N-30D 1 edg8799.txt ALLIANCE -------------------- VARIABLE PRODUCTS -------------------- SERIES FUND -------------------- HIGH YIELD PORTFOLIO -------------------- ANNUAL REPORT DECEMBER 31, 2002 Investment Products Offered --------------------------- > Are Not FDIC Insured > May Lose Value > Are Not Bank Guaranteed --------------------------- HIGH YIELD PORTFOLIO Alliance Variable Products Series Fund ================================================================================ LETTER TO INVESTORS January 16, 2003 Dear Investor: The following is an update of Alliance Variable Products Series Fund Alliance High Yield Portfolio (the "Portfolio") for the annual reporting period ended December 31, 2002. INVESTMENT OBJECTIVE AND POLICIES The Portfolio seeks the highest level of current income available without assuming undue risk by investing principally in high yielding fixed income securities. As a secondary objective, the Portfolio seeks capital appreciation. The Portfolio invests a substantial portion of its assets in higher-yielding, higher-risk, fixed income securities (commonly known as "junk bonds") that are rated below investment grade and are considered to have predominantly speculative characteristics. INVESTMENT RESULTS Periods Ended December 31, 2002 Total Returns Since 1 Year 5 Years Inception* --------- -------- --------- Alliance High Yield Portfolio -3.03% -2.32% -1.63% Credit Suisse First Boston High Yield Index 3.10% 1.44% 1.71% 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. Total return does not reflect the deduction of taxes that a shareholder would pay on portfolio distributions or the redemption of portfolio 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 inception date is 10/27/97. The unmanaged Credit Suisse First Boston High Yield (CSFBHY) Index is a trader-priced portfolio constructed to mirror the high yield debt market. An investor cannot invest directly in an index, and its results are not indicative of the performance for any specific investment, including Alliance High Yield Portfolio. For the 12-month period ended December 31, 2002, the Portfolio returned -3.03%, as compared to the Credit Suisse First Boston High Yield (CSFBHY) Index, which returned 3.10%. Although the Portfolio's performance lagged that of the index in the first half of the year, improved economic and market conditions in the second half allowed us to recapture some of the underperformance. In the first half of the period, the Portfolio's holdings of two specific issuers, Adelphia Communications and WorldCom, Inc., were the primary causes of underperformance. Adelphia Communication's disclosure of off-balance sheet leverage, accounting irregularities and unreliable subscriber counts, which ultimately resulted in its filing Chapter 11 in June 2002, placed a very critical spotlight on the cable sector. In addition, WorldCom's sell-off on June 26 triggered one of the worst one-day losses in the history of the high yield market. WorldCom's revelation of accounting irregularities dealt a significant blow to the financial markets with WorldCom bond prices falling 25 to 60 points, depending on the issue. The Portfolio's overweight position in the cable and telecommunications sector also detracted from performance. The wireless telecommunications sector, which had suffered post September 11, 2001 as a result of reduced subscriber additions and greater scrutiny of their leveraged balance sheets, continued to experience heavy selling pressure and precipitously lower bond prices for most of the reporting period. Exacerbating this decline was the unexpected downgrading of the entire wireless telecommunications sector by Moody's, due to concerns over the material slowdown in subscriber additions, mature market conditions and the perceived difficulty for the market to support six national carriers competing on price. The Portfolio's overweight position in single B-rated securities also negatively impacted performance. Concerns regarding corporate governance had a negative effect on the market with investors becoming more risk adverse. In this more cautious environment, higher rated, double B securities outperformed lower rated single B securities. As the Portfolio was overweight in single B securities, this was a drag on the full year performance. It is worth noting that the market psychology changed in the fourth quarter, with both the Portfolio and index generating a 5.92% positive return for the three-month period ended December 31, 2002. As we mentioned earlier, during the second half of the year the Portfolio regained some of the underperformance, returning 4.94%, as compared to 2.94% for the 1 HIGH YIELD PORTFOLIO Alliance Variable Products Series Fund ================================================================================ CSFBHY Index for the six-month period ended December 31, 2002. Improved economic and market conditions, as well as stronger investor confidence in the second half of the year, resulted in positive returns for the cable and telecommunications sectors--the worst performers in the first half of the year. Nextel, a telecommunications provider, proved to be one of the Portfolio's top performers. This company's bonds rallied strongly after the company increased guidance for the second half of the year. The Portfolio also benefited from its allocation to the cable sector. Its holdings in Cablevision contributed positively to performance, as this company was viewed as a stable and cash flow producing company. At year-end, the Portfolio was overweight in the cable, wireless communications and services sectors and underweight in utilities and retailers. We increased the Portfolio's diversification, holding 233 securities at the end of the reporting period. MARKET REVIEW Performance of the high yield market has been plagued by concerns regarding accounting irregularities, negative earnings surprises and declining equity valuations. Downgrade pressure from the rating agencies continues, and an unprecedented number of "fallen angels"--securities downgraded from investment grade to speculative status--have contributed to the volatility in the marketplace. Particularly hard hit were the media cable and telecommunications sectors, while more defensive sectors fared better. As measured by the CSFBHY Index, the best performing industries for the annual reporting period included consumer durables at 16.04%, broadcasting at 15.65% and gaming/leisure at 14.40%. The cable/wireless, fixed telecommunications and utility industries were the worst performers, returning -21.80%, -15.32% and -15.00%, respectively. For 2002, the new issue market totaled $65.7 billion, with 261 new issues coming to market. Inflows to high yield mutual funds totaled $10.1 billion. Higher rated issuers outperformed in 2002 with double B-rated securities returning 5.97%, and single B- and triple C-rated securities returning 4.97% and -6.53%, respectively. The default rate peaked in early 2002, but it has fallen precipitously throughout the year. Historically, high default rates have been followed by periods of strong performance as investors have returned to the market. OUTLOOK Economic signals were mixed at the end of 2002. Auto sales were very strong in December. However, retail sales for the important holiday season were weaker than anticipated. New orders, as measured by the National Association of Purchasing Managers (NAPM) rose in December, another positive indicator. The stock market rallied in the fourth quarter of 2002, anticipating a more robust economy in 2003. Defaults have declined in each of the last six months as measured by Moody's. We anticipate a continuation of this trend in 2003. In addition, we expect high yield spreads to tighten with some of the contraction due to a rising Treasury yield curve. We believe this contraction, along with the coupon yield, should produce solid positive results for high yield in 2003. We remain optimistic for 2003, estimating real gross domestic product to grow at 4%. The expectation is that a stimulus package of tax cuts and spending will be proposed and passed by Congress early this year. Incoming data indicate that the U.S. economy is growing at about 2.5% annualized in the fourth quarter, better than many analysts and policymakers predicted. Progress toward resolving geopolitical tension may create volatility early on, however, we expect economic and financial performance to improve by mid-year. We remain focused on the fundamentals of individual issuers because one of the primary risks in this lower growth environment is that it places an additional strain on highly leveraged companies. Since economic growth varies greatly from one industry to another, fundamental credit research is critical in identifying the winners and the losers. With interest rates near all time lows and the economy slowly improving, we believe all high yield is likely to outperform over the next 12 to 18 months. We appreciate your investment in Alliance High Yield Portfolio and look forward to reporting further investment progress in the coming period. Sincerely, /s/ Michael A. Snyder Michael A. Snyder Vice President and Portfolio Manager 2 HIGH YIELD PORTFOLIO Alliance Variable Products Series Fund ================================================================================ PERFORMANCE UPDATE ALLIANCE HIGH YIELD PORTFOLIO GROWTH OF A $10,000 INVESTMENT 10/31/97*-12/31/02 [The following table was depicted as a mountain chart in the printed material.] Credit Suisse First Boston High Yield Index: $12,089 Alliance High Yield Portfolio: $9,185 Alliance High Credit Suisse First Yield Portfolio Boston High Yield Index -------------------------------------------------------------------------------- 10/31/97* $10,000 $10,000 12/31/97 $10,330 $11,263 12/31/98 $9,949 $11,328 12/31/99 $9,692 $11,700 12/31/00 $9,193 $11,090 12/31/01 $9,472 $11,726 12/31/02 $9,185 $12,089 Past performance is no guarantee of future results. This chart illustrates the total value of an assumed $10,000 investment in the Portfolio (from 10/31/97* to 12/31/02) as compared to the performance of an appropriate broad-based index. The unmanaged Credit Suisse First Boston High Yield (CSFBHY) Index is a trader-priced portfolio constructed to mirror the high yield debt market. An investor cannot invest directly in an index, and its results are not indicative of the performance for any specific investment, including Alliance High Yield Portfolio. -------------------------------------------------------------------------------- * Since closest month-end after Portfolio's inception date of 10/27/97. 3 HIGH YIELD PORTFOLIO PORTFOLIO OF INVESTMENTS December 31, 2002 Alliance Variable Products Series Fund ================================================================================ Principal Amount Company (000) U.S. $ Value -------------------------------------------------------------------------------- CORPORATE DEBT OBLIGATIONS-88.1% AEROSPACE/DEFENSE-0.9% K & F Industries, Inc. 9.625%, 12/15/10 (a).................... $ 80 $ 81,800 Sequa Corp. 9.00%, 8/01/09.......................... 70 67,550 Transdigm, Inc. 10.375%, 12/01/08 (a)................... 155 161,200 ------------ 310,550 ------------ AIR TRANSPORTATION-0.2% Dunlop Standard Aero Holdings 11.875%, 5/15/09........................ 80 82,100 ------------ AUTOMOTIVE-3.2% ArvinMeritor, Inc. 8.75%, 3/01/12.......................... 100 105,714 AutoNation, Inc. 9.00%, 8/01/08.......................... 50 50,750 Cummins, Inc. 9.50%, 12/01/10 (a)..................... 165 176,550 Dana Corp. 10.125%, 3/15/10........................ 250 254,375 Dura Operating Corp. 9.00%, 5/01/09.......................... 275 251,625 Lear Corp. 8.11%, 5/15/09.......................... 80 85,000 Stoneridge, Inc. 11.50%, 5/01/12......................... 75 72,000 United Auto Group, Inc. 9.625%, 3/15/12 (a)..................... 120 117,000 ------------ 1,113,014 ------------ BANKING-1.0% Cho Hung Bank Co., Ltd. 11.875%, 4/01/10 (a).................... 240 276,551 Hanvit Bank 12.75%, 3/01/10 (a)..................... 70 81,988 ------------ 358,539 ------------ BROADCASTING/MEDIA-5.4% Allbritton Communications Co. 7.75%, 12/15/12 (a)..................... 195 196,219 8.875%, 2/01/08......................... 170 176,587 9.75%, 11/30/07......................... 32 33,280 American Media Operations, Inc. 10.25%, 5/01/09...................... 165 171,600 Corus Entertainment, Inc. 8.75%, 3/01/12 (a)...................... 120 127,650 Emmis Communications Corp. 12.50%, 3/15/06 (b)..................... 100 80,750 Hollinger International Publishing, Inc. 9.00%, 12/15/10 (a)..................... 105 106,444 Mediacom Broadband LLC 11.00%, 7/15/13......................... 260 265,200 Paxson Communications Corp. 10.75%, 7/15/08......................... 255 252,769 Radio One, Inc. 8.875%, 7/01/11......................... 50 53,750 Sinclair Broadcast Group, Inc. 8.00%, 3/15/12 (a)...................... 65 68,088 8.00%, 3/15/12 (a)...................... 85 89,037 8.75%, 12/15/11 (a)..................... 75 81,094 Time Warner Telecom, Inc. 10.125%, 2/01/11........................ 185 100,825 Young Broadcasting, Inc. 8.50%, 12/15/08......................... 75 77,812 ------------ 1,881,105 ------------ BUILDING/ REAL ESTATE-3.5% Associated Materials, Inc. 9.75%, 4/15/12.......................... 65 68,900 Beazer Homes USA, Inc. 8.375%, 4/15/12......................... 155 160,425 D.R. Horton, Inc. 8.00%, 2/01/09.......................... 40 40,200 10.50%, 4/01/05......................... 40 42,400 Lennar Corp. 9.95%, 5/01/10.......................... 45 49,275 LNR Property Corp. 10.50%, 1/15/09......................... 315 319,725 M.D.C Holdings, Inc. 7.00%, 12/01/12......................... 90 87,300 Meritage Corp. 9.75%, 6/01/11.......................... 155 162,750 Schuler Homes, Inc. 10.50%, 7/15/11......................... 165 169,950 The Ryland Group, Inc. 9.75%, 9/01/10.......................... 40 44,000 Werner Holding Co., Inc. 10.00%, 11/15/07........................ 100 101,000 ------------ 1,245,925 ------------ CABLE-4.6% Charter Communications Holdings LLC 10.00%, 5/15/11......................... 150 67,500 10.75%, 10/01/09........................ 45 20,587 11.75%, 5/15/06 (b)..................... 835 212,925 Coaxial, Communications Inc. 10.00%, 8/15/06......................... 90 79,200 CSC Holdings, Inc. 7.625%, 7/15/18......................... 305 271,831 EchoStar DBS Corp. 9.25%, 2/01/06.......................... 300 315,000 9.375%, 2/01/09......................... 190 201,875 Innova S. de R.L. 12.875%, 4/01/07........................ 205 177,223 Insight Midwest LP 9.75%, 10/01/09 (a)..................... 180 171,900 PanAmSat Corp. 8.75%, 2/01/12 (a)...................... 100 96,000 ------------ 1,614,041 ------------ 4 Alliance Variable Products Series Fund ================================================================================ Principal Amount Company (000) U.S. $ Value -------------------------------------------------------------------------------- CHEMICALS-4.4% Avecia Group Plc 11.00%, 7/01/09......................... $ 330 $ 259,050 Equistar Chemicals LP 10.125%, 9/01/08........................ 155 141,825 Ferro Corp. 9.125%, 1/01/09......................... 115 121,526 FMC Corp. 10.25%, 11/01/09 (a).................... 160 173,600 Georgia Gulf Corp. 10.375%, 11/01/07....................... 215 228,975 Huntsman ICI Chemicals LLC 10.125%, 7/01/09........................ 365 304,775 Lyondell Chemical Co. 9.625%, 5/01/07......................... 115 110,975 10.875%, 5/01/09........................ 230 197,800 ------------ 1,538,526 ------------ COMMUNICATIONS - FIXED-1.4% Qwest Corp. 8.875%, 3/15/12 (a)..................... 210 204,750 Qwest Services Corp. 13.50%, 12/15/10 (a).................... 288 300,960 ------------ 505,710 ------------ COMMUNICATIONS - MOBILE-5.3% Dobson/Sygnet Communications 12.25%, 12/15/08........................ 270 207,900 Iridium Capital Corp. LLC 14.00%, 7/15/05 (c)..................... 550 35,750 Microcell Telecommunications, Inc. 14.00%, 6/01/06 (c)..................... 260 9,100 Nextel Communications, Inc. 9.375%, 11/15/09........................ 100 91,000 9.95%, 2/15/08.......................... 280 257,600 10.65%, 9/15/07 (b)..................... 225 216,000 Nextel Partners, Inc. 11.00%, 3/15/10......................... 85 72,675 12.50%, 11/15/09 (a).................... 105 95,025 14.00%, 2/01/04 (b)..................... 65 49,075 PTC International Finance II, SA 11.25%, 12/01/09........................ 200 213,000 Rural Cellular Corp. 9.75%, 1/15/10 (a)...................... 230 139,150 TeleCorp PCS, Inc. 10.625%, 7/15/10........................ 83 89,640 Tritel PCS, Inc. 10.375%, 1/15/11........................ 94 101,050 Triton PCS, Inc. 8.75%, 11/15/11......................... 65 52,975 11.00%, 5/01/08......................... 265 221,937 ------------ 1,851,877 ------------ CONSUMER MANUFACTURING-3.0% Applica, Inc. 10.00%, 7/31/08......................... 90 90,000 Collins & Aikman Floor Cover 9.75%, 2/15/10.......................... 110 110,550 10.75%, 12/31/11........................ 225 215,438 Pennzoil-Quaker State Co. 10.00%, 11/01/08 (a).................... 75 93,000 Playtex Products, Inc. 9.375%, 6/01/11......................... 105 116,550 Remington Products Co. LLC 11.00%, 5/15/06......................... 100 82,625 Salton, Inc. 12.25%, 4/15/08......................... 85 84,256 St. John Knits International, Inc. 12.50%, 7/01/09......................... 90 93,150 Tyco International, Ltd. 6.75%, 2/15/11............... 185 175,144 ------------ 1,060,713 ------------ ENERGY-2.4% Chesapeake Energy Corp. 7.75%, 1/15/15 (a)...................... 30 29,850 9.00%, 8/15/12.......................... 80 85,200 Grant Prideco, Inc. 9.00%, 12/15/09 (a)..................... 65 67,925 Grey Wolf, Inc. 8.875%, 7/01/07......................... 60 61,500 Parker & Parsley Petroleum Co. 8.875%, 4/15/05......................... 150 160,991 Petrobras International Finance Co. 9.125%, 2/01/07 (a)..................... 15 14,138 Pride International, Inc. 9.375%, 5/01/07......................... 160 168,000 Range Resources Corp. 8.75%, 1/15/07 (a)...................... 100 101,250 Westport Resources, Corp. 8.25%, 11/01/11 (a)..................... 55 58,025 XTO Energy, Inc. 7.50%, 4/15/12.......................... 90 96,075 ------------ 842,954 ------------ ENTERTAINMENT & LEISURE-2.0% Regal Cinemas, Inc. 9.375%, 2/01/12......................... 65 69,550 Royal Caribbean Cruises, Ltd. 8.75%, 2/02/11.......................... 185 172,975 Six Flags, Inc. 9.50%, 2/01/09.......................... 255 247,350 9.75%, 6/15/07.......................... 230 224,250 ------------ 714,125 ------------ 5 HIGH YIELD PORTFOLIO PORTFOLIO OF INVESTMENTS (continued) Alliance Variable Products Series Fund ================================================================================ Principal Amount Company (000) U.S. $ Value -------------------------------------------------------------------------------- FINANCIAL-2.5% Fairfax Financial Holdings, Ltd. 7.375%, 4/15/18......................... $ 55 $ 33,332 7.75%, 7/15/37.......................... 50 28,772 8.25%, 10/01/15......................... 30 20,340 Finova Group, Inc. 7.50%, 11/15/09......................... 225 78,750 iStar Financial, Inc. 8.75%, 8/15/08.......................... 130 138,503 Markel Capital Trust I 8.71%, 1/01/46.......................... 210 162,130 PXRE Capital Trust I 8.85%, 2/01/27.......................... 205 160,925 Western Financial Bank 9.625%, 5/15/12......................... 170 165,750 Williams Scotsman, Inc. 9.875%, 6/01/07......................... 110 102,300 ------------ 890,802 ------------ FOOD/BEVERAGE-1.9% B & G Foods, Inc. 9.625%, 8/01/07......................... 75 77,531 Dean Foods Co. 8.15%, 8/01/07.......................... 80 84,297 Del Monte Foods Co. 8.625%, 12/15/12 (a).................... 100 102,500 9.25%, 5/15/11.......................... 110 115,087 DIMON, Inc. 9.625%, 10/15/11........................ 75 79,688 Dole Food Co. 7.25%, 5/01/09.......................... 110 106,664 Swift & Co. 10.125%, 10/01/09 (a)................... 115 109,250 ------------ 675,017 ------------ GAMING-7.5% Ameristar Casinos, Inc. 10.75%, 2/15/09......................... 85 93,500 Argosy Gaming Co. 9.00%, 9/01/11.......................... 250 265,937 Boyd Gaming Corp. 7.75%, 12/15/12 (a)..................... 210 206,588 Harrahs Operating Co., Inc. 7.875%, 12/15/05........................ 230 244,375 Horseshoe Gaming Holding Corp. 8.625%, 5/15/09......................... 80 85,400 Las Vegas Sands, Inc. 11.00%, 6/15/10 (a)..................... 85 89,250 Mandalay Resort Group 10.25%, 8/01/07......................... 225 248,063 MGM Mirage, Inc. 8.375%, 2/01/11......................... 315 340,987 Mohegan Tribal Gaming Authority 8.375%, 7/01/11 (a)..................... 265 279,906 8.75%, 1/01/09.......................... 60 63,300 Park Place Entertainment Corp. 7.875%, 3/15/10......................... 90 92,025 9.375%, 2/15/07......................... 195 208,650 Station Casinos, Inc. 8.375%, 2/15/08......................... 155 165,463 Sun International Hotels, Ltd. 8.875%, 8/15/11 (a)..................... 160 164,000 Turning Stone Casino Resort Enterprises 9.125%, 12/15/10 (a).................... 80 82,200 ------------ 2,629,644 ------------ HEALTHCARE-5.9% Advanced Medical Optics, Inc. 9.25%, 7/15/10 (a)...................... 110 113,850 Alliance Imaging, Inc. 10.375%, 4/15/11........................ 75 73,500 AmerisourceBergen, Corp. 8.125%, 9/01/08......................... 75 80,250 Concentra Operating Corp. 13.00%, 8/15/09......................... 221 224,315 Extendicare Health Services, Inc. 9.50%, 7/01/10 (a)...................... 160 156,000 Hanger Orthopedic Group, Inc. 10.375%, 2/15/09........................ 145 150,800 HCA-The Healthcare Co. 7.875%, 2/01/11......................... 225 247,060 Iasis Healthcare Corp. 13.00%, 10/15/09........................ 205 219,350 Omnicare Inc. 8.125%, 3/15/11......................... 95 102,125 PacifiCare Health Systems, Inc. 10.75%, 6/01/09......................... 200 215,000 Triad Hospitals, Inc. 8.75%, 5/01/09.......................... 100 107,625 11.00%, 5/15/09......................... 125 138,750 Vanguard Health Systems, Inc. 9.75%, 8/01/11.......................... 160 153,600 Ventas Realty LP 9.00%, 5/01/12.......................... 80 84,000 ------------ 2,066,225 ------------ HOME FURNISHINGS-0.4% Sealy Mattress Co. 9.875%, 12/15/07........................ 160 154,400 ------------ HOTEL/LODGING-5.0% Extended Stay America, Inc. 9.875%, 6/15/11......................... 330 336,600 Felcor Lodging LP 8.50%, 6/01/11.......................... 35 34,650 9.50%, 9/15/08.......................... 125 128,125 Host Marriott LP 9.25%, 10/01/07......................... 290 294,350 9.50%, 1/15/07.......................... 135 137,700 Intrawest Corp. 10.50%, 2/01/10......................... 240 253,200 6 Alliance Variable Products Series Fund ================================================================================ Principal Amount Company (000) U.S. $ Value -------------------------------------------------------------------------------- MeriStar Hospitality Corp. 9.125%, 1/15/11......................... $ 145 $ 126,875 10.50%, 6/15/09......................... 80 73,400 Starwood Hotels & Resorts Worldwide, Inc. 7.875%, 5/01/12 (a)..................... 250 248,750 Vail Resorts, Inc. 8.75%, 5/15/09.......................... 105 108,150 ------------ 1,741,800 ------------ INDUSTRIAL-5.4% Airgas, Inc. 9.125%, 10/01/11........................ 115 124,775 Amtrol, Inc. 10.625%, 12/31/06....................... 145 71,050 Applied Extrusion Technologies, Inc. 10.75%, 7/01/11......................... 180 86,400 Flowserve Corp. 12.25%, 8/15/10......................... 150 164,250 H&E Equipment Services, Inc. 11.125%, 6/15/12 (a).................... 110 83,050 LIN Holdings Co. 10.00%, 3/01/03 (b)..................... 310 318,137 NMHG Holdings Co. 10.00%, 5/15/09......................... 105 105,525 Resolution Performance Products LLC 13.50%, 11/15/10........................ 230 243,800 Rexnord Corp. 10.125%, 12/15/12 (a)................... 85 87,550 Russell-Stanley Holdings, Inc. ......................... 10 0 9.00%, 11/30/08 (a)(d).................. 73 54,843 Service Corp. International 6.00%, 12/15/05......................... 40 37,800 6.50%, 3/15/08.......................... 55 49,500 SPX Corp. 7.50%, 1/01/13.......................... 180 183,375 Terex Corp. 10.375%, 4/01/11........................ 145 137,025 TriMas Corp. 9.875%, 6/15/12 (a)..................... 95 94,525 9.875%, 6/15/12 (a)..................... 45 44,775 ------------ 1,886,380 ------------ MINING & METALS-2.1% Earle M. Jorgensen Co. 9.75%, 6/01/12.......................... 115 117,588 Peabody Energy Corp. 9.625%, 5/15/08......................... 245 260,006 Steel Dynamics Inc. 9.50%, 3/15/09.......................... 100 105,250 United States Steel Corp. 10.75%, 8/01/08......................... 255 252,450 ------------ 735,294 ------------ PAPER/PACKAGING-6.7% Abitibi-Consolidated, Inc. 8.55%, 8/01/10.......................... 170 188,998 Ball Corp. 6.875%, 12/15/12 (a).................... 85 85,850 Berry Plastics Corp. 10.75%, 7/15/12......................... 160 171,200 Bowater, Inc. 7.95%, 11/15/11......................... 85 89,988 Caraustar Industries, Inc. 9.875%, 4/01/11......................... 80 82,800 Doman Industries, Ltd. 12.00%, 7/01/04......................... 65 60,206 Graphic Packaging International Corp. 8.625%, 2/15/12......................... 80 84,600 MDP Acquisitions Plc 9.625%, 10/01/12 (a).................... 165 172,425 Owens-Brockway Glass Container 8.875%, 2/15/09......................... 175 181,125 Owens-Illinois, Inc. 7.80%, 5/15/18.......................... 85 72,675 7.85%, 5/15/04.......................... 175 173,687 Plastipak Holdings, Inc. 10.75%, 9/01/11 (a)..................... 240 253,500 Pliant Corp. warrants, expiring 6/01/10 (a)(e)................. 0 56 13.00%, 6/01/10......................... 105 96,863 13.00%, 6/01/10......................... 20 18,400 Riverwood International Corp. 10.625%, 8/01/07........................ 245 254,800 Smurfit-Stone Container Corp. 8.25%, 10/01/12 (a)..................... 40 41,000 Stone Container Corp. 9.25%, 2/01/08.......................... 70 74,375 9.75%, 2/01/11.......................... 155 166,625 Tembec Industries, Inc. 8.625%, 6/30/09......................... 85 86,063 ------------ 2,355,236 ------------ PETROLEUM PRODUCTS-0.4% Frontier Oil Corp. 11.75%, 11/15/09........................ 150 155,250 ------------ PUBLIC UTILITIES - ELECTRIC & GAS-0.3% TECO Energy, Inc. 10.50%, 12/01/07 (a).................... 95 93,205 ------------ 7 HIGH YIELD PORTFOLIO PORTFOLIO OF INVESTMENTS (continued) Alliance Variable Products Series Fund ================================================================================ Principal Amount Company (000) U.S. $ Value -------------------------------------------------------------------------------- PUBLISHING-0.9% Dex Media East LLC 9.875%, 11/15/09 (a).................... $ 50 $ 53,750 12.125%, 11/15/12 (a)................... 75 83,437 R.H. Donnelley Corp. 8.875%, 12/15/10 (a).................... 55 59,125 10.875%, 12/15/12 (a)................... 110 120,450 ------------ 316,762 ------------ RETAIL-2.2% Advance Stores Co., Inc. 10.25%, 4/15/08......................... 205 218,325 Jostens, Inc. warrants, expiring 5/01/10 (a)(d)................. 0 6,800 12.75%, 5/01/10 ........................ 280 319,200 Pathmark Stores, Inc. 8.75%, 2/01/12.......................... 5 4,625 Rite Aid Corp. 11.25%, 7/01/08......................... 255 237,150 ------------ 786,100 ------------ SERVICES-6.0% Alderwoods Group, Inc. 11.00%, 1/02/07......................... 75 75,777 12.25%, 1/02/09......................... 100 91,500 Allied Waste North America, Inc. 8.50%, 12/01/08......................... 225 227,250 8.875%, 4/01/08......................... 180 183,600 10.00%, 8/01/09......................... 330 329,175 Avis Rent a Car, Inc. 11.00%, 5/01/09......................... 275 302,500 Coinmach Corp. 9.00%, 2/01/10.......................... 105 110,644 Corrections Corp. of America 9.875%, 5/01/09 (a)..................... 125 133,125 Iron Mountain, Inc. 8.625%, 4/01/13......................... 150 157,500 National Waterworks, Inc. 10.50%, 12/01/12 (a).................... 95 99,631 Service Corp. 7.70%, 4/15/09 (a)...................... 290 272,600 Stewart Enterprises, Inc. 10.75%, 7/01/08......................... 120 133,200 ------------ 2,116,502 ------------ SUPERMARKET/DRUG-0.8% Roundy's, Inc. 8.875%, 6/15/12......................... 115 113,275 Stater Bros. Holdings, Inc. 10.75%, 8/15/06......................... 150 153,000 ------------ 266,275 ------------ TECHNOLOGY-1.7% Fairchild Semiconductor Corp. 10.50%, 2/01/09......................... $ 225 $ 244,125 Filtronic Plc 10.00%, 12/01/05........................ 245 224,175 Flextronics International, Ltd. 9.875%, 7/01/10......................... 30 32,475 ON Semiconductor Corp. 12.00%, 5/15/08 (a)..................... 130 96,200 ------------ 596,975 ------------ CONTAINERS-1.1% BWAY Corp. 10.00%, 10/15/10 (a).................... 85 88,613 Greif Bros. Corp. 8.875%, 8/01/12 (a)..................... 105 111,825 Silgan Holdings, Inc. 9.00%, 6/01/09.......................... 165 172,837 ------------ 373,275 ------------ Total Corporate Debt Obligations (cost $31,979,436)...................... 30,958,321 ------------ PREFERRED STOCKS-3.7% CABLE-1.7% CSC Holdings, Inc. 11.125%, 4/01/08........................ 4,850 452,263 11.75%, 10/01/07........................ 1,500 142,875 ------------ 595,138 ------------ CHEMICALS-0.1% Avecia Group Plc 16.00%, 7/01/10................................. 1,728 22,464 ------------ COMMUNICATIONS - FIXED-0.1% Broadwing Communications, Inc. 12.50%, 8/15/09......................... 2,800 25,550 ------------ COMMUNICATIONS - MOBILE-0.7% Nextel Communications, Inc. 11.125%, 2/15/03 (d).................... 303 265,125 ------------ BROADCAST/MEDIA-1.1% Sinclair Broadcast Group, Inc. 11.625%................................. 250 26,563 Sovereign Real Estate Investor Trust 12.00%, 8/29/49 (a)..................... 335 372,687 ------------ 399,250 ------------ Total Preferred Stocks (cost $1,343,906)....................... 1,307,527 ------------ 8 Alliance Variable Products Series Fund ================================================================================ Principal Amount Company (000) U.S. $ Value -------------------------------------------------------------------------------- SOVEREIGN DEBT OBLIGATIONS-1.9% Republic of Brazil 8.00%, 4/15/14.......................... $ 166 $ 109,303 Republic of Bulgaria 8.25%, 1/15/15.......................... 40 43,700 Republic of Colombia 10.00%, 1/23/12......................... 85 86,275 Republic of Panama 10.75%, 5/15/20......................... 30 33,525 Republic of Peru 9.125%, 2/21/12......................... 60 59,025 Republic of Philippines 10.625%, 3/16/25........................ 45 46,463 Republic of Ukraine 11.00%, 3/15/07......................... 29 30,411 Russian Federation 5.00%, 3/30/30 (a) (b).................. 250 199,062 5.00%, 3/31/30.......................... 55 43,794 ------------ (cost $575,548)......................... 651,558 ------------ SHORT-TERM INVESTMENT-4.2% TIME DEPOSIT-4.2% State Street Euro Dollar 0.75%, 1/02/03 (cost $1,468,000)....................... $1,468 $ 1,468,000 ------------ TOTAL INVESTMENTS-97.9% (cost $35,366,890)...................... 34,385,406 Other assets less liabilities(f)-2.1%..................... 745,712 ------------ NET ASSETS-100%............................. $ 35,131,118 ============ -------------------------------------------------------------------------------- (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, 2002, the aggregate market value of these securities amounted to $7,369,572 or 21.0% of net assets. (b) Indicates a security that has a zero coupon that remains in effect until a predetermined date at which time the stated coupon rate becomes effective until final maturity. (c) Security is in default and is non-income producing. (d) PIK (Paid-in-kind) preferred quarterly stock payments. (e) Non-income producing security. (f) Includes cash collateral received of $158,000 for securities on loan as of December 31, 2002 (see Note F). The lending agent invested the cash in a short-term investment as follows: Current Yield Shares Value --------- ---------- ---------- UBS Private Money Market Fund, LLC 1.46% 158,000 $158,000 See Notes to Financial Statements. 9 HIGH YIELD PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES December 31, 2002 Alliance Variable Products Series Fund ================================================================================ ASSETS Investments in securities, at value (cost $35,366,890) .... $ 34,385,406(a) Cash ...................................................... 23,921 Dividends and interest receivable ......................... 811,745 Collateral held for securities loaned ..................... 158,000 Receivable for capital stock sold ......................... 14,744 ------------ Total assets .............................................. 35,393,816 ------------ LIABILITIES Payable for collateral received on securities loaned ...... 158,000 Payable for capital stock redeemed ........................ 47,098 Advisory fee payable ...................................... 22,208 Accrued expenses .......................................... 35,392 ------------ Total liabilities ......................................... 262,698 ------------ NET ASSETS ................................................... $ 35,131,118 COMPOSITION OF NET ASSETS Capital stock, at par ..................................... $ 5,141 Additional paid-in capital ................................ 50,609,948 Undistributed net investment income ....................... 2,576,630 Accumulated net realized loss on investment transactions .. (17,079,117) Net unrealized depreciation of investments ................ (981,484) ------------ $ 35,131,118 ============ Class A Shares Net assets ................................................ $ 34,764,775 ============ Shares of capital stock outstanding ....................... 5,087,302 ------------ Net asset value per share ................................. $ 6.83 ============ Class B Shares Net assets ................................................ $ 366,343 ============ Shares of capital stock outstanding ....................... 53,531 ============ Net asset value per share ................................. $ 6.84 ============ -------------------------------------------------------------------------------- (a) Includes securities on loan with a value of $154,000 (see Note F). See Notes to Financial Statements. 10 HIGH YIELD PORTFOLIO STATEMENT OF OPERATIONS Year Ended December 31, 2002 Alliance Variable Products Series Fund ================================================================================ INVESTMENT INCOME Interest ........................................................... $ 2,865,374 Dividends .......................................................... 109,379 ----------- Total investment income ............................................ 2,974,753 ----------- EXPENSES Advisory fee ....................................................... 249,075 Distribution fee -- Class B ........................................ 48 Custodian .......................................................... 106,131 Administrative ..................................................... 69,000 Audit and legal .................................................... 28,104 Printing ........................................................... 8,118 Transfer agency .................................................... 947 Directors' fees and expenses ....................................... 900 Miscellaneous ...................................................... 20,857 ----------- Total expenses ..................................................... 483,180 Less: expenses waived and reimbursed (see Note B) .................. (91,929) ----------- Net expenses ....................................................... 391,251 ----------- Net investment income .............................................. 2,583,502 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS Net realized loss on investment transactions ....................... (4,355,071) Net change in unrealized appreciation/depreciation of investments .. 739,335 ----------- Net loss on investment transactions ................................ (3,615,736) ----------- NET DECREASE IN NET ASSETS FROM OPERATIONS ............................ $(1,032,234) ===========
-------------------------------------------------------------------------------- See Notes to Financial Statements. 11 HIGH YIELD PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS Alliance Variable Products Series Fund ================================================================================
Year Ended Year Ended December 31, December 31, 2002 2001 ------------ ------------ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income ............................................... $ 2,583,502 $ 2,168,710 Net realized loss on investment transactions ........................ (4,355,071) (2,876,948) Net change in unrealized appreciation/depreciation of investments ... 739,335 1,321,559 ------------ ------------ Net increase (decrease) in net assets from operations ............... (1,032,234) 613,321 DIVIDENDS TO SHAREHOLDERS FROM Net investment income Class A ........................................................... (2,125,869) (2,037,954) Class B ........................................................... -0- -0- CAPITAL STOCK TRANSACTIONS Net increase ........................................................ 7,005,841 10,375,324 ------------ ------------ Total increase ................................................... 3,847,738 8,950,691 NET ASSETS Beginning of period ................................................. 31,283,380 22,332,689 ------------ ------------ End of period (including undistributed net investment income of $2,576,630 and $2,123,305, respectively) .......................... $ 35,131,118 $ 31,283,380 ============ ============
-------------------------------------------------------------------------------- See Notes to Financial Statements. 12 HIGH YIELD PORTFOLIO NOTES TO FINANCIAL STATEMENTS December 31, 2002 Alliance Variable Products Series Fund ================================================================================ NOTE A: Significant Accounting Policies The High Yield Portfolio (the "Portfolio") is a series of Alliance Variable Products Series Fund, Inc. (the "Fund"). The Portfolio's investment objective is to seek to earn the highest level of current income without assuming undue risk by investing principally in high yielding, fixed-income securities rated Baa or lower by Moody's or BBB or lower by S&P Duff &Phelps or Fitch or, if unrated of comparable quantity. 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. Both classes of shares have identical voting, dividend, liqudating and other rights, except that Class B shares bear a distribution expense and have exclusive voting rights with respect to the Class B distribution plan. 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 prices 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 prices. 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 prices of such currencies against the U.S. dollar. Purchases and sales of portfolio investments are translated into U.S. dollars at the rates of exchange prevailing when such securities were acquired or sold. Income and expenses are translated into U.S. dollars at rates of exchange prevailing when accrued. Net realized gain or loss on foreign currency transactions represents foreign exchange gains and losses from sales and maturities of foreign fixed income investments and foreign currency exchange contracts, holding of foreign currencies, currency gains or losses realized between the trade and settlement dates on foreign investment transactions, and the difference between the amounts of dividends, interest and foreign withholding taxes 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 amortizes premiums and 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 13 HIGH YIELD PORTFOLIO NOTES TO FINANCIAL STATEMENTS (continued) Alliance Variable Products Series Fund ================================================================================ 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 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. 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 the tax treatment of bond premium, resulted in a net increase in undistributed net investment income and a corresponding increase in accumulated net realized loss on investment transactions. This reclassification had no effect on net assets. -------------------------------------------------------------------------------- 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 annual rate of .75 of 1% of the Portfolio's average daily net assets. Such fee is accrued daily and paid monthly. Prior to May 1, 2002, the Adviser agreed to waive its fee and to reimburse the additional operating expenses ("Expense Limitation Undertaking") 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. The Adviser terminated the Expense Limitation Undertaking effective May 1, 2002. Any expense waivers or reimbursements are accrued daily and paid monthly. For the year ended December 31, 2002, the Adviser waived fees in the amount of $22,929. Pursuant to the terms of the investment advisory agreement, the Portfolio has agreed to reimburse the Adviser for the cost of providing the Portfolio with certain legal and accounting services. For the year ended December 31, 2002, the Adviser voluntarily waived such reimbursement in the amount of $69,000. The Portfolio compensates Alliance Global Investor 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 $947 for the year ended December 31, 2002. -------------------------------------------------------------------------------- NOTE C: Distribution Plan The Portfolio has adopted a Distribution Plan (the "Plan") for Class B shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the Plan, the Portfolio pays distribution and servicing fees to Alliance Fund Distributors, Inc. (the "Distributor"), a wholly-owned subsidiary of the Adviser, at an annual rate of up to .50 of 1% 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 limits payments under the Plan to .25 of 1% 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. 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 Class B 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 Securities and Exchange 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 Portfolios to the Distributor. The Plan also provides that the Adviser may use its own resources to finance the distribution of the Portfolio's shares. 14 Alliance Variable Products Series Fund ================================================================================ NOTE D: Investment Transactions Purchases and sales of investment securities (excluding short-term investments) for the year ended December 31, 2002, were as follows: Purchases: Stocks and debt obligations ................................. $ 35,769,530 U.S. government and agencies ................................ -0- Sales: Stocks and debt obligations ................................. $ 23,377,339 U.S. government and agencies ................................ -0- At December 31, 2002, the cost of investments for federal income tax purposes was $35,441,583 Accordingly, gross unrealized appreciation and unrealized depreciation are as follows: Gross unrealized appreciation ............................... $ 1,370,600 Gross unrealized depreciation ............................... (2,426,777) ------------ Net unrealized depreciation ................................. $ (1,056,177) ============ 1. Forward Exchange Currency Contracts The Portfolio may enter into forward exchange currency contracts to hedge its exposure to changes in foreign currency exchange rates on its 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 on 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 net realized gain or loss on foreign currency transactions. Fluctuations in the value of outstanding 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 a value at least 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, 2002, 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 and foreign currencies that are traded on U.S. securities exchanges and over-the-counter markets. The risk associated with purchasing an option is that the Portfolio pays a premium whether or not the option is exercised. Additionally, the Portfolio bears the risk of loss of premium and change in market value should the counterparty not perform under the contract. Put and call options purchased are accounted for in the same manner as portfolio securities. The cost of securities acquired through the exercise of call options is increased by premiums paid. The proceeds from securities sold through the exercise of put options are decreased by the premiums paid. When the Portfolio writes an option, the premium received by the Portfolio is recorded as a liability and is subsequently adjusted to the current market value of the option written. Premiums received from 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 writ- 15 HIGH YIELD PORTFOLIO NOTES TO FINANCIAL STATEMENTS (continued) Alliance Variable Products Series Fund ================================================================================ ing 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, 2002. NOTE E: Distributions to Shareholders The tax character of distributions paid during the fiscal years ended December 31, 2002 and December 31, 2001 were as follows: 2002 2001 ============ ============ Distributions paid from: Ordinary income ....................... $ 2,125,869 $ 2,037,954 ------------ ------------ Total taxable distributions .............. 2,125,869 2,037,954 ------------ ------------ Total distributions paid ................. $ 2,125,869 $ 2,037,954 ============ ============ As of December 31, 2002, the components of accumulated earnings/(deficit) on a tax basis were as follows: Undistributed ordinary income ........................... $ 2,576,630 Accumulated capital and other losses .................... (17,004,424)(a) Unrealized appreciation/(depreciation) .................. (1,056,177)(b) ------------ Total accumulated earnings/(deficit) .................... $(15,483,971) ============ (a) On December 31, 2002, the Portfolio had a net capital loss carryforward of $16,871,043 of which $63,971 will expire in the year 2006, $3,933,459 will expire in the year 2007, $5,774,960 will expire in the year 2008, $2,890,265 will expire in the year 2009 and $4,208,388 will expire in the year 2010. To the extent future capital gains are offset by capital loss carryforwards, such gains will not be distributed. Based on certain provisions in the Internal Revenue Code, various limitations regarding the future utilization of these carryforwards, brought forward as a result of the Portfolio's merger with Brinson Series Trust High Income Portfolio, may apply. Net capital 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, 2002, the Portfolio deferred to January 1, 2003, post October capital losses of $133,381. (b) The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to the tax deferral of losses on wash sales. -------------------------------------------------------------------------------- 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 earns fee income from the lending transactions or it retains a portion of interest on the investment of any cash received as collateral. The Portfolio also continues to receive dividends or interest on the securities loaned. Unrealized gain or loss in the value of the securities loaned that may occur during the term of the loan will be reflected in the accounts of the Portfolio. 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 received in an eligible money market vehicle in accordance with the investment restrictions of the Portfolio. The lending agent will indemnify the Portfolio for any loss resulting from a borrower's failure to return a loaned security when due. As of December 31, 2002, the Portfolio had loaned securities with a value of $154,000 and received cash collateral of $158,000 which was invested in a money market fund as included in the footnotes in the accompanying portfolio of investments. For the year ended December 31, 2002, the Portfolio earned fee income of $482 which is included in interest income in the accompanying statement of operations. 16 Alliance Variable Products Series Fund ================================================================================ NOTE G: Capital Stock There are 1,000,000,000 shares of $.001 par value capital stock authorized, divided into two classes, designated Class A and Class B shares. Each class consists of 500,000,000 authorized shares. 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, 2002 2001 2002 2001 ============ ============ ============ ============ Class A Shares sold .................................... 1,640,577 1,898,761 $ 11,549,210 $ 14,804,355 Shares issued in connection with acquisition of Brinson Series Trust High Income Portfolio ....................... -0- 82,390 -0- 604,121 Shares issued in reinvestment of dividends ................................... 309,442 268,152 2,125,868 2,037,954 Shares redeemed ................................ (1,030,895) (903,663) (7,032,050) (7,071,106) ------------ ------------ ------------ ------------ Net increase ................................... 919,124 1,345,640 $ 6,643,028 $ 10,375,324 ============ ============ ============ ============ Shares Amount July 22, 2002(a) to July 22, 2002(a) to December 31, December 31, 2002 2002 =================== =================== Class B Shares sold .................................... 103,564 $ 704,198 Shares issued in reinvestment of dividends ................................... -0- -0- Shares redeemed ................................ (50,033) (341,385) ------------ ------------ Net increase ................................... 53,531 $ 362,813 ============ ============
-------------------------------------------------------------------------------- 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: Joint Credit Facility 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, 2002. -------------------------------------------------------------------------------- (a) Commencement of distributions. 17 HIGH YIELD PORTFOLIO NOTES TO FINANCIAL STATEMENTS (continued) Alliance Variable Products Series Fund ================================================================================ NOTE J: Acquisition of Brinson Series Trust High Income Portfolio On October 26, 2001, the Portfolio acquired all of the assets and liabilities, of the Brinson Series Trust High Income Portfolio pursuant to a plan of reorganization approved by the shareholders of Brinson Series Trust High Income Portfolio on March 1, 2001. The acquisition was accomplished by a tax-free exchange of 82,390 shares of the Portfolio for 79,463 shares of Brinson Series Trust High Income Portfolio on October 26, 2001. The aggregate net assets of the Portfolio and Brinson Series Trust High Income Portfolio immediately before the acquisition were $28,122,652 and $604,121 (including $2,248 net unrealized depreciation of investments), respectively. Immediately after the acquisition, the combined net assets of the Portfolio amounted to $28,726,773. 18 HIGH YIELD 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, ============================================================ 2002 2001 (a) 2000 1999 1998 ======== ======== ======== ======== ======== NET ASSET VALUE, BEGINNING OF PERIOD .................... $ 7.51 $ 7.91 $ 9.14 $ 9.94 $ 10.33 -------- -------- -------- -------- -------- Income From Investment Operations Net investment income (b)(c) ............................ .54 .63 .74 .91 1.03 Net realized and unrealized loss on investment and foreign currency transactions .................... (.76) (.38) (1.18) (1.16) (1.41) -------- -------- -------- -------- -------- Net increase (decrease) in net asset value from operations ........................................... (.22) .25 (.44) (.25) (.38) -------- -------- -------- -------- -------- Less: Dividends Dividends from net investment income .................... (.46) (.65) (.79) (.55) (.01) -------- -------- -------- -------- -------- Net asset value, end of period .......................... $ 6.83 $ 7.51 $ 7.91 $ 9.14 $ 9.94 ======== ======== ======== ======== ======== Total Return Total investment return based on net asset value (d) .... (3.03)% 3.04% (5.15)% (2.58)% (3.69)% Ratios/Supplemental Data Net assets, end of period (000's omitted) ............... $ 34,765 $ 31,283 $ 22,333 $ 24,567 $ 16,910 Ratio to average net assets of: Expenses, net of waivers and reimbursements .......... 1.18% .95% .95% .95% .95% Expenses, before waivers and reimbursements .......... 1.45% 1.51% 1.42% 1.40% 1.80% Net investment income (b) ............................ 7.78% 8.08% 8.68% 9.72% 9.77% Portfolio turnover rate ................................. 83% 95% 175% 198% 295%
-------------------------------------------------------------------------------- See footnote summary on page 20. 19 HIGH YIELD PORTFOLIO FINANCIAL HIGHLIGHTS (continued) Alliance Variable Products Series Fund ================================================================================ Selected Data For A Share Of Capital Stock Outstanding Throughout The Period ------------ Class B ------------ July 22, 2002(e) to December 31, 2002 ============ Net asset value, beginning of period ............................ $ 6.45 ------- Income From Investment Operations Net investment income (b)(c) .................................... .15 Net realized and unrealized gain on investment transactions ..... .24 ------- Net increase in net asset value from operations ................. .39 ------- Net asset value, end of period .................................. $ 6.84 ======= Total Return Total investment return based on net asset value (d) ............ 6.05% Ratios/Supplemental Data Net assets, end of period (000's omitted) ....................... $ 366 Ratio to average net assets of: EXPENSES, NET OF WAIVERS AND REIMBURSEMENTS (F) .............. 1.42% Expenses, before waivers and reimbursements (f) .............. 1.63% Net investment income (b)(f) ................................. 8.39% Portfolio turnover rate ......................................... 83% -------------------------------------------------------------------------------- (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 the year ended December 31, 2002, the effect of this change was to decrease net investment income by less than $.01 per share, decrease net realized and unrealized loss on investments by less than $.01 per share and decrease the ratio of net investment income to average net assets from 8.14% to 8.08%. 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 Return does not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. Total investment return calculated for a period of less than one year is not annualized. (e) Commencement of distributions. (f) Annualized. 20 REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS Alliance Variable Products Series Fund ================================================================================ To the Shareholders and Board of Directors High Yield Portfolio Alliance Variable Products Series Fund, Inc. We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the High Yield 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, 2002, 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 High Yield Portfolio of the Alliance Variable Products Series Fund, Inc. at December 31, 2002, 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 3, 2003 21 HIGH YIELD 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 5 Times Square New York, NY 10036 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. 22 HIGH YIELD 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, AGE OF DIRECTOR, PRINCIPAL COMPLEX DIRECTORSHIPS ADDRESS, OCCUPATION(S) OVERSEEN BY HELD BY (YEARS OF SERVICE*) DURING PAST 5 YEARS DIRECTOR DIRECTOR -------------------------------------------------------------------------------------------------------------------------- INTERESTED DIRECTOR John D. Carifa,** 57 President, Chief Operating Officer and 114 None 1345 Avenue of the Americas a Director of Alliance Capital Management New York, NY 10105 Corporation ("ACMC"), with which he has (13) been associated since prior to 1998. DISINTERESTED DIRECTORS Ruth Block, #+, 72 Formerly an Executive Vice President and 93 None P.O. Box 4623 Chief Insurance Officer of The Equitable Stamford, CT 06903 Life Assurance Society of the United States; (11) Chairman and Chief Executive Officer of Evlico; formerly a Director of Avon, BP Amoco Corporation (oil and gas), Ecolab Incorporated (specialty chemicals), Tandem Financial Group, and Donaldson Lufkin & Jenrette Securities Corporation. David H. Dievler, #+, 73 Independent consultant. Until December 98 None P.O. Box 167 1994 he was Senior Vice President of ACMC Spring Lake, NJ 07762 responsible for mutual fund administration. (13) Prior to joining ACMC in 1984 he was Chief Financial Officer of Eberstadt Asset Management since 1968. Prior to that he was a Senior Manager at Price Waterhouse & Co. Member of American Institute of Certified Public Accountants since 1953. John H. Dobkin, #+, 60 Consultant. He was formerly a Senior Advisor 94 None P.O. Box 12 from June 1999 - June 2000 and President Annandale, NY 12504 of Historic Hudson Valley (December 1989 - (11) May 1999). Previously, Director of the National Academy of Design and during 1988-92, he was Director and Chairman of the Audit Committee of ACMC. William H. Foulk, Jr., #+, 70 Investment adviser and an independent 110 None Suite 100 consultant. He was formerly Senior 2 Sound View Drive Manager of Barrett Associates, Inc., a Greenwich, CT 06830 registered investment adviser, with which (13) he had been associated since prior to 1998. He was formerly Deputy Comptroller of the State of New York and, prior thereto, Chief Investment Officer of the New York Bank for Savings.
23 HIGH YIELD PORTFOLIO Alliance Variable Products Series Fund ================================================================================
PORTFOLIOS IN FUND OTHER NAME, AGE OF DIRECTOR, PRINCIPAL COMPLEX DIRECTORSHIPS ADDRESS, OCCUPATION(S) OVERSEEN BY HELD BY (YEARS OF SERVICE*) DURING PAST 5 YEARS DIRECTOR DIRECTOR -------------------------------------------------------------------------------------------------------------------------- DISINTERESTED DIRECTORS (continued) Clifford L. Michel, #+, 63 Senior Counsel of the law firm of Cahill 93 Placer Dome Inc. 15 St. Bernard's Road Gordon & Reindel since February 2001 Gladstone, NJ 07934 and a partner of that firm for more than (11) twenty-five years prior thereto. He is President and Chief Executive Officer of Wenonah Development Company (investments) and a Director of Placer Dome Inc. (mining). Donald J. Robinson, #+, 68 Senior Counsel to the law firm of Orrick, 92 None 98 Hell's Peak Road Herrington & Sutcliffe since prior to 1998. Weston, VT 05161 Formerly a senior partner and a member of (7) the Executive Committee of that firm. He was also a member and Chairman of the Municipal Securities Rulemaking Board and Trustee of the Museum of the City of New York.
-------------------------------------------------------------------------------- * There is no stated term of office for the 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. 24 HIGH YIELD PORTFOLIO Alliance Variable Products Series Fund ================================================================================ Officer Information Certain information concerning the Fund's Officers is listed below.
NAME, ADDRESS* POSITION(S) HELD PRINCIPAL OCCUPATION AND AGE WITH FUND DURING PAST 5 YEARS** ------------------------------------------------------------------------------------------------------------ John D. Carifa, 57 Chairman & President See biography above. Kathleen A. Corbet, 43 Senior Vice President Executive Vice President of ACMC, with which she has been associated since prior to 1998. George D. Caffrey, 49 Vice President Vice President of ACMC and a Portfolio Manager since January 2000. Prior thereto, he headed the High Yield Bond Group at AIG Global Investment Corp. since prior to 1998. Michael A. Snyder, 40 Vice President Senior Vice President of ACMC since May, 2001. Prior thereto he was a Managing Director in the high yield asset management group at Donaldson, Lufkin & Jenrette Corporation since 1998. Edmund P. Bergan, Jr., 52 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 1998. Mark D. Gersten, 52 Treasurer and Chief Senior Vice President of AGIS and Vice President of AFD, with which he has been Financial Officer associated since prior to 1998. Thomas R. Manley, 51 Controller Vice President of ACMC, with which he has been associated since prior to 1998.
-------------------------------------------------------------------------------- * The address for each of the Fund's Officers is 1345 Avenue of the Americas, New York, NY 10105. ** ACMC, AFD, 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. 25