the price of the underlying security alone. If the call options are exercised in such transactions, a Portfolio's maximum gain will be the premium received by it for writing the option, adjusted upwards or downwards by the difference between the Portfolio's purchase price of the security and the exercise price. If the options are not exercised and the price of the underlying security declines, the amount of such decline will be offset in part, or entirely, by the premium received. The writing of covered put options is similar in terms of risk/return characteristics to buy-and-write transactions. If the market price of the underlying security rises or otherwise is above the exercise price, the put option will expire worthless and a Portfolio's gain will be limited to the premium received. If the market price of the underlying security declines or otherwise is below the exercise price, a Portfolio may elect to close the position or retain the option until it is exercised, at which time the Portfolio will be required to take delivery of the security at the exercise price; the Portfolio's return will be the premium received from the put option minus the amount by 118 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. 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. 119 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 will seek to offset a decline in the value of securities it owns through appreciation of the put option. If the value of a Portfolio's investments does not decline as anticipated, or if the value of the option does not increase, the Portfolio's loss will be limited to the premium paid for the option. The success of this strategy will largely depend on the accuracy of the correlation between the changes in value of the index and the changes in value of a Portfolio's security holdings. The purchase of call options on securities indexes may be used by a Portfolio to attempt to reduce the risk of missing a broad market advance, or an advance in an industry or market segment, at a time when the Portfolio holds uninvested cash or short-term debt securities awaiting investment. When purchasing call options for this purpose, a Portfolio will also bear 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 120 volatility similar to those involved in purchasing calls on securities the Portfolio owns. FUTURES CONTRACTS AND OPTIONS ON FUTURE CONTRACTS. 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. 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 121 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. 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 will sustain losses on 122 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 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. 123 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 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 124 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 SEC policies concerning purchases of foreign currency through Forward Contracts. Since those policies currently recommend that an amount of a Portfolio's assets equal to the amount of the purchase be held aside or segregated to be used to pay for the commitment, a Portfolio will always have cash, U.S. Government securities or other liquid equivalents or high-grade debt securities available sufficient to cover any commitments under these contracts or to limit any potential risk. 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 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, 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 125 require it to forego a portion or all of the benefits of advantageous changes in such rates. Each of the Portfolios may write options on foreign currencies for the same types of hedging purposes or to increase return. For example, where the Portfolio anticipates a decline in the dollar value of foreign-denominated securities due to adverse fluctuations in exchange rates it could, instead of purchasing a put option, write a call option on the relevant currency. If the expected decline occurs, the option will most likely not be exercised, and the diminution in value of portfolio securities 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 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 Portfolios' 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 Portfolios' 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 126 completely offset by the put option. It is also possible that there may be a negative correlation between the index or obligation underlying an option or Futures Contract in which the Portfolio has a position and the portfolio securities the Portfolio is attempting to hedge, which could result in a loss on both the portfolio and the hedging instrument. It should be noted that stock index futures contracts or options based upon a narrower index of securities, such as those of a particular industry group, may present greater risk than options or futures based on a broad market index. This is due to the fact that a narrower index is more susceptible to rapid and extreme fluctuations as a result of changes in the value of a small number of securities. 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. 127 In writing a call option on a security, foreign currency, index or futures contract, a Portfolio also incurs the risk that changes in the value of the assets used to cover the position will not correlate closely with changes in the value of the option or underlying index or instrument. For example, when a Portfolio writes a call option on a stock index, the securities used as "cover" may not match the composition of the index, and the Portfolio may not be fully covered. As a result, the Portfolio could suffer a loss on the call which is not entirely offset or offset at all by an increase in the value of the Portfolio's portfolio securities. The writing of options on securities, options on stock indexes or Options on Futures Contracts constitutes only a 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 holder's 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 128 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 will enter into options or futures positions only if there appears to be a liquid secondary market therefor, there can be no assurance that such a market will exist for any particular contracts at any specific time. In that event, it may not be possible to close out a position held by a Portfolio, and the Portfolio could be required to purchase or sell the instrument underlying an option, make or receive a cash settlement or meet ongoing variation margin 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 Portfolios' 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 129 connection with these special arrangements, the Fund will establish standards for the creditworthiness of the primary dealers with which it may enter into over-the-counter option contracts and those standards, as modified from time to time, will be implemented and monitored by the Adviser. Under these special arrangements, the Fund will enter into contracts with primary dealers which provide that each Portfolio has the absolute right to repurchase an option it writes at any time at a repurchase price which represents fair market value, as determined in good faith through negotiation between the parties, but which in no event will exceed a price determined pursuant to a formula contained in the contract. Although the specific details of the formula may vary between contracts with different primary dealers, the formula will generally be based on a multiple of the premium received by the Portfolio for writing the 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 Portfolios 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 130 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 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. 131 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 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 132 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 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. 133 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 Portfolio maintains with its custodian in a segregated account cash, short-term U.S. Government securities or high quality United States dollar denominated money market instruments, 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. 134 ECONOMIC EFFECTS AND LIMITATIONS. Income earned by a Portfolio from its hedging activities will be treated as capital gain and, if not offset by net realized capital losses incurred by a Portfolio, will be 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, will be distributed in light of certain tax considerations and will constitute 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 will depend on the availability of liquid markets in such instruments. Markets in financial futures and related options are still developing. It is impossible to predict the amount of trading interest that may hereafter exist in various types of options or futures. Therefore no assurance can be given that a Portfolio will be able to use these instruments effectively for the purposes set forth above. In addition, a Portfolio's ability to engage in options and futures transactions may be materially limited by tax considerations. The Portfolios' 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. 135 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 periods ended December 31, 1994 was 2% for Conservative Investors Portfolio, 3% for Growth Investors Portfolio and 25% 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. 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 136 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, 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 137 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) Purchase securities issued by any other registered investment company or investment trust except (A) by purchase in the open market where no commission or profit to a sponsor or dealer results from such purchase other than the customary broker's 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 a 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 a Portfolio's purchases of securities issued by an open-end investment company will be consistent with the provisions of the 1940 Act. 138 (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. WORLDWIDE PRIVATIZATION PORTFOLIO Worldwide Privatization Portfolio seeks long term capital appreciation. In seeking to achieve its investment objective, as a fundamental policy, the Portfolio will invest 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, 139 significantly more of the Portfolio's total assets will be invested in such securities. The balance of the Portfolio's investment portfolio will include 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 issuer's successful transition to private sector ownership. In addition, these enterprises generally tend to enjoy dominant market positions in their local markets. Because of the relaxation of government controls upon privatization, these enterprises typically have the potential for significant managerial and operational efficiency gains, which, among other factors, can increase their earnings due to the restructuring that accompanies privatization and the incentives management frequently receives. The following investment policies and restrictions supplement, and should be read in conjunction with the information set forth in the Prospectus of the Portfolio under the heading "Description of the Portfolio." Except as otherwise noted, the Portfolio's investment policies described below are not designated "fundamental policies" within the meaning of the Investment Company Act of 1940 (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 140 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 issuer's capital structure. They are consequently of higher quality and entail less risk than the issuer's 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, 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 and S&P, or determined by the Adviser to be of equivalent quality, but may retain a debt security the rating of which drops below B. See "Special Risk Considerations" below. OPTIONS. The Portfolio may write covered put and call options and purchase put and call options on securities of the types in which it is permitted to invest that are traded on U.S. 141 and foreign securities exchanges and over-the-counter, including options on market indices. The Portfolio will only write "covered" put and call options, unless such options are written for cross-hedging purposes. There are no specific limitations on the Portfolio's writing and purchasing of options. If a put option written by the Portfolio were exercised, the Portfolio would be obligated to purchase the underlying security at the exercise price. If a call option written by the Portfolio were exercised, the Portfolio would be obligated to sell the underlying security at the exercise price. For additional information on the use, risks and costs of options, see Appendix D. 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 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 C. OPTIONS ON FOREIGN CURRENCIES. For additional information on the use, risks and costs of options on foreign currencies, see Appendix C. 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 142 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 Adviser's 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 issuer's 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. 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 purchase securities with a view to holding them for periods of time sufficient to assure that the Portfolio will realize less than 30% of its gross income from the sale or other disposition of securities held for less than three months (see "Dividends, Distributions and Taxes") and to hold its securities for six months or longer. However, it is also the Portfolio's policy to sell any security whenever, in the 143 judgment of the Adviser, its appreciation possibilities have been substantially realized or the business or market prospects for such security have deteriorated, irrespective of the length of time that such security has been held. The Adviser anticipates that the Portfolio's annual rate of portfolio turnover will not exceed 200%. A 200% annual turnover rate would occur if all the securities in the Portfolio's portfolio were replaced twice within a period of one year. The turnover rate has a direct effect on the transaction costs to be borne by the Portfolio, and as portfolio turnover increases it is more likely that the Portfolio will realize short-term capital gains. The portfolio turnover rate for the fiscal period ended December 31, 1994 was 0%. 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 enterprise's prior management and may have a negative effect on such enterprise. In addition, 144 the privatization of an enterprise by its government may occur over a number of years, with the government continuing to hold a controlling position in the enterprise even after the initial equity offering for the enterprise. LOSS OF GOVERNMENT SUPPORT. Prior to privatization, most of the state enterprises in which the Portfolio may invest enjoy the protection of and receive preferential treatment from the respective sovereigns that own or control them. After making an initial equity offering these enterprises may no longer have such protection or receive such preferential treatment and may become subject to market competition from which they were previously protected. Some of these enterprises may not be able to effectively operate in a competitive market and may suffer losses or experience bankruptcy due to such competition. CURRENCY CONSIDERATIONS. Because substantially all of the Portfolio's assets will be invested in securities denominated in foreign currencies and a corresponding portion of the Portfolio's revenues will be received in such currencies, the dollar equivalent of the Portfolio's net assets and distributions will be adversely affected by reductions in the value of certain foreign currencies relative to the U.S. dollar. Such changes will also affect the Portfolio's income. The Portfolio will, however, have 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 145 instances be subject to delays and related administrative uncertainties. INVESTMENT AND REPATRIATION RESTRICTIONS. Foreign investment in the securities markets of certain foreign countries is restricted or controlled to varying degrees. These restrictions or controls may at times limit or preclude investment in certain securities and may increase the cost and expenses of the Portfolio. As illustrations, certain countries require governmental approval prior to investments by foreign persons, or limit the amount of investment by foreign persons in a particular company, or limit the investment by foreign persons to only a specific class of securities of a company which may have less advantageous terms than securities of the company available for purchase by nationals or impose additional taxes on foreign investors. The national policies of certain countries may restrict investment opportunities in issuers deemed sensitive to national interests. In addition, the repatriation of investment income, capital or the proceeds of sales of securities from certain of the countries is controlled under regulations, including in some cases the need for certain advance government notification or authority. In addition, if a deterioration occurs in a country's balance of payments, the country could impose temporary restrictions on foreign capital remittances. 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 146 position or results of operations in the way they would be reflected had the financial statements been prepared in accordance with U.S. generally accepted accounting principles. In addition, for an issuer that keeps accounting records in local currency, inflation accounting rules in some of the countries in which the Portfolio will invest require, for both tax and accounting purposes, that certain assets and liabilities be restated on the issuer's balance sheet in order to express items in terms of currency of constant purchasing power. Inflation accounting may indirectly generate losses or profits. Consequently, financial data may be materially affected by restatements for inflation and may not accurately reflect the real condition of those issuers and securities markets. Substantially less information is publicly available about certain non-U.S. issuers than is available about U.S. issuers. TRANSACTION COSTS. Transaction costs including brokerage commissions for transactions both on and off the securities exchanges in many foreign countries are generally higher than in the United States. U.S. AND FOREIGN TAXES. Foreign taxes paid by the Portfolio may be creditable or deductible by U.S. shareholders for U.S. income tax purposes. No assurance can be given that 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 147 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, 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 will limit its investments so that, at the close of each quarter of the taxable year, (i) not more than 25% of the market value of the Portfolio's total assets will be invested in the 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 ("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 issuer's 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 148 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 are judged to have speculative characteristics or to be predominantly speculative with respect to the issuer's ability to pay interest and repay principal. Debt securities rated B by Moody's and S&P 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 or S&P (i.e., rated C by Moody's or CCC and lower by S&P) 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. Ratings of fixed-income securities by Moody's and S&P are a generally accepted barometer of credit risk. They are, however, subject to certain limitations from an investor's 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 C for a description of Moody's and S&P's 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 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 conditions. 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 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 will attempt 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 Adviser's analysis focuses on relative values based on such factors as interest or 149 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: (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 150 (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. OTHER INVESTMENT POLICIES REPURCHASE AGREEMENTS. Each Portfolio, except the Total Return 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 buyer's 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 151 Board of Directors, is applicable to each of the Fund's Portfolios. A Portfolio will not invest in illiquid securities if immediately after such investment more than 10% or, in the case of the North American Government Income Portfolio, Global Dollar Government Portfolio and the Utility Income 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 issuer's ability to honor a demand for repayment. The fact that there are contractual or legal 152 restrictions on resale to the general public or to certain institutions may not be indicative of the liquidity of such investments. During the coming year, each Portfolio may invest up to 5% of its total assets in restricted securities issued under Section 4(2) of the Securities Act, which exempts from registration "transactions by an issuer not involving any public offering." Section 4(2) instruments are restricted in the sense that they can only be resold through the issuing dealer and only to institutional investors; they cannot be resold to the general public without registration. Rule 144A under the Securities Act allows a broader institutional trading market for securities otherwise subject to restriction on resale to the general public. Rule 144A establishes a "safe harbor" from the registration requirements of the Securities Act for resales of certain securities to qualified institutional buyers. An insufficient number of qualified institutional buyers interested in purchasing certain restricted securities held by a Portfolio, however, could affect adversely the marketability of such portfolio securities and the Portfolio might be unable to dispose of such securities promptly or at reasonable prices. Rule 144A has already produced enhanced liquidity for many restricted securities, and market liquidity for such securities may continue to expand as a result of this regulation and the consequent inception of the PORTAL System sponsored by the National Association of Securities Dealers, Inc., an automated system for the trading, clearance and settlement of unregistered securities of domestic and foreign issuers. The 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, INTER ALIA, 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 153 of rising interest rates and falling bond prices, the Portfolio might sell securities in its portfolio on a forward commitment basis to limit its exposure to falling prices. In periods of falling interest rates and rising bond prices, the Portfolio might sell a security in its portfolio and purchase the same or a similar security on a when-issued or forward commitment basis, thereby obtaining the benefit of currently higher cash yields. However, if the Adviser were to forecast incorrectly the direction of interest rate movements, the Portfolio might be required to complete such when-issued or forward transactions at prices inferior to then current market values. The Portfolio's right to receive or deliver a security under a forward commitment may be sold prior to the settlement date, but the Portfolio will enter into forward commitments only with the intention of actually receiving or delivering the securities, as the case may be. To facilitate such transactions, the Portfolio's Custodian will maintain, in the separate account of the Portfolio, cash or liquid high-grade Government Securities having value equal to, or greater than, any commitments to purchase securities on a forward commitment basis and, with respect to forward commitments to sell portfolio securities of the Portfolio, the portfolio securities themselves. GENERAL. Whenever any investment policy or restriction states a minimum or maximum percentage of a Portfolio's assets which may be invested in any security or other asset, it is intended that such minimum or maximum percentage limitation be determined immediately after and as a result of the Portfolio's acquisition of such security or other asset. Accordingly, any later increase or decrease in percentage beyond the specified limitations resulting from a change in values or net assets will not be considered a violation. The Fund has voluntarily agreed that each Portfolio with the ability to invest in foreign issuers will adhere to the foreign security diversification guidelines promulgated by certain State Insurance Departments. Pursuant to these guidelines, each such Portfolio will invest in issuers from a minimum of five different foreign countries. This minimum will be reduced to four different foreign countries when foreign 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 154 that the Portfolio may have an additional 15% of its net asset value invested in securities of issuers located in Australia, Canada, France, Japan, the United Kingdom or West Germany. _________________________________________________________________ MANAGEMENT OF THE FUND _________________________________________________________________ DIRECTORS AND OFFICERS The Directors and principal officers of the Fund, their ages and their primary occupations during the past five years are set forth below. Each such Director and officer is also a trustee, director or officer of other registered investment companies sponsored by the Adviser. Unless otherwise specified, the address of each such persons is 1345 Avenue of the Americas, New York, New York 10105. DIRECTORS JOHN D. CARIFA*, 49, Chairman of the Board, is the President, Chief Operating Officer and a Director of Alliance Capital Management Corporation ("ACMC"), the sole general partner of the Adviser, with which he has been associated since prior to 1990. RUTH BLOCK, 64, was formerly Executive Vice President and the Chief Insurance Officer of The Equitable Life Assurance Society of the United States. She is a Director of Ecolab Incorporated (specialty chemicals) and Amoco Corporation (oil and gas). Her address is Box 4653, Stamford, Connecticut 06905. DAVID H. DIEVLER, 65, was formerly Chairman and President of the Fund and a Senior Vice President of ACMC with which he had been associated since prior to 1990. He is currently an independent consultant. His address is P.O. Box 167, Spring Lake, New Jersey 07762. JOHN H. DOBKIN, 51, is the President of Historic Hudson Valley (historic preservation) since 1990. Previously, he was Director of the National Academy of Design. From 1988 to 1992, he was a Director of ACMC. His address is 105 West 55th Street, Chairman of the Board and President, is a Senior Vice President of Alliance Capital Management Corporation ("ACMC"), New York, New York 10019. WILLIAM H. FOULK, JR., 62, is Senior Manager of Barrett Associates, Inc., a registered investment adviser, since prior to 1990. His address is 521 Fifth Avenue, New York, New York 10175. 155 DR. JAMES M. HESTER, 70, is President of the Harry Frank Guggenheim Foundation and a Director of Union Carbide Corporation. He was formerly President of New York University, The New York Botanical Garden and Rector of the United Nations University. His address is 525 East 72nd Street, New York, New York 10021. CLIFFORD L. MICHEL, 55, is a member of the law firm of Cahill Gordon & Reindel with which he has been associated since prior to 1990. He is Chief Executive Officer of Wenonah Development Company (investments) and a Director of Placer Dome, Inc. (mining) and Faber-Castell Corporation (writing products). His address is St. Bernard's Road, Gladstone, New Jersey 07934. ROBERT C. WHITE, 74, is a Vice President and Chief Financial Officer of the Howard Hughes Medical Institute with which he has been associated since prior to 1990. He is also a Trustee of St. Clair Fixed Income Fund, St. Clair Tax-Free Fund and St. Clair Equity Fund (registered investment companies) and a Director of MEDSTAAT Systems, Inc. (health care information). His address is 8101 Connecticut Avenue, Apartment S501, Chevy Chase, Maryland, 20815. OFFICERS ALFRED L. HARRISON, SENIOR VICE PRESIDENT, 57, is a Vice Chairman of ACMC with which he has been associated with since prior to 1990. WAYNE D. LYSKI, SENIOR VICE PRESIDENT, 53, is an Executive Vice President of ACMC with which he has been associated with since prior to 1990. ROBERT M. SINCHE, SENIOR VICE PRESIDENT, 42, is a Senior Vice President of ACMC with which he has been associated since prior to 1990. Previously he was Managing Director-Fixed Income of Simms Capital Management. EDMUND P. BERGAN, JR., SECRETARY, 44, is a Vice President and Assistant General Counsel of ACMC with which he has been associated since prior to 1990. MARK D. GERSTEN, TREASURER AND CHIEF FINANCIAL OFFICER, 44, is a Senior Vice President of Alliance Fund Services, Inc. ("AFS") with which he has been associated since prior to 1990. ANDREW GANGOLF, ASSISTANT SECRETARY, 40, 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 October 1992 156 and a Vice President and Counsel to Equitable Life Assurance Society of the United States since prior to 1990. LAURA MAH, CONTROLLER, 39, has been a Vice President of ACMC since July 1992. Previously she was associated with Equitable Capital Management Corporation ("ECMC") since prior to 1990. THOMAS R. MANLEY, ASSISTANT CONTROLLER, 43, has been an Assistant Vice President of ACMC since July 1993. Previously he was associated with ECMC since 1990. STEVEN YU, ASSISTANT CONTROLLER, 35, has been an Assistant Vice President of ACMC since 1993. Previously he was associated with ECMC since prior to 1990. 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, 1994 and the aggregate compensation paid to each of the Directors during calendar year 1994 by all of the registered investment companies to which the Adviser provides investment advisory services (collectively, the "Alliance Fund Complex"), are set forth below. Each of the Directors is a director or trustee of one or more other registered investment companies in the Alliance Fund Complex. Total Compensation Pension or Estimated from the Retirement Annual Alliance Fund Aggregate Benefits Benefits Complex, Name of Director Compensation as part of upon Including the of the Fund from the Fund Fund Expenses Retirement Fund* _______________ _____________ _____________ __________ ______________ Ruth Block $3,688 $ -0- $ -0- $ 157,000 John D. Carifa $-0- -0- -0- $-0- John H. Dobkin $4,653 -0- -0- $ 110,750 William H. Foulk, Jr. $4,706 -0- -0- $ 141,500 Dr. James M. Hester $4,188 -0- -0- $ 154,500 Clifford L. Michel $3,938 -0- -0- $ 120,500 Robert C. White $3,721 -0- -0- $ 133,500 ___________________________ * The information in this column represents amounts actually paid during calendar year 1994. 157 As of March 24, 1995, the Directors and officers of the Fund as a group owned less than 1% of the shares of the Fund. ADVISER The Adviser is a leading international investment manager supervising client accounts with assets as of December 31, 1994 of more than $121 billion (of which more than $36 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 and included, as of December 31, 1994, 29 of the FORTUNE 100 Companies. As of that date, the Adviser and its subsidiaries employed approximately 1,450 employees who operated out of domestic offices and the overseas offices of subsidiaries in Bombay, Istanbul, London, Sydney, Tokyo, Toronto, Bahrain, Luxembourg and Singapore. The 51 registered investment companies comprising 103 separate investment portfolios managed by the Adviser currently have more than one million shareholders. Alliance Capital Management Corporation, 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"), a holding company controlled by AXA, a French insurance holding company. As of December 31, 1994, ACMC, Inc. and Equitable Capital Management Corporation, each a wholly-owned direct or indirect subsidiary of Equitable, owned in the aggregate approximately 59% of the issued and outstanding units representing assignments of beneficial ownership of limited partnership interests in the Adviser ("Units"). As of December 31, 1994, approximately 32% and 9% of the Units were owned by the public and employees of the Adviser and its subsidiaries, respectively, including employees of the Adviser who serve as Directors of the Fund. AXA owns approximately 60% of the outstanding voting shares of common stock of ECI. AXA is the holding company for an international group of insurance and related financial services companies. AXA's insurance operations are comprised of activities in life insurance, property and casualty insurance and reinsurance. The insurance operations are diverse geographically with activities in France, the United States, the United Kingdom, Canada and other countries, principally in Europe. AXA is also engaged in asset management, investment banking and brokerage, real estate and other financial services activities in the United States and Europe. Based on information provided by AXA, as of January 1, 1995, 42.3% of the issued shares (representing 54.7% 158 of the voting power) of AXA were owned by Midi Participations, a French corporation that is a holding company. The voting shares of Midi Participations are in turn owned 60% by Finaxa, a French corporation that is a holding company, and 40% by subsidiaries of Assicurazioni Generali S.p.A., an Italian corporation ("Generali") (one of which, Belgica Insurance Holding S.A., a Belgian corporation, owned 34.1%). As of January 1, 1995, 62.1% of the issued shares (representing 75.7% of the voting power) of Finaxa were owned by five French mutual insurance companies (the "Mutuelles AXA") (one of which, AXA Assurances I.A.R.D. Mutuelle, owned 31.8% of the issued shares) (representing 39.0% of the voting power), and 26.5% of the issued shares (representing 16.6% of the voting power) of Finaxa were owned by Banque Paribas, a French bank ("Paribas"). Including the shares owned by Midi Participations, as of January 1, 1995, the Mutuelles AXA directly or indirectly owned 51.3% of the issued shares (representing 65.8% of the voting power) of AXA. In addition, certain subsidiaries of AXA own 0.4% of the shares of AXA which are not entitled to be voted. Acting as a group, the Mutuelles AXA control AXA, Midi Participations and Finaxa. The Investment Advisory Agreement became effective on July 22, 1992. The Investment Advisory Agreement replaced an earlier substantially identical agreement (the "First Investment Advisory Agreement") that terminated because of its technical assignment as a result of AXA's acquisition of control over Equitable. In anticipation of the assignment of the First Investment Advisory Agreement, 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 the purpose and held on June 14, 1994. 159 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% Growth Portfolio 1.000% Growth and Income Portfolio .625% U.S. Government/High-Grade Securities Portfolio .600% High-Yield Portfolio .625% 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% For each of the period December 30, 1992 (commencement of operations) through December 31, 1992 and the fiscal years ended December 31, 1993 and December 31, 1994 the advisory fee paid by the Money Market Portfolio to the Adviser was $-0-; for the period June 26, 1992 (commencement of operations) through December 31, 1992 and for the fiscal years ended December 31, 1993 and December 31, 1994 the advisory fees paid by the Premier Growth Portfolio to the Adviser were $-0-, $10,976 and $128,361, respectively; for the period January 14, 1991 (commencement of operations) through December 31, 1991 and for the fiscal years ended December 31, 1992, December 31, 1993, and December 31, 1994 the advisory fees paid to the Adviser by the Growth and Income Portfolio were $-0-, $-0-, $79,930, and $200,454, respectively; for each of the period September 17, 1992, (commencement of operations) through December 31, 1992 and the fiscal years ended December 31, 1993 and December 31, 1994 the advisory fee paid by the U.S. Government/High Grade Securities Portfolio to the Adviser was $-0-; for each of the period December 28, 1992 160 (commencement of operations) through December 31, 1992 and the fiscal years ended December 31, 1993 and December 31, 1994 the advisory fee paid by the Total Return Portfolio to the Adviser was $-0-; for the each of period December 28, 1992 (commencement of operations) through December 31, 1992 and the fiscal years ended December 31, 1993 and December 31, 1994 the advisory fee paid by the International Portfolio to the Adviser was $-0-; for the fiscal years ended December 31, 1992, December 31, 1993 and December 31, 1994 the advisory fees paid by the Short-Term Multi Market Portfolio to the Adviser were $-0-, $86,361 and $127,682, respectively; and for the period July 15, 1991 (commencement of operations) to December 31, 1991 and for the fiscal years ended December 31, 1992 and December 31, 1993 the advisory fees paid by the Global Bond Portfolio to the Adviser were $3,966, $4,733 and $-0-, respectively; for the period May 3, 1994 (commencement of operations) through December 31, 1994 the advisory fee paid by the North American Government Income Portfolio to the Advisor was $-0-; for the period May 2, 1994 (commencement of operations) through December 31,1994 the advisory fee paid by the Global Dollar Government Portfolio to the Adviser was $-0-; for the period May 10, 1994 (commencement of operations) through December 31, 1994 the advisory the paid by the Utility Income Portfolio to the Advisor was $-0-; for the period October 28, 1994 (commencement of operations) through December 31, 1994 the advisory fee paid by the Conservative Investors Portfolio to the Adviser was $-0-; for the period October 28, 1994 (commencement of operations) through December 31, 1994 the advisory fee paid by the Growth Investors Portfolio to the Adviser was $-0-; for the period September 15, 1994 (commencement of operations) through December 31, 1994 the advisory fee paid by the Growth Portfolio to the Adviser was $-0-; for the period September 23, 1994 (commencement of operations) through December 31, 1994 the advisory fee paid by the Worldwide Privatizations Portfolio to the Advisor was $-0-. The Commission takes the position that the rates of fee applicable to the Growth Portfolio, the International Portfolio, the Global Dollar Government Portfolio, the Utility Income Portfolio, the Conservative Investors Portfolio, the Growth Portfolio and the Worldwide Privatization Portfolio are higher than those paid by most investment companies, however, the Adviser believes the fees are comparable to those paid by investment companies of similar investment orientation. 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 161 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 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 Advisory Agreement or interested persons of such parties as defined by the 1940 Act. 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 Balanced Shares, Inc., Alliance Bond Fund, Inc., Alliance Capital Reserves, Alliance Counterpoint Fund, Alliance Global Dollar Government Fund, Inc., Alliance Global Fund, Alliance Global Small Cap Fund, Inc., Alliance Government Reserves, Alliance Growth and Income Fund, Inc., Alliance Income Builder Fund, Inc., Alliance International Fund, Alliance Managed Dollar Income Fund, Inc., Alliance Mortgage Securities Income Fund, Inc., Alliance Mortgage Strategy Trust, Inc., Alliance Multi-Market Strategy 162 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 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 Managed Multi-Market Trust, Inc., ACM Municipal Securities Income Fund, Inc., Alliance Global Environment Fund, Inc., Alliance World Dollar Government Fund, Inc., Alliance World Dollar Government Fund II, Inc., The Austria Fund, Inc., The Global Privatization Fund, Inc., The Korean Investment Fund, Inc., The Southern Africa Fund, Inc. and The Spain Fund, Inc., all registered closed-end investment companies; and Alliance Global Bond Fund, SICAV, Alliance Global Leisure Fund, Alliance Global Growth Trends Portfolio, Alliance Global Income Fund, Alliance International Currency Reserves, Alliance International Health Care Fund, SICAV, Alliance International Technology Fund, SICAV, Alliance Worldwide Income Fund, India Liberalisation Fund, SICAV, ML-Alliance Asset Allocation N.V. and The Spanish Smaller Companies Fund, all foreign investment companies. SUB-ADVISER TO THE GLOBAL BOND PORTFOLIO The Adviser has retained under a sub-advisory agreement (the "Sub-Advisory Agreement") a sub-adviser, AIGAM International Limited (the "Sub-Adviser"), an indirect, majority owned subsidiary of American International Group, Inc., a major international financial service company, to provide research and management services to the Global Bond Portfolio. The Sub- Adviser may, from time to time, direct transactions for its investment accounts which result in the purchase or sale of a particular security by its investment accounts simultaneously with the recommendation by the Sub-Adviser to the Global Bond Portfolio to purchase or sell such security. If transactions on behalf of such investment accounts increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price for the Portfolio. In 1994 the Sub-Advisor changed its name from Dempsey & Company International Limited, which was founded in 1988. For its services as Sub-Adviser to the Global Bond Portfolio, the Sub- Adviser receives from the Adviser a monthly fee at the annual rate of .40 of 1% of the Portfolio's average daily net asset value. The fee is accrued daily and payable in arrears for 163 services performed during each calendar month within fifteen days following the end of such month. For the period from July 15, 1991 (commencement of operations) until December 31, 1991, the Sub-Adviser for the Global Bond Portfolio agreed to waive its sub-advisory fee and for the fiscal years ended December 31, 1992, December 31, 1993 and December 31, 1994 the Sub-Adviser received sub-advisory fees in the amount of $6,346, $7,573 and $27,175, respectively, from the Adviser. 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 Portfolio's 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- Adviser's 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 replaced an earlier substantially identical agreement (the "First Sub- Advisory Agreement") that provided for its automatic termination in the event of an assignment of the Fund's First Investment Advisory Agreement. Since AXA's acquisition over the Equitable resulted in the technical assignment of the First Advisory Agreement, the First Sub-Advisory Agreement was terminated pursuant to its terms. 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. 164 _________________________________________________________________ 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 shareholder's shares on redemption or repurchase may be more or less than the cost of such shares to the shareholder, depending upon the market value of the Portfolio's securities at the time of such redemption or repurchase. Payment either in cash or in portfolio securities received by a shareholder upon redemption or repurchase of his shares, assuming the shares constitute capital assets in his hands, will result in long-term or short-term capital gains (or loss) depending upon the shareholder's holding period and basis in respect of the shares redeemed. _________________________________________________________________ NET ASSET VALUE _________________________________________________________________ The net asset value of shares of any of the Fund's Portfolios on which the subscription and redemption prices are based is computed in accordance with the Articles of Incorporation and By-Laws of the Fund at the next close of regular trading on the New York Stock Exchange (the "Exchange") (currently 4:00 p.m. New York 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 a Portfolio invests might materially affect the value of such Portfolio's shares, by dividing the value of the Portfolio's assets less its liabilities, by the total number of shares then outstanding. For this purpose, a Fund business day is any weekday exclusive of national holidays on which the New York Stock Exchange is closed and Good Friday. Portfolio securities that are actively traded in the over-the-counter market, including listed securities for which the primary market is believed to be over-the-counter, are valued at the mean between the most recently quoted bid and asked prices provided by the principal market makers. Any security for which the primary market is on an exchange is valued at the last sale price on such exchange on the day of valuation or, if there was no sale on such day, the last bid price quoted on such day. Options will be valued at market value or fair market value if no 165 market exists. Futures contracts will be valued in a like manner, except that open futures contracts sales will be valued using the closing settlement price or, in the absence of such a price, the most recently quoted asked price. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund. However, readily marketable fixed-income securities may be valued on the basis of prices provided by a pricing service when such prices are believed by the Adviser to reflect the fair market value of such securities. The prices provided by a pricing service take into account institutional size trading in similar groups of securities and any developments related to specific securities. U.S. Government Securities and other debt instruments having 60 days or less remaining until maturity are stated 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 Fund's Board of Directors determines that this method does not represent fair value). The Money Market Portfolio uses amortized cost for all of its portfolio securities. All other assets of the Fund, including restricted and not readily marketable securities, are valued in such manner as the Board of Directors of the Fund in good faith deems appropriate to reflect their fair market value. Trading in securities on European and Far Eastern securities exchanges and over-the-counter markets is normally completed well before the close of business of each business day in New York. In addition, European or Far Eastern securities trading generally or in a particular country or countries may not take place on all business days in New York. Furthermore, trading takes place in Japanese markets on certain Saturdays and in various foreign markets on days which are not business days in New York and on which the Fund's net asset value is not calculated. Events affecting the values of portfolio securities that occur between the time their prices are determined and the close of the New York Stock Exchange will not be reflected in the Portfolio's calculation of net asset value unless the Board of Directors of the Fund deems that the particular event would materially affect net asset value, in which case an adjustment will be made. For purposes of determining the net asset value per share of the International Portfolio, the Short-Term Multi-Market Portfolio, the North American Government Income Portfolio and the Utility Income Portfolio, all assets and liabilities initially expressed in foreign currencies will be converted into United States dollars at the mean of the bid and asked prices of such currencies against the United States dollar last quoted by a major bank which is a regular participant in the institutional 166 foreign exchange markets or on the basis of a pricing service which takes into account the quotes provided by a number of such major banks. _________________________________________________________________ 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 Adviser's 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, 167 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 comparable transactions involving similar securities during a comparable period of time. No brokerage commissions were incurred by any Portfolio of the Fund for the fiscal years ended December 31, 1991 and 1992 and no brokerage commissions were incurred by the Money Market Portfolio, U.S. Government/High Grade Securities Portfolio, Short-Term Multi-Market Portfolio and Global Bond Portfolio for the fiscal year ended December 31, 1993. Brokerage commissions paid for the period ended December 31, 1994 on securities transactions amounted to $54,827, $102,852, $28,278, $1,043, $3,214, $10,634, $105 and $175 on the Premier Growth Portfolio, the Growth and Income Portfolio, the International Portfolio, the Total Return Portfolio, the Utility Income Portfolio, the Growth Portfolio, the Conservative Investors Portfolio and the Growth Investors Portfolio, respectively. During the fiscal years ended December 31, 1992, 1993 and 1994, no brokerage commissions were paid to Donaldson, Lufkin & Jenrette Securities Corporation and no brokerage commissions were paid to brokers utilizing the Pershing Division of Donaldson, Lufkin & Jenrette Securities Corporation. _________________________________________________________________ DIVIDENDS, DISTRIBUTIONS AND TAXES _________________________________________________________________ Each Portfolio of the Fund qualified and intends to continue to qualify to be taxed as a "regulated investment company" under the Internal Revenue Code of 1986 (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 when left to accumulate within a 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. 168 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 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 169 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 Portfolios 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 Portfolios 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 March 24, 1995 consisted of 9,720,060.020 shares of common stock of the Money Market Portfolio, 3,525,549.932 shares of common stock of the Premier Growth Portfolio, 3,712,091.558 shares of common stock of the Growth and Income Portfolio, 619,388.062 shares of common stock of the U.S. Government/High Grade Securities Portfolio, 624,517.931 shares of common stock of the International Portfolio, 93,130.950 shares of common stock of the Total Return Portfolio, 1,701,776.436 shares of common stock of the Short-Term Multi-Market Portfolio, 740,132.970 shares of common stock of the Global Bond Portfolio, 395,698.870 shares of common stock of the North American Government Income Portfolio, 132,220.653 shares of common stock of the Global Dollar Government Portfolio, 168,716.666 shares of common stock the Utility Income Portfolio, 98,031.010 shares of common stock of the Conservative Investors Portfolio, 46,617.495 shares of common stock of the Growth Investors Portfolio, 850,499.489 shares of common stock of the Growth Portfolio, and 171,766.832 shares of common stock of the 170 Worldwide Privatization 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 March 24, 1995. NUMBER OF % OF PORTFOLIO NAME AND ADDRESS SHARES SHARES Money Market AIG Life Insurance 5,971,638.670 61% Company ("AIG") One ALICO Plaza 600 Kings Street Wilmington, DE 19801 American International 3,452,717.240 36% Life Assurance Company of New York ("American") 80 Pine Street New York, NY 10005 Premier Growth American Skandia Life 3,221,110.548 91% Assurance Corporation ("Skandia") One Corporate Drive Shelton, CT 06484 AIG 203,675.819 6% Growth and Income Skandia 2,677,991.775 72% AIG 507,346.657 14% Bankers Life Insurance 332,307.237 9% Society ("Bankers Life") 4601 Fairfax Drive Arlington, VA 22203 American 204,445.889 5% U.S. Government/ AIG 354,246.098 57% High Grade American 139,794.133 23% Skandia 125,347.821 20% Total Return AIG 49,438.395 53% Skandia 33,275.526 36% American 10,417.029 11% 171 International AIG 423,106.897 68% American 127,700.137 20% Skandia 73,710.897 12% Short-Term Skandia 1,435,147.436 84% Multi-Market Bankers Life 168,767.628 10% Global Bond Skandia 624,829.363 84% AIG 80,391.272 11% North American AIG 305,372.785 77% Government Income American 78,372.672 20% Global Dollar AIG 80,298.380 61% Government Skandia 41,651.459 31% American 10,269.814 8% Utility Income AIG 144,590.764 86% American 21,302.242 13% Conservative AIG 85,533.609 87% Investors American 12,496.401 13% Growth Investors AIG 37,978.277 81% American 8,638.218 19% Growth AIG 700,569.361 82% American 149,471.378 18% Worldwide AIG 152,166.085 89% Privatization American 19,599.747 11% CUSTODIAN State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, acts as Custodian for the 172 securities and cash of the Fund but plays no part in deciding the purchase or sale of portfolio securities. PRINCIPAL UNDERWRITER Alliance Fund Distributors, Inc., 1345 Avenue of the Americas, New York, New York 10105, serves as the Fund's Principal Underwriter, and as such may solicit orders from the public to purchase shares of the Fund. 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, One Battery Park Plaza, New York, New York 10004. INDEPENDENT AUDITORS Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019, 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", "actual distribution rate" 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 173 investment income per share. Advertisements of a Portfolio's total return disclose the Portfolio's average annual compounded total return for the period since the Portfolio's inception. The Portfolio's total return for each such period is computed by finding, through the use of a formula prescribed by the Commission, the average annual compounded rate of return over the period that would equate an assumed initial amount invested to the value of such investment at the end of the period. For purposes of computing total return, income dividends and capital gains distributions paid on shares of the Portfolio are assumed to have been reinvested when received and the maximum sales charge applicable to purchases of Portfolio shares is assumed to have been paid. The past performance of each Portfolio is not intended to indicate future performance. The Money Market Portfolio's yield for the seven days ended December 31, 1994 was 4.81%. The U.S. Government/High Grade Securities Portfolio's yield for the month ended December 31, 1994 was .50%. The Short-Term Multi-Market Portfolio's yield for the month ended December 31, 1994 was 0%. The Global Bond Portfolio's yield for the month ended December 31, 1994 was 0.10%. The North American Government Income Portfolio's yield for the month ended December 31, 1994 was -10.49%. The Global Dollar Government Portfolio's yield for the month ended December 31, 1994 was -2.00%. The actual distribution rate for such period for the Money Market Portfolio was .40%, for the U.S. Government/High Grade Security Portfolio was 0%, for the Short- Term Multi-Market Portfolio was 0%, for the Global Bond Portfolio was 0%, for the North American Government Income Portfolio was 0% and for the Global Dollar Government Portfolio was 0%. The Money Market Portfolio's average annual total returns for the period December 30, 1992 (commencement of operations) through December 31, 1994 and for the fiscal year ended December 31, 1994 were 2.76% and 3.27%, respectively. The Premier Growth Portfolio's average annual total returns for the period June 26, 1992 (commencement of operations) through December 31, 1994 and for the fiscal year ended December 31, 1994 were 9.08% and -2.96%, respectively. The Growth and Income Portfolio's average annual total returns for the period January 14, 1991 (commencement of operations) through December 31, 1994 and for the fiscal year ended December 31, 1994 were 6.04% and - -0.35%, 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, 1994 and for the fiscal year ended December 31, 1994 were 2.37% and - -4.03%, respectively. The Total Return Portfolio's average annual total returns for the period December 28, 1992 (commencement of operations) through December 31, 1994 and for the fiscal year ended December 31, 1994 were 2.75% and -3.77%, respectively. The International Portfolio's average annual total 174 returns for the period December 28, 1992 (commencement of operations) through December 31, 1994 and for the fiscal year ended December 31, 1994 were 13.91% and 6.70%, respectively. The Short-Term Multi-Market Portfolio's average annual total returns for the period November 28, 1990 (commencement of operations) through December 31, 1994 and for the fiscal year ended December 31, 1994 were -0.16% and -6.51%, respectively. The Global Bond Portfolio's average annual total returns for the period July 15, 1991 (commencement of operations) through December 31, 1994 and for the fiscal year ended December 31, 1994 were 6.10% and - -5.16%, respectively. The North American Government Income Portfolio's average annual total return for the period May 3, 1994 (commencement of operations) through December 31, 1994 was - -12.10%. The Global Dollar Government Portfolio's average annual total return for the period May 2, 1994 (commencement of operations) through December 31, 1994 was -1.60%. The Utility Income Portfolio's average annual total return for the period May 10, 1994 (commencement of operations) through December 31, 1994 was -0.40%. The Conservative Investors Portfolio's average annual total return for the period October 28, 1994 (commencement of operations) through December 31, 1994 was 0.70%. The Growth Investors Portfolio's average annual total return for the period October 28, 1994 (commencement of operations) through December 31, 1994 was -1.40%. The Growth Portfolio's average annual total return for the period September 15, 1994 (commencement of operations) through December 31, 1994 was 5.30%. The Worldwide Privatization Portfolio's average annual total return for the period September 23, 1994 (commencement of operations) through December 31, 1994 was 1.00%. 175 00250292.AP7 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. PREMIER GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994 - ------------------------------------------------------------------------------- SHARES U.S.$ VALUE ------ ----------- COMMON STOCKS AND OTHER INVESTMENTS - 94.8% BASIC INDUSTRIES - 5.9% CHEMICALS - 2.1% Hercules, Inc....................... 2,500 $ 288,437 Monsanto Co......................... 4,400 310,200 Morton International, Inc........... 6,500 185,250 ------------ 783,887 ------------ METALS & MINING - 2.9% Bethlehem Steel, Corp.* 41,000 738,000 LTV Corp.* 9,500 154,375 USX-United States Steel Group 6,200 220,100 ------------ 1,112,475 ------------ PAPER & FOREST PRODUCTS - 0.9% Georgia-Pacific Corp. 4,800 343,200 ------------ 2,239,562 ------------ CAPITAL GOODS - 1.9% ELECTRICAL EQUIPMENT - 1.9% Caterpillar, Inc. 6,800 374,850 Deere & Co. 2,000 132,500 General Electric Co. 4,000 204,000 ------------ 711,350 ------------ CONSUMER MANUFACTURING - 8.6% AUTO & RELATED - 8.6% Chrysler Corp. 28,200 1,381,800 Ford Motor Co. 16,800 470,400 General Motors Corp. 24,500 1,035,125 Goodyear Tire & Rubber Co. 10,600 356,425 ------------ 3,243,750 ------------ CONSUMER SERVICES - 24.5% AIRLINES - 4.2% AMR Corp.* 6,400 340,800 Southwest Airlines Co. 27,700 463,975 UAL Corp.* 8,900 777,638 ------------ 1,582,413 ------------ BROADCASTING & CABLE - 8.4% AirTouch Communications, Inc.* 21,400 623,275 Comcast Corp. Cl.A SPL 39,000 611,812 Tele-Communications, Inc. Cl.A* 45,300 988,106 Viacom, Inc. Cl.A 1,448 60,273 Cl. B 20,168 819,325 rights 50,700 57,038 ------------ 3,159,829 ------------ ENTERTAINMENT & LEISURE - 4.2% Mirage Resorts, Inc.* 14,950 306,475 Time Warner, Inc. 13,700 481,212 Walt Disney Co. 17,800 821,025 ------------ 1,608,712 ------------ RESTAURANTS & LODGING - 1.0% McDonald's Corp. 13,000 $ 380,250 ------------ RETAILING - 6.7% Best Buy Co., Inc.* 12,800 400,000 Home Depot, Inc. 16,133 742,118 Kohls Corp.* 6,300 250,425 May Department Stores Co. 12,800 432,000 Wal-Mart Stores, Inc. 32,400 688,500 ------------ 2,513,043 ------------ 9,244,247 ------------ CONSUMER STAPLES - 1.7% TOBACCO - 1.7% Philip Morris Cos., Inc............. 11,400 655,500 ------------ FINANCE - 21.8% BANKING & CREDIT - 8.9% Chemical Banking Corp............... 7,000 251,125 Citicorp............................ 15,200 628,900 First Bank System, Inc.............. 13,300 442,225 NationsBank Corp.................... 12,100 546,012 Norwest Corp........................ 64,400 1,505,350 ------------ 3,373,612 ------------ BROKERAGE & MONEY MANAGEMENT - 6.0% Merrill Lynch & Co., Inc............ 47,200 1,687,400 Morgan Stanley Group, Inc........... 9,500 560,500 ------------ 2,247,900 ------------ INSURANCE - 2.2% Progressive Corp.................... 7,600 266,000 Travelers, Inc...................... 17,055 554,288 ------------ 820,288 ------------ MORTGAGE BANKING - 4.0% Federal National Mortgage Assn...... 20,800 1,515,800 ------------ OTHER - 0.7% MBNA Corp........................... 10,800 252,450 ------------ 8,210,050 ------------ HEALTH CARE - 6.6% HOSPITAL SERVICES - 6.6% Columbia HCA Healthcare Corp........ 12,000 438,000 United Healthcare Corp.............. 38,500 1,737,312 U.S. Healthcare, Inc................ 7,500 308,438 ------------ 2,483,750 ------------ TECHNOLOGY - 19.9% COMMUNICATIONS EQUIPMENT - 7.2% Cisco Systems, Inc.*................ 15,800 553,988 General Instrument Corp.*........... 11,200 336,000 Motorola, Inc....................... 31,200 1,805,700 ------------ 2,695,688 ------------ 15 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. PREMIER GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS (CONT'D) - ------------------------------------------------------------------------------- SHARES U.S.$ VALUE ------ ----------- COMPUTER HARDWARE - 3.1% Compaq Computer Corp.*.............. 29,900 $ 1,181,050 ------------ COMPUTER SOFTWARE & SERVICES - 2.4% Microsoft Corp.* 10,500 643,125 Oracle System Corp.* 6,000 265,500 ------------ 908,625 ------------ SEMI-CONDUCTORS & RELATED - 7.2% Intel Corp. 21,600 1,377,000 warrants expiring 3/14/98* 59,700 832,069 Texas Instruments, Inc. 6,500 486,687 ------------ 2,695,756 ------------ 7,481,119 ------------ TRANSPORTATION - 2.7% RAILROAD - 2.7% Conrail, Inc. 15,600 787,800 Southern Pacific Rail Corp.* 12,000 217,500 1,005,300 UTILITIES - 1.2% TELEPHONE - 1.2% MCI Communications Corp. 24,200 446,188 ------------ Total Common Stocks and Other Investments (cost $35,457,521) 35,720,816 ------------ Principal Amount (000) U.S.$ VALUE COMMERCIAL PAPER - 2.9% American Express Co. 5.80%, 1/03/95 (amortized cost $1,104,644) $ 1,105 $ 1,104,644 ------------ TIME DEPOSIT - 8.7% State Street Bank and Trust Co. 5.4375%, 1/03/95 (amortized cost $3,260,000) 3,260 3,260,000 ------------ TOTAL INVESTMENTS - 106.4% (cost $39,822,165) 40,085,460 Other assets less liabilities - (6.4%) (2,416,366) ------------ NET ASSETS - 100.0% $37,669,094 ============ - ------------------------------------------------------------------------------- * Non-income producing security. See Notes to Financial Statements. 16 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. GLOBAL BOND PORTFOLIO PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994 - ------------------------------------------------------------------------------- PRINCIPAL AMOUNT (000) U.S.$ VALUE ------ ----------- AUSTRIA - 4.7% GOVERNMENT/AGENCY - 4.7% Republic of Austria 7.625%, 10/18/04 (cost $347,327) ATS 3,800 $ 346,729 ------------ DENMARK - 5.3% GOVERNMENT/AGENCY - 5.3% Kingdom of Denmark 8.00%, 5/15/03 (a) DKK 1,000 154,421 9.00%, 11/15/00 (a) 1,400 230,112 ------------ Total Danish Securities (cost $412,880) 384,533 ------------ GERMANY - 14.9% GOVERNMENT/AGENCY - 11.9% Federal Republic of Germany 8.00%, 7/22/02 DEM 510 334,691 Kingdom of Belgium 6.25%, 10/06/03 (a) 520 300,987 Treuhandanstalt 6.625%, 7/09/03 (a) 380 228,902 ------------ 864,580 ------------ MISCELLANEOUS - 3.0% Baden Wurttemberg 6.00%, 5/10/99 360 220,340 ------------ Total German Securities (cost $1,100,317) 1,084,920 ------------ IRELAND - 4.2% GOVERNMENT/AGENCY - 4.2% Republic of Ireland 6.25%, 10/18/04 (cost $307,619) IEP 240 306,860 ------------ ITALY - 5.5% GOVERNMENT/AGENCY - 3.0% Republic of Italy 12.00%, 9/01/01 (a) LIRA 360,000 222,051 ------------ CORPORATE OBLIGATIONS - 2.5% Nordic Investment Bank 11.30%, 3/04/02 (a) 300,000 183,423 ------------ Total Italian Securities (cost $425,345) $ 405,474 ------------ JAPAN - 27.0% CORPORATE OBLIGATIONS - 14.0% Asian Development Bank 5.00%, 2/05/03 JPY 28,000 288,153 European Investment Bank 4.625%, 2/26/03 38,000 382,003 International Bank for Reconstruction & Development 4.50%, 3/20/03 35,000 350,088 ------------ 1,020,244 ------------ GOVERNMENT/AGENCY - 13.0% Japan Development Bank 6.50%, 9/20/01 60,000 671,310 Republic of Austria 6.25%, 10/16/03 25,000 279,556 ------------ 950,866 ------------ Total Japanese Securities (cost $1,948,277) 1,971,110 ------------ UNITED KINGDOM - 4.3% CORPORATE OBLIGATIONS - 4.3% British Telecommunications, Plc 7.125%, 9/15/03 (cost $322,073) GBP 225 311,791 ------------ UNITED STATES - 31.7% GOVERNMENT/AGENCY - 28.8% United States Treasury Notes 5.125%, 3/31/96 US$ 650 631,820 6.375%, 8/15/02 500 457,810 8.25%, 7/15/98 1,000 1,012,340 ------------ 2,101,970 ------------ TIME DEPOSIT - 2.9% State Street Bank and Trust Co. 5.4375%, 1/04/95 212 212,000 ------------ Total United States Securities (amortized cost $2,382,621) 2,313,970 ------------ TOTAL INVESTMENTS - 97.6% (cost $7,246,459) 7,125,387 Other assets less liabilities - 2.4% 172,682 ------------ NET ASSETS - 100.0%.......... $ 7,298,069 ============ - ------------------------------------------------------------------------------- (a) Securities segregated to collateralize forward exchange currency contracts with an aggregate market value of approximately $1,319,896. See Notes to Financial Statements. 17 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. GROWTH AND INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994 - ------------------------------------------------------------------------------- SHARES U.S.$ VALUE ------ ----------- COMMON AND PREFERRED STOCKS - 82.4% BASIC INDUSTRIES - 4.7% CHEMICALS - 2.9% Lubrizol Corp....................... 8,000 $ 271,000 Monsanto Co......................... 7,000 493,500 Rohm & Haas Co...................... 8,000 457,000 ------------ 1,221,500 ------------ METALS & MINING - 0.7% Alcan Aluminum Ltd. 12,000 304,500 ------------ PAPER & FOREST PRODUCTS - 1.1% International Paper Co. 6,000 452,250 ------------ 1,978,250 ------------ CAPITAL GOODS - 5.7% ELECTRICAL EQUIPMENT - 3.5% Emerson Electric Co. 7,000 437,500 General Electric Co. 20,000 1,020,000 ------------ 1,457,500 ------------ MACHINERY - 2.2% Allied-Signal, Inc. 14,000 476,000 Coltec Industries, Inc.* 26,100 446,962 ------------ 922,962 ------------ 2,380,462 ------------ CONSUMER MANUFACTURING - 2.8% AUTO & RELATED - 2.8% General Motors Corp. 10,000 422,500 cv. pfd. Series C 5,000 286,875 Magna International, Inc. Cl.A 12,000 460,500 ------------ 1,169,875 ------------ CONSUMER SERVICES - 12.0% BROADCASTING & CABLE - 3.2% Comcast Corp. Cl.A SPL 37,200 583,575 Viacom, Inc. Cl. B* 8,486 344,744 rights* 14,000 15,750 Vodafone Plc (ADR) 12,200 410,225 ------------ 1,354,294 ------------ ENTERTAINMENT & LEISURE - 2.8% Eastman Kodak Co. 7,000 334,250 Walt Disney Co. 18,000 830,250 ------------ 1,164,500 ------------ PRINTING & PUBLISHING - 0.3% American Greetings Corp. Cl.A 4,000 107,750 ------------ RETAILING - 5.7% Federated Department Stores, Inc.* 15,500 298,375 Gap, Inc. 10,000 305,000 Kohls Corp.* 10,000 397,500 May Department Stores Co. 18,000 607,500 Toys R Us, Inc.* 14,000 427,000 Wal-Mart Stores, Inc. 16,000 340,000 ------------ 2,375,375 ------------ 5,001,919 ------------ CONSUMER STAPLES - 10.4% CONSUMER PRODUCTS & SERVICES - 1.9% Perrigo Co.* 12,000 $ 149,250 Procter and Gamble Co. 10,000 620,000 ------------ 769,250 ------------ COSMETICS - 3.1% Avon Products, Inc 6,000 358,500 Colgate-Palmolive Co 6,400 405,600 Gillette Co 7,000 523,250 ------------ 1,287,350 ------------ FOOD - 2.3% Campbell Soup Co 12,000 529,500 Heinz (HJ) Co 12,000 441,000 ------------ 970,500 ------------ TOBACCO - 3.1% Philip Morris Cos., Inc 22,600 1,299,500 ------------ 4,326,600 ------------ ENERGY - 10.4% DOMESTIC PRODUCERS - 2.2% Apache Corp 14,000 350,000 Renaissance Energy Ltd.* 18,000 348,054 Snyder Oil Corp. 5,000 74,375 4.00% cv. pfd 2,000 164,012 ------------ 936,441 ------------ INTERNATIONAL PRODUCERS - 3.2% YPF Sociedad Anonima (ADR) 62,000 1,325,250 ------------ OIL & GAS SERVICES - 3.2% Repsol S.A. (ADR) 14,800 403,300 Western Atlas, Inc.* 24,900 936,862 ------------ 1,340,162 ------------ PIPELINES - 1.8% Enron Corp 24,000 732,000 ------------ 4,333,853 ------------ FINANCE - 11.1% BANKING & CREDIT - 2.9% BankAmerica Corp 9,000 355,500 First Bank Systems, Inc. pfd 12,000 399,000 cv. pfd. $3.56 Series 91-A 3,000 179,250 First Interstate Bancorp 4,000 270,500 ------------ 1,204,250 ------------ BROKERAGE & MONEY MANAGEMENT - 1.0% Merrill Lynch & Co., Inc 12,000 429,000 ------------ INSURANCE - 4.1% American International Group, Inc 8,000 784,000 Travelers, Inc 28,000 910,000 ------------ 1,694,000 ------------ 18 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. GROWTH AND INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS (CONT'D) - ------------------------------------------------------------------------------- SHARES U.S.$ VALUE ------ ----------- MORTGAGE BANKING - 0.9% Federal National Mortgage Assn 5,000 $ 364,375 ------------ REAL ESTATE - 1.9% Avalon Property, Inc 12,000 276,000 Crescent Real Estate Equities 10,000 271,250 Spieker Properties, Inc 12,000 244,500 ------------ 791,750 ------------ OTHER - 0.3% American Express Co. 5,000 147,500 ------------ 4,630,875 ------------ HEALTH CARE - 12.2% DRUGS - 11.2% AB Astra (ADR) 16,400 423,561 AB Astra Series A 5,000 129,195 AB Astra Series B 15,000 382,540 Abbott Laboratories, Inc. 19,000 619,875 Columbia HCA Healthcare Corp. 21,300 777,450 Health Care Property Investors, Inc. 13,100 394,638 Merck & Co., Inc. 14,000 533,750 Pfizer, Inc. 5,200 401,700 Schering-Plough Corp. 7,000 518,000 United Healthcare Corp. 11,000 496,375 ------------ 4,677,084 ------------ MEDICAL SERVICES - 1.0% Meditrust 13,300 402,325 ------------ 5,079,409 ------------ MULTI INDUSTRY COMPANIES - 0.9% ITT Corp. 4,000 354,500 ------------ TRANSPORTATION - 1.9% RAILROAD - 1.9% Conrail, Inc. 11,000 555,500 Southern Pacific Rail Corp.* 14,000 253,750 ------------ 809,250 ------------ TECHNOLOGY - 4.5% COMMUNICATIONS EQUIPMENT - 0.5% General Instrument Corp. 7,000 210,000 ------------ COMPUTER HARDWARE - 1.3% Compaq Computer Corp.* 14,000 553,000 ------------ COMPUTER SOFTWARE & SERVICES - 0.7% Informix Corp.* 9,000 288,563 ------------ SHARES OR PRINCIPAL AMOUNT (000) U.S.$ VALUE ------ ----------- SEMI-CONDUCTORS & RELATED - 2.0% Intel Corp. 12,600 $ 803,250 ------------ 1,854,813 ------------ UTILITIES - 5.8% TELEPHONE - 5.8% MCI Communications Corp. 28,000 516,250 Sprint Corp. 69,300 1,914,412 2,430,662 ------------ Total Common and Preferred Stocks (cost $34,465,621) 34,350,468 ------------ CONVERTIBLE BONDS - 6.8% Comcast Corp. 3.375%, 9/09/05 $ 250 227,500 EMC Corp. 4.25%, 1/01/01 200 236,000 General Instrument Corp. 5.00%, 6/15/00 550 741,812 IRT Property Co. 7.30%, 8/15/03 200 184,000 Legg Mason, Inc. 7.00%, 6/15/11 100 105,000 Liberty Property Ltd. Partnership 8.00%, 7/01/01 200 187,500 Motorola Inc. Zero Coupon, 9/27/13 1,100 781,000 Wendy's International, Inc. 7.00%, 4/01/06 300 376,500 ------------ Total Convertible Bonds (cost $2,862,685) 2,839,312 ------------ U.S. GOVERNMENT OBLIGATIONS- 10.8% Federal Home Loan Mortgage Corp. 5.75%, 1/03/95 4,200 4,198,659 5.75%, 1/05/95 300 299,808 ------------ Total U.S. Government Obligations (amortized cost $4,498,467) 4,498,467 ------------ TOTAL INVESTMENTS - 100.0% (cost $41,826,773) 41,688,247 Other assets less liabilities - 0.0% 13,624 ------------ NET ASSETS - 100.0% $ 41,701,871 ============ - ------------------------------------------------------------------------------- * Non-income producing security. See Glossary of Terms on page 37. See Notes to Financial Statements. 19 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. SHORT-TERM MULTI-MARKET PORTFOLIO PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994 - ------------------------------------------------------------------------------- PRINCIPAL AMOUNT (000) U.S.$ VALUE ------ ----------- AUSTRALIA - 4.5% GOVERNMENT/AGENCY - 4.5% New South Wales Treasury 12.10%, 4/01/95 (a) AU$ 300 $ 234,305 Queensland Treasury 5.125%, 1/15/97 (b) 1,000 706,809 ------------ Total Australian Securities (cost $931,168) 941,114 ------------ CANADA - 1.2% GOVERNMENT/AGENCY - 1.2% Canadian Treasury Bill Zero Coupon, 6/29/95 (a) (cost $260,699) CA$ 375 257,645 ------------ ITALY - 2.9% GOVERNMENT/AGENCY - 2.9% Republic of Italy 8.50%, 8/01/97 (a) (cost $618,900) LIRA 1,045,000 597,769 ------------ MEXICO - 6.5% GOVERNMENT/AGENCY - 6.5% Mexican Treasury Bills Zero Coupon, 6/08/95 (a) MXP 2,368 420,297 Zero Coupon, 11/30/95 (a) 4,360 733,478 9.214%, 2/16/95 (a) 1,110 214,766 ------------ Total Mexican Securities (cost $2,114,276) 1,368,541 --------- NEW ZEALAND - 7.3% GOVERNMENT/AGENCY - 7.3% New Zealand Treasury Bond 8.00%, 11/15/95 (a) (cost $1,442,245) NZ$ 2,400 1,516,881 ------------ SPAIN - 2.4% GOVERNMENT/AGENCY - 2.4% Government of Spain 9.00%, 2/28/97 (a) (cost $521,493) ESP 70,000 511,073 ------------ UNITED KINGDOM - 2.3% GOVERNMENT/AGENCY - 2.3% U.K. Treasury 8.75%, 9/01/97 (a) (cost $468,894) GBP 300 $ 473,541 ------------ UNITED STATES - 73.7% DEBT OBLIGATIONS - 16.5% Teso Bonos Zero Coupon, 5/04/95 US$ 685 640,544 Zero Coupon, 6/01/95 1,045 963,072 Zero Coupon, 7/13/95 1,000 902,200 Zero Coupon, 11/16/95 1,100 947,760 ------------ 3,453,576 ------------ BANK OBLIGATIONS - 13.5% Bankers Trust Zero Coupon, 2/10/95 (b) 1,500 1,230,600 Bayerische Landesbank Zero Coupon, 4/12/95 1,000 770,000 Morgan Guaranty Trust Company Nassau Zero Coupon, 1/19/95 1,000 831,000 ------------ 2,831,600 ------------ TIME DEPOSIT - 43.7% State Street Bank and Trust Co. 5.4375%, 1/03/95 9,133 9,133,000 ------------ Total United States Securities (cost $16,253,390) 15,418,176 ------------ TOTAL INVESTMENTS - 100.8% (cost $22,611,065) 21,084,740 Other assets less liabilities - (0.8%) (163,881) ------------ NET ASSETS - 100.0% $20,920,859 =========== - ------------------------------------------------------------------------------- (a) Securities segregated to collateralize forward exchange currency contracts with an aggregate market value of approximately $4,959,755. (b) Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration normally applied to certain qualified buyers. At December 31, 1994, the aggregate market value of these securities amounted to $1,937,029 or 9.3% of net assets. See Notes to Financial Statements. 20 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994 - ------------------------------------------------------------------------------- PRINCIPAL AMOUNT (000) U.S.$ VALUE ------ ----------- PREFERRED STOCK - 0.9% FINANCE - 0.9% Banesto Holdings Ltd. cv. pfd. Series A 10.50% (a) (cost $49,725)................... 1,800 $ 45,225 ------------ CORPORATE OBLIGATIONS - 12.9% FINANCE - 8.6% BankAmerica Corp. 7.20%, 4/15/06 $ 100 88,791 Chemical Banking Corp. 7.875%, 7/15/06 100 94,000 General Motors Acceptance Corp. 7.125%, 6/01/99 200 188,570 Wachovia Corp. 6.375%, 4/15/03 75 65,625 ------------ 436,986 ------------ ASSET BACKED - 4.3% MBNA Master Credit Card Trust 5.40%, 9/15/00 100 91,125 Navistar Finance 6.40%, 1/15/20 131 128,179 ------------ 219,304 ------------ Total Corporate Obligations (cost $687,750) 656,290 ------------ U.S. GOVERNMENT OBLIGATIONS- 67.0% U.S. TREASURY SECURITIES - 35.6% U.S. Treasury Bond 7.50%, 11/15/24 50 47,828 U.S. Treasury Notes 6.375%, 1/15/00 400 376,124 6.75%, 5/31/99 650 623,292 7.25%, 8/15/04 410 393,534 7.75%, 3/31/96 350 351,204 U.S. Treasury Strip Zero Coupon, 2/15/13 100 23,810 ------------ 1,815,792 ------------ FEDERAL AGENCY - MORTGAGES - 18.2% Federal Home Loan Mortgage Corp./ Government National Mortgage Assn. 4.75%, 7/25/11 $ 400 $ 365,248 Federal National Mortgage Assn. 6.05%, 1/12/98 100 94,687 6.85%, 4/05/04 100 91,156 Government National Mortgage Assn. 7.00%, 7/15/23 93 83,663 8.00%, 1/15/24 146 139,800 9.00%, 9/15/24 153 154,098 ------------ 928,652 ------------ FEDERAL AGENCY - 13.2% AID - Israel 8.00%, 11/15/01 200 199,194 Federal Home Loan Bank 7.26%, 9/06/01 300 290,061 Federal Home Loan Mortgage Corp. 6.13%, 8/19/99 200 185,500 ------------ 674,755 ------------ Total U.S. Government Obligations (cost $3,580,257) 3,419,199 ------------ TIME DEPOSIT - 14.9% State Street Bank and Trust Co. 5.4375%, 1/03/95 (amortized cost $761,000) 761 761,000 ------------ TOTAL INVESTMENTS -95.7% (cost $5,078,732) 4,881,714 Other assets less liabilities - 4.3% 219,570 ------------ NET ASSETS - 100.0% $ 5,101,284 ============ - ------------------------------------------------------------------------------- (a) Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration normally applied to certain qualified buyers. At December 31, 1994, the aggregate market value of these securities amounted to $45,225 or 0.9% of net assets. See Notes to Financial Statements. 21 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. TOTAL RETURN PORTFOLIO PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994 - ------------------------------------------------------------------------------- SHARES U.S.$ VALUE ------ ----------- COMMON STOCKS - 41.2% BASIC INDUSTRIES - 3.0% CHEMICALS - 2.6% Lubrizol Corp. 120 $ 4,065 Monsanto Co. 100 7,050 Rohm & Haas Co. 100 5,712 Union Carbide Corp. 100 2,938 ------------ 19,765 ------------ METALS & MINING - 0.4% Bethlehem Steel, Corp.* 150 2,700 ------------ 22,465 ------------ CAPITAL GOODS - 3.8% ELECTRICAL EQUIPMENT - 2.2% General Electric Co. 320 16,320 ------------ MACHINERY - 1.6% Allied-Signal, Inc. 200 6,800 Coltec Industries, Inc.* 130 2,226 Paccar, Inc. 70 3,080 ------------ 12,106 ------------ 28,426 ------------ CONSUMER MANUFACTURING - 2.4% AUTO & RELATED - 1.8% Chrysler Corp. 90 4,410 General Motors Corp. 70 2,958 Magna International, Inc. 150 5,756 ------------ 13,124 ------------ OTHER - 0.6% Eastman Kodak Co. 100 4,775 ------------ 17,899 ------------ CONSUMER SERVICES - 6.5% BROADCASTING & CABLE - 1.2% Comcast Corp. Cl.A SPL 200 3,138 Tele-Communications, Inc. Cl.A 100 2,181 Viacom, Inc. Cl.B 100 4,062 ------------ 9,381 ------------ ENTERTAINMENT & LEISURE - 1.4% Walt Disney Co. 220 10,148 ------------ RESTAURANTS & LODGING - 1.2% McDonald's Corp. 220 6,435 Wendy's International, Inc. 190 2,731 ------------ 9,166 ------------ RETAILING - 2.7% Federated Department Stores Inc. 350 6,737 Kohls Corp.* 100 3,975 May Department Stores Co. 100 3,375 Toys R Us, Inc.* 200 $ 6,100 ------------ 20,187 ------------ 48,882 ------------ CONSUMER STAPLES - 3.9% COSMETICS - 0.6% Gillette Co. 60 4,485 ------------ HOUSEHOLD PRODUCTS - 1.9% Colgate-Palmolive Co. 70 4,436 Procter & Gamble Co. 90 5,580 Scott Paper Co. 60 4,148 ------------ 14,164 ------------ TOBACCO - 1.4% Philip Morris Cos., Inc. 180 10,350 ------------ 28,999 ------------ ENERGY - 4.0% DOMESTIC PRODUCERS - 0.6% Snyder Oil Corp. 300 4,463 ------------ INTERNATIONAL PRODUCERS - 1.3% Chevron Corp. 220 9,817 ------------ OIL & GAS SERVICES - 0.7% Western Atlas, Inc.* 140 5,268 ------------ PIPELINES - 1.4% Enron Corp. 350 10,675 ------------ 30,223 ------------ FINANCE - 7.0% BANKING & CREDIT - 2.3% Citicorp 70 2,896 Fleet Financial Group, Inc. 100 3,250 MBNA Corp. 150 3,506 NationsBank Corp. 110 4,964 Norwest Corp. 120 2,805 ------------ 17,421 ------------ BROKERAGE & MONEY MANAGEMENT - 0.5% Morgan Stanley Group, Inc. 60 3,540 ------------ INSURANCE - 2.8% American International Group, Inc. 100 9,800 MGIC Investment Corp. 150 4,969 Travelers, Inc. 200 6,500 ------------ 21,269 ------------ MORTGAGE BANKING - 1.4% Federal National Mortgage Assn. 140 10,202 ------------ 52,432 ------------ 22 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. TOTAL RETURN PORTFOLIO PORTFOLIO OF INVESTMENTS (CONT'D) - ------------------------------------------------------------------------------- SHARES U.S.$ VALUE ------ ----------- HEALTH CARE - 4.1% DRUGS - 1.8% Merck & Co., Inc. 230 $ 8,769 Pfizer, Inc. 60 4,635 ------------ 13,404 ------------ MEDICAL PRODUCTS - 0.5% Abbott Laboratories, Inc. 130 4,241 ------------ MEDICAL SERVICES - 1.8% Columbia HCA Healthcare Corp. 140 5,110 Healthsource, Inc. 70 2,861 United Healthcare Corp. 80 3,610 Value Health, Inc. 50 1,863 ------------ 13,444 ------------ 31,089 ------------ TECHNOLOGY - 2.5% COMMUNICATIONS EQUIPMENT - 1.7% General Instrument Corp. 170 5,100 Motorola, Inc. 130 7,524 ------------ 12,624 ------------ COMPUTER HARDWARE - 0.5% Sun Microsystems, Inc.* 100 3,544 ------------ SEMI-CONDUCTORS & RELATED - 0.3% Intel Corp. 40 2,550 ------------ 18,718 ------------ TRANSPORTATION - 1.0% RAILROAD - 1.0% Conrail, Inc. 80 4,040 Illinois Central Corp. 100 3,075 ------------ 7,115 ------------ UTILITIES - 3.0% ELECTRIC & GAS - 1.3% NIPSCO Industries, Inc. 240 7,140 Peco Energy Co. 120 2,940 ------------ 10,080 ------------ SHARES OR PRINCIPAL AMOUNT (000) U.S.$ VALUE TELEPHONE - 1.7% MCI Communications Corp. 250 $ 4,609 Sprint Corp. 280 7,735 ------------ 12,344 ------------ 22,424 ------------ Total Common Stocks (cost $309,666) 308,672 ------------ U.S. GOVERNMENT OBLIGATIONS- 32.7% U.S. Treasury Notes 4.25%, 5/15/96 $ 42 40,255 4.75%, 8/31/98 37 33,404 5.125%, 12/31/98 25 22,703 7.25%, 8/15/04 155 148,775 ------------ Total U.S. Government Obligations (cost $252,764) 245,137 ------------ TIME DEPOSIT - 25.2% State Street Bank and Trust Co. 5.4375%, 1/03/95 (amortized cost $189,000) 189 189,000 ------- TOTAL INVESTMENTS -99.1% (cost $751,430) 742,809 Other assets less liabilities - 0.9% 7,091 ------------ NET ASSETS - 100.0% $ 749,900 ============ - ------------------------------------------------------------------------------- * Non-income producing security. See Notes to Financial Statements. 23 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. INTERNATIONAL PORTFOLIO PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994 - ------------------------------------------------------------------------------- SHARES U.S.$ VALUE ------ ----------- COMMON STOCKS AND OTHER INVESTMENTS - 95.5% ARGENTINA - 0.3% Telecom Argentina S.A. Cl. B (b) 1,900 $ 9,309 YPF Sociedad Anonima (ADR) 600 12,825 ------------ 22,134 ------------ AUSTRALIA - 2.7% Australia and New Zealand Banking Group 7,429 24,483 Boral Ltd. 8,638 22,774 Brambles Industries Ltd. 3,000 28,660 Broken Hill Proprietary Co. 3,651 55,433 Coca Cola Amatil Ltd. 3,492 22,204 Mayne Nickless Ltd. 7,891 40,385 ------------ 193,939 ------------ BELGIUM - 0.9% Arbed S.A.* 98 14,726 Kredietbank S.A. 243 50,953 ------------ 65,679 ------------ CANADA - 0.2% Alcan Aluminum Ltd. 1 31 Renaissance Energy Ltd.* (b) 600 11,548 ------------ 11,579 ------------ DENMARK - 0.7% Den Danske Bank 900 49,112 ------------ FINLAND - 1.2% Nokia AB Preferred 572 84,267 ------------ FRANCE - 6.9% Banque National De Paris 537 24,683 Bouygues 400 38,270 Coflexip Sponsored (ADR) 754 17,436 Compagnie De Saint Gobain 540 62,078 Compagnie Financiere De Paribas S.A. 766 50,914 Compagnie Generale Des Eaux 655 63,648 Group Danone 120 16,828 Pechiney International S.A. 500 33,702 Salomon S.A. 100 39,974 Societe Centrale Des Assurances Generales De France 1,854 73,591 Total S.A. (ADR) 1,217 35,902 Total S.A. Cl. B 600 34,847 Union Du Credit Bail Immobil 125 11,421 ------------ 503,294 ------------ GERMANY - 6.6% Basf AG 400 82,468 Bayer AG 238 55,749 Bayerische Motoren Werke AG 72 35,589 Deutsche Bank AG 178 $ 82,700 KSB AG - Vorzug Preferred 20 4,194 Lufthansa AG* 562 70,717 PWA - Papierwerke Waldhof - Aschaffenburg AG* 205 31,483 Suedzucker AG 81 40,508 Veba AG 218 75,963 ------------ 479,371 ------------ GHANA - 0.2% Ashanti Goldfields (ADR)* (b) 140 3,027 Ashanti Goldfields (GDS)* (b) 475 10,094 ------------ 13,121 ------------ HONG KONG - 2.5% Hong Kong and China Gas Co. Ltd. warrants expiring 12/31/95 200 323 Hong Kong Land Holdings Ltd. 13,000 25,370 Hutchison Whampoa 9,000 36,407 Jardine Strategic Holdings Ltd. 10,000 32,827 Sun Hung Kai Properties Ltd. 8,000 47,767 Television Broadcasts of Hong Kong Ltd. 10,000 39,936 ------------ 182,630 ------------ INDIA - 0.5% Bajaj Auto Ltd. (GDR)* 230 5,520 Hindalco Industries Ltd. (GDR)* 450 15,300 Reliance Industries Ltd.* (b) 350 7,699 rights * (b) 420 8,316 ------------ 36,835 ------------ INDONESIA - 0.5% Astra International 9,000 17,197 Indocement Tunggal Prakarsa 4,000 11,511 Indosat* 1,500 5,374 Idr500 (alien Mkt)* 1,000 3,583 ------------ 37,665 ------------ ITALY - 1.9% Burgo (Cartiere) Spa* 5,600 37,132 La Rinascente Spa 6,855 38,561 Societa Italiana Per L'Eserreizio Delle Telecommunicazioni, P.A. 23,140 60,232 ------------ 135,925 ------------ JAPAN - 39.7% Asahi Bank Ltd. 8,000 93,173 Asahi Glass Co. Ltd. 8,000 98,795 Bank of Tokyo 8,000 123,695 Canon, Inc. 4,000 67,871 Dai Ichi Kangyo Bank 4,000 75,502 Dai Nippon Printing Co. Ltd. 2,000 34,137 Daiwa Securities Co. Ltd. 3,000 43,373 DDI Corp. 6 51,807 24 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. INTERNATIONAL PORTFOLIO PORTFOLIO OF INVESTMENTS (CONT'D) - ------------------------------------------------------------------------------- SHARES U.S.$ VALUE ------ ----------- East Japan Railway Co. 7 $ 35,000 Fuji Photo Film Co. (ORD) 3,000 69,578 Hankyu Department Stores 5,000 64,257 Hitachi Metals Ltd. 8,000 97,992 Ito - Yokado Co. Ltd. (ADR) 225 48,037 Kajima Corp. 1,000 8,574 Kao Corp. 2,000 22,691 Komatsu Co. Ltd. 4,000 36,145 Kuraray Co. Ltd. 5,000 59,237 Long-Term Credit Bank of Japan 6,000 65,663 Matsushita Electric Works (a) 7,000 71,687 Mitsubishi Chemical 13,200 72,626 Mitsubishi Electric Corp. 10,000 70,984 Mitsubishi Heavy Industries Ltd. 4,000 30,522 NEC Corp. 7,000 80,120 Nippondenso Co. Ltd. 4,000 84,337 Nippon Electric Glass Co. Ltd. 4,000 79,518 Nippon Express Co Ltd. 4,000 40,161 Nippon Paper Industries Co. 6,000 44,096 Nippon Steel Corp. 11,000 41,416 Nippon Telegraph and Telephone Corp. 7 61,918 Nomura Securities Ltd. (ADR) 226 46,890 NTN Corp. 10,000 75,000 Sakura Bank Ltd. 7,000 94,177 Sankyo Co. Ltd. 1,000 24,900 Santen Pharmaceutical Co. 2,000 55,622 Sanyo Electric Co. Ltd. 2,000 11,506 Seven Eleven Japan 1,000 80,422 Sony Corp. 2,000 113,454 Sumitomo Bank 6,000 114,458 Sumitomo Realty and Development 4,000 23,695 Taisho Pharmaceutical Co. 3,000 57,530 Takara Shuzo Co. 6,000 47,651 Tokio Marine and Fire Co. 8,000 97,992 Tokyo Electric Power 1,000 27,912 Tokyo Gas Cos. Ltd. 10,000 43,373 Toyota Corp. (a) 4,000 84,337 Ube Industries Ltd.* 9,000 34,789 Yamazaki Baking Co. Ltd. 4,000 80,321 ------------ 2,886,941 ------------ MALAYSIA - 1.4% Aokam Perdana Bhd 5,400 33,413 Development & Commercial Bank 7,000 15,626 Development & Commercial Bank, Rights* 1,750 0 Resorts World Bhd 6,000 35,246 Technology Resources Industries Bhd 6,000 19,150 ------------ 103,435 ------------ MEXICO - 0.6% Grupo Financiero Bancomer S.A. (b) 16,100 $ 8,738 Grupo Situr S.A. Series BCP 7,503 15,383 Telefonos de Mexico S.A. Series L (ADR) 557 22,837 ------------ 46,958 ------------ NETHERLANDS - 4.7% Amev N.V. 2,209 93,786 DSM N.V. 630 50,047 Elsevier N.V. 3,400 35,451 European Vinyls Corp. International N.V.* 400 17,720 Heineken N.V. 526 79,087 Royal Ptt Nederland N.V. 1,050 35,385 VNU - Ver Ned Uitgevers Ver Bezit 321 33,322 ------------ 344,798 ------------ NORWAY - 0.5% Transocean AS* 4,700 38,921 ------------ PHILIPPINES - 0.5% Manila Electric Co. 2,300 31,578 Philippine Long Distance Telephone Company (ADR) 105 5,788 ------------ 37,366 ------------ SINGAPORE - 1.9% Development Bank of Singapore 6,000 61,749 Keppel Corp. 7,000 59,554 Singapore Press Holdings Ltd. 1,000 18,182 ------------ 139,485 ------------ SPAIN - 3.6% Banco Intercontinental Espana 442 36,569 Centros Comerciale Continente S.A. 2,250 45,299 Gas Natural Sdg E 285 24,510 Iberdrola S.A. 3,495 21,561 Repsol S.A. 1,975 53,567 Tabacalera S.A. 1,200 32,091 Telefonica De Espana 3,945 46,606 ------------ 260,203 ------------ SWEDEN - 2.8% Astra AB 3,930 101,548 Hennes and Mauritz AB 280 14,357 Marieberg Tidnings AB 1,400 31,653 SKF AB Cl. A* 792 13,110 SKF AB Cl. B* 1,000 16,486 Stora Kopparbergs Series B 495 29,844 ------------ 206,998 ------------ 25 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. INTERNATIONAL PORTFOLIO PORTFOLIO OF INVESTMENTS (CONT'D) - ------------------------------------------------------------------------------- SHARES U.S.$ VALUE ------ ----------- SWITZERLAND - 2.0% BBC Brown Boveri AG - Bearer 56 $ 48,214 BBC Brown Boveri AG - Regular 24 3,960 Nestle S.A. 96 91,453 ------------ 143,627 ------------ UNITED KINGDOM - 12.7% Argos Plc (a) 7,500 41,308 Barclays Plc 6,635 63,433 Barratt Development Plc 3,000 7,839 Bat Industries Plc 9,425 63,561 British Airways Plc 10,575 59,237 British Land Co. Plc 6,000 36,004 British Petroleum Co. Plc 5,720 38,083 Dixons Group Plc 21,600 64,215 Forte Plc (a) 24,350 91,822 General Electric Plc 6,637 28,662 Johnson Matthey Plc 7,100 60,657 Mowlem (John) & Co. Plc* 21,700 33,954 Royal Bank of Scotland Group 9,200 56,717 Smithkline Beecham Cl. A 4,700 33,351 Thorn EMI Plc 4,219 68,292 Unilever Plc (a) 2,960 53,610 Vodafone Group Plc 23,452 77,795 Wimpey (George) Plc (a) 20,905 42,196 ------------ 920,736 ------------ Total Common Stocks and Other Investments (cost $7,026,388) 6,945,019 ------------ TIME DEPOSIT - 9.0% State Street Bank and Trust Co. 5.4375%, 1/03/95 (amortized cost $658,000) $ 658 $ 658,000 ------------ TOTAL INVESTMENTS - 104.5% (cost $7,684,388) 7,603,019 Other assets less liabilities - (4.5%) (326,631) ------------ NET ASSETS - 100.0% $ 7,276,388 ============ - ------------------------------------------------------------------------------- * Non-income producing security. (a) Securities segregated to collateralize forward exchange currency contracts with an aggregate market value of approximately $384,960. (b) Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration normally applied to certain qualified buyers. At December 31, 1994, the aggregate market value of these securities amounted to $58,731 or 0.8% of net assets. See Glossary of Terms on page 37. See Notes to Financial Statements. 26 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. MONEY MARKET PORTFOLIO PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994 - ------------------------------------------------------------------------------- PRINCIPAL AMOUNT (000) U.S.$ VALUE ------ ----------- U.S. GOVERNMENT AND AGENCY OBLIGATIONS - 98.2% Federal Farm Credit Bank 5.70%, 1/23/95 $ 810 $ 807,178 Federal Home Loan Bank 5.65%, 1/06/95 500 499,608 5.89%, 2/21/95 300 297,497 Federal Home Loan Mortgage Corp. 5.24%, 1/04/95 300 299,869 5.63%, 1/23/95 300 298,968 5.88%, 1/12/95 400 399,281 5.94%, 1/23/95 700 697,459 Federal National Mortgage Assn. 5.64%, 2/13/95 300 297,979 5.90%, 1/06/95 800 799,344 5.91%, 1/09/95 400 399,475 United States Treasury Bill 5.36%, 3/09/95 2,000 1,980,049 ------------ Total U.S. Government and Agency Obligations (amortized cost $6,776,707) 6,776,707 ------------ TOTAL INVESTMENTS -98.2% (amortized cost $6,776,707) $ 6,776,707 Other assets less liabilities - 1.8% 121,588 ------------ NET ASSETS - 100.0% $ 6,898,295 ============ - ------------------------------------------------------------------------------ See Notes to Financial Statements. 27 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. GLOBAL DOLLAR GOVERNMENT PORTFOLIO PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994 - ------------------------------------------------------------------------------- PRINCIPAL AMOUNT (000) U.S.$ VALUE ------ ----------- SOVEREIGN DEBT OBLIGATIONS - 30.7% COLLATERALIZED BRADY BONDS - 18.9% ARGENTINA - 1.5% Republic of Argentina Euro Par Bond 4.25%, 3/31/23 (cost $20,856) $ 40 $ 16,950 ------------ BULGARIA - 8.1% National Republic of Bulgaria Series A Disc. 6.0625%, 7/28/24 (cost $93,513) 200 93,500 ------------ PHILIPPINE - 4.9% Central Bank of Philippines Par Bonds FRB 5.75%, 12/01/95 (cost $57,818) 90 55,800 ------------ POLAND - 4.4% Republic of Poland Disc. 6.8125%, 10/27/24 (cost $51,110) 70 50,470 ------------ Total Collateralized Brady Bonds (cost $223,297) 216,720 ------------ OTHER SOVEREIGN DEBT - 11.8% ARGENTINA - 2.1% Republic of Argentina FRB 6.50%, 3/31/05 (cost $28,725) 38 24,320 ------------ BRAZIL - 4.5% Republic of Brazil C-Bonds 8.00%, 4/15/14 41 19,635 Republic of Brazil Series A IDU 6.0625%, 1/01/01 38 31,985 ------------ Total Brazilian Securities (cost $51,099) 51,620 ------------ MEXICO - 0.8% Desc Sociedad de Fomento 11.00%, 12/15/97 (cost $10,500) $ 10 $ 9,613 ------------ TRINIDAD & TOBAGO - 4.3% Republic of Trinidad & Tobago 11.75%, 10/03/04 (cost $49,692) 50 49,500 ------------ Total Other Sovereign Debt Obligations (cost $140,016) 135,053 ------------ CORPORATE DEBT OBLIGATIONS - 18.5% BROADCASTING - 3.2% Paramount Communications, Inc. 8.25%, 8/01/22 3 2,483 Viacom, Inc. 8.00%, 7/07/06 40 34,300 ------------ Total Broadcasting (cost $35,377) 36,783 ------------ ELECTRIC & GAS - 0.2% DQU II Funding Corp. 8.70%, 6/01/16 (cost $2,873) 3 2,763 ------------ FINANCIAL - 2.8% Dine SA De CV 8.125%, 10/15/98 (cost $36,177) 40 31,700 ------------ INDUSTRIAL - 3.8% Hylsa SA De CV 11.00%, 2/23/98 (cost $49,888) 50 43,125 ------------ TELEPHONE - 1.4% Telefonica De Argentina 8.375%, 10/01/00 (cost $18,587) 20 16,100 ------------ YANKEES - 7.1% Centragas 10.65%, 12/01/10 (a) 50 47,625 28 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. GLOBAL DOLLAR GOVERNMENT PORTFOLIO PORTFOLIO OF INVESTMENTS (CONT'D) - ------------------------------------------------------------------------------- PRINCIPAL AMOUNT (000) U.S.$ VALUE ------ ----------- Grupo Mexicano De Desarrollo 8.25%, 2/17/01 $ 40 $ 24,750 Transportacion Maritima Mexicana, S.A. 9.25%, 5/15/03 12 9,105 ------------ Total Yankees (cost $92,716) 81,480 ------------ Total Corporate Debt Obligations (cost $235,618) 211,951 ------------ U.S. GOVERNMENT OBLIGATIONS - 41.4% U.S. Treasury Notes 6.50%, 4/30/99 55 52,267 6.75%, 5/31/99 90 86,302 7.25%, 8/15/04 350 335,944 ------------ Total U.S. Government Obligations (cost $492,027) 474,513 ------------ TIME DEPOSIT - 17.5% State Street Bank and Trust Co. 5.4375%, 1/03/95 (amortized cost $201,000) $ 201 $ 201,000 ------------ TOTAL INVESTMENTS - 108.1% (cost $1,291,958) 1,239,237 Other assets less liabilities - (8.1%) (92,911) ------------ NET ASSETS - 100.0% $ 1,146,326 ============ - ------------------------------------------------------------------------------- (a) Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration normally applied to certain qualified buyers. At December 31, 1994, the aggregate market value of these securities amounted to $47,625 or 4.2% of net assets. See Notes to Financial Statements. 29 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994 - ------------------------------------------------------------------------------- PRINCIPAL AMOUNT (000) U.S.$ VALUE ------ ----------- ARGENTINA - 15.9% GOVERNMENT OBLIGATIONS - 15.9% Bonos De Inversion y Creimiento 18.75%, 5/01/01 (FRN) ARS 78 $ 69,571 Republic of Argentina Pensioner-Bocon Series I 3.50%, 4/01/01 (FRN) 319 135,307 3.50%, 4/01/07 (FRN) 1,517 406,085 ------------ Total Argentina Securities (cost $928,928). 610,963 ------------ MEXICO - 18.4% GOVERNMENT/AGENCY - 18.4% Mexican Treasury Bills Zero Coupon, 1/26/95 MXP 241 47,366 Zero Coupon, 2/16/95 500 96,637 Zero Coupon, 4/12/95 180 33,702 Zero Coupon, 4/20/95 650 121,221 Zero Coupon, 5/04/95 1,103 203,954 Zero Coupon, 10/19/95 1,129 203,736 ------------ Total Mexican Securities (cost $1,056,137) 706,616 ------------ UNITED STATES - 64.7% GOVERNMENT/AGENCY - 58.6% Federal Home Loan Bank 7.26%, 9/06/01 US$ 200 193,374 Federal Home Loan Mortgage Corp. 6.13%, 8/19/99 US$ 150 $ 139,125 Federal National Mortgage Assn. 5.05%, 11/10/98 305 275,168 Government National Mortgage Assn. 9.00%, 9/15/24 204 205,464 U.S. Treasury Notes 6.50%, 4/30/99 185 175,808 6.75%, 5/31/99 320 306,851 7.25%, 8/15/04 1,000 959,840 ------------ 2,255,630 ------------ TIME DEPOSIT - 6.1% State Street Bank and Trust Co. 5.4375%, 1/03/95 236 236,000 ------------ Total United States Securities (cost $2,539,885) 2,491,630 ------------ TOTAL INVESTMENTS - 99.0% (cost $4,524,950) 3,809,209 ------------ Other assets less liabilities - 1.0% 38,873 ------------ NET ASSETS - 100.0% $ 3,848,082 ============ - ------------------------------------------------------------------------------- See Notes to Financial Statements. 30 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. UTILITY INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994 - ------------------------------------------------------------------------------- SHARES U.S.$ VALUE ------ ----------- COMMON AND PREFERRED STOCKS - 83.1% UNITED STATES INVESTMENTS - 79.0% ENERGY - 3.5% OIL & GAS SERVICES - 1.8% Western Atlas, Inc.* 600 $ 22,575 ------------ PIPELINES - 1.7% Enron Corp. 700 21,350 ------------ 43,925 ------------ MULTI INDUSTRY COMPANIES - 5.9% Cinergy Corp. 1,200 28,050 Penn Engineering Manufacturing Corp. 1,100 46,338 ------------ 74,388 ------------ PUBLIC UTILITIES - 69.1% ELECTRIC & GAS - 59.6% American Electric Power, Inc. 1,200 39,450 Baltimore Gas & Electric Co. 1,800 39,825 CMS Energy Corp. 950 21,731 Companhia Energetica De Minas (ADR) (a) 400 9,455 Companhia Energetica De Sao Paulo (ADR)* (a) 300 4,091 Compania Boliviana De Energia Electrica S.A. (ADR) 200 4,550 Dominion Resources, Inc. 1,000 35,750 DPL, Inc. 1,500 30,750 Duke Power Co. 1,100 41,937 Eastern Utilities Assoc. 1,000 22,000 Empresa Nacional De Electricd (ADR) 100 4,050 Enersis S.A. (ADR) 100 2,775 Entergy Corp. 500 10,938 FPL Group, Inc. 1,100 38,637 Hawaiian Electric Industries, Inc. 800 25,900 IES Industries, Inc. 400 10,100 LG & E Energy Corp. 400 14,750 NIPSCO Industries, Inc. 900 26,775 Northeast Utilities 1,000 21,625 Oklahoma Gas & Electric Co. 600 19,875 Pacificorp 600 10,875 Peco Energy Capital LP 9.00% Series A pfd. 430 10,804 Peco Energy Co. 600 14,700 Pennsylvania Power & Light Co. 1,700 32,300 Portland General Corp. 1,200 23,100 Public Service Co. of Colorado 800 23,500 Public Service Company NM 2,600 33,800 Repsol SA, ADR 500 13,625 San Diego Gas & Electric Co. 2,000 38,500 Scecorp 400 5,850 Southern Co. 1,200 24,000 Texas Utilities Co. 900 $ 28,800 Unicom Corp. 1,000 24,000 Western Resources, Inc. 200 5,725 Wisconsin Energy Corp. 1,300 33,638 ------------ 748,181 ------------ TELEPHONE - 9.5% GTE Corp. 700 21,262 MCI Communications Corp. 1,000 18,437 Pacific Telesis Group 650 18,525 Philippine Long Distance Telephone Co. (ADR) 100 5,513 Telecom Argentina Stet France (ADR) (a) 200 10,350 Telecom Corp. of New Zealand (ADR) 200 10,275 Telecomunicacoes Brasileras S.A. (ADR) 100 4,475 Telefonica De Argentina (ADR) 100 5,300 Telefonos de Mexico, S.A., Series L (ADR) 600 24,600 ------------ 118,737 ------------ 866,918 ------------ TECHNOLOGY - 0.5% COMPUTER PERIPHERALS - 0.5% Indonesian Satellite Corp. (ADR) 170 6,077 ------------ Total United States Investments (cost $1,014,037) 991,308 ------------ FOREIGN INVESTMENTS - 4.1% ARGENTINA - 1.8% Central Costanera S.A. (a) 300 7,950 Central Puerta S.A. (a) 300 7,424 Transportadora De Gas Del Sur 3,800 7,143 ------------ 22,517 ------------ CANADA - 1.2% Renaissance Energy Ltd.* 800 15,469 ------------ MALAYSIA - 0.3% Tenaga Nasional 1,000 3,956 ------------ PHILIPPINE - 0.8% Manila Electric Co. 680 9,336 ------------ Total Foreign Investments (cost $60,987) 51,278 ------------ Total Common and Preferred Stocks (cost $1,075,024) 1,042,586 ------------ 31 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. UTILITY INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS (CONT'D) - ------------------------------------------------------------------------------- PRINCIPAL AMOUNT (000) U.S.$ VALUE ------ ----------- CORPORATE BONDS - 3.9% ELECTRIC & GAS - 3.9% Gulf States Utilities Company 8.25%, 4/01/04 $ 25 $ 24,231 Texas Utilities Electric Co. 8.25%, 4/01/04 25 24,562 ------------ Total Corporate Bonds (cost $49,317) 48,793 ------------ TOTAL INVESTMENTS - 87.0% (cost $1,124,341) 1,091,379 Other assets less liabilities - 13.0% 162,870 ------------ NET ASSETS - 100.0% $ 1,254,249 ============ - ------------------------------------------------------------------------------- * Non-income producing security. (a) Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration normally applied to certain qualified buyers. At December 31, 1994, the aggregate market value of these securities amounted to $39,270 or 3.1% of net assets. See Notes to Financial Statements. 32 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994 - ------------------------------------------------------------------------------- SHARES U.S.$ VALUE ------ ----------- COMMON STOCKS - 89.0% BASIC INDUSTRIES - 2.2% CHEMICALS - 1.4% NL Industries, Inc.* 6,000 $ 75,750 ------------ METALS & MINING - 0.8% Kaiser Aluminum Corp.* 2,000 21,750 National Steel Corp.* 1,500 21,750 ------------ 43,500 ------------ 119,250 ------------ CAPITAL GOODS - 1.0% MACHINERY - 1.0% Caterpillar, Inc. 1,000 55,125 ------------ CONSUMER MANUFACTURING - 3.2% AUTO & RELATED - 1.9% Chrysler Corp. 2,100 102,900 ------------ OTHER - 1.3% Americredit Corp.* 12,000 72,000 ------------ 174,900 ------------ CONSUMER SERVICES - 12.5% BROADCASTING & CABLE - 5.2% AirTouch Communications, Inc.* 2,900 84,463 Tele-Communications, Inc. Cl.A* 4,300 93,794 Viacom, Inc. Cl.A* 64 2,664 Cl.B* 2,484 100,912 ------------ 281,833 ENTERTAINMENT & LEISURE - 0.8% Time Warner, Inc. 1,300 45,662 ------------ PRINTING & PUBLISHING - 0.4% Donnelley (R.R.) & Sons Co. 800 23,600 ------------ RETAILING - 6.1% Home Depot, Inc. 700 32,200 Sears, Roebuck & Co. 3,800 174,800 Sports Authority, Inc.* 6,000 126,000 ------------ 333,000 ------------ 684,095 ------------ CONSUMER STAPLES - 5.0% TOBACCO - 5.0% Loews Corp. 2,300 199,813 Philip Morris Cos., Inc. 1,300 74,750 ------------ 274,563 ------------ ENERGY - 4.8% DOMESTIC PRODUCERS - 1.0% Anadarko Petroleum Corp. 400 15,400 Apache Corp. 500 $ 12,500 Renaissance Energy Ltd.* 500 9,668 Seagull Energy Corp.* 1,000 19,125 ------------ 56,693 ------------ INTERNATIONAL PRODUCERS - 0.6% YPF Sociedad Anonima (ADR) 1,600 34,200 ------------ OIL & GAS SERVICES - 2.6% Baker Hughes, Inc. 2,000 36,500 Energy Service, Inc.* 1,000 12,250 Western Atlas, Inc.* 2,500 94,063 ------------ 142,813 ------------ PIPELINES - 0.4% Enron Corp. 500 15,250 Sonat Offshore Drilling, Inc. 200 3,550 ------------ 18,800 ------------ OTHER - 0.2% Enron Oil & Gas Co. 700 13,125 ------------ 265,631 ------------ FINANCE - 24.5% BANKING & CREDIT - 2.8% Capital One Financial Corp.* 5,000 80,000 Citicorp. 1,000 41,375 World Acceptance Corp.* 1,500 35,062 ------------ 156,437 ------------ INSURANCE - 11.6% Acceptance Insurance Co. 3,000 45,000 American International Group, Inc. 1,200 117,600 CNA Financial Corp. 100 6,488 General Reinsurance Corp. 200 24,750 John Alden Financial Corp. 2,500 71,875 Penncorp Financial Group, Inc. 7,000 91,875 Travelers, Inc. 5,600 182,000 Twentieth Century Industries, Inc. 7,900 82,950 USF&G Corp. 1,100 14,987 ------------ 637,525 ------------ MORTGAGE BANKING - 0.4% Federal National Mortgage Assn. 300 21,863 ------------ REAL ESTATE - 7.4% Essex Property Trust 1,000 15,125 Evans Withycombe Residential 1,500 31,500 Gables Residential Trust 2,000 43,000 Highwoods Properties, Inc. 3,800 82,175 Macerich Co. 1,500 32,063 Manufactured Home Communities, Inc. 1,500 29,813 Saul Centers, Inc. 3,000 44,250 Summit Properties, Inc. 5,000 96,250 Weeks Corp. 1,500 32,812 ------------ 406,988 ------------ 33 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS (CONT'D) - ------------------------------------------------------------------------------- SHARES U.S.$ VALUE ------ ----------- OTHER - 2.3% Dean Witter, Discover & Co. 1,000 $ 33,875 Mercury Finance Co. 900 11,700 MGIC Investment Corp. 100 3,312 Student Loan Marketing Assn. 2,300 74,750 ------------ 123,637 ------------ 1,346,450 ------------ HEALTH CARE - 8.2% DRUGS - 4.9% Healthsource, Inc.* 4,200 171,675 Lilly (Eli) & Co. 200 13,125 Merck & Co., Inc. 1,200 45,750 Pfizer, Inc. 500 38,625 ------------ 269,175 ------------ MEDICAL PRODUCTS - 1.4% SciMed Life Systems, Inc.* 1,500 75,844 ------------ MEDICAL SERVICES - 1.5% Abbott Laboratories, Inc. 1,000 32,625 United Healthcare Corp. 700 31,587 U.S. Healthcare, Inc. 400 16,450 ------------ 80,662 ------------ OTHER - 0.4% Guidant Corp.* 1,500 24,000 ------------ 449,681 ------------ TECHNOLOGY - 23.7% COMMUNICATIONS EQUIPMENT - 17.9% Cisco Systems, Inc.* 6,500 227,906 DSC Communications Corp.* 1,800 64,913 EMC Corp.* 8,000 173,000 General Instrument Corp.* 3,600 108,000 Indonesian Satellite Corp. (ADR) 2,100 75,075 Millicom International Cellular S.A.* 3,600 109,575 Motorola, Inc. 1,600 92,600 Ortel Corp.* 5,000 131,250 ------------ 982,319 ------------ COMPUTER HARDWARE - 1.2% Dell Computer Corp.* 1,200 49,125 Silicon Graphics, Inc.* 500 15,437 ------------ 64,562 ------------ SHARES OR PRINCIPAL AMOUNT (000) COMPUTER SOFTWARE & SERVICES - 0.8% Aspen Technology, Inc.* 200 $ 3,887 Epic Design Technology, Inc.* 300 6,675 Shiva Corp.* 800 31,900 ------------ 42,462 ------------ SEMI-CONDUCTORS & RELATED - 2.7% Intel Corp. 2,300 146,625 ------------ TRUCKING - 0.2% Knight Transportation, Inc.* 1,000 14,375 ------------ OTHER - 0.9% Covenant Transport, Inc.* 200 3,950 PRI Automation, Inc.* 400 6,450 Security Dynamics Technology, Inc.* 1,500 27,844 Videonics, Inc.* 1,000 12,500 ------------ 50,744 ------------ 1,301,087 ------------ UTILITIES - 3.9% TELEPHONE - 3.9% Rogers Cantel Mobile Communications, Inc. Cl.B* 5,300 155,025 Sprint Corp. 1,200 33,150 Telephone & Data Systems, Inc. 600 27,675 ------------ 215,850 ------------ Total Common Stocks (cost $4,680,726) 4,886,632 ------------ SHORT-TERM INVESTMENTS - 10.9% U.S. GOVERNMENT OBLIGATIONS - 10.9% Federal Home Loan Bank 5.65%, 1/05/95 (amortized cost $599,623) $ 600 599,623 ------------ TOTAL INVESTMENTS - 99.9% (cost $5,280,349) 5,486,255 Other assets less liabilities - 0.1% 5,509 ------------ NET ASSETS - 100.0% $ 5,491,764 ============ - ------------------------------------------------------------------------------- * Non-income producing security. See Notes to Financial Statements. 34 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. WORLDWIDE PRIVATIZATION PORTFOLIO PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994 - ------------------------------------------------------------------------------- PRINCIPAL AMOUNT (000) U.S.$ VALUE ------ ----------- UNITED STATES - 100.4% TIME DEPOSIT - 100.4% State Street Bank and Trust Co. 5.4375%, 1/03/95 (amortized cost $1,132,000) $1,132 $ 1,132,000 ------------ TOTAL INVESTMENTS - 100.4% (cost $1,132,000) 1,132,000 Other assets less liabilities - (0.4%) (4,938) ------------ NET ASSETS - 100.0% $ 1,127,062 =========== - ------------------------------------------------------------------------------- See Notes to Financial Statements. 35 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. CONSERVATIVE INVESTORS PORTFOLIO PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994 - ------------------------------------------------------------------------------- SHARES U.S.$ VALUE ------ ----------- COMMON STOCKS - 9.7% BASIC INDUSTRIES - 1.4% CHEMICALS - 0.8% Hercules, Inc. 50 $ 5,769 ------------ METALS & MINING - 0.6% Aluminum Co. of America 50 4,331 ------------ 10,100 ------------ CAPITAL GOODS - 1.5% ELECTRICAL EQUIPMENT - 0.7% General Electric Co. 100 5,100 ------------ MACHINERY - 0.8% Caterpillar, Inc. 100 5,512 ------------ 10,612 ------------ CONSUMER MANUFACTURING - 0.7% AUTO & RELATED - 0.7% Chrysler Corp. 100 4,900 ------------ CONSUMER SERVICES - 0.6% BROADCASTING & CABLE - 0.6% Capital Cities ABC, Inc. 50 4,263 ------------ CONSUMER STAPLES - 1.8% COSMETICS - 0.6% Gillette Co. 50 3,737 ------------ FOOD - 0.4% IBP, Inc. 100 3,025 ------------ TOBACCO - 0.8% Philip Morris Cos., Inc. 100 5,750 ------------ ENERGY - 1.3% DOMESTIC PRODUCERS - 0.9% Amoco Corp. 100 5,912 ------------ PIPELINES - 0.4% Enron Corp. 100 3,050 ------------ 8,962 ------------ FINANCE - 0.6% BANKING & CREDIT - 0.6% Citicorp 100 4,138 ------------ TECHNOLOGY - 1.2% COMMUNICATIONS EQUIPMENT - 0.8% Motorola, Inc. 100 $ 5,788 ------------ COMPUTER SOFTWARE & SERVICES - 0.4% Reynolds & Reynolds Co. 100 2,500 ------------ 8,288 ------------ UTILITIES - 0.6% TELEPHONE - 0.6% Southwestern Bell Corp. 100 4,038 ------------ Total Common Stocks (cost $69,543) 67,813 ------------ U.S. GOVERNMENT OBLIGATIONS- 30.0% U.S. Treasury Bond 7.50%, 11/15/24 (cost $207,419) $ 220 210,443 ------------ SHORT-TERM INVESTMENTS - 42.0% U.S. GOVERNMENT OBLIGATIONS- 42.0% Federal Farm Credit Bank 5.85%, 1/06/95 65 64,947 5.85%, 1/17/95 40 39,896 Federal Home Loan Bank 5.85%, 1/09/95 100 99,870 Federal National Mortgage Assn. 5.89%, 1/26/95 90 89,632 ------------ Total Short-Term Investments (amortized cost $294,346) 294,345 ------------ TOTAL INVESTMENTS -81.7% (cost $571,308) 572,601 Other assets less liabilities - 18.3% 128,291 ------------ NET ASSETS - 100.0% $ 700,892 ============ - ------------------------------------------------------------------------------- See Notes to Financial Statements. 36 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. GROWTH INVESTORS PORTFOLIO PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994 - ------------------------------------------------------------------------------- SHARES U.S.$ VALUE ------ ----------- COMMON STOCKS - 39.6% BASIC INDUSTRIES - 4.5% CHEMICALS - 1.8% Hercules, Inc. 50 $ 5,769 ------------ METALS & MINING - 2.7% Aluminum Co. of America 100 8,662 ------------ 14,431 ------------ CAPITAL GOODS - 5.0% ELECTRICAL EQUIPMENT - 1.6% General Electric Co. 100 5,100 ------------ MACHINERY - 3.4% Caterpillar, Inc. 200 11,025 ------------ 16,125 ------------ CONSUMER MANUFACTURING - 1.5% AUTO & RELATED - 1.5% Chrysler Corp. 100 4,900 ------------ CONSUMER SERVICES - 1.3% BROADCASTING & CABLE - 1.3% Capital Cities ABC, Inc. 50 4,263 ------------ CONSUMER STAPLES - 6.7% COSMETICS - 1.2% Gillette Co. 50 3,737 ------------ FOOD - 1.9% IBP, Inc. 200 6,050 ------------ TOBACCO - 3.6% Philip Morris Cos., Inc. 200 11,500 ------------ 21,287 ------------ ENERGY - 5.6% DOMESTIC PRODUCERS - 3.7% Amoco Corp. 200 11,825 ------------ PIPELINES - 1.9% Enron Corp. 200 6,100 ------------ 17,925 ------------ FINANCE - 4.5% BANKING & CREDIT - 2.6% Citicorp 200 8,275 ------------ SHARES OR PRINCIPAL AMOUNT (000) BROKERAGE & MONEY MANAGEMENT - 1.9% First Financial Management Corp. 100 $ 6,162 ------------ 14,437 ------------ HEALTH CARE - 1.4% MEDICAL SERVICES - 1.4% United Healthcare Corp. 100 4,513 ------------ TECHNOLOGY - 7.8% COMMUNICATIONS EQUIPMENT - 3.6% Motorola, Inc. 200 11,575 ------------ COMPUTER SOFTWARE & SERVICES - 4.2% Oracle Systems Corp.* 100 4,425 Paychex, Inc. 100 4,025 Reynolds & Reynolds Co. 200 5,000 ------------ 13,450 ------------ 25,025 ------------ UTILITIES - 1.3% TELEPHONE - 1.3% Southwestern Bell Corp. 100 4,038 ------------ Total Common Stocks (cost $131,571) 126,944 ------------ U.S. GOVERNMENT OBLIGATIONS- 11.9% U.S. Treasury Bond 7.50%, 11/15/24 (cost $37,528) $ 40 38,262 ------------ SHORT-TERM INVESTMENTS - 21.7% U.S. GOVERNMENT OBLIGATIONS- 21.7% Federal Farm Credit Bank 5.70%, 1/23/95 (amortized cost $69,756) 70 69,756 ------------ TOTAL INVESTMENTS -73.2% (cost $238,855) 234,962 Other assets less liabilities - 26.8% 85,836 ------------ NET ASSETS - 100.0% $ 320,798 ============ - ------------------------------------------------------------------------------- See Notes to Financial Statements. GLOSSARY OF TERMS ADR - American Depository Receipts ADS - American Depository Shares FRB - Floating Rate Bond FRN - Floating Rate Note GDR - Global Depository Receipts GDS - Global Depository Shares 37 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1994 - -------------------------------------------------------------------------------
PREMIER GLOBAL GROWTH AND SHORT-TERM GROWTH BOND INCOME MULTI-MARKET PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO ----------- ---------- ---------- ---------- ASSETS Investments in securities, at value (cost $39,822,165, $7,246,459, $41,826,773 and $22,611,065, respectively) $ 40,085,460 $ 7,125,387 $ 41,688,247 $21,084,740 Cash, at value (cost $482, $3,617, $180,170 and $617, respectively).................................. 482 3,615 180,170 617 Receivable for capital stock sold...................... 36,005 -0- 195,982 -0- Dividends receivable................................... 24,856 -0- 67,175 -0- Deferred organization expense.......................... 13,666 6,111 5,107 4,040 Interest receivable.................................... 985 191,903 27,529 117,841 Receivable for investment securities sold.............. -0- -0- 685,918 -0- Receivable from investment adviser..................... -0- 2,837 -0- -0- Unrealized appreciation of forward exchange currency contracts................................... -0- -0- -0- 50,450 Total assets........................................... 40,161,454 7,329,853 42,850,128 21,257,688 ------------ ----------- ----------- ----------- LIABILITIES Payable for investment securities purchased............ 2,441,781 -0- 1,088,770 -0- Investment advisory fee payable........................ 17,758 -0- 21,535 10,885 Payable for capital stock redeemed..................... 6,506 -0- 6,421 298,420 Unrealized depreciation on forward exchange currency contracts................................... -0- 2,620 -0- -0- Accrued expenses....................................... 26,315 29,164 31,531 27,524 ------------ ----------- ----------- ----------- Total liabilities...................................... 2,492,360 31,784 1,148,257 336,829 ------------ ----------- ----------- ----------- NET ASSETS................................................ $ 37,669,094 $ 7,298,069 $41,701,871 $20,920,859 ============ =========== =========== =========== Shares of capital stock outstanding.................... 3,044,420 743,012 3,517,661 2,111,469 ========= ======= ========= ========= Net asset value per share.............................. $ 12.37 $ 9.82 $11.85 $ 9.91 ======= ======= ====== ====== COMPOSITION OF NET ASSETS Capital stock, at par.................................. $ 3,044 $ 743 $ 3,517 $ 2,111 Additional paid-in capital............................. 37,035,476 7,502,422 40,751,533 22,564,821 Undistributed (overdistributed) net investment income.. 95,835 70,965 539,879 (2,357) Accumulated net realized gain (loss) on investments, options written and foreign currency transactions............ 271,444 (151,800) 545,474 (170,178) Net unrealized appreciation (depreciation) of investments and foreign currency................................. 263,295 (124,261) (138,532) (1,473,538) ------------ ----------- ----------- ----------- $ 37,669,094 $ 7,298,069 $41,701,871 $ 20,920,859 ============ =========== =========== ============
- ------------------------------------------------------------------------------- See Notes to Financial Statements. 38 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1994 - -------------------------------------------------------------------------------
U.S. GOVERNMENT/ HIGH GRADE TOTAL MONEY SECURITIES RETURN INTERNATIONAL MARKET PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO ------------ ----------- ----------- ----------- ASSETS Investment in securities, at value (cost $5,078,732, $751,430, $7,684,388 and $6,776,707, respectively).... $ 4,881,714 $ 742,809 $ 7,603,019 $ 6,776,707 Cash, at value (cost $355, $973, $38,275 and $128,581 respectively)............................... 355 973 38,381 128,581 Receivable for capital stock sold...................... 162,931 132,000 7,914 21,091 Interest receivable.................................... 64,909 5,820 199 -0- Deferred organization expense.......................... 13,223 14,585 14,941 14,969 Receivable from investment adviser..................... 3,160 6,435 24,773 1,533 Dividends receivable................................... 1,181 800 8,365 -0- Receivable for investment securities sold.............. -0- -0- 144,910 -0- ------------ ----------- ----------- ----------- Total assets........................................... 5,127,473 903,422 7,842,502 6,942,881 ------------ ----------- ----------- ----------- LIABILITIES Payable for investment securities purchased............ -0- 113,810 478,005 -0- Unrealized depreciation on forward exchange currency contracts................................... -0- -0- 1,892 -0- Accrued expenses....................................... 26,189 39,712 86,217 44,586 ------------ ----------- ----------- ----------- Total liabilities...................................... 26,189 153,522 566,114 44,586 ------------ ----------- ----------- ----------- NET ASSETS................................................ $ 5,101,284 $ 749,900 $ 7,276,388 $ 6,898,295 ============ =========== =========== =========== Shares of capital stock outstanding.................... 513,429 72,033 564,889 6,898,778 ======= ====== ======= ========= Net asset value per share.............................. $ 9.94 $ 10.41 $ 12.88 $ 1.00 ======= ======= ======= ====== COMPOSITION OF NET ASSETS Capital stock, at par.................................. $ 513 $ 72 $ 565 $ 6,899 Additional paid-in capital............................. 5,180,229 752,946 7,314,758 6,891,076 Undistributed net investment income.................... 147,340 9,940 23,907 803 Accumulated net realized gain (loss) on investments and foreign currency transactions........................ (29,780) (4,437) 20,397 (483) Net unrealized depreciation of investments and foreign currency..................................... (197,018) (8,621) (83,239) -0- ------------ ----------- ----------- ----------- $ 5,101,284 $ 749,900 $ 7,276,388 $ 6,898,295 ============ =========== =========== ===========
- ------------------------------------------------------------------------------- See Notes to Financial Statements. 39 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1994 - -------------------------------------------------------------------------------
NORTH AMERICAN GLOBAL DOLLAR GOVERNMENT UTILITY GOVERNMENT INCOME INCOME GROWTH PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO ------------ ----------- ----------- ----------- ASSETS Investments in securities, at value (cost $1,291,958, $4,524,950, $1,124,341 and $5,280,349, respectively). $ 1,239,237 $ 3,809,209 $ 1,091,379 $ 5,486,255 Cash, at value (cost $168, $110, $190,118 and $187,520, respectively).............................. 168 110 190,118 187,520 Interest receivable.................................... 26,090 49,709 1,031 -0- Receivable for investment securities sold.............. 14,969 -0- 58,405 -0- Deferred organization expense.......................... 8,663 8,668 8,707 9,408 Receivable from investment adviser..................... 6,997 5,885 7,984 6,758 Receivable for capital stock sold...................... -0- 7,086 -0- 14,301 Dividends receivable................................... -0- -0- 5,718 5,686 Total assets........................................... 1,296,124 3,880,667 1,363,342 5,709,928 ------------ ----------- ----------- ----------- LIABILITIES Payable for investment securities purchased............ 113,760 -0- 77,252 195,358 Accrued expenses....................................... 36,038 32,585 31,841 22,806 ------------ ----------- ----------- ----------- Total liabilities...................................... 149,798 32,585 109,093 218,164 ------------ ----------- ----------- ----------- NET ASSETS................................................ $ 1,146,326 $ 3,848,082 $ 1,254,249 $ 5,491,764 ============ =========== =========== =========== Shares of capital stock outstanding.................... 116,502 437,622 125,979 521,613 ======= ======= ======= ======= Net asset value per share.............................. $ 9.84 $ 8.79 $ 9.96 $10.53 ======= ======= ====== ====== COMPOSITION OF NET ASSETS Capital stock, at par.................................. $ 116 $ 438 $ 126 $ 522 Additional paid-in capital............................. 1,173,920 4,434,779 1,277,920 5,322,867 Undistributed net investment income.................... 25,782 141,547 18,832 11,263 Accumulated net realized loss on investments and foreign currency transactions........................ (771) (12,932) (9,667) (48,794) Net unrealized appreciation (depreciation) of investments and foreign currency................................. (52,721) (715,750) (32,962) 205,906 ------------ ----------- ----------- ----------- $ 1,146,326 $ 3,848,082 $ 1,254,249 $ 5,491,764 ============ =========== =========== ===========
- ------------------------------------------------------------------------------- See Notes to Financial Statements. 40 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1994 - -------------------------------------------------------------------------------
WORLDWIDE CONSERVATIVE GROWTH PRIVATIZATION INVESTORS INVESTORS PORTFOLIO PORTFOLIO PORTFOLIO ------------- ------------- ----------- ASSETS Investments in securities, at value ( cost $1,132,000, $571,308 and $238,855, respectively)................. $ 1,132,000 $ 572,601 $ 234,962 Cash, at value (cost $299, $91,980 and $98,226, respectively)............................... 299 91,980 98,226 Deferred organization expense.......................... 9,452 9,644 9,644 Receivable from investment adviser..................... 8,529 8,911 8,856 Receivable for capital stock sold...................... 2,500 32,500 -0- Interest receivable.................................... 342 2,142 390 Dividends receivable................................... -0- 191 298 ------------ ----------- ------------ Total assets........................................... 1,153,122 717,969 352,376 ------------ ----------- ------------ LIABILITIES Payable for investment securities purchased............ -0- -0- 14,798 Accrued expenses....................................... 26,060 17,077 16,780 ------------ ----------- ------------ Total liabilities...................................... 26,060 17,077 31,578 ------------ ----------- ------------ NET ASSETS................................................ $ 1,127,062 $ 700,892 $ 320,798 =========== ============ ============ Shares of capital stock outstanding.................... 111,570 69,581 32,549 ======= ====== ====== Net asset value per share.............................. $ 10.10 $ 10.07 $ 9.86 ======= ======= ======= COMPOSITION OF NET ASSETS Capital stock, at par.................................. $ 112 $ 69 $ 33 Additional paid-in capital............................. 1,119,766 696,780 324,301 Undistributed net investment income.................... 7,184 3,462 1,067 Accumulated net realized loss on investments........... -0- (712) (710) Net unrealized appreciation (depreciation) of investments -0- 1,293 (3,893) $ 1,127,062 $ 700,892 $ 320,798 ============ =========== ============
- ------------------------------------------------------------------------------- See Notes to Financial Statements. 41 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1994 - -------------------------------------------------------------------------------
PREMIER GLOBAL GROWTH AND SHORT-TERM GROWTH BOND INCOME MULTI-MARKET PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO ------------ ----------- ----------- ----------- INVESTMENT INCOME Dividends (net of foreign tax withheld of $-0-, $-0-, $9,432 and $-0-, respectively)....................... $ 286,083 $ -0- $ 658,453 $ -0- Interest (net of foreign tax withheld of $-0-, $3,345, $-0- and $13,291, respectively)...................... 34,773 473,105 192,025 1,916,619 ------------ ----------- ----------- ----------- Total investment income................................ 320,856 473,105 850,478 1,916,619 ------------ ----------- ----------- ----------- EXPENSES Investment advisory fee................................ 235,000 44,159 203,549 141,225 Custodian.............................................. 57,131 64,179 55,384 79,186 Audit and legal........................................ 12,039 10,554 10,765 12,422 Printing............................................... 9,485 10,729 8,335 9,310 Amortization of organization expenses.................. 5,497 3,975 4,449 4,449 Registration........................................... 5,057 153 6,506 1,696 Transfer agency........................................ 2,248 2,195 2,814 2,327 Director's fees........................................ 1,420 1,420 1,972 1,651 Miscellaneous.......................................... 2,012 2,126 3,613 2,773 ------------ ----------- ----------- ----------- Total expenses......................................... 329,889 139,490 297,387 255,039 Less: expense reimbursement............................ (106,639) (74,975) (3,095) (13,543) ------------ ----------- ----------- ----------- Net expenses........................................... 223,250 64,515 294,292 241,496 ------------ ----------- ----------- ----------- Net investment income.................................. 97,606 408,590 556,186 1,675,123 ------------ ----------- ----------- ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on security transactions...... 271,826 (154,419) 605,669 (150,822) Net realized loss on options written and foreign currency transactions........................ -0- (253,681) (50) (1,801,598) Net change in unrealized appreciation (depreciation) of investments....................................... (1,055,863) (279,435) (1,403,801) (1,154,264) Net change in unrealized appreciation (depreciation) of options written and foreign currency.............. -0- (74,522) (6) (61,098) ------------ ----------- ----------- ----------- Net loss on investments................................ (784,037) (762,057) (798,188) (3,167,782) ------------ ----------- ----------- ----------- NET DECREASE IN NET ASSETS FROM OPERATIONS................ $ (686,431) $ (353,467) $ (242,002) $(1,492,659) =========== ========== ========== ===========
- ------------------------------------------------------------------------------- See Notes to Financial Statements. 42 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1994 - -------------------------------------------------------------------------------
U.S. GOVERNMENT/ HIGH GRADE TOTAL MONEY SECURITIES RETURN INTERNATIONAL MARKET PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO ------------ ----------- ----------- ----------- INVESTMENT INCOME Interest............................................... $ 167,791 $ 9,014 $ 18,531 $ 102,454 Dividends (net of foreign tax withheld of $-0-, $-0-, $4,687 and $-0-, respectively).............................. 4,725 4,714 33,148 -0- ------------ ----------- ----------- ----------- Total investment income................................ 172,516 13,728 51,679 102,454 ------------ ----------- ----------- ----------- EXPENSES Investment advisory fee................................ 15,701 2,645 27,975 10,387 Custodian.............................................. 48,846 46,788 141,885 46,179 Audit and legal........................................ 12,073 12,252 13,127 13,591 Printing............................................... 10,208 10,299 10,139 8,412 Amortization of organization expenses.................. 4,873 4,872 4,994 4,993 Transfer agency........................................ 2,785 2,754 2,233 2,569 Director's fees........................................ 1,819 2,150 1,114 3,996 Registration........................................... 184 142 1,103 1,348 Miscellaneous.......................................... 1,239 590 544 1,091 ------------ ----------- ----------- ----------- Total expenses......................................... 97,728 82,492 203,114 92,566 Less: expense reimbursement............................ (72,868) (78,468) (176,537) (72,831) ------------ ----------- ----------- ----------- Net expenses........................................... 24,860 4,024 26,577 19,735 ------------ ----------- ----------- ----------- Net investment income.................................. 147,656 9,704 25,102 82,719 ------------ ----------- ----------- ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized loss on security transactions............. (29,780) (4,437) 18,758 (473) Net realized gain on foreign currency transactions..... -0- -0- 1,982 -0- Net change in unrealized depreciation of investments... (182,479) (22,102) (103,346) -0- Net change in unrealized depreciation on foreign currency -0- -0- (3,355) -0- Net loss on investments................................ (212,259) (26,539) (85,961) (473) ------------ ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS..... $ (64,603) $ (16,835) $ (60,859) $ 82,246 =========== ========== ========== ==========
- ------------------------------------------------------------------------------- See Notes to Financial Statements. 43 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1994 - -------------------------------------------------------------------------------
NORTH AMERICAN GLOBAL DOLLAR GOVERNMENT UTILITY GOVERNMENT INCOME INCOME GROWTH PORTFOLIO (A) PORTFOLIO (B) PORTFOLIO (C) PORTFOLIO (D) -------------- ------------ ------------- ------------- INVESTMENT INCOME Interest................................................. $ 29,849 $ 161,885 $ 4,462 $ 9,840 Dividends (net of foreign tax withheld of $-0-, $-0-, $178 and $-0-, respectively)................................ -0- -0- 18,261 10,542 ------------ ----------- ----------- ----------- Total investment income.................................. 29,849 161,885 22,723 20,382 ------------ ----------- ----------- ----------- EXPENSES Investment advisory fee.................................. 3,211 11,144 3,059 7,199 Custodian................................................ 33,213 36,004 35,381 14,796 Audit and legal.......................................... 14,878 14,695 14,855 11,340 Printing................................................. 7,428 7,417 7,346 3,348 Director's fees.......................................... 2,204 2,891 1,621 324 Amortization of organization expenses.................... 1,337 1,331 1,293 592 Transfer agency.......................................... 424 328 472 216 Registration............................................. 304 1,068 153 1,600 Miscellaneous............................................ 1,217 1,121 978 756 ------------ ----------- ----------- ----------- Total expenses........................................... 64,216 75,999 65,158 40,171 Less: expense reimbursement.............................. (60,149) (59,712) (61,284) (31,052) ------------ ----------- ----------- ----------- Net expenses............................................. 4,067 16,287 3,874 9,119 ------------ ----------- ----------- ----------- Net investment income.................................... 25,782 145,598 18,849 11,263 ------------ ----------- ----------- ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized loss on security transactions............... (771) (12,751) (9,667) (48,794) Net realized loss on foreign currency transactions....... -0- (4,232) (17) -0- Net unrealized appreciation (depreciation) of investments (52,721) (715,741) (32,962) 205,906 Net unrealized depreciation on foreign currency.......... -0- (9) -0- -0- Net gain (loss) on investments........................... (53,492) (732,733) (42,646) 157,112 ------------ ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS..... $ (27,710) $ (587,135) $ (23,797) $ 168,375 ============ =========== =========== ===========
- ------------------------------------------------------------------------------- (a) Commencement of operations, May 2, 1994. (b) Commencement of operations, May 3, 1994. (c) Commencement of operations, May 10, 1994. (d) Commencement of operations, September 15, 1994. See Notes to Financial Statements. 44 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1994 - -------------------------------------------------------------------------------
WORLDWIDE CONSERVATIVE GROWTH PRIVATIZATION INVESTORS INVESTORS PORTFOLIO (A) PORTFOLIO (B) PORTFOLIO (B) ------------ ----------- ------------ INVESTMENT INCOME Interest............................................... $ 8,782 $ 4,101 $ 1,022 Dividends.............................................. -0- 286 488 ------------ ----------- ------------ Total investment income................................ 8,782 4,387 1,510 ------------ ----------- ------------ EXPENSES Investment advisory fee................................ 1,682 730 350 Custodian expense...................................... 13,700 8,905 8,905 Audit and legal........................................ 10,500 6,825 6,825 Printing............................................... 3,100 2,015 2,015 Amortization of organization expenses.................. 548 356 356 Registration........................................... 336 205 180 Director's fees........................................ 300 195 195 Transfer agency........................................ 200 130 130 Miscellaneous.......................................... 700 455 455 ------------ ----------- ------------ Total expenses......................................... 31,066 19,816 19,411 Less: expense reimbursement............................ (29,468) (18,891) (18,968) ------------ ----------- ------------ Net expenses........................................... 1,598 925 443 ------------ ----------- ------------ Net investment income.................................. 7,184 3,462 1,067 ------------ ----------- ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized loss on security transactions............. -0- (712) (710) Net unrealized appreciation (depreciation) of investments -0- 1,293 (3,893) Net gain (loss) on investments......................... -0- 581 (4,603) ------------ ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS..... $ 7,184 $ 4,043 $ (3,536) ============ =========== ===========
- ------------------------------------------------------------------------------- (a) Commencement of operations, September 23, 1994. (b) Commencement of operations, October 28, 1994. See Notes to Financial Statements. 45 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------
PREMIER GROWTH PORTFOLIO GLOBAL BOND PORTFOLIO ----------------------------------- ------------------------------ YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1994 1993 ---------------- ---------------- ---------------- ---------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income....................... $ 97,606 $ 19,019 $ 408,590 $ 302,648 Net realized gain (loss) on security transactions............................... 271,826 55,949 (154,419) 181,668 Net realized gain (loss) on foreign currency transactions.............................. -0- -0- (253,681) 42,628 Net change in unrealized appreciation (depreciation) of investments and foreign currency....... (1,055,863) 1,001,174 (353,957) 136,242 ------------ ----------- ----------- ----------- Net increase (decrease) in net assets from operations........................... (686,431) 1,076,142 (353,467) 663,186 DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income....................... (20,473) (10,082) (383,604) (330,796) Net realized gain on investments and foreign currency transactions..................... (56,132) (9,307) (181,669) (255,069) CAPITAL STOCK TRANSACTIONS Net increase................................ 24,773,454 8,842,017 1,468,349 795,308 ------------ ----------- ----------- ----------- Total increase.............................. 24,010,418 9,898,770 549,609 872,629 NET ASSETS Beginning of period......................... 13,658,676 3,759,906 6,748,460 5,875,831 ------------ ----------- ----------- ----------- End of period (including undistributed net investment income of $95,835, $18,702, $70,965 and $303,791, respectively)....... $37,669,094 $ 13,658,676 $ 7,298,069 $ 6,748,460 =========== ============ =========== ===========
- ------------------------------------------------------------------------------- See Notes to Financial Statements. 46 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO SHORT-TERM MULTI-MARKET PORTFOLIO ----------------------------------- ------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1994 1993 ---------------- ---------------- ---------------- ---------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income....................... $ 556,186 $ 264,070 $ 1,675,123 $ 1,144,150 Net realized gain (loss) on security transactions .................... 605,669 422,874 (567,154) 35,446 Net realized gain (loss) on options written and foreign currency transactions............. (50) -0- (1,385,266) (226,112) Net change in unrealized appreciation (depreciation) of investments and foreign currency....... (1,403,807) 997,654 (1,215,362) 140,407 ------------ ----------- ----------- ----------- Net increase (decrease) in net assets from operations........................... (242,002) 1,684,598 (1,492,659) 1,093,891 DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income....................... (277,061) (82,842) (1,057,212) (671,358) Net realized gain on investments............ (484,873) (43,527) -0- -0- Return of capital........................... -0- -0- (940) -0- CAPITAL STOCK TRANSACTIONS Net increase (decrease)..................... 19,950,283 13,394,453 (88,801) 8,296,929 ------------ ----------- ----------- ----------- Total increase (decrease)................... 18,946,347 14,952,682 (2,639,612) 8,719,462 NET ASSETS Beginning of period......................... 22,755,524 7,802,842 23,560,471 14,841,009 ------------ ----------- ----------- ----------- End of period (including undistributed (overdistributed) net investment income of $539,879, $263,579, $(2,357) and $1,411,590, respectively)............. $41,701,871 $ 22,755,524 $20,920,859 $ 23,560,471 =========== ============ =========== ============
- ------------------------------------------------------------------------------- See Notes to Financial Statements. 47 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------
U.S. GOVERNMENT/ HIGH GRADE SECURITIES PORTFOLIO TOTAL RETURN PORTFOLIO ----------------------------------- ---------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1994 1993 ---------------- ----------------- ---------------- --------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income....................... $ 147,656 $ 52,417 $ 9,704 $ 3,228 Net realized gain (loss) on security transactions.............................. (29,780) 37,563 (4,437) 2,282 Net change in unrealized appreciation (depreciation) of investments............................ (182,479) (2,396) (22,102) 13,455 ------------ ----------- ----------- ----------- Net increase (decrease) in net assets from operations........................... (64,603) 87,584 (16,835) 18,965 DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income....................... (52,816) (8,681) (3,795) -0- Net realized gain on investments............ (35,522) -0- (2,282) -0- CAPITAL STOCK TRANSACTIONS Net increase................................ 3,903,950 485,928 412,828 245,865 ------------ ----------- ----------- ----------- Total increase.............................. 3,751,009 564,831 389,916 264,830 NET ASSETS Beginning of period......................... 1,350,275 785,444 359,984 95,154 ------------ ----------- ----------- ----------- End of period (including undistributed net investment income of $147,340, $52,500, $9,940 and $3,251, respectively).......... $ 5,101,284 $ 1,350,275 $ 749,900 $ 359,984 =========== ============ =========== ============
- ------------------------------------------------------------------------------- See Notes to Financial Statements. 48 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO MONEY MARKET PORTFOLIO ----------------------------------- ------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1994 1993 ---------------- ---------------- ---------------- ---------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income....................... $ 25,102 $ 511 $ 82,719 $ 1,847 Net realized gain (loss) on security transactions.............................. 18,758 10,916 (473) (10) Net realized gain (loss) on foreign currency transactions.............................. 1,982 (698) -0- -0- Net change in unrealized appreciation (depreciation) of investments and foreign currency....... (106,701) 23,442 -0- -0- ------------ ----------- ----------- ----------- Net increase (decrease) in net assets from operations........................... (60,859) 34,171 82,246 1,837 DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income....................... (1,901) -0- (82,719) (1,847) Net realized gain on investments and foreign currency transactions..................... (11,169) -0- -0- -0- CAPITAL STOCK TRANSACTIONS Net increase................................ 6,662,423 574,261 6,797,225 71,544 ------------ ----------- ----------- ----------- Total increase.............................. 6,588,494 608,432 6,796,752 71,534 NET ASSETS Beginning of period......................... 687,894 79,462 101,543 30,009 ------------ ----------- ----------- ----------- End of period (including undistributed net investment income of $23,907, $529, $803 and $-0-, respectively)................... $ 7,276,388 $ 687,894 $ 6,898,295 $ 101,543 =========== ============ =========== ============
- ------------------------------------------------------------------------------- See Notes to Financial Statements. 49 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------
NORTH AMERICAN GLOBAL DOLLAR GOVERNMENT UTILITY GOVERNMENT INCOME INCOME GROWTH PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO -------------- ----------------- ---------------- -------------- PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 (A) 1994 (B) 1994 (C) 1994 (D) ---------------- ---------------- ---------------- ------------ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income....................... $ 25,782 $ 145,598 $ 18,849 $ 11,263 Net realized loss on security transactions.. (771) (12,751) (9,667) (48,794) Net realized gain (loss) on foreign currency transactions.............................. -0- (4,232) (17) -0- Net unrealized appreciation (depreciation) of investments and foreign currency....... (52,721) (715,750) (32,962) 205,906 ------------ ----------- ----------- ----------- Net increase (decrease) in net assets from operations........................... (27,710) (587,135) (23,797) 168,375 CAPITAL STOCK TRANSACTIONS Net increase................................ 1,174,036 4,435,217 1,278,046 5,323,389 ------------ ----------- ----------- ----------- Total increase.............................. 1,146,326 3,848,082 1,254,249 5,491,764 NET ASSETS Beginning of period......................... -0- -0- -0- -0- ------------ ----------- ----------- ----------- End of period (including undistributed net investment income of $25,782, $141,547, $18,832 and $11,263, respectively)........ $ 1,146,326 $ 3,848,082 $ 1,254,249 $ 5,491,764 ============ =========== =========== ============
- ------------------------------------------------------------------------------- (a) Commencement of operations, May 2, 1994. (b) Commencement of operations, May 3, 1994. (c) Commencement of operations, May 10, 1994. (d) Commencement of operations, September 15, 1994. See Notes to Financial Statements. 50 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------
WORLDWIDE CONSERVATIVE GROWTH PRIVATIZATION INVESTORS INVESTORS PORTFOLIO PORTFOLIO PORTFOLIO ---------------- ---------------- -------------- PERIOD ENDED PERIOD ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 (A) 1994 (B) 1994 (B) ---------------- ---------------- ------------ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income....................... $ 7,184 $ 3,462 $ 1,067 Net realized gain (loss) on security transactions -0- (712) (710) Net unrealized appreciation (depreciation) of investments and foreign currency....... -0- 1,293 (3,893) ------------ ----------- ------------ Net increase (decrease) in net assets from operations........................... 7,184 4,043 (3,536) CAPITAL STOCK TRANSACTIONS Net increase................................ 1,119,878 696,849 324,334 ------------ ----------- ------------ Total increase.............................. 1,127,062 700,892 320,798 NET ASSETS Beginning of period......................... -0- -0- -0- ------------ ----------- ------------ End of period (including undistributed net investment income of $7,184, $3,462 and $1,067, respectively)..................... $ 1,127,062 $ 700,892 $ 320,798 ============ =========== ============
- ------------------------------------------------------------------------------- (a) Commencement of operations, September 23, 1994. (b) Commencement of operations, October 28, 1994. See Notes to Financial Statements. 51 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1994 - ------------------------------------------------------------------------------- NOTE A -- SIGNIFICANT ACCOUNTING POLICIES Alliance Variable Products Series Fund, Inc. (the "Fund"), was incorporated in the State of Maryland on November 17, 1987 as an open-end series investment company. The Fund had no operations prior to November 28, 1990. The Fund offers fifteen separately managed pools of assets which have differing investment objectives and policies. The Fund currently issues shares of the Premier Growth Portfolio (formerly Growth Portfolio), Global Bond Portfolio, Growth and Income Portfolio, Short-Term Multi-Market Portfolio, U.S. Government/High Grade Securities Portfolio, Total Return Portfolio, International Portfolio, Money Market Portfolio, Global Dollar Government Portfolio, North American Government Income Portfolio, Utility Income Portfolio, Growth Portfolio, Worldwide Privatization Portfolio, Conservative Investors Portfolio and Growth Investors Portfolio (the "Portfolios"). The Fund offers and sells its shares only to separate accounts of certain life insurance companies, for the purpose of funding variable annuity contracts and variable life insurance policies. Sales are made without sales charge, at each Portfolio's net asset value per share. The following is a summary of significant accounting policies followed by the Fund. 1. SECURITY VALUATION Investments are stated at value. Investments for which market quotations are readily available are valued at the closing price on the day of valuation. Securities for which market quotations are not readily available are valued in good faith at fair value using methods determined by the Board of Directors. Securities which mature in 60 days or less are valued at amortized cost, which approximates market value, unless this method does not represent fair value. 2. OPTION WRITING When a Portfolio writes an option, an amount equal to the premium received by the Portfolio is recorded as a liability and is subsequently adjusted to the current market value of the option written. Premiums received from writing options which expire unexercised are recorded by the Portfolio on the expiration date as realized gains. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also recorded as a realized gain, or if the premium is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Portfolio has realized a gain or loss. If a put option is exercised, the premium reduces the cost basis of the security or currency purchased by the Portfolio. In writing an option, the Portfolio bears the market risk of unfavorable changes in the price of the security or currency underlying the written option. Exercise of an option written by the Portfolio could result in the Portfolio selling or buying a security or currency at a price different from the current market value. 3. CURRENCY TRANSLATION Assets and liabilities denominated in foreign currencies and commitments under forward exchange currency contracts are translated into U.S. dollars at the mean of the quoted bid and asked prices of such currencies against the U.S. dollar. Purchases and sales of portfolio securities are translated at the rates of exchange prevailing when such securities were acquired or sold. Income and expenses are translated at rates of exchange prevailing when accrued. Net foreign exchange gains (losses) of $(253,681), $(50), $(1,394,953), $1,982, $(4,232) and $(17) in the Global Bond Portfolio, Growth and Income Portfolio, Short-Term Multi-Market Portfolio, International Portfolio, North American Government Income Portfolio and Utility Income Portfolio, respectively, represent foreign exchange gains and losses from sales and maturities of securities, holding of foreign currencies, options on foreign currencies, exchange gains or losses realized between the trade and settlement dates on security transactions, and the difference between the amounts of interest and dividends recorded on the Portfolio's books and the U.S. dollar equivalent of the amounts actually received or paid. Net currency gains and losses from valuing foreign currency denominated assets and liabilities at period end 52 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONT'D) - ------------------------------------------------------------------------------- exchange rates are reflected as a component of unrealized appreciation (depreciation) on investments and foreign currency. 4. ORGANIZATION EXPENSES Organization expenses of $260,664 have been deferred and are being amortized on a straight-line basis as follows: Premier Growth Portfolio $27,506 through June 1997; Global Bond Portfolio $19,898 through July 1996; Growth and Income Portfolio $22,263 through January 1996; Short-Term Multi-Market Portfolio $22,263 through November 1995; U.S. Government/High Grade Securities Portfolio $24,384 through September 1997; Total Return Portfolio $24,384 through December 1997; International Portfolio $24,983 through December 1997; Money Market Portfolio $24,983 through December 1997; Global Dollar Government Portfolio $10,000 through April 1999; North American Government Income Portfolio $10,000 through April 1999; Utility Income Portfolio $10,000 through April 1999; Growth Portfolio $10,000 through September 1999; Worldwide Privatization Portfolio $10,000 through September 1999; Conservative Investors Portfolio $10,000 through October 1999 and Growth Investors Portfolio $10,000 through October 1999. 5. FEDERAL INCOME TAX It is the Fund's policy to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its investment company taxable income and net realized gains, if applicable, to shareholders. Therefore, no provision for federal income tax is required. 6. INVESTMENT INCOME AND SECURITY TRANSACTIONS Interest income is accrued daily. Dividend income is recorded on the ex-dividend date. Security transactions are accounted for on the date securities are purchased or sold. Security gains and losses are determined on the identified cost basis. The Fund accretes discounts as adjustments to interest income. 7. DIVIDENDS AND DISTRIBUTIONS Each Portfolio declares and distributes dividends and distributions from net investment income and net realized gains, respectively, if any, at least annually, except for dividends on the Money Market Portfolio, which are declared daily and paid monthly. Income dividends and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. - ------------------------------------------------------------------------------- NOTE B -- ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES Under the terms of an investment advisory agreement, each Portfolio pays Alliance Capital Management L.P., (the "Adviser"), an investment advisory fee, based on average net assets, at the following annual rates: Premier Growth Portfolio, 1%; Global Bond Portfolio .65 of 1%; Growth and Income Portfolio .625 of 1%; Short-Term Multi-Market Portfolio, .55 of 1%; U.S. Government/High Grade Securities Portfolio, .60 of 1%; Total Return Portfolio, .625 of 1%; International Portfolio, 1%; Money Market Portfolio, .50 of 1%; Global Dollar Government Portfolio, .75 of 1%; North American Government Income Portfolio, .65 of 1%; Utility Income Portfolio, .75 of 1%; Growth Portfolio, .75 of 1%; Worldwide Privatization Portfolio, 1%; Conservative Investors Portfolio, .75 of 1% and Growth Investors Portfolio, .75 of 1%. Such fee is accrued daily and paid monthly. For the Global Bond Portfolio, the adviser has retained, under a sub-advisory agreement, a sub-adviser, AIGAM International Ltd., an affiliate of American International Group, Inc. The Adviser voluntarily agreed to reimburse each Portfolio based on their respective average net assets for expenses exceeding their limitation which was .95% for the period ended December 31, 1994. Expense reimbursements, if any, are accrued daily and paid monthly. For the period ended December 31, 1994, such reimbursements amounted to $106,639, $30,816, $3,095, $13,543, $72,868, $78,468, $176,537, $72,831, $60,149, $59,712, $61,284, $31,052, $29,468, $18,891 and $18,968 for the Premier Growth Portfolio, the Global Bond Portfolio, the Growth and Income Portfolio, the Short-Term Multi-Market Portfolio, the U.S. Government/High Grade Securities Portfolio, the Total Return Portfolio, the International Portfolio, the Money Market Portfolio, the Global Dollar Government Portfolio, the North American Government Income Portfolio, the Utility Income Portfolio, the Growth Portfolio, the 53 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONT'D) - ------------------------------------------------------------------------------- Worldwide Privatization Portfolio, the Conservative Investors Portfolio and the Growth Investors Portfolio, respectively. In addition, for the year ended December 31, 1994, the Advisers agreed to waive the Global Bond Portfolio's investment advisory fee in the amount of $44,159. Each Portfolio compensates Alliance Fund Services, Inc. (a wholly-owned subsidiary of the Adviser) for providing personnel and facilities to perform transfer agency services for the Portfolio. Such compensation amounted to $900 for the Premier Growth Portfolio, the Global Bond Portfolio, the Growth and Income Portfolio, the Short-Term Multi-Market Portfolio, the U.S. Government/High Grade Securities Portfolio, the Total Return Portfolio, the International Portfolio and the Money Market Portfolio and $424, $328, $472, $216, $200, $130 and $130 for the Global Dollar Government Portfolio, the North American Government Income Portfolio, the Utility Income Portfolio, the Growth Portfolio, the Worldwide Privatization Portfolio, the Conservative Investors Portfolio and the Growth Investors Portfolio, respectively, for the period ended December 31, 1994. Brokerage commissions paid for the period ended December 31, 1994 on securities transactions amounted to $54,827, $102,852, $28,278, $1,043, $3,214, $10,634, $105 and $175 on the Premier Growth Portfolio, the Growth and Income Portfolio, the International Portfolio, the Total Return Portfolio, the Utility Income Portfolio, the Growth Portfolio, the Conservative Investors Portfolio and the Growth Investors Portfolio, respectively, none of which was paid to affiliated brokers. - ------------------------------------------------------------------------------- NOTE C -- INVESTMENT TRANSACTIONS Purchases and sales of investment securities (excluding short-term investments) for the period ended December 31, 1994 were:
U.S. GOVERNMENT/ PREMIER GLOBAL GROWTH AND SHORT-TERM HIGH GRADE GROWTH BOND INCOME MULTI-MARKET SECURITIES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO --------- --------- ----------- ------------ ------------ PURCHASES Stocks and debt obligations.................. $ 32,753,919 $ 6,933,893 $ 45,231,112 $ 13,998,012 $ 943,138 U.S. Government and government agency obligations........................ -0- 1,127,828 87,695 1,191,875 2,934,005 SALES Stocks and debt obligations.................. 8,887,239 6,260,040 27,997,025 23,296,459 522,775 U.S. Government and government agency obligations........................ -0- 157,735 481,561 1,192,125 239,834 GLOBAL NORTH AMERICAN TOTAL DOLLAR GOVERNMENT UTILITY RETURN INTERNATIONAL GOVERNMENT INCOME INCOME PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO --------- --------- ----------- ------------ ------------ PURCHASES Stocks and debt obligations.................. $ 365,375 $ 9,011,605 $ 653,376 $ 922,173 $ 1,298,176 U.S. Government and government agency obligations........................ 218,416 -0- 491,914 2,599,688 -0- SALES Stocks and debt obligations.................. 247,272 2,489,956 55,619 6,444 164,177 U.S. Government and government agency obligations........................ 81,758 -0- -0- 285,816 -0-
54 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONT'D) - -------------------------------------------------------------------------------
WORLDWIDE CONSERVATIVE GROWTH GROWTH PRIVATIZATION INVESTORS INVESTORS PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO --------- ------------- ------------ ---------- PURCHASES Stocks and debt obligations.................. $ 5,501,242 $ -0- $ 74,838 $ 136,866 U.S. Government and government agency obligations........................ -0- -0- 207,407 37,524 SALES Stocks and debt obligations.................. 771,721 -0- 4,592 4,592 U.S. Government and government agency obligations........................ -0- -0- -0- -0-
At December 31, 1994, the cost of investments for federal income tax purposes was substantially the same as the cost for financial reporting purposes. Accordingly, gross unrealized appreciation (depreciation) of investments for each Portfolio were as follows:
NET UNREALIZED GROSS UNREALIZED APPRECIATION PORTFOLIO APPRECIATION DEPRECIATION (DEPRECIATION) - --------- ------------ ------------ -------------- Premier Growth..................................................... $ 2,157,787 $ (1,894,492) $ 263,295 Global Bond........................................................ 30,214 (151,286) (121,072) Growth and Income.................................................. 1,471,498 (1,610,024) (138,526) Short-Term Multi-Market............................................ 89,229 (1,615,554) (1,526,325) U.S. Government/High Grade Securities.............................. 506 (197,524) (197,018) Total Return....................................................... 14,283 (22,904) (8,621) International...................................................... 148,894 (230,263) (81,369) Global Dollar Government........................................... 3,351 (56,072) (52,721) North American Government Income................................... -0- (715,741) (715,741) Utility Income..................................................... 20,245 (53,208) (32,963) Growth Portfolio................................................... 319,888 (113,982) 205,906 Worldwide Privatization............................................ -0- -0- -0- Conservative Investors............................................. 3,659 (2,366) 1,293 Growth Investors................................................... 1,608 (5,501) (3,893)
At December 31, 1994, for federal income tax purposes, the Short-Term Multi-Market and Money Market Portfolios had net capital loss carryforwards of $160,415 (of which $9,593 expires in 2000 and $150,822 expires in 2002) and $483 (of which $10 expires in 2001 and $473 expires in 2002), respectively, and the Global Bond, U.S. Government/High Grade Securities, Total Return, Global Dollar Government, North American Government Income, Utility Income, Growth, Conservative Investors and Growth Investors Portfolios had net capital loss carryforwards of $154,419, $29,780, $2,456, $771, $12,931, $9,667, $43,194, $712 and $710, respectively, which all expire in 2002. The Global Bond, Short-Term Multi-Market and International Portfolios enter into forward exchange currency contracts in order to hedge their exposure to changes in foreign currency exchange rates on their foreign portfolio holdings. A forward contract is a commitment to purchase or sell a foreign currency at a future date at a negotiated forward rate. The Portfolios may enter into contracts to deliver or receive foreign currency it will receive from or require for its normal investment activi-ties. It may also use contracts in a manner intended to protect foreign currency-denominated securities from declines in value due to unfavorable exchange rate movements. The gain or loss arising from the difference 55 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONT'D) - ------------------------------------------------------------------------------- between the original contract and the closing of such contract is included in realized gains or losses from foreign currency transactions. Fluctuations in the value of forward exchange currency contracts are recorded for financial reporting purposes as unrealized gains or losses by the Portfolio. Risks may arise from the potential inability of a counterparty to meet the terms of a contract and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. At December 31, 1994, the outstanding forward exchange currency contracts were as follows:
GLOBAL BOND PORTFOLIO: CONTRACT COST ON U.S.$ AMOUNT ORIGINATION CURRENT UNREALIZED FOREIGN CURRENCY SALE CONTRACTS (000) DATE VALUE DEPRECIATION - ------------------------------- ---------- -------------- ------- ------------ Deutsche Marks, expiring 1/30/95........................ 450 $ 287,908 $ 290,528 $ 2,620 ========= SHORT-TERM MULTI-MARKET PORTFOLIO: CONTRACT COST ON U.S.$ UNREALIZED AMOUNT ORIGINATION CURRENT APPRECIATION FOREIGN CURRENCY BUY CONTRACTS (000) DATE VALUE (DEPRECIATION) - ------------------------------ ---------- -------------- ------- -------------- British Pounds, expiring 2/23/95........................ 616 $ 966,768 $ 963,555 $ (3,213) Canadian Dollars, expiring 1/30/95-4/17/95.............. 2,528 1,822,944 1,801,767 (21,177) Deutsche Marks, expiring 2/21/95-2/23/95................ 3,842 2,492,151 2,481,594 (10,557) Finnish Markka, expiring 1/9/95-1/17/95................. 4,945 1,040,929 1,044,147 3,218 French Francs, expiring 1/31/95......................... 3,331 615,334 623,764 8,430 Indonesian Rupiahs, expiring 3/7/95..................... 440,602 195,840 198,066 2,226 New Zealand Dollars, expiring 1/24/95................... 1,783 1,083,775 1,139,520 55,745 Spanish Pesetas, expiring 1/23/95....................... 164,557 1,248,504 1,249,039 535 FOREIGN CURRENCY SALE CONTRACTS Australian Dollars, expiring 1/20/95.................... 1318 969,376 1,021,599 (52,223) Belgian Francs, expiring 1/11/95-1/26/95................ 51,033 1,637,243 1,604,436 32,807 Deutsche Marks, expiring 2/21/95-2/23/95................ 2,512 1,608,484 1,622,376 (13,892) Finnish Markka, expiring 1/9/95-1/17/95................. 5,155 1,107,017 1,088,121 18,896 French Francs, expiring 1/31/95......................... 3,331 649,533 623,601 25,932 New Zealand Dollars, expiring 1/24/95................... 847 521,074 541,416 (20,342) Spanish Pesetas, expiring 1/23/95....................... 156,803 1,209,899 1,189,838 20,061 Swedish Krona, expiring 1/23/95-1/31/95................. 13,590 1,830,486 1,826,482 4,004 --------- $ 50,450 ========= INTERNATIONAL PORTFOLIO: CONTRACT COST ON U.S.$ AMOUNT ORIGINATION CURRENT UNREALIZED FOREIGN CURRENCY SALE CONTRACTS (000) DATE VALUE DEPRECIATION - ------------------------------- ---------- -------------- ------- ------------ Deutsche Marks, expiring 2/28/95........................ 300 $ 191,914 $ 193,806 $ 1,892 =========
56 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONT'D) - ------------------------------------------------------------------------------- Transactions in currency call and put options written by the Short-Term Multi-Market Portfolio for the year ended December 31, 1994 were as follows:
NUMBER OF CONTRACTS PREMIUMS ---------- ---------- Options outstanding at beginning of year................................................ -0- $ -0- Options written......................................................................... 4 11,662 Options terminated in closing purchase transactions..................................... -0- -0- Options expired......................................................................... (4) (11,662) Options exercised....................................................................... -0- -0- --- --- Options outstanding at December 31, 1994 ............................................... -0- $ -0- === ==========
- ------------------------------------------------------------------------------- NOTE D -- CAPITAL STOCK There are 900,000,000 shares of capital stock, $.001 par value per share of the Fund authorized. Transactions in capital stock were as follows:
PREMIER GROWTH PORTFOLIO ------------------------------------------------------------- SHARES AMOUNT --------------------------- --------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1994 1993 -------------------------------- -------------------------- Shares sold.......................................... 2,158,503 889,167 $ 27,040,995 $ 10,571,023 Shares issued in reinvestment of dividends and distributions................................. 6,295 1,643 76,606 19,389 Shares redeemed...................................... (187,942) (153,728) (2,344,147) (1,748,395) -------- -------- ---------- ---------- Net increase......................................... 1,976,856 737,082 $ 24,773,454 $ 8,842,017 ========= ======= ============= ============= GLOBAL BOND PORTFOLIO ------------------------------------------------------------- SHARES AMOUNT -------------------------------- --------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1994 1993 -------------- ---------------- ------------- ------------ Shares sold.......................................... 99,445 18,949 $ 1,004,475 $ 213,273 Shares issued in reinvestment of dividends and distributions................................. 57,681 54,146 565,272 585,865 Shares redeemed...................................... (9,522) (334) (101,398) (3,830) ------ ---- -------- ------ Net increase......................................... 147,604 72,761 $ 1,468,349 $ 795,308 ======= ====== ============ ============
57 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONT'D) - -------------------------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO ------------------------------------------------------------- SHARES AMOUNT -------------------------------- --------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1994 1993 -------------------------------- -------------------------- Shares sold.......................................... 1,938,671 1,270,247 $ 23,400,005 $ 14,712,220 Shares issued in reinvestment of dividends and distributions................................. 65,234 10,969 761,935 126,368 Shares redeemed...................................... (355,050) (122,326) (4,211,657) (1,444,135) -------- -------- ---------- ---------- Net increase......................................... 1,648,855 1,158,890 $ 19,950,283 $ 13,394,453 ========= ========= = ========== = ========== SHORT-TERM MULTI-MARKET PORTFOLIO ------------------------------------------------------------ SHARES AMOUNT -------------------------------- -------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1994 1993 -------------- ----------------- -------------- ---------- Shares sold.......................................... 2,182,196 1,712,885 $ 23,826,681 $ 18,917,712 Shares issued in reinvestment of dividends and distributions................................. 100,584 61,354 1,058,151 671,209 Shares redeemed...................................... (2,298,689) (1,025,075) (24,973,632) (11,291,992) ---------- ---------- ----------- ----------- Net increase (decrease).............................. (15,909) 749,164 $ (88,801) $ 8,296,929 ========== ========== ============ ============ U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLI -------------------------------------------------------------- SHARES AMOUNT --------------------------------- ---------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1994 1993 --------------- ---------------- --------------- ------------ Shares sold.......................................... 518,614 124,778 $ 5,232,257 $ 1,316,230 Shares issued in reinvestment of dividends and distributions................................. 8,852 817 88,339 8,681 Shares redeemed...................................... (140,052) (78,982) (1,416,646) (838,983) -------- ------- ------------ ------------ Net increase......................................... 387,414 46,613 $ 3,903,950 $ 485,928 ======== ======= ============ ============ TOTAL RETURN PORTFOLIO ------------------------------------------------------------ SHARES AMOUNT ------------------------------- --------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1994 1993 -------------- ----------------- -------------- ---------- Shares sold.......................................... 69,761 26,302 $ 736,467 $ 278,320 Shares issued in reinvestment of dividends and distributions................................. 583 -0- 6,076 -0- Shares redeemed...................................... (31,120) (3,003) (329,715) (32,455) ------- ------ -------- ------- Net increase......................................... 39,224 23,299 $ 412,828 $ 245,865 ====== ====== ============ ============
58 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONT'D) - -------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO -------------------------------------------------------------- SHARES AMOUNT --------------------------------- ----------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1994 1993 -------------------------------- -------------------------- Shares sold.......................................... 547,184 49,958 $ 7,176,460 $ 589,918 Shares issued in reinvestment of dividends and distributions................................. 1,015 -0- 13,070 -0- Shares redeemed...................................... (39,868) (1,343) (527,107) (15,657) ------- ------ -------- ------- Net increase......................................... 508,331 48,615 $ 6,662,423 $ 574,261 ======= ====== ============ ============ MONEY MARKET PORTFOLIO -------------------------------------------------------------- SHARES AMOUNT --------------------------------- ----------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1994 1993 -------------------------------- -------------------------- Shares sold.......................................... 14,471,656 597,121 $ 14,471,656 $ 597,121 Shares issued in reinvestment of dividends........... 82,845 1,851 82,845 1,851 Shares redeemed...................................... (7,757,276) (527,428) (7,757,276) (527,428) ---------- -------- ---------- -------- Net increase......................................... 6,797,225 71,544 $ 6,797,225 $ 71,544 ========= ====== ============ ============ NORTH AMERICAN GLOBAL DOLLAR GOVERNMENT GOVERNMENT PORTFOLIO INCOME PORTFOLIO ------------------------------- ------------------------------- SHARES AMOUNT SHARES AMOUNT --------- ------- --------- ---------- MAY 2, 1994 (A) MAY 3, 1994 (A) TO TO DECEMBER 31, 1994 DECEMBER 31, 1994 --------------------------------- -------------------------------- Shares sold.......................................... 118,322 $ 1,192,406 525,199 $ 5,263,041 Shares redeemed...................................... (1,820) (18,370) (87,577) (827,824) ------ ------- ------- -------- Net increase......................................... 116,502 $ 1,174,036 437,622 $ 4,435,217 ======= ============ ======= ============ UTILITY GROWTH INCOME PORTFOLIO PORTFOLIO -------------------------------- ----------------------------- SHARES AMOUNT SHARES AMOUNT -------------- ---------------- ---------------- ------------ MAY 10, 1994 (A) SEPTEMBER 15, 1994 (A) TO TO DECEMBER 31, 1994 DECEMBER 31, 1994 --------------------------------- ------------------------------- Shares sold.......................................... 130,903 $ 1,329,004 525,636 $ 5,364,669 Shares redeemed...................................... (4,924) (50,958) (4,023) (41,280) ------ ------- ------ ------- Net increase......................................... 125,979 $ 1,278,046 521,613 $ 5,323,389 ======= ============ ======= ===========
59 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONT'D) - -------------------------------------------------------------------------------
WORLDWIDE CONSERVATIVE PRIVATIZATION PORTFOLIO INVESTORS PORTFOLIO -------------------------------- ------------------------------- SHARES AMOUNT SHARES AMOUNT ----------- --------- --------------- -------- SEPTEMBER 23, 1994 (A) OCTOBER 28, 1994 (A) TO TO DECEMBER 31, 1994 DECEMBER 31, 1994 --------------------------------- ------------------------- Shares sold.......................................... 111,619 $ 1,120,370 71,574 $ 716,743 Shares redeemed...................................... (49) (492) (1,993) (19,894) --- ---- ------ ------- Net increase......................................... 111,570 $ 1,119,878 69,581 $ 696,849 ======= ============ ====== =========== GROWTH INVESTORS PORTFOLIO ----------------------- SHARES AMOUNT ------- --------- OCTOBER 28, 1994 (A) TO DECEMBER 31, 1994 ------------------------- Shares sold.......................................... 34,433 $ 342,801 Shares redeemed...................................... (1,884) (18,467) ------ ------- Net increase......................................... 32,549 $ 324,334 ====== ============
- ------------------------------------------------------------------------------- (a) Commencement of operations. NOTE E -- RECLASSIFICATION OF COMPONENTS OF NET ASSETS During the year ended December 31, 1994, the Fund adopted Statement of Position 93-2 Determination, Disclosure, and Financial Statement Presentation of Income, Capital Gain, and Return of Capital Distributions by Investment Companies. Accordingly, permanent book and tax basis differences relating to shareholder distributions have been reclassified to additional paid in capital. As of the beginning of the current period, the cumulative effect of such differences have been restated as follows:
GLOBAL GROWTH AND SHORT-TERM TOTAL BOND INCOME MULTI-MARKET RETURN PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO --------- ----------- ------------ --------- Paid-in capital...................................... $ -0- $ 711 $ (309,420) $ (780) Undistributed net investment income.................. (257,812) (2,825) (2,031,858) 780 Undistributed net realized gains..................... 257,812 2,114 2,341,278 -0- NORTH AMERICAN MONEY GOVERNMENT UTILITY INTERNATIONAL MARKET INCOME INCOME PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO ------------- --------- ---------------- ---------- Paid-in capital...................................... $ (785) $ (803) $ -0- $ -0- Undistributed net investment income.................. 226 803 (4,051) (17) Undistributed net realized gains..................... 559 -0- 4,051 17
Net investment income, net realized gains and net assets were not affected by the change. 60 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. FINANCIAL HIGHLIGHTS SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD - -------------------------------------------------------------------------------
PREMIER GROWTH PORTFOLIO ------------------------------------------------------- YEAR ENDED DECEMBER 31, JUNE 26, 1992(A) -------------------------- TO 1994 1993 DECEMBER 31, 1992 ----- ---- ----------------- Net asset value, beginning of period......................... $ 12.79 $ 11.38 $ 10.00 ---------- ---------- ---------- INCOME FROM INVESTMENT OPERATIONS Net investment income (b)................................. .03(c) -0-(c) .06(c) Net realized and unrealized gain (loss) on investments.... (.41) 1.43 1.32 ---------- ---------- ---------- Net increase (decrease) in net asset value from operations (.38) 1.43 1.38 ---------- ---------- ---------- LESS: DISTRIBUTIONS Dividends from net investment income...................... (.01) (.01) -0- Distributions from net realized gains..................... (.03) (.01) -0- ---------- ---------- ---------- Total dividends and distributions......................... (.04) (.02) -0- ---------- ---------- ---------- Net asset value, end of period............................ $ 12.37 $ 12.79 $ 11.38 ========== ========== ========== TOTAL RETURNS Total investment return based on net asset value (d)...... (2.96)% 12.63% 13.80%(e) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)................. $37,669 $13,659 $3,760 Ratio to average net assets of: Expenses, net of waivers and reimbursements............. .95% 1.18% .95%(f) Expenses, before waivers and reimbursements............. 1.40% 2.05% 4.20%(f) Net investment income................................... .42% .22% .96%(f) Portfolio turnover rate................................... 38% 42% 14% GLOBAL BOND PORTFOLIO YEAR ENDED DECEMBER 31, JULY 15, 1991(A) ---------------------------------- TO 1994 1993 1992 DECEMBER 31, 1991 ----- ---- ---- ------------------- Net asset value, beginning of period......................... $ 11.33 $ 11.24 $ 11.10 $ 10.00 ---------- ---------- --------- --------- INCOME FROM INVESTMENT OPERATIONS Net investment income (b)................................. .57(c) .77(c) .64 .28 Net realized and unrealized gain (loss) on investments and foreign currency transactions....................... (1.16) .43 (.13) .82 ---------- ---------- --------- --------- Net increase (decrease) in net asset value from operations (.59) 1.20 .51 1.10 ---------- ---------- --------- --------- LESS: DISTRIBUTIONS Dividends from net investment income...................... (.62) (.85) (.28) -0- Distributions from net realized gains..................... (.30) (.26) (.09) -0- ---------- ---------- ---------- --------- Total dividends and distributions......................... (.92) (1.11) (.37) -0- ---------- ---------- --------- --------- Net asset value, end of period............................ $ 9.82 $ 11.33 $ 11.24 $ 11.10 ========== ========== ========= ========= TOTAL RETURNS Total investment return based on net asset value (d)...... (5.16)% 11.15% 4.87% 11.00%(e) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)................. $7,298 $6,748 $5,876 $5,551 Ratio to average net assets of: Expenses, net of waivers and reimbursements............. .95% 1.50% 1.50% 1.50%(f) Expenses, before waivers and reimbursements............. 2.05% 1.50% 1.97% 2.15%(f) Net investment income................................... 6.01% 4.85% 5.85% 5.77%(f) Portfolio turnover rate................................... 102% 125% 78% 25%
- ------------------------------------------------------------------------------ (a) Commencement of operations. (b) Net of expenses reimbursed or waived by the investment advisor. (c) Based on average shares outstanding. (d) Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, and redemption on the last day of the period. (e) Total investment return calculated for a period of less than one year is not annualized. (f) Annualized. 61 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. FINANCIAL HIGHLIGHTS SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD - -------------------------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO --------------------------------------------------------- JANUARY 14, 1991(A) YEAR ENDED DECEMBER 31, TO 1994 1993 1992 DECEMBER 31, 1991 ----- ------ ------ ------------------ Net asset value, beginning of period......................... $ 12.18 $ 10.99 $ 10.35 $ 10.00 ------- ------- -------- ------- INCOME FROM INVESTMENT OPERATIONS Net investment income (b)................................. .10(c) .01(c) .10(c) .35(c) Net realized and unrealized gain (loss) on investments.... (.16) 1.27 .71 -0- ------- ------- -------- ------- Net increase (decrease) in net asset value from operations (.06) 1.28 .81 .35 ------- ------- -------- ------- LESS: DISTRIBUTIONS Dividends from net investment income...................... (.10) (.06) (.17) -0- Distributions from net realized gains..................... (.17) (.03) -0- -0- ------- ------- -------- ------- Total dividends and distributions......................... (.27) (.09) (.17) -0- ------- ------- ------- ------- Net asset value, end of period............................ $ 11.85 $ 12.18 $ 10.99 $ 10.35 ======= ======= ======= ======= TOTAL RETURNS Total investment return based on net asset value (d)...... (.35)% 11.69% 7.92% 3.50%(e) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)................. $41,702 $22,756 $7,803 $1,431 Ratio to average net assets of: Expenses, net of waivers and reimbursements............. .90% 1.18% .99% 1.79%(f) Expenses, before waivers and reimbursements............. .91% 1.28% 2.09% 9.43%(f) Net investment income................................... 1.71% 1.76% 2.42% 3.59%(f) Portfolio turnover rate................................... 95% 69% 49% 0% SHORT-TERM MULTI-MARKETPORTFOLIO ------------------------------------------------------------------- NOVEMBER 28, 1990(A) YEAR ENDED DECEMBER 31, TO --------------------------------------------- 1994 1993 1992 1991 DECEMBER 31, 1990 -------- -------- -------- -------- ----------------- Net asset value, beginning of period............. $ 11.07 $ 10.77 $ 10.68 $ 10.03 $ 10.00 ------- -------- ---------- --------- --------- INCOME FROM INVESTMENT OPERATIONS Net investment income (b)..................... .47(c) .28(c) .63(c) .36 .03 Net realized and unrealized gain (loss) on investments and foreign currency transactions (1.16) .43 (.54) .34 -0- ------- -------- ---------- --------- --------- Net increase (decrease) in net asset value from operations............................. (.69) .71 .09 .70 .03 ------- -------- ---------- --------- --------- LESS: DISTRIBUTIONS Dividends from net investment income.......... (.46) (.41) -0- (.03) -0- Distributions from net realized gains......... -0- -0- -0- (.02) -0- Return of capital............................. (.01) -0- -0- -0- -0- ------- -------- ---------- --------- --------- Total dividends and distributions............. (.47) (.41) -0- (.05) -0- ------- -------- ---------- --------- --------- Net asset value, end of period................ $ 9.91 $ 11.07 $ 10.77 $ 10.68 $ 10.03 ======= ========= ========== ========= ========= TOTAL RETURN Total investment return based on net asset value (d)......................... (6.51)% 6.62% .84% 7.01% .30%(e) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)..... $20,921 $23,560 $14,841 $5,858 $296 Ratio to average net assets of: Expenses, net of waivers and reimbursements. .94% 1.17% .99% 1.79% 2.50%(f) Expenses, before waivers and reimbursements. .99% 1.24% 1.66% 4.40% 10.62%(f) Net investment income....................... 6.52% 6.39% 7.18% 7.53% 5.76%(f) Portfolio turnover rate....................... 134% 210% 153% 51% 0% - -------------------------------------------------------------------------------------------------------------------------------- (a) Commencement of operations. (b) Net of expenses reimbursed by the investment adviser. (c) Based on average shares outstanding. (d) Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, and redemption on the last day of the period. (e) Total investment return calculated for a period of less than one year is not annualized. (f) Annualized.
62 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. FINANCIAL HIGHLIGHTS SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD - --------------------------------------------------------------------------------
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO --------------------------------------------------------------- YEAR ENDED DECEMBER 31, SEPTEMBER 17, 1992(A) --------------------------------- TO 1994 1993 DECEMBER 31, 1992 ---- ---- ------------------------ Net asset value, beginning of period......................... $ 10.72 $ 9.89 $ 10.00 ------- ---------- --------- INCOME FROM INVESTMENT OPERATIONS Net investment income (b)................................. .28(c) .43(c) .14(c) Net realized and unrealized gain (loss) on investments.... (.71) .48 (.25) ------- ---------- --------- Net increase (decrease) in net asset value from operations (.43) .91 (.11) ------- ---------- --------- LESS: DISTRIBUTIONS Dividends from net investment income...................... (.21) (.08) -0- Distributions from net realized gains..................... (.14) -0- -0- ------- ---------- --------- Total dividends and distributions......................... (.35) (.08) -0- ------- ---------- --------- Net asset value, end of period............................ $ 9.94 $ 10.72 $ 9.89 ======= ========== ========= TOTAL RETURNS Total investment return based on net asset value (d)...... (4.03)% 9.20% (1.10%)(e) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)................. $5,101 $1,350 $785 Ratio to average net assets of: Expenses, net of waivers and reimbursements............. .95% 1.16% .95%(f) Expenses, before waivers and reimbursements............. 3.73% 5.42% 11.56%(f) Net investment income................................... 5.64% 4.59% 4.82%(f) Portfolio turnover rate................................... 32% 177% 13% TOTAL RETURN PORTFOLIO ------------------------------------------------------------ YEAR ENDED DECEMBER 31, DECEMBER 28, 1992(A) ------------------------ TO 1994 1993 DECEMBER 31, 1992 ---- ---- ---------------------- Net asset value, beginning of period......................... $ 10.97 $ 10.01 $ 10.00 ---------- ---------- --------- INCOME FROM INVESTMENT OPERATIONS Net investment income (b)................................. .15(c) .15(c) .01 Net realized and unrealized gain (loss) on investments.... (.56) .81 -0- ---------- ---------- --------- Net increase (decrease) in net asset value from operations (.41) .96 .01 ---------- ---------- --------- LESS: DISTRIBUTIONS Dividends from net investment income...................... (.09) -0- -0- Distributions from net realized gains..................... (.06) -0- -0- ---------- ---------- --------- Total dividends and distributions......................... (.15) -0- -0- ---------- ---------- --------- Net asset value, end of period............................ $ 10.41 $ 10.97 $ 10.01 ========== ========== ========= TOTAL RETURNS Total investment return based on net asset value (d)...... (3.77)% 9.59% .10%(e) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)................. $750 $360 $95 Ratio to average net assets of: Expenses, net of waivers and reimbursements............. .95% 1.20% 0% Expenses, before waivers and reimbursements............. 19.49% 25.96% 0% Net investment income................................... 2.29% 1.45% 2.21%(f) Portfolio turnover rate................................... 83% 25% 0% - ------------------------------------------------------------------------------------------------------------------------------- (a) Commencement of operations. (b) Net of expenses reimbursed or waived by the investment adviser. (c) Based on average share outstanding. (d) Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, and redemption on the last day of the period. (e) Total investment return calculated for a period of less than one year is not annualized. (f) Annualized.
63 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. FINANCIAL HIGHLIGHTS SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD - --------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO --------------------------------------------------------------- YEAR ENDED DECEMBER 31, DECEMBER 28, 1992(A) ----------------------------------- TO 1994 1993 DECEMBER 31, 1992 ---- ---- ---------------------- Net asset value, beginning of period......................... $ 12.16 $ 10.00 $ 10.00 ---------- ---------- --------- INCOME FROM INVESTMENT OPERATIONS Net investment income (b)................................. .10(c) .03(c) -0- Net realized and unrealized gain on investments and foreign currency transactions........................... .72(d) 2.13 -0- ---------- ---------- --------- Net increase in net asset value from operations........... .82 2.16 -0- ---------- ---------- --------- LESS: DISTRIBUTIONS Dividends from net investment income...................... (.02) -0- -0- Distributions from net realized gains..................... (.08) -0- -0- ---------- ---------- --------- Total dividends and distributions......................... (.10) -0- -0- ---------- ---------- --------- Net asset value, end of period............................ $ 12.88 $ 12.16 $ 10.00 ========== ========== ========= TOTAL RETURN Total investment return based on net asset value (e)...... 6.70% 21.60% 0% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)................. $7,276 $688 $79 Ratio to average net assets of: Expenses, net of waivers and reimbursements............. .95% 1.20% 0% Expenses, before waivers and reimbursements............. 7.26% 39.28% 0% Net investment income................................... .90% .26% 2.07%(g) Portfolio turnover rate................................... 95% 85% 0% MONEY MARKET PORTFOLIO -------------------------------------------------------------- YEAR ENDED DECEMBER 31, DECEMBER 28, 1992(A) ------------------------------ TO 1994 1993 DECEMBER 31, 1992 ---- ---- ------------------------- Net asset value, beginning of period......................... $ 1.00 $ 1.00 $ 1.00 --------- ---------- --------- INCOME FROM INVESTMENT OPERATIONS Net investment income (b)................................. .03 .22 -0- Net realized and unrealized gain on investments........... -0- -0- -0- --------- ---------- --------- Net increase in net asset value from operations........... .03 .22 -0- --------- ---------- --------- LESS: DISTRIBUTIONS Dividends from net investment income...................... (.03) (.22) -0- Distributions from net realized gains..................... -0- -0- -0- --------- ---------- --------- Total dividends and distributions......................... (.03) (.22) -0- --------- ---------- --------- Net asset value, end of period............................ $ 1.00 $ 1.00 $ 1.00 ========= ========== ========= TOTAL RETURNS Total investment return based on net asset value (e)...... 3.27% 2.25% .02%(f) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)................. $6,899 $102 $30 Ratio to average net assets of: Expenses, net of waivers and reimbursements............. .95% 1.16% 0% Expenses, before waivers and reimbursements............. 4.46% 68.14% 0% Net investment income................................... 3.98% 2.15% 3.05%(g) Portfolio turnover rate................................... 0% 0% 0% - -------------------------------------------------------------------------------------------------------------------------- (a) Commencement of operations. (b) Net of expenses reimbursed by investment advisor. (c) Based on average shares outstanding. (d) The amount shown in this caption for a share outstanding throughout the period may not accord with the change in realized and unrealized gains and losses in the Portfolio securities for the period because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating market values for the Portfolio. (e) Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, and redemption on the last day of the period. (f) Total investment return calculated for a period of less than one year is not annualized. (g) Annualized.
64 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. FINANCIAL HIGHLIGHTS SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD - --------------------------------------------------------------------------------
NORTH AMERICAN GLOBAL DOLLAR GOVERNMENT GOVERNMENT PORTFOLIO INCOME PORTFOLIO --------------------- ---------------- MAY 2, 1994(A) MAY 3, 1994(A) TO TO DECEMBER 31, 1994 DECEMBER 31, 1994 ------------------- ------------------ Net asset value, beginning of period......................... $ 10.00 $ 10.00 ------- ------ INCOME FROM INVESTMENT OPERATIONS Net investment income (b)................................. .36(c) .50(c) Net realized and unrealized loss on investments and foreign currency transactions........................... (.52) (1.71) ------- ------ Net decrease in net asset value from operations........... (.16) (1.21) ------- ------ LESS: DISTRIBUTIONS Dividends from net investment income...................... -0- -0- Distributions from net realized gains..................... -0- -0- --- --- Total dividends and distributions......................... -0- -0- --- --- Net asset value, end of period............................ $ 9.84 $ 8.79 ======= ====== TOTAL RETURN Total investment return based on net asset value(d)....... (1.60)%(e) (12.10)%(e) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)................. $1,146 $3,848 Ratio to average net assets of: Expenses, net of waivers and reimbursements............. .95%(f) .95%(f) Expenses, before waivers and reimbursements............. 15.00%(f) 4.43%(f) Net investment income................................... 6.02%(f) 8.49%(f) Portfolio turnover rate................................... 9% 15% UTILITY GROWTH INCOME PORTFOLIO PORTFOLIO ---------------- --------------------- MAY 10, 1994(A) SEPTEMBER 15, 1994(A) TO TO DECEMBER 31, 1994 DECEMBER 31, 1994 ------------------- ------------------ Net asset value, beginning of period......................... $ 10.00 $ 10.00 ---------- --------- INCOME FROM INVESTMENT OPERATIONS Net investment income (b)................................. .28(c) .03(c) Net realized and unrealized gain (loss) on investments.... (.32) .50 ---- --- Net increase (decrease) in net asset value from operations (.04) .53 ---- --- LESS: DISTRIBUTIONS Dividends from net investment income...................... -0- -0- Distributions from net realized gains..................... -0- -0- --- --- Total dividends and distributions......................... -0- -0- --- --- Net asset value, end of period............................ $ 9.96 $ 10.53 ========== ========= TOTAL RETURN Total investment return based on net asset value(d)....... (.40)%(e) 5.30%(e) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)................. $1,254 $5,492 Ratio to average net assets of: Expenses, net of waivers and reimbursements............. .95%(f) .95%(f) Expenses, before waivers and reimbursements............. 15.98%(f) 4.19%(f) Net investment income................................... 4.62%(f) 1.17%(f) Portfolio turnover rate................................... 31% 25% - --------------------------------------------------------------------------------------------------------------------------------- (a) Commencement of operations. (b) Net of expenses reimbursed by investment advisor. (c) Based on average shares outstanding. (d) Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, and redemption on the last day of the period. (e) Total investment return calculated for a period of less than one year is not annualized. (f) Annualized.
65 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. FINANCIAL HIGHLIGHTS SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD - --------------------------------------------------------------------------------
WORLDWIDE CONSERVATIVE PRIVATIZATION PORTFOLIO INVESTORS PORTFOLIO ----------------------- ------------------- SEPTEMBER 23, 1994(A) OCTOBER 28, 1994(A) TO TO DECEMBER 31, 1994 DECEMBER 31, 1994 ------------------- ------------------ Net asset value, beginning of period......................... $ 10.00 $ 10.00 ---------- --------- INCOME FROM INVESTMENT OPERATIONS Net investment income (b)................................. .10(c) .06(c) Net realized and unrealized gain on investments........... -0- .01 ---------- --------- Net increase in net asset value from operations........... .10 .07 ---------- --------- LESS: DISTRIBUTIONS Dividends from net investment income...................... -0- -0- Distributions from net realized gains..................... -0- -0- ---------- --------- Total dividends and distributions......................... -0- -0- ---------- --------- Net asset value, end of period............................ $ 10.10 $ 10.07 ========== ========= TOTAL RETURN Total investment return based on net asset value(d)....... 1.00%(e) 0.70%(e) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)................. $1,127 $701 Ratio to average net assets of: Expenses, net of waivers and reimbursements............. .95%(f) .95%(f) Expenses, before waivers and reimbursements............. 18.47%(f) 20.35%(f) Net investment income................................... 4.27%(f) 3.55%(f) Portfolio turnover rate................................... 0% 2% GROWTH INVESTORS PORTFOLIO ------------------- OCTOBER 28, 1994(A) TO DECEMBER 31, 1994 ------------------ Net asset value, beginning of period......................... $ 10.00 -------- INCOME FROM INVESTMENT OPERATIONS Net investment income (b)................................. .04(c) Net realized and unrealized loss on investments........... (.18) --------- Net decrease in net asset value from operations........... (.14) -------- LESS: DISTRIBUTIONS Dividends from net investment income...................... -0- Distributions from net realized gains..................... -0- -------- Total dividends and distributions......................... -0- -------- Net asset value, end of period............................ $ 9.86 ======== TOTAL RETURN Total investment return based on net asset value(d)....... (1.40)%(e) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)................. $321 Ratio to average net assets of: Expenses, net of waivers and reimbursements............. .95%(f) Expenses, before waivers and reimbursements............. 41.62%(f) Net investment income................................... 2.29%(f) Portfolio turnover rate................................... 3% - -------------------------------------------------------------------------------------------------------------------------------- (a) Commencement of operations. (b) Net of expenses reimbursed by investment advisor. (c) Based on average shares outstanding. (d) Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, and redemption on the last day of the period. (e) Total investment return calculated for a period of less than one year is not annualized. (f) Annualized.
66 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS - ----------------------------------------------------------------------------- TO THE SHAREHOLDERS AND BOARD OF DIRECTORS ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. We have audited the accompanying statements of assets and liabilities, including the portfolios of investments, of Alliance Variable Products Series Fund, Inc., (the "Fund"), (comprising, respectively, the Premier Growth (formerly the Growth Portfolio), Global Bond, Growth and Income, Short-Term Multi-Market, U.S. Government/High Grade Securities, Total Return, International, Money Market, Global Dollar Government, North American Government Income, Utility Income, Growth, Worldwide Privatization, Conservative Investors and Growth Investors Portfolios), as of December 31, 1994, and the related statements of operations and changes in net assets and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1994, by correspondence with the custodian and brokers or other alternative procedures when replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the respective Portfolios constituting Alliance Variable Products Series Fund, Inc. at December 31, 1994, and the results of their operations, the changes in their net assets and the financial highlights for each of the indicated periods, in conformity with generally accepted accounting principles. New York, New York February 6, 1995 - ----------------------------------------------------------------------------- FEDERAL INCOME TAX INFORMATION (UNAUDITED) The following Portfolios of the Fund hereby designate the respective amounts per share as long-term capital gain distributions during the taxable year ended December 31, 1994: PER SHARE --------- Premier Growth $.013 Global Bond $.12 Growth and Income $.01 67 APPENDIX A BOND AND COMMERCIAL PAPER RATINGS STANDARD & POOR'S BOND RATINGS A Standard & Poor's corporate debt rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. Debt rated "AA" has a very strong capacity to pay interest and to repay principal and differs from the highest rated issues only in small degree. Debt rated "A" has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than a debt of a higher rated category. Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions, or changing circumstances are more likely to lead to a weakened capacity to pay interest and to repay principal for debt in this category than for higher rated categories. Debt rated "BB," "B," "CCC" or "CC" is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. "BB" indicates the lowest degree of speculation and "CC" the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. The rating "C" is reserved for income bonds on which no interest is being paid. Debt rated "D" is in default and payments of interest and/or repayment of principal is in arrears. The ratings from "AA" to "B" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. MOODY'S BOND RATINGS Excerpts from Moody's description of its corporate bond ratings: Aaa - judged to be the best quality, carry the smallest degree of investment risk; Aa - judged to be of high quality by all standards; A - possess many favorable investment attributes and are to be considered as higher medium grade obligations; Baa - - considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured and have speculative characteristics as well; Ba, B, Caa, Ca, C--protection of A-1 interest and principal payments is questionable; Ba indicates some speculative elements while Ca represents a high degree of speculation and C represents the lowest rated class of bonds; Caa, Ca and C bonds may be in default. Moody's applies numerical modifiers 1, 2 and 3 in each generic rating classification from Aa to B in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks at the lower end of its generic rating category. FITCH INVESTORS SERVICE BOND RATINGS AAA. Securities of this rating are regarded as strictly high-grade, broadly marketable, suitable for investment by trustees and fiduciary institutions, and liable to but slight market fluctuation other that through changes in the money rate. The factor last named is of importance varying with the length of maturity. Such securities are mainly senior issues of strong companies, and are most numerous in the railway and public utility fields, though some industrial obligations have this rating. The prime feature of an AAA rating is showing of earnings several times or many times interest requirements with such stability of applicable earnings that safety is beyond reasonable question whatever changes occur in conditions. Other features may enter in, such as a wide margin of protection through collateral security or direct lien on specific property as in the case of high class equipment certificates or bonds that are first mortgages on valuable real estate. Sinking funds or voluntary reduction of the debt by call or purchase are often factors, while guarantee or assumption by parties other than the original debtor may also influence the rating. AA. Securities in this group are of safety virtually beyond question, and as a class are readily salable while many are highly active. Their merits are not greatly unlike those of the AAA class, but a security so rated may be of junior through strong lien -- in many cases directly following an AAA security - -- or the margin of safety is less strikingly broad. The issue may be the obligation of a small company, strongly secured but influenced as to ratings by the lesser financial power of the enterprise and more local type of market. A. A securities are strong investments and in many cases of highly active market, but are not so heavily protected as the two upper classes or possibly are of similar security but less quickly salable. As a class they are more sensitive in standing and market to material changes in current earnings of the company. With favoring conditions such securities are likely to work into a high rating, but in occasional instances changes cause the rating to be lowered. A-2 BBB. BBB rated bonds are considered to be investment grade and of satisfactory quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to weaken this ability than bonds with higher ratings. STANDARD & POOR'S COMMERCIAL PAPER RATINGS A is the highest commercial paper rating category utilized by S&P, which uses the number 1+, 1, 2 and 3 to denote relative strength within its A classification. Commercial paper issues rated A by S&P have the following characteristics: Liquidity ratios are better than industry average, long-term debt rating is A or better. The issuer has access to at least two additional channels of borrowing. Basic earnings and cash flow are in an upward trend. Typically, the issuer is a strong company in a well-established industry and has superior management. Issues rated "B" are regarded as having only an adequate capacity for timely payment. However, such capacity may be damaged by changing conditions or short-term adversities. The rating "C" is assigned to short-term debt obligations with a doubtful capacity for repayment. An issue rated "D" is either in default or is expected to be in default upon maturity. MOODY'S COMMERCIAL PAPER RATINGS Issuers rated Prime-1 (or related supporting institutions) have a superior capacity for repayment of short- term promissory obligations. Prime-1 repayment capacity will normally be evidenced by the following characteristics: Leading market positions in well established industries; high rates of return on funds employed; conservative capitalization structures with moderate reliance on debt and ample asset protection; broad margins in earnings coverage of fixed financial charges and high internal cash generation; well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated Prime-2 (or related supporting institutions) have a strong capacity for repayment of short-term promissory 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, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated Prime-3 (or related supporting institutions) have an acceptable capacity for repayment of short- term promissory obligations. The effect of industry characteristics and market composition may be more pronounced. A-3 Variability in earnings and profitability may result in changes in the level of debt protection measurements and the requirement for relatively high financial leverage. Adequate alternate liquidity is maintained. The rating category Not Prime encompasses all other rated commercial paper issuers. COMMERCIAL PAPER RATINGS OF FITCH INVESTORS SERVICES, INC. AND DUFF & PHELPS INC. Commercial paper rated "Fitch-1" is considered to be the highest grade paper and is regarded as having the strongest degree of assurance for timely payment. "Fitch-2" is considered very good grade paper and reflects an assurance of timely payment only slightly less in degree than the strongest issue. Commercial paper carrying the "Fitch-3" rating is considered to be good grade paper having a satisfactory degree of assurance for timely payment but the margin of safety is not as great as the two higher categories. "Fitch-4" is considered poor grade paper having characteristics suggesting that the degree of assurance for timely payment is minimal and is susceptible to near-term adverse change due to less favorable financial economic conditions. Commercial paper issues rated "Duff 1" by Duff & Phelps Inc. have the following characteristics: very high certainty of timely payment, excellent liquidity factors supported by good fundamental protection factors, and risk factors which are minor. Issues rated "Duff 2" have a good certainty of timely payment, sound liquidity factors and company fundamentals, small risk factors, and good access to capital markets. Commercial paper issues rated "Duff 3" have satisfactory liquidity and other protection factors which qualify them as investment grade issue. Although the risk factors associated with these issues are larger and subject to more variation, timely payment is expected. Issues rated "Duff 4" are considered to be non-investment grade and have speculative investment characteristics, liquidity insufficient to insure against disruption in debt service, and operating factors and market access subject to a high degree of variation. Issuers of commercial paper issues rated "Duff 5" are considered to be in default and have failed to meet scheduled principal and/or interest payments. A-4 00250292.AP7 APPENDIX B 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. B-1 00250292.AP7 APPENDIX C 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 contract's 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 contract's 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 C-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. C-2 The ordinary spreads between prices in the cash and futures markets, due to differences in the nature of those markets, are subject to distortions. First, all participants in the futures market are subject to initial deposit and variation margin requirements. Rather than meeting additional variation margin requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus 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 Adviser's 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 C-3 moves less than the price of the securities which are the subject of the hedge, the hedge will not be fully effective but, if the price of the securities being hedged has moved in an unfavorable direction, the Portfolio would be in a better position than if it had not hedged at all. If the price of the securities being hedged has moved in a favorable direction, this advantage will be partially offset by the loss on the index future. If the price of the future moves more than the price of the stock, the Portfolio will experience either a loss or gain on the future which will not be completely offset by movements in the price of the securities which are subject to the hedge. To compensate for the imperfect correlation of movements in the price of securities being hedged and movements in the price of the stock index futures, the Portfolio may buy or sell stock index futures contracts in a greater dollar amount than the dollar amount of securities being hedged if the volatility over a particular time period of the prices of such securities has been greater than the volatility over such time period of the index, or if otherwise deemed to be appropriate by the Adviser. Conversely, the Portfolio may buy or sell fewer stock index futures contracts if the volatility over a particular time period of the prices of the securities being hedged is less than the volatility over such time period of the stock index, or it is otherwise deemed to be appropriate by the Adviser It is also possible that, where the Portfolio has sold futures to hedge its portfolio against a decline in the market, the market may advance and the value of securities held in the Portfolio may decline. If this occurred, the Portfolio would lose money on the futures and also experience a decline in value in its portfolio securities. However, over time the value of a diversified portfolio should tend to move in the same direction as the market indices upon which the futures are based, although there may be deviations arising from differences between the composition of the Portfolio and the stocks comprising the index. Where futures are purchased to hedge against a possible increase in the price of stock before the Portfolio is able to invest its cash (or cash equivalents) in stocks (or options) in an orderly fashion, it is possible that the market may decline instead. If the Portfolio then concludes not to invest in stock or options at that time because of concern as to possible further market decline or for other reasons, the Portfolio will realize a loss on the futures contract that is not offset by a reduction in the price of securities purchased. In addition the possibility that there may be an imperfect correlation, or no correlation at all, between movements in the stock index futures and the portion of the portfolio being hedged, the price of stock index futures may not correlate perfectly with movement in the stock index due to certain market distortions. Rather than meeting additional C-4 margin deposit requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the index and futures markets. Secondly, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may also cause temporary price distortions. Due to the possibility of price distortion in the futures market, and because of the imperfect correlation between the movements in the stock index and movements in the price of stock index futures, a correct forecast of general market trends by the investment adviser may still not result in a successful hedging transaction over a short time frame. Positions in stock index futures may be closed out only on an exchange or board of trade which provides a secondary market for such futures. Although the Portfolios 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 C-5 of the underlying debt securities, it may or may not be less risky than ownership of the futures contract or underlying debt securities. As with the purchase of futures contracts, when a Portfolio is not fully invested it may purchase a call option on a futures contract to hedge against a market advance due to declining interest rates. The writing of a call option on a futures contract constitutes a partial hedge against declining prices of the security or foreign currency which is deliverable upon exercise of the futures contract or securities comprising an index. If the futures price at expiration of the option is below the exercise price, the Portfolio will retain the full amount of the option premium which provides a partial hedge against any decline that may have occurred in the Portfolio's portfolio holdings. The writing of a put option on a futures contract constitutes a partial hedge against increasing prices of the security or foreign currency which is deliverable upon exercise of the futures contract or securities comprising an index. If the futures price at expiration of the option is higher than the exercise price, the Portfolio will retain the full amount of the option premium which provides a partial hedge against any increase in the price of securities which the Portfolio intends to purchase. If a put or call option the Portfolio has written is exercised, the Portfolio will incur a loss which will be reduced by the amount of the premium it receives. Depending on the degree of correlation between changes in the value of its portfolio securities and changes in the value of its futures positions, the Portfolio's losses from existing options on futures may to some extent be reduced or increased by changes in the value of portfolio securities. The purchase of a put option on a futures contract is similar in some respects to the purchase of protective put options on portfolio securities. For example, the Portfolio may purchase a put option on a futures contract to hedge the Portfolio's portfolio against the risk of rising interest rates. The amount of risk the Portfolio assumes when it purchases an option on a futures contract is the premium paid for the option plus related transaction costs. In addition to the correlation risks discussed above, the purchase of an option also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of the option purchased. OPTIONS ON FOREIGN CURRENCIES Portfolios of the Fund may purchase and write options on foreign currencies for hedging purposes in a manner similar to that in which futures contracts on foreign currencies, or forward C-6 contracts, will be utilized. For example, a decline in the dollar value of a foreign currency in which portfolio dollar value of a foreign currency in which portfolio securities are denominated will reduce the dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against such diminutions in the value of portfolio securities, the Portfolio may purchase put options on the foreign currency. If the value of the currency does decline, the Portfolio will have the right to sell such currency for a fixed amount in dollars and will thereby offset, in whole or in part, the adverse effect on its portfolio which otherwise would have resulted. Conversely, where a rise in the dollar value of a currency in which securities to be acquired are denominated is projected, thereby increasing the cost of such securities, the Portfolio may purchase call options thereon. The purchase of such options could offset, at least partially, the effects of the adverse movements in exchange rates. As in the case of other types of options, however, the benefit to the Portfolio deriving from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, where currency exchange rates do not move in the direction or to the extent anticipated, the Portfolio could sustain losses on transactions in foreign currency options which would require it to forego a portion or all of the benefits of advantageous changes in such rates. Portfolios of the Fund may write options on foreign currencies for the same types of hedging purposes. For example, where a Portfolio anticipates a decline in the dollar value of foreign currency denominated securities due to adverse fluctuations in exchange rates it could, instead of purchasing a put option, write a call option on the relevant currency. If the expected decline occurs, the option will most likely not be exercised, and the diminution in value of portfolio securities will be offset by the amount of the premium received. Similarly, instead of purchasing a call option to hedge against an anticipated increase in the 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 C-7 currencies, the Portfolio also may be required to forego all or a portion of the benefits which might otherwise have been obtained from favorable movements in exchange rates. Portfolios of the Fund intend to write covered call options on foreign currencies. A call option written on a foreign currency by a Portfolio is "covered" if the Portfolio owns the underlying foreign currency covered by the call or has an absolute and immediate right to acquire that foreign currency without additional cash consideration (or for additional cash consideration held in a segregated account by the Fund's Custodian) upon conversion or exchange of other foreign currency held in its portfolio. A call option is also covered if the Portfolio has a call on the same foreign currency and in the same principal amount as the call written where the exercise price of the call held (a) is equal to or less than the exercise price of the call written or (b) is greater than the exercise price of the call written if the difference is maintained by the Portfolio in cash, U.S. Government Securities and other high grade liquid debt securities in a segregated account with the Fund's Custodian. Portfolios of the Fund also intend to write call options on foreign currencies that are not covered for cross-hedging purposes. A call option on a foreign currency is for cross- hedging purposes if it is not covered, but is designed to provide a hedge against a decline in the U.S. dollar value of a security which the Portfolio owns or has the right to acquire and which is denominated in the currency underlying the option due to an adverse change in the exchange rate. In such circumstances, the Portfolio collateralizes the option by maintaining in a segregated account with the Fund's Custodian, cash or U.S. Government Securities or other high quality liquid debt securities (or, in the case of the North American Government Income Portfolio and the Utility Income Portfolio, high grade liquid debt securities) in an amount not less than the value of the underlying foreign currency in U.S. dollars marked to market daily. ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES Unlike transactions entered into by a Portfolio in futures contracts, options on foreign currencies and forward contracts are not traded on contract markets regulated by the CFTC or (with the exception of certain foreign currency options) by the Commission. To the contrary, such instruments are traded through financial institutions acting as market-makers, although foreign currency options are also traded on certain national securities exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to SEC regulation. Similarly, options on currencies may be traded over-the-counter. C-8 In an over-the-counter trading environment, many of the protections afforded to exchange participants will not be available. For example, there are no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. Moreover, the option writer and a trader of forward contracts could lose amounts substantially in excess of their initial investments, due to the margin and collateral requirements associated with such positions. Options on foreign currencies traded on national securities exchanges are within the jurisdiction of the SEC, as are other securities traded on such exchanges. As a result, many of the protections provided to traders on organized exchanges will be available with respect to such transactions. In particular, all foreign currency option positions entered into on a national securities exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"), thereby reducing the risk of counterparty default. Further, a liquid secondary market in options traded on a national securities exchange may be more readily available than in the over-the-counter market, potentially permitting a Portfolio to liquidate open positions at a profit prior to exercise or expiration, or to limit losses in the event of adverse market movements. The purchase and sale of exchange-traded foreign currency options, however, is subject to the risks of the availability of a liquid secondary market described above, as well as the risks regarding adverse market movements, margining of options written, the nature of the foreign currency market, possible intervention by governmental authorities and the effects of other political and economic events. In addition, exchange- traded options on foreign currencies involve certain risks not presented by the over-the-counter market. For example, exercise and settlement of such options must be made exclusively through the OCC, which has established banking relationships in applicable foreign countries for this purpose. As a result, the OCC may, if it determines that foreign governmental restrictions or taxes would prevent the orderly settlement of foreign currency option exercises, or would result in undue burdens on the OCC or its clearing member, impose special procedures on exercise and settlement, such as technical changes in the mechanics of delivery of currency, the fixing of dollar settlement prices or prohibitions, on exercise. In addition, futures contracts, options on futures contracts, forward contracts and options on foreign currencies may be traded on foreign exchanges. Such transactions are subject to the risk of governmental actions affecting trading in C-9 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. C-10 00250292.AP7 APPENDIX D 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 writer's 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 D-1 written a call option, it will effect a closing transaction prior to or concurrent with the sale of the security. A Portfolio will realize a profit from a closing transaction if the price of the transaction is less than the premium received from writing the option or is more than the premium paid to purchase the option; the Portfolio will realize a loss from a closing transaction if the price of the transaction is more than the premium received from writing the option or is less than the premium paid to purchase the option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, any loss resulting from the repurchase of a call option is likely to be offset in whole or in part by appreciation of the underlying security owned by the Portfolio. An option position may be closed out only where there exists a secondary market for an option of the same series. If a secondary market does not exist, it might not be possible to effect closing transactions in particular options with the result that the Portfolio would have to exercise the options in order to realize any profit. If the Portfolio is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise. Reasons for the absence of a liquid secondary market include the following: (i) there may be insufficient trading interest in certain options, (ii) restrictions may be imposed by a national securities exchange ("Exchange") on opening transactions or closing transactions or both, (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities, (iv) unusual or unforeseen circumstances may interrupt normal operations on an Exchange, (v) the facilities of an Exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading volume, or (vi) one or more Exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that Exchange (or in that class or series of options) would cease to exist, although outstanding options on that Exchange that had been issued by the Options Clearing Corporation as a result of trades on that Exchange would continue to be exercisable in accordance with their terms. A Portfolio may write options in connection with buy- and-write transactions; that is, the Portfolio may purchase a security and then write a call option against that security. The exercise price of the call the Portfolio determines to write will depend upon the expected price movement of the underlying security. The exercise price of a call option may be below ("in- D-2 the-money"), equal to ("at-the-money") or above ("out-of-the- money") the current value of the underlying security at the time the option is written. Buy-and-write transactions using in-the- money call options may be used when it is expected that the price of the underlying security will remain flat or decline moderately during the option period. Buy-and-write transactions using at- the-money call options may be used when it is expected that the price of the underlying security will remain fixed or advance moderately during the option period. Buy-and-write transactions using out- of-the-money call options may be used when it is expected that the premiums received from writing the call option plus the appreciation in the market price of the underlying security up to the exercise price will be greater than the appreciation in the price of the underlying security alone. If the call options are exercised in such transactions, the Portfolio's maximum gain will be the premium received by it for writing the option, adjusted upwards or downwards by the difference between the Portfolio's purchase price of the security and the exercise price. If the options are not exercised and the price of the underlying security declines, the amount of such decline will be offset in part, or entirely, by the premium received. The writing of covered put options is similar in terms of risk/return characteristics to buy-and-write transactions. If the market price of the underlying security rises or otherwise is above the exercise price, the put option will expire worthless and the Portfolio's gain will be limited to the premium received. If the market price of the underlying security declines or otherwise is below the exercise price, the Portfolio may elect to close the position or take delivery of the security at the exercise price and the Portfolio's return will be the premium received from the put option minus the amount by which the market price of the security is below the exercise price. Out-of-the- money, at-the-money, and in-the-money put options may be used by the Portfolio in the same market environments that call options are used in equivalent buy- and-write transactions. A portfolio may purchase put options to hedge against a decline in the value of its portfolio. By using put options in this way, the Portfolio will reduce any profit it might otherwise have realized in the underlying security by the amount of the premium paid for the put option and by transaction costs. A Portfolio may purchase call options to hedge against an increase in the price of securities that the Portfolio anticipates purchasing in the future. The premium paid for the call option plus any transaction costs will reduce the benefit, if any, realized by the Portfolio upon exercise of the option, and, unless the price of the underlying security rises sufficiently, the option may expire worthless to the Portfolio. D-3 00250292.AP7 APPENDIX E: JAPAN Japan, located in eastern Asia, consists of four main islands, Hokkaido, Honshu, Kyushu and Shikoku, and many small islands. Its population is approximately 125 million. 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 Social Democratic Party of Japan (the "SDPJ"), a leftist party, withdrew from the coalition. Consequently, Mr. Hata's government was a minority coalition, the first since 1955, and was therefore inherently unstable. In June 1994, Mr. Hata and his coalition were replaced by a new coalition made up of the SDPJ, the LDP and the New Party Harbinger. This coalition is led by the present prime minister Tomiichi Murayama, the first Socialist prime minister in 47 years. Various political parties within the present coalition are calling for political reform that could split the government and lead to new political alignments. Thus, the stability of the current ruling coalition is not assured. ECONOMY The Japanese economy maintained an average annual growth rate of 3.9% in real GDP terms from 1980 through 1992, compared with 2.1% for the United States during the same period. In 1992, Japan's real GDP growth rate fell to 1.3% and there was little or no growth in GDP in 1993. Inflation has remained low, estimated at 1.5% for 1993. Consumer expenditures dropped 0.9% in 1993 from 1992 due to prevalent fears that have affected consumer and business sentiment, such as the fear of corporate restructuring. Recently, Japanese companies have taken steps designed to address the economic downturn. These steps include reducing overtime and bonus payments and initiating or accelerating early retirement programs. Overall employment, however, increased in 1993. E-1 Employment growth has been shifting from the manufacturing to the service industry, a trend expected to continue for the foreseable future. Although investment has declined from the high levels of the late 1980's and the recent appreciation of the Japanese Yen against the U.S. Dollar has curtailed business profits and weakened exports, increases in housing and public investment and a decline in imports in the early part of 1993 have provided some buffers to the economy's recent downturn. Japan's post World War II reliance on heavy industries has shifted in recent years to higher technology products assembly and to automobile, electrical and electronics production. Most recently, because of the strong Yen and high production costs in Japan, a structural change in Japan's economy has begun, with final assembly of manufactured goods being shifted to lower-cost nations, while increased reliance is being placed on service-based industries and the production of high technology components and parts requiring specialized skills. Japan's success in exporting its products has generated sizeable trade surpluses, which have caused it difficulty in its relations with its trading partners. Japan's overall trade surplus for 1993 was the largest in its history, amounting to $120 billion. Exports totaled $362 billion, up 6.2% from 1992, and imports were $242 billion, up 3.5% from 1992. Its current account surplus in 1993 was a record $131 billion. Consequently, Japan has become 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. The two countries failed to agree, however, with respect to Japanese imports of American automobiles and automotive parts. In response to this failure, the U.S. has initiated the process of imposing limited trade sanctions on Japan. The sanctions process is lengthy and, therefore, it will be late 1995 at the earliest before the U.S. imposes any trade sanctions on Japanese exports. In response to pressures exerted by the slumping economy and the growing trade surplus, the government, in April and September 1993, announced emergency economic packages which included stimulus plans totaling Yen19.2 trillion for 1994 and numerous legislative provisions. A significant amount of the expenditures was allocated for improving infrastructure, public works projects, low-interest loans used for housing, and low interest small business loans. Most importantly, the September 1993 package includes an elimination or relaxation of government regulations, a reduction of import costs, an extension of subsidies to companies for sustaining excess workers in order to curb unemployment, and an offer of tax breaks to middle-income taxpayers for educational expenses and to companies for E-2 operational streamlining in order to influence lower retail costs. In early 1994, the government responded to the business and financial communities by providing an immediate income-tax cut. The Japanese Yen has been generally appreciating against the U.S. Dollar for the past decade. In 1994, through September 30, the Japanese Yen high against the U.S. Dollar was Yen96.81 per dollar and the low was Yen113.10 per dollar. The average for 1994 through September 30 was Yen103.37 per dollar. On October 19, 1994, the exchange rate was Yen97.36 per dollar. JAPANESE STOCK EXCHANGES Currently, there are eight stock exchanges in Japan. The Tokyo Stock Exchange (the "TSE"), the Osaka Securities Exchange and the Nagoya Stock Exchange are the largest, together accounting for approximately 99% of the share trading volume and for about 98.9% of the overall market value of all shares traded on Japanese stock exchanges during the year ended December 31, 1993. The other stock exchanges are located in Kyoto, Hiroshima, Fukuoka, Niigata and Sapporo. The chart below presents share trading volume and overall market value information of each of the three major Japanese stock exchanges for the years 1989 through 1993. Share Trading Volume and Market Value on Japanese Stock Exchanges (mils. of shares, YEN bils.) ____________________________________________________________________________ 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 Sources: The Tokyo Stock Exchange 1994 Fact Book and 1993 Fact Book. Trading volume and value of foreign stocks are not included. At end of the third quarter of 1994, the market capitalization of the First Section of the TSE (described below) was approximately 40% below its all-time high reached in 1989. Although the price/earnings ratios of individual companies vary widely from company to company, absolute Japanese price/earnings ratios are high in comparison with other major stock markets. E-3 Other valuation measures, such as price-to-book value and price- to-cash flow ratios, show that the Japanese market is near its lowest level in the last 20 years relative to other world markets. 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 1993, the TSE accounted for 81.9% of the market value and 85.9% of the share trading volume on all Japanese stock exchanges. A foreign stock section on the TSE, consisting of shares of non-Japanese companies, listed 110 non-Japanese companies at the end of 1993. 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 stringent 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 1993, the four largest industry sectors, based on market value, listed on the TSE were banking, with 101 companies representing 23.8% of all domestic stocks listed on the TSE; electric appliances, with 172 companies representing 10.2% of all domestic stocks so listed; transportation equipment, with 82 companies representing 6.6% of all domestic stocks so listed; and electric power and gas, with 16 companies representing 5.4% of all domestic stocks so listed. No other industry sector represented more than 5% of TSE listed domestic stocks. Market Growth of the TSE. The First and Second Sections of the TSE grew in terms of both average daily trading value and aggregate year-end market value from 1982, when they were Yen128,320 million and Yen98,090 billion, respectively, through the end of 1989, when they were Yen1,335,810 million and Yen611,152 billion, respectively. Following the peak in 1989, both average daily trading value and aggregate year-end market value declined through 1992 when they were Yen243,362 million and Yen289,483 billion, respectively. In 1993, both average daily trading value and aggregate year-end market value increased and were Yen353,208 million and Yen324,357 billion, respectively. 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 E-4 First Section reached a peak in 1989. Thereafter, the TOPIX declined approximately 46% through the beginning of 1993. In 1993, the TOPIX increased by approximately 9% from the end of 1992, and by the end of the third quarter of 1994 increased by approximately 8% from the end of 1993. 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 Yen100 million. 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 and including 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 conditions specified in the Foreign Exchange Controls, the foreign investor must file a prior notification with respect to the proposed acquisition with the Minister of Finance and any other minister with proper jurisdiction. The ministers may make a recommendation to modify or prohibit the proposed acquisition if they consider that the acquisition would impair the safety and maintenance of public order in Japan or harmfully influence the smooth operation of the Japanese economy. If the foreign investor does not accept the recommendation, the ministers may issue an order modifying or prohibiting the acquisition. In certain limited and exceptional circumstances, the Foreign Exchange Controls give the Minister of Finance the power to require prior approval for any acquisition of shares in a Japanese company by a non-resident of Japan. In general, the acquisition of shares by non-resident shareholders by way of stock splits, as well as the acquisition of shares of a Japanese company listed on a Japanese stock exchange by non-residents upon exercise of warrants or conversion of convertible bonds, are not subject to any of the foregoing notification or reporting requirements. Under the Foreign Exchange Controls, dividends paid on shares held by non-residents E-5 of Japan and the proceeds of any sales of shares within Japan may, in general, be converted into any foreign currency and remitted abroad. REGULATION OF THE JAPANESE EQUITIES MARKETS The principal securities law in Japan is the Securities and Exchange Law which provides overall regulation for the issuance of securities in public offerings and private placements and for secondary market 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 Japan Securities Dealer's Association (the "JSDA"). 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. 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 Securities and Exchange Law, which took effect in 1992, as well as two reform bills passed by the Diet in 1992. The amended Securities Exchange Law 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. To ensure that securities are traded at their fair value, the JSDA 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 or illegal gains regardless of whether the transaction otherwise technically complies with the rules. The reform bills passed by the Diet, which took effect in 1992 and 1993, provide 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. E-6 00250292.AP7 -----END PRIVACY-ENHANCED MESSAGE-----