-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GLwmcfv2Go8566KMQspLoQwUYs2muRW1IJ5ulpoVB2vFJCX7lxnTP4AGb75ldAO+ ud0GHWnRiXDUkxBvqKXUeQ== 0000936772-02-000157.txt : 20020415 0000936772-02-000157.hdr.sgml : 20020415 ACCESSION NUMBER: 0000936772-02-000157 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020307 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE VARIABLE PRODUCTS SERIES FUND INC CENTRAL INDEX KEY: 0000825316 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-05398 FILM NUMBER: 02569498 BUSINESS ADDRESS: STREET 1: 500 PLAZA DRIVE STREET 2: 1345 AVENUE OF THE AMERICAS 31ST FL CITY: NEW YORK STATE: NY ZIP: 10105 BUSINESS PHONE: 2013194105 MAIL ADDRESS: STREET 1: ALLIANCE CAPITAL MANGEMENT LP STREET 2: 1345 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10105 N-30D 1 edg7537.txt ALLIANCE - -------------------------------------------------------------------------------- VARIABLE PRODUCTS - -------------------------------------------------------------------------------- SERIES FUND - -------------------------------------------------------------------------------- NORTH AMERICAN - -------------------------------------------------------------------------------- GOVERNMENT INCOME - -------------------------------------------------------------------------------- PORTFOLIO - -------------------------------------------------------------------------------- ANNUAL REPORT DECEMBER 31, 2001 Investment Products Offered --------------------------- > Are Not FDIC Insured > May Lose Value > Are Not Bank Guaranteed --------------------------- NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO Alliance Variable Products Series Fund ================================================================================ LETTER TO INVESTORS February 12, 2002 Dear Investor: We are pleased to provide you with an update of Alliance Variable Products Series Fund--Alliance North American Government Income Portfolio+ (the "Portfolio") for the annual reporting period ended December 31, 2001. INVESTMENT OBJECTIVE The Portfolio seeks the highest level of current income, consistent with what Alliance considers to be prudent investment risk, that is available from a portfolio of debt securities issued or guaranteed by the governments of the United States, Canada and Mexico, their political subdivisions (including Canadian Provinces but excluding the States of the United States), agencies, instrumentalities or authorities. The Portfolio invests in government securities denominated in local currency and U.S. dollars. Normally, the Portfolio expects to maintain at least 25% of its assets in securities denominated in the U.S. dollar. INVESTMENT RESULTS Listed below are the Portfolio's average annual total returns for the one-year, five-year and since inception periods ended December 31, 2001. 1 Year 3.59% 5 Years 7.66% Since Inception (5/94) 8.36% Total returns are based on net asset value (NAV) performance for Class A shares and reflect reinvestment of dividends and/or capital gains distributions in additional shares. These figures do not reflect insurance company separate account or annuity contract charges, which would reduce total return to a contract owner. Past performance does not guarantee future results. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The Portfolio's performance is compared to the Lehman Brothers (LB) Aggregate Bond Index, a standard measure of the performance of the overall U.S. bond market, and to the LB Intermediate Government Bond Index, which measures the performance of U.S. bonds in the one- to 10-year-maturity range. During the 12-month period ending December 31, 2001, the Portfolio underperformed both benchmarks, returning 3.59% versus 8.44% for LB Aggregate Bond Index and 8.68% for the LB Intermediate-Term Government Bond Index. The Portfolio's former position in Argentina was the primary detractor from performance (Argentina is not represented within either of the benchmarks). Concerns over Argentina's ability to repay its public foreign debt and the lack of political will to implement fiscal and economic reform caused Argentine bond prices to decline. The strong U.S. dollar (the Argentine peso is pegged to the U.S. dollar), deficient labor reforms and a lack of competitive industries also had a negative impact on Argentine bonds. Although we maintained a relatively low allocation to Canadian bonds, the Portfolio's Canadian position also detracted from performance, as Canadian government bonds lagged behind U.S. Treasuries during this period. MARKET REVIEW Led by the economic slowdown in the U.S., the global economy decelerated during the period. Reduced business investment and falling exports were the chief detractors from global growth while consumer spending was the primary contributor. The events of September 11 sent shock waves through global financial markets, undermining consumer and investor confidence, key ingredients that were required for global economic recovery. In an effort to restore confidence and provide liquidity in the markets, global central banks responded quickly by cutting interest rates, following the example set by the U.S. Federal Reserve. In the U.S., restrained capital spending, inventory reductions, shrinking investments and weaker export performance significantly slowed the economy over the 12-month period. U.S. gross domestic product (GDP) dropped from 0.80% in the first half of 2001 to a revised -1.10% in the third quarter, ending a record period of economic expansion. In an effort to stimulate the slowing economy, the U.S. Federal Reserve began aggressively lowering interest rates early in the period under review, and in late May, Congress passed a tax package designed to further stimulate the economy. The events of September 11 had a severe impact on consumer and investor confidence in the U.S., further weakening growth and triggering additional monetary and fiscal policy easing. The U.S. Federal Reserve cut interest rates 475 basis points this year to 1.75%, the lowest in four decades. The Lehman Brothers U.S. Aggregate Bond Index, a standard measure of traditional U.S. bonds, returned 8.44% for the year. Among the sectors, investment-grade corporates returned 10.40%, benefiting from low interest rates, a steep yield curve and substantive market liquidity. U.S. Treasuries posted a return of 6.75%. - -------------------------------------------------------------------------------- + The Portfolio will change its name to Americas Government Income Portfolio on May 1, 2002. 1 NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO Alliance Variable Products Series Fund ================================================================================ Performance weakened when the aggressive easing of monetary policy compelled investors to take on more credit risk, reducing the attraction of U.S. Treasuries. As economic recovery became uncertain, the appetite for risk declined, lifting returns on U.S. Treasury bonds. Emerging-market debt was the poorest performing sector during the period, returning -0.79%. Although most emerging-market countries posted positive returns, the overall performance of the sector was significantly dampened by the negative performance of Argentina, which returned -66.85% for the year. Argentine bond prices fell due to growing concerns that the country would be unable to make its foreign debt payments. Economic officials determined that they would need to reduce debt interest payments by $3 to $4 billion a year in order to free up resources to restart the country's ailing economy, but were unable to agree on a budget. Violent protests due to economic hardship and rising unemployment led to the collapse of the government at the end of December. In an effort to end the civil unrest, the current president has halted the country's debt payments and ended the fixed exchange rate with the U.S. dollar, thus devaluing the currency. Mexico posted a return of 14.21%, despite the negative impact made by a slowing U.S. economy. Mexican industries, such as tourism and exports, declined as a result of the drop in travel and strictness in border security. The industries most affected were electronics, textiles, chemicals and auto parts provided by Mexican plants to American car manufacturers. Falling global oil prices also had a negative impact. Canada's economic growth declined over the 12-month period due to falling exports, inventory reductions, receding corporate profits and reduced consumer spending. Following the actions of the U.S. Federal Reserve, the Bank of Canada lowered interest rates from 5.75% at the beginning of the year to 2.25% by year-end, providing substantial monetary stimulus. INVESTMENT STRATEGY The Portfolio continues to be invested in Mexican, Canadian and U.S. Government debt. Due to growing concerns of a possible foreign debt default and devaluation of the Argentine peso, the Portfolio had entirely eliminated its Argentine holdings by the end of November. We increased the Portfolio's exposure to U.S. Government debt and have been gradually increasing the average duration of U.S. Treasury bonds, as slowing global growth has kept inflationary pressures well contained. We also increased the Portfolio's Mexican local currency position and extended duration as Mexico continued to integrate with the U.S. in economic terms, lessening currency volatility. We decreased the Portfolio's Canadian position as Canadian government bonds lagged behind U.S. Treasuries. MARKET OUTLOOK Accelerating liquidity, improving consumer confidence, a deceleration in the umemployment rate and signs of a turnaround in manufacturing activity point to a recovery in the U.S. economy in early 2002. We expect economic growth to advance throughout the year, with GDP reaching a 3.5% annualized pace by the fourth quarter. We believe the U.S. Federal Reserve's monetary policy will remain largely unchanged for the first half of the year; tighter policy is expected in the latter half of 2002. In this environment, interest rates will gradually trend higher, and the yield curve will flatten somewhat. We expect growth to accelerate in all emerging market economies next year as the demand for imports increases in developed economies and global risk aversion begins to subside. The crisis in Argentina had muted effects on other emerging market countries, which we find to be an encouraging sign, as the countries within the asset class appear to be de-coupling. The economic slowdown in the U.S. will continue to affect economic growth in Mexico, however, fiscal discipline remains intact and the budget deficit is likely to remain flat at 0.65%. The deep integration with the U.S. markets should lead to lower interest rates and better credit ratios in 2002, and we expect to see continued currency stability. Like the Federal Reserve in the U.S., the Bank of Canada has provided significant monetary stimulus in an effort to boost consumer and business spending and to restore economic growth in 2002. The Bank of Canada continues its easing bias and has left the door open for further interest rate cuts. Inflation is expected to decline in 2002, supporting the decision to further reduce interest rates. We appreciate your investment in Alliance North American Government Income Portfolio and look forward to reporting further investment progress in the coming period. Sincerely, /s/ Wayne Lyski Wayne Lyski Senior Vice President and Portfolio Manager 2 NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO Alliance Variable Products Series Fund ================================================================================ PERFORMANCE UPDATE [The following was represented by a mountain chart in the printed material.] North American Government Income Portfolio: $18,517 LB Aggregate Bond Index: $17,702 LB Intermediate Gov't Bond Index: $16,861 Lehman Brothers North American Lehman Brothers Intermediate Government Aggregate Government Portfolio Bond Index Bond Index - ------------------------------------------------------------------------------- 5/31/94* $10,000 $10,000 $10,000 12/31/94 $ 8,790 $10,077 $10,069 12/31/95 $10,786 $11,938 $11,519 12/31/96 $12,803 $12,372 $11,987 12/31/97 $14,035 $13,566 $12,913 12/31/98 $14,605 $14,755 $14,009 12/31/99 $15,905 $14,623 $14,077 12/31/00 $17,876 $16,323 $15,552 12/31/01 $18,517 $17,702 $16,861 Past performance is no guarantee of future results. This chart illustrates the total value of an assumed $10,000 investment in the Portfolio as compared to the performance of an appropriate broad-based index for the time frames indicated for the Portfolio. Performance results for the Portfolio represent the Portfolio's total return at net asset value (NAV). An investor cannot invest directly in an index or average, and its results are not indicative of the performance for any Alliance mutual fund. The Lehman Brothers Aggregate Bond Index (LB Aggregate Bond Index) is composed of the Mortgage-Backed and Asset-Backed Securities Indices, and the Government/Credit Bond Index. The Lehman Brothers Intermediate Government Bond Index (LB Intermediate Gov't Bond Index) is composed of U.S. Government agency and Treasury Securities with maturities of one to 10 years. - -------------------------------------------------------------------------------- * Since closest month-end after Portfolio's inception. Inception date for the Portfolio is 5/3/94 3 NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS December 31, 2001 Alliance Variable Products Series Fund ================================================================================ Principal Amount (000) U.S. $ Value - -------------------------------------------------------------------------------- LONG-TERM INVESTMENTS-88.3% CANADA-3.4% GOVERNMENT/AGENCY OBLIGATIONS-3.4% Government of Canada 10.25%, 3/15/14 ....................... CA$ 650 $ 579,150 Province of British Columbia 8.00%, 9/08/23 ........................ 400 302,003 Province of Manitoba 7.75%, 12/22/25 ....................... 450 332,593 Province of Ontario 6.10%, 12/02/11 ....................... 300 193,759 Province of Saskatchewan 9.60%, 2/04/22 ........................ 400 347,121 ----------- Total Canadian Securities (cost $1,722,856) ..................... 1,754,626 ----------- MEXICO-23.7% GOVERNMENT/AGENCY OBLIGATIONS-23.7% Mexican Government Bonds 10.50%, 7/14/11 ....................... MXP 3,740 401,932 13.50%, 3/02/06 ....................... 17,173 2,001,554 14.00%, 9/02/04 ....................... 5,885 694,379 14.50%, 5/12/05 ....................... 47,833 5,808,791 16.00%, 1/23/03 ....................... 18,012 2,080,482 Mexican Treasury Bills Zero coupon, 3/20/02 (a) .............. 939 100,357 Nacional Financiera SNC 22.00%, 5/20/02 ....................... 9,000 1,024,148 ----------- Total Mexican Securities (cost $11,151,990) .................... 12,111,643 ----------- UNITED STATES-61.2% FEDERAL/AGENCY OBLIGATIONS-0.1% Government National Mortgage Association 9.00%, 9/15/24 ........................ US$ 32 34,660 ----------- U.S. TREASURY SECURITIES-61.1% U.S. Treasury Bonds 5.375%, 2/15/31 ....................... 9,475 9,337,329 6.125%, 8/15/29 ....................... 1,400 1,481,816 8.125%, 8/15/19 ....................... 2,000 2,525,320 U.S. Treasury Notes 5.00%, 8/15/11 ........................ 5,530 5,512,691 5.625%, 5/15/08 ....................... 6,800 7,124,088 U.S. Treasury Strips Zero coupon, 5/15/13 ................. 3,500 1,838,410 8.00%, 11/15/21 ....................... 7,700 2,363,053 9.25%, 2/15/16 ........................ 2,500 1,090,225 ----------- 31,272,932 ----------- Total United States Securities (cost $31,542,668) .................... 31,307,592 ----------- Total Long-Term Investments (cost $44,417,514) .................... 45,173,861 ----------- SHORT-TERM INVESTMENT-8.8% REPURCHASE AGREEMENT-8.8% State Street Bank & Trust Co. 1.70%, dated 12/31/01, due 1/02/02 in the amount of $4,500,425 (collateralized by $4,685,000 FNMA, 6.072%, 3/01/33, value $4,591,300) (cost $4,500,000) ..................... 4,500 4,500,000 ----------- TOTAL INVESTMENTS-97.1% (cost $48,917,514) .................... 49,673,861 Other assets less liabilities-2.9% ...................... 1,471,691 ----------- NET ASSETS-100% .......................... $51,145,552 =========== - -------------------------------------------------------------------------------- (a) Interest rate represents annualized yield to maturity at purchase date. Glossary: FNMA - Federal National Mortgage Association. See Notes to Financial Statements. 4 NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 2001 Alliance Variable Products Series Fund ================================================================================ ASSETS Investments in securities, at value (cost $48,917,514) ........................... $ 49,673,861 Cash ............................................................................. 28,149 Interest receivable .............................................................. 976,064 Receivable for capital stock sold ................................................ 524,399 ------------ Total assets ..................................................................... 51,202,473 ------------ LIABILITIES Advisory fee payable ............................................................. 24,130 Accrued expenses ................................................................. 32,791 ------------ Total liabilities ................................................................ 56,921 ------------ NET ASSETS .......................................................................... $ 51,145,552 ============ COMPOSITION OF NET ASSETS Capital stock, at par ............................................................ $ 4,204 Additional paid-in capital ....................................................... 50,086,787 Undistributed net investment income .............................................. 3,046,154 Accumulated net realized loss on investment and foreign currency transactions .... (2,751,560) Net unrealized appreciation of investments and foreign currency denominated assets and liabilities ................................................................ 759,967 ------------ $ 51,145,552 ============ Class A Shares Net assets ....................................................................... $ 51,145,552 ============ Shares of capital stock outstanding .............................................. 4,203,860 ============ Net asset value per share ........................................................ $ 12.17 ============
- -------------------------------------------------------------------------------- See Notes to Financial Statements. 5 NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO STATEMENT OF OPERATIONS Year Ended December 31, 2001 Alliance Variable Products Series Fund ================================================================================ INVESTMENT INCOME Interest ................................................... $ 3,515,467 ----------- EXPENSES Advisory fee ............................................... 275,292 Custodian .................................................. 95,364 Administrative ............................................. 69,000 Audit and legal ............................................ 26,143 Printing ................................................... 11,829 Directors' fees ............................................ 1,741 Transfer agency ............................................ 948 Miscellaneous .............................................. 6,324 ----------- Total expenses ............................................. 486,641 Less: expenses waived and reimbursed (see Note B) .......... (84,294) ----------- Net expenses ............................................... 402,347 ----------- Net investment income ...................................... 3,113,120 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT AND FOREIGN CURRENCY TRANSACTIONS Net realized loss on investment transactions ............... (2,569,326) Net realized loss on foreign currency transactions ......... (71,001) Net change in unrealized appreciation/depreciation of: Investments .............................................. 713,317 Foreign currency denominated assets and liabilities ...... 4,017 ----------- Net loss on investment and foreign currency transactions ... (1,922,993) ----------- NET INCREASE IN NET ASSETS FROM OPERATIONS .................... $ 1,190,127 =========== - -------------------------------------------------------------------------------- See Notes to Financial Statements. 6 NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS Alliance Variable Products Series Fund ================================================================================
Year Ended Year Ended December 31, December 31, 2001 2000 ============ ============ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income .................................................. $ 3,113,120 $ 2,710,310 Net realized gain (loss) on investment and foreign currency transactions (2,640,327) 464,074 Net change in unrealized appreciation/depreciation of investments and foreign currency denominated assets and liabilities .................. 717,334 492,688 ------------ ------------ Net increase in net assets from operations ............................. 1,190,127 3,667,072 DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income Class A .............................................................. (2,671,875) (2,266,836) Net realized gain on investments Class A .............................................................. (381,696) (436,838) CAPITAL STOCK TRANSACTIONS Net increase ........................................................... 19,855,135 2,779,907 ------------ ------------ Total increase ......................................................... 17,991,691 3,743,305 NET ASSETS Beginning of period .................................................... 33,153,861 29,410,556 ------------ ------------ End of period (including undistributed net investment income of $3,046,154 and $2,643,725, respectively) ............................. $ 51,145,552 $ 33,153,861 ============ ============
- -------------------------------------------------------------------------------- See Notes to Financial Statements. 7 NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO NOTES TO FINANCIAL STATEMENTS December 31, 2001 Alliance Variable Products Series Fund ================================================================================ NOTE A: Significant Accounting Policies The North American Government Income Portfolio (the "Portfolio") is a series of Alliance Variable Products Series Fund, Inc., (the "Fund"). The Portfolio's investment objective is to seek the highest level of current income, consistent with what Alliance Capital Management L.P., considers to be prudent investment risk, that is available from a portfolio of debt securities issued or guaranteed by the government of the United States, Canada, or Mexico, their political subdivisions (including Canadian provinces, but excluding States of the United States), agencies, instrumentalities or authorities. The Fund was incorporated in the State of Maryland on November 17, 1987, as an open-end series investment company. The Fund offers nineteen separately managed pools of assets which have differing investment objectives and policies. The Portfolio offers Class A and Class B shares. As of December 31, 2001, the Portfolio had only Class A shares outstanding. The Portfolio offers and sells its shares only to separate accounts of certain life insurance companies for the purpose of funding variable annuity contracts and variable life insurance policies. Sales are made without a sales charge at the Portfolio's net asset value per share. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which require management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies followed by the Portfolio. 1. Security Valuation Portfolio securities traded on a national securities exchange or on a foreign securities exchange (other than foreign securities exchanges whose operations are similar to those of the United States over-the-counter market) or on The Nasdaq Stock Market, Inc., are generally valued at the last reported sales price or if no sale occurred, at the mean of the closing bid and asked price on that day. Readily marketable securities traded in the over-the-counter market, securities listed on a foreign securities exchange whose operations are similar to the U.S. over-the-counter market, and securities listed on a national securities exchange whose primary market is believed to be over-the-counter (but excluding securities traded on The Nasdaq Stock Market, Inc.) are valued at the mean of the current bid and asked price. U.S. government and fixed income securities which mature in 60 days or less are valued at amortized cost, unless this method does not represent fair value. Securities for which current market quotations are not readily available are valued at their fair value as determined in good faith by, or in accordance with procedures adopted by, the Board of Directors. Fixed income securities may be valued on the basis of prices obtained from a pricing service when such prices are believed to reflect the fair market value of such securities. 2. Currency Translation Assets and liabilities denominated in foreign currencies and commitments under forward exchange currency contracts are translated into U.S. dollars at the mean of the quoted bid and asked price of such currencies against the U.S. dollar. Purchases and sales of portfolio securities are translated 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 realized gains and losses on foreign currency transactions represent foreign exchange gains and losses from sales and maturities of securities and forward exchange currency contracts, holdings of foreign currencies, exchange gains and losses realized between the trade and settlement dates on investment transactions, and the difference between the amounts of interest, dividends and foreign withholding tax reclaims recorded on the Portfolio's books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains and losses from valuing foreign currency denominated assets and liabilities at period end exchange rates are reflected as a component of net unrealized appreciation or depreciation of investments and foreign currency denominated assets and liabilities. 3. Taxes It is the Portfolio's policy to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its investment company taxable income and net realized gains, if any, to shareholders. Therefore, no provisions for federal income or excise taxes are required. 4. Investment Income and Investment Transactions Dividend income is recorded on the ex-dividend date. Interest income is accrued daily. Investment transactions are accounted for on the date securities are purchased or sold. The Portfolio accretes discounts as adjustments to interest income. Investment gains and losses are determined on the identified cost basis. 5. Income and Expenses Expenses attributable to a single portfolio are charged to that portfolio. Expenses of the Fund are charged to each portfolio in proportion to net assets. All income earned and expenses incurred by a portfolio with multi-class shares outstanding are borne on a pro-rata basis by each 8 NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO NOTES TO FINANCIAL STATEMENTS (continued) Alliance Variable Products Series Fund ================================================================================ outstanding class of shares, based on the proportionate interest in the portfolio represented by the net assets of such class, except that the portfolio's Class B shares bear the distribution fees. 6. Repurchase Agreements It is the Portfolio's policy that its custodian or designated subcustodian take control of securities as collateral under repurchase agreements and to determine on a daily basis that the value of such securities are sufficient to cover the value of the repurchase agreements. If the seller defaults and the value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of collateral by the Portfolio may be delayed or limited. 7. Dividends and Distributions The Portfolio declares and distributes dividends and distributions from net investment income and net realized gains, respectively, if any, at least annually. Income dividends and capital gains distributions to shareholders are recorded on the ex-dividend date. Income dividends and capital gains distributions are determined in accordance with federal tax regulations and may differ from those determined in accordance with accounting principles generally accepted in the United States. To the extent these differences are permanent, such amounts are reclassified within the capital accounts based on their federal tax basis treatment; temporary differences do not require such reclassification. During the current fiscal year, permanent differences, primarily due to foreign currency transactions and recognition of bond premium, resulted in a net increase in undistributed net investment income and a corresponding increase in accumulated net realized loss on investment and foreign currency transactions. This reclassification had no effect on net assets. 8. Change in Accounting Principle As required, effective January 1, 2001, the Portfolio has adopted the provisions of the AICPA Audit and Accounting Guide, Audits of Investment Companies, and began amortizing premium on debt securities for financial statement reporting purposes only. This change has no impact on the net assets of the Portfolio. Prior to January 1, 2001, the Portfolio did not amortize premiums on debt securities. The cumulative effect of this accounting change resulted in a $135,276 reduction in cost of investments and a corresponding $135,276 increase in net unrealized appreciation/depreciation, based on investments owned by the Portfolio on January 1, 2001. The effect of this change for the year ended December 31, 2001, was to decrease net investment income by $112,002, increase net unrealized appreciation of investments by $26,648, and decrease net realized loss on investment transactions by $85,354. The statement of changes in net assets and financial highlights for prior periods have not been restated to reflect this change in accounting principle. - -------------------------------------------------------------------------------- NOTE B: Advisory Fee and Other Transactions with Affiliates Under the terms of an investment advisory agreement, the Portfolio pays Alliance Capital Management L.P. (the "Adviser"), an investment advisory fee at an annualized rate of .65% of the Portfolio's average daily net assets. Pursuant to the advisory agreement, the Portfolio paid $69,000 to the Adviser representing the cost of certain legal and accounting services provided to the Portfolio by the Adviser for the year ended December 31, 2001. During the year ended December 31, 2001, the Adviser agreed to waive its fee and to reimburse additional operating expenses to the extent necessary to limit total operating expenses on an annual basis to .95% of the average daily net assets for Class A shares. Expense waivers/reimbursements, if any, are accrued daily and paid monthly. For the year ended December 31, 2001, such waivers/reimbursements amounted to $84,294. The Portfolio compensates Alliance Global Investor Services, Inc. (formerly Alliance Fund Services, Inc.), a wholly-owned subsidiary of the Adviser, under a Transfer Agency Agreement for providing personnel and facilities to perform transfer agency services for the Portfolio. Such compensation amounted to $948 for the year ended December 31, 2001. - -------------------------------------------------------------------------------- NOTE C: Distribution Plan The Portfolio has adopted a Plan for Class B shares pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "Plan"). Under the Plan, the Portfolio pays distribution and servicing fees to the Distributor at an annual rate of up to .50% of the Portfolio's average daily net assets attributable to the Class B shares. The fees are accrued daily and paid monthly. The Board of Directors currently limit payments under the Plan to .25% of the Portfolio's average daily net assets attributable to Class B shares. The Plan provides that the Distributor will use such payments in their entirety for distribution assistance and promotional activities. 9 Alliance Variable Products Series Fund ================================================================================ The Portfolio is not obligated under the Plan to pay any distribution and servicing fees in excess of the amounts set forth above. The purpose of the payments to the Distributor under the Plan is to compensate the Distributor for its distribution services with respect to the sale of the Portfolio's shares. Since the Distributor's compensation is not directly tied to its expenses, the amount of compensation received by it under the Plan during any year may be more or less than its actual expenses. For this reason, the Plan is characterized by the staff of the Commission as being of the "compensation" variety. In the event that the Plan is terminated or not continued, no distribution and servicing fees (other than current amounts accrued but not yet paid) would be owed by the Portfolio to the Distributor. The Plan also provides that the Adviser may use its own resources to finance the distribution of the Portfolio's shares. - -------------------------------------------------------------------------------- NOTE D: Investment Transactions Purchases and sales of investment securities (excluding short-term investments) for the year ended December 31, 2001, were as follows: Purchases: Stocks and debt obligations ............................ $18,119,522 U.S. government and agencies ........................... 28,776,854 Sales: Stocks and debt obligations ............................ $ 9,945,690 U.S. government and agencies ........................... 10,119,008 At December 31, 2001, the cost of investments for federal income tax purposes was $49,079,438. Accordingly, gross unrealized appreciation and unrealized depreciation (excluding foreign currency transactions) are as follows: Gross unrealized appreciation .......................... $ 1,217,622 Gross unrealized depreciation .......................... (623,199) ----------- Net unrealized appreciation ............................ $ 594,423 =========== 1. Forward Exchange Currency Contracts The Portfolio may enter into forward exchange currency contracts to hedge exposure to changes in foreign currency exchange rates on foreign portfolio holdings, to hedge certain firm purchase and sales commitments denominated in foreign currencies and for investment purposes. A forward exchange currency contract is a commitment to purchase or sell a foreign currency at a future date at a negotiated forward rate. The Portfolio may enter into contracts to deliver or receive foreign currency it will receive from or require for its normal investment activities. It may also use contracts in a manner intended to protect foreign currency denominated securities from declines in value due to unfavorable exchange rate movements. The gain or loss arising from the difference between the original contracts and the closing of such contracts is included in realized 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. The Portfolio's custodian will place and maintain cash not available for investment or other liquid assets in a separate account of the Portfolio having an approximate value equal to the aggregate amount of the Portfolio's commitments under forward exchange currency contracts entered into with respect to position hedges. Risks may arise from the potential inability of a counterparty to meet the terms of a contract and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. The face or contract amount, in U.S. dollars, reflects the total exposure the Portfolio has in that particular currency contract. At December 31, 2001, the Portfolio had no outstanding forward exchange currency contracts. 2. Option Transactions For hedging and investment purposes, the Portfolio may purchase and write call options and purchase put options on U.S. securities that are traded on U.S. securities exchanges and over-the-counter markets. The risk associated with purchasing an option is that the Portfolio pays a premium whether or not the option is exercised. Additionally, the Portfolio bears the risk of loss of premium and change in market value should the counterparty not perform under the contract. Put and call 10 NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO NOTES TO FINANCIAL STATEMENTS (continued) Alliance Variable Products Series Fund ================================================================================ options purchased are accounted for in the same manner as portfolio securities. The cost of securities acquired through the exercise of call options is increased by premiums paid. The proceeds from securities sold through the exercise of put options are decreased by the premiums paid. When the Portfolio writes an option, the premium received by the Portfolio is recorded as a liability and is subsequently adjusted to the current market value of the option written. Premiums received from which written options expire unexercised are recorded by the Portfolio on the expiration date as realized gains from written options. The difference between the premium received and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium received is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium received is added to the proceeds from the sale of the underlying security or currency in determining whether the Portfolio has realized a gain or loss. In writing an option, the Portfolio bears the market risk of an unfavorable change 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. The Portfolio had no transactions in options written for the year ended December 31, 2001. - -------------------------------------------------------------------------------- NOTE E: Distributions to Shareholders The tax character of distributions paid during the fiscal year ended December 31, 2001 and December 31, 2000 were as follows: 2001 2000 ========== ========== Distributions paid from: Ordinary income ......................... $2,701,236 $2,351,842 Net long-term capital gains ............. 352,335 351,832 ---------- ---------- Total taxable distributions ................ 3,053,571 2,703,674 ---------- ---------- Total distributions paid ................... $3,053,571 $2,703,674 ========== ========== As of December 31, 2001, the components of accumulated earnings/(deficit) on a tax basis were as follows: Undistributed ordinary income .......................... $ 3,277,588 Undistributed long-term capital gains .................. 242,581 ----------- Accumulated earnings ................................... 3,520,169 Accumulated capital and other losses ................... (3,063,651)(a) Unrealized appreciation/(depreciation) ................. 598,043 (b) ----------- Total accumulated earnings/(deficit) ................... $ 1,054,561 =========== (a) Net capital losses and currency losses incurred after October 31, and within the taxable year are deemed to arise on the first business day of the Portfolio's next taxable year. For the year ended December 31, 2001, the Portfolio deferred to January 1, 2002, post October capital losses and post October currency losses of $3,040,907 and $2,180, respectively. As of December 31, 2001, the Portfolio had deferred straddle losses of $20,564. (b) The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to the difference between book and tax amortization methods for premium and market discount. - -------------------------------------------------------------------------------- NOTE F: Securities Lending The Portfolio has entered into a securities lending agreement with UBS/PaineWebber, Inc. (the "Lending Agent"). Under the terms of the agreement, the Lending Agent, on behalf of the Portfolio administers the lending of portfolio securities to certain broker-dealers. In return, the Portfolio receives fee income from the lending transactions. All loans are continuously secured by collateral exceeding the value of the securities loaned. All collateral consists of either cash or U.S. Government securities. The Lending Agent invests the cash collateral in an eligible money market vehicle in accordance with the investment restrictions of the Portfolio. UBS/Paine Webber will indemnify the Portfolio for any loss resulting from a borrower's failure to return a loaned security when due. As of December 31, 2001, the Portfolio had no securities on loan. For the year ended December 31, 2001, the Portfolio received fee income of $2,676 which is included in interest income in the accompanying statement of operations. 11 Alliance Variable Products Series Fund ================================================================================ NOTE G: Capital Stock There are 500,000,000 Class A shares of $.001 par value capital stock authorized. Transactions in capital stock were as follows:
-------------------------------- ------------------------------ SHARES AMOUNT -------------------------------- ------------------------------ Year Ended Year Ended Year Ended Year Ended December 31, December 31, December 31, December 31, 2001 2000 2001 2000 ============ ============ ============= ============ Class A Shares sold .............................. 2,791,791 741,265 $ 34,791,591 $ 9,219,121 Shares issued in reinvestment of dividends and distributions ........... 242,732 229,904 3,053,571 2,703,674 Shares redeemed .......................... (1,436,830) (732,496) (17,990,027) (9,142,888) ------------ ----------- ------------- ------------ Net increase ............................. 1,597,693 238,673 $ 19,855,135 $ 2,779,907 ============ =========== ============= ============
- -------------------------------------------------------------------------------- NOTE H: Concentration of Risk Investing in securities of foreign companies or foreign governments involves special risks which include changes in foreign exchange rates and the possibility of future political and economic developments which could adversely affect the value of such securities. Moreover, securities of many foreign companies or foreign governments and their markets may be less liquid and their prices more volatile than those of comparable United States companies or of the United States government. - -------------------------------------------------------------------------------- NOTE I: Bank Borrowing A number of open-end mutual funds managed by the Adviser, including the Portfolio, participate in a $750 million revolving credit facility (the "Facility") intended to provide short-term financing if necessary, subject to certain restrictions in connection with abnormal redemption activity. Commitment fees related to the Facility are paid by the participating funds and are included in the miscellaneous expenses in the statement of operations. The Portfolio did not utilize the Facility during the year ended December 31, 2001. 12 NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO FINANCIAL HIGHLIGHTS Alliance Variable Products Series Fund ================================================================================ Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
----------------------------------------------------------- CLASS A ----------------------------------------------------------- Year Ended December 31, =========================================================== 2001(a) 2000 1999 1998 1997 ======= ======= ======= ======= ======= Net asset value, beginning of period ......................... $ 12.72 $ 12.42 $ 12.55 $ 12.97 $ 12.38 Income From Investment Operations Net investment income (b)(c) ................................. .92 1.08 1.22 1.16 1.07 Net realized and unrealized gain (loss) on investment and foreign currency transactions ......................... (.43) .37 (.16) (.65) .10 Net increase in net asset value from operations .............. .49 1.45 1.06 .51 1.17 Less: Dividends and Distributions Dividends from net investment income ......................... (.91) (.96) (1.05) (.82) (.58) Distributions from net realized gain on investments .......... (.13) (.19) (.14) (.11) -0- Total dividends and distributions ............................ (1.04) (1.15) (1.19) (.93) (.58) Net asset value, end of period ............................... $ 12.17 $ 12.72 $ 12.42 $ 12.55 $ 12.97 Total Return Total investment return based on net asset value (d) ......... 3.59% 12.39% 8.90% 4.07% 9.62% Ratios/Supplemental Data Net assets, end of period (000's omitted) .................... $51,146 $33,154 $29,411 $32,059 $30,507 Ratio to average net assets of: Expenses, net of waivers and reimbursements ............... .95% .95% .95% .86% .95% Expenses, before waivers and reimbursements ............... 1.15% 1.24% 1.20% 1.17% 1.04% Net investment income (b) ................................. 7.35% 8.68% 9.91% 9.16% 8.34% Portfolio turnover rate ...................................... 57% 0% 6% 8% 20%
- -------------------------------------------------------------------------------- (a) As required, effective January 1, 2001, the Portfolio has adopted the provisions of the AICPA Audit and Accounting Guide, Audits of Investment Companies, and began amortizing premium on debt securities for financial reporting purposes only. For the year ended December 31, 2001, the effect of this change was to decrease net investment income per share by $.04, increase net realized and unrealized gain (loss) on investments per share by $.04, and decrease the ratio of net investment income to average net assets from 7.61% to 7.35%. Per share, ratios and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. (b) Net of expenses reimbursed or waived by the 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. Total investment return calculated for a period of less than one year is not annualized. 13 REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS Alliance Variable Products Series Fund ================================================================================ To the Shareholders and Board of Directors North American Government Income Portfolio Alliance Variable Products Series Fund, Inc. We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the North American Government Income Portfolio (the "Portfolio"), (one of the portfolios constituting the Alliance Variable Products Series Fund, Inc.) as of December 31, 2001, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Portfolio'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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit 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 and financial highlights. Our procedures included confirmation of securities owned as of December 31, 2001, by correspondence with the custodian and others. 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 the North American Government Income Portfolio of the Alliance Variable Products Series Fund, Inc. at December 31, 2001, and the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the indicated periods, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP New York, New York February 12, 2002 FEDERAL INCOME TAX INFORMATION (unaudited) ================================================================================ The Portfolio hereby designated $352,335 as long-term capital gain distributions during the taxable year ended December 31, 2001. 14 NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO Alliance Variable Products Series Fund ================================================================================ BOARD OF DIRECTORS John D. Carifa, Chairman and President Ruth Block (1) David H. Dievler (1) John H. Dobkin (1) William H. Foulk, Jr. (1) Clifford L. Michel (1) Donald J. Robinson (1) CUSTODIAN State Street Bank and Trust Company 225 Franklin Street Boston, MA 02110 DISTRIBUTOR Alliance Fund Distributors, Inc. 1345 Avenue of the Americas New York, NY 10105 INDEPENDENT AUDITORS Ernst & Young LLP 787 Seventh Avenue New York, NY 10019 LEGAL COUNSEL Seward & Kissel One Battery Park Plaza New York, NY 10004 TRANSFER AGENT Alliance Global Investor Services, Inc. P.O. Box 1520 Secaucus, NJ 07096-1520 Toll-free 1-(800) 221-5672 - -------------------------------------------------------------------------------- (1) Member of the Audit Committee. 15 NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO Alliance Variable Products Series Fund ================================================================================ MANAGEMENT OF THE FUND Board of Directors Information The business and affairs of the Fund are managed under the direction of the Board of Directors. Certain information concerning the Fund's Directors is set forth below.
PORTFOLIOS IN FUND OTHER NAME, ADDRESS, PRINCIPAL COMPLEX DIRECTORSHIPS AGE OF DIRECTOR OCCUPATION(S) OVERSEEN BY HELD BY (YEARS OF SERVICE*) DURING PAST 5 YEARS DIRECTOR DIRECTOR - ----------------------------------------------------------------------------------------------------------------- INTERESTED DIRECTOR John D. Carifa,** 56, President, Chief Operating Officer and a 113 None 1345 Avenue of the Americas, Director of ACMC, with which he has been New York, NY 10105 (12) associated since prior to 1997. DISINTERESTED DIRECTORS Ruth Block,#+ 71, Formerly an Executive Vice President and 88 Ecolab Incorp.; P.O. Box 4623, the Chief Insurance Officer of the BP Amoco Corp. Stamford, CT 06903 (10) Equitable Life Assurance Society of the United States; Chairman and Chief Executive Officer of Evlico; a Director of Avon, Tandem Financial Group and Donaldson, Lufkin & Jenrette Securities Corporation. She is currently a Director of Ecolab Incorporated (specialty chemicals) and BP Amoco Corporation (oil and gas). David H. Dievler,#+ 72, Independent consultant. Until December 94 None P.O. Box 167, 1994, Senior Vice President of ACMC Spring Lake, New Jersey responsible for mutual fund 07762 (12) administration. Prior to joining ACMC in 1984, Chief Financial Officer of Eberstadt Asset Management since 1968. Prior to that, Senior Manager at Price Waterhouse & Co. Member of American Institute of Certified Public Accountants since 1953. John H. Dobkin,#+ 59, Consultant. Currently, President of the 91 None P.O. Box 12, Board of Save Venice, Inc. (preservation Annandale, New York organization). Formerly a Senior Advisor 12504 (10) from June 1999 - June 2000 and President from December 1989 - May 1999 of Historic Hudson Valley (historic preservation). Previously, Director of the National Academy of Design. During 1988-92, Director and Chairman of the Audit Committee of ACMC.
- -------------------------------------------------------------------------------- * There is no stated term of office for the Fund's Directors. ** Mr. Carifa is an "interested director", as defined in the 1940 Act, due to his position as President and Chief Operating Officer of ACMC, the Fund's investment adviser. # Member of the Audit Committee. + Member of the Nominating Committee. 16 NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO Alliance Variable Products Series Fund ================================================================================
PORTFOLIOS IN FUND OTHER NAME, ADDRESS, PRINCIPAL COMPLEX DIRECTORSHIPS AGE OF DIRECTOR OCCUPATION(S) OVERSEEN BY HELD BY (YEARS OF SERVICE*) DURING PAST 5 YEARS DIRECTOR DIRECTOR - -------------------------------------------------------------------------------------------------------------------- DISINTERESTED DIRECTORS (continued) William H. Foulk, Jr., #+ 69 Investment Adviser and an independent 110 None Room 100, consultant. Formerly Senior Manager of 2 Greenwich Plaza, Barrett Associates, Inc., a registered Greenwich, Connecticut investment adviser, with which he had been 06830 (12) associated since prior to 1997. Formerly Deputy Comptroller of the State of New York and, prior thereto, Chief Investment Officer of the New York Bank for Savings. Clifford L. Michel,#+ 62, Senior Counsel of the law firm of Cahill 91 Placer Dome, Inc. St. Bernard's Road, Gordon & Reindel, with which he has been Gladstone, New Jersey associated since prior to 1997. President 07934 (10) and Chief Executive Officer of Wenonah Development Company (investments) and a Director of Placer Dome, Inc. (mining) Donald J. Robinson,#+ 67, Senior Counsel of the law firm of Orrick, 103 None 98 Hell's Peak Road, Herrington & Sutcliffe LLP since January 1997. Weston, Vermont 05161 (6) Formerly a senior partner and a member of the Executive Committee of that firm. Member of the Municipal Securities Rulemaking Board and a Trustee of the Museum of the City of New York.
- -------------------------------------------------------------------------------- * There is no stated term of office for the Fund's Directors. # Member of the Audit Committee. + Member of the Nominating Committee. 17 NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO Alliance Variable Products Series Fund ================================================================================ Officer Information Certain information concerning the Fund's officers is set forth below.
NAME, ADDRESS* POSITION(S) HELD PRINCIPAL OCCUPATION AND AGE WITH FUND DURING PAST 5 YEARS** - ------------------------------------------------------------------------------------------------------------------- John D. Carifa, 56 Chairman & President See biography above. Kathleen A. Corbet, 42 Senior Vice President Executive Vice President of ACMC, with which she has been associated since prior to 1997. Alfred L. Harrison, 64 Senior Vice President Vice Chairman of ACMC, with which he has been associated since prior to 1997. Wayne D. Lyski, 60 Senior Vice President Executive Vice President of ACMC, with which he has been associated with since prior to 1997. Edmund P. Bergan, Jr., 51 Secretary Senior Vice President and the General Counsel of Alliance Fund Distributors, Inc. (AFD) and Alliance Global Investor Services Inc. ("AGIS"), with which he has been associated since prior to 1997. Mark D. Gersten, 51 Treasurer and Chief Senior Vice President of AGIS, with which he has been Financial Officer associated since prior to 1997. Thomas R. Manley, 50 Controller Vice President of ACMC, with which he has been associated since prior to 1997.
- -------------------------------------------------------------------------------- * The address for each of the Fund's officers is 1345 Avenue of the Americas, New York, NY 10105. ** ACMC, AFD, ACL, and AGIS are affiliates of the Fund. The Fund's Statement of Additional Information (SAI) has additional information about the Fund's Directors and Officers and is available without charge upon request. Contact your financial representative or Alliance Capital at 800-227-4618 for a free prospectus or SAI. 18 (This page left intentionally blank.) (This page left intentionally blank.) (This page left intentionally blank.) -----END PRIVACY-ENHANCED MESSAGE-----