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Filed Pursuant to Rule 497(c)
File No. 333-17217
EQ ADVISORS TRUST
1290 Avenue of the Americas -- New York, New York 10104
EQ Advisors Trust ("Trust") is an open-end management investment company that
offers a selection of professionally managed investment portfolios
("Portfolios"). Each Portfolio has its own investment objective and policies
that are designed to meet different investment goals.
This Prospectus describes the following five Portfolios currently offered by
the Trust pursuant to this Prospectus.
o EQ/Putnam Growth & Income Value Portfolio
o EQ/Putnam Investors Growth Portfolio
o EQ/Putnam International Equity Portfolio
o MFS Research Portfolio
o MFS Emerging Growth Companies Portfolio
The Trust offers two classes of shares on behalf of each Portfolio: Class IA
shares offered pursuant to another prospectus, and Class IB shares offered
hereby.
This Prospectus sets forth concisely the information about the Trust and the
Portfolios that a prospective investor should know before investing. Please
read the Prospectus and retain it for future reference. Additional
information contained in a Statement of Additional Information also dated May
1, 1997 has been filed with the Securities and Exchange Commission and is
available upon request without charge by writing to the Trust at the address
noted above. California residents can obtain a copy of the Statement of
Additional Information by calling 1-800-999-3527. The Statement of Additional
Information is incorporated into this Prospectus by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
PROSPECTUS DATED MAY 1, 1997
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THE TRUST
The Trust is an open-end management investment company registered under the
Investment Company Act of 1940, as amended ("1940 Act"). As a "series" type
of mutual fund, the Trust issues shares of beneficial interest that are
currently divided among twelve Portfolios. Five of those Portfolios are
offered pursuant to this Prospectus. Each Portfolio is a separate series of
the Trust with its own objective and policies. Each of the Portfolios set
forth below are diversified for 1940 Act purposes. The Trustees of the Trust
may establish additional Portfolios at any time.
Each Portfolio is managed by EQ Financial Consultants, Inc. ("Manager") which
directs the day to day operations of each Portfolio. Putnam Investment
Management, Inc. and Massachusetts Financial Services Company serve as the
advisers (each an "Adviser" and, together the "Advisers") to two or more of
the Portfolios, as detailed in the table below.
<TABLE>
<CAPTION>
PORTFOLIO ADVISER
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<S> <C>
EQ/Putnam Growth & Putnam Investment Management, Inc.
Income Value Portfolio
EQ/Putnam Investors Putnam Investment Management, Inc.
Growth Portfolio
EQ/Putnam International Putnam Investment Management, Inc.
Equity Portfolio
MFS Research Portfolio Massachusetts Financial Services Company
MFS Emerging Growth Massachusetts Financial Services Company
Companies Portfolio
</TABLE>
The Trust offers two classes of shares on behalf of each Portfolio: Class IA
shares and Class IB shares. EQ Financial Consultants, Inc. ("EQ Financial"),
the Trust's Manager, serves as one of the distributors for the Class IB
shares of the Trust offered by this Prospectus. Equitable Distributors, Inc.
("EDI") also serves as one of the distributors for the Class IB shares of the
Trust as well as one of the distributors of the Class IA shares. (EQ
Financial and EDI are collectively referred to as the "Distributors"). The
Trust's shares are currently sold only to insurance company separate accounts
in connection with variable life insurance contracts and variable annuity
certificates and contracts (collectively, the "Contracts") issued by The
Equitable Life Assurance Society of the United States ("Equitable"). Both
classes of shares are offered and redeemed at their net asset value without
the imposition of any sales load.
Class IA shares are offered pursuant to another prospectus and are subject to
the same expenses as the Class IB shares, but unlike the Class IB shares they
are not subject to distribution fees imposed pursuant to a distribution plan.
Class IB shares are subject to distribution fees imposed under a distribution
plan ("Distribution Plan") adopted pursuant to Rule 12b-1 under the 1940 Act.
Inquiries regarding Class IA shares should be addressed to Equitable, at 1290
Avenue of the Americas, New York, NY 10104 or by calling 1-212-641-7237.
INVESTMENT OBJECTIVES AND POLICIES
The following is a brief description of the investment objectives and
policies of each of the Portfolios. All of the objectives and policies of
each Portfolio, unless otherwise noted, are not fundamental and may be
changed by the Board of Trustees of the Trust without the approval of
shareholders. Certain investment strategies and instruments discussed below
are described in greater detail in the Statement of Additional Information.
Because of the uncertainty inherent in all investments, there can be no
assurance that the Portfolios will be able to achieve their respective
investment objectives.
EQ/PUTNAM GROWTH & INCOME VALUE PORTFOLIO
The investment objective of the EQ/Putnam Growth & Income Value Portfolio is
capital growth. Current income is a secondary objective. The Adviser intends
to invest primarily in common stocks that offer
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potential for capital growth and may, consistent with the Portfolio's
investment objective, invest in common stocks that offer potential for
current income. The Portfolio may also purchase corporate bonds, notes and
debentures, preferred stocks and convertible securities (which include both
debt securities and preferred stocks). The types of securities held by the
Portfolio may vary from time to time in light of the Portfolio's investment
objective, changes in interest rates, and economic and other factors.
In analyzing companies for investment, the Adviser will seek to identify
companies whose securities are significantly undervalued in relation to their
underlying asset values or earnings potential.
At times, the Adviser may judge that conditions in the securities markets may
make pursuing the Portfolio's basic investment strategy inconsistent with the
best interests of the Portfolio's shareholders. At such times, the Adviser
may temporarily use alternative strategies that are primarily designed to
reduce fluctuations in the value of the Portfolio's assets. In implementing
these defensive strategies, the Portfolio may invest without limit in debt
securities or preferred stocks, or may invest in any other securities the
Adviser considers consistent with such defensive strategies. It is impossible
to predict when, or for how long, the Adviser will use these alternative
defensive strategies.
The Portfolio may invest up to 20% of its total assets in foreign securities.
The Portfolio may also purchase Eurodollar certificates of deposit (i.e.,
short-term time deposits issued by European banks) without regard to this 20%
limit. Such investments increase the Portfolio's diversification and may
enhance return, but they may represent a greater degree of risk than
investing in domestic securities.
In addition, the Portfolio may also invest a portion of its assets in United
States government securities and high-quality United States and foreign
dollar-denominated money market securities (i.e., within the two highest
rating categories assigned by a nationally recognized securities rating
organization ("NRSRO")) including certificates of deposit, bankers'
acceptances, commercial paper, short-term corporate securities and repurchase
agreements. For temporary defensive purposes or to meet redemption requests,
the Portfolio may invest without limitation in such securities.
The Portfolio may also invest in investment grade debt securities and may
invest a portion of its total assets in debt securities rated below
investment grade (commonly known as "junk bonds"). The price of a bond
generally fluctuates with changes in interest rates, rising when interest
rates fall and falling when interest rates rise.
The Portfolio may also engage in a variety of investment management practices
such as buying and selling options and futures contracts and engaging in
foreign currency exchange contracts.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, futures contracts,
foreign securities, securities loans, convertible securities, borrowings,
repurchase agreements, illiquid securities, forward commitments, zero-coupon
bonds, derivatives, United States Government securities, foreign currency
transactions, payment-in-kind bonds, and investment grade and lower quality
fixed-income securities) are discussed under the caption "Investment
Strategies" below and in the Statement of Additional Information.
EQ/PUTNAM INVESTORS GROWTH PORTFOLIO
The investment objective of the EQ/Putnam Investors Growth Portfolio is
long-term growth of capital and any increased income that results from this
growth. The Adviser intends to invest primarily in common stocks in view of
the Adviser's belief that equity ownership affords the best opportunity for
capital growth over the long term. The Portfolio may also purchase
convertible bonds, convertible preferred stocks, preferred stocks and debt
securities if the Adviser believes that they will help to achieve the
Portfolio's objective. In addition, the Portfolio may hold a portion of its
assets in cash or money market instruments.
In analyzing potential investments, the Adviser considers three main factors:
(i) the general outlook of the economy; (ii) a study of various industries to
determine those with the best possibilities for long-term growth; and (iii) a
detailed study of what appear to be the most promising individual companies.
In
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evaluating individual companies, the Adviser gives more weight to growth
potential characteristics than to dividend income. In particular, the Adviser
believes that evaluating a company's probable future earnings, dividends,
financial strength, working assets and competitive position may be more
profitable in the long run than seeking current dividend income.
Although the Portfolio's investments are not limited to any particular type
of company, the Adviser currently expects that the Portfolio will invest a
substantial portion of its assets in common stocks of companies with equity
market capitalizations of more than $1 billion. The Portfolio may also invest
in small to medium-sized companies having a proprietary product or profitable
market niche and the potential to grow very rapidly. The Adviser believes
that such small to medium-sized companies may present greater opportunities
for capital appreciation because of their high potential earnings growth, but
also may involve greater risk.
At times, the Adviser may judge that conditions in the securities markets may
make pursuing the Portfolio's basic investment strategy inconsistent with the
best interests of the Portfolio's shareholders. At such times, the Adviser
may temporarily use alternative strategies that are primarily designed to
reduce fluctuations in the value of the Portfolio's assets. In implementing
these defensive strategies, the Portfolio may invest, without limit, in debt
securities, preferred stocks, United States government and agency
obligations, cash or money market instruments, or may invest in any other
securities the Adviser considers consistent with such defensive strategies.
It is impossible to predict when, or for how long, the Adviser will use these
alternative defensive strategies.
The Portfolio may invest up to 20% of its total assets in foreign securities.
The Portfolio may also purchase Eurodollar certificates of deposit (i.e.,
short-term time deposits issued by European banks) without regard to this 20%
limit. Such investments increase the Portfolio's diversification and may
enhance return, but they may represent a greater degree of risk than
investing in domestic securities.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, borrowings, futures
contracts, investment grade and lower quality fixed-income securities,
foreign securities, foreign currency transactions, securities loans, illiquid
securities, derivatives, repurchase agreements and forward commitments) are
discussed under the caption "Investment Strategies" below and in the
Statement of Additional Information.
EQ/PUTNAM INTERNATIONAL EQUITY PORTFOLIO
The investment objective of the EQ/Putnam International Equity Portfolio is
capital appreciation. The Portfolio is designed for investors seeking capital
appreciation primarily through a diversified portfolio of equity securities
of companies organized under the laws of a country other than the United
States. Such equity securities normally will include common stocks, preferred
stocks, securities convertible into common or preferred stocks, and warrants.
The Portfolio may also invest to a lesser extent in debt securities and other
types of investments if the Adviser believes that purchasing them would help
to achieve the Portfolio's objective. The Portfolio may hold a portion of its
assets in cash or money market instruments. The Portfolio may also engage in
a variety of investment management practices such as buying and selling
options and futures contracts and engaging in foreign currency exchange
contracts.
Under normal circumstances the Portfolio will invest at least 65% of its
assets in issuers located in at least three different countries outside the
United States. The Portfolio will consider an issuer to be located outside
the United States if the issuer is organized under the laws of a country
outside the United States. The Portfolio may invest in securities of issuers
in emerging markets, as well as more developed markets. Investing in
securities of issuers in emerging markets generally involves more risks than
investing in securities of issuers in developed markets.
The Adviser believes that the securities markets of many countries move
relatively independently of one another because business cycles and other
economic or political events that influence one country's securities markets
may have little effect on securities markets in other countries. By investing
in a diversified portfolio of securities of issuers located in different
foreign countries, the Adviser attempts to reduce the risks associated with
being invested in the securities of issuers within the economy of only one
country. Countries that the Adviser believes offer attractive opportunities
for investment may change from time to time.
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The Portfolio will not limit its investments to any particular type of
company. The Portfolio may invest in companies, large or small, whose
earnings are believed by the Adviser to be in a relatively strong growth
trend or it may invest in companies that are not expected to experience
significant further growth but whose market value per share is considered by
the Adviser to be undervalued. The Portfolio also may invest in small and
relatively less well-known companies that meet these characteristics.
At times, the Adviser may believe that conditions in the international
securities markets may make pursuing the Portfolio's basic investment
strategy inconsistent with the best interests of its shareholders. At such
times, the Portfolio may temporarily use alternative strategies that are
primarily designed to reduce fluctuations in the value of the Portfolio's
assets. In implementing these defensive strategies, the Portfolio may invest,
without limitation, in securities of any kind, including securities traded
primarily in United States markets and in cash and money market instruments.
It is impossible to predict when, or for how long, the Portfolio will use
these alternative strategies.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, futures contracts,
United States Government securities, borrowings, derivatives, repurchase
agreements, futures contracts, foreign securities, forward commitments,
passive foreign investment companies, small company securities, foreign
currency transactions, investment grade and lower quality fixed-income
securities, securities loans, and illiquid securities) are discussed under
the caption "Investment Strategies" below and in the Statement of Additional
Information.
MFS RESEARCH PORTFOLIO
The investment objective of the MFS Research Portfolio is to provide
long-term growth of capital and future income. In pursuing its objective, the
Portfolio invests a substantial portion of its assets in the common stock or
securities convertible into common stock of companies believed by the Adviser
to possess better than average prospects for long-term growth. A smaller
proportion of the assets of the Portfolio may be invested in bonds,
short-term debt obligations, preferred stocks or common stocks whose
principal characteristic is income production rather than growth. Such
securities may also offer opportunities for growth of capital as well as
income. In the case of both growth stocks and income securities, the Adviser
emphasizes progressive, well-managed companies.
The portfolio securities of the Portfolio are selected by a committee of
investment research analysts. This committee includes investment analysts
employed not only by the Adviser but also by MFS International (U.K.)
Limited, a wholly-owned subsidiary of the Adviser. The Portfolio's assets are
allocated among industries by the analysts acting together as a group.
Individual analysts are then responsible for selecting what they view as the
securities best suited to meet the Portfolio's investment objective within
their assigned industry responsibility.
To the extent that such investments comply with the Portfolio's investment
objective, the Portfolio may invest up to 20% of its total assets in foreign
securities, including those in emerging markets. These securities include
dollar-denominated and non-dollar-denominated foreign securities. Such
foreign investments increase a portfolio's diversification and may enhance
return, but they may represent a greater degree of risk than investing
exclusively in domestic securities.
The Portfolio may invest in investment grade debt securities and may invest
up to 10% of its total assets in securities rated below investment grade
(commonly known as "junk bonds"). The price of a bond generally fluctuates
with changes in interest rates, rising when interest rates fall and falling
when interest rates rise.
Certain investment strategies and practices which may be employed by the
Portfolio (such as foreign securities, convertible securities, borrowings,
forward commitments, United States Government securities, repurchase
agreements, securities loans, illiquid securities and investment grade and
lower quality fixed-income securities) are discussed under the caption
"Investment Strategies" below and in the Statement of Additional Information.
MFS EMERGING GROWTH COMPANIES PORTFOLIO
The investment objective of the MFS Emerging Growth Companies Portfolio is to
provide long-term growth of capital. Dividend and interest income from
portfolio securities, if any, is incidental to the
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Portfolio's investment objective. In pursuing its objective, the Portfolio
invests primarily (i.e., at least 80% of its assets under normal
circumstances) in common stocks of emerging growth companies that the Adviser
believes are early in their life cycle but which have the potential to become
major enterprises. Such emerging growth companies generally are expected to:
(i) show earnings growth over time that is well above the growth rate of the
overall economy and the rate of inflation; and (ii) have the products,
technologies, management and market and other opportunities that are usually
necessary to become more widely recognized as growth companies.
Emerging growth companies can be of any size and the Portfolio may invest in
larger or more established companies whose rates of earnings growth are
expected to accelerate because of special factors, such as rejuvenated
management, new products, changes in customer demand, or basic changes in the
economic environment. Investing in emerging growth companies involves greater
risk than is customarily associated with investments in more established
companies. Emerging growth companies often have limited product lines,
markets or financial resources and may be more dependent on one-person
management. In addition, there may be less research available on many
promising small or medium-sized emerging growth companies, making it more
difficult both to identify and to analyze such companies. Moreover, the
securities of such companies may have limited marketability and may be
subject to more abrupt or erratic market movements than the securities of
larger, more established companies.
While the Portfolio may invest primarily in common stocks, the Portfolio may,
to a limited extent, seek long-term growth in other types of securities such
as convertible securities and warrants. To the extent that such investments
comply with the Portfolio's investment objective, the Portfolio may invest up
to 25% of its total assets in foreign securities, including those in emerging
markets. These securities include non-United States dollar-denominated
securities traded outside the United States and dollar-denominated securities
traded in the United States (such as American Depositary Receipts ("ADRs")).
Such foreign investments increase a portfolio's diversification and may
enhance return, but they may represent a greater degree of risk than
investing exclusively in domestic securities. The Portfolio may also invest
in debt securities and hold cash and cash equivalents. In addition, the
Portfolio may invest in lower-rated debt securities (commonly referred to as
"junk bonds").
The Portfolio is aggressively managed and, therefore, the value of its shares
is subject to greater fluctuation and investment in its shares generally
involves a higher degree of risk than would be the case with an investment in
a conservative equity or growth fund investing entirely in proven growth
companies.
Certain investment strategies and practices which may be employed by the
Portfolio (such as foreign securities, repurchase agreements, loan
participations, derivatives, United States Government securities, securities
loans, forward commitments, asset-backed securities, borrowings, options,
futures contracts, loan participations, convertible securities, foreign
currency transactions, illiquid securities and investment grade and lower
quality fixed-income securities) are discussed under the caption "Investment
Strategies" below and in the Statement of Additional Information.
INVESTMENT STRATEGIES
In addition to making investments directly in securities, to the extent
described above, each of the Portfolios (except for MFS Research Portfolio)
may purchase and sell call and put options, engage in transactions in futures
contracts and related options, loans and other direct indebtedness and engage
in forward foreign currency exchange transactions. They may also enter into
repurchase agreements, lend their portfolio securities, and borrow funds
under certain limited circumstances. In addition, each Portfolio may engage
in other types of investment strategies as described below. Each Portfolio
may invest in or utilize any of these investment strategies and instruments
or engage in any of these practices except where otherwise prohibited by law
or the Portfolio's own investment restrictions. Portfolios that anticipate
committing 5% or more of their net assets to a particular type of investment
strategy or instruments are specifically referred to in the descriptions
below of such investment strategy or instrument. Certain investment
strategies and instruments and the risks related to them are summarized below
and certain of these strategies and instruments are described in more detail
in the Statement of Additional Information.
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Asset-Backed Securities. The MFS Emerging Growth Companies Portfolio may
invest in asset-backed securities. These asset-backed securities, issued by
trusts and special purpose corporations, are collateralized by a pool of
assets, such as credit card or automobile loans, home equity loans or
computer leases, and represent the obligations of a number of different
parties. Asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Due to the possibility that
prepayments (on automobile loans and other collateral) will alter the cash
flow on asset-backed securities, it is not possible to determine in advance
the actual final maturity date or average life. Faster prepayment will
shorten the average life and slower prepayments will lengthen it. However, it
is possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security. In
selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.
Borrowings. The Portfolios may borrow money from banks or other lenders as a
temporary measure for emergency purposes, to facilitate redemption requests,
or for other purposes consistent with each Portfolio's investment objective
and program. Borrowings for the MFS Research Portfolio and MFS Emerging
Growth Companies Portfolio may not exceed 33 1/3% of each Portfolio's total
assets. Borrowings for the EQ/Putnam Growth & Income Value Portfolio,
EQ/Putnam Investors Growth Portfolio and the EQ/Putnam International Equity
Portfolio may not exceed 10% of each Portfolio's total assets. Each Portfolio
may pledge its assets to secure these permissible borrowings. No Portfolio
may purchase additional securities when its borrowings exceed 5% of its total
assets. Further information concerning each Portfolio's fundamental policy
with respect to borrowings is provided in the Statement of Additional
Information.
Convertible Securities. Each of the Portfolios may invest in convertible
securities, including both convertible debt and convertible preferred stock.
Such securities may be converted into shares of the underlying common stock
at either a stated price or stated rate. Because of this feature, convertible
securities enable an investor to benefit from increases in the market price
of the underlying common stock. Convertible securities provide higher yields
than the underlying common stocks, but generally offer lower yields than
non-convertible securities of similar quality. Like bonds, the value of
convertible securities fluctuates in relation to changes in interest rates
and, in addition, fluctuates in relation to the underlying common stock.
Subsequent to purchase by a Portfolio, convertible securities may cease to be
rated or a rating may be reduced below the minimum required for purchase by
that Portfolio. Neither event will require sale of such securities, although
each Adviser will consider such event in its determination of whether a
Portfolio should continue to hold the securities.
Derivatives. Each Portfolio (except the MFS Research Portfolio) may invest in
one or more types of derivatives. Derivatives are financial products or
instruments that derive their value from the value of one or more underlying
assets, reference rates or indices. Derivatives include, but are not limited
to, the following: asset-backed securities, collateralized mortgage
obligations, floaters, futures, hybrid instruments, inverse floaters,
mortgage-backed securities, options, stripped mortgage-backed securities,
structured notes and swaps. Further information about these instruments and
the risks involved in their use are contained under the description of each
of these instruments in this section or the Statement of Additional
Information.
Foreign Securities. Foreign investments involve certain risks that are not
present in domestic securities. Because each of the Portfolios may purchase
securities denominated in foreign currencies, a change in the value of any
such currency against the United States dollar will result in a change in the
United States dollar value of a Portfolio's assets and income. In addition,
although a portion of a Portfolio's investment income may be received or
realized in such currencies, the Portfolio will be required to compute and
distribute its income in United States dollars. Therefore, if the exchange
rate for any such currency declines after a Portfolio's income has been
earned and computed in United States dollars but before conversion and
payment, the Portfolio could be required to liquidate portfolio securities to
make such distributions.
The value of foreign investments and the investment income derived from them
may also be affected unfavorably by changes in currency exchange control
regulations. Although the Portfolios will invest only
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in securities denominated in foreign currencies that are fully exchangeable
into United States dollars without legal restriction at the time of
investment, there can be no assurance that currency controls will not be
imposed subsequently. In addition, the value of foreign fixed income
investments may fluctuate in response to changes in United States and foreign
interest rates.
There may be less information publicly available about a foreign issuer than
about a United States issuer, and a foreign issuer is not generally subject
to accounting, auditing and financial reporting standards and practices
comparable to those in the United States. Foreign stock markets are generally
not as developed or efficient as, and may be more volatile than, those in the
United States. While growing in volume, they usually have substantially less
volume than United States markets and a Portfolio's investment securities may
be less liquid and subject to more rapid and erratic price movements than
securities of comparable United States companies. Equity securities may trade
at price/earnings multiples higher than comparable United States securities
and such levels may not be sustainable. There is generally less government
supervision and regulation of foreign stock exchanges, brokers and listed
companies than in the United States. Moreover, settlement practices for
transactions in foreign markets may differ from those in United States
markets. Such differences may include delays beyond periods customary in the
United States and practices, such as delivery of securities prior to receipt
of payment, which increase the likelihood of a "failed settlement." Failed
settlements can result in losses to a Portfolio. In less liquid and well
developed stock markets, such as those in some Asian and Latin American
countries, volatility may be heightened by actions of a few major investors.
For example, substantial increases or decreases in cash flows of mutual funds
investing in these markets could significantly affect stock prices and,
therefore, share prices.
Foreign brokerage commissions, custodial expenses and other fees are also
generally higher than for securities traded in the United States.
Consequently, the overall expense ratios of international or global funds are
usually somewhat higher than those of typical domestic stock funds.
In addition, the economies, markets and political structures of a number of
the countries in which the Portfolios can invest do not compare favorably
with the United States and other mature economies in terms of wealth and
stability. Therefore, investments in these countries may be riskier, and will
be subject to erratic and abrupt price movements. Some economies are less
well developed and less diverse (for example, Latin America, Eastern Europe
and certain Asian countries), and more vulnerable to the ebb and flow of
international trade, trade barriers and other protectionist or retaliatory
measures (for example, Japan, Southeast Asia and Latin America). Some
countries, particularly in Latin America, are grappling with severe inflation
and high levels of national debt. Investments in countries that have recently
begun moving away from central planning and state-owned industries toward
free markets, such as the Eastern European or Chinese economies, should be
regarded as speculative.
In addition, investment in foreign securities may also include the risk of
expropriation by a foreign government.
Moreover, investments in foreign government debt securities, particularly
those of emerging market country governments, involve special risks. Certain
emerging market countries have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging market country's debt
may not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A debtor's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, and, in the case of a government
debtor, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole and the political constraints to
which a government debtor may be subject. Government debtors may default on
their debt and may also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce principal and
interest arrearages on their debt. Holders of government debt may be
requested to participate in the rescheduling of such debt and to extend
further loans to government debtors.
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Certain Portfolios may invest in the following types of foreign securities or
engage in the following types of transactions related to foreign securities.
Brady Bonds. The MFS Emerging Growth Companies Portfolio may invest in "Brady
Bonds," which are fixed-income securities created through the exchange of
existing commercial bank loans to foreign entities for new obligations in
connection with debt restructuring under a plan introduced by Nicholas F.
Brady when he was the United States Secretary of the Treasury. Brady Bonds
have been issued only recently, and, accordingly, do not have a long payment
history. They may be collateralized or uncollateralized and issued in various
currencies (although most are United States dollar-denominated) and they are
actively traded in the over-the-counter ("OTC") secondary market.
Depositary Receipts. Each of the Portfolios may purchase depositary receipts,
which are securities representing ownership interests in securities of
foreign companies (an "underlying issuer") and are deposited with a
securities depositary. Depositary receipts are not necessarily denominated in
the same currency as the underlying securities. Depositary receipts include
ADRs and Global Depositary Receipts ("GDRs") and other types of depositary
receipts (which, together with ADRs and GDRs, are hereinafter collectively
referred to as "Depositary Receipts"). ADRs are dollar-denominated Depositary
Receipts typically issued by a United States financial institution which
evidence ownership interests in a security or pool of securities issued by a
foreign issuer. ADRs are listed and traded in the United States. GDRs and
other types of depositary receipts are typically issued by foreign banks or
trust companies, although they also may be issued by United States financial
institutions, and evidence ownership interests in a security or pool of
securities issued by either a foreign or a United States corporation.
Generally, depositary receipts in registered form are designed for use in the
United States securities market and depositary receipts in bearer form are
designed for use in securities markets outside the United States. Although
there may be more reliable information available regarding issuers of certain
ADRs that are issued under so-called "sponsored" programs and ADRs do not
involve foreign currency risks, ADRs and other Depositary Receipts are
subject to the risks of other investments in foreign securities, as described
directly above.
Foreign Currency Transactions. Each of the Portfolios (except the MFS
Research Portfolio) may purchase foreign currency on a spot (or cash) basis,
and may enter into contracts to purchase or sell foreign currencies at a
future date ("forward contracts"). Each of the Portfolios (except MFS
Research Portfolio) may also purchase and sell foreign currency futures
contracts and may purchase and sell exchange traded call and put options on
foreign currency futures contracts and on foreign currencies. The EQ/Putnam
Growth & Income Value Portfolio, EQ/Putnam Investors Growth Portfolio,
EQ/Putnam International Equity Portfolio and MFS Emerging Growth Companies
Portfolio may engage in OTC options on foreign currency transactions. The MFS
Emerging Growth Companies Portfolio may only enter into forward contracts on
currencies in the OTC market. The Advisers may engage in these transactions
to protect against uncertainty in the level of future exchange rates in
connection with the purchase and sale of portfolio securities ("transaction
hedging") and to protect the value of specific portfolio positions ("position
hedging").
Hedging transactions involve costs and may result in losses. Each of the
Portfolios (except the MFS Research Portfolio) may also write covered call
options on foreign currencies to offset some of the costs of hedging those
currencies. A Portfolio will engage in over-the-counter options transactions
on foreign currencies only when appropriate exchange traded transactions are
unavailable and when, in the Adviser's opinion, the pricing mechanism and
liquidity are satisfactory and the participants are responsible parties
likely to meet their contractual obligations. A Portfolio's ability to engage
in hedging and related option transactions may be limited by tax
considerations.
Transactions and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolios own or intend to
purchase or sell. They simply establish a rate of exchange which one can
achieve at some future point in time. Additionally, although these techniques
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, they tend to limit any potential gain which might result from the
increase in the value of such currency.
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Forward Commitments. Each Portfolio may make contracts to purchase securities
for a fixed price at a future date beyond customary settlement time ("forward
commitments") if it holds, and maintains until the settlement date in a
segregated account, cash or liquid securities in an amount sufficient to meet
the purchase price, or if it enters into offsetting contracts for the forward
sale of other securities it owns. Forward commitments may be considered
securities in themselves and involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is
in addition to the risk of decline in value of the Portfolio's other assets.
Where such purchases are made through dealers, a Portfolio relies on the
dealer to consummate the sale. The dealer's failure to do so may result in
the loss to a Portfolio of an advantageous yield or price.
Illiquid Securities. Each Portfolio may invest up to 15% of its respective
net assets in illiquid securities and other securities which are not readily
marketable, including non-negotiable time deposits, certain restricted
securities not deemed by the Trust's Board of Trustees to be liquid, and
repurchase agreements with maturities longer than seven days. Securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933,
as amended, which have been determined by the Board of Trustees to be liquid,
will not be considered by the Adviser to be illiquid or not readily
marketable and, therefore, are not subject to the 15% limit. The inability of
a Portfolio to dispose of illiquid or not readily marketable investments
readily or at a reasonable price could impair the Portfolio's ability to
raise cash for redemptions or other purposes. The liquidity of securities
purchased by a Portfolio which are eligible for resale pursuant to Rule 144A
will be monitored by each Portfolio's Adviser on an ongoing basis, subject to
the oversight of the Board of Trustees of the Trust. In the event that such a
security is deemed to be no longer liquid, a Portfolio's holdings will be
reviewed to determine what action, if any, is required to ensure that the
retention of such security does not result in a Portfolio's having more than
15% of its assets invested in illiquid or not readily marketable securities.
Investment Grade and Lower Quality Fixed-Income Securities. Each Portfolio
may invest in or hold a portion of its total assets in investment grade or
lower quality fixed-income securities. Investment grade securities are
securities rated Baa or higher by Moody's Investor Services, Inc. ("Moody's")
or BBB or higher by Standard & Poor's Rating Service ("S&P") and comparable
unrated securities. Investment grade securities rated Baa by Moody's or BBB
by S&P while normally exhibiting adequate protection parameters, have
speculative characteristics, and, consequently, changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity of such issuers to make principal and interest payments than is the
case for higher grade fixed-income securities. Lower quality fixed-income
securities are securities that are rated in the lower categories by NRSROs
(i.e., Ba or lower by Moody's and BB or lower by S&P) or comparable unrated
securities. Such lower quality securities are known as "junk bonds" and are
regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. (Each NRSRO's descriptions
of these bond ratings are set forth in the Appendix to the Statement of
Additional Information.) Because investment in lower quality securities
involves greater investment risk, achievement of a Portfolio's investment
objective will be more dependent on the Adviser's analysis than would be the
case if that Portfolio were investing in higher quality bonds. In addition,
lower quality securities may be more susceptible to real or perceived adverse
economic and individual corporate developments than would investment grade
bonds. Moreover, the secondary trading market for lower quality securities
may be less liquid than the market for investment grade bonds. This potential
lack of liquidity may make it more difficult for an Adviser to value
accurately certain portfolio securities.
Loan Participations. The MFS Emerging Growth Companies Portfolio may invest a
portion of its assets in loan participations and other direct indebtedness.
By purchasing a loan, a Portfolio acquires some or all of the interest of a
bank or other lending institution in a loan to a corporate borrower. Many
such loans are secured, and most impose restrictive covenants that must be
met by the borrower. These loans are made generally to finance internal
growth, mergers, acquisitions, stock repurchases, leveraged buy-outs and
other corporate activities. Such loans may be in default at the time of
purchase. The MFS Emerging Growth Companies Portfolio may also purchase other
direct indebtedness such as trade or other claims against companies, which
generally represent money owed by a company to a supplier of goods and
services. These claims may also be purchased at a time when the company is in
default. Certain of the
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loans and other direct indebtedness acquired by the Portfolio may involve
revolving credit facilities or other standby financing commitments which
obligate the Portfolio to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans and other direct indebtedness
may make such loans especially vulnerable to adverse changes in economic or
market conditions. Loans and other direct indebtedness may not be in the form
of securities or may be subject to restrictions on transfer, and only limited
opportunities may exist to resell such instruments. As a result, the
Portfolio may be unable to sell such investments at an opportune time or may
have to resell them at less than fair market value.
Options and Futures Transactions. Each Portfolio (except the MFS Research
Portfolio) may utilize futures contracts and write and purchase put and call
options. Futures contracts (a type of potentially high-risk security) enable
the investor to buy or sell an asset in the future at an agreed upon price.
Options (another type of potentially high-risk security) give the purchaser
of an option the right, but not the obligation, to buy or sell in the future
an asset at a predetermined price during the term of the option. (The writer
of a put or call option would be obligated to buy or sell the underlying
asset at a predetermined price during the term of the option.) Each Portfolio
will write put and call options only if such options are considered to be
"covered". A call option on a security is covered, for example, when the
writer of the call option owns throughout the option period the security on
which the option is written (or a security convertible into such a security
without the payment of additional consideration). A put option on a security
is covered, for example, when the writer of the put has deposited and
maintained in a segregated account throughout the option period sufficient
cash or other liquid assets in an amount equal to or greater than the
exercise price of the put option. Each Portfolio may utilize futures
contracts and related options for other than hedging purposes to the extent
that aggregate initial margin deposits and premiums paid do not exceed 5% of
the Portfolio's net assets. Each Portfolio may not commit more than 5% of its
total assets to premiums when purchasing call or put options. In addition,
the total market value of securities against which a Portfolio has written
call or put options may not exceed 25% of its total assets. The MFS Emerging
Growth Companies Portfolio will not enter a futures contract if the
obligations underlying all such futures contracts would exceed 50% of the
value of the Portfolio's total assets. The EQ/Putnam Growth & Income
Portfolio, EQ/Putnam Investors Growth Portfolio, EQ/Putnam International
Equity Portfolio and MFS Emerging Growth Companies may engage in OTC put and
call option transactions. Options traded in the OTC market may not be as
actively traded as those on an exchange, so it may be more difficult to value
such options. In addition, it may be difficult to enter into closing
transactions with respect to such options. Such OTC options, and the
securities used as "cover" for such options, may be considered illiquid
securities.
Each Portfolio may buy and sell futures and options contracts for any number
of reasons, including: to manage its exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting its overall
exposure to certain markets; in an effort to enhance income; and to protect
the value of portfolio securities. Each Portfolio may purchase, sell, or
write call and put options and futures contracts on securities, financial
indices, and foreign currencies and options on futures contracts.
The risk of loss in trading futures contracts can be substantial because of
the low margin deposits required and the extremely high degree of leveraging
involved in futures pricing. As a result, a relatively small price movement
in a futures contract may cause an immediate and substantial loss or gain.
The primary risks associated with the use of futures contracts and options
are: (i) imperfect correlation between the change in market value of the
stocks held by a Portfolio and the prices of futures contracts and options;
and (ii) possible lack of a liquid secondary market for a futures contract or
an OTC option and the resulting inability to close a futures position or OTC
option prior to its maturity date.
Passive Foreign Investment Companies. The EQ/Putnam International Equity
Portfolio may purchase the securities of certain foreign investment funds or
trusts called passive foreign investment companies. Such entities have been
the only or primary way to invest in certain countries. In addition to
bearing their proportionate share of the Portfolio's expenses (management
fees and operating expenses), shareholders will also indirectly bear similar
expenses of such entities. Like other foreign securities, interests in
passive foreign investment companies also involve the risk of foreign
securities, as described above.
Payment-in-Kind Bonds. The EQ/Putnam Growth & Income Value Portfolio may
invest in payment-in-kind bonds. Payment-in-kind bonds allow the issuer, at
its option, to make current interest payments
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on the bonds either in cash or in additional bonds. The value of
payment-in-kind bonds is subject to greater fluctuation in response to
changes in market interest rates than bonds which pay interest in cash
currently. Payment-in-kind bonds allow an issuer to avoid the need to
generate cash to meet current interest payments. Accordingly, such bonds may
involve greater credit risks than bonds paying interest currently. Even
though such bonds do not pay current interest in cash, the Portfolio is
nonetheless required to accrue interest income on such investments and to
distribute such amounts at least annually to shareholders. Thus, the
Portfolio could be required, at times, to liquidate other investments in
order to satisfy its distribution requirements.
Repurchase Agreements. Each Portfolio may enter into repurchase agreements
with qualified and Board approved banks, broker-dealers or other financial
institutions as a means of earning a fixed rate of return on its cash
reserves for periods as short as overnight. A repurchase agreement is a
contract pursuant to which a Portfolio, against receipt of securities of at
least equal value including accrued interest, agrees to advance a specified
sum to the financial institution which agrees to reacquire the securities at
a mutually agreed upon time (usually one day) and price. Each repurchase
agreement entered into by a Portfolio will provide that the value of the
collateral underlying the repurchase agreement will always be at least equal
to the repurchase price, including any accrued interest. A Portfolio's right
to liquidate such securities in the event of a default by the seller could
involve certain costs, losses or delays and, to the extent that proceeds from
any sale upon a default of the obligation to repurchase are less than the
repurchase price, the Portfolio could suffer a loss.
Securities Loans. The MFS Research Portfolio and MFS Emerging Growth
Companies Portfolio may seek to obtain additional income by making secured
loans of portfolio securities with a value up to 33 1/3% of their respective
total assets. The EQ/Putnam Growth & Income Value Portfolio, EQ/Putnam
Investors Growth Portfolio and EQ/Putnam International Equity Portfolio may
lend portfolio securities in an amount up to 25% of their respective total
assets. All securities loans will be made pursuant to agreements requiring
the loans to be continuously secured by collateral in cash or high-grade debt
obligations at least equal at all times to the market value of the loaned
securities. The borrower pays to the Portfolios an amount equal to any
dividends or interest received on loaned securities. The Portfolios retain
all or a portion of the interest received on investment of cash collateral or
receive a fee from the borrower. Lending portfolio securities involves risks
of delay in recovery of the loaned securities or in some cases loss of rights
in the collateral should the borrower fail financially. Further information
concerning each Portfolio's fundamental policy with respect to loans is
provided in the Statement of Additional Information.
Small Company Securities. The EQ/Putnam International Equity Portfolio may
invest in the securities of smaller capitalization companies. Investing in
securities of small companies may involve greater risks since these
securities may have limited marketability and, thus, may be more volatile.
Because smaller companies normally have fewer shares outstanding than larger
companies, it may be more difficult for the Portfolio to buy or sell
significant amounts of shares without an unfavorable impact on prevailing
prices. In addition, small companies are typically subject to a greater
degree of changes in earnings and business prospects than are larger, more
established companies. There is typically less publicly available information
concerning smaller companies than for larger, more established ones.
Therefore, an investment in this Portfolio may involve a greater degree of
risk than an investment in other Portfolios that seek capital appreciation by
investing in better-known, larger companies.
United States Government Securities. Each Portfolio may invest in debt
obligations of varying maturities issued or guaranteed by the United States
Government, its agencies or instrumentalities ("United States Government
securities"). Direct obligations of the United States Treasury include a
variety of securities that differ in their interest rates, maturities and
dates of issuance. United States Government securities also include
securities issued or guaranteed by government agencies that are supported by
the full faith and credit of the United States (e.g., securities issued by
the Government National Mortgage Association); securities issued or
guaranteed by government agencies that are supported by the ability to borrow
from the United States Treasury (e.g., securities issued by the Federal
National Mortgage Association); and securities issued or guaranteed by
government agencies that are only supported by the credit of the particular
agency (e.g., the Tennessee Valley Authority).
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Warrants. Warrants are securities that give the holder the right, but not the
obligation to purchase equity issues of the company issuing the warrants, or
a related company, at a fixed price either on a date certain or during a set
period. At the time of issue, the cost of a warrant is substantially less
than the cost of the underlying security itself, and price movements in the
underlying security are generally magnified in the price movements of the
warrant. This effect enables the investor to gain exposure to the underlying
security with a relatively low capital investment but increases an investor's
risk in the event of a decline in the value of the underlying security and
can result in a complete loss of the amount invested in the warrant. In
addition, the price of a warrant tends to be more volatile than, and may not
correlate exactly to, the price of the underlying security. If the market
price of the underlying security is below the exercise price of the warrant
on its expiration date, the warrant will generally expire without value.
Zero-Coupon Bonds. The EQ/Putnam Growth & Income Value Portfolio may invest
in zero-coupon bonds. Zero-coupon bonds are issued at a significant discount
from their principal amount and pay interest only at maturity rather than at
intervals during the life of the security. The value of zero-coupon bonds is
subject to greater fluctuation in response to changes in market interest
rates than bonds which pay interest in cash currently. Zero-coupon bonds
allow an issuer to avoid the need to generate cash to meet current interest
payments. Accordingly, such bonds may involve greater credit risks than bonds
paying interest currently. Even though such bonds do not pay current interest
in cash, the Portfolio is nonetheless required to accrue interest income on
such investments and to distribute such amounts at least annually to
investors in such instruments. Thus, the Portfolio could be required, at
times, to liquidate other investments in order to satisfy its distribution
requirements.
Portfolio Turnover. The length of time a Portfolio has held a particular
security is not generally a consideration in investment decisions. A change
in the securities held by a Portfolio is known as "portfolio turnover." Each
Portfolio's turnover rate is not expected to exceed 100% during its first
year of operation. A high turnover rate increases transaction costs (e.g.,
brokerage commissions) and increases realized gains and losses.
MANAGEMENT OF THE TRUST
THE BOARD OF TRUSTEES
The Board of Trustees of the Trust provides broad supervision over the
business and affairs of the Portfolios and the Trust as provided in the
Trust's Amended and Restated Declaration of Trust and By-Laws.
THE MANAGER
The Trust is managed by EQ Financial Consultants, Inc. which, subject to the
supervision and direction of the Trustees of the Trust, has overall
responsibility for the general management and administration of the Trust.
The Manager is an investment adviser registered under the Investment Advisers
Act of 1940, as amended, and a broker-dealer registered under the Securities
Exchange Act of 1934, as amended ("1934 Act"). It is located at 1755
Broadway, New York, New York 10019. The Manager currently furnishes
specialized investment advice to other clients, including individuals,
pension and profit sharing plans, trusts, charitable organizations,
corporations and other business entities. The Manager is a Delaware
corporation and an indirect, wholly-owned subsidiary of Equitable, a New York
stock life insurance company.
The Manager is responsible for providing investment management and
administrative services to the Trust and in the exercise of such
responsibility selects, subject to review and approval by the Trustees, the
investment advisers for the Trust's Portfolios and monitors the Advisers'
investment programs and results, reviews brokerage matters, oversees
compliance by the Trust with various federal and state statutes, and carries
out the directives of the Board of Trustees. The Manager is responsible for
providing the Trust with office space, office equipment, and personnel
necessary to operate and administer the Trust's business, and also supervises
the provision of services by third parties such as the Trust's custodian.
As compensation for managing the EQ/Putnam Growth & Income Value Portfolio,
EQ/Putnam Investors Growth Portfolio, MFS Research Portfolio and MFS Emerging
Growth Companies Portfolio, the Trust
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pays the Manager a monthly fee at the annual rate of .55% of the respective
Portfolio's average daily net assets. As compensation for managing the
EQ/Putnam International Equity Portfolio, the Trust pays the Manager a
monthly fee at an annual rate of .70% of the Portfolio's average daily net
assets.
The Manager pays the expenses of providing investment advisory services to
the Portfolios, including the fees of the Adviser of each Portfolio.
In addition to the management fees, the Trust pays all expenses not assumed
by the Manager, including, without limitation: the fees and expenses of its
independent auditors and of its legal counsel; the costs of printing and
mailing annual and semi-annual reports to shareholders, proxy statements,
prospectuses, prospectus supplements and statements of additional
information, all to the extent they are sent to existing Contract owners; the
costs of printing registration statements; bank transaction charges and
custodian's fees; any proxy solicitors' fees and expenses; filing fees; any
federal, state or local income or other taxes; any interest; any membership
fees of the Investment Company Institute and similar organizations; fidelity
bond and Trustees' liability insurance premiums; and any extraordinary
expenses, such as indemnification payments or damages awarded in litigation
or settlements made. All general Trust expenses are allocated among and
charged to the assets of the Portfolios of the Trust on a basis that the
Trustees deem fair and equitable, which may be on the basis of relative net
assets of each Portfolio or the nature of the services performed and relative
applicability to each Portfolio. As discussed in greater detail below, under
"Distribution of the Trust's Shares," the Class IB shares may pay for certain
distribution related expenses in connection with activities primarily
intended to result in the sale of its shares.
THE ADVISERS
Pursuant to an investment advisory agreement with the Manager, each Adviser
to a Portfolio furnishes continuously an investment program for the
Portfolio, makes investment decisions on behalf of the Portfolio, places all
orders for the purchase and sale of investments for the Portfolio's account
with brokers or dealers selected by such Adviser and may perform certain
limited related administrative functions in connection therewith.
For its services, the Manager pays each Adviser an advisory fee based on a
percentage of the average daily net assets of the Portfolio that it advises.
Monthly, with respect to each Portfolio, each Adviser is paid the pro rata
portion of an annual fee, based on the monthly average of the assets of the
Portfolio for which it serves as the Adviser. The Manager will retain, as
compensation for the services described under "The Manager" and to pay its
expenses, the difference between the fees paid to each Adviser and the
management fee of the applicable Portfolio. Each Adviser has agreed that once
the Portfolio has paid the Manager its management fee the Adviser will look
only to the Manager as the party responsible for making the payment of its
advisory fee.
The Advisers are employed for management of the assets of a Portfolio
pursuant to investment advisory agreements approved by the Board of Trustees
of the Trust (including a majority of certain Trustees who are not interested
persons of the Trust or the Manager), and an Adviser's services may be
terminated at any time by the Manager, the Board of Trustees, or the
shareholders of an affected Portfolio.
The Trust has submitted an application requesting an exemptive order from the
Securities and Exchange Commission ("SEC") that would permit the Manager,
subject to certain conditions, and without the approval of shareholders to:
(a) employ a new Adviser or Advisers for any Portfolio pursuant to the terms
of a new Advisory Agreement, in each case either as a replacement for an
existing Adviser or as an additional Adviser; (b) change the terms of any
Advisory Agreement; and (c) continue the employment of an existing Adviser on
the same advisory contract terms where a contract has been assigned because
of a change in control of the Adviser. In such circumstances, shareholders
would receive notice of such action, including the information concerning the
Adviser that normally is provided in the Prospectus. It is uncertain at this
time whether such exemptive relief will be granted by the SEC.
Putnam Investment Management, Inc. ("Putnam Management") has been the Adviser
to the EQ/Putnam Growth & Income Value Portfolio, EQ/Putnam Investors Growth
Portfolio and EQ/Putnam International Equity Portfolio since each Portfolio
commenced operations. As compensation for services as the Adviser to the
EQ/Putnam Growth & Income Portfolio and EQ/Putnam Investors Growth Portfolio,
the
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Manager pays Putnam Management a monthly fee at an annual rate equal to: .50%
of the respective Portfolio's average daily net assets up to and including
$150 million; .45% of the respective Portfolio's average daily net assets
over $150 million and up to and including $300 million; and .35% of the
respective Portfolio's average daily net assets in excess of $300 million. As
compensation for services as the EQ/Putnam International Equity Portfolio's
Adviser, the Manager pays Putnam Management a monthly fee at the annual rate
equal to: .65% of the Portfolio's average daily net assets up to and
including $150 million; .55% of the Portfolio's average daily net assets over
$150 million and up to and including $300 million; and .45% of the
Portfolio's average daily net assets in excess of $300 million.
Putnam Management has been managing mutual funds since 1937. Putnam
Management is located at One Post Office Square, Boston, MA 02109. As of
December 31, 1996, Putnam Management and its affiliates managed more than
$173 billion of assets. Putnam Management is a subsidiary of Putnam
Investments, Inc., which is wholly owned by Marsh & McLennan Companies, Inc.,
a publicly-owned holding company whose principal businesses are international
insurance and reinsurance brokerage, employee benefit consulting and
investment management. Anthony I. Kreisel has been responsible for the day to
day management of the EQ/Putnam Growth & Income Value Portfolio since the
Portfolio commenced operations, which includes investment decisions made on
behalf of the Portfolio. Mr. Kreisel has been employed by Putnam Management
as an investment professional since 1986. Ms. C. Beth Cotner and Messrs.
Richard England, Manuel Weiss Herrero and David J. Santos are responsible for
the day to day management of the EQ/Putnam Investors Growth Portfolio, which
includes investment decisions made on behalf of the Portfolio. Ms. Cotner has
been employed by Putnam Management as an investment professional since 1995.
Prior to 1995, Ms. Cotner was Executive Vice President of Kemper Financial
Services. Mr. England has been employed by Putnam Management as an investment
professional since December, 1992. Prior to December, 1992, Mr. England was
an investment officer at Aetna Equity Investors. Mr. Herrero has been
employed by Putnam Management as an investment professional since 1987. Mr.
Santos has been employed by Putnam Management as an investment professional
since 1988. Justin Scott is responsible for the day to day management of the
EQ/Putnam International Equity Portfolio, which includes investment decisions
made on behalf of the Portfolio. Mr. Scott has been employed by Putnam
Management as an investment professional since 1988.
Massachusetts Financial Services Company ("MFS") has been the Adviser to the
MFS Research Portfolio and the MFS Emerging Growth Companies Portfolio since
each Portfolio commenced operations. As compensation for services as the
Adviser to each of those Portfolios, the Manager pays MFS a monthly fee at an
annual rate equal to: .40% of the respective Portfolio's average daily net
assets up to and including $150 million; .375% of the respective Portfolio's
average daily net assets over $150 million and up to and including $300
million; and .35% of the respective Portfolio's average daily net assets in
excess of $300 million. MFS has agreed to waive its advisory fees for the
first six months after the commencement of each Portfolio's investment
operations.
MFS is America's oldest mutual fund organization. MFS is located at 500
Boylston Street, Boston, MA 02116. MFS and its predecessor organizations have
a history of money management dating from 1924 and the founding of the first
mutual fund in the United States, Massachusetts Investors Trust. As of
January 31, 1997, MFS managed more than $54.0 billion on behalf of over 2.3
million investors accounts. MFS is a subsidiary of Sun Life of Canada (United
States), which, in turn, is a wholly-owned subsidiary of Sun Life Assurance
Company of Canada. MFS has established a strategic alliance with Foreign &
Colonial Management Ltd. ("Foreign & Colonial"). Foreign & Colonial is a
subsidiary of two of the world's oldest financial services institutions, the
London-based Foreign & Colonial Investment Trust PLC, which pioneered the
idea of investment management in 1868, and HYPO-BANK (Bayerische
Hypotheken-und Weschsel-Bank AG), the oldest publicly listed bank in Germany,
founded in 1835. As part of this alliance, the portfolio managers and
investment analysts of MFS and Foreign & Colonial share their views on a
variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other
portfolio management matters. The portfolio securities of the MFS Research
Portfolio are selected by a committee of investment research analysts. This
committee includes investment analysts employed not only by MFS but also by
MFS International (U.K.) Limited, a wholly owned subsidiary of MFS. The
assets
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of the MFS Research Portfolio are allocated among industries by the analysts
acting together as a group. Individual analysts are then responsible for
selecting what they view as the securities best suited to meet the investment
objectives of the MFS Research Portfolio within their assigned industry
responsibility. Since it commenced operations the MFS Emerging Growth
Companies Portfolio has been managed by John W. Ballen, a Senior Vice
President of MFS, who has been employed by the Adviser as a portfolio manager
since 1984, and Toni K. Shimura, a Vice President of MFS, who has been
employed as a portfolio manager by the Adviser since 1987.
THE ADMINISTRATOR
Pursuant to an agreement ("Mutual Funds Service Agreement"), Chase Global
Funds Services Company (the "Administrator") assists the Manager in the
performance of its administrative responsibilities to the Trust and provides
the Trust with other necessary administrative, fund accounting and compliance
services. In addition, the Administrator makes available the office space,
equipment, personnel and facilities required to provide such services to the
Trust. For these services, the Trust pays the Administrator a monthly fee at
the annual rate of .0525 of 1% of the total Trust assets, plus $25,000 for
each Portfolio, until the total Trust assets reach $2.0 billion, and when the
total Trust assets exceed $2.0 billion: .0425 of 1% of the first $0.5 billion
of the total Trust assets; .035 of 1% of the next $2.0 billion of the total
Trust assets; .025 of 1% of the next $1.0 billion of the total Trust assets;
.015 of 1% of the next $2.5 billion of the total Trust assets; .01 of 1% of
the total Trust assets in excess of $6.0 billion; and except that the annual
fee payable to Chase with respect to any Portfolio which commences operation
after July 1, 1997 and whose assets do not exceed $200 million shall be
computed at the annual rate of .0525% of the Portfolio's total assets plus
$25,000.
THE TRANSFER AGENT
Equitable serves as the transfer agent and dividend disbursing agent of the
Trust and receives no compensation for serving in such capacity.
EXPENSE LIMITATION AGREEMENTS
In the interest of limiting expenses of the Portfolios, the Manager has
entered into an expense limitation agreement with the Trust, with respect to
each Portfolio ("Expense Limitation Agreements"), pursuant to which the
Manager has agreed to waive or limit its fees and to assume other expenses so
that the total annual operating expenses of each Portfolio are limited to:
.85% of the respective average daily net assets of the EQ/Putnam Growth &
Income Value, EQ/Putnam Investors Growth, MFS Research and MFS Emerging
Growth Companies; and 1.20% of the average daily net assets of the EQ/Putnam
International Equity Portfolio.
Each Portfolio may at a later date reimburse to the Manager the management
fees waived or limited and other expenses assumed and paid by the Manager
pursuant to the Expense Limitation Agreement provided such Portfolio has
reached a sufficient asset size to permit such reimbursement to be made
without causing the total annual expense ratio of each Portfolio to exceed
the percentage limits stated above. Consequently, no reimbursement by a
Portfolio will be made unless: (i) the Portfolio's assets exceed $100
million; (ii) the Portfolio's total annual expense ratio is less than the
respective percentages stated above; and (iii) the payment of such
reimbursement has been approved by the Trust's Board of Trustees on a
quarterly basis.
BROKERAGE PRACTICES
In selecting brokers and dealers, the Manager and each Adviser may consider
research and brokerage services furnished to either company and their
affiliates. Subject to seeking the most favorable net price and execution
available, the Manager and each Adviser may also consider sales of shares of
the Trust as a factor in the selection of brokers and dealers.
TRANSACTIONS WITH AFFILIATES
In December 1984, Equitable acquired Donaldson, Lufkin & Jenrette, Inc.
("DLJ"). A DLJ subsidiary, Donaldson, Lufkin & Jenrette Securities
Corporation, is one of the nation's largest investment banking
16
<PAGE>
and securities firms. Another DLJ subsidiary, Autranet, Inc., is a securities
broker that markets independently originated research to institutions.
Through the Pershing Division of Donaldson, Lufkin & Jenrette Securities
Corporation, DLJ supplies security execution and clearance services to
financial intermediaries including broker-dealers and banks. To the extent
permitted by law, the Trust may engage in securities and other transactions
with the above entities or may invest in shares of the investment companies
with which those entities have affiliations.
The 1940 Act generally prohibits the Trust from engaging in principal
securities transactions with an affiliate of the Manager or Advisers unless
pursuant to an exemptive order from the SEC. The Trust may apply for such
exemptive relief. The Trust has adopted procedures, prescribed by Section
17(e)(2)(A) of the 1940 Act and Rule 17e-1 thereunder, which are reasonably
designed to provide that any commission it pays to affiliates of the Manager
or Advisers does not exceed the usual and customary broker's commission. In
addition, the Trust will adhere to Section 11(a) of the 1934 Act and any
applicable rules thereunder governing floor trading. The Trust has adopted
procedures permitting it to purchase securities, under certain restrictions
prescribed by a rule under the 1940 Act, in a public offering in which an
affiliate of the Manager or Advisers is an underwriter.
DESCRIPTION OF THE TRUST AND TRUST'S SHARES
THE TRUST
The Trust is a registered open-end management investment company that was
organized as a Delaware business trust on October 31, 1996. As of May 1,
1997, Separate Account FP, a separate account of Equitable, owned 100% of the
shares of a portfolio of the the Trust not offered herein, the T. Rowe Price
Equity Income Portfolio, and through such ownership may be deemed a
controlling person of each Portfolio. The Trust currently is divided into
twelve portfolios, each of which has Class IA and Class IB shares. The Board
of Trustees may establish additional portfolios and additional classes of
shares.
CHARACTERISTICS OF TRUST'S SHARES
The Board of Trustees of the Trust has authority to issue an unlimited number
of shares of beneficial interest, without par value. Each share of each class
of a Portfolio shall be entitled to one vote (or fraction thereof in respect
of a fractional share) on matters that such shares (or class of shares) shall
be entitled to vote. Shareholders of each Portfolio shall vote together on
any matter, except to the extent otherwise required by the 1940 Act, or when
the Board of Trustees of the Trust has determined that the matter affects
only the interest of shareholders of one or more classes, in which case only
the shareholders of such class or classes shall be entitled to vote thereon.
Any matter shall be deemed to have been effectively acted upon with respect
to each Portfolio if acted upon as provided in Rule 18f-2 under the 1940 Act,
or any successor rule, and in the Amended and Restated Declaration of Trust.
The Trust is not required to hold annual shareholder meetings, but special
meetings may be called for purposes such as electing or removing Trustees,
changing fundamental policies or approving an investment management or
advisory agreement.
Under the Trust's multi-class system, shares of each class of a Portfolio
represent an equal pro rata interest in that Portfolio and, generally, shall
have identical voting, dividend, liquidation, and other rights, preferences,
powers, restrictions, limitations, qualifications and terms and conditions,
except that: (a) each class shall have a different designation; (b) each
class of shares shall bear its "Class Expenses;" (c) each class shall have
exclusive voting rights on any matter submitted to shareholders that relates
solely to its distribution arrangements; (d) each class shall have separate
voting rights on any matter submitted to shareholders in which the interests
of one class differ from the interests of any other class; (e) each class may
have separate exchange privileges, although exchange privileges are not
currently contemplated; and (f) each class may have different conversion
features, although a conversion feature is not currently contemplated.
Expenses currently designated as "Class Expenses" by the Trust's Board of
Trustees under the plan pursuant to Rule 18f-3 are currently limited to
payments made to the Distributors for the Class IB shares, pursuant to the
Distribution Plan for the Class IB shares adopted pursuant to Rule 12b-1
under the 1940 Act.
17
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
EQ Financial, 1755 Broadway, New York, New York, 10019, formerly Equico
Securities, Inc., a wholly-owned subsidiary of Equitable, serves as one of
the Distributors for the Trust's Class IB shares pursuant to a distribution
agreement with the Trust. EDI, 1290 Avenue of the Americas, New York, New
York, 10104, a Delaware corporation and an indirect, wholly-owned subsidiary
of Equitable, also serves as one of the Distributors for the Trust's Class IB
shares pursuant to a distribution agreement with the Trust. Class IB shares
are offered and redeemed without a sales charge, at net asset value. The
price at which a purchase or redemption is effected is based on the next
calculation of net asset value after an order is placed by an insurance
company investing in or redeeming from the Trust. Net asset value per share
is calculated for purchases and redemption of shares of each Portfolio by
dividing the value of total Portfolio assets, less liabilities (including
Trust expenses, which are accrued daily), by the total number of outstanding
shares of that Portfolio. The net asset value per share of each Portfolio is
determined each business day at 4:00 p.m. Eastern time. Net asset value per
share is not calculated on national business holidays.
The Trust also has distribution agreements for its Class IA shares with EQ
Financial and EDI pursuant to which each of them acts as the Distributor for
the Class IA shares of the Trust.
The Trust has adopted the Distribution Plan pursuant to Rule 12b-1 under the
1940 Act for the Class IB shares of the Trust. Pursuant to the Distribution
Plan, the Trust compensates the Distributors from assets attributable to the
Class IB shares for services rendered and expenses borne in connection with
activities primarily intended to result in the sale of the Trust's Class IB
shares. It is anticipated that a portion of the amounts received by the
Distributors will be used to defray various costs incurred or paid by the
Distributors in connection with the printing and mailing of Trust
prospectuses, statements of additional information, any supplements thereto
and shareholder reports and holding seminars and sales meetings with
wholesale and retail sales personnel designed to promote the distribution of
Class IB shares. The Distributors may also use a portion of the amounts
received to provide compensation to financial intermediaries and third-party
broker-dealers for their services in connection with the distribution of
Class IB shares.
The Distribution Plan provides that the Trust, on behalf of each Portfolio,
may pay annually up to 0.50% of the average daily net assets of a Portfolio
attributable to its Class IB shares in respect of activities primarily
intended to result in the sale of Class IB shares. However, under the
Distribution Agreements, payments to the Distributors for activities pursuant
to the Distribution Plan are limited to payments at an annual rate equal to
0.25% of average daily net assets of a Portfolio attributable to its Class IB
shares. Under terms of the Distribution Plan and the Distribution Agreements,
each Portfolio is authorized to make payments monthly to the Distributors
which may be used to pay or reimburse entities providing distribution and
shareholder servicing with respect to the Class IB shares for such entities'
fees or expenses incurred or paid in that regard.
The Distribution Plan is of a type known as a "compensation" plan because
payments are made for services rendered to the Trust with respect to Class IB
shares regardless of the level of expenditures by the Distributors. The
Trustees will, however, take into account such expenditures for purposes of
reviewing operations under the Distribution Plan and in connection with their
annual consideration of the Plan's renewal. The Distributors have indicated
that they expect their expenditures to include, without limitation: (a) the
printing and mailing of Trust prospectuses, statements of additional
information, any supplements thereto and shareholder reports for prospective
Contract owners with respect to the Class IB shares of the Trust; (b) those
relating to the development, preparation, printing and mailing of
advertisements, sales literature and other promotional materials describing
and/or relating to the Class IB shares of the Trust; (c) holding seminars and
sales meetings designed to promote the distribution of Trust Class IB shares;
(d) obtaining information and providing explanations to wholesale and retail
distributors of Contracts regarding Trust investment objectives and policies
and other information about the Trust and its Portfolios, including the
performance of the Portfolios; (e) training sales personnel regarding the
Class IB shares of the Trust; and (f) financing any other activity that the
Distributors determines is primarily intended to result in the sale of Class
IB shares.
18
<PAGE>
All shares are purchased and redeemed in accordance with the Trust's Amended
and Restated Declaration of Trust and By-Laws. Sales and redemptions of
shares of the same class by the same shareholder on the same day will be
netted for each Portfolio. All redemption requests will be processed and
payment with respect thereto will normally be made within seven days after
tenders. The Trust may suspend redemption, if permitted by the 1940 Act, for
any period during which the New York Stock Exchange is closed or during which
trading is restricted by the SEC or the SEC declares that an emergency
exists. Redemption may also be suspended during other periods permitted by
the SEC for the protection of the Trust's shareholders. If the Board of
Trustees determines that it would be detrimental to the best interest of the
Trust's remaining shareholders to make payment in cash, the Trust may pay
redemption proceeds in whole or in part by a distribution-in-kind of readily
marketable securities.
HOW ASSETS ARE VALUED
Values are determined according to accepted accounting practices and all laws
and regulations that apply. The assets of each Portfolio are generally valued
as follows:
o Stocks and debt securities which mature in more than 60 days are
valued on the basis of market quotations.
o Foreign securities not traded directly in the United States are
valued at representative quoted prices in the currency of the
country of origin. Foreign currency amounts are translated into
United States dollars at the bid price last quoted by a composite
list of major United States banks.
o Short-term debt securities in the Portfolios which mature in 60
days or less are valued at amortized cost, which approximates
market value.
o Other securities and assets for which market quotations are not
readily available or for which valuation cannot be provided are
valued in good faith by the Valuation Committee of the Board of
Trustees of the Trust using its best judgment.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Under current federal income tax law, the Trust believes that each Portfolio
is entitled, and the Trust intends that each Portfolio shall qualify each
year and elect, to be treated as a regulated investment company ("RIC") under
Subchapter M of the Code. As a RIC, a Portfolio will not be subject to
federal tax on its net investment income and net realized capital gains to
the extent such income and gains are timely distributed to its insurance
company shareholders. Accordingly, each Portfolio intends to distribute all
of its net investment income and net realized capital gains to its
shareholders. An insurance company that is a shareholder of a Portfolio will
generally not be taxed on distributions from that Portfolio. All dividend
distributions will be reinvested in full and fractional shares of the
Portfolio to which they relate.
Although the Trust intends that it and the Portfolios will be operated so
that they will have no federal income or excise tax liability, if any such
liability is nevertheless incurred, the investment performance of the
Portfolio or Portfolios incurring such liability will be adversely affected.
In addition, Portfolios investing in foreign securities and currencies may be
subject to foreign taxes which could reduce the investment performance of
such Portfolio.
In addition to meeting investment diversification rules applicable to
regulated investment companies under Subchapter M of the Code, each Portfolio
will also comply with the investment diversification requirements of
Subchapter L of the Code. Were any Portfolio to fail to comply with those
requirements, owners of Contracts (other than "pension plan contracts")
funded through the Trust would be taxed immediately on the accumulated
investment earnings under their Contracts and would thereby lose any benefit
of tax deferral. Compliance is therefore carefully monitored by the
Administrator and the Manager.
Certain additional tax information appears in the Statement of Additional
Information.
For more information regarding the tax implications for owners of Contracts
investing in the Trust, refer to the prospectuses for those Contracts.
19
<PAGE>
PERFORMANCE INFORMATION
From time to time, the Trust may advertise the "average annual or cumulative
total return" and may compare the performance of the Portfolios with that of
other mutual funds with similar investment objectives as listed in rankings
prepared by Lipper Analytical Services, Inc., or similar independent services
monitoring mutual fund performance, and with appropriate securities or other
relevant indices. The "average annual total return" of a Portfolio refers to
the average annual compounded rate of return over the stated period that
would equate an initial investment in that Portfolio at the beginning of the
period to its ending redeemable value, assuming reinvestment of all dividends
and distributions and deduction of all recurring charges, other than charges
and deductions which may be imposed under the Contracts. Performance figures
will be given for the recent one, five and ten year periods and for the life
of the Portfolio if it has not been in existence for any such periods. When
considering "average annual total return" figures for periods longer than one
year, it is important to note that a Portfolio's annual total return for any
given year might have been greater or less than its average for the entire
period. "Cumulative total return" represents the total change in value of an
investment in a Portfolio for a specified period (again reflecting changes in
Portfolio share prices and assuming reinvestment of Portfolio distributions).
The methods used to calculate "average annual and cumulative total return"
are described further in the Statement of Additional Information.
The performance of each Portfolio will vary from time to time in response to
fluctuations in market conditions, interest rates, the composition of the
Portfolio's investments and expenses. Consequently, a Portfolio's performance
figures are historical and should not be considered representative of the
performance of the Portfolio for any future period. Such performance does not
reflect fees and charges imposed under the Contracts, which fees and charges
will reduce such performance figures; therefore, these figures may be of
limited use for comparative purposes. No Portfolio will use information
concerning its investment performance in advertisements or sales materials
unless appropriate information concerning the relevant separate account is
also included.
PRIOR PERFORMANCE OF EACH ADVISER
The following tables provide information concerning the historical
performance of another registered investment company (or series) managed by
each Adviser, that has investment objectives, policies, strategies and risks
substantially similar to those of its respective Portfolio(s) of the Trust.
The data is provided to illustrate the past performance of each Adviser in
managing a substantially similar investment vehicle as measured against
specified market indices and does not represent the past performance of any
of the Portfolios or the future performance of any Portfolio or its Adviser.
Consequently, potential investors should not consider this performance data
as an indication of the future performance of any Portfolio of the Trust or
of its Adviser.
Each Adviser's performance data shown below was calculated in accordance with
standards prescribed by the SEC for the calculation of average annual total
return information for registered investment companies. Share prices and
investment returns will fluctuate reflecting market conditions as well as
changes in company-specific fundamentals of portfolio securities.
20
<PAGE>
EQ/PUTNAM GROWTH & INCOME VALUE PORTFOLIO
The table below sets forth performance history for another registered
investment company, i.e., the Putnam Growth & Income Fund II, which is
managed by the Putnam Investment Management, Inc., and whose investment
policies are substantially similar to those of EQ/Putnam Growth & Income
Value Portfolio. Putnam Growth & Income Fund II will be subject to different
expenses than the EQ/Putnam Growth & Income Value Portfolio. In addition,
holders of variable insurance contracts representing interests in EQ/Putnam
Growth & Income Value will be subject to charges and expenses relating to
such insurance contract. The performance results presented below do not
reflect any insurance related expenses.
The investment results of Putnam Growth & Income Fund II presented below are
unaudited and are not intended to predict or suggest the returns that might
be experienced by the EQ/Putnam Growth & Income Value Portfolio or an
individual investor investing in the EQ/Putnam Growth & Income Value
Portfolio.
<TABLE>
<CAPTION>
PUTNAM GROWTH &
INCOME FUND S&P 500
YEAR ENDING 3/31/97 II(1) INDEX(2)
- ------------------- --------------- ---------
<S> <C> <C>
One Year(3) ........ 17.16% 19.82%
Since inception(3) . 25.44% 27.88%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The S&P 500 Index ("Index") is an unmanaged index containing common
stocks of 500 industrial, transportation, utility and financial
companies, regarded as generally representative of the United States
stock market. The Index reflects the reinvestment of income dividends
and capital gain distributions, if any, but does not reflect fees,
brokerage commissions, or other expenses of investing.
(3) Annualized performance for the Class A shares of the Putnam Growth &
Income Fund II. The inception date for the Putnam Growth & Income Fund
II was January, 1995. The Class A shares are subject to a front-end
sales charge of up to 5.75%. Other share classes have different expenses
and their performance will vary.
21
<PAGE>
EQ/PUTNAM INVESTORS GROWTH PORTFOLIO
The table below, sets forth performance history for another registered
investment company, i.e., the Putnam Investors Fund, which is managed by the
Putnam Investment Management, Inc., and whose investment policies are
substantially similar to those of EQ/Putnam Investors Growth Portfolio.
Putnam Investors Fund will be subject to different expenses than the
EQ/Putnam Investors Growth Portfolio. In addition, holders of the variable
insurance contracts representing interests in EQ/Putnam Investors Growth
Portfolio will be subject to charges and expenses relating to such insurance
contract. The performance results presented below do not reflect any
insurance related expenses.
The investment results of Putnam Investors Fund presented below are unaudited
and are not intended to predict or suggest the returns that might be
experienced by the EQ/Putnam Investors Growth Portfolio or an individual
investor investing in the EQ/Putnam Investors Growth Portfolio.
<TABLE>
<CAPTION>
PUTNAM INVESTORS S&P 500
YEAR ENDING 3/31/97 FUND(1) INDEX(2)
- ------------------- ---------------------- ---------
<S> <C> <C>
One Year(3) ........ 14.86% 19.82%
Five Years(3) ...... 16.23% 16.40%
Ten Years(3) ....... 12.22% 13.36%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The S&P 500 Index ("Index") is an unmanaged index containing common
stocks of 500 industrial, transportation, utility and financial
companies, regarded as generally representative of the United States
stock market. The Index reflects the reinvestment of income dividends
and capital gain distributions, if any, but does not reflect fees,
brokerage commissions, or other expenses of investing.
(3) Annualized performance for the Class A shares of the Putnam Investors
Fund. The Class A shares are subject to a front-end sales charge of up
to 5.75%. Other share classes have different expenses and their
performance will vary.
22
<PAGE>
EQ/PUTNAM INTERNATIONAL EQUITY PORTFOLIO
The table below sets forth performance history for another registered
investment company, i.e., the Putnam International Growth Fund, which is
managed by the Putnam Investment Management, Inc., and whose investment
policies are substantially similar to those of EQ/Putnam International Equity
Portfolio. Putnam International Growth Fund will be subject to different
expenses than the EQ/Putnam International Equity Portfolio. In addition,
holders of variable insurance contracts representing interests in EQ/Putnam
International Equity Portfolio will be subject to charges and expenses
relating to such insurance contract. The performance results presented below
do not reflect any insurance related expenses.
The investment results of Putnam International Growth Fund presented below
are unaudited and are not intended to predict or suggest the returns that
might be experienced by the EQ/Putnam International Equity Portfolio or an
individual investor investing in the EQ/Putnam International Equity
Portfolio.
<TABLE>
<CAPTION>
PUTNAM INTERNATIONAL MSCI EAFE
YEAR ENDING 3/31/97 GROWTH FUND(1) INDEX(2)
- ------------------- -------------------- -----------
<S> <C> <C>
One Year(3) ........ 14.60% 1.75%
Five Years(3) ...... 14.66% 10.91%
Since inception(3) . 16.70% 6.04%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The MSCI EAFE ("Index") is an unmanaged capitalization-weighted measure
of stock markets in Europe, Australia, the Far East and Canada. MSCI
EAFE Index returns assume dividends reinvested net of withholding tax
and do not reflect any fees or expenses.
(3) Annualized performance the Class A shares of the Putnam International
Growth Fund. The inception date of the Class A shares of the Putnam
International Growth Fund was March, 1991. The Class A shares are
subject to a front-end sales charge of up to 5.75%.
23
<PAGE>
MFS RESEARCH PORTFOLIO
In the table below, the only account which is included is another registered
investment company, i.e., MFS Research Fund which is managed by the
Massachusetts Financial Services Company and whose investment policies are
substantially similar to MFS Research Portfolio. However, MFS Research Fund
will be subject to different expenses than the MFS Research Portfolio. In
addition, holders of variable insurance contracts representing interests in
the MFS Research Portfolio will be subject to charges and expenses relating
to such insurance contracts. The performance results presented below do not
reflect any insurance related expenses.
The investment results of MFS Research Fund presented below are unaudited and
are not intended to predict or suggest the returns that might be experienced
by the MFS Research Portfolio or an individual investor investing in the MFS
Research Portfolio.
<TABLE>
<CAPTION>
MFS RESEARCH S&P 500
YEAR ENDING 3/31/97 FUND(1) INDEX(2)
- ------------------- ------------------ ---------
<S> <C> <C>
One Year(3) ........ 12.96% 19.82%
Five Years(3) ...... 18.13% 16.40%
Ten Years(3) ....... 12.91% 13.36%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The S&P 500 Index ("Index") is an unmanaged index containing common
stocks of 500 industrial, transportation, utility and financial
companies, regarded as generally representative of the United States
stock market. The Index reflects the reinvestment of income dividends
and capital gain distributions, if any, but does not reflect fees,
brokerage commissions, or other expenses of investing.
(3) Annualized performance for the Class A shares of the MFS Research Fund.
The results for the MFS Research Fund do not reflect any sales charge
that may be imposed on the Class A shares of the MFS Research Fund, nor
any charges that would be imposed at the insurance company separate
account level.
24
<PAGE>
MFS EMERGING GROWTH COMPANIES PORTFOLIO
In the table below, the only account which is included is another registered
investment company, i.e., MFS Emerging Growth Fund which is managed by the
Massachusetts Financial Services Company and whose investment policies are
substantially similar to MFS Emerging Growth Companies Portfolio. However,
MFS Emerging Growth Fund will be subject to different expenses than the MFS
Emerging Growth Companies Portfolio. In addition, holders of variable
insurance contracts representing interests in the MFS Emerging Growth
Companies Portfolio will be subject to charges and expenses relating to such
insurance contracts. The performance results presented below do not reflect
any insurance related expenses.
The investment results of MFS Emerging Growth Fund presented below are
unaudited and are not intended to predict or suggest the returns that might
be experienced by the MFS Emerging Growth Companies Portfolio or an
individual investor investing in the MFS Emerging Growth Companies Portfolio.
<TABLE>
<CAPTION>
MFS EMERGING RUSSELL 2000
YEAR ENDING 3/31/97 GROWTH FUND(1) INDEX(2)
- ------------------- -------------- --------------
<S> <C> <C>
One Year(3) ........ 2.32% 5.11%
Five Years(3) ...... 16.85% 12.78%
Ten Years(3) ....... 14.72% 9.42%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The Russell 2000 Index is an unmanaged index (with no defined investment
objective) of 2000 small-cap stocks and it includes reinvestments of
dividends. It is compiled by the Frank Russell Company.
(3) Annualized performance for the Class B shares of the MFS Emerging Growth
Fund. The results for the MFS Emerging Growth Fund do not reflect any
sales charge that may be imposed on the Class B shares of the MFS
Emerging Growth Fund, nor any charges that would be imposed at the
insurance company separate account level.
25
<PAGE>
APPENDIX A
The following table summarizes the historical performance information of
certain other registered investment companies that appears on pages 21
through 25 of this Prospectus. Each other registered investment company is
managed by an Adviser and has investment objectives, policies, strategies and
risks substantially similar to the Portfolio managed by that Adviser. For
further information regarding each of the registered investment companies and
the indexes presented below, please refer to pages 21 through 25 of this
Prospectus.
ANNUALIZED RATES OF RETURN
PERIODS ENDING MARCH 31, 1997
<TABLE>
<CAPTION>
SINCE
FUND NAME 1 YEAR 5 YEARS 10 YEARS INCEPTION
- --------------------------------- -------- --------- ---------- -----------
<S> <C> <C> <C> <C>
PUTNAM GROWTH & INCOME FUND II 17.16% -- -- 25.44%
- --------------------------------- -------- --------- ---------- -----------
S&P 500 Index 19.82% -- -- 27.88%
- --------------------------------- -------- --------- ---------- -----------
PUTNAM INVESTORS FUND 14.86% 16.23% 12.22% --
- --------------------------------- -------- --------- ---------- -----------
S&P 500 Index 19.82% 16.40% 13.36% --
- --------------------------------- -------- --------- ---------- -----------
PUTNAM INTERNATIONAL GROWTH FUND 14.60% 14.66% -- 16.70%
- --------------------------------- -------- --------- ---------- -----------
MSCI EAFE Index 1.75% 10.91% -- 6.04%
- --------------------------------- -------- --------- ---------- -----------
MFS RESEARCH FUND 12.96% 18.13% 12.91% --
- --------------------------------- -------- --------- ---------- -----------
S&P 500 Index 19.82% 16.40% 13.36% --
- --------------------------------- -------- --------- ---------- -----------
MFS EMERGING GROWTH FUND 2.32% 16.85% 14.72% --
- --------------------------------- -------- --------- ---------- -----------
Russell 2000 Index 5.11% 12.78% 9.42% --
- --------------------------------- -------- --------- ---------- -----------
</TABLE>
A-1
<PAGE>
Filed Pursuant to Rule 497(c)
File No. 333-17217
EQ ADVISORS TRUST
1290 Avenue of the Americas -- New York, New York 10104
EQ Advisors Trust ("Trust") is an open-end management investment company that
offers a selection of professionally managed investment portfolios
("Portfolios"). Each Portfolio has its own investment objective and policies
that are designed to meet different investment goals.
This Prospectus describes the following seven Portfolios currently offered by
the Trust pursuant to this Prospectus.
o EQ/Putnam Growth & Income Value Portfolio
o EQ/Putnam International Equity Portfolio
o EQ/Putnam Investors Growth Portfolio
o MFS Research Portfolio
o MFS Emerging Growth Companies Portfolio
o Merrill Lynch World Strategy Portfolio
o Merrill Lynch Basic Value Equity Portfolio
The Trust offers two classes of shares on behalf of each Portfolio: Class IA
shares offered pursuant to another prospectus, and Class IB shares offered
hereby.
This Prospectus sets forth concisely the information about the Trust and the
Portfolios that a prospective investor should know before investing. Please
read the Prospectus and retain it for future reference. Additional
information contained in a Statement of Additional Information also dated May
1, 1997 has been filed with the Securities and Exchange Commission and is
available upon request without charge by writing to the Trust at the address
noted above or California residents can obtain a copy of the Statement of
Additional Information by calling 1-800-999-3527. The Statement of Additional
Information is incorporated into this Prospectus by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
PROSPECTUS DATED MAY 1, 1997
<PAGE>
THE TRUST
The Trust is an open-end management investment company registered under the
Investment Company Act of 1940, as amended ("1940 Act"). As a "series" type
of mutual fund, the Trust issues shares of beneficial interest that are
currently divided among twelve Portfolios. Seven of these Portfolios are
offered pursuant to this Prospectus. Each Portfolio is a separate series of
the Trust with its own objective and policies. Each of the Portfolios set
forth below, except for the Merrill Lynch World Strategy Portfolio, are
diversified for 1940 Act purposes. The Trustees of the Trust may establish
additional Portfolios at any time.
Each Portfolio is managed by EQ Financial Consultants, Inc. ("Manager") which
directs the day to day operations of each Portfolio. Putnam Investment
Management, Inc., Massachusetts Financial Services Company and Merrill Lynch
Asset Management, L.P. serve as the advisers (each an "Adviser" and, together
the "Advisers") to two or more of the Portfolios, as detailed in the table
below.
<TABLE>
<CAPTION>
PORTFOLIO ADVISER
- ---------------------------------------------- --------------------------------------------
<S> <C>
EQ/Putnam Growth & Income Value Portfolio Putnam Investment Management, Inc.
EQ/Putnam International Equity Portfolio Putnam Investment Management, Inc.
EQ/Putnam Investors Growth Portfolio Putnam Investment Management, Inc.
MFS Research Portfolio Massachusetts Financial Services Company
MFS Emerging Growth Companies Portfolio Massachusetts Financial Services Company
Merrill Lynch World Strategy Portfolio Merrill Lynch Asset Management, L.P.
Merrill Lynch Basic Value Equity Portfolio Merrill Lynch Asset Management, L.P.
</TABLE>
The Trust offers two classes of shares on behalf of each Portfolio: Class IA
shares and Class IB shares. EQ Financial Consultants, Inc. ("EQ Financial"),
the Trust's Manager, serves as one of the distributors for the Class IB
shares of the Trust offered by this Prospectus. Equitable Distributors, Inc.
("EDI") also serves as one of the distributors for the Class IB shares of the
Trust as well as one of the distributors of the Class IA shares. (EQ
Financial and EDI are collectively referred to as the "Distributors"). The
Trust's shares are currently sold only to insurance company separate accounts
in connection with variable life insurance contracts and variable annuity
certificates and contracts (collectively, the "Contracts") issued by The
Equitable Life Assurance Society of the United States ("Equitable"). Both
classes of shares are offered and redeemed at their net asset value without
the imposition of any sales load.
Class IA shares are offered pursuant to another prospectus and are subject to
the same expenses as the Class IB shares, but unlike the Class IB shares they
are not subject to distribution fees imposed pursuant to a distribution plan.
Class IB shares are subject to distribution fees imposed under a distribution
plan ("Distribution Plan") adopted pursuant to Rule 12b-1 under the 1940 Act.
Inquiries regarding Class IA shares should be addressed to Equitable, at 1290
Avenue of the Americas, New York, NY 10104 or by calling 1-212-641-7237.
INVESTMENT OBJECTIVES AND POLICIES
The following is a brief description of the investment objectives and
policies of each of the Portfolios. All of the objectives and policies of
each Portfolio, unless otherwise noted, are not fundamental and may be
changed by the Board of Trustees of the Trust without the approval of
shareholders. Certain investment strategies and instruments discussed below
are described in greater detail in the Statement of Additional Information.
Because of the uncertainty inherent in all investments, there can be no
assurance that the Portfolios will be able to achieve their respective
investment objectives.
EQ/PUTNAM GROWTH & INCOME VALUE PORTFOLIO
The investment objective of the EQ/Putnam Growth & Income Value Portfolio is
capital growth. Current income is a secondary objective. The Adviser intends
to invest primarily in common stocks that offer
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potential for capital growth and may, consistent with the Portfolio's
investment objective, invest in common stocks that offer potential for
current income. The Portfolio may also purchase corporate bonds, notes and
debentures, preferred stocks and convertible securities (which include both
debt securities and preferred stocks). The types of securities held by the
Portfolio may vary from time to time in light of the Portfolio's investment
objective, changes in interest rates, and economic and other factors.
In analyzing companies for investment, the Adviser will seek to identify
companies whose securities are significantly undervalued in relation to their
underlying asset values or earnings potential.
At times, the Adviser may judge that conditions in the securities markets may
make pursuing the Portfolio's basic investment strategy inconsistent with the
best interests of the Portfolio's shareholders. At such times, the Adviser
may temporarily use alternative strategies that are primarily designed to
reduce fluctuations in the value of the Portfolio's assets. In implementing
these defensive strategies, the Portfolio may invest without limit in debt
securities or preferred stocks, or may invest in any other securities the
Adviser considers consistent with such defensive strategies. It is impossible
to predict when, or for how long, the Adviser will use these alternative
defensive strategies.
The Portfolio may invest up to 20% of its total assets in foreign securities.
The Portfolio may also purchase Eurodollar certificates of deposit (i.e.,
short-term time deposits issued by European banks) without regard to this 20%
limit. Such investments increase the Portfolio's diversification and may
enhance return, but they may represent a greater degree of risk than
investing in domestic securities.
In addition, the Portfolio may also invest a portion of its assets in United
States government securities and high-quality United States and foreign
dollar-denominated money market securities (i.e., within the two highest
rating categories assigned by a nationally recognized statistical rating
organization ("NRSRO")) including certificates of deposit, bankers'
acceptances, commercial paper, short-term corporate securities and repurchase
agreements. For temporary defensive purposes or to meet redemption requests,
the Portfolio may invest without limitation in such securities.
The Portfolio may also invest in investment grade debt securities and may
invest a portion of its total assets in debt securities rated below
investment grade (commonly known as "junk bonds"). The price of a bond
generally fluctuates with changes in interest rates, rising when interest
rates fall and falling when interest rates rise.
The Portfolio may also engage in a variety of investment management practices
such as buying and selling options and futures contracts and engaging in
foreign currency exchange contracts.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, futures contracts,
foreign securities, securities loans, convertible securities, borrowings,
repurchase agreements, illiquid securities, forward commitments, zero-coupon
bonds, derivatives, United States Government securities, foreign currency
transactions, payment-in-kind bonds, and investment grade and lower quality
fixed-income securities) are discussed under the caption "Investment
Strategies" below and in the Statement of Additional Information.
EQ/PUTNAM INTERNATIONAL EQUITY PORTFOLIO
The investment objective of the EQ/Putnam International Equity Portfolio is
capital appreciation. The Portfolio is designed for investors seeking capital
appreciation primarily through a diversified portfolio of equity securities
of companies organized under the laws of a country other than the United
States. Such equity securities normally will include common stocks, preferred
stocks, securities convertible into common or preferred stocks, and warrants.
The Portfolio may also invest to a lesser extent in debt securities and other
types of investments if the Adviser believes that purchasing them would help
to achieve the Portfolio's objective. The Portfolio may hold a portion of its
assets in cash or money market instruments. The Portfolio may also engage in
a variety of investment management practices such as buying and selling
options and futures contracts and engaging in foreign currency exchange
contracts.
Under normal circumstances the Portfolio will invest at least 65% of its
assets in issuers located in at least three different countries outside the
United States. The Portfolio will consider an issuer to be located outside
the United States if the issuer is organized under the laws of a country
outside the United States.
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The Portfolio may invest in securities of issuers in emerging markets, as
well as more developed markets. Investing in securities of issuers in
emerging markets generally involves more risks than investing in securities
of issuers in developed markets.
The Adviser believes that the securities markets of many countries move
relatively independently of one another because business cycles and other
economic or political events that influence one country's securities markets
may have little effect on securities markets in other countries. By investing
in a diversified portfolio of securities of issuers located in different
foreign countries, the Adviser attempts to reduce the risks associated with
being invested in the securities of issuers within the economy of only one
country. Countries that the Adviser believes offer attractive opportunities
for investment may change from time to time.
The Portfolio will not limit its investments to any particular type of
company. The Portfolio may invest in companies, large or small, whose
earnings are believed by the Adviser to be in a relatively strong growth
trend or it may invest in companies that are not expected to experience
significant further growth but whose market value per share is considered by
the Adviser to be undervalued. The Portfolio also may invest in small and
relatively less well-known companies that meet these characteristics.
At times, the Adviser may believe that conditions in the international
securities markets may make pursuing the Portfolio's basic investment
strategy inconsistent with the best interests of its shareholders. At such
times, the Portfolio may temporarily use alternative strategies that are
primarily designed to reduce fluctuations in the value of the Portfolio's
assets. In implementing these defensive strategies, the Portfolio may invest,
without limitation, in securities of any kind, including securities traded
primarily in United States markets and in cash and money market instruments.
It is impossible to predict when, or for how long, the Portfolio will use
these alternative strategies.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, futures contracts,
United States Government securities, borrowings, derivatives, repurchase
agreements, futures contracts, foreign securities, forward commitments,
passive foreign investment companies, small company securities, foreign
currency transactions, investment grade and lower quality fixed-income
securities, securities loans, and illiquid securities) are discussed under
the caption "Investment Strategies" below and in the Statement of Additional
Information.
EQ/PUTNAM INVESTORS GROWTH PORTFOLIO
The investment objective of the EQ/Putnam Investors Growth Portfolio is
long-term growth of capital and any increased income that results from this
growth. The Adviser intends to invest primarily in common stocks in view of
the Adviser's belief that equity ownership affords the best opportunity for
capital growth over the long term. The Portfolio may also purchase
convertible bonds, convertible preferred stocks, preferred stocks and debt
securities if the Adviser believes that they will help to achieve the
Portfolio's objective. In addition, the Portfolio may hold a portion of its
assets in cash or money market instruments.
In analyzing potential investments, the Adviser considers three main factors:
(i) the general outlook of the economy; (ii) a study of various industries to
determine those with the best possibilities for long-term growth; and (iii) a
detailed study of what appear to be the most promising individual companies.
In evaluating individual companies, the Adviser gives more weight to growth
potential characteristics than to dividend income. In particular, the Adviser
believes that evaluating a company's probable future earnings, dividends,
financial strength, working assets and competitive position may be more
profitable in the long run than seeking current dividend income.
Although the Portfolio's investments are not limited to any particular type
of company, the Adviser currently expects that the Portfolio will invest a
substantial portion of its assets in common stocks of companies with equity
market capitalizations of more than $1 billion. The Portfolio may also invest
in small to medium-sized companies having a proprietary product or profitable
market niche and the potential to grow very rapidly. The Adviser believes
that such small to medium-sized companies may present greater opportunities
for capital appreciation because of their high potential earnings growth, but
also may involve greater risk.
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<PAGE>
At times, the Adviser may judge that conditions in the securities markets may
make pursuing the Portfolio's basic investment strategy inconsistent with the
best interests of the Portfolio's shareholders. At such times, the Adviser
may temporarily use alternative strategies that are primarily designed to
reduce fluctuations in the value of the Portfolio's assets. In implementing
these defensive strategies, the Portfolio may invest, without limit, in debt
securities, preferred stocks, United States government and agency
obligations, cash or money market instruments, or may invest in any other
securities the Adviser considers consistent with such defensive strategies.
It is impossible to predict when, or for how long, the Adviser will use these
alternative defensive strategies.
The Portfolio may invest up to 20% of its total assets in foreign securities.
The Portfolio may also purchase Eurodollar certificates of deposit (i.e.,
short-term time deposits issued by European banks) without regard to this 20%
limit. Such investments increase the Portfolio's diversification and may
enhance return, but they may represent a greater degree of risk than
investing in domestic securities.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, borrowings, futures
contracts, investment grade and lower quality fixed-income securities,
foreign securities, foreign currency transactions, securities loans, illiquid
securities, derivatives, repurchase agreements and forward commitments) are
discussed under the caption "Investment Strategies" below and in the
Statement of Additional Information.
MFS RESEARCH PORTFOLIO
The investment objective of the MFS Research Portfolio is to provide
long-term growth of capital and future income. In pursuing its objective, the
Portfolio invests a substantial portion of its assets in the common stock or
securities convertible into common stock of companies believed by the Adviser
to possess better than average prospects for long-term growth. A smaller
proportion of the assets of the Portfolio may be invested in bonds,
short-term debt obligations, preferred stocks or common stocks whose
principal characteristic is income production rather than growth. Such
securities may also offer opportunities for growth of capital as well as
income. In the case of both growth stocks and income securities, the Adviser
emphasizes progressive, well-managed companies.
The portfolio securities of the Portfolio are selected by a committee of
investment research analysts. This committee includes investment analysts
employed not only by the Adviser but also by MFS International (U.K.)
Limited, a wholly-owned subsidiary of the Adviser. The Portfolio's assets are
allocated among industries by the analysts acting together as a group.
Individual analysts are then responsible for selecting what they view as the
securities best suited to meet the Portfolio's investment objective within
their assigned industry responsibility.
To the extent that such investments comply with the Portfolio's investment
objective, the Portfolio may invest up to 20% of its total assets in foreign
securities, including those in emerging markets. These securities include
dollar-denominated and non-dollar-denominated foreign securities. Such
foreign investments increase a portfolio's diversification and may enhance
return, but they may represent a greater degree of risk than investing
exclusively in domestic securities.
The Portfolio may invest in investment grade debt securities and may invest
up to 10% of its total assets in securities rated below investment grade
(commonly known as "junk bonds"). The price of a bond generally fluctuates
with changes in interest rates, rising when interest rates fall and falling
when interest rates rise.
Certain investment strategies and practices which may be employed by the
Portfolio (such as foreign securities, convertible securities, borrowings,
forward commitments, United States Government securities, repurchase
agreements, securities loans, illiquid securities and investment grade and
lower quality fixed-income securities) are discussed under the caption
"Investment Strategies" below and in the Statement of Additional Information.
MFS EMERGING GROWTH COMPANIES PORTFOLIO
The investment objective of the MFS Emerging Growth Companies Portfolio is to
provide long-term growth of capital. Dividend and interest income from
portfolio securities, if any, is incidental to the
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Portfolio's investment objective. In pursuing its objective, the Portfolio
invests primarily (i.e., at least 80% of its assets under normal
circumstances) in common stocks of emerging growth companies that the Adviser
believes are early in their life cycle but which have the potential to become
major enterprises. Such emerging growth companies generally are expected to:
(i) show earnings growth over time that is well above the growth rate of the
overall economy and the rate of inflation; and (ii) have the products,
technologies, management and market and other opportunities that are usually
necessary to become more widely recognized as growth companies.
Emerging growth companies can be of any size and the Portfolio may invest in
larger or more established companies whose rates of earnings growth are
expected to accelerate because of special factors, such as rejuvenated
management, new products, changes in customer demand, or basic changes in the
economic environment. Investing in emerging growth companies involves greater
risk than is customarily associated with investments in more established
companies. Emerging growth companies often have limited product lines,
markets or financial resources and may be more dependent on one-person
management. In addition, there may be less research available on many
promising small or medium-sized emerging growth companies, making it more
difficult both to identify and to analyze such companies. Moreover, the
securities of such companies may have limited marketability and may be
subject to more abrupt or erratic market movements than the securities of
larger, more established companies.
While the Portfolio may invest primarily in common stocks, the Portfolio may,
to a limited extent, seek long-term growth in other types of securities such
as convertible securities and warrants. To the extent that such investments
comply with the Portfolio's investment objective, the Portfolio may invest up
to 25% of its total assets in foreign securities, including those in emerging
markets. These securities include non-United States dollar-denominated
securities traded outside the United States and dollar-denominated securities
traded in the United States (such as American Depositary Receipts ("ADRs")).
Such foreign investments increase a portfolio's diversification and may
enhance return, but they may represent a greater degree of risk than
investing exclusively in domestic securities. The Portfolio may also invest
in debt securities and hold cash and cash equivalents. In addition, the
Portfolio may invest in lower-rated debt securities (commonly referred to as
"junk bonds").
The Portfolio is aggressively managed and, therefore, the value of its shares
is subject to greater fluctuation and investment in its shares generally
involves a higher degree of risk than would be the case with an investment in
a conservative equity or growth fund investing entirely in proven growth
companies.
Certain investment strategies and practices which may be employed by the
Portfolio (such as foreign securities, repurchase agreements, loan
participations, derivatives, United States Government securities, securities
loans, forward commitments, asset-backed securities, borrowings, options,
futures contracts, loan participations, convertible securities, foreign
currency transactions, illiquid securities and investment grade and lower
quality fixed-income securities) are discussed under the caption "Investment
Strategies" below and in the Statement of Additional Information.
MERRILL LYNCH WORLD STRATEGY PORTFOLIO
The investment objective of the Merrill Lynch World Strategy Portfolio is to
seek high total investment return by investing primarily in a portfolio of
equity and fixed income securities, including convertible securities, of U.S.
and foreign issuers. Total investment return consists of interest, dividends,
discount accruals and capital changes, including changes in the value of
non-dollar denominated securities and other assets and liabilities resulting
from currency fluctuations. Investing in foreign securities involves special
considerations. The Portfolio may employ a variety of instruments and
techniques to enhance income and to hedge against market and currency risk.
The Portfolio seeks to achieve its objective by investing primarily in the
securities of issuers located in the United States, Canada, Western Europe
and the Far East. There are no prescribed limits on the geographical
allocation of the Portfolio among these regions. Such allocation will be made
primarily on the basis of the anticipated total return from investments in
the securities of issuers wherever located, considering such factors as: the
condition and growth potential of the various economies and securities
markets and the issuers domiciled therein; anticipated movements in interest
rates in the various capital
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markets and in the value of foreign currencies relative to the U.S. dollar;
tax considerations; and economic, social, financial, national and political
factors that may affect the climate for investing within the various
securities markets. When in the judgment of the Adviser, economic or market
conditions warrant, the Portfolio reserves the right to concentrate its
investments in one or more capital markets, including the United States.
The equity and convertible preferred securities in which the Portfolio may
invest are primarily securities issued by quality companies. Generally, the
characteristics of such companies include a strong balance sheet, good
financial resources, a satisfactory rate of return on capital, a good
industry position and superior management.
The corporate debt securities, including convertible debt securities, in
which the Portfolio may invest will be primarily investment grade securities
those rated BBB or better by Standard & Poor's Rating Group ("S&P") or Baa or
better by Moody's Investors Service, Inc. ("Moody's") or of comparable
quality. The Fund may also invest in debt obligations issued or guaranteed by
sovereign governments, political subdivisions thereof (including states,
provinces and municipalities) or their agencies or instrumentalities or
issued or guaranteed by international organizations designated or supported
by governmental entities to promote economic reconstruction or development
("supranational entities") such as the International Bank for Reconstruction
and Development (the "World Bank") and the European Coal and Steel Community.
Investments in securities of supranational entities are subject to the risk
that member governments will fail to make required capital contributions and
that a supranational entity will thus be unable to meet its obligations.
When market or financial conditions warrant, the Portfolio may invest as a
temporary defensive measure up to 100% of its assets in United States
Government or Government agency securities issued or guaranteed by the United
States Government or its agencies or instrumentalities, money market
securities or other fixed income securities deemed by the Adviser to be
consistent with a defensive posture, or may hold its assets in cash.
The Portfolio is non-diversified for the 1940 Act purposes and as such may
invest a larger percentage of its assets in individual issuers than a
diversified investment company. In this regard, the Portfolio is not subject
to the general limitation that it not invest more than 5% of its total assets
in the securities of any one issuer. To the extent the Portfolio makes
investments in excess of 5% of its assets in a particular issuer, its
exposure to credit and market risks associated with that issuer is increased.
However, the Portfolio's investments will be limited so as to qualify for the
special tax treatment afforded "regulated investment companies" under the
Code.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, futures contracts,
foreign securities, foreign currency transactions, United States Government
securities, convertible securities, borrowings, derivatives, investment grade
fixed-income securities, repurchase agreements, securities loans, illiquid
securities and forward commitments) are discussed under the caption
"Investment Strategies" below and in the Statement of Additional Information.
MERRILL LYNCH BASIC VALUE EQUITY PORTFOLIO
The investment objective of the Merrill Lynch Basic Value Equity Portfolio is
to seek capital appreciation and, secondarily, income by investing in
securities, primarily equities, that the Adviser of the Portfolio believes
are undervalued and therefore represent basic investment value. The Portfolio
seeks special opportunities in securities that are selling at a discount,
either from book value or historical price-earnings ratios, or seem capable
of recovering from temporarily out of favor considerations. Particular
emphasis is placed on securities that provide an above-average dividend
return and sell at a below-average price-earnings ratio.
The investment policy of the Portfolio is based on the belief that the
pricing mechanism of the securities market lacks total efficiency and has a
tendency to inflate prices of securities in favorable market climates and
depress prices of securities in unfavorable climates. Based on this premise,
the Adviser believes that favorable changes in market prices are more likely
to begin when securities are out of favor, earnings are
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depressed, price-earnings ratios are relatively low, investment expectations
are limited, and there is no real general interest in the particular security
or industry involved. On the other hand, the Adviser believes that negative
developments are more likely to occur when investment expectations are
generally high, stock prices are advancing or have advanced rapidly,
price-earnings ratios have been inflated, and the industry or issue continues
to gain new investment acceptance on an accelerated basis. In other words,
the Adviser believes that market prices of securities with relative high
price-earnings ratios are more susceptible to unexpected adverse developments
while securities with relatively low price-earnings ratios are more favorably
positioned to benefit from favorable, but generally unanticipated events.
This investment policy departs from traditional philosophy. The Adviser
believes that the market risk involved in this policy is moderated somewhat
by an emphasis on securities with above-average dividend returns.
The current institutionally-dominated market tends to ignore, to some extent,
the numerous secondary issues whose market capitalizations are below those of
the relatively few larger size growth companies. It is expected that the
Portfolio's portfolio generally will have significant representation in this
secondary segment of the market. The Adviser is responsible for the
management of the Portfolio's securities portfolio and makes portfolio
decisions based on its own research information supplemented by research
information provided by other sources. The basic orientation of the
Portfolio's investment policies is such that at times a large portion of its
common stock holdings may carry less than favorable research ratings from
research analysts.
Investment emphasis is on equities, primarily common stock and, to a lesser
extent, securities convertible into common stocks. The Portfolio also may
invest in preferred stocks and non-convertible investment grade debt
securities and utilize covered call options with respect to portfolio
securities. The Portfolio has the right, as a defensive measure, to hold
other types of securities, including United States Government and Government
agency securities, money market securities, or other fixed-income securities
deemed by the Adviser to be consistent with a defensive posture, or cash, in
such proportions as, in the opinion of the Adviser, prevailing market or
economic conditions warrant. The Portfolio may invest up to 10% of its total
assets, taken at market value at the time of acquisition, in the securities
of foreign issuers.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as options, futures contracts, convertible securities, United
States Government securities, repurchase agreements, securities loans,
foreign securities, borrowings, foreign currency transactions, forward
commitments, investment grade fixed-income securities, derivatives and
illiquid securities) are discussed under the caption "Investment Strategies"
below and in the Statement of Additional Information.
INVESTMENT STRATEGIES
In addition to making investments directly in securities, to the extent
described above, each of the Portfolios (except for MFS Research Portfolio)
may purchase and sell call and put options, engage in transactions in futures
contracts and related options, loans and other direct indebtedness and engage
in forward foreign currency exchange transactions. They may also enter into
repurchase agreements, lend their portfolio securities, and borrow funds
under certain limited circumstances. In addition, each Portfolio may engage
in other types of investment strategies as described below. Each Portfolio
may invest in or utilize any of these investment strategies and instruments
or engage in any of these practices except where otherwise prohibited by law
or the Portfolio's own investment restrictions. Portfolios that anticipate
committing 5% or more of their net assets to a particular type of investment
strategy or instruments are specifically referred to in the descriptions
below of such investment strategy or instrument. Certain investment
strategies and instruments and the risks related to them are summarized below
and certain of these strategies and instruments are described in more detail
in the Statement of Additional Information.
Asset-Backed Securities. The MFS Emerging Growth Companies Portfolio may
invest in asset-backed securities. These asset-backed securities, issued by
trusts and special purpose corporations, are collateralized by a pool of
assets, such as credit card or automobile loans, home equity loans or
computer leases, and represent the obligations of a number of different
parties. Asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Due to the possibility that
prepayments (on automobile loans
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and other collateral) will alter the cash flow on asset-backed securities, it
is not possible to determine in advance the actual final maturity date or
average life. Faster prepayment will shorten the average life and slower
prepayments will lengthen it. However, it is possible to determine what the
range of that movement could be and to calculate the effect that it will have
on the price of the security. In selecting these securities, the Adviser will
look for those securities that offer a higher yield to compensate for any
variation in average maturity.
Borrowings. The Portfolios may borrow money from banks or other lenders as a
temporary measure for emergency purposes, to facilitate redemption requests,
or for other purposes consistent with each Portfolio's investment objective
and program. Borrowings for MFS Research Portfolio, MFS Emerging Growth
Companies Portfolio, Merrill Lynch World Strategy Portfolio and Merrill Lynch
Basic Value Equity Portfolio may not exceed 33 1/3% of each Portfolio's total
assets. Borrowings for the EQ/Putnam Growth & Income Value Portfolio, the
EQ/Putnam International Equity Portfolio and EQ/Putnam Investors Growth
Portfolio may not exceed 10% of each Portfolio's total assets. Each Portfolio
may pledge its assets to secure these permissible borrowings. No Portfolio
may purchase additional securities when its borrowings exceed 5% of its total
assets. Further information concerning each Portfolio's fundamental policy
with respect to borrowings is provided in the Statement of Additional
Information.
Convertible Securities. Each of the Portfolios may invest in convertible
securities, including both convertible debt and convertible preferred stock.
Such securities may be converted into shares of the underlying common stock
at either a stated price or stated rate. Because of this feature, convertible
securities enable an investor to benefit from increases in the market price
of the underlying common stock. Convertible securities provide higher yields
than the underlying common stocks, but generally offer lower yields than
non-convertible securities of similar quality. Like bonds, the value of
convertible securities fluctuates in relation to changes in interest rates
and, in addition, fluctuates in relation to the underlying common stock.
Subsequent to purchase by a Portfolio, convertible securities may cease to be
rated or a rating may be reduced below the minimum required for purchase by
that Portfolio. Neither event will require sale of such securities, although
each Adviser will consider such event in its determination of whether a
Portfolio should continue to hold the securities.
Derivatives. Each Portfolio (except the MFS Research Portfolio) may invest in
one or more types of derivatives. Derivatives are financial products or
instruments that derive their value from the value of one or more underlying
assets, reference rates or indices. Derivatives include, but are not limited
to, the following: asset-backed securities, collateralized mortgage
obligations, floaters, futures, hybrid instruments, inverse floaters,
mortgage-backed securities, options, stripped mortgage-backed securities,
structured notes and swaps. Further information about these instruments and
the risks involved in their use are contained under the description of each
of these instruments in this section or the Statement of Additional
Information.
Foreign Securities. Foreign investments involve certain risks that are not
present in domestic securities. Because each of the Portfolios may purchase
securities denominated in foreign currencies, a change in the value of any
such currency against the United States dollar will result in a change in the
United States dollar value of a Portfolio's assets and income. In addition,
although a portion of a Portfolio's investment income may be received or
realized in such currencies, the Portfolio will be required to compute and
distribute its income in United States dollars. Therefore, if the exchange
rate for any such currency declines after a Portfolio's income has been
earned and computed in United States dollars but before conversion and
payment, the Portfolio could be required to liquidate portfolio securities to
make such distributions.
The value of foreign investments and the investment income derived from them
may also be affected unfavorably by changes in currency exchange control
regulations. Although the Portfolios will invest only in securities
denominated in foreign currencies that are fully exchangeable into United
States dollars without legal restriction at the time of investment, there can
be no assurance that currency controls will not be imposed subsequently. In
addition, the value of foreign fixed income investments may fluctuate in
response to changes in United States and foreign interest rates.
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There may be less information publicly available about a foreign issuer than
about a United States issuer, and a foreign issuer is not generally subject
to accounting, auditing and financial reporting standards and practices
comparable to those in the United States. Foreign stock markets are generally
not as developed or efficient as, and may be more volatile than, those in the
United States. While growing in volume, they usually have substantially less
volume than United States markets and a Portfolio's investment securities may
be less liquid and subject to more rapid and erratic price movements than
securities of comparable United States companies. Equity securities may trade
at price/earnings multiples higher than comparable United States securities
and such levels may not be sustainable. There is generally less government
supervision and regulation of foreign stock exchanges, brokers and listed
companies than in the United States. Moreover, settlement practices for
transactions in foreign markets may differ from those in United States
markets. Such differences may include delays beyond periods customary in the
United States and practices, such as delivery of securities prior to receipt
of payment, which increase the likelihood of a "failed settlement." Failed
settlements can result in losses to a Portfolio. In less liquid and well
developed stock markets, such as those in some Asian and Latin American
countries, volatility may be heightened by actions of a few major investors.
For example, substantial increases or decreases in cash flows of mutual funds
investing in these markets could significantly affect stock prices and,
therefore, share prices.
Foreign brokerage commissions, custodial expenses and other fees are also
generally higher than for securities traded in the United States.
Consequently, the overall expense ratios of international or global funds are
usually somewhat higher than those of typical domestic stock funds.
In addition, the economies, markets and political structures of a number of
the countries in which the Portfolios can invest do not compare favorably
with the United States and other mature economies in terms of wealth and
stability. Therefore, investments in these countries may be riskier, and will
be subject to erratic and abrupt price movements. Some economies are less
well developed and less diverse (for example, Latin America, Eastern Europe
and certain Asian countries), and more vulnerable to the ebb and flow of
international trade, trade barriers and other protectionist or retaliatory
measures (for example, Japan, Southeast Asia and Latin America). Some
countries, particularly in Latin America, are grappling with severe inflation
and high levels of national debt. Investments in countries that have recently
begun moving away from central planning and state-owned industries toward
free markets, such as the Eastern European or Chinese economies, should be
regarded as speculative.
In addition, investment in foreign securities may also include the risk of
expropriation by a foreign government.
Moreover, investments in foreign government debt securities, particularly
those of emerging market country governments, involve special risks. Certain
emerging market countries have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging market country's debt
may not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A debtor's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, and, in the case of a government
debtor, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole and the political constraints to
which a government debtor may be subject. Government debtors may default on
their debt and may also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce principal and
interest arrearages on their debt. Holders of government debt may be
requested to participate in the rescheduling of such debt and to extend
further loans to government debtors.
Certain Portfolios may invest in the following types of foreign securities or
engage in the following types of transactions related to foreign securities.
Brady Bonds. The MFS Emerging Growth Companies Portfolio may invest in "Brady
Bonds," which are fixed-income securities created through the exchange of
existing commercial bank loans to foreign entities for new obligations in
connection with debt restructuring under a plan introduced by Nicholas F.
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Brady when he was the United States Secretary of the Treasury. Brady Bonds
have been issued only recently, and, accordingly, do not have a long payment
history. They may be collateralized or uncollateralized and issued in various
currencies (although most are United States dollar-denominated) and they are
actively traded in the over-the-counter ("OTC") secondary market.
Depositary Receipts. Each of the Portfolios may purchase depositary receipts,
which are securities representing ownership interests in securities of
foreign companies (an "underlying issuer") and are deposited with a
securities depositary. Depositary receipts are not necessarily denominated in
the same currency as the underlying securities. Depositary receipts include
ADRs and Global Depositary Receipts ("GDRs") and other types of depositary
receipts (which, together with ADRs and GDRs, are hereinafter collectively
referred to as "Depositary Receipts"). ADRs are dollar-denominated Depositary
Receipts typically issued by a United States financial institution which
evidence ownership interests in a security or pool of securities issued by a
foreign issuer. ADRs are listed and traded in the United States. GDRs and
other types of depositary receipts are typically issued by foreign banks or
trust companies, although they also may be issued by United States financial
institutions, and evidence ownership interests in a security or pool of
securities issued by either a foreign or a United States corporation.
Generally, depositary receipts in registered form are designed for use in the
United States securities market and depositary receipts in bearer form are
designed for use in securities markets outside the United States. Although
there may be more reliable information available regarding issuers of certain
ADRs that are issued under so-called "sponsored" programs and ADRs do not
involve foreign currency risks, ADRs and other Depositary Receipts are
subject to the risks of other investments in foreign securities, as described
directly above.
Foreign Currency Transactions. Each of the Portfolios (except the MFS
Research Portfolio) may purchase foreign currency on a spot (or cash) basis,
and may enter into contracts to purchase or sell foreign currencies at a
future date ("forward contracts"). Each of the Portfolios (except the MFS
Research Portfolio) may also purchase and sell foreign currency futures
contracts and may purchase and sell exchange traded call and put options on
foreign currency futures contracts and on foreign currencies. The EQ/Putnam
Growth & Income Value Portfolio, EQ/Putnam International Equity Portfolio,
EQ/Putnam Investors Growth Portfolio, MFS Emerging Growth Companies Portfolio
and Merrill Lynch World Strategy Portfolio may engage in OTC options on
foreign currency transactions. The Merrill Lynch World Strategy Portfolio
will engage in OTC options on foreign currency transactions only with
financial institutions that have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50
million. The MFS Emerging Growth Companies Portfolio may only enter into
forward contracts on currencies in the OTC market. The Advisers may engage in
these transactions to protect against uncertainty in the level of future
exchange rates in connection with the purchase and sale of portfolio
securities ("transaction hedging") and to protect the value of specific
portfolio positions ("position hedging").
Hedging transactions involve costs and may result in losses. Each of the
Portfolios (except the MFS Research Portfolio) may also write covered call
options on foreign currencies to offset some of the costs of hedging those
currencies. A Portfolio will engage in over-the-counter options transactions
on foreign currencies only when appropriate exchange traded transactions are
unavailable and when, in the Adviser's opinion, the pricing mechanism and
liquidity are satisfactory and the participants are responsible parties
likely to meet their contractual obligations. A Portfolio's ability to engage
in hedging and related option transactions may be limited by tax
considerations.
Transactions and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolios own or intend to
purchase or sell. They simply establish a rate of exchange which one can
achieve at some future point in time. Additionally, although these techniques
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, they tend to limit any potential gain which might result from the
increase in the value of such currency.
Forward Commitments. Each Portfolio may make contracts to purchase securities
for a fixed price at a future date beyond customary settlement time ("forward
commitments") if it holds, and maintains until the settlement date in a
segregated account, cash or liquid securities in an amount sufficient to meet
the
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purchase price, or if it enters into offsetting contracts for the forward
sale of other securities it owns. Forward commitments may be considered
securities in themselves and involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is
in addition to the risk of decline in value of the Portfolio's other assets.
Where such purchases are made through dealers, a Portfolio relies on the
dealer to consummate the sale. The dealer's failure to do so may result in
the loss to a Portfolio of an advantageous yield or price.
Illiquid Securities. Each Portfolio may invest up to 15% of its respective
net assets in illiquid securities and other securities which are not readily
marketable, including non-negotiable time deposits, certain restricted
securities not deemed by the Trust's Board of Trustees to be liquid, and
repurchase agreements with maturities longer than seven days. Securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933,
as amended, which have been determined by the Board of Trustees to be liquid,
will not be considered by the Adviser to be illiquid or not readily
marketable and, therefore, are not subject to the 15% limit. The inability of
a Portfolio to dispose of illiquid or not readily marketable investments
readily or at a reasonable price could impair the Portfolio's ability to
raise cash for redemptions or other purposes. The liquidity of securities
purchased by a Portfolio which are eligible for resale pursuant to Rule 144A
will be monitored by each Portfolio's Adviser on an ongoing basis, subject to
the oversight of the Board of Trustees of the Trust. In the event that such a
security is deemed to be no longer liquid, a Portfolio's holdings will be
reviewed to determine what action, if any, is required to ensure that the
retention of such security does not result in a Portfolio's having more than
15% of its assets invested in illiquid or not readily marketable securities.
Investment Grade and Lower Quality Fixed-Income Securities. Each Portfolio
may invest in or hold a portion of its total assets in investment grade or
lower quality fixed-income securities. The Merrill Lynch Basic Value Equity
Portfolio each may invest in or hold investment grade securities, but not
lower quality fixed-income securities. Investment grade securities are
securities rated Baa or higher by Moody's or BBB or higher by S&P and
comparable unrated securities. Investment grade securities rated Baa by
Moody's or BBB by S&P while normally exhibiting adequate protection
parameters, have speculative characteristics, and, consequently, changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity of such issuers to make principal and interest payments
than is the case for higher grade fixed-income securities. Lower quality
fixed-income securities are securities that are rated in the lower categories
by NRSROs (i.e., Ba or lower by Moody's and BB or lower by S&P) or comparable
unrated securities. Such lower quality securities are known as "junk bonds"
and are regarded as predominantly speculative with respect to the issuer's
continuing ability to meet principal and interest payments. (Each NRSRO's
descriptions of these bond ratings are set forth in the Appendix to the
Statement of Additional Information.) Because investment in lower quality
securities involves greater investment risk, achievement of the Portfolio's
investment objective will be more dependent on the Adviser's analysis than
would be the case if the Portfolio were investing in higher quality bonds. In
addition, lower quality securities may be more susceptible to real or
perceived adverse economic and individual corporate developments than would
investment grade bonds. Moreover, the secondary trading market for lower
quality securities may be less liquid than the market for investment grade
bonds. This potential lack of liquidity may make it more difficult for an
Adviser to value accurately certain portfolio securities.
Loan Participations. The MFS Emerging Growth Companies Portfolio may invest a
portion of its assets in loan participations and other direct indebtedness.
By purchasing a loan, the Portfolio acquires some or all of the interest of a
bank or other lending institution in a loan to a corporate borrower. Many
such loans are secured, and most impose restrictive covenants that must be
met by the borrower. These loans are made generally to finance internal
growth, mergers, acquisitions, stock repurchases, leveraged buy-outs and
other corporate activities. Such loans may be in default at the time of
purchase. The MFS Emerging Growth Companies Portfolio may also purchase other
direct indebtedness such as trade or other claims against companies, which
generally represent money owed by a company to a supplier of goods and
services. These claims may also be purchased at a time when the company is in
default. Certain of the loans and other direct indebtedness acquired by the
Portfolio may involve revolving credit facilities or other standby financing
commitments which obligate the Portfolio to pay additional cash on a certain
date
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or on demand. The highly leveraged nature of many such loans and other direct
indebtedness may make such loans especially vulnerable to adverse changes in
economic or market conditions. Loans and other direct indebtedness may not be
in the form of securities or may be subject to restrictions on transfer, and
only limited opportunities may exist to resell such instruments. As a result,
the Portfolio may be unable to sell such investments at an opportune time or
may have to resell them at less than fair market value.
Options and Futures Transactions. Each Portfolio (except the MFS Research
Portfolio) may utilize futures contracts and write and purchase put and call
options. Futures contracts (a type of potentially high-risk security) enable
the investor to buy or sell an asset in the future at an agreed upon price.
Options (another type of potentially high-risk security) give the purchaser
of an option the right, but not the obligation, to buy or sell in the future
an asset at a predetermined price during the term of the option. (The writer
of a put or call option would be obligated to buy or sell the underlying
asset at a predetermined price during the term of the option.) Each Portfolio
will write put and call options only if such options are considered to be
"covered". A call option on a security is covered, for example, when the
writer of the call option owns throughout the option period the security on
which the option is written (or a security convertible into such a security
without the payment of additional consideration). A put option on a security
is covered, for example, when the writer of the put has deposited and
maintained in a segregated account throughout the option period sufficient
cash or other liquid assets in an amount equal to or greater than the
exercise price of the put option. Each Portfolio may utilize futures
contracts and related options for other than hedging purposes to the extent
that aggregate initial margin deposits and premiums paid do not exceed 5% of
the Portfolio's net assets. Each Portfolio will not commit more than 5% of
its total assets to premiums when purchasing call or put options In addition,
the total market value of securities against which a Portfolio has written
call or put options may not exceed 25% of its total assets. The Merrill Lynch
Basic Value Equity Portfolio will not write covered call options on
underlying securities exceeding 15% of the value of its total assets. The MFS
Emerging Growth Companies Portfolio will not enter a futures contract if the
obligations underlying all such futures contracts would exceed 50% of the
value of the Portfolio's total assets. The EQ/Putnam Growth & Income
Portfolio, EQ/Putnam International Equity Portfolio, EQ/Putnam Investors
Growth Portfolios, MFS Emerging Growth Companies Portfolio and Merrill Lynch
World Strategy Portfolio may engage in OTC put and call option transactions.
Options traded in the OTC market may not be as actively traded as those on an
exchange, so it may be more difficult to value such options. In addition, it
may be difficult to enter into closing transactions with respect to such
options. Such OTC options, and the securities used as "cover" for such
options, may be considered illiquid securities.
Each Portfolio may buy and sell futures and options contracts for any number
of reasons, including: to manage its exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting its overall
exposure to certain markets; in an effort to enhance income; and to protect
the value of portfolio securities. Each Portfolio may purchase, sell, or
write call and put options and futures contracts on securities, financial
indices, and foreign currencies and options on futures contracts.
The risk of loss in trading futures contracts can be substantial because of
the low margin deposits required and the extremely high degree of leveraging
involved in futures pricing. As a result, a relatively small price movement
in a futures contract may cause an immediate and substantial loss or gain.
The primary risks associated with the use of futures contracts and options
are: (i) imperfect correlation between the change in market value of the
stocks held by a Portfolio and the prices of futures contracts and options;
and (ii) possible lack of a liquid secondary market for a futures contract or
an OTC option and the resulting inability to close a futures position or OTC
option prior to its maturity date.
Passive Foreign Investment Companies. The EQ/Putnam International Equity
Portfolio may purchase the securities of certain foreign investment funds or
trusts called passive foreign investment companies. Such entities have been
the only or primary way to invest in certain countries. In addition to
bearing their proportionate share of the Portfolio's expenses (management
fees and operating expenses), shareholders will also indirectly bear similar
expenses of such entities. Like other foreign securities, interests in
passive foreign investment companies also involve the risk of foreign
securities, as described above.
Payment-In-Kind Bonds. The EQ/Putnam Growth & Income Value Portfolio may
invest in payment-in-kind bonds. Payment-in-kind bonds allow the issuer, at
its option, to make current interest payments
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on the bonds either in cash or in additional bonds. The value of
payment-in-kind bonds is subject to greater fluctuation in response to
changes in market interest rates than bonds which pay interest in cash
currently. Payment-in-kind bonds allow an issuer to avoid the need to
generate cash to meet current interest payments. Accordingly, such bonds may
involve greater credit risks than bonds paying interest currently. Even
though such bonds do not pay current interest in cash, the Portfolio is
nonetheless required to accrue interest income on such investments and to
distribute such amounts at least annually to shareholders. Thus, the
Portfolio could be required, at times, to liquidate other investments in
order to satisfy its distribution requirements.
Repurchase Agreements. Each Portfolio may enter into repurchase agreements
with qualified and Board approved banks, broker-dealers or other financial
institutions as a means of earning a fixed rate of return on its cash
reserves for periods as short as overnight. A repurchase agreement is a
contract pursuant to which a Portfolio, against receipt of securities of at
least equal value including accrued interest, agrees to advance a specified
sum to the financial institution which agrees to reacquire the securities at
a mutually agreed upon time (usually one day) and price. Each repurchase
agreement entered into by a Portfolio will provide that the value of the
collateral underlying the repurchase agreement will always be at least equal
to the repurchase price, including any accrued interest. A Portfolio's right
to liquidate such securities in the event of a default by the seller could
involve certain costs, losses or delays and, to the extent that proceeds from
any sale upon a default of the obligation to repurchase are less than the
repurchase price, the Portfolio could suffer a loss.
Securities Loans. The MFS Research Portfolio and MFS Emerging Growth
Companies Portfolio may seek to obtain additional income by making secured
loans of portfolio securities with a value up to 33 1/3% of their respective
total assets. The EQ/Putnam Growth & Income Value Portfolio, EQ/Putnam
International Equity Portfolio and EQ/Putnam Investors Growth Portfolio may
lend portfolio securities in an amount up to 25% of their respective total
assets. The Merrill Lynch Basic Value Equity Portfolio and Merrill Lynch
World Strategy Portfolio may each lend portfolio securities in an amount up
to 20% of their respective total assets. All securities loans will be made
pursuant to agreements requiring the loans to be continuously secured by
collateral in cash or high-grade debt obligations at least equal at all times
to the market value of the loaned securities. The borrower pays to the
Portfolios an amount equal to any dividends or interest received on loaned
securities. The Portfolios retain all or a portion of the interest received
on investment of cash collateral or receive a fee from the borrower. Lending
portfolio securities involves risks of delay in recovery of the loaned
securities or in some cases loss of rights in the collateral should the
borrower fail financially. Further information concerning each Portfolio's
fundamental policy with respect to loans is provided in the Statement of
Additional Information.
Small Company Securities. The EQ/Putnam International Equity Portfolio may
invest in the securities of smaller capitalization companies. Investing in
securities of small companies may involve greater risks since these
securities may have limited marketability and, thus, may be more volatile.
Because smaller companies normally have fewer shares outstanding than larger
companies, it may be more difficult for the Portfolio to buy or sell
significant amounts of shares without an unfavorable impact on prevailing
prices. In addition, small companies are typically subject to a greater
degree of changes in earnings and business prospects than are larger, more
established companies. There is typically less publicly available information
concerning smaller companies than for larger, more established ones.
Therefore, an investment in the Portfolio may involve a greater degree of
risk than an investment in other Portfolios that seek capital appreciation by
investing in better-known, larger companies.
United States Government Securities. Each Portfolio may invest in debt
obligations of varying maturities issued or guaranteed by the United States
Government, its agencies or instrumentalities ("United States Government
securities"). Direct obligations of the United States Treasury include a
variety of securities that differ in their interest rates, maturities and
dates of issuance. United States Government securities also include
securities issued or guaranteed by government agencies that are supported by
the full faith and credit of the United States (e.g., securities issued by
the Government National Mortgage Association); securities issued or
guaranteed by government agencies that are supported by the ability to borrow
from the United States Treasury (e.g., securities issued by the Federal
National Mortgage Association); and securities issued or guaranteed by
government agencies that are only supported by the credit of the particular
agency (e.g., the Tennessee Valley Authority).
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Warrants. Warrants are securities that give the holder the right, but not the
obligation to purchase equity issues of the company issuing the warrants, or
a related company, at a fixed price either on a date certain or during a set
period. At the time of issue, the cost of a warrant is substantially less
than the cost of the underlying security itself, and price movements in the
underlying security are generally magnified in the price movements of the
warrant. This effect enables the investor to gain exposure to the underlying
security with a relatively low capital investment but increases an investor's
risk in the event of a decline in the value of the underlying security and
can result in a complete loss of the amount invested in the warrant. In
addition, the price of a warrant tends to be more volatile than, and may not
correlate exactly to, the price of the underlying security. If the market
price of the underlying security is below the exercise price of the warrant
on its expiration date, the warrant will generally expire without value.
Zero-Coupon Bonds. The EQ/Putnam Growth & Income Value Portfolio may invest
in zero-coupon bonds. Zero-coupon bonds are issued at a significant discount
from their principal amount and pay interest only at maturity rather than at
intervals during the life of the security. The value of zero-coupon bonds is
subject to greater fluctuation in response to changes in market interest
rates than bonds which pay interest in cash currently. Zero-coupon bonds
allow an issuer to avoid the need to generate cash to meet current interest
payments. Accordingly, such bonds may involve greater credit risks than bonds
paying interest currently. Even though such bonds do not pay current interest
in cash, the Portfolio is nonetheless required to accrue interest income on
such investments and to distribute such amounts at least annually to
investors in such instruments. Thus, the Portfolio could be required, at
times, to liquidate other investments in order to satisfy its distribution
requirements.
Portfolio Turnover. The length of time a Portfolio has held a particular
security is not generally a consideration in investment decisions. A change
in the securities held by a Portfolio is known as "portfolio turnover." Each
Portfolio's turnover rate is not expected to exceed 100% during its first
year of operation. A high turnover rate increases transaction costs (e.g.,
brokerage commissions) and increases realized gains and losses.
MANAGEMENT OF THE TRUST
THE BOARD OF TRUSTEES
The Board of Trustees of the Trust provides broad supervision over the
business and affairs of the Portfolios and the Trust as provided in the
Trust's Amended and Restated Declaration of Trust and By-Laws.
THE MANAGER
The Trust is managed by EQ Financial Consultants, Inc. which, subject to the
supervision and direction of the Trustees of the Trust, has overall
responsibility for the general management and administration of the Trust.
The Manager is an investment adviser registered under the Investment Advisers
Act of 1940, as amended, and a broker-dealer registered under the Securities
Exchange Act of 1934, as amended ("1934 Act"). It is located at 1755
Broadway, New York, New York 10019. The Manager currently furnishes
specialized investment advice to other clients, including individuals,
pension and profit sharing plans, trusts, charitable organizations,
corporations and other business entities. The Manager is a Delaware
corporation and an indirect, wholly-owned subsidiary of Equitable, a New York
stock life insurance company.
The Manager is responsible for providing investment management and
administrative services to the Trust and in the exercise of such
responsibility selects, subject to review and approval by the Trustees, the
investment advisers for the Trust's Portfolios and monitors the Advisers'
investment programs and results, reviews brokerage matters, oversees
compliance by the Trust with various federal and state statutes, and carries
out the directives of the Board of Trustees. The Manager is responsible for
providing the Trust with office space, office equipment, and personnel
necessary to operate and administer the Trust's business, and also supervises
the provision of services by third parties such as the Trust's custodian.
As compensation for managing the EQ/Putnam Growth & Income Value Portfolio,
EQ/Putnam Investors Growth Portfolio, MFS Research Portfolio, MFS Emerging
Growth Companies Portfolio and Merrill
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Lynch Basic Value Equity Portfolio the Trust pays the Manager a monthly fee
at the annual rate of .55% of the respective Portfolio's average daily net
assets. As compensation for managing the EQ/Putnam International Equity
Portfolio and Merrill Lynch World Strategy Portfolio, the Trust pays the
Manager a monthly fee at an annual rate of .70% of the respective Portfolio's
average daily net assets.
The Manager pays the expenses of providing investment advisory services to
the Portfolios, including the fees of the Adviser of each Portfolio.
In addition to the management fees, the Trust pays all expenses not assumed
by the Manager, including, without limitation: the fees and expenses of its
independent auditors and of its legal counsel; the costs of printing and
mailing annual and semi-annual reports to shareholders, proxy statements,
prospectuses, prospectus supplements and statements of additional
information, all to the extent they are sent to existing Contract owners; the
costs of printing registration statements; bank transaction charges and
custodian's fees; any proxy solicitors' fees and expenses; filing fees; any
federal, state or local income or other taxes; any interest; any membership
fees of the Investment Company Institute and similar organizations; fidelity
bond and Trustees' liability insurance premiums; and any extraordinary
expenses, such as indemnification payments or damages awarded in litigation
or settlements made. All general Trust expenses are allocated among and
charged to the assets of the Portfolios of the Trust on a basis that the
Trustees deem fair and equitable, which may be on the basis of relative net
assets of each Portfolio or the nature of the services performed and relative
applicability to each Portfolio. As discussed in greater detail below, under
"Distribution of the Trust's Shares," the Class IB shares may pay for certain
distribution related expenses in connection with activities primarily
intended to result in the sale of its shares.
THE ADVISERS
Pursuant to an investment advisory agreement with the Manager, each Adviser
to a Portfolio furnishes continuously an investment program for the
Portfolio, makes investment decisions on behalf of the Portfolio, places all
orders for the purchase and sale of investments for the Portfolio's account
with brokers or dealers selected by such Adviser and may perform certain
limited related administrative functions in connection therewith.
For its services, the Manager pays each Adviser an advisory fee based on a
percentage of the average daily net assets of the Portfolio that it advises.
Monthly, with respect to each Portfolio, each Adviser is paid the pro rata
portion of an annual fee, based on the monthly average of the assets of the
Portfolio for which it serves as the Adviser. The Manager will retain, as
compensation for the services described under "The Manager" and to pay its
expenses, the difference between the fees paid to each Adviser and the
management fee of the applicable Portfolio. Each Adviser has agreed that once
the Portfolio has paid the Manager its management fee the Adviser will look
only to the Manager as the party responsible for making the payment of its
advisory fee.
The Advisers are employed for management of the assets of a Portfolio
pursuant to investment advisory agreements approved by the Board of Trustees
of the Trust (including a majority of certain Trustees who are not interested
persons of the Trust or the Manager), and an Adviser's services may be
terminated at any time by the Manager, the Board of Trustees, or the
shareholders of an affected Portfolio.
The Trust has submitted an application requesting an exemptive order from the
Securities and Exchange Commission ("SEC") that would permit the Manager,
subject to certain conditions, and without the approval of shareholders to:
(a) employ a new Adviser or Advisers for any Portfolio pursuant to the terms
of a new Advisory Agreement, in each case either as a replacement for an
existing Adviser or as an additional Adviser; (b) change the terms of any
Advisory Agreement; and (c) continue the employment of an existing Adviser on
the same advisory contract terms where a contract has been assigned because
of a change in control of the Adviser. In such circumstances, shareholders
would receive notice of such action, including the information concerning the
Adviser that normally is provided in the Prospectus. It is uncertain at this
time whether such exemptive relief will be granted by the SEC.
Putnam Investment Management, Inc. ("Putnam Management") has been the Adviser
to the EQ/Putnam Growth & Income Value Portfolio, EQ/Putnam International
Equity Portfolio and EQ/Putnam Investors Growth Portfolio since each
Portfolio commenced operations. As compensation for services as the
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Adviser to the EQ/Putnam Growth & Income Portfolio and EQ/Putnam Investors
Growth Portfolio, the Manager pays Putnam Management a monthly fee at an
annual rate equal to: .50% of the respective Portfolio's average daily net
assets up to and including $150 million; .45% of the respective Portfolio's
average daily net assets over $150 million and up to and including $300
million; and .35% of the respective Portfolio's average daily net assets in
excess of $300 million. As compensation for services as the EQ/Putnam
International Equity Portfolio's Adviser, the Manager pays Putnam Management
a monthly fee at the annual rate equal to: .65% of the Portfolio's average
daily net assets up to and including $150 million; .55% of the Portfolio's
average daily net assets over $150 million and up to and including $300
million; and .45% of the Portfolio's average daily net assets in excess of
$300 million.
Putnam Management has been managing mutual funds since 1937. Putnam
Management is located at One Post Office Square, Boston, MA 02109. As of
December 31, 1996, Putnam Management and its affiliates managed more than
$173 billion of assets. Putnam Management is a subsidiary of Putnam
Investments, Inc., which is wholly owned by Marsh & McLennan Companies, Inc.,
a publicly-owned holding company whose principal businesses are international
insurance and reinsurance brokerage, employee benefit consulting and
investment management. Anthony I. Kreisel has been responsible for the day to
day management of the EQ/Putnam Growth & Income Value Portfolio since the
Portfolio commenced operations, which includes investment decisions made on
behalf of the Portfolio. Mr. Kreisel has been employed by Putnam Management
as an investment professional since 1986. Justin Scott is responsible for the
day to day management of the EQ/Putnam International Equity Portfolio, which
includes investment decisions made on behalf of the Portfolio. Mr. Scott has
been employed by Putnam Management as an investment professional since 1988.
Ms. C. Beth Cotner and Messrs. Richard England, Manuel Weiss Herrero and
David J. Santos are responsible for the day to day management of the
EQ/Putnam Investors Growth Portfolio, which includes investment decisions
made on behalf of the Portfolio. Ms. Cotner has been employed by Putnam
Management as an investment professional since 1995. Prior to 1995, Ms.
Cotner was Executive Vice President of Kemper Financial Services. Mr. England
has been employed by Putnam Management as an investment professional since
December, 1992. Prior to December, 1992, Mr. England was an investment
officer at Aetna Equity Investors. Mr. Herrero has been employed by Putnam
Management as an investment professional since 1987. Mr. Santos has been
employed by Putnam Management as an investment professional since 1988.
Massachusetts Financial Services Company ("MFS") has been the Adviser to the
MFS Research Portfolio and the MFS Emerging Growth Companies Portfolio since
each Portfolio commenced operations. As compensation for services as the
Adviser to each of those Portfolios, the Manager pays MFS a monthly fee at an
annual rate equal to: .40% of the respective Portfolio's average daily net
assets up to and including $150 million; .375% of the respective Portfolio's
average daily net assets over $150 million and up to and including $300
million; and .35% of the respective Portfolio's average daily net assets in
excess of $300 million. MFS has agreed to waive its advisory fees for the
first six months after the commencement of each Portfolio's investment
operations.
MFS is America's oldest mutual fund organization. MFS is located at 500
Boylston Street, Boston, MA 02116. MFS and its predecessor organizations have
a history of money management dating from 1924 and the founding of the first
mutual fund in the United States, Massachusetts Investors Trust. As of
January 31, 1997, MFS managed more than $54.0 billion on behalf of over 2.3
million investors accounts. MFS is a subsidiary of Sun Life of Canada (United
States), which, in turn, is a wholly-owned subsidiary of Sun Life Assurance
Company of Canada. MFS has established a strategic alliance with Foreign &
Colonial Management Ltd. ("Foreign & Colonial"). Foreign & Colonial is a
subsidiary of two of the world's oldest financial services institutions, the
London-based Foreign & Colonial Investment Trust PLC, which pioneered the
idea of investment management in 1868, and HYPO-BANK (Bayerische
Hypotheken-und Weschsel-Bank AG), the oldest publicly listed bank in Germany,
founded in 1835. As part of this alliance, the portfolio managers and
investment analysts of MFS and Foreign & Colonial share their views on a
variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other
portfolio management matters. The portfolio securities of the MFS Research
Portfolio are selected by a committee of investment research analysts. This
committee includes investment analysts employed not
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<PAGE>
only by MFS but also by MFS International (U.K.) Limited, a wholly owned
subsidiary of MFS. The assets of the MFS Research Portfolio are allocated
among industries by the analysts acting together as a group. Individual
analysts are then responsible for selecting what they view as the securities
best suited to meet the investment objectives of the MFS Research Portfolio
within their assigned industry responsibility. Since it commenced operations
the MFS Emerging Growth Companies Portfolio has been managed by John W.
Ballen, a Senior Vice President of MFS, who has been employed by the Adviser
as a portfolio manager since 1984, and Toni K. Shimura, a Vice President of
MFS, who has been employed as a portfolio manager by the Adviser since 1987.
Merrill Lynch Asset Management, L.P. ("MLAM") has been the Adviser to the
Merrill Lynch World Strategy Portfolio and the Merrill Lynch Basic Value
Equity Portfolio since each Portfolio commenced operations. MLAM is located
at 800 Scudders Mill Road, Plainsboro, New Jersey 08543-9011. As compensation
for services as the Merrill Lynch World Strategy Portfolio's Adviser, the
Manager pays MLAM a monthly fee at an annual rate equal to: .50% of the
Portfolio's average daily net assets up to and including $100 million; .45%
of the Portfolio's average daily net assets over $100 million and up to and
including $300 million; and .35% of the Portfolio's average daily net assets
in excess of $300 million. As compensation for services as the Merrill Lynch
Basic Value Equity Portfolio's Adviser, the Manager pays MLAM a monthly fee
at an annual rate equal to: .40% of the Portfolio's average daily net assets
up to and including $100 million; .375% of the Portfolio's average daily net
assets over $100 million and up to and including $300 million; and .35% of
the Portfolio's average daily net assets in excess of $300 million.
MLAM is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc., a
financial services holding company and the parent of Merrill Lynch, Pierce,
Fenner & Smith Incorporated. The general partner of MLAM is Princeton
Services, Inc., a wholly-owned subsidiary of Merrill Lynch & Co., Inc. MLAM
and its affiliates act as the manager for more than 130 registered investment
companies. MLAM also offers portfolio management and portfolio analysis
services to individuals and institutions. As of December 31, 1996, the
Adviser and its affiliates had a total of approximately $234 billion in
investment company and other portfolio assets under management, including
assets of certain affiliates of MLAM.
Thomas R. Robinson is the portfolio manager of the Merrill Lynch World
Strategy Portfolio. Mr. Robinson has served as a Senior Portfolio Manager of
MLAM since 1995. Mr. Robinson has been primarily responsible for the day to
day management of the Portfolio's securities portfolio since it commenced
operations. Kevin Rendino is the portfolio manager of the Merrill Lynch Basic
Value Equity Portfolio. Mr. Rendino has been a Vice President of MLAM since
1993 and was a Senior Research Analyst of MLAM from 1990 to 1992. Mr. Rendino
has been primarily responsible for the day to day management of the
Portfolio's securities portfolio since it commenced operations.
THE ADMINISTRATOR
Pursuant to an agreement ("Mutual Funds Service Agreement"), Chase Global
Funds Services Company (the "Administrator") assists the Manager in the
performance of its administrative responsibilities to the Trust and provides
the Trust with other necessary administrative, fund accounting and compliance
services. In addition, the Administrator makes available the office space,
equipment, personnel and facilities required to provide such services to the
Trust. For these services, the Trust pays the Administrator a monthly fee at
the annual rate of .0525 of 1% of the total Trust assets, plus $25,000 for
each Portfolio, until the total Trust assets reach $2.0 billion, and when the
total Trust assets exceed $2.0 billion: .0425 of 1% of the first $0.5 billion
of the total Trust assets; .035 of 1% of the next $2.0 billion of the total
Trust assets; .025 of 1% of the next $1.0 billion of the total Trust assets;
.015 of 1% of the next $2.5 billion of the total Trust assets; .01 of 1% of
the total Trust assets in excess of $6.0 billion; and except that the annual
fee payable to Chase with respect to any Portfolio which commences operation
after July 1, 1997 and whose assets do not exceed $200 million shall be
computed at the annual rate of .0525% of the Portfolio's total assets plus
$25,000.
THE TRANSFER AGENT
Equitable serves as the transfer agent and dividend disbursing agent of the
Trust and receives no compensation for serving in such capacity.
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<PAGE>
EXPENSE LIMITATION AGREEMENTS
In the interest of limiting expenses of the Portfolios, the Manager has
entered into an expense limitation agreement with the Trust, with respect to
each Portfolio ("Expense Limitation Agreements"), pursuant to which the
Manager has agreed to waive or limit its fees and to assume other expenses so
that the total annual operating expenses of each Portfolio are limited to:
.85% of the respective average daily net assets of the EQ/Putnam Growth &
Income Value, EQ/Putnam Investors Growth, MFS Research, MFS Emerging Growth
Companies and Merrill Lynch Basic Value Equity Portfolios; and 1.20% of the
respective average daily net assets of the EQ/Putnam International Equity and
Merrill Lynch World Strategy Portfolios.
Each Portfolio may at a later date reimburse to the Manager the management
fees waived or limited and other expenses assumed and paid by the Manager
pursuant to the Expense Limitation Agreement provided such Portfolio has
reached a sufficient asset size to permit such reimbursement to be made
without causing the total annual expense ratio of each Portfolio to exceed
the percentage limits stated above. Consequently, no reimbursement by a
Portfolio will be made unless: (i) the Portfolio's assets exceed $100
million; (ii) the Portfolio's total annual expense ratio is less than the
respective percentages stated above; and (iii) the payment of such
reimbursement has been approved by the Trust's Board of Trustees on a
quarterly basis.
BROKERAGE PRACTICES
In selecting brokers and dealers, the Manager and each Adviser may consider
research and brokerage services furnished to either company and their
affiliates. Subject to seeking the most favorable net price and execution
available, the Manager and each Adviser may also consider sales of shares of
the Trust as a factor in the selection of brokers and dealers.
TRANSACTIONS WITH AFFILIATES
In December 1984, Equitable acquired Donaldson, Lufkin & Jenrette, Inc.
("DLJ"). A DLJ subsidiary, Donaldson, Lufkin & Jenrette Securities
Corporation, is one of the nation's largest investment banking and securities
firms. Another DLJ subsidiary, Autranet, Inc., is a securities broker that
markets independently originated research to institutions. Through the
Pershing Division of Donaldson, Lufkin & Jenrette Securities Corporation, DLJ
supplies security execution and clearance services to financial
intermediaries including broker-dealers and banks. To the extent permitted by
law, the Trust may engage in securities and other transactions with the above
entities or may invest in shares of the investment companies with which those
entities have affiliations. The Adviser to the Merrill Lynch World Strategy
Portfolio and Merrill Lynch Basic Value Equity Portfolio may execute
portfolio transactions through certain of the Adviser's affiliates.
The 1940 Act generally prohibits the Trust from engaging in principal
securities transactions with an affiliate of the Manager or Advisers unless
pursuant to an exemptive order from the SEC. The Trust may apply for such
exemptive relief. The Trust has adopted procedures, prescribed by Section
17(e)(2)(A) of the 1940 Act and Rule 17e-1 thereunder, which are reasonably
designed to provide that any commission it pays to affiliates of the Manager
or Advisers does not exceed the usual and customary broker's commission. In
addition, the Trust will adhere to Section 11(a) of the 1934 Act and any
applicable rules thereunder governing floor trading. The Trust has adopted
procedures permitting it to purchase securities, under certain restrictions
prescribed by a rule under the 1940 Act, in a public offering in which an
affiliate of the Manager or Advisers is an underwriter.
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<PAGE>
DESCRIPTION OF THE TRUST AND TRUST'S SHARES
THE TRUST
The Trust is a registered open-end management investment company that was
organized as a Delaware business trust on October 31, 1996. As of May 1,
1997, Separate Account FP, a separate account of Equitable, owned 100% of the
shares of a Portfolio of the Trust not offered hereby, the T. Rowe Price
Equity Income Portfolio, and through such ownership may be deemed a
controlling person of each Portfolio. The Trust currently is divided into
twelve portfolios, each of which has Class IA and Class IB shares. The Board
of Trustees may establish additional portfolios and additional classes of
shares.
CHARACTERISTICS OF TRUST'S SHARES
The Board of Trustees of the Trust has authority to issue an unlimited number
of shares of beneficial interest, without par value. Each share of each class
of a Portfolio shall be entitled to one vote (or fraction thereof in respect
of a fractional share) on matters that such shares (or class of shares) shall
be entitled to vote. Shareholders of each Portfolio shall vote together on
any matter, except to the extent otherwise required by the 1940 Act, or when
the Board of Trustees of the Trust has determined that the matter affects
only the interest of shareholders of one or more classes, in which case only
the shareholders of such class or classes shall be entitled to vote thereon.
Any matter shall be deemed to have been effectively acted upon with respect
to each Portfolio if acted upon as provided in Rule 18f-2 under the 1940 Act,
or any successor rule, and in the Amended and Restated Declaration of Trust.
The Trust is not required to hold annual shareholder meetings, but special
meetings may be called for purposes such as electing or removing Trustees,
changing fundamental policies or approving an investment management or
advisory agreement.
Under the Trust's multi-class system, shares of each class of a Portfolio
represent an equal pro rata interest in that Portfolio and, generally, shall
have identical voting, dividend, liquidation, and other rights, preferences,
powers, restrictions, limitations, qualifications and terms and conditions,
except that: (a) each class shall have a different designation; (b) each
class of shares shall bear its "Class Expenses;" (c) each class shall have
exclusive voting rights on any matter submitted to shareholders that relates
solely to its distribution arrangements; (d) each class shall have separate
voting rights on any matter submitted to shareholders in which the interests
of one class differ from the interests of any other class; (e) each class may
have separate exchange privileges, although exchange privileges are not
currently contemplated; and (f) each class may have different conversion
features, although a conversion feature is not currently contemplated.
Expenses currently designated as "Class Expenses" by the Trust's Board of
Trustees under the plan pursuant to Rule 18f-3 are currently limited to
payments made to the Distributors for the Class IB shares, pursuant to the
Distribution Plan for the Class IB shares adopted pursuant to Rule 12b-1
under the 1940 Act.
PURCHASE AND REDEMPTION OF SHARES
EQ Financial, 1755 Broadway, New York, New York, 10019, formerly Equico
Securities, Inc., a wholly-owned subsidiary of Equitable, serves as one of
the Distributors for the Trust's Class IB shares pursuant to a distribution
agreement with the Trust. EDI, 1290 Avenue of the Americas, New York, New
York, 10104, a Delaware corporation and an indirect wholly-owned subsidiary
of Equitable, also serves as one of the Distributors for the Trust's Class IB
shares pursuant to a distribution agreement with the Trust. Class IB shares
are offered and redeemed without a sales charge, at net asset value . The
price at which a purchase or redemption is effected is based on the next
calculation of net asset value after an order is placed by an insurance
company investing in or redeeming from the Trust. Net asset value per share
is calculated for purchases and redemption of shares of each Portfolio by
dividing the value of total Portfolio assets, less liabilities (including
Trust expenses, which are accrued daily), by the total number of outstanding
shares of that Portfolio. The net asset value per share of each Portfolio is
determined each business day at 4:00 p.m. Eastern time. Net asset value per
share is not calculated on national business holidays.
The Trust also has distribution agreements for its Class IA shares with EQ
Financial and EDI pursuant to which each of them acts as the Distributor for
the Class IA shares of the Trust.
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<PAGE>
The Trust has adopted the Distribution Plan pursuant to Rule 12b-1 under the
1940 Act for the Class IB shares of the Trust. Pursuant to the Distribution
Plan, the Trust compensates the Distributors from assets attributable to the
Class IB shares for services rendered and expenses borne in connection with
activities primarily intended to result in the sale of the Trust's Class IB
shares. It is anticipated that a portion of the amounts received by the
Distributors will be used to defray various costs incurred or paid by the
Distributors in connection with the printing and mailing of Trust
prospectuses, statements of additional information, any supplements thereto
and shareholder reports and holding seminars and sales meetings with
wholesale and retail sales personnel designed to promote the distribution of
Class IB shares. The Distributors may also use a portion of the amounts
received to provide compensation to financial intermediaries and third-party
broker-dealers for their services in connection with the distribution of
Class IB shares.
The Distribution Plan provides that the Trust, on behalf of each Portfolio,
may pay annually up to 0.50% of the average daily net assets of a Portfolio
attributable to its Class IB shares in respect of activities primarily
intended to result in the sale of Class IB shares. However, under the
Distribution Agreements, payments to the Distributors for activities pursuant
to the Distribution Plan are limited to payments at an annual rate equal to
0.25% of average daily net assets of a Portfolio attributable to its Class IB
shares. Under terms of the Distribution Plan and the Distribution Agreements,
each Portfolio is authorized to make payments monthly to the Distributors
which may be used to pay or reimburse entities providing distribution and
shareholder servicing with respect to the Class IB shares for such entities'
fees or expenses incurred or paid in that regard.
The Distribution Plan is of a type known as a "compensation" plan because
payments are made for services rendered to the Trust with respect to Class IB
shares regardless of the level of expenditures by the Distributors. The
Trustees will, however, take into account such expenditures for purposes of
reviewing operations under the Distribution Plan and in connection with their
annual consideration of the Plan's renewal. The Distributors have indicated
that they expect their expenditures to include, without limitation: (a) the
printing and mailing of Trust prospectuses, statements of additional
information, any supplements thereto and shareholder reports for prospective
Contract owners with respect to the Class IB shares of the Trust; (b) those
relating to the development, preparation, printing and mailing of
advertisements, sales literature and other promotional materials describing
and/or relating to the Class IB shares of the Trust; (c) holding seminars and
sales meetings designed to promote the distribution of Trust Class IB shares;
(d) obtaining information and providing explanations to wholesale and retail
distributors of Contracts regarding Trust investment objectives and policies
and other information about the Trust and its Portfolios, including the
performance of the Portfolios; (e) training sales personnel regarding the
Class IB shares of the Trust; and (f) financing any other activity that the
Distributors determines is primarily intended to result in the sale of Class
IB shares.
All shares are purchased and redeemed in accordance with the Trust's Amended
and Restated Declaration of Trust and By-Laws. Sales and redemptions of
shares of the same class by the same shareholder on the same day will be
netted for each Portfolio. All redemption requests will be processed and
payment with respect thereto normally will be made within seven days after
tenders. The Trust may suspend redemption, if permitted by the 1940 Act, for
any period during which the New York Stock Exchange is closed or during which
trading is restricted by the SEC or the SEC declares that an emergency
exists. Redemption may also be suspended during other periods permitted by
the SEC for the protection of the Trust's shareholders. If the Board of
Trustees determines that it would be detrimental to the best interest of the
Trust's remaining shareholders to make payment in cash, the Trust may pay
redemption proceeds in whole or in part by a distribution-in-kind of readily
marketable securities.
HOW ASSETS ARE VALUED
Vales are determined according to accepted accounting practices and all laws
and regulations that apply. The assets of each Portfolio are generally valued
as follows:
o Stocks and debt securities which mature in more than 60 days are
valued on the basis of market quotations.
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<PAGE>
o Foreign securities not traded directly in the United States are
valued at representative quoted prices in the currency of the
country of origin. Foreign currency amounts are translated into
United States dollars at the bid price last quoted by a composite
list of major United States banks.
o Short-term debt securities in the Portfolios which mature in 60
days or less are valued at amortized cost, which approximates
market value.
o Other securities and assets for which market quotations are not
readily available or for which valuation cannot be provided are
valued in good faith by the Valuation Committee of the Board of
Trustees of the Trust using its best judgment.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Under current federal income tax law, the Trust believes that each Portfolio
is entitled, and the Trust intends that each Portfolio shall qualify each
year and elect, to be treated as a regulated investment company ("RIC") under
Subchapter M of the Code. As a RIC, a Portfolio will not be subject to
federal tax on its net investment income and net realized capital gains to
the extent such income and gains are timely distributed to its insurance
company shareholders. Accordingly, each Portfolio intends to distribute all
of its net investment income and net realized capital gains to its
shareholders. An insurance company that is a shareholder of a Portfolio will
generally not be taxed on distributions from that Portfolio. All dividend
distributions will be reinvested in full and fractional shares of the
Portfolio to which they relate.
Although the Trust intends that it and the Portfolios will be operated so
that they will have no federal income or excise tax liability, if any such
liability is nevertheless incurred, the investment performance of the
Portfolio or Portfolios incurring such liability will be adversely affected.
In addition, Portfolios investing in foreign securities and currencies may be
subject to foreign taxes which could reduce the investment performance of
such Portfolio.
In addition to meeting investment diversification rules applicable to
regulated investment companies under Subchapter M of the Code, each Portfolio
will also comply with the investment diversification requirements of
Subchapter L of the Code. Were any Portfolio to fail to comply with those
requirements, owners of Contracts (other than "pension plan contracts")
funded through the Trust would be taxed immediately on the accumulated
investment earnings under their Contracts and would thereby lose any benefit
of tax deferral. Compliance is therefore carefully monitored by the
Administrator and the Manager.
Certain additional tax information appears in the Statement of Additional
Information.
For more information regarding the tax implications for owners of Contracts
investing in the Trust, refer to the prospectuses for those Contracts.
PERFORMANCE INFORMATION
From time to time, the Trust may advertise the "average annual or cumulative
total return" and may compare the performance of the Portfolios with that of
other mutual funds with similar investment objectives as listed in rankings
prepared by Lipper Analytical Services, Inc., or similar independent services
monitoring mutual fund performance, and with appropriate securities or other
relevant indices. The "average annual total return" of a Portfolio refers to
the average annual compounded rate of return over the stated period that
would equate an initial investment in that Portfolio at the beginning of the
period to its ending redeemable value, assuming reinvestment of all dividends
and distributions and deduction of all recurring charges, other than charges
and deductions which may be imposed under the Contracts. Performance figures
will be given for the recent one, five and ten year periods and for the life
of the Portfolio if it has not been in existence for any such periods. When
considering "average annual total return" figures for periods longer than one
year, it is important to note that a Portfolio's annual total return for any
given year might have been greater or less than its average for the entire
period. "Cumulative total return" represents the total change in value of an
investment in a Portfolio for a specified period (again reflecting changes in
Portfolio share prices and assuming reinvestment of Portfolio distributions).
The methods used to calculate "average annual and cumulative total return"
are described further in the Statement of Additional Information.
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<PAGE>
The performance of each Portfolio will vary from time to time in response to
fluctuations in market conditions, interest rates, the composition of the
Portfolio's investments and expenses. Consequently, a Portfolio's performance
figures are historical and should not be considered representative of the
performance of the Portfolio for any future period. Such performance does not
reflect fees and charges imposed under the Contracts, which fees and charges
will reduce such performance figures; therefore, these figures may be of
limited use for comparative purposes. No Portfolio will use information
concerning its investment performance in advertisements or sales materials
unless appropriate information concerning the relevant separate account is
also included.
PRIOR PERFORMANCE OF EACH ADVISER
The following tables provide information concerning the historical
performance of another registered investment company (or series) managed by
each Adviser, that has investment objectives, policies, strategies and risks
substantially similar to those of its respective Portfolio(s) of the Trust.
The data is provided to illustrate the past performance of each Adviser in
managing a substantially similar investment vehicle as measured against
specified market indices and does not represent the past performance of any
of the Portfolios or the future performance of any Portfolio or its Adviser.
Consequently, potential investors should not consider this performance data
as an indication of the future performance of any Portfolio of the Trust or
of its Adviser.
Each Adviser's performance data shown below was calculated in accordance with
standards prescribed by the SEC for the calculation of average annual total
return information for registered investment companies. Share prices and
investment returns will fluctuate reflecting market conditions as well as
changes in company-specific fundamentals of portfolio securities.
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<PAGE>
EQ/PUTNAM GROWTH & INCOME VALUE PORTFOLIO
The table below sets forth performance history for another registered
investment company, i.e., the Putnam Growth & Income Fund II, which is
managed by the Putnam Investment Management, Inc., and whose investment
policies are substantially similar to those of EQ/Putnam Growth & Income
Value Portfolio. Putnam Growth & Income Fund II will be subject to different
expenses than the EQ/Putnam Growth & Income Value Portfolio. In addition,
holders of variable insurance contracts representing interests in EQ/Putnam
Growth & Income Value will be subject to charges and expenses relating to
such insurance contract. The performance results presented below do not
reflect any insurance related expenses.
The investment results of Putnam Growth & Income Fund II presented below are
unaudited and are not intended to predict or suggest the returns that might
be experienced by the EQ/Putnam Growth & Income Value Portfolio or an
individual investor investing in the EQ/Putnam Growth & Income Value
Portfolio.
<TABLE>
<CAPTION>
PUTNAM GROWTH &
INCOME FUND S&P 500
YEAR ENDING 3/31/97 II(1) INDEX(2)
- ------------------- --------------- ---------
<S> <C> <C>
One Year(3) ........ 17.16% 19.82%
Since inception(3).. 25.44% 27.88%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The S&P 500 Index ("Index") is an unmanaged index containing common
stocks of 500 industrial, transportation, utility and financial
companies, regarded as generally representative of the United States
stock market. The Index reflects the reinvestment of income dividends
and capital gain distributions, if any, but does not reflect fees,
brokerage commissions, or other expenses of investing.
(3) Annualized performance for the Class A shares of the Putnam Growth &
Income Fund II. The inception date for the Putnam Growth & Income Fund
II was January, 1995. The Class A shares are subject to a front-end
sales charge of up to 5.75%. Other share classes have different expenses
and their performance will vary.
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<PAGE>
EQ/PUTNAM INTERNATIONAL EQUITY PORTFOLIO
The table below sets forth performance history for another registered
investment company, i.e., the Putnam International Growth Fund, which is
managed by the Putnam Investment Management, Inc., and whose investment
policies are substantially similar to those of EQ/Putnam International Equity
Portfolio. Putnam International Growth Fund will be subject to different
expenses than the EQ/Putnam International Equity Portfolio. In addition,
holders of variable insurance contracts representing interests in EQ/Putnam
International Equity Portfolio will be subject to charges and expenses
relating to such insurance contract. The performance results presented below
do not reflect any insurance related expenses.
The investment results of Putnam International Growth Fund presented below
are unaudited and are not intended to predict or suggest the returns that
might be experienced by the EQ/Putnam International Equity Portfolio or an
individual investor investing in the EQ/Putnam International Equity
Portfolio.
<TABLE>
<CAPTION>
PUTNAM INTERNATIONAL MSCI EAFE
YEAR ENDING 3/31/97 GROWTH FUND(1) INDEX(2)
- ------------------- -------------------- -----------
<S> <C> <C>
One Year(3) ........ 14.60% 1.75%
Five Years(3) ...... 14.66% 10.91%
Since inception(3) 16.70% 6.04%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The MSCI EAFE ("Index") is an unmanaged capitalization-weighted measure
of stock markets in Europe, Australia, the Far East and Canada. MSCI
EAFE Index returns assume dividends reinvested net of withholding tax
and do not reflect any fees or expenses.
(3) Annualized performance the Class A shares of the Putnam International
Growth Fund. The inception date of the Class A shares of the Putnam
International Growth Fund was March, 1991. The Class A shares are
subject to a front-end sales charge of up to 5.75%.
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<PAGE>
EQ/PUTNAM INVESTORS GROWTH PORTFOLIO
The table below sets forth performance history for another registered
investment company, i.e., the Putnam Investors Fund, which is managed by the
Putnam Investment Management, Inc., and whose investment policies are
substantially similar to those of EQ/Putnam Investors Growth Portfolio.
Putnam Investors Fund will be subject to different expenses than the
EQ/Putnam Investors Growth Portfolio. In addition, holders of the variable
insurance contracts representing interests in EQ/Putnam Investors Growth
Portfolio will be subject to charges and expenses relating to such insurance
contract. The performance results presented below do not reflect any
insurance related expenses.
The investment results of Putnam Investors Fund presented below are unaudited
and are not intended to predict or suggest the returns that might be
experienced by the EQ/Putnam Investors Growth Portfolio or an individual
investor investing in the EQ/Putnam Investors Growth Portfolio.
<TABLE>
<CAPTION>
PUTNAM INVESTORS S&P 500
YEAR ENDING 3/31/97 FUND(1) INDEX(2)
- ------------------- ---------------------- ---------
<S> <C> <C>
One Year(3) ........ 14.86% 19.82%
Five Years(3) ...... 16.23% 16.40%
Ten Years(3) ....... 12.22% 13.36%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The S&P 500 Index ("Index") is an unmanaged index containing common
stocks of 500 industrial, transportation, utility and financial
companies, regarded as generally representative of the United States
stock market. The Index reflects the reinvestment of income dividends
and capital gain distributions, if any, but does not reflect fees,
brokerage commissions, or other expenses of investing.
(3) Annualized performance for the Class A shares of the Putnam Investors
Fund. The Class A shares are subject to a front-end sales charge of up
to 5.75%. Other share classes have different expenses and their
performance will vary.
26
<PAGE>
MFS RESEARCH PORTFOLIO
In the table below, the only account which is included is another registered
investment company, i.e., MFS Research Fund, which is managed by the
Massachusetts Financial Services Company and whose investment policies are
substantially similar to MFS Research Portfolio. However, MFS Research Fund
will be subject to different expenses than the MFS Research Portfolio. In
addition, holders of variable insurance contracts representing interests in
the MFS Research Portfolio will be subject to charges and expenses relating
to such insurance contracts. The performance results presented below do not
reflect any insurance related expenses.
The investment results of MFS Research Fund presented below are unaudited and
are not intended to predict or suggest the returns that might be experienced
by the MFS Research Portfolio or an individual investor investing in the MFS
Research Portfolio.
<TABLE>
<CAPTION>
MFS RESEARCH S&P 500
YEAR ENDING 3/31/97 FUND(1) INDEX(2)
- ------------------- ------------------ ---------
<S> <C> <C>
One Year(3) ........ 12.96% 19.82%
Five Years(3) ...... 18.13% 16.40%
Ten Years(3) ....... 12.91% 13.36%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The S&P 500 Index ("Index") is an unmanaged index containing common
stocks of 500 industrial, transportation, utility and financial
companies, regarded as generally representative of the United States
stock market. The Index reflects the reinvestment of income dividends
and capital gain distributions, if any, but does not reflect fees,
brokerage commissions, or other expenses of investing.
(3) Annualized performance for the Class A shares of the MFS Research Fund.
The results for the MFS Research Fund do not reflect any sales charge
that may be imposed on the Class A shares of the MFS Research Fund, nor
any charges that would be imposed at the insurance company separate
account level.
27
<PAGE>
MFS EMERGING GROWTH COMPANIES PORTFOLIO
In the table below, the only account which is included is another registered
investment company, i.e., MFS Emerging Growth Fund, which is managed by the
Massachusetts Financial Services Company and whose investment policies are
substantially similar to MFS Emerging Growth Companies Portfolio. However,
MFS Emerging Growth Fund will be subject to different expenses than the MFS
Emerging Growth Companies Portfolio. In addition, holders of variable
insurance contracts representing interests in the MFS Emerging Growth
Companies Portfolio will be subject to charges and expenses relating to such
insurance contracts. The performance results presented below do not reflect
any insurance related expenses.
The investment results of MFS Emerging Growth Fund presented below are
unaudited and are not intended to predict or suggest the returns that might
be experienced by the MFS Emerging Growth Companies Portfolio or an
individual investor investing in the MFS Emerging Growth Companies Portfolio.
<TABLE>
<CAPTION>
MFS EMERGING RUSSELL 2000
YEAR ENDING 3/31/97 GROWTH FUND(1) INDEX(2)
- ------------------- -------------- --------------
<S> <C> <C>
One Year(3) ........ 2.32% 5.11%
Five Years(3) ...... 16.85% 12.78%
Ten Years(3) ....... 14.72% 9.42%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The Russell 2000 Index is an unmanaged index (with no defined investment
objective) of 2000 small-cap stocks and it includes reinvestments of
dividends. It is compiled by the Frank Russell Company.
(3) Annualized performance for the Class B shares of the MFS Emerging Growth
Fund. The results for the MFS Emerging Growth Fund do not reflect any
sales charge that may be imposed on the Class B shares of the MFS
Emerging Growth Fund, nor any charges that would be imposed at the
insurance company separate account level.
28
<PAGE>
MERRILL LYNCH WORLD STRATEGY PORTFOLIO
In the table below, the only account which is included is a series of another
registered investment company, i.e., Merrill Lynch Global Strategy Focus
Fund, a series of Merrill Lynch Variable Series Funds, Inc., which is managed
by Merrill Lynch Asset Management, L.P. and whose investment policies are
substantially similar to the Merrill Lynch World Strategy Portfolio. However,
the Merrill Lynch Global Strategy Focus Fund will be subject to different
expenses than the Merrill Lynch World Strategy Portfolio. In addition,
holders of variable insurance contracts representing interests in the Merrill
Lynch World Strategy Portfolio will be subject to charges and expenses
relating to such insurance contracts. The performance results presented below
do not reflect any insurance related expenses.
The investment results of Merrill Lynch Global Strategy Focus Fund presented
below are unaudited and are not intended to predict or suggest the returns
that might be experienced by the Merrill Lynch World Strategy Portfolio or an
individual investor investing in the Merrill Lynch World Strategy Portfolio.
<TABLE>
<CAPTION>
MERRILL LYNCH
VARIABLE SERIES FUNDS, INC.--
MERRILL LYNCH MSCI EAFE
YEAR ENDING 3/31/97 GLOBAL STRATEGY FOCUS FUND(1) INDEX(2)
- ------------------- ----------------------------- -----------
<S> <C> <C>
One Year(3) ........ 13.50% 1.75%
Five Year(3) ....... 9.52% 10.91%
Since inception(3) 9.20% 8.91%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The Morgan Stanley Capital International Europe, Australia, and Far East
Index ("MSCI EAFE Index") is an unmanaged capitalization-weighted
measure of stock markets in Europe, Australia, the Far East and Canada.
MSCI EAFE Index returns assume dividends reinvested net of withholding
tax and do not reflect any fees or expenses.
(3) Annualized performance for shares of the Merrill Lynch Global Strategy
Focus Fund. The inception date for the Merrill Lynch Global Strategy
Focus Fund was February 28, 1992.
29
<PAGE>
MERRILL LYNCH BASIC VALUE EQUITY PORTFOLIO
In the table below, the only account which is included is another registered
investment company, i.e., Merrill Lynch Basic Value Focus Fund, a series of
Merrill Lynch Variable Series Funds, Inc., which is managed by Merrill Lynch
Asset Management, L.P. and whose investment policies are substantially
similar to the Merrill Lynch Basic Value Equity Portfolio. However, the
Merrill Lynch Basic Value Focus Fund will be subject to different expenses
than the Merrill Lynch Basic Value Equity Portfolio. In addition, holders of
variable insurance contracts representing interests in the Merrill Lynch
Basic Value Equity Portfolio will be subject to charges and expenses relating
to such insurance contracts. The performance results presented below do not
reflect any insurance related expenses.
The investment results of Merrill Lynch Basic Value Focus Fund presented
below are unaudited and are not intended to predict or suggest the returns
that might be experienced by the Merrill Lynch Basic Value Equity Portfolio
or an individual investor investing in the Merrill Lynch Basic Value Equity
Portfolio.
<TABLE>
<CAPTION>
MERRILL LYNCH
VARIABLE SERIES FUNDS, INC.--
MERRILL LYNCH S&P 500
YEAR ENDING 3/31/97 BASIC VALUE FOCUS FUND(1) INDEX(2)
- ------------------- ----------------------------- ---------
<S> <C> <C>
One Year(3) ........ 14.82% 19.82%
Since inception(3).. 15.39% 17.78%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The S&P 500 Index ("Index") is an unmanaged index containing common
stocks of 500 industrial, transportation, utility and financial
companies, regarded as generally representative of the United States
stock market. The Index reflects the reinvestment of income dividends
and capital gain distributions, if any, but does not reflect fees,
brokerage commissions, or other expenses of investing.
(3) Annualized performance for shares of the Merrill Lynch Basic Value Focus
Fund. The inception date for the Merrill Lynch Basic Value Focus Fund
was July 1, 1993.
30
<PAGE>
APPENDIX A
The following table summarizes the historical performance information of
certain other registered investment companies that appears on pages 24
through 30 of this Prospectus. Each other registered investment company is
managed by an Adviser and has investment objectives, policies, strategies and
risks substantially similar to the Portfolio managed by that Adviser. For
further information regarding each of the registered investment companies and
the indexes presented below, please refer to pages 24 through 30 of this
Prospectus.
ANNUALIZED RATES OF RETURN
PERIODS ENDING MARCH 31, 1997
<TABLE>
<CAPTION>
SINCE
FUND NAME 1 YEAR 5 YEARS 10 YEARS INCEPTION
- ----------------------------------------- -------- --------- ---------- -----------
<S> <C> <C> <C> <C>
DOMESTIC EQUITY SERIES
- ----------------------------------------- -------- --------- ---------- ----------
PUTNAM GROWTH & INCOME FUND II 17.16% -- -- 25.44%
- ----------------------------------------- -------- --------- ---------- -----------
S&P 500 Index 19.82% -- -- 27.88%
- ----------------------------------------- -------- --------- ---------- -----------
PUTNAM INVESTORS FUND 14.86% 16.23% 12.22% --
- ----------------------------------------- -------- --------- ---------- -----------
S&P 500 Index 19.82% 16.40% 13.36% --
- ----------------------------------------- -------- --------- ---------- -----------
MERRILL LYNCH BASIC VALUE FOCUS FUND 14.82% -- -- 15.39%
- ----------------------------------------- -------- --------- ---------- -----------
S&P 500 Index 19.82% -- -- 17.78%
- ----------------------------------------- -------- --------- ---------- -----------
MFS RESEARCH FUND 12.96% 18.13% 12.91% --
- ----------------------------------------- -------- --------- ---------- -----------
S&P 500 Index 19.82% 16.40% 13.36% --
- ----------------------------------------- -------- --------- ---------- -----------
INTERNATIONAL EQUITY SERIES
- ----------------------------------------- -------- --------- ---------- -----------
PUTNAM INTERNATIONAL GROWTH FUND 14.60% 14.66% -- 16.70%
- ----------------------------------------- -------- --------- ---------- -----------
MSCI EAFE Index 1.75% 10.91% -- 6.04%
- ----------------------------------------- -------- --------- ---------- -----------
AGGRESSIVE DOMESTIC EQUITY SERIES
- ----------------------------------------- -------- --------- ---------- -----------
MFS EMERGING GROWTH FUND 2.32% 16.85% 14.72% --
- ----------------------------------------- -------- --------- ---------- -----------
Russell 2000 Index 5.11% 12.78% 9.42% --
- ----------------------------------------- -------- --------- ---------- -----------
ASSET ALLOCATION SERIES
- ----------------------------------------- -------- --------- ---------- -----------
MERRILL LYNCH GLOBAL STRATEGY FOCUS FUND 13.50% 9.52% -- 9.20%
- ----------------------------------------- -------- --------- ---------- -----------
MSCI EAFE Index 1.75% 10.91% -- 8.91%
- ----------------------------------------- -------- --------- ---------- -----------
</TABLE>
A-1
<PAGE>
Filed Pursuant to Rule 497(c)
File No. 333-17217
EQ ADVISORS TRUST
1290 Avenue of the Americas -- New York, New York 10104
EQ Advisors Trust ("Trust") is an open-end management investment company that
offers a selection of professionally managed investment portfolios
("Portfolios"). Each Portfolio has its own investment objective and policies
that are designed to meet different investment goals.
This Prospectus describes the following four Portfolios currently offered by
the Trust pursuant to this Prospectus.
o T. Rowe Price Equity Income Portfolio
o MFS Research Portfolio
o Warburg Pincus Small Company Value Portfolio
o Merrill Lynch World Strategy Portfolio
The Trust offers two classes of shares on behalf of each Portfolio: Class IA
shares offered pursuant to another prospectus, and Class IB shares offered
hereby.
This Prospectus sets forth concisely the information about the Trust and the
Portfolios that a prospective investor should know before investing. Please
read the Prospectus and retain it for future reference. Additional
information contained in a Statement of Additional Information also dated May
1, 1997 has been filed with the Securities and Exchange Commission and is
available upon request without charge by writing to the Trust at the address
noted above. California residents can obtain a copy of the Statement of
Additional Information by calling 1-800-999-3527. The Statement of Additional
Information is incorporated into this Prospectus by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
PROSPECTUS DATED MAY 1, 1997
<PAGE>
THE TRUST
The Trust is an open-end management investment company registered under the
Investment Company Act of 1940, as amended ("1940 Act"). As a "series" type
of mutual fund, the Trust issues shares of beneficial interest that are
currently divided among twelve Portfolios. Four of these Portfolios are
offered pursuant to this Prospectus. Each Portfolio is a separate series of
the Trust with its own objective and policies. Each of the Portfolios set
forth below, except for the Merrill Lynch World Strategy Portfolio, are
diversified for 1940 Act purposes. The Trustees of the Trust may establish
additional Portfolios at any time.
Each Portfolio is managed by EQ Financial Consultants, Inc. ("Manager") which
directs the day to day operations of each Portfolio. T. Rowe Price
Associates, Inc., Massachusetts Financial Services Company, Warburg, Pincus
Counsellors, Inc., and Merrill Lynch Asset Management, L.P. serve as the
advisers (each an "Adviser" and, together the "Advisers") to one of the
Portfolios, as detailed in the table below.
<TABLE>
<CAPTION>
PORTFOLIO ADVISER
- ----------------------------------------- --------------------------------------------
<S> <C>
T. Rowe Price Equity Income Portfolio T. Rowe Price Associates, Inc.
MFS Research Portfolio Massachusetts Financial Services Company
Warburg Pincus Small Company Warburg, Pincus Counsellors, Inc.
Value Portfolio
Merrill Lynch Merrill Lynch Asset Management, L.P.
World Strategy Portfolio
</TABLE>
The Trust offers two classes of shares on behalf of each Portfolio: Class IA
shares and Class IB shares. EQ Financial Consultants, Inc. ("EQ Financial"),
the Trust's Manager, serves as one of the distributors for the Class IB
shares of the Trust offered by this Prospectus. Equitable Distributors, Inc.
("EDI") also serves as one of the distributors for the Class IB shares of the
Trust as well as one of the distributors of the Class IA shares. (EQ
Financial and EDI are collectively referred to as the "Distributors"). The
Trust's shares are currently sold only to insurance company separate accounts
in connection with variable life insurance contracts and variable annuity
certificates and contracts (collectively, the "Contracts") issued by The
Equitable Life Assurance Society of the United States ("Equitable"). Both
classes of shares are offered and redeemed at their net asset value without
the imposition of any sales load.
Class IA shares are offered pursuant to another prospectus and are subject to
the same expenses as the Class IB shares, but unlike the Class IB shares they
are not subject to distribution fees imposed pursuant to a distribution plan.
Class IB shares are subject to distribution fees imposed under a distribution
plan ("Distribution Plan") adopted pursuant to Rule 12b-1 under the 1940 Act.
Inquiries regarding Class IA shares should be addressed to Equitable, at 1290
Avenue of the Americas, New York, NY 10104 or by calling 1-212-641-7237.
INVESTMENT OBJECTIVES AND POLICIES
The following is a brief description of the investment objectives and
policies of each of the Portfolios. All of the objectives and policies of
each Portfolio, unless otherwise noted, are not fundamental and may be
changed by the Board of Trustees of the Trust without the approval of
shareholders. Certain investment strategies and instruments discussed below
are described in greater detail in the Statement of Additional Information.
Because of the uncertainty inherent in all investments, there can be no
assurance that the Portfolios will be able to achieve their respective
investment objectives.
T. ROWE PRICE EQUITY INCOME PORTFOLIO
The investment objective of the T. Rowe Price Equity Income Portfolio is to
seek to provide substantial dividend income and also capital appreciation by
investing primarily in dividend-paying common stocks of established
companies. In pursuing its objective, the Portfolio emphasizes companies with
favorable prospects for increasing dividend income and capital appreciation.
Over time, the income component
2
<PAGE>
(dividends and interest earned) of the Portfolio's investments is expected to
be a significant contributor to the Portfolio's total return. The Portfolio's
yield is expected to be significantly above that of the Standard & Poor's 500
Composite Stock Price Index ("S&P 500"). Total return will consist primarily
of dividend income and secondarily of capital appreciation (or depreciation).
The investment program of the Portfolio is based on several premises. First,
the Adviser believes that over time, dividend income can account for a
significant component of the total return from equity investments. Second,
dividends are normally a more stable and predictable source of return than
capital appreciation. While the price of a company's stock generally
increases or decreases in response to short-term earnings and market
fluctuations, its dividends are generally less volatile. Finally, the Adviser
believes that stocks that distribute a high level of current income tend to
have less price volatility than those that pay below average dividends.
Under normal circumstances, the Portfolio will invest at least 65% of its
total assets in income-producing common stocks of established companies
paying above-average dividends. The Adviser uses a "value" approach and
invests in common stocks and other equities-related securities it believes
are temporarily undervalued by various measures, such as price/earnings
ratios. The Portfolio's investments will generally be made in companies that
share some of the following characteristics: established operating histories;
above-average current dividend yields relative to the S&P 500; low
price/earnings ratios relative to the S&P 500; sound balance sheets and other
financial characteristics; and low stock price relative to company's
underlying value as measured by assets, earnings, cash flow or business
franchises.
Although the Portfolio will invest primarily in United States common stocks,
it may also purchase other types of securities (for example, foreign
securities, preferred stocks, convertible securities and warrants) when
considered consistent with the Portfolio's investment objective and program.
The Portfolio may invest up to 25% of its total assets in foreign securities.
These include non-dollar denominated securities traded outside the United
States and dollar-denominated securities traded in the United States (such as
American Depositary Receipts ("ADRs")). Such investments increase a
portfolio's diversification and may enhance return, but they may represent a
greater degree of risk than investing in domestic securities.
The Portfolio may also engage in a variety of investment practices, such as
buying and selling options and futures contracts and engaging in foreign
currency exchange transactions. In addition, the Portfolio may invest up to
10% of its total assets in hybrid instruments.
The Portfolio may also invest a portion of its assets in United States
Government securities and high-quality United States and foreign
dollar-denominated money market securities (i.e., within the two highest
rating categories assigned by a nationally recognized statistical rating
organization ("NRSRO")) including certificates of deposit, bankers'
acceptances, commercial paper, short-term corporate securities and repurchase
agreements. For temporary defensive purposes or to meet redemption requests,
the Portfolio may invest without limitation in such securities.
The Portfolio may also invest in debt securities of any type including
municipal securities, without regard to quality or rating. Such securities
would be purchased in companies that meet the investment criteria for the
Portfolio. The price of a bond generally fluctuates with changes in interest
rates, rising when interest rates fall and falling when interest rates rise.
The Portfolio, however, will not invest more than 10% of its total assets in
securities rated below investment grade (commonly known as "junk bonds").
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, futures contracts,
convertible securities, borrowings, foreign securities, repurchase
agreements, derivatives, forward commitments, hybrid instruments, United
States Government securities, securities loans, foreign currency
transactions, illiquid securities and investment grade and lower quality
fixed-income securities) are discussed under the caption "Investment
Strategies" below and in the Statement of Additional Information.
MFS RESEARCH PORTFOLIO
The investment objective of the MFS Research Portfolio is to provide
long-term growth of capital and future income. In pursuing its objective, the
Portfolio invests a substantial portion of its assets in the
3
<PAGE>
common stock or securities convertible into common stock of companies
believed by the Adviser to possess better than average prospects for
long-term growth. A smaller proportion of the assets of the Portfolio may be
invested in bonds, short-term debt obligations, preferred stocks or common
stocks whose principal characteristic is income production rather than
growth. Such securities may also offer opportunities for growth of capital as
well as income. In the case of both growth stocks and income securities, the
Adviser emphasizes progressive, well-managed companies.
The portfolio securities of the Portfolio are selected by a committee of
investment research analysts. This committee includes investment analysts
employed not only by the Adviser but also by MFS International (U.K.)
Limited, a wholly-owned subsidiary of the Adviser. The Portfolio's assets are
allocated among industries by the analysts acting together as a group.
Individual analysts are then responsible for selecting what they view as the
securities best suited to meet the Portfolio's investment objective within
their assigned industry responsibility.
To the extent that such investments comply with the Portfolio's investment
objective, the Portfolio may invest up to 20% of its total assets in foreign
securities, including those in emerging markets. These securities include
dollar-denominated and non-dollar-denominated foreign securities. Such
foreign investments increase a portfolio's diversification and may enhance
return, but they may represent a greater degree of risk than investing
exclusively in domestic securities.
The Portfolio may invest in investment grade debt securities and may invest
up to 10% of its total assets in securities rated below investment grade
(commonly known as "junk bonds"). The price of a bond generally fluctuates
with changes in interest rates, rising when interest rates fall and falling
when interest rates rise.
Certain investment strategies and practices which may be employed by the
Portfolio (such as foreign securities, convertible securities, borrowings,
forward commitments, United States Government Securities, repurchase
agreements, securities loans, illiquid securities and investment grade and
lower quality fixed-income securities) are discussed under the caption
"Investment Strategies" below and in the Statement of Additional Information.
WARBURG PINCUS SMALL COMPANY VALUE PORTFOLIO
The investment objective of the Warburg Pincus Small Company Value Portfolio
is to seek long-term capital appreciation. The Portfolio is a diversified
management investment company that pursues its investment objective by
investing primarily in a portfolio of equity securities of small
capitalization companies (i.e., companies having market capitalizations of $1
billion or less at the time of initial purchase) that the Adviser considers
to be relatively undervalued. Current income is a secondary consideration in
selecting portfolio investments.
Under normal market conditions, the Portfolio will invest at least 65% of its
total assets in common stocks, preferred stocks, debt securities convertible
into common stocks, warrants and other rights of small companies. The
Portfolio may invest up to 10% of its total assets in warrants.
The Adviser will determine whether a company is undervalued based on a
variety of measures, including: price/earnings ratio, price/book ratio,
price/cash flow ratio, earnings growth and debt/capital ratio. Other relevant
factors, including a company's asset value, franchise value and quality of
management, will also be considered. The Portfolio will invest primarily in
companies whose securities are traded on United States stock exchanges or in
the United States over-the-counter market, but it may invest up to 20% of its
total assets in foreign securities.
The Portfolio may also invest up to 20% of its total assets in investment
grade securities (other than money market obligations) that are not
convertible into common stock for the purpose of seeking capital
appreciation. Subsequent to its purchase by the Portfolio, an issue of
securities may cease to be rated or its rating may be reduced below the
minimum required for purchase by the Portfolio. Neither event will require
the sale of such securities by the Portfolio. The Adviser will consider such
events in its determination of whether the Portfolio should continue to hold
the securities. The interest income to be derived may be considered as one
factor in selecting debt securities by the Adviser.
4
<PAGE>
The Portfolio is authorized to invest, under normal market conditions, up to
20% of its total assets in domestic and foreign short-term (one year or less
remaining to maturity) and medium-term (five years of less remaining to
maturity) money market obligations. For temporary defensive purposes, the
Portfolio may invest in these securities without limit. These instruments
consist of: obligations issued or guaranteed by the United States Government
or a foreign government, their agencies or instrumentalities; bank
obligations (including certificates of deposit, time deposits and bankers'
acceptances of domestic or foreign banks, domestic savings and loans and
similar institutions) that are high-quality investments or, if unrated,
deemed by the Adviser to be high-quality investments; commercial paper rated
no lower than A-2 by Standard & Poor's Rating Service ("S&P") or Prime-2 by
Moody's Investors Service, Inc. ("Moody's") or the equivalent from another
NRSRO or, if unrated, of an issuer having an outstanding, unsecured debt
issue then rated within the three highest rating categories by any NRSRO; and
repurchase agreements with respect to the foregoing.
When the Adviser believes that a defensive posture is warranted, the
Portfolio may invest temporarily, without limit, in investment grade debt
obligations and in domestic and foreign money market instruments, including
repurchase agreements.
Certain investment strategies and practices which may be employed by the
Portfolio (such as foreign securities, repurchase agreements, borrowings,
options, securities loans, small company securities, derivatives, futures
contracts, foreign currency transactions, United States Government
securities, short sales against the box, convertible securities, investment
grade and lower-quality fixed-income securities, and illiquid securities) are
discussed under the caption "Investment Strategies" below and in the
Statement of Additional Information.
MERRILL LYNCH WORLD STRATEGY PORTFOLIO
The investment objective of the Merrill Lynch World Strategy Portfolio is to
seek high total investment return by investing primarily in a portfolio of
equity and fixed income securities, including convertible securities, of U.S.
and foreign issuers. Total investment return consists of interest, dividends,
discount accruals and capital changes, including changes in the value of
non-dollar denominated securities and other assets and liabilities resulting
from currency fluctuations. Investing in foreign securities involves special
considerations. The Portfolio may employ a variety of instruments and
techniques to enhance income and to hedge against market and currency risk.
The Portfolio seeks to achieve its objective by investing primarily in the
securities of issuers located in the United States, Canada, Western Europe
and the Far East. There are no prescribed limits on the geographical
allocation of the Portfolio among these regions. Such allocation will be made
primarily on the basis of the anticipated total return from investments in
the securities of issuers wherever located, considering such factors as: the
condition and growth potential of the various economies and securities
markets and the issuers domiciled therein; anticipated movements in interest
rates in the various capital markets and in the value of foreign currencies
relative to the U.S. dollar; tax considerations; and economic, social,
financial, national and political factors that may affect the climate for
investing within the various securities markets. When in the judgment of the
Adviser, economic or market conditions warrant, the Portfolio reserves the
right to concentrate its investments in one or more capital markets,
including the United States.
The equity and convertible preferred securities in which the Portfolio may
invest are primarily securities issued by quality companies. Generally, the
characteristics of such companies include a strong balance sheet, good
financial resources, a satisfactory rate of return on capital, a good
industry position and superior management.
The corporate debt securities, including convertible debt securities, in
which the Portfolio may invest will be primarily investment grade securities
those rated BBB or better by S&P or Baa or better by Moody's or of comparable
quality. The Fund may also invest in debt obligations issued or guaranteed by
sovereign governments, political subdivisions thereof (including states,
provinces and municipalities) or their agencies or instrumentalities or
issued or guaranteed by international organizations designated or supported
by governmental entities to promote economic reconstruction or development
("supranational
5
<PAGE>
entities") such as the International Bank for Reconstruction and Development
(the "World Bank") and the European Coal and Steel Community. Investments in
securities of supranational entities are subject to the risk that member
governments will fail to make required capital contributions and that a
supranational entity will thus be unable to meet its obligations.
When market or financial conditions warrant, the Portfolio may invest as a
temporary defensive measure up to 100% of its assets in United States
Government or Government agency securities issued or guaranteed by the United
States Government or its agencies or instrumentalities, money market
securities or other fixed income securities deemed by the Adviser to be
consistent with a defensive posture, or may hold its assets in cash.
The Portfolio is non-diversified for 1940 Act purposes and as such may invest
a larger percentage of its assets in individual issuers than a diversified
investment company. In this regard, the Portfolio is not subject to the
general limitation that it not invest more than 5% of its total assets in the
securities of any one issuer. To the extent the Portfolio makes investments
in excess of 5% of its assets in a particular issuer, its exposure to credit
and market risks associated with that issuer is increased. However, the
Portfolio's investments will be limited so as to qualify for the special tax
treatment afforded "regulated investment companies" under the Code.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, futures contracts,
foreign securities, foreign currency transactions, United States Government
securities, convertible securities, borrowings, derivatives, investment grade
fixed-income securities, repurchase agreements, securities loans, illiquid
securities and forward commitments) are discussed under the caption
"Investment Strategies" below and in the Statement of Additional Information.
INVESTMENT STRATEGIES
In addition to making investments directly in securities, to the extent
described above, each of the Portfolios (except for MFS Research Portfolio)
may purchase and sell call and put options, engage in transactions in futures
contracts and related options, loans and other direct indebtedness and engage
in forward foreign currency exchange transactions. They may also enter into
repurchase agreements, lend their portfolio securities, and borrow funds
under certain limited circumstances. In addition, each Portfolio may engage
in other types of investment strategies as described below. Each Portfolio
may invest in or utilize any of these investment strategies and instruments
or engage in any of these practices except where otherwise prohibited by law
or the Portfolio's own investment restrictions. Portfolios that anticipate
committing 5% or more of their net assets to a particular type of investment
strategy or instruments are specifically referred to in the descriptions
below of such investment strategy or instrument. Certain investment
strategies and instruments and the risks related to them are summarized below
and certain of these strategies and instruments are described in more detail
in the Statement of Additional Information.
Borrowings. The Portfolios may borrow money from banks or other lenders as a
temporary measure for emergency purposes, to facilitate redemption requests,
or for other purposes consistent with each Portfolio's investment objective
and program. Borrowings for the T. Rowe Price Equity Income Portfolio, MFS
Research Portfolio and Merrill Lynch World Strategy Portfolio may not exceed
33 1/3% of each Portfolio's total assets. Borrowings for the Warburg Pincus
Small Company Value Portfolio may not exceed 30% of the Portfolio's total
assets. Each Portfolio may pledge its assets to secure these permissible
borrowings. No Portfolio may purchase additional securities when its
borrowings exceed 5% of its total assets. Further information concerning each
Portfolio's fundamental policy with respect to borrowings is provided in the
Statement of Additional Information.
Convertible Securities. Each of the Portfolios may invest in convertible
securities, including both convertible debt and convertible preferred stock.
Such securities may be converted into shares of the underlying common stock
at either a stated price or stated rate. Because of this feature, convertible
securities enable an investor to benefit from increases in the market price
of the underlying common stock. Convertible securities provide higher yields
than the underlying common stocks, but generally offer
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lower yields than non-convertible securities of similar quality. Like bonds,
the value of convertible securities fluctuates in relation to changes in
interest rates and, in addition, fluctuates in relation to the underlying
common stock. Subsequent to purchase by a Portfolio, convertible securities
may cease to be rated or a rating may be reduced below the minimum required
for purchase by that Portfolio. Neither event will require sale of such
securities, although each Adviser will consider such event in its
determination of whether a Portfolio should continue to hold the securities.
Derivatives. Each Portfolio (except the MFS Research Portfolio) may invest in
one or more types of derivatives. Derivatives are financial products or
instruments that derive their value from the value of one or more underlying
assets, reference rates or indices. Derivatives include, but are not limited
to, the following: asset-backed securities, collateralized mortgage
obligations, floaters, futures, hybrid instruments, inverse floaters,
mortgage-backed securities, options, stripped mortgage-backed securities,
structured notes and swaps. Further information about these instruments and
the risks involved in their use are contained under the description of each
of these instruments in this section or the Statement of Additional
Information.
Foreign Securities. Foreign investments involve certain risks that are not
present in domestic securities. Because each of the Portfolios may purchase
securities denominated in foreign currencies, a change in the value of any
such currency against the United States dollar will result in a change in the
United States dollar value of a Portfolio's assets and income. In addition,
although a portion of a Portfolio's investment income may be received or
realized in such currencies, the Portfolio will be required to compute and
distribute its income in United States dollars. Therefore, if the exchange
rate for any such currency declines after a Portfolio's income has been
earned and computed in United States dollars but before conversion and
payment, the Portfolio could be required to liquidate portfolio securities to
make such distributions.
The value of foreign investments and the investment income derived from them
may also be affected unfavorably by changes in currency exchange control
regulations. Although the Portfolios will invest only in securities
denominated in foreign currencies that are fully exchangeable into United
States dollars without legal restriction at the time of investment, there can
be no assurance that currency controls will not be imposed subsequently. In
addition, the value of foreign fixed income investments may fluctuate in
response to changes in United States and foreign interest rates.
There may be less information publicly available about a foreign issuer than
about a United States issuer, and a foreign issuer is not generally subject
to accounting, auditing and financial reporting standards and practices
comparable to those in the United States. Foreign stock markets are generally
not as developed or efficient as, and may be more volatile than, those in the
United States. While growing in volume, they usually have substantially less
volume than United States markets and a Portfolio's investment securities may
be less liquid and subject to more rapid and erratic price movements than
securities of comparable United States companies. Equity securities may trade
at price/earnings multiples higher than comparable United States securities
and such levels may not be sustainable. There is generally less government
supervision and regulation of foreign stock exchanges, brokers and listed
companies than in the United States. Moreover, settlement practices for
transactions in foreign markets may differ from those in United States
markets. Such differences may include delays beyond periods customary in the
United States and practices, such as delivery of securities prior to receipt
of payment, which increase the likelihood of a "failed settlement." Failed
settlements can result in losses to a Portfolio. In less liquid and well
developed stock markets, such as those in some Asian and Latin American
countries, volatility may be heightened by actions of a few major investors.
For example, substantial increases or decreases in cash flows of mutual funds
investing in these markets could significantly affect stock prices and,
therefore, share prices.
Foreign brokerage commissions, custodial expenses and other fees are also
generally higher than for securities traded in the United States.
Consequently, the overall expense ratios of international or global funds are
usually somewhat higher than those of typical domestic stock funds.
In addition, the economies, markets and political structures of a number of
the countries in which the Portfolios can invest do not compare favorably
with the United States and other mature economies in terms of wealth and
stability. Therefore, investments in these countries may be riskier, and will
be subject
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to erratic and abrupt price movements. Some economies are less well developed
and less diverse (for example, Latin America, Eastern Europe and certain
Asian countries), and more vulnerable to the ebb and flow of international
trade, trade barriers and other protectionist or retaliatory measures (for
example, Japan, Southeast Asia and Latin America). Some countries,
particularly in Latin America, are grappling with severe inflation and high
levels of national debt. Investments in countries that have recently begun
moving away from central planning and state-owned industries toward free
markets, such as the Eastern European or Chinese economies, should be
regarded as speculative.
In addition, investment in foreign securities may also include the risk of
expropriation by a foreign government.
Moreover, investments in foreign government debt securities, particularly
those of emerging market country governments, involve special risks. Certain
emerging market countries have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging market country's debt
may not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A debtor's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, and, in the case of a government
debtor, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole and the political constraints to
which a government debtor may be subject. Government debtors may default on
their debt and may also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce principal and
interest arrearages on their debt. Holders of government debt may be
requested to participate in the rescheduling of such debt and to extend
further loans to government debtors.
Certain Portfolios may invest in the following types of foreign securities or
engage in the following types of transactions related to foreign securities.
Depositary Receipts. Each of the Portfolios may purchase depositary receipts,
which are securities representing ownership interests in securities of
foreign companies (an "underlying issuer") and are deposited with a
securities depositary. Depositary receipts are not necessarily denominated in
the same currency as the underlying securities. Depositary receipts include
ADRs and Global Depositary Receipts ("GDRs") and other types of depositary
receipts (which, together with ADRs and GDRs, are hereinafter collectively
referred to as "Depositary Receipts"). ADRs are dollar-denominated Depositary
Receipts typically issued by a United States financial institution which
evidence ownership interests in a security or pool of securities issued by a
foreign issuer. ADRs are listed and traded in the United States. GDRs and
other types of depositary receipts are typically issued by foreign banks or
trust companies, although they also may be issued by United States financial
institutions, and evidence ownership interests in a security or pool of
securities issued by either a foreign or a United States corporation.
Generally, depositary receipts in registered form are designed for use in the
United States securities market and depositary receipts in bearer form are
designed for use in securities markets outside the United States. Although
there may be more reliable information available regarding issuers of certain
ADRs that are issued under so-called "sponsored" programs and ADRs do not
involve foreign currency risks, ADRs and other Depositary Receipts are
subject to the risks of other investments in foreign securities, as described
directly above.
Foreign Currency Transactions. Each of the Portfolios (except the MFS
Research Portfolio) may purchase foreign currency on a spot (or cash) basis,
and may enter into contracts to purchase or sell foreign currencies at a
future date ("forward contracts"). Each of the Portfolios (except the MFS
Research Portfolio) may also purchase and sell foreign currency futures
contracts and may purchase and sell exchange traded call and put options on
foreign currency futures contracts and on foreign currencies. The Merrill
Lynch World Strategy Portfolio may engage in OTC options on foreign currency
transactions. The Merrill Lynch World Strategy Portfolio will engage in OTC
options on foreign currency transactions only with financial institutions
that have capital of at least $50 million or whose obligations are guaranteed
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by an entity having capital of at least $50 million. The Advisers may engage
in these transactions to protect against uncertainty in the level of future
exchange rates in connection with the purchase and sale of portfolio
securities ("transaction hedging") and to protect the value of specific
portfolio positions ("position hedging").
Hedging transactions involve costs and may result in losses. Each of the
Portfolios (except the MFS Research Portfolio) may also write covered call
options on foreign currencies to offset some of the costs of hedging those
currencies. A Portfolio will engage in over-the-counter options transactions
on foreign currencies only when appropriate exchange traded transactions are
unavailable and when, in the Adviser's opinion, the pricing mechanism and
liquidity are satisfactory and the participants are responsible parties
likely to meet their contractual obligations. A Portfolio's ability to engage
in hedging and related option transactions may be limited by tax
considerations.
Transactions and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolios own or intend to
purchase or sell. They simply establish a rate of exchange which one can
achieve at some future point in time. Additionally, although these techniques
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, they tend to limit any potential gain which might result from the
increase in the value of such currency.
Forward Commitments. Each Portfolio (except the Warburg Pincus Small Company
Value Portfolio) may make contracts to purchase securities for a fixed price
at a future date beyond customary settlement time ("forward commitments") if
it holds, and maintains until the settlement date in a segregated account,
cash or liquid securities in an amount sufficient to meet the purchase price,
or if it enters into offsetting contracts for the forward sale of other
securities it owns. Forward commitments may be considered securities in
themselves and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in value of the Portfolio's other assets. Where such
purchases are made through dealers, a Portfolio relies on the dealer to
consummate the sale. The dealer's failure to do so may result in the loss to
a Portfolio of an advantageous yield or price.
Hybrid Instruments. The T. Rowe Price Equity Income Portfolio may invest in
hybrid instruments. Hybrid instruments have recently been developed and
combine the elements of futures contacts or options with those of debt,
preferred equity or a depository instrument. Often these hybrid instruments
are indexed to the price of a commodity, particular currency, or a domestic
or foreign debt or equity securities index. Hybrid instruments may take a
variety of forms, including, but not limited to, debt instruments with
interest or principal payments or redemption terms determined by reference to
the value of a currency or commodity or securities index at a future point in
time, preferred stock with dividend rates determined by reference to the
value of a currency, or convertible securities with the conversion terms
related to a particular commodity. Hybrid instruments may bear interest or
pay dividends at below market (or even relatively nominal) rates. Under
certain conditions, the redemption value of such an instrument could be zero.
Hybrid instruments can have volatile prices and limited liquidity and their
use by the Portfolio may not be successful.
Illiquid Securities. The Warburg Pincus Small Company Value Portfolio may
invest up to 10% of its assets and each other Portfolio may invest up to 15%
of their respective net assets in illiquid securities and other securities
which are not readily marketable, including non-negotiable time deposits,
certain restricted securities not deemed by the Trust's Board of Trustees to
be liquid, and repurchase agreements with maturities longer than seven days.
Securities eligible for resale pursuant to Rule 144A under the Securities Act
of 1933, as amended, which have been determined by the Board of Trustees to
be liquid, will not be considered by the Adviser to be illiquid or not
readily marketable and, therefore, are not subject to the 10% or 15% limit.
The inability of a Portfolio to dispose of illiquid or not readily marketable
investments readily or at a reasonable price could impair the Portfolio's
ability to raise cash for redemptions or other purposes. The liquidity of
securities purchased by a Portfolio which are eligible for resale pursuant to
Rule 144A will be monitored by each Portfolio's Adviser on an ongoing basis,
subject to the oversight of the Board of Trustees of the Trust. In the event
that such a security is deemed to be no longer liquid, a Portfolio's holdings
will be reviewed to determine what action, if any, is required to ensure that
the retention of such security does not result in a Portfolio's having more
than 10% or 15% of its assets invested in illiquid or not readily marketable
securities.
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Investment Grade and Lower Quality Fixed-Income Securities. Each Portfolio
may invest in or hold a portion of its total assets in investment grade or
lower quality fixed-income securities. Investment grade securities are
securities rated Baa or higher by Moody's or BBB or higher by S&P and
comparable unrated securities. Investment grade securities rated Baa by
Moody's or BBB by S&P while normally exhibiting adequate protection
parameters, have speculative characteristics, and, consequently, changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity of such issuers to make principal and interest payments
than is the case for higher grade fixed-income securities. Lower quality
fixed-income securities are securities that are rated in the lower categories
by NRSROs (i.e., Ba or lower by Moody's and BB or lower by S&P) or comparable
unrated securities. Such lower quality securities are known as "junk bonds"
and are regarded as predominantly speculative with respect to the issuer's
continuing ability to meet principal and interest payments. (Each NRSRO's
descriptions of these bond ratings are set forth in the Appendix to the
Statement of Additional Information.) Because investment in lower quality
securities involves greater investment risk, achievement of a Portfolio's
investment objective will be more dependent on the Adviser's analysis than
would be the case if that Portfolio were investing in higher quality bonds.
In addition, lower quality securities may be more susceptible to real or
perceived adverse economic and individual corporate developments than would
investment grade bonds. Moreover, the secondary trading market for lower
quality securities may be less liquid than the market for investment grade
bonds. This potential lack of liquidity may make it more difficult for the
Adviser to value accurately certain portfolio securities.
Options and Futures Transactions. Each Portfolio (except the MFS Research
Portfolio) may utilize futures contracts and write and purchase put and call
options. Futures contracts (a type of potentially high-risk security) enable
the investor to buy or sell an asset in the future at an agreed upon price.
Options (another type of potentially high-risk security) give the purchaser
of an option the right, but not the obligation, to buy or sell in the future
an asset at a predetermined price during the term of the option. (The writer
of a put or call option would be obligated to buy or sell the underlying
asset at a predetermined price during the term of the option.) Each Portfolio
will write put and call options only if such options are considered to be
"covered." A call option on a security is covered, for example, when the
writer of the call option owns throughout the option period the security on
which the option is written (or a security convertible into such a security
without the payment of additional consideration). A put option on a security
is covered, for example, when the writer of the put has deposited and
maintained in a segregated account throughout the option period sufficient
cash or other liquid assets in an amount equal to or greater than the
exercise price of the put option. Each Portfolio may utilize futures
contracts and related options for other than hedging purposes to the extent
that aggregate initial margin deposits and premiums paid do not exceed 5% of
the Portfolio's net assets. Each Portfolio (other than the Warburg Pincus
Small Company Value Portfolio) will not commit more than 5% of its total
assets to premiums when purchasing call or put options. The Warburg Pincus
Small Company Value Portfolio may commit up to 10% of its total assets to
premiums when purchasing put or call options. In addition, the total market
value of securities against which a Portfolio has written call or put options
may not exceed 25% of its total assets. The Warburg Pincus Small Company
Value Portfolio may utilize up to 10% of its total assets to purchase
exchange-listed and OTC put and call options on stock indexes. The Merrill
Lynch World Strategy Portfolio may engage in OTC put and call option
transactions. Options traded in the OTC market may not be as actively traded
as those on an exchange, so it may be more difficult to value such options.
In addition, it may be difficult to enter into closing transactions with
respect to such options. Such OTC options, and the securities used as "cover"
for such options, may be considered illiquid securities.
Each Portfolio may buy and sell futures and options contracts for any number
of reasons, including: to manage its exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting its overall
exposure to certain markets; in an effort to enhance income; and to protect
the value of portfolio securities. Each Portfolio may purchase, sell, or
write call and put options and futures contracts on securities, financial
indices, and foreign currencies and options on futures contracts.
The risk of loss in trading futures contracts can be substantial because of
the low margin deposits required and the extremely high degree of leveraging
involved in futures pricing. As a result, a relatively small price movement
in a futures contract may cause an immediate and substantial loss or gain.
The primary risks
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associated with the use of futures contracts and options are: (i) imperfect
correlation between the change in market value of the stocks held by a
Portfolio and the prices of futures contracts and options; and (ii) possible
lack of a liquid secondary market for a futures contract or an OTC option and
the resulting inability to close a futures position or OTC option prior to
its maturity date.
Repurchase Agreements. Each Portfolio may enter into repurchase agreements
with qualified and Board approved banks, broker-dealers or other financial
institutions as a means of earning a fixed rate of return on its cash
reserves for periods as short as overnight. A repurchase agreement is a
contract pursuant to which a Portfolio, against receipt of securities of at
least equal value including accrued interest, agrees to advance a specified
sum to the financial institution which agrees to reacquire the securities at
a mutually agreed upon time (usually one day) and price. Each repurchase
agreement entered into by a Portfolio will provide that the value of the
collateral underlying the repurchase agreement will always be at least equal
to the repurchase price, including any accrued interest. A Portfolio's right
to liquidate such securities in the event of a default by the seller could
involve certain costs, losses or delays and, to the extent that proceeds from
any sale upon a default of the obligation to repurchase are less than the
repurchase price, the Portfolio could suffer a loss.
Securities Loans. The T. Rowe Price Equity Income Portfolio and MFS Research
Portfolio may seek to obtain additional income by making secured loans of
portfolio securities with a value up to 33 1/3% of their respective total
assets. The Merrill Lynch World Strategy Portfolio and Warburg Pincus Small
Company Value Portfolio may each lend portfolio securities in an amount up to
20% of their respective total assets. All securities loans will be made
pursuant to agreements requiring the loans to be continuously secured by
collateral in cash or high-grade debt obligations at least equal at all times
to the market value of the loaned securities. The borrower pays to the
Portfolios an amount equal to any dividends or interest received on loaned
securities. The Portfolios retain all or a portion of the interest received
on investment of cash collateral or receive a fee from the borrower. Lending
portfolio securities involves risks of delay in recovery of the loaned
securities or in some cases loss of rights in the collateral should the
borrower fail financially. Further information concerning each Portfolio's
fundamental policy with respect to loans is provided in the Statement of
Additional Information.
Short Sales Against the Box. The Warburg Pincus Small Company Value Portfolio
may enter into a "short sale" of securities in circumstances in which, at the
time the short position is open, the Portfolio owns an equal amount of the
securities sold short or owns preferred stocks or debt securities,
convertible or exchangeable without payment of further consideration, into an
equal number of securities sold short. This kind of short sale, which is
referred to as one "against the box," may be entered into by the Portfolio
to, for example, lock in a sale price for a security the Portfolio does not
wish to sell immediately or to postpone a gain or loss for federal income tax
purposes. The Portfolio will deposit, in a segregated account with its
custodian or a qualified subcustodian, the securities sold short or
convertible or exchangeable preferred stocks or debt securities sold in
connection with short sales against the box. The Portfolio will endeavor to
offset transaction costs associated with short sales against the box with the
income from the investment of the cash proceeds. Not more than 10% of the
Portfolio's net assets (taken at current value) may be held as collateral for
short sales against the box at any one time. The extent to which the
Portfolio may make short sales may be limited by Code requirements for
qualification as a regulated investment company.
Small Company Securities. The Warburg Pincus Small Company Value Portfolio
may invest in the securities of smaller capitalization companies. Investing
in securities of small companies may involve greater risks since these
securities may have limited marketability and, thus, may be more volatile.
Because smaller companies normally have fewer shares outstanding than larger
companies, it may be more difficult for the Portfolio to buy or sell
significant amounts of shares without an unfavorable impact on prevailing
prices. In addition, small companies are typically subject to a greater
degree of changes in earnings and business prospects than are larger, more
established companies. There is typically less publicly available information
concerning smaller companies than for larger, more established ones.
Therefore, an investment in this Portfolio may involve a greater degree of
risk than an investment in other Portfolios that seek capital appreciation by
investing in better-known, larger companies.
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United States Government Securities. Each Portfolio may invest in debt
obligations of varying maturities issued or guaranteed by the United States
Government, its agencies or instrumentalities ("United States Government
securities"). Direct obligations of the United States Treasury include a
variety of securities that differ in their interest rates, maturities and
dates of issuance. United States Government securities also include
securities issued or guaranteed by government agencies that are supported by
the full faith and credit of the United States (e.g., securities issued by
the Government National Mortgage Association); securities issued or
guaranteed by government agencies that are supported by the ability to borrow
from the United States Treasury (e.g., securities issued by the Federal
National Mortgage Association); and securities issued or guaranteed by
government agencies that are only supported by the credit of the particular
agency (e.g., the Tennessee Valley Authority).
Warrants. Warrants are securities that give the holder the right, but not the
obligation to purchase equity issues of the company issuing the warrants, or
a related company, at a fixed price either on a date certain or during a set
period. At the time of issue, the cost of a warrant is substantially less
than the cost of the underlying security itself, and price movements in the
underlying security are generally magnified in the price movements of the
warrant. This effect enables the investor to gain exposure to the underlying
security with a relatively low capital investment but increases an investor's
risk in the event of a decline in the value of the underlying security and
can result in a complete loss of the amount invested in the warrant. In
addition, the price of a warrant tends to be more volatile than, and may not
correlate exactly to, the price of the underlying security. If the market
price of the underlying security is below the exercise price of the warrant
on its expiration date, the warrant will generally expire without value.
Portfolio Turnover. The length of time a Portfolio has held a particular
security is not generally a consideration in investment decisions. A change
in the securities held by a Portfolio is known as "portfolio turnover." Each
Portfolio's turnover rate is not expected to exceed 100% during its first
year of operation. A high turnover rate increases transaction costs (e.g.,
brokerage commissions) and increases realized gains and losses.
MANAGEMENT OF THE TRUST
THE BOARD OF TRUSTEES
The Board of Trustees of the Trust provides broad supervision over the
business and affairs of the Portfolios and the Trust as provided in the
Trust's Amended and Restated Declaration of Trust and By-Laws.
THE MANAGER
The Trust is managed by EQ Financial Consultants, Inc. which, subject to the
supervision and direction of the Trustees of the Trust, has overall
responsibility for the general management and administration of the Trust.
The Manager is an investment adviser registered under the Investment Advisers
Act of 1940, as amended, and a broker-dealer registered under the Securities
Exchange Act of 1934, as amended ("1934 Act"). It is located at 1755
Broadway, New York, New York 10019. The Manager currently furnishes
specialized investment advice to other clients, including individuals,
pension and profit sharing plans, trusts, charitable organizations,
corporations and other business entities. The Manager is a Delaware
corporation and an indirect, wholly-owned subsidiary of Equitable, a New York
stock life insurance company.
The Manager is responsible for providing investment management and
administrative services to the Trust and in the exercise of such
responsibility selects, subject to review and approval by the Trustees, the
investment advisers for the Trust's Portfolios and monitors the Advisers'
investment programs and results, reviews brokerage matters, oversees
compliance by the Trust with various federal and state statutes, and carries
out the directives of the Board of Trustees. The Manager is responsible for
providing the Trust with office space, office equipment, and personnel
necessary to operate and administer the Trust's business, and also supervises
the provision of services by third parties such as the Trust's custodian.
As compensation for managing the T. Rowe Price Equity Income Portfolio and
MFS Research Portfolio, the Trust pays the Manager a monthly fee at the
annual rate of .55% of the respective Portfolio's average
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daily net assets. As compensation for managing the Merrill Lynch World
Strategy Portfolio, the Trust pays the Manager a monthly fee at an annual
rate of .70% of the Portfolio's average daily net assets. As compensation for
managing the Warburg Pincus Small Company Value Portfolio, the Trust pays the
Manager a monthly fee at an annual rate of .65% of the Portfolio's average
daily net assets.
The Manager pays the expenses of providing investment advisory services to
the Portfolios, including the fees of the Adviser of each Portfolio.
In addition to the management fees, the Trust pays all expenses not assumed
by the Manager, including, without limitation: the fees and expenses of its
independent auditors and of its legal counsel; the costs of printing and
mailing annual and semi-annual reports to shareholders, proxy statements,
prospectuses, prospectus supplements and statements of additional
information, all to the extent they are sent to existing Contract owners; the
costs of printing registration statements; bank transaction charges and
custodian's fees; any proxy solicitors' fees and expenses; filing fees; any
federal, state or local income or other taxes; any interest; any membership
fees of the Investment Company Institute and similar organizations; fidelity
bond and Trustees' liability insurance premiums; and any extraordinary
expenses, such as indemnification payments or damages awarded in litigation
or settlements made. All general Trust expenses are allocated among and
charged to the assets of the Portfolios of the Trust on a basis that the
Trustees deem fair and equitable, which may be on the basis of relative net
assets of each Portfolio or the nature of the services performed and relative
applicability to each Portfolio. As discussed in greater detail below, under
"Distribution of the Trust's Shares," the Class IB shares may pay for certain
distribution related expenses in connection with activities primarily
intended to result in the sale of its shares.
THE ADVISERS
Pursuant to an investment advisory agreement with the Manager, each Adviser
to a Portfolio furnishes continuously an investment program for the
Portfolio, makes investment decisions on behalf of the Portfolio, places all
orders for the purchase and sale of investments for the Portfolio's account
with brokers or dealers selected by such Adviser and may perform certain
limited related administrative functions in connection therewith.
For its services, the Manager pays each Adviser an advisory fee based on a
percentage of the average daily net assets of the Portfolio that it advises.
Monthly, with respect to each Portfolio, each Adviser is paid the pro rata
portion of an annual fee, based on the monthly average of the assets of the
Portfolio for which it serves as the Adviser. The Manager will retain, as
compensation for the services described under "The Manager" and to pay its
expenses, the difference between the fees paid to each Adviser and the
management fee of the applicable Portfolio. Each Adviser has agreed that once
the Portfolio has paid the Manager its management fee the Adviser will look
only to the Manager as the party responsible for making the payment of its
advisory fee.
The Advisers are employed for management of the assets of a Portfolio
pursuant to investment advisory agreements approved by the Board of Trustees
of the Trust (including a majority of certain Trustees who are not interested
persons of the Trust or the Manager), and an Adviser's services may be
terminated at any time by the Manager, the Board of Trustees, or the
shareholders of an affected Portfolio.
The Trust has submitted an application requesting an exemptive order from the
Securities and Exchange Commission ("SEC") that would permit the Manager,
subject to certain conditions, and without the approval of shareholders to:
(a) employ a new Adviser or Advisers for any Portfolio pursuant to the terms
of a new Advisory Agreement, in each case either as a replacement for an
existing Adviser or as an additional Adviser; (b) change the terms of any
Advisory Agreement; and (c) continue the employment of an existing Adviser on
the same advisory contract terms where a contract has been assigned because
of a change in control of the Adviser. In such circumstances, shareholders
would receive notice of such action, including the information concerning the
Adviser that normally is provided in the Prospectus. It is uncertain at this
time whether such exemptive relief will be granted by the SEC.
T. Rowe Price Associates, Inc. ("T. Rowe Price"), 100 East Pratt Street,
Baltimore, MD 21202, has been the Adviser to the T. Rowe Price Equity Income
Portfolio since the Portfolio commenced its operations. As compensation for
services as the Portfolio's Adviser, the Manager pays T. Rowe Price a monthly
fee at the annual rate of .40% of the Portfolio's average daily net assets.
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T. Rowe Price was incorporated in Maryland in 1947 as successor to the
investment counseling business founded by the late Thomas Rowe Price, Jr., in
1937. As of December 31, 1996, T. Rowe Price and its affiliates managed more
than $95 billion of assets. T. Rowe Price serves as investment manager to a
variety of individual and institutional investor accounts, including limited
and real estate partnerships and other mutual funds. Investment decisions
with respect to the T. Rowe Price Equity Income Portfolio are made by an
Investment Advisory Committee composed of the following members: Brian C.
Rogers, Chairman, Thomas H. Broadus, Jr., Richard P. Howard, and William J.
Stromberg. The Committee Chairman has day-to-day responsibility for managing
the Portfolio and works with the Committee in developing and executing the
Portfolio's investment program. Mr. Rogers has been Chairman of the Committee
since 1993. He joined T. Rowe Price in 1982 and has been managing investments
since 1983.
Massachusetts Financial Services Company ("MFS") has been the Adviser to the
MFS Research Portfolio since the Portfolio commenced operations. As
compensation for services as the Portfolio's Adviser, the Manager pays MFS a
monthly fee at an annual rate equal to: .40% of the Portfolio's average daily
net assets up to and including $150 million; .375% of the Portfolio's average
daily net assets over $150 million and up to and including $300 million; and
.35% of the Portfolio's average daily net assets in excess of $300 million.
MFS has agreed to waive its advisory fees for the first six months after the
commencement of the Portfolio's investment operations.
MFS is America's oldest mutual fund organization. MFS is located at 500
Boylston Street, Boston, MA 02116. MFS and its predecessor organizations have
a history of money management dating from 1924 and the founding of the first
mutual fund in the United States, Massachusetts Investors Trust. As of
January 31, 1997, MFS managed more than $54.0 billion on behalf of over 2.3
million investors accounts. MFS is a subsidiary of Sun Life of Canada (United
States), which, in turn, is a wholly-owned subsidiary of Sun Life Assurance
Company of Canada. MFS has established a strategic alliance with Foreign &
Colonial Management Ltd. ("Foreign & Colonial"). Foreign & Colonial is a
subsidiary of two of the world's oldest financial services institutions, the
London-based Foreign & Colonial Investment Trust PLC, which pioneered the
idea of investment management in 1868, and HYPO-BANK (Bayerische
Hypotheken-und Weschsel-Bank AG), the oldest publicly listed bank in Germany,
founded in 1835. As part of this alliance, the portfolio managers and
investment analysts of MFS and Foreign & Colonial share their views on a
variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other
portfolio management matters. The portfolio securities of the MFS Research
Portfolio are selected by a committee of investment research analysts. This
committee includes investment analysts employed not only by MFS but also by
MFS International (U.K.) Limited, a wholly owned subsidiary of MFS. The
assets of the MFS Research Portfolio are allocated among industries by the
analysts acting together as a group. Individual analysts are then responsible
for selecting what they view as the securities best suited to meet the
investment objectives of the MFS Research Portfolio within their assigned
industry responsibility.
Warburg, Pincus Counsellors, Inc. ("WPC") has been the Adviser to the Warburg
Pincus Small Company Value Portfolio since the Portfolio commenced
operations. WPC is located at 466 Lexington Avenue, New York, New York
10017-3147. As compensation for services as the Portfolio's Adviser, the
Manager pays WPC a monthly fee at an annual rate of .50% of the Portfolio's
average daily net assets.
WPC is a professional investment counselling firm that provides investment
services to investment companies, employee benefit plans, endowment funds,
foundations and other institutions and individuals. As of January 31, 1997,
WPC managed approximately $17.9 billion in assets. WPC, incorporated in 1970,
is a wholly-owned subsidiary of Warburg, Pincus Counsellors G.P. ("Warburg
G.P."), a New York general partnership, which itself is controlled by
Warburg, Pincus & Co. ("WP&Co."), also a New York general partnership. Lionel
I. Pincus, the managing partner of WP&Co., may be deemed to control both
WP&Co. and WPC. Warburg G. P. has no business other than being a holding
company of WPC and its subsidiaries.
George U. Wyper has been responsible for the day to day management of the
Warburg Pincus Small Company Value Portfolio, which includes investment
decisions made on behalf of the Portfolio, since the Portfolio commenced
operations. Mr. Wyper is a managing director of WPC, which he joined in
August, 1994. Before joining WPC, he was chief investment officer of White
River Corporation and president of
14
<PAGE>
Hanover Advisors, Inc. from 1993 to August, 1994. Prior to that position, he
was chief investment officer of Fund American Enterprises, Inc. from 1990 to
1993. Kyle F. Frey, a senior vice president of WPC, is associate portfolio
manager and research analyst of the Portfolio. Mr. Frey has been with WPC
since 1989.
Merrill Lynch Asset Management, L.P. ("MLAM") has been the Adviser to the
Merrill Lynch World Strategy Portfolio since the Portfolio commenced
operations. MLAM is located at 800 Scudders Mill Road, Plainsboro, New Jersey
08543-9011. As compensation for services as the Merrill Lynch World Strategy
Portfolio's Adviser, the Manager pays MLAM a monthly fee at an annual rate
equal to: .50% of the Portfolio's average daily net assets up to and
including $100 million; .45% of the Portfolio's average daily net assets over
$100 million and up to and including $300 million; and .35% of the
Portfolio's average daily net assets in excess of $300 million.
MLAM is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc., a
financial services holding company and the parent of Merrill Lynch, Pierce,
Fenner & Smith Incorporated. The general partner of MLAM is Princeton
Services, Inc., a wholly-owned subsidiary of Merrill Lynch & Co., Inc. MLAM
and its affiliates act as the manager for more than 130 registered investment
companies. MLAM also offers portfolio management and portfolio analysis
services to individuals and institutions. As of December 31, 1996, the
Adviser and its affiliates had a total of approximately $234 billion in
investment company and other portfolio assets under management, including
assets of certain affiliates of MLAM.
Thomas R. Robinson is the portfolio manager of the Merrill Lynch World
Strategy Portfolio. Mr. Robinson has served as a Senior Portfolio Manager of
MLAM since 1995. Mr. Robinson has been primarily responsible for the day to
day management of the Portfolio's securities portfolio since it commenced
operations.
THE ADMINISTRATOR
Pursuant to an agreement ("Mutual Funds Service Agreement"), Chase Global
Funds Services Company (the "Administrator") assists the Manager in the
performance of its administrative responsibilities to the Trust and provides
the Trust with other necessary administrative, fund accounting and compliance
services. In addition, the Administrator makes available the office space,
equipment, personnel and facilities required to provide such services to the
Trust. For these services, the Trust pays the Administrator a monthly fee at
the annual rate of .0525 of 1% of the total Trust assets, plus $25,000 for
each Portfolio, until the total Trust assets reach $2.0 billion, and when the
total Trust assets exceed $2.0 billion: .0425 of 1% of the first $0.5 billion
of the total Trust assets; .035 of 1% of the next $2.0 billion of the total
Trust assets; .025 of 1% of the next $1.0 billion of the total Trust assets;
.015 of 1% of the next $2.5 billion of the total Trust assets; .01 of 1% of
the total Trust assets in excess of $6.0 billion; and except that the annual
fee payable to Chase with respect to any Portfolio which commences operation
after July 1, 1997 and whose assets do not exceed $200 million shall be
computed at the annual rate of .0525% of the Portfolio's total assets plus
$25,000.
THE TRANSFER AGENT
Equitable serves as the transfer agent and dividend disbursing agent of the
Trust and receives no compensation for serving in such capacity.
15
<PAGE>
EXPENSE LIMITATION AGREEMENTS
In the interest of limiting expenses of the Portfolios, the Manager has
entered into an expense limitation agreement with the Trust, with respect to
each Portfolio ("Expense Limitation Agreements"), pursuant to which the
Manager has agreed to waive or limit its fees and to assume other expenses so
that the total annual operating expenses of each Portfolio are limited to:
.85% of the average daily net assets of the T. Rowe Price Equity Income and
MFS Research Portfolios; 1.00% of the Warburg Pincus Small Company Value
Portfolio's average daily net assets; and 1.20% of the average daily net
assets of the Merrill Lynch World Strategy Portfolio.
Each Portfolio may at a later date reimburse to the Manager the management
fees waived or limited and other expenses assumed and paid by the Manager
pursuant to the Expense Limitation Agreement provided such Portfolio has
reached a sufficient asset size to permit such reimbursement to be made
without causing the total annual expense ratio of each Portfolio to exceed
the percentage limits stated above. Consequently, no reimbursement by a
Portfolio will be made unless: (i) the Portfolio's assets exceed $100
million; (ii) the Portfolio's total annual expense ratio is less than the
respective percentages stated above; and (iii) the payment of such
reimbursement has been approved by the Trust's Board of Trustees on a
quarterly basis.
BROKERAGE PRACTICES
In selecting brokers and dealers, the Manager and each Adviser may consider
research and brokerage services furnished to either company and their
affiliates. Subject to seeking the most favorable net price and execution
available, the Manager and each Adviser may also consider sales of shares of
the Trust as a factor in the selection of brokers and dealers.
TRANSACTIONS WITH AFFILIATES
In December 1984, Equitable acquired Donaldson, Lufkin & Jenrette, Inc.
("DLJ"). A DLJ subsidiary, Donaldson, Lufkin & Jenrette Securities
Corporation, is one of the nation's largest investment banking and securities
firms. Another DLJ subsidiary, Autranet, Inc., is a securities broker that
markets independently originated research to institutions. Through the
Pershing Division of Donaldson, Lufkin & Jenrette Securities Corporation, DLJ
supplies security execution and clearance services to financial
intermediaries including broker-dealers and banks. To the extent permitted by
law, the Trust may engage in securities and other transactions with the above
entities or may invest in shares of the investment companies with which those
entities have affiliations. The Adviser to T. Rowe Price Equity Income
Portfolio may execute portfolio transactions through certain affiliates of
Robert Fleming Holdings Limited and Jardine Fleming Group Limited, which are
persons indirectly related to the Adviser, acting as an agent in accordance
with procedures established by the Trust's Board of Trustees. The Adviser to
the Merrill Lynch World Strategy Portfolio may execute portfolio transactions
through certain of the Adviser's affiliates.
The 1940 Act generally prohibits the Trust from engaging in principal
securities transactions with an affiliate of the Manager or Advisers unless
pursuant to an exemptive order from the SEC. The Trust may apply for such
exemptive relief. The Trust has adopted procedures, prescribed by Section
17(e)(2)(A) of the 1940 Act and Rule 17e-1 thereunder, which are reasonably
designed to provide that any commission it pays to affiliates of the Manager
or Advisers does not exceed the usual and customary broker's commission. In
addition, the Trust will adhere to Section 11(a) of the 1934 Act and any
applicable rules thereunder governing floor trading. The Trust has adopted
procedures permitting it to purchase securities, under certain restrictions
prescribed by a rule under the 1940 Act, in a public offering in which an
affiliate of the Manager or Advisers is an underwriter.
16
<PAGE>
DESCRIPTION OF THE TRUST AND TRUST'S SHARES
THE TRUST
The Trust is a registered open-end management investment company that was
organized as a Delaware business trust on October 31, 1996. As of May 1,
1997, Separate Account FP, a separate account of Equitable, owned 100% of the
shares of the T. Rowe Price Equity Income Portfolio and through such
ownership may be deemed a controlling person of each Portfolio. The Trust
currently is divided into twelve portfolios, each of which has Class IA and
Class IB shares. The Board of Trustees may establish additional portfolios
and additional classes of shares.
CHARACTERISTICS OF TRUST'S SHARES
The Board of Trustees of the Trust has authority to issue an unlimited number
of shares of beneficial interest, without par value. Each share of each class
of a Portfolio shall be entitled to one vote (or fraction thereof in respect
of a fractional share) on matters that such shares (or class of shares) shall
be entitled to vote. Shareholders of each Portfolio shall vote together on
any matter, except to the extent otherwise required by the 1940 Act, or when
the Board of Trustees of the Trust has determined that the matter affects
only the interest of shareholders of one or more classes, in which case only
the shareholders of such class or classes shall be entitled to vote thereon.
Any matter shall be deemed to have been effectively acted upon with respect
to each Portfolio if acted upon as provided in Rule 18f-2 under the 1940 Act,
or any successor rule, and in the Amended and Restated Declaration of Trust.
The Trust is not required to hold annual shareholder meetings, but special
meetings may be called for purposes such as electing or removing Trustees,
changing fundamental policies or approving an investment management or
advisory agreement.
Under the Trust's multi-class system, shares of each class of a Portfolio
represent an equal pro rata interest in that Portfolio and, generally, shall
have identical voting, dividend, liquidation, and other rights, preferences,
powers, restrictions, limitations, qualifications and terms and conditions,
except that: (a) each class shall have a different designation; (b) each
class of shares shall bear its "Class Expenses;" (c) each class shall have
exclusive voting rights on any matter submitted to shareholders that relates
solely to its distribution arrangements; (d) each class shall have separate
voting rights on any matter submitted to shareholders in which the interests
of one class differ from the interests of any other class; (e) each class may
have separate exchange privileges, although exchange privileges are not
currently contemplated; and (f) each class may have different conversion
features, although a conversion feature is not currently contemplated.
Expenses currently designated as "Class Expenses" by the Trust's Board of
Trustees under the plan pursuant to Rule 18f-3 are currently limited to
payments made to the Distributors for the Class IB shares, pursuant to the
Distribution Plan for the Class IB shares adopted pursuant to Rule 12b-1
under the 1940 Act.
PURCHASE AND REDEMPTION OF SHARES
EQ Financial, 1755 Broadway, New York, New York, 10019, formerly Equico
Securities, Inc., a wholly-owned subsidiary of Equitable, serves as one of
the Distributors for the Trust's Class IB shares pursuant to a distribution
agreement with the Trust. EDI, 1290 Avenue of the Americas, New York, New
York, 10104, a Delaware corporation and an indirect wholly-owned subsidiary
of Equitable, also serves as one of the Distributors for the Trust's Class IB
shares pursuant to a distribution agreement with the Trust. Class IB shares
are offered and redeemed without a sales charge, at net asset value . The
price at which a purchase or redemption is effected is based on the next
calculation of net asset value after an order is placed by an insurance
company investing in or redeeming from the Trust. Net asset value per share
is calculated for purchases and redemption of shares of each Portfolio by
dividing the value of total Portfolio assets, less liabilities (including
Trust expenses, which are accrued daily), by the total number of outstanding
shares of that Portfolio. The net asset value per share of each Portfolio is
determined each business day at 4:00 p.m. Eastern time. Net asset value per
share is not calculated on national business holidays.
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<PAGE>
The Trust also has distribution agreements for its Class IA shares with EQ
Financial and EDI pursuant to which each of them acts as the Distributor for
the Class IA shares of the Trust.
The Trust has adopted the Distribution Plan pursuant to Rule 12b-1 under the
1940 Act for the Class IB shares of the Trust. Pursuant to the Distribution
Plan, the Trust compensates the Distributors from assets attributable to the
Class IB shares for services rendered and expenses borne in connection with
activities primarily intended to result in the sale of the Trust's Class IB
shares. It is anticipated that a portion of the amounts received by the
Distributors will be used to defray various costs incurred or paid by the
Distributors in connection with the printing and mailing of Trust
prospectuses, statements of additional information, any supplements thereto
and shareholder reports and holding seminars and sales meetings with
wholesale and retail sales personnel designed to promote the distribution of
Class IB shares. The Distributors may also use a portion of the amounts
received to provide compensation to financial intermediaries and third-party
broker-dealers for their services in connection with the distribution of
Class IB shares.
The Distribution Plan provides that the Trust, on behalf of each Portfolio,
may pay annually up to 0.50% of the average daily net assets of a Portfolio
attributable to its Class IB shares in respect of activities primarily
intended to result in the sale of Class IB shares. However, under the
Distribution Agreements, payments to the Distributors for activities pursuant
to the Distribution Plan are limited to payments at an annual rate equal to
0.25% of average daily net assets of a Portfolio attributable to its Class IB
shares. Under terms of the Distribution Plan and the Distribution Agreements,
each Portfolio is authorized to make payments monthly to the Distributors
which may be used to pay or reimburse entities providing distribution and
shareholder servicing with respect to the Class IB shares for such entities'
fees or expenses incurred or paid in that regard.
The Distribution Plan is of a type known as a "compensation" plan because
payments are made for services rendered to the Trust with respect to Class IB
shares regardless of the level of expenditures by the Distributors. The
Trustees will, however, take into account such expenditures for purposes of
reviewing operations under the Distribution Plan and in connection with their
annual consideration of the Plan's renewal. The Distributors have indicated
that they expect their expenditures to include, without limitation: (a) the
printing and mailing of Trust prospectuses, statements of additional
information, any supplements thereto and shareholder reports for prospective
Contract owners with respect to the Class IB shares of the Trust; (b) those
relating to the development, preparation, printing and mailing of
advertisements, sales literature and other promotional materials describing
and/or relating to the Class IB shares of the Trust; (c) holding seminars and
sales meetings designed to promote the distribution of Trust Class IB shares;
(d) obtaining information and providing explanations to wholesale and retail
distributors of Contracts regarding Trust investment objectives and policies
and other information about the Trust and its Portfolios, including the
performance of the Portfolios; (e) training sales personnel regarding the
Class IB shares of the Trust; and (f) financing any other activity that the
Distributors determines is primarily intended to result in the sale of Class
IB shares.
All shares are purchased and redeemed in accordance with the Trust's Amended
and Restated Declaration of Trust and By-Laws. Sales and redemptions of
shares of the same class by the same shareholder on the same day will be
netted for each Portfolio. All redemption requests will be processed and
payment with respect thereto will normally be made within seven days after
tenders. The Trust may suspend redemption, if permitted by the 1940 Act, for
any period during which the New York Stock Exchange is closed or during which
trading is restricted by the SEC or the SEC declares that an emergency
exists. Redemption may also be suspended during other periods permitted by
the SEC for the protection of the Trust's shareholders. If the Board of
Trustees determines that it would be detrimental to the best interest of the
Trust's remaining shareholders to make payment in cash, the Trust may pay
redemption proceeds in whole or in part by a distribution-in-kind of readily
marketable securities.
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<PAGE>
HOW ASSETS ARE VALUED
Values are determined according to accepted accounting practices and all laws
and regulations that apply. The assets of each Portfolio are generally valued
as follows:
o Stocks and debt securities which mature in more than 60 days are
valued on the basis of market quotations.
o Foreign securities not traded directly in the United States are
valued at representative quoted prices in the currency of the country
of origin. Foreign currency amounts are translated into United States
dollars at the bid price last quoted by a composite list of major
United States banks.
o Short-term debt securities in the Portfolios which mature in 60 days
or less are valued at amortized cost, which approximates market
value.
o Other securities and assets for which market quotations are not
readily available or for which valuation cannot be provided are
valued in good faith by the Valuation Committee of the Board of
Trustees of the Trust using its best judgment.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Under current federal income tax law, the Trust believes that each Portfolio
is entitled, and the Trust intends that each Portfolio shall qualify each
year and elect, to be treated as a regulated investment company ("RIC") under
Subchapter M of the Code. As a RIC, a Portfolio will not be subject to
federal tax on its net investment income and net realized capital gains to
the extent such income and gains are timely distributed to its insurance
company shareholders. Accordingly, each Portfolio intends to distribute all
of its net investment income and net realized capital gains to its
shareholders. An insurance company that is a shareholder of a Portfolio will
generally not be taxed on distributions from that Portfolio. All dividend
distributions will be reinvested in full and fractional shares of the
Portfolio to which they relate.
Although the Trust intends that it and the Portfolios will be operated so
that they will have no federal income or excise tax liability, if any such
liability is nevertheless incurred, the investment performance of the
Portfolio or Portfolios incurring such liability will be adversely affected.
In addition, Portfolios investing in foreign securities and currencies may be
subject to foreign taxes which could reduce the investment performance of
such Portfolio.
In addition to meeting investment diversification rules applicable to
regulated investment companies under Subchapter M of the Code, each Portfolio
will also comply with the investment diversification requirements of
Subchapter L of the Code. Were any Portfolio to fail to comply with those
requirements, owners of Contracts (other than "pension plan contracts")
funded through the Trust would be taxed immediately on the accumulated
investment earnings under their Contracts and would thereby lose any benefit
of tax deferral. Compliance is therefore carefully monitored by the
Administrator and the Manager.
Certain additional tax information appears in the Statement of Additional
Information.
For more information regarding the tax implications for owners of Contracts
investing in the Trust, refer to the prospectuses for those Contracts.
PERFORMANCE INFORMATION
From time to time, the Trust may advertise the "average annual or cumulative
total return" and may compare the performance of the Portfolios with that of
other mutual funds with similar investment objectives as listed in rankings
prepared by Lipper Analytical Services, Inc., or similar independent services
monitoring mutual fund performance, and with appropriate securities or other
relevant indices. The "average annual total return" of a Portfolio refers to
the average annual compounded rate of return over the stated period that
would equate an initial investment in that Portfolio at the beginning of the
period to its ending redeemable value, assuming reinvestment of all dividends
and distributions and deduction of all recurring charges, other than charges
and deductions which may be imposed under the
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<PAGE>
Contracts. Performance figures will be given for the recent one, five and ten
year periods and for the life of the Portfolio if it has not been in
existence for any such periods. When considering "average annual total
return" figures for periods longer than one year, it is important to note
that a Portfolio's annual total return for any given year might have been
greater or less than its average for the entire period. "Cumulative total
return" represents the total change in value of an investment in a Portfolio
for a specified period (again reflecting changes in Portfolio share prices
and assuming reinvestment of Portfolio distributions). The methods used to
calculate "average annual and cumulative total return" are described further
in the Statement of Additional Information.
The performance of each Portfolio will vary from time to time in response to
fluctuations in market conditions, interest rates, the composition of the
Portfolio's investments and expenses. Consequently, a Portfolio's performance
figures are historical and should not be considered representative of the
performance of the Portfolio for any future period. Such performance does not
reflect fees and charges imposed under the Contracts, which fees and charges
will reduce such performance figures; therefore, these figures may be of
limited use for comparative purposes. No Portfolio will use information
concerning its investment performance in advertisements or sales materials
unless appropriate information concerning the relevant separate account is
also included.
PRIOR PERFORMANCE OF EACH ADVISER
The following tables provide information concerning the historical
performance of another registered investment company (or series) managed by
each Adviser, that has investment objectives, policies, strategies and risks
substantially similar to those of its respective Portfolio(s) of the Trust.
The data is provided to illustrate the past performance of each Adviser in
managing a substantially similar investment vehicle as measured against
specified market indices and does not represent the past performance of any
of the Portfolios or the future performance of any Portfolio or its Adviser.
Consequently, potential investors should not consider this performance data
as an indication of the future performance of any Portfolio of the Trust or
of its Adviser.
Each Adviser's performance data shown below was calculated in accordance with
standards prescribed by the SEC for the calculation of average annual total
return information for registered investment companies. Share prices and
investment returns will fluctuate reflecting market conditions as well as
changes in company-specific fundamentals of portfolio securities.
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<PAGE>
T. ROWE PRICE EQUITY INCOME PORTFOLIO
In the table below, the only account which is included is another registered
investment company, i.e., T. Rowe Price Equity Income Fund, which is managed
by the T. Rowe Price Associates, Inc. and whose investment policies are
substantially similar to the T. Rowe Price Equity Income Portfolio. However,
the T. Rowe Price Equity Income Fund will be subject to different expenses
than the T. Rowe Price Equity Income Portfolio. In addition, holders of
variable insurance contracts representing interests in the T. Rowe Equity
Income Portfolio will be subject to charges and expenses relating to such
insurance contracts. The performance results presented below do not reflect
any insurance related expenses.
The investment results of T. Rowe Price Equity Income Fund presented below
are unaudited and are not intended to predict or suggest the returns that
might be experienced by the T. Rowe Price Equity Income Portfolio or an
individual investor investing in the T. Rowe Price Equity Income Portfolio.
<TABLE>
<CAPTION>
T. ROWE PRICE
EQUITY INCOME S&P 500
YEAR ENDING 3/31/97 FUND(1) INDEX(2)
- ------------------- ------------------- ---------
<S> <C> <C>
One Year(3) ........ 18.06% 19.82%
Five Years(3) ...... 16.95% 16.40%
Ten Years(3) ....... 13.35% 13.36%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The S&P 500 Index ("Index") is an unmanaged index containing common
stocks of 500 industrial, transportation, utility and financial
companies, regarded as generally representative of the United States
stock market. The Index reflects the reinvestment of income dividends
and capital gain distributions, if any, but does not reflect fees,
brokerage commissions, or other expenses of investing.
(3) Annualized performance for the shares of the T. Rowe Price Equity Income
Fund. The investment advisory fee applicable to the T. Rowe Price Equity
Income Fund was capped at 1.00% in 1986 and capped at the maximum
state-allowed fee in 1987.
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<PAGE>
MFS RESEARCH PORTFOLIO
In the table below, the only account which is included is another registered
investment company, i.e., MFS Research Fund which is managed by the
Massachusetts Financial Services Company and whose investment policies are
substantially similar to MFS Research Portfolio. However, MFS Research Fund
will be subject to different expenses than the MFS Research Portfolio. In
addition, holders of variable insurance contracts representing interests in
the MFS Research Portfolio will be subject to charges and expenses relating
to such insurance contracts. The performance results presented below do not
reflect any insurance related expenses.
The investment results of MFS Research Fund presented below are unaudited and
are not intended to predict or suggest the returns that might be experienced
by the MFS Research Portfolio or an individual investor investing in the MFS
Research Portfolio.
<TABLE>
<CAPTION>
MFS RESEARCH S&P 500
YEAR ENDING 3/31/97 FUND(1) INDEX(2)
- ------------------- ------------------ ---------
<S> <C> <C>
One Year(3) ........ 12.96% 19.82%
Five Years(3) ...... 18.13% 16.40%
Ten Years(3) ....... 12.91% 13.36%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The S&P 500 Index ("Index") is an unmanaged index containing common
stocks of 500 industrial, transportation, utility and financial
companies, regarded as generally representative of the United States
stock market. The Index reflects the reinvestment of income dividends
and capital gain distributions, if any, but does not reflect fees,
brokerage commissions, or other expenses of investing.
(3) Annualized performance for the Class A shares of the MFS Research Fund.
The results for the MFS Research Fund do not reflect any sales charge
that may be imposed on the Class A shares of the MFS Research Fund, nor
any charges that would be imposed at the insurance company separate
account level.
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<PAGE>
WARBURG PINCUS SMALL COMPANY VALUE PORTFOLIO
In the table below, the only account which is included is included is another
registered investment company, i.e., Warburg Pincus Small Company Value Fund
which is managed by the Warburg, Pincus Counsellors, Inc. and whose
investment policies are substantially similar to the Warburg Pincus Small
Company Value Portfolio. However, the Warburg Pincus Small Company Value Fund
will be subject to different expenses than the Warburg Pincus Small Company
Value Portfolio. In addition, holders of variable insurance contracts
representing interests in the Warburg Pincus Small Company Value Portfolio
will be subject to charges and expenses relating to such insurance contracts.
The performance results presented below do not reflect any insurance related
expenses.
The investment results of Warburg Pincus Small Company Value Portfolio
presented below are unaudited and are not intended to predict or suggest the
returns that might be experienced by the Warburg Pincus Small Company Value
Portfolio or an individual investor investing in such Portfolio and should
not be considered a substitute for the Warburg Pincus Small Company Value
Portfolio's own performance information.
<TABLE>
<CAPTION>
WARBURG PINCUS SMALL COMPANY RUSSELL 2000
YEAR ENDING 3/31/97 VALUE FUND1, 2 INDEX(3)
- ------------------- ---------------------------- --------------
<S> <C> <C>
One Year(4)......... 30.33% 5.11%
Since inception(4) . 38.46% 10.47%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) Absent the waiver of fees by the Warburg Pincus Small Company Value
Fund's investment adviser and co-administrator, management fees of the
Warburg Pincus Small Company Value Fund would equal 1.00%, other
expenses would equal .94% and total operating expenses would equal
2.19%. The investment adviser and co-administrator of the Warburg Pincus
Small Company Value Fund are under no obligation to continue these
waivers.
(3) The Russell 2000 Index is an unmanaged index (with no defined investment
objective) of 2,000 small-cap stocks, and includes reinvestment of
dividends. It is compiled by the Frank Russell Company.
(4) Annualized performance for shares of the Warburg Pincus Small Company
Value Fund. The inception date for the Warburg Pincus Small Company
Value Fund was December 29, 1995.
23
<PAGE>
MERRILL LYNCH WORLD STRATEGY PORTFOLIO
In the table below, the only account which is included is a series of another
registered investment company, i.e., Merrill Lynch Global Strategy Focus
Fund, a series of Merrill Lynch Variable Series Funds, Inc., which is managed
by Merrill Lynch Asset Management, L.P. and whose investment policies are
substantially similar to the Merrill Lynch World Strategy Portfolio. However,
the Merrill Lynch Global Strategy Focus Fund will be subject to different
expenses than the Merrill Lynch World Strategy Portfolio. In addition,
holders of variable insurance contracts representing interests in the Merrill
Lynch World Strategy Portfolio will be subject to charges and expenses
relating to such insurance contracts. The performance results presented below
do not reflect any insurance related expenses.
The investment results of Merrill Lynch Global Strategy Focus Fund presented
below are unaudited and are not intended to predict or suggest the returns
that might be experienced by the Merrill Lynch World Strategy Portfolio or an
individual investor investing in the Merrill Lynch World Strategy Portfolio.
<TABLE>
<CAPTION>
MERRILL LYNCH VARIABLE
SERIES FUNDS, INC.--
MERRILL LYNCH GLOBAL MSCI EAFE
YEAR ENDING 3/31/97 STRATEGY FOCUS FUND(1) INDEX(2)
- ------------------- ---------------------- -----------
<S> <C> <C>
One Year(3) ........ 13.50% 1.75%
Five Year(3)........ 9.52% 10.91%
Since inception(3) . 9.20% 8.91%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The Morgan Stanley Capital International Europe, Australia, and Far East
Index ("MSCI EAFE Index") is an unmanaged capitalization-weighted
measure of stock markets in Europe, Australia, the Far East and Canada.
MSCI EAFE Index returns assume dividends reinvested net of withholding
tax and do not reflect any fees or expenses.
(3) Annualized performance for shares of the Merrill Lynch Global Strategy
Focus Fund. The inception date for the Merrill Lynch Global Strategy
Focus Fund was February 28, 1992.
24
<PAGE>
APPENDIX A
The following table summarizes the historical performance information of
certain other registered investment companies that appears on pages 21
through 24 of this Prospectus. Each other registered investment company is
managed by an Adviser and has investment objectives, policies, strategies and
risks substantially similar to the Portfolio managed by that Adviser. For
further information regarding each of the registered investment companies and
the indexes presented below, please refer to pages 21 through 24 of this
Prospectus.
ANNUALIZED RATES OF RETURN
PERIODS ENDING MARCH 31, 1997
<TABLE>
<CAPTION>
SINCE
FUND NAME 1 YEAR 5 YEARS 10 YEARS INCEPTION
- ---------------------------------------- -------- --------- ---------- -----------
<S> <C> <C> <C> <C>
DOMESTIC EQUITY SERIES
- ---------------------------------------- -------- --------- ---------- -----------
T. ROWE PRICE EQUITY INCOME FUND 18.06% 16.95% 13.35% --
- ---------------------------------------- -------- --------- ---------- -----------
S&P 500 19.82% 16.40% 13.36% --
- ---------------------------------------- -------- --------- ---------- -----------
MFS RESEARCH FUND 12.96% 18.13% 12.91% --
- ---------------------------------------- -------- --------- ---------- -----------
S&P 500 Index 19.82% 16.40% 13.36% --
- ---------------------------------------- -------- --------- ---------- -----------
AGGRESSIVE DOMESTIC EQUITY SERIES
- ---------------------------------------- -------- --------- ---------- -----------
WARBURG PINCUS SMALL COMPANY VALUE FUND 30.33% -- -- 38.46%
- ---------------------------------------- -------- --------- ---------- -----------
Russell 2000 Index 5.11% -- -- 10.47%
- ---------------------------------------- -------- --------- ---------- -----------
ASSET ALLOCATION SERIES
- ---------------------------------------- -------- --------- ---------- -----------
MERRILL LYNCH GLOBAL STRATEGY FOCUS FUND 13.50% 9.52% -- 9.20%
- ---------------------------------------- -------- --------- ---------- -----------
MSCI EAFE Index 1.75% 10.91% -- 8.91%
- ---------------------------------------- -------- --------- ---------- -----------
</TABLE>
A-1
<PAGE>
Filed Pursuant to Rule 497(c)
File No. 333-17217
EQ ADVISORS TRUST
1290 Avenue of the Americas -- New York, New York 10104
EQ Advisors Trust ("Trust") is an open-end management investment company that
offers a selection of professionally managed investment portfolios
("Portfolios"). Each Portfolio has its own investment objective and policies
that are designed to meet different investment goals.
This Prospectus describes the ten Portfolios listed below. Except for the
Morgan Stanley Emerging Markets Equity Portfolio, all of these Portfolios are
currently offered by the Trust pursuant to this Prospectus.
o T. Rowe Price International Stock Portfolio
o T. Rowe Price Equity Income Portfolio
o EQ/Putnam Growth & Income Value Portfolio
o EQ/Putnam Balanced Portfolio
o MFS Research Portfolio
o MFS Emerging Growth Companies Portfolio
o Morgan Stanley Emerging Markets Equity Portfolio
o Warburg Pincus Small Company Value Portfolio
o Merrill Lynch World Strategy Portfolio
o Merrill Lynch Basic Value Equity Portfolio
It is anticipated that the Morgan Stanley Emerging Markets Equity Portfolio
will be offered by the Trust on or about September 2, 1997.
The Trust offers two classes of shares on behalf of each Portfolio: Class IA
shares offered pursuant to another prospectus, and Class IB shares offered
hereby.
This Prospectus sets forth concisely the information about the Trust and the
Portfolios that a prospective investor should know before investing. Please
read the Prospectus and retain it for future reference. Additional
information contained in a Statement of Additional Information also dated May
1, 1997 has been filed with the Securities and Exchange Commission and is
available upon request without charge by writing to the Trust at the address
noted above. California residents can obtain a copy of the Statement of
Additional Information by calling 1-800-999-3527. The Statement of Additional
Information is incorporated into this Prospectus by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
PROSPECTUS DATED MAY 1, 1997
<PAGE>
THE TRUST
The Trust is an open-end management investment company registered under the
Investment Company Act of 1940, as amended ("1940 Act"). As a "series" type
of mutual fund, the Trust issues shares of beneficial interest that are
currently divided among twelve Portfolios. Ten of these Portfolios are
offered pursuant to this Prospectus. Each Portfolio is a separate series of
the Trust with its own objective and policies. Each of the Portfolios set
forth below, except for the Morgan Stanley Emerging Markets Equity Portfolio
and Merrill Lynch World Strategy Portfolio, are diversified for 1940 Act
purposes. The Trustees of the Trust may establish additional Portfolios at
any time.
Each Portfolio is managed by EQ Financial Consultants, Inc. ("Manager") which
directs the day to day operations of each Portfolio. Rowe Price-Fleming
International, Inc., T. Rowe Price Associates, Inc., Putnam Investment
Management, Inc., Massachusetts Financial Services Company, Morgan Stanley
Asset Management Inc., Warburg, Pincus Counsellors, Inc., and Merrill Lynch
Asset Management, L.P. serve as the advisers (each an "Adviser" and, together
the "Advisers") to one or more of the Portfolios, as detailed in the table
below.
<TABLE>
<CAPTION>
PORTFOLIO ADVISER
- ----------------------------------------------- --------------------------------------------
<S> <C>
T. Rowe Price International Stock Portfolio Rowe Price-Fleming International, Inc.
T. Rowe Price Equity Income Portfolio T. Rowe Price Associates, Inc.
EQ/Putnam Growth & Putnam Investment Management, Inc.
Income Value Portfolio
EQ/Putnam Balanced Portfolio Putnam Investment Management, Inc.
MFS Research Portfolio Massachusetts Financial Services Company
MFS Emerging Growth Companies Portfolio Massachusetts Financial Services Company
Morgan Stanley Emerging Markets Morgan Stanley Asset Management Inc.
Equity Portfolio
Warburg Pincus Small Company Warburg, Pincus Counsellors, Inc.
Value Portfolio
Merrill Lynch World Strategy Portfolio Merrill Lynch Asset Management, L.P.
Merrill Lynch Basic Value Merrill Lynch Asset Management, L.P.
Equity Portfolio
</TABLE>
The Trust offers two classes of shares on behalf of each Portfolio: Class IA
shares and Class IB shares. EQ Financial Consultants, Inc. ("EQ Financial"),
the Trust's Manager, serves as one of the distributors for the Class IB
shares of the Trust offered by this Prospectus. Equitable Distributors, Inc.
("EDI") also serves as one of the distributors for the Class IB shares of the
Trust as well as one of the distributors of the Class IA shares. (EQ
Financial and EDI are collectively referred to as the "Distributors"). The
Trust's shares are currently sold only to insurance company separate accounts
in connection with variable life insurance contracts and variable annuity
certificates and contracts (collectively, the "Contracts") issued by The
Equitable Life Assurance Society of the United States ("Equitable"). Both
classes of shares are offered and redeemed at their net asset value without
the imposition of any sales load.
Class IA shares are offered pursuant to another prospectus and are subject to
the same expenses as the Class IB shares, but unlike the Class IB shares they
are not subject to distribution fees imposed pursuant to a distribution plan.
Class IB shares are subject to distribution fees imposed under a distribution
plan ("Distribution Plan") adopted pursuant to Rule 12b-1 under the 1940 Act.
Inquiries regarding Class IA shares should be addressed to Equitable, at 1290
Avenue of the Americas, New York, NY 10104 or by calling 1-212-641-7237.
INVESTMENT OBJECTIVES AND POLICIES
The following is a brief description of the investment objectives and
policies of each of the Portfolios. All of the objectives and policies of
each Portfolio, unless otherwise noted, are not fundamental and may be
2
<PAGE>
changed by the Board of Trustees of the Trust without the approval of
shareholders. Certain investment strategies and instruments discussed below
are described in greater detail in the Statement of Additional Information.
Because of the uncertainty inherent in all investments, there can be no
assurance that the Portfolios will be able to achieve their respective
investment objectives.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO
The investment objective of the T. Rowe Price International Stock Portfolio
is to seek long-term growth of capital through investment primarily in common
stocks of established non-United States companies. The Adviser intends to
invest substantially all of the Portfolio's assets outside the United States
and to diversify broadly among countries throughout the world--developed,
newly industrialized and emerging--by having at least five different
countries represented in the Portfolio. The Portfolio may invest in countries
of the Far East and Europe as well as South Africa, Australia, Canada, and
other areas (including developing countries). No more than 20% of the
Portfolio's net assets will be invested in securities of issuers located in
any one country with the exception of issuers located in Australia, Canada,
France, Japan, the United Kingdom or Germany (where the investment limitation
is 35%). In determining the appropriate distribution of investments among
various countries and geographic regions, the Adviser ordinarily considers
the following factors: prospects for relative economic growth between foreign
countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
individual investment opportunities available to international investors.
The Portfolio expects to invest substantially all of its assets in common
stocks. However, the Portfolio may also invest in a variety of other
equity-related securities (such as preferred stocks, warrants and convertible
securities) as well as corporate and governmental debt securities, when
considered consistent with the Portfolio's investment objective and program.
The Portfolio may also invest in certain foreign investment portfolios or
trusts commonly referred to as passive foreign investment companies. These
entities have been authorized by the governments of certain countries
specifically to permit foreign investment in securities of companies listed
or traded on the stock exchanges in those countries. The Portfolio may also
engage in a variety of investment management practices such as buying and
selling options and futures contracts and engaging in foreign currency
exchange contracts and may invest up to 10% of its total assets in hybrid
instruments, which are a type of high-risk instrument that can combine the
characteristics of securities, futures contracts and options.
Under normal conditions, the Portfolio's investment in securities other than
common stocks is limited to no more than 35% of its total assets. However,
for temporary defensive purposes, the Portfolio may invest all or a
significant portion of its assets in United States Government securities and
corporate debt obligations. The Portfolio will not purchase any debt security
which, at the time of purchase, is rated below investment grade by a
nationally recognized statistical rating organization ("NRSRO"). This
restriction would not prevent the Portfolio from retaining a security
downgraded to below investment grade after purchase. In addition, the
Portfolio may invest without limitation in high-quality United States and
foreign dollar-denominated money market securities for temporary defensive
purposes or to meet redemption requests.
In analyzing companies for investment, the Adviser uses a "bottom up"
approach. A company's prospects for achieving and sustaining above-average,
long-term earnings growth is generally the Adviser's primary focus. However
the Adviser also considers certain other factors in making its investment
decisions, including: above-average earnings growth per share; high return on
invested capital; healthy balance sheet; sound financial and accounting
policies and overall financial strength; strong competitive advantages;
effective research, product development and marketing; efficient service;
pricing flexibility; strength of management; and general operating
characteristics that should enable the companies to compete successfully in
their market place. While current dividend income is not a prerequisite in
the selection of portfolio companies, the companies in which the Portfolio
invests normally will have a record of paying dividends, and will generally
be expected to increase the amounts of such dividends in future years as
earnings increase. It is expected that the Portfolio's investments will
ordinarily be made on exchanges located at least in the respective countries
in which the various issuers of such securities are principally based.
3
<PAGE>
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, futures contracts,
hybrid instruments, foreign securities, foreign currency transactions,
passive foreign investment companies, United States Government securities,
convertible securities, borrowings, derivatives, foreign commitments,
repurchase agreements, investment grade fixed-income securities, securities
loans and illiquid securities) are discussed under the caption "Investment
Strategies" below and in the Statement of Additional Information.
T. ROWE PRICE EQUITY INCOME PORTFOLIO
The investment objective of the T. Rowe Price Equity Income Portfolio is to
seek to provide substantial dividend income and also capital appreciation by
investing primarily in dividend-paying common stocks of established
companies. In pursuing its objective, the Portfolio emphasizes companies with
favorable prospects for increasing dividend income and capital appreciation.
Over time, the income component (dividends and interest earned) of the
Portfolio's investments is expected to be a significant contributor to the
Portfolio's total return. The Portfolio's yield is expected to be
significantly above that of the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"). Total return will consist primarily of dividend income and
secondarily of capital appreciation (or depreciation).
The investment program of the Portfolio is based on several premises. First,
the Adviser believes that over time, dividend income can account for a
significant component of the total return from equity investments. Second,
dividends are normally a more stable and predictable source of return than
capital appreciation. While the price of a company's stock generally
increases or decreases in response to short-term earnings and market
fluctuations, its dividends are generally less volatile. Finally, the Adviser
believes that stocks that distribute a high level of current income tend to
have less price volatility than those that pay below average dividends.
Under normal circumstances, the Portfolio will invest at least 65% of its
total assets in income-producing common stocks of established companies
paying above-average dividends. The Adviser uses a "value" approach and
invests in common stocks and other equities-related securities it believes
are temporarily undervalued by various measures, such as price/earnings
ratios. The Portfolio's investments will generally be made in companies that
share some of the following characteristics: established operating histories;
above-average current dividend yields relative to the S&P 500; low
price/earnings ratios relative to the S&P 500; sound balance sheets and other
financial characteristics; and low stock price relative to company's
underlying value as measured by assets, earnings, cash flow or business
franchises.
Although the Portfolio will invest primarily in United States common stocks,
it may also purchase other types of securities (for example, foreign
securities, preferred stocks, convertible securities and warrants) when
considered consistent with the Portfolio's investment objective and program.
The Portfolio may invest up to 25% of its total assets in foreign securities.
These include non-dollar denominated securities traded outside the United
States and dollar-denominated securities traded in the United States (such as
American Depositary Receipts ("ADRs")). Such investments increase a
portfolio's diversification and may enhance return, but they may represent a
greater degree of risk than investing in domestic securities.
The Portfolio may also engage in a variety of investment practices, such as
buying and selling options and futures contracts and engaging in foreign
currency exchange transactions. In addition, the Portfolio may invest up to
10% of its total assets in hybrid instruments.
The Portfolio may also invest a portion of its assets in United States
government securities and high-quality United States and foreign
dollar-denominated money market securities (i.e., within the two highest
rating categories assigned by a NRSRO) including certificates of deposit,
bankers' acceptances, commercial paper, short-term corporate securities and
repurchase agreements. For temporary defensive purposes or to meet redemption
requests, the Portfolio may invest without limitation in such securities.
The Portfolio may also invest in debt securities of any type including
municipal securities, without regard to quality or rating. Such securities
would be purchased in companies that meet the investment criteria for the
Portfolio. The price of a bond generally fluctuates with changes in interest
rates, rising when interest rates fall and falling when interest rates rise.
The Portfolio, however, will not invest more than 10% of its total assets in
securities rated below investment grade (commonly known as "junk bonds").
4
<PAGE>
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, futures contracts,
convertible securities, borrowings, foreign securities, repurchase
agreements, derivatives, forward commitments, hybrid instruments, United
States government securities, securities loans, foreign currency
transactions, illiquid securities and investment grade and lower quality
fixed-income securities) are discussed under the caption "Investment
Strategies" below and in the Statement of Additional Information.
EQ/PUTNAM GROWTH & INCOME VALUE PORTFOLIO
The investment objective of the EQ/Putnam Growth & Income Value Portfolio is
capital growth. Current income is a secondary objective. The Adviser intends
to invest primarily in common stocks that offer potential for capital growth
and may, consistent with the Portfolio's investment objective, invest in
common stocks that offer potential for current income. The Portfolio may also
purchase corporate bonds, notes and debentures, preferred stocks and
convertible securities (which include both debt securities and preferred
stocks). The types of securities held by the Portfolio may vary from time to
time in light of the Portfolio's investment objective, changes in interest
rates, and economic and other factors.
In analyzing companies for investment, the Adviser will seek to identify
companies whose securities are significantly undervalued in relation to their
underlying asset values or earnings potential.
At times, the Adviser may judge that conditions in the securities markets may
make pursuing the Portfolio's basic investment strategy inconsistent with the
best interests of the Portfolio's shareholders. At such times, the Adviser
may temporarily use alternative strategies that are primarily designed to
reduce fluctuations in the value of the Portfolio's assets. In implementing
these defensive strategies, the Portfolio may invest without limit in debt
securities or preferred stocks, or may invest in any other securities the
Adviser considers consistent with such defensive strategies. It is impossible
to predict when, or for how long, the Adviser will use these alternative
defensive strategies.
The Portfolio may invest up to 20% of its total assets in foreign securities.
The Portfolio may also purchase Eurodollar certificates of deposit (i.e.,
short-term time deposits issued by European banks) without regard to this 20%
limit. Such investments increase the Portfolio's diversification and may
enhance return, but they may represent a greater degree of risk than
investing in domestic securities.
In addition, the Portfolio may also invest a portion of its assets in United
States government securities and high-quality United States and foreign
dollar-denominated money market securities (i.e., within the two highest
rating categories assigned by a NRSRO) including certificates of deposit,
bankers' acceptances, commercial paper, short-term corporate securities and
repurchase agreements. For temporary defensive purposes or to meet redemption
requests, the Portfolio may invest without limitation in such securities.
The Portfolio may also invest in investment grade debt securities and may
invest a portion of its total assets in debt securities rated below
investment grade (commonly known as "junk bonds"). The price of a bond
generally fluctuates with changes in interest rates, rising when interest
rates fall and falling when interest rates rise.
The Portfolio may also engage in a variety of investment management practices
such as buying and selling options and futures contracts and engaging in
foreign currency exchange contracts.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, futures contracts,
foreign securities, securities loans, convertible securities, borrowings,
repurchase agreements, illiquid securities, forward commitments, zero-coupon
bonds, derivatives, United States Government securities, foreign currency
transactions, payment-in-kind bonds, and investment grade and lower quality
fixed-income securities) are discussed under the caption "Investment
Strategies" below and in the Statement of Additional Information.
EQ/PUTNAM BALANCED PORTFOLIO
The investment objective of the EQ/Putnam Balanced Portfolio is to provide a
balanced investment composed of a well-diversified portfolio of stocks and
bonds that will produce both capital growth and
5
<PAGE>
current income. In seeking its objective, the Portfolio may invest in almost
any type of security or negotiable instrument, including cash or money market
instruments. While the proportion invested in each type of security is not
fixed, ordinarily the Adviser will invest no more than 75% of the Portfolio's
assets in common stocks and conversion rights with respect to convertible
securities. The Adviser may, however, invest more than 75% of the Portfolio's
assets in such securities if it determines that unusual market or economic
conditions make it appropriate to do so.
The Portfolio may also invest in debt securities, including lower-rated debt
securities (commonly referred to as "junk bonds"). The Portfolio will not
necessarily dispose of a security when its rating is reduced below its rating
at the time of purchase. However, the Adviser will consider such reduction in
its determination of whether the Portfolio should continue to hold the
security.
At times, the Adviser may judge that conditions in the securities markets may
make pursuing the Portfolio's basic investment strategy inconsistent with the
best interests of the Portfolio's shareholders. At such times, the Adviser
may temporarily use alternative strategies that are primarily designed to
reduce fluctuations in the value of the Portfolio's assets. In implementing
these defensive strategies, the Portfolio may invest without limit in debt
securities, preferred stocks, United States Government and agency
obligations, cash or money market instruments, or may invest in any other
securities the Adviser considers consistent with such defensive strategies.
It is impossible to predict when, or for how long, the Adviser will use these
alternative defensive strategies.
The Portfolio may invest up to 20% of its total assets in foreign securities.
The Portfolio may also purchase Eurodollar certificates of deposit (i.e.,
short-term time deposits issued by European banks) without regard to this 20%
limit. Such investments increase the Portfolio's diversification and may
enhance return, but they may represent a greater degree of risk than
investing in domestic securities.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, futures contracts,
foreign securities, securities loans, asset-backed securities, floaters,
inverse floaters, borrowings, illiquid securities, zero-coupon bonds,
investment grade and lower quality fixed-income securities, payment-in-kind
bonds, derivatives, loan participations, mortgage-backed securities, small
company securities, United States Government securities, foreign currency
transactions, repurchase agreements, forward commitments and investment grade
and lower quality fixed-income securities) are discussed under the caption
"Investment Strategies" below and in the Statement of Additional Information.
MFS RESEARCH PORTFOLIO
The investment objective of the MFS Research Portfolio is to provide
long-term growth of capital and future income. In pursuing its objective, the
Portfolio invests a substantial portion of its assets in the common stock or
securities convertible into common stock of companies believed by the Adviser
to possess better than average prospects for long-term growth. A smaller
proportion of the assets of the Portfolio may be invested in bonds,
short-term debt obligations, preferred stocks or common stocks whose
principal characteristic is income production rather than growth. Such
securities may also offer opportunities for growth of capital as well as
income. In the case of both growth stocks and income securities, the Adviser
emphasizes progressive, well-managed companies.
The portfolio securities of the Portfolio are selected by a committee of
investment research analysts. This committee includes investment analysts
employed not only by the Adviser but also by MFS International (U.K.)
Limited, a wholly-owned subsidiary of the Adviser. The Portfolio's assets are
allocated among industries by the analysts acting together as a group.
Individual analysts are then responsible for selecting what they view as the
securities best suited to meet the Portfolio's investment objective within
their assigned industry responsibility.
To the extent that such investments comply with the Portfolio's investment
objective, the Portfolio may invest up to 20% of its total assets in foreign
securities, including those in emerging markets. These securities include
dollar-denominated and non-dollar-denominated foreign securities. Such
foreign investments increase a portfolio's diversification and may enhance
return, but they may represent a greater degree of risk than investing
exclusively in domestic securities.
6
<PAGE>
The Portfolio may invest in investment grade debt securities and may invest
up to 10% of its total assets in securities rated below investment grade
(commonly known as "junk bonds"). The price of a bond generally fluctuates
with changes in interest rates, rising when interest rates fall and falling
when interest rates rise.
Certain investment strategies and practices which may be employed by the
Portfolio (such as foreign securities, convertible securities, borrowings,
forward commitments, United States Government securities, repurchase
agreements, securities loans, illiquid securities and investment grade and
lower quality fixed-income securities) are discussed under the caption
"Investment Strategies" below and in the Statement of Additional Information.
MFS EMERGING GROWTH COMPANIES PORTFOLIO
The investment objective of the MFS Emerging Growth Companies Portfolio is to
provide long-term growth of capital. Dividend and interest income from
portfolio securities, if any, is incidental to the Portfolio's investment
objective. In pursuing its objective, the Portfolio invests primarily (i.e.,
at least 80% of its assets under normal circumstances) in common stocks of
emerging growth companies that the Adviser believes are early in their life
cycle but which have the potential to become major enterprises. Such emerging
growth companies generally are expected to: (i) show earnings growth over
time that is well above the growth rate of the overall economy and the rate
of inflation; and (ii) have the products, technologies, management and market
and other opportunities that are usually necessary to become more widely
recognized as growth companies.
Emerging growth companies can be of any size and the Portfolio may invest in
larger or more established companies whose rates of earnings growth are
expected to accelerate because of special factors, such as rejuvenated
management, new products, changes in customer demand, or basic changes in the
economic environment. Investing in emerging growth companies involves greater
risk than is customarily associated with investments in more established
companies. Emerging growth companies often have limited product lines,
markets or financial resources and may be more dependent on one-person
management. In addition, there may be less research available on many
promising small or medium-sized emerging growth companies, making it more
difficult both to identify and to analyze such companies. Moreover, the
securities of such companies may have limited marketability and may be
subject to more abrupt or erratic market movements than the securities of
larger, more established companies.
While the Portfolio may invest primarily in common stocks, the Portfolio may,
to a limited extent, seek long-term growth in other types of securities such
as convertible securities and warrants. To the extent that such investments
comply with the Portfolio's investment objective, the Portfolio may invest up
to 25% of its total assets in foreign securities, including those in emerging
markets. These securities include non-United States dollar-denominated
securities traded outside the United States and dollar-denominated securities
traded in the United States (such as ADRs). Such foreign investments increase
a portfolio's diversification and may enhance return, but they may represent
a greater degree of risk than investing exclusively in domestic securities.
The Portfolio may also invest in debt securities and hold cash and cash
equivalents. In addition, the Portfolio may invest in lower-rated debt
securities (commonly referred to as "junk bonds").
The Portfolio is aggressively managed and, therefore, the value of its shares
is subject to greater fluctuation and investment in its shares generally
involves a higher degree of risk than would be the case with an investment in
a conservative equity or growth fund investing entirely in proven growth
companies.
Certain investment strategies and practices which may be employed by the
Portfolio (such as foreign securities, repurchase agreements, loan
participations, derivatives, United States Government securities, securities
loans, forward commitments, asset-backed securities, borrowings, options,
futures contracts, loan participations, convertible securities, foreign
currency transactions, illiquid securities and investment grade and lower
quality fixed-income securities) are discussed under the caption "Investment
Strategies" below and in the Statement of Additional Information.
7
<PAGE>
MORGAN STANLEY EMERGING MARKETS EQUITY PORTFOLIO
The investment objective of the Morgan Stanley Emerging Markets Equity
Portfolio is long-term capital appreciation by investing primarily in equity
securities of emerging market country issuers. In pursuing its investment
objective, the Adviser focuses on issuers in emerging market countries in
which it believes the economies are developing strongly and in which the
markets are becoming more sophisticated.
Under normal circumstances, at least 65% of the Portfolio's total assets will
be invested in emerging market country equity securities, including common
stocks, preferred stocks, convertible securities, rights and warrants to
purchase common stocks, depository receipts and other equity securities of
emerging market country issuers.
For these purposes, an emerging market country security is a security issued
by a company that has one or more of the following characteristics: (i) its
principal securities trading market is in an emerging market country; (ii)
alone or on a consolidated basis, it derives 50% or more of its revenue from
either goods produced, sales made or services performed in emerging markets
countries; or (iii) it is organized under the laws of, and has a principal
office in, an emerging market country. The Adviser will base determinations
as to eligibility on publicly available information and inquiries made to the
companies.
The Portfolio intends to invest primarily in some or all of the following
emerging market countries: Argentina, Botswana, Brazil, Chile, China,
Colombia, Greece, Hong Kong, Hungary, India, Indonesia, Jamaica, Jordan,
Kenya, Malaysia, Mexico, Nigeria, Pakistan, Peru, Philippines, Poland,
Portugal, Russia, South Africa, South Korea, Sri Lanka, Taiwan, Thailand,
Turkey, Venezuela and Zimbabwe. As markets in other countries develop, the
Portfolio expects to expand and further diversify the emerging market
countries in which it invests. The Portfolio does not intend to invest in any
security in a country where the currency is not freely convertible to United
States dollars, unless: (i) the Portfolio has obtained the necessary
governmental licensing to convert such currency or other appropriately
licensed or sanctioned contractual guarantees to protect such investment
against loss of that currency's external value, or (ii) the Portfolio has a
reasonable expectation at the time the investment is made that such
governmental licensing or other appropriately licensed or sanctioned
guarantees would be obtained or that the currency in which the security is
quoted would be freely convertible at the time of any proposed sale of the
security by the Portfolio. Currently, investing in many emerging market
countries is not feasible or may involve unacceptable political risks.
In selecting industries and particular issuers, the Adviser will analyze
assets, revenues and earnings of an issuer and, with respect to particular
countries, evaluate costs of labor and raw materials, access to technology,
export of products and government regulation. Although the Portfolio seeks to
invest in larger companies, it may invest in small and medium-size companies
that, in the Adviser's view, have potential for growth.
The Portfolio may also invest in fixed-income securities denominated in the
currency of an emerging market country or issued or guaranteed by an emerging
market country company or the government of an emerging market country. In
addition, the Portfolio may invest in equity or fixed-income securities of
corporate or governmental issuers located in industrialized countries,
foreign currency and investment funds (i.e., funds specifically authorized to
invest in companies of a particular emerging market country). The Portfolio
may also invest in debt securities issued or guaranteed by international
organizations designed or supported by multiple governmental entities to
promote economic reconstruction or development such as the International Bank
for Reconstruction and Development (i.e., the World Bank). The Portfolio may
invest up to 10% of its total assets (measured at the time of investment) in
fixed-income securities that are not investment grade securities (commonly
referred to as "junk bonds").
For temporary defensive purposes, the Portfolio may invest less than 65% of
its assets in equity securities of emerging market countries in which case
the Portfolio may invest in other equity securities or fixed income
securities. Moreover, the Portfolio may invest without limitation in
high-quality money market instruments.
The value of the Portfolio's investments and the income they generate will
vary from day to day and generally reflect market conditions, interest rates,
and other company, political, or economic news both
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in the United States and abroad. In the short-term, stock prices can
fluctuate dramatically in response to these factors. Over time, however,
stocks have shown greater growth potential than other types of securities.
The prices of fixed-income securities also fluctuate and generally move in
the opposite direction from interest rates.
The Portfolio is a non-diversified portfolio under the 1940 Act, which means
that it may invest a greater proportion of its assets in the securities of a
small number of issuers than a diversified investment company. In this
regard, the Portfolio is not subject to the general limitation that it not
invest more than 5% of its total assets in the securities of a single issuer.
As a result, because the Portfolio is permitted greater flexibility to invest
its assets in the obligations of a single issuer it is exposed to increased
risk of loss if such an investment underperforms expectations. However, the
Portfolio intends to limit its investments so as to comply with
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a "regulated investment company."
The Portfolio spreads investment risk by limiting its holdings in any one
company or industry. Nevertheless, the Portfolio will experience price
volatility, the extent of which will be affected by the types of securities
and techniques the Portfolio uses. The Adviser may use various investment
techniques to hedge risks, including derivatives, but there is no guarantee
that these strategies will work as intended.
Certain investment strategies and practices which may be employed by the
Portfolio such as the purchase and sale of options, futures contracts, United
States Government securities, hybrid instruments, illiquid securities,
foreign securities, securities loans, borrowings, payment-in-kind bonds,
passive foreign investment companies, derivatives, convertible securities,
zero coupon bonds, investment grade and lower quality fixed-income
securities, mortgage-backed securities, forward commitments, stripped
mortgage-backed securities, municipal securities, small company securities,
collateralized mortgage obligations, asset-backed securities, floaters,
inverse floaters, foreign currency transactions, loan participations,
repurchase agreements, reverse repurchase agreements, short sales against the
box, structured notes and swaps are discussed under the caption "Investment
Strategies" below and in the Statement of Additional Information.
WARBURG PINCUS SMALL COMPANY VALUE PORTFOLIO
The investment objective of the Warburg Pincus Small Company Value Portfolio
is to seek long-term capital appreciation. The Portfolio is a diversified
management investment company that pursues its investment objective by
investing primarily in a portfolio of equity securities of small
capitalization companies (i.e., companies having market capitalizations of $1
billion or less at the time of initial purchase) that the Adviser considers
to be relatively undervalued. Current income is a secondary consideration in
selecting portfolio investments.
Under normal market conditions, the Portfolio will invest at least 65% of its
total assets in common stocks, preferred stocks, debt securities convertible
into common stocks, warrants and other rights of small companies. The
Portfolio may invest up to 10% of its total assets in warrants.
The Adviser will determine whether a company is undervalued based on a
variety of measures, including: price/earnings ratio, price/book ratio,
price/cash flow ratio, earnings growth and debt/capital ratio. Other relevant
factors, including a company's asset value, franchise value and quality of
management, will also be considered. The Portfolio will invest primarily in
companies whose securities are traded on United States stock exchanges or in
the United States over-the-counter market, but it may invest up to 20% of its
total assets in foreign securities.
The Portfolio may also invest up to 20% of its total assets in investment
grade securities (other than money market obligations) that are not
convertible into common stock for the purpose of seeking capital
appreciation. Subsequent to its purchase by the Portfolio, an issue of
securities may cease to be rated or its rating may be reduced below the
minimum required for purchase by the Portfolio. Neither event will require
the sale of such securities by the Portfolio. The Adviser will consider such
events in its determination of whether the Portfolio should continue to hold
the securities. The interest income to be derived may be considered as one
factor in selecting debt securities by the Adviser.
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The Portfolio is authorized to invest, under normal market conditions, up to
20% of its total assets in domestic and foreign short-term (one year or less
remaining to maturity) and medium-term (five years of less remaining to
maturity) money market obligations. For temporary defensive purposes, the
Portfolio may invest in these securities without limit. These instruments
consist of: obligations issued or guaranteed by the United States Government
or a foreign government, their agencies or instrumentalities; bank
obligations (including certificates of deposit, time deposits and bankers'
acceptances of domestic or foreign banks, domestic savings and loans and
similar institutions) that are high-quality investments or, if unrated,
deemed by the Adviser to be high-quality investments; commercial paper rated
no lower than A-2 by Standard & Poor's Rating Service ("S&P") or Prime-2 by
Moody's Investors Service, Inc. ("Moody's") or the equivalent from another
NRSRO or, if unrated, of an issuer having an outstanding, unsecured debt
issue then rated within the three highest rating categories by any NRSRO; and
repurchase agreements with respect to the foregoing.
When the Adviser believes that a defensive posture is warranted, the
Portfolio may invest temporarily, without limit, in investment grade debt
obligations and in domestic and foreign money market instruments, including
repurchase agreements.
Certain investment strategies and practices which may be employed by the
Portfolio (such as foreign securities, repurchase agreements, borrowings,
options, securities loans, small company securities, derivatives, futures
contracts, foreign currency transactions, United States Government
securities, short sales against the box, convertible securities, investment
grade and lower-quality fixed-income securities, and illiquid securities) are
discussed under the caption "Investment Strategies" below and in the
Statement of Additional Information.
MERRILL LYNCH WORLD STRATEGY PORTFOLIO
The investment objective of the Merrill Lynch World Strategy Portfolio is to
seek high total investment return by investing primarily in a portfolio of
equity and fixed income securities, including convertible securities, of U.S.
and foreign issuers. Total investment return consists of interest, dividends,
discount accruals and capital changes, including changes in the value of
non-dollar denominated securities and other assets and liabilities resulting
from currency fluctuations. Investing in foreign securities involves special
considerations. The Portfolio may employ a variety of instruments and
techniques to enhance income and to hedge against market and currency risk.
The Portfolio seeks to achieve its objective by investing primarily in the
securities of issuers located in the United States, Canada, Western Europe
and the Far East. There are no prescribed limits on the geographical
allocation of the Portfolio among these regions. Such allocation will be made
primarily on the basis of the anticipated total return from investments in
the securities of issuers wherever located, considering such factors as: the
condition and growth potential of the various economies and securities
markets and the issuers domiciled therein; anticipated movements in interest
rates in the various capital markets and in the value of foreign currencies
relative to the U.S. dollar; tax considerations; and economic, social,
financial, national and political factors that may affect the climate for
investing within the various securities markets. When in the judgment of the
Adviser, economic or market conditions warrant, the Portfolio reserves the
right to concentrate its investments in one or more capital markets,
including the United States.
The equity and convertible preferred securities in which the Portfolio may
invest are primarily securities issued by quality companies. Generally, the
characteristics of such companies include a strong balance sheet, good
financial resources, a satisfactory rate of return on capital, a good
industry position and superior management.
The corporate debt securities, including convertible debt securities, in
which the Portfolio may invest will be primarily investment grade securities
those rated BBB or better by S&P or Baa or better by Moody's or of comparable
quality. The Fund may also invest in debt obligations issued or guaranteed by
sovereign governments, political subdivisions thereof (including states,
provinces and municipalities) or their agencies or instrumentalities or
issued or guaranteed by international organizations designated or supported
by governmental entities to promote economic reconstruction or development
('supranational
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entities') such as the International Bank for Reconstruction and Development
(the "World Bank") and the European Coal and Steel Community. Investments in
securities of supranational entities are subject to the risk that member
governments will fail to make required capital contributions and that a
supranational entity will thus be unable to meet its obligations.
When market or financial conditions warrant, the Portfolio may invest as a
temporary defensive measure up to 100% of its assets in United States
Government or Government agency securities issued or guaranteed by the United
States Government or its agencies or instrumentalities, money market
securities or other fixed income securities deemed by the Adviser to be
consistent with a defensive posture, or may hold its assets in cash.
The Portfolio is non-diversified for 1940 Act purposes and as such may invest
a larger percentage of its assets in individual issuers than a diversified
investment company. In this regard, the Portfolio is not subject to the
general limitation that it not invest more than 5% of its total assets in the
securities of any one issuer. To the extent the Portfolio makes investments
in excess of 5% of its assets in a particular issuer, its exposure to credit
and market risks associated with that issuer is increased. However, the
Portfolio's investments will be limited so as to qualify for the special tax
treatment afforded "regulated investment companies" under the Code.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, futures contracts,
foreign securities, foreign currency transactions, United States Government
securities, convertible securities, borrowings, derivatives, investment grade
fixed-income securities, repurchase agreements, securities loans, illiquid
securities and forward commitments) are discussed under the caption
"Investment Strategies" below and in the Statement of Additional Information.
MERRILL LYNCH BASIC VALUE EQUITY PORTFOLIO
The investment objective of the Merrill Lynch Basic Value Equity Portfolio is
to seek capital appreciation and, secondarily, income by investing in
securities, primarily equities, that the Adviser of the Portfolio believes
are undervalued and therefore represent basic investment value. The Portfolio
seeks special opportunities in securities that are selling at a discount,
either from book value or historical price-earnings ratios, or seem capable
of recovering from temporarily out of favor considerations. Particular
emphasis is placed on securities that provide an above-average dividend
return and sell at a below-average price-earnings ratio.
The investment policy of the Portfolio is based on the belief that the
pricing mechanism of the securities market lacks total efficiency and has a
tendency to inflate prices of securities in favorable market climates and
depress prices of securities in unfavorable climates. Based on this premise,
the Adviser believes that favorable changes in market prices are more likely
to begin when securities are out of favor, earnings are depressed,
price-earnings ratios are relatively low, investment expectations are
limited, and there is no real general interest in the particular security or
industry involved. On the other hand, the Adviser believes that negative
developments are more likely to occur when investment expectations are
generally high, stock prices are advancing or have advanced rapidly,
price-earnings ratios have been inflated, and the industry or issue continues
to gain new investment acceptance on an accelerated basis. In other words,
the Adviser believes that market prices of securities with relative high
price-earnings ratios are more susceptible to unexpected adverse developments
while securities with relatively low price-earnings ratios are more favorably
positioned to benefit from favorable, but generally unanticipated events.
This investment policy departs from traditional philosophy. The Adviser
believes that the market risk involved in this policy is moderated somewhat
by an emphasis on securities with above-average dividend returns.
The current institutionally-dominated market tends to ignore, to some extent,
the numerous secondary issues whose market capitalizations are below those of
the relatively few larger size growth companies. It is expected that the
Portfolio's portfolio generally will have significant representation in this
secondary segment of the market. The Adviser is responsible for the
management of the Portfolio's securities
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portfolio and makes portfolio decisions based on its own research information
supplemented by research information provided by other sources. The basic
orientation of the Portfolio's investment policies is such that at times a
large portion of its common stock holdings may carry less than favorable
research ratings from research analysts.
Investment emphasis is on equities, primarily common stock and, to a lesser
extent, securities convertible into common stocks. The Portfolio also may
invest in preferred stocks and non-convertible investment grade debt
securities and utilize covered call options with respect to portfolio
securities. The Portfolio has the right, as a defensive measure, to hold
other types of securities, including United States Government and Government
agency securities, money market securities, or other fixed-income securities
deemed by the Adviser to be consistent with a defensive posture, or cash, in
such proportions as, in the opinion of the Adviser, prevailing market or
economic conditions warrant. The Portfolio may invest up to 10% of its total
assets, taken at market value at the time of acquisition, in the securities
of foreign issuers.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as options, futures contracts, convertible securities, United
States Government securities, repurchase agreements, securities loans,
foreign securities, borrowings, foreign currency transactions, forward
commitments, investment grade fixed-income securities, derivatives and
illiquid securities) are discussed under the caption "Investment Strategies"
below and in the Statement of Additional Information.
INVESTMENT STRATEGIES
In addition to making investments directly in securities, to the extent
described above, each of the Portfolios (except for MFS Research Portfolio)
may purchase and sell call and put options, engage in transactions in futures
contracts and related options, loans and other direct indebtedness and engage
in forward foreign currency exchange transactions. They may also enter into
repurchase agreements, lend their portfolio securities, and borrow funds
under certain limited circumstances. In addition, each Portfolio may engage
in other types of investment strategies as described below. Each Portfolio
may invest in or utilize any of these investment strategies and instruments
or engage in any of these practices except where otherwise prohibited by law
or the Portfolio's own investment restrictions. Portfolios that anticipate
committing 5% or more of their net assets to a particular type of investment
strategy or instruments are specifically referred to in the descriptions
below of such investment strategy or instrument. Certain investment
strategies and instruments and the risks related to them are summarized below
and certain of these strategies and instruments are described in more detail
in the Statement of Additional Information.
Asset-Backed Securities. The EQ/Putnam Balanced Portfolio, MFS Emerging
Growth Companies Portfolio and Morgan Stanley Emerging Markets Equity
Portfolio may invest in asset-backed securities. These asset-backed
securities, issued by trusts and special purpose corporations, are
collateralized by a pool of assets, such as credit card or automobile loans,
home equity loans or computer leases, and represent the obligations of a
number of different parties. Asset-backed securities present certain risks.
For instance, in the case of credit card receivables, these securities may
not have the benefit of any security interest in the related collateral. Due
to the possibility that prepayments (on automobile loans and other
collateral) will alter the cash flow on asset-backed securities, it is not
possible to determine in advance the actual final maturity date or average
life. Faster prepayment will shorten the average life and slower prepayments
will lengthen it. However, it is possible to determine what the range of that
movement could be and to calculate the effect that it will have on the price
of the security. In selecting these securities, the Adviser will look for
those securities that offer a higher yield to compensate for any variation in
average maturity.
Borrowings. The Portfolios may borrow money from banks or other lenders as a
temporary measure for emergency purposes, to facilitate redemption requests,
or for other purposes consistent with each Portfolio's investment objective
and program. Borrowings for the T. Rowe Price International Stock Portfolio,
T. Rowe Price Equity Income Portfolio, MFS Research Portfolio, MFS Emerging
Growth Companies Portfolio, Morgan Stanley Emerging Markets Equity Portfolio,
Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity
Portfolio may not exceed 33 1/3% of each Portfolio's total assets. Borrowings
for the Warburg Pincus Small Company Value Portfolio may not exceed 30% of
the
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Portfolio's total assets. Borrowings for the EQ/Putnam Growth & Income Value
Portfolio and EQ/Putnam Balanced Portfolio may not exceed 10% of each
Portfolio's total assets. Each Portfolio may pledge its assets to secure
these permissible borrowings. No Portfolio may purchase additional securities
when its borrowings exceed 5% of its total assets. See also "Reverse
Repurchase Agreements" for information concerning an investment technique
that may be deemed to involve a borrowing. Further information concerning
each Portfolio's fundamental policy with respect to borrowings is provided in
the Statement of Additional Information.
Convertible Securities. Each of the Portfolios may invest in convertible
securities, including both convertible debt and convertible preferred stock.
Such securities may be converted into shares of the underlying common stock
at either a stated price or stated rate. Because of this feature, convertible
securities enable an investor to benefit from increases in the market price
of the underlying common stock. Convertible securities provide higher yields
than the underlying common stocks, but generally offer lower yields than
non-convertible securities of similar quality. Like bonds, the value of
convertible securities fluctuates in relation to changes in interest rates
and, in addition, fluctuates in relation to the underlying common stock.
Subsequent to purchase by a Portfolio, convertible securities may cease to be
rated or a rating may be reduced below the minimum required for purchase by
that Portfolio. Neither event will require sale of such securities, although
each Adviser will consider such event in its determination of whether a
Portfolio should continue to hold the securities.
Derivatives. Each Portfolio (except the MFS Research Portfolio) may invest in
one or more types of derivatives. Derivatives are financial products or
instruments that derive their value from the value of one or more underlying
assets, reference rates or indices. Derivatives include, but are not limited
to, the following: asset-backed securities, collateralized mortgage
obligations, floaters, futures, hybrid instruments, inverse floaters,
mortgage-backed securities, options, stripped mortgage-backed securities,
structured notes and swaps. Further information about these instruments and
the risks involved in their use are contained under the description of each
of these instruments in this section or the Statement of Additional
Information.
Floaters and Inverse Floaters. The EQ/Putnam Balanced Portfolio and Morgan
Stanley Emerging Markets Equity Portfolio each may invest in floaters, which
are fixed-income securities with a floating or variable rate of interest,
i.e., the rate of interest varies with changes in specified market rates or
indices, such as the prime rate, or at specified intervals. Certain floaters
may carry a demand feature that permits the holder to tender them back to the
issuer of the underlying instrument, or to a third party, at par value prior
to maturity. When the demand feature of certain floaters represents an
obligation of a foreign entity, the demand feature will be subject to certain
risks discussed under "Foreign Securities".
In addition, the Morgan Stanley Emerging Markets Equity Portfolio may invest
in inverse floating rate obligations which are fixed-income securities that
have coupon rates that vary inversely at a multiple of a designated floating
rate, such as London Inter-Bank Offered Rate ("LIBOR"). Any rise in the
reference rate of an inverse floater (as a consequence of an increase in
interest rates) causes a drop in the coupon rate while any drop in the
reference rate of an inverse floater causes an increase in the coupon rate.
Inverse floaters may exhibit substantially greater price volatility than
fixed rate obligations having similar credit quality, redemption provisions
and maturity, and inverse floater collateralized mortgage obligations
("CMOs") exhibit greater price volatility than the majority of
mortgage-related securities. In addition, some inverse floater CMOs exhibit
extreme sensitivity to changes in prepayments. As a result, the yield to
maturity of an inverse floater CMOs is sensitive not only to changes in
interest rates but also to changes in prepayment rates on the related
underlying mortgage assets.
Foreign Securities. Foreign investments involve certain risks that are not
present in domestic securities. Because each of the Portfolios may purchase
securities denominated in foreign currencies, a change in the value of any
such currency against the United States dollar will result in a change in the
United States dollar value of a Portfolio's assets and income. In addition,
although a portion of a Portfolio's investment income may be received or
realized in such currencies, the Portfolio will be required to compute and
distribute its income in United States dollars. Therefore, if the exchange
rate for any such currency declines after a Portfolio's income has been
earned and computed in United States dollars but before conversion and
payment, the Portfolio could be required to liquidate portfolio securities to
make such distributions.
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The value of foreign investments and the investment income derived from them
may also be affected unfavorably by changes in currency exchange control
regulations. Although the Portfolios will invest only in securities
denominated in foreign currencies that are fully exchangeable into United
States dollars without legal restriction at the time of investment, there can
be no assurance that currency controls will not be imposed subsequently. In
addition, the value of foreign fixed income investments may fluctuate in
response to changes in United States and foreign interest rates.
There may be less information publicly available about a foreign issuer than
about a United States issuer, and a foreign issuer is not generally subject
to accounting, auditing and financial reporting standards and practices
comparable to those in the United States. Foreign stock markets are generally
not as developed or efficient as, and may be more volatile than, those in the
United States. While growing in volume, they usually have substantially less
volume than United States markets and a Portfolio's investment securities may
be less liquid and subject to more rapid and erratic price movements than
securities of comparable United States companies. Equity securities may trade
at price/earnings multiples higher than comparable United States securities
and such levels may not be sustainable. There is generally less government
supervision and regulation of foreign stock exchanges, brokers and listed
companies than in the United States. Moreover, settlement practices for
transactions in foreign markets may differ from those in United States
markets. Such differences may include delays beyond periods customary in the
United States and practices, such as delivery of securities prior to receipt
of payment, which increase the likelihood of a "failed settlement." Failed
settlements can result in losses to a Portfolio. In less liquid and well
developed stock markets, such as those in some Asian and Latin American
countries, volatility may be heightened by actions of a few major investors.
For example, substantial increases or decreases in cash flows of mutual funds
investing in these markets could significantly affect stock prices and,
therefore, share prices.
Foreign brokerage commissions, custodial expenses and other fees are also
generally higher than for securities traded in the United States.
Consequently, the overall expense ratios of international or global funds are
usually somewhat higher than those of typical domestic stock funds.
In addition, the economies, markets and political structures of a number of
the countries in which the Portfolios can invest do not compare favorably
with the United States and other mature economies in terms of wealth and
stability. Therefore, investments in these countries may be riskier, and will
be subject to erratic and abrupt price movements. Some economies are less
well developed and less diverse (for example, Latin America, Eastern Europe
and certain Asian countries), and more vulnerable to the ebb and flow of
international trade, trade barriers and other protectionist or retaliatory
measures (for example, Japan, Southeast Asia and Latin America). Some
countries, particularly in Latin America, are grappling with severe inflation
and high levels of national debt. Investments in countries that have recently
begun moving away from central planning and state-owned industries toward
free markets, such as the Eastern European or Chinese economies, should be
regarded as speculative.
In addition, investment in foreign securities may also include the risk of
expropriation by a foreign government.
Moreover, investments in foreign government debt securities, particularly
those of emerging market country governments, involve special risks. Certain
emerging market countries have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging market country's debt
may not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A debtor's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, and, in the case of a government
debtor, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole and the political constraints to
which a government debtor may be subject. Government debtors may default on
their debt and may also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce principal and
interest arrearages on their debt. Holders of government debt may be
requested to participate in the rescheduling of such debt and to extend
further loans to government debtors.
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Certain Portfolios may invest in the following types of foreign securities or
engage in the following types of transactions related to foreign securities.
Brady Bonds. The EQ/Putnam Balanced Portfolio, MFS Emerging Growth Companies
Portfolio and Morgan Stanley Emerging Markets Equity Portfolio each may
invest in "Brady Bonds," which are fixed-income securities created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
Nicholas F. Brady when he was the United States Secretary of the Treasury.
Brady Bonds have been issued only recently, and, accordingly, do not have a
long payment history. They may be collateralized or uncollateralized and
issued in various currencies (although most are United States
dollar-denominated) and they are actively traded in the over-the-counter
("OTC") secondary market. The Morgan Stanley Emerging Markets Equity
Portfolio will invest in Brady Bonds only if they are consistent with quality
specifications established from time to time by the Adviser to that
Portfolio.
Depositary Receipts. Each of the Portfolios may purchase depositary receipts,
which are securities representing ownership interests in securities of
foreign companies (an "underlying issuer") and are deposited with a
securities depositary. Depositary receipts are not necessarily denominated in
the same currency as the underlying securities. Depositary receipts include
ADRs and Global Depositary Receipts ("GDRs") and other types of depositary
receipts (which, together with ADRs and GDRs, are hereinafter collectively
referred to as "Depositary Receipts"). ADRs are dollar-denominated Depositary
Receipts typically issued by a United States financial institution which
evidence ownership interests in a security or pool of securities issued by a
foreign issuer. ADRs are listed and traded in the United States. GDRs and
other types of depositary receipts are typically issued by foreign banks or
trust companies, although they also may be issued by United States financial
institutions, and evidence ownership interests in a security or pool of
securities issued by either a foreign or a United States corporation.
Generally, depositary receipts in registered form are designed for use in the
United States securities market and depositary receipts in bearer form are
designed for use in securities markets outside the United States. Although
there may be more reliable information available regarding issuers of certain
ADRs that are issued under so-called "sponsored" programs and ADRs do not
involve foreign currency risks, ADRs and other Depositary Receipts are
subject to the risks of other investments in foreign securities, as described
directly above.
Foreign Currency Transactions. Each of the Portfolios (except the MFS
Research Portfolio) may purchase foreign currency on a spot (or cash) basis,
and may enter into contracts to purchase or sell foreign currencies at a
future date ("forward contracts"). Each of the Portfolios (except the MFS
Research Portfolio) may also purchase and sell foreign currency futures
contracts and may purchase and sell exchange traded call and put options on
foreign currency futures contracts and on foreign currencies. The EQ/Putnam
Growth & Income Value Portfolio, EQ/Putnam Balanced Portfolio, MFS Emerging
Growth Companies Portfolio, Morgan Stanley Emerging Markets Equity Portfolio
and Merrill Lynch World Strategy Portfolio may engage in OTC options on
foreign currency transactions. The Merrill Lynch World Strategy Portfolio
will engage in OTC options on foreign currency transactions only with
financial institutions that have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50
million. The MFS Emerging Growth Companies Portfolio may only enter into
forward contracts on currencies in the OTC market. The Advisers may engage in
these transactions to protect against uncertainty in the level of future
exchange rates in connection with the purchase and sale of portfolio
securities ("transaction hedging") and to protect the value of specific
portfolio positions ("position hedging").
Hedging transactions involve costs and may result in losses. Each of the
Portfolios (except the MFS Research Portfolio) may also write covered call
options on foreign currencies to offset some of the costs of hedging those
currencies. A Portfolio will engage in over-the-counter options transactions
on foreign currencies only when appropriate exchange traded transactions are
unavailable and when, in the Adviser's opinion, the pricing mechanism and
liquidity are satisfactory and the participants are responsible parties
likely to meet their contractual obligations. A Portfolio's ability to engage
in hedging and related option transactions may be limited by tax
considerations.
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Transactions and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolios own or intend to
purchase or sell. They simply establish a rate of exchange which one can
achieve at some future point in time. Additionally, although these techniques
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, they tend to limit any potential gain which might result from the
increase in the value of such currency.
Forward Commitments. Each Portfolio (except the Warburg Pincus Small Company
Value Portfolio) may make contracts to purchase securities for a fixed price
at a future date beyond customary settlement time ("forward commitments") if
it holds, and maintains until the settlement date in a segregated account,
cash or liquid securities in an amount sufficient to meet the purchase price,
or if it enters into offsetting contracts for the forward sale of other
securities it owns. Forward commitments may be considered securities in
themselves and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in value of the Portfolio's other assets. Where such
purchases are made through dealers, a Portfolio relies on the dealer to
consummate the sale. The dealer's failure to do so may result in the loss to
a Portfolio of an advantageous yield or price.
Hybrid Instruments. The T. Rowe Price International Stock Portfolio, T. Rowe
Price Equity Income Portfolio and Morgan Stanley Emerging Markets Equity
Portfolio may invest in hybrid instruments. Hybrid instruments have recently
been developed and combine the elements of futures contacts or options with
those of debt, preferred equity or a depository instrument. Often these
hybrid instruments are indexed to the price of a commodity, particular
currency, or a domestic or foreign debt or equity securities index. Hybrid
instruments may take a variety of forms, including, but not limited to, debt
instruments with interest or principal payments or redemption terms
determined by reference to the value of a currency or commodity or securities
index at a future point in time, preferred stock with dividend rates
determined by reference to the value of a currency, or convertible securities
with the conversion terms related to a particular commodity. Hybrid
instruments may bear interest or pay dividends at below market (or even
relatively nominal) rates. Under certain conditions, the redemption value of
such an instrument could be zero. Hybrid instruments can have volatile prices
and limited liquidity and their use by a Portfolio may not be successful.
Illiquid Securities. The Warburg Pincus Small Company Value Portfolio may
invest up to 10% of its assets and each other Portfolio may invest up to 15%
of their respective net assets in illiquid securities and other securities
which are not readily marketable, including non-negotiable time deposits,
certain restricted securities not deemed by the Trust's Board of Trustees to
be liquid, and repurchase agreements with maturities longer than seven days.
Securities eligible for resale pursuant to Rule 144A under the Securities Act
of 1933, as amended, which have been determined by the Board of Trustees to
be liquid, will not be considered by the Adviser to be illiquid or not
readily marketable and, therefore, are not subject to the 10% or 15% limit.
The inability of a Portfolio to dispose of illiquid or not readily marketable
investments readily or at a reasonable price could impair the Portfolio's
ability to raise cash for redemptions or other purposes. The liquidity of
securities purchased by a Portfolio which are eligible for resale pursuant to
Rule 144A will be monitored by each Portfolio's Adviser on an ongoing basis,
subject to the oversight of the Board of Trustees of the Trust. In the event
that such a security is deemed to be no longer liquid, a Portfolio's holdings
will be reviewed to determine what action, if any, is required to ensure that
the retention of such security does not result in a Portfolio's having more
than 10% or 15% of its assets invested in illiquid or not readily marketable
securities.
Investment Grade and Lower Quality Fixed-Income Securities. Each Portfolio
may invest in or hold a portion of its total assets in investment grade or
lower quality fixed-income securities. The T. Rowe Price International Stock
Portfolio and the Merrill Lynch Basic Value Equity Portfolio each may invest
in or hold investment grade securities, but not lower quality fixed-income
securities. Investment grade securities are securities rated Baa or higher by
Moody's or BBB or higher by S&P and comparable unrated securities. Investment
grade securities rated Baa by Moody's or BBB by S&P while normally exhibiting
adequate protection parameters, have speculative characteristics, and,
consequently, changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity of such issuers to make principal and
interest payments than is the case for higher grade fixed-income securities.
Lower quality fixed-income securities are securities that are rated in the
lower categories by NRSROs (i.e., Ba
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or lower by Moody's and BB or lower by S&P) or comparable unrated securities.
Such lower quality securities are known as "junk bonds" and are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. (Each NRSRO's descriptions of these
bond ratings are set forth in the Appendix to the Statement of Additional
Information.) Because investment in lower quality securities involves greater
investment risk, achievement of a Portfolio's investment objective will be
more dependent on the Adviser's analysis than would be the case if that
Portfolio were investing in higher quality bonds. In addition, lower quality
securities may be more susceptible to real or perceived adverse economic and
individual corporate developments than would investment grade bonds.
Moreover, the secondary trading market for lower quality securities may be
less liquid than the market for investment grade bonds. This potential lack
of liquidity may make it more difficult for an Adviser to value accurately
certain portfolio securities.
Loan Participations. The EQ/Putnam Balanced Portfolio, MFS Emerging Growth
Companies Portfolio and the Morgan Stanley Emerging Markets Equity Portfolio
may invest a portion of each of their assets in loan participations and other
direct indebtedness. By purchasing a loan, a Portfolio acquires some or all
of the interest of a bank or other lending institution in a loan to a
corporate borrower. Many such loans are secured, and most impose restrictive
covenants that must be met by the borrower. These loans are made generally to
finance internal growth, mergers, acquisitions, stock repurchases, leveraged
buy-outs and other corporate activities. Such loans may be in default at the
time of purchase. The MFS Emerging Growth Companies Portfolio may also
purchase other direct indebtedness such as trade or other claims against
companies, which generally represent money owed by a company to a supplier of
goods and services. These claims may also be purchased at a time when the
company is in default. Certain of the loans and other direct indebtedness
acquired by the Portfolio may involve revolving credit facilities or other
standby financing commitments which obligate the Portfolio to pay additional
cash on a certain date or on demand. The highly leveraged nature of many such
loans and other direct indebtedness may make such loans especially vulnerable
to adverse changes in economic or market conditions. Loans and other direct
indebtedness may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the Portfolio may be unable to sell such
investments at an opportune time or may have to resell them at less than fair
market value.
Mortgage-Related Securities. The EQ/Putnam Balanced Portfolio and Morgan
Stanley Emerging Markets Equity Portfolio may invest in mortgage-related
securities (i.e., mortgage-backed securities). A mortgage-backed security may
be an obligation of the issuer backed by a mortgage or pool of mortgages or a
direct interest in an underlying pool of mortgages. Some mortgage-backed
securities, such as CMOs, make payments of both principal and interest at a
variety of intervals; others make semiannual interest payments at a
predetermined rate and repay principal at maturity (like a typical bond).
Mortgage-backed securities are based on different types of mortgages
including those on commercial real estate or residential properties.
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these
securities and may lower their returns.
Stripped mortgage-backed securities are created when a United States
government agency or a financial institution separates the interest and
principal components of a mortgage-backed security and sells them as
individual securities. The holder of the "principal-only" security ("PO")
receives the principal payments made by the underlying mortgage-backed
security, while the holder of the "interest-only" security ("IO") receives
interest payments from the same underlying security. The prices of stripped
mortgage-backed securities may be particularly affected by changes in
interest rates. As interest rates fall, prepayment rates tend to increase,
which tends to reduce prices of IOs and increase prices of POs. Rising
interest rates can have the opposite effect.
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Municipal Securities. The Morgan Stanley Emerging Markets Equity Portfolio
may invest in municipal securities ("municipals"), which are debt obligations
issued by local, state and regional governments that provide interest income
that is exempt from federal income taxes. Municipals include both municipal
bonds (those securities with maturities of five years or more) and municipal
notes (those with maturities of less than five years). Municipal bonds are
issued for a wide variety of reasons: to construct public facilities, such as
airports, highways, bridges, schools, hospitals, mass transportation,
streets, water and sewer works; to obtain funds for operating expenses; to
refund outstanding municipal obligations; and to loan funds to various public
institutions and facilities. Certain industrial development bonds are also
considered municipal bonds if their interest is exempt from federal income
tax. Industrial development bonds are issued by or on behalf of public
authorities to obtain funds for various privately-operated manufacturing
facilities, housing, sports arenas, convention centers, airports, mass
transportation systems and water, gas or sewer works. Industrial development
bonds are ordinarily dependent on the credit quality of a private user, not
the public issuer.
Options and Futures Transactions. Each Portfolio (except the MFS Research
Portfolio) may utilize futures contracts and write and purchase put and call
options. Futures contracts (a type of potentially high-risk security) enable
the investor to buy or sell an asset in the future at an agreed upon price.
Options (another type of potentially high-risk security) give the purchaser
of an option the right, but not the obligation, to buy or sell in the future
an asset at a predetermined price during the term of the option. (The writer
of a put or call option would be obligated to buy or sell the underlying
asset at a predetermined price during the term of the option.) Each Portfolio
will write put and call options only if such options are considered to be
"covered". A call option on a security is covered, for example, when the
writer of the call option owns throughout the option period the security on
which the option is written (or a security convertible into such a security
without the payment of additional consideration). A put option on a security
is covered, for example, when the writer of the put has deposited and
maintained in a segregated account throughout the option period sufficient
cash or other liquid assets in an amount equal to or greater than the
exercise price of the put option. Each Portfolio may utilize futures
contracts and related options for other than hedging purposes to the extent
that aggregate initial margin deposits and premiums paid do not exceed 5% of
the Portfolio's net assets. Each Portfolio (other than the Warburg Pincus
Small Company Value Portfolio) will not commit more than 5% of its total
assets to premiums when purchasing call or put options. The Warburg Pincus
Small Company Value Portfolio may commit up to 10% of its total assets to
premiums when purchasing put or call options. In addition, the total market
value of securities against which a Portfolio has written call or put options
may not exceed 25% of its total assets. The Merrill Lynch Basic Value Equity
Portfolio will not write covered call options on underlying securities
exceeding 15% of the value of its total assets. The MFS Emerging Growth
Companies Portfolio and Morgan Stanley Emerging Markets Equity Portfolio will
not enter a futures contract if the obligations underlying all such futures
contracts would exceed 50% of the value of each such Portfolio's total
assets. The Warburg Pincus Small Company Value Portfolio may utilize up to
10% of its total assets to purchase exchange-listed and OTC put and call
options on stock indexes. The EQ/Putnam Growth & Income Portfolio, EQ/Putnam
Balanced Portfolio, MFS Emerging Growth Companies Portfolio, Merrill Lynch
World Strategy Portfolio and Morgan Stanley Emerging Markets Equity Portfolio
may engage in OTC put and call option transactions. Options traded in the OTC
market may not be as actively traded as those on an exchange, so it may be
more difficult to value such options. In addition, it may be difficult to
enter into closing transactions with respect to such options. Such OTC
options, and the securities used as "cover" for such options, may be
considered illiquid securities.
Each Portfolio may buy and sell futures and options contracts for any number
of reasons, including: to manage its exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting its overall
exposure to certain markets; in an effort to enhance income; and to protect
the value of portfolio securities. Each Portfolio may purchase, sell, or
write call and put options and futures contracts on securities, financial
indices, and foreign currencies and options on futures contracts.
The risk of loss in trading futures contracts can be substantial because of
the low margin deposits required and the extremely high degree of leveraging
involved in futures pricing. As a result, a relatively small price movement
in a futures contract may cause an immediate and substantial loss or gain.
The primary risks
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associated with the use of futures contracts and options are: (i) imperfect
correlation between the change in market value of the stocks held by a
Portfolio and the prices of futures contracts and options; and (ii) possible
lack of a liquid secondary market for a futures contract or an OTC option and
the resulting inability to close a futures position or OTC option prior to
its maturity date.
Passive Foreign Investment Companies. The T. Rowe Price International Stock
Portfolio and Morgan Stanley Emerging Markets Equity Portfolio may purchase
the securities of certain foreign investment funds or trusts called passive
foreign investment companies. Such entities have been the only or primary way
to invest in certain countries. In addition to bearing their proportionate
share of a Portfolio's expenses (management fees and operating expenses),
shareholders will also indirectly bear similar expenses of such entities.
Like other foreign securities, interests in passive foreign investment
companies also involve the risk of foreign securities, as described above.
Payment-in-Kind Bonds. The EQ/Putnam Growth & Income Value Portfolio, the
EQ/Putnam Balanced Portfolio and Morgan Stanley Emerging Markets Equity
Portfolio may invest in payment-in-kind bonds. Payment-in-kind bonds allow
the issuer, at its option, to make current interest payments on the bonds
either in cash or in additional bonds. The value of payment-in-kind bonds is
subject to greater fluctuation in response to changes in market interest
rates than bonds which pay interest in cash currently. Payment-in-kind bonds
allow an issuer to avoid the need to generate cash to meet current interest
payments. Accordingly, such bonds may involve greater credit risks than bonds
paying interest currently. Even though such bonds do not pay current interest
in cash, the Portfolios are nonetheless required to accrue interest income on
such investments and to distribute such amounts at least annually to
shareholders. Thus, the Portfolios could be required, at times, to liquidate
other investments in order to satisfy its distribution requirements.
Repurchase Agreements. Each Portfolio may enter into repurchase agreements
with qualified and Board approved banks, broker-dealers or other financial
institutions as a means of earning a fixed rate of return on its cash
reserves for periods as short as overnight. A repurchase agreement is a
contract pursuant to which a Portfolio, against receipt of securities of at
least equal value including accrued interest, agrees to advance a specified
sum to the financial institution which agrees to reacquire the securities at
a mutually agreed upon time (usually one day) and price. Each repurchase
agreement entered into by a Portfolio will provide that the value of the
collateral underlying the repurchase agreement will always be at least equal
to the repurchase price, including any accrued interest. A Portfolio's right
to liquidate such securities in the event of a default by the seller could
involve certain costs, losses or delays and, to the extent that proceeds from
any sale upon a default of the obligation to repurchase are less than the
repurchase price, the Portfolio could suffer a loss.
Reverse Repurchase Agreements. The Morgan Stanley Emerging Markets Equity
Portfolio may enter into reverse repurchase agreements with brokers, dealers,
domestic and foreign banks or other financial institutions. In a reverse
repurchase agreement, the Portfolio sells a security and agrees to repurchase
it at a mutually agreed upon date and price, reflecting the interest rate
effective for the term of the agreement. It may also be viewed as the
borrowing of money by the Portfolio. The Portfolio's investment of the
proceeds of a reverse repurchase agreement is the speculative factor known as
leverage. The Portfolio may enter into a reverse repurchase agreement only if
the interest income from investment of the proceeds is greater than the
interest expense of the transaction and the proceeds are invested for a
period no longer than the term of the agreement. The Portfolio will maintain
with the custodian a separate account with a segregated portfolio of
unencumbered liquid assets in an amount at least equal to its purchase
obligations under these agreements. If interest rates rise during a reverse
repurchase agreement, it may adversely affect the Portfolio's net asset
value. See "Borrowing" for more information concerning restrictions on
borrowing by each Portfolio.
Securities Loans. The T. Rowe Price International Stock Portfolio, T. Rowe
Price Equity Income Portfolio, MFS Research Portfolio, MFS Emerging Growth
Companies Portfolio and Morgan Stanley Emerging Markets Equity Portfolio may
seek to obtain additional income by making secured loans of portfolio
securities with a value up to 33 1/3% of their respective total assets. The
EQ/ Putnam Growth & Income Value Portfolio and EQ/Putnam Balanced Portfolio
may lend portfolio securities in an amount
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up to 25% of their respective total assets. The Merrill Lynch Basic Value
Equity Portfolio, Merrill Lynch World Strategy Portfolio and Warburg Pincus
Small Company Value Portfolio may each lend portfolio securities in an amount
up to 20% of their respective total assets. All securities loans will be made
pursuant to agreements requiring the loans to be continuously secured by
collateral in cash or high-grade debt obligations at least equal at all times
to the market value of the loaned securities. The borrower pays to the
Portfolios an amount equal to any dividends or interest received on loaned
securities. The Portfolios retain all or a portion of the interest received
on investment of cash collateral or receive a fee from the borrower. Lending
portfolio securities involves risks of delay in recovery of the loaned
securities or in some cases loss of rights in the collateral should the
borrower fail financially. Further information concerning each Portfolio's
fundamental policy with respect to loans is provided in the Statement of
Additional Information.
Short Sales Against the Box. The Warburg Pincus Small Company Value Portfolio
and Morgan Stanley Emerging Markets Equity Portfolio may enter into a "short
sale" of securities in circumstances in which, at the time the short position
is open, the Portfolio owns an equal amount of the securities sold short or
owns preferred stocks or debt securities, convertible or exchangeable without
payment of further consideration, into an equal number of securities sold
short. This kind of short sale, which is referred to as one "against the
box," may be entered into by each Portfolio to, for example, lock in a sale
price for a security the Portfolio does not wish to sell immediately or to
postpone a gain or loss for federal income tax purposes. Each Portfolio will
deposit, in a segregated account with its custodian or a qualified
subcustodian, the securities sold short or convertible or exchangeable
preferred stocks or debt securities sold in connection with short sales
against the box. Each Portfolio will endeavor to offset transaction costs
associated with short sales against the box with the income from the
investment of the cash proceeds. Not more than 10% of a Portfolio's net
assets (taken at current value) may be held as collateral for short sales
against the box at any one time. The extent to which a Portfolio may make
short sales may be limited by Code requirements for qualification as a
regulated investment company.
Small Company Securities. The EQ/Putnam Balanced Portfolio, Morgan Stanley
Emerging Markets Equity Portfolio and Warburg Pincus Small Company Value
Portfolio may invest in the securities of smaller capitalization companies.
Investing in securities of small companies may involve greater risks since
these securities may have limited marketability and, thus, may be more
volatile. Because smaller companies normally have fewer shares outstanding
than larger companies, it may be more difficult for a Portfolio to buy or
sell significant amounts of shares without an unfavorable impact on
prevailing prices. In addition, small companies are typically subject to a
greater degree of changes in earnings and business prospects than are larger,
more established companies. There is typically less publicly available
information concerning smaller companies than for larger, more established
ones. Therefore, an investment in these Portfolios may involve a greater
degree of risk than an investment in other Portfolios that seek capital
appreciation by investing in better-known, larger companies.
Structured Notes. The Morgan Stanley Emerging Markets Equity Portfolio may
invest in structured notes, which are derivatives on which the amount of
principal repayment and/or interest payments is based upon the movement of
one or more factors. These factors include, but are not limited to, currency
exchange rates, interest rates (such as the prime lending rate and LIBOR) and
stock indices such as the S&P 500. In some cases, the impact of the movements
of these factors may increase or decrease through the use of multipliers or
deflators. The use of structured notes allows the Portfolio to tailor its
investments to the specific risks and returns the Adviser wishes to accept
while avoiding or reducing certain other risks.
Swaps. The Morgan Stanley Emerging Markets Equity Portfolio may invest in
swap contracts, which are derivatives in the form of a contract or other
similar instrument which is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The payment
streams are calculated by reference to a specified index and agreed upon
notional amount. The term "specified index" includes, but is not limited to,
currencies, fixed interest rates, prices and total return on interest rate
indices, fixed-income indices, stock indices and commodity indices (as well
as amounts derived from arithmetic operations on these indices). For example,
the Portfolio may agree to swap the return generated by a fixed-income index
for the return generated by a second fixed-income index. The Portfolio will
usually enter into swaps on a net basis, i.e., the two return streams are
netted out in a cash settlement
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on the payment date or dates specified in the instrument, with the Portfolio
receiving or paying, as the case may be, only the net amount of the two
returns. The Portfolio's obligations under a swap agreement will be accrued
daily (offset against any amounts owing to the Portfolio) and any accrued but
unpaid net amounts owed to a swap counterparty will be covered by the
maintenance of a segregated account consisting of cash, or other liquid
obligations. The Portfolio will not enter into any swap agreement unless the
counterparty meets the rating requirements set forth in guidelines
established by the Trust's Board of Trustees. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively
liquid. Swaps that include more recent innovations for which standardized
documentation has not yet been fully developed are less liquid than
"traditional" swaps. The use of swaps is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser is incorrect in
its forecasts of market values, interest rates, and currency exchange rates,
the investment performance of the Portfolio would be less favorable than it
would have been if this investment technique were not used.
United States Government Securities. Each Portfolio may invest in debt
obligations of varying maturities issued or guaranteed by the United States
Government, its agencies or instrumentalities ("United States Government
securities"). Direct obligations of the United States Treasury include a
variety of securities that differ in their interest rates, maturities and
dates of issuance. United States Government securities also include
securities issued or guaranteed by government agencies that are supported by
the full faith and credit of the United States (e.g., securities issued by
the Government National Mortgage Association); securities issued or
guaranteed by government agencies that are supported by the ability to borrow
from the United States Treasury (e.g., securities issued by the Federal
National Mortgage Association); and securities issued or guaranteed by
government agencies that are only supported by the credit of the particular
agency (e.g., the Tennessee Valley Authority).
Warrants. Warrants are securities that give the holder the right, but not the
obligation to purchase equity issues of the company issuing the warrants, or
a related company, at a fixed price either on a date certain or during a set
period. At the time of issue, the cost of a warrant is substantially less
than the cost of the underlying security itself, and price movements in the
underlying security are generally magnified in the price movements of the
warrant. This effect enables the investor to gain exposure to the underlying
security with a relatively low capital investment but increases an investor's
risk in the event of a decline in the value of the underlying security and
can result in a complete loss of the amount invested in the warrant. In
addition, the price of a warrant tends to be more volatile than, and may not
correlate exactly to, the price of the underlying security. If the market
price of the underlying security is below the exercise price of the warrant
on its expiration date, the warrant will generally expire without value.
Zero-Coupon Bonds. The EQ/Putnam Growth & Income Value Portfolio, EQ/Putnam
Balanced Portfolio and Morgan Stanley Emerging Markets Equity Portfolio may
invest in zero-coupon bonds. Zero-coupon bonds are issued at a significant
discount from their principal amount and pay interest only at maturity rather
than at intervals during the life of the security. The value of zero-coupon
bonds is subject to greater fluctuation in response to changes in market
interest rates than bonds which pay interest in cash currently. Zero-coupon
bonds allow an issuer to avoid the need to generate cash to meet current
interest payments. Accordingly, such bonds may involve greater credit risks
than bonds paying interest currently. Even though such bonds do not pay
current interest in cash, a Portfolio is nonetheless required to accrue
interest income on such investments and to distribute such amounts at least
annually to investors in such instruments. Thus, each Portfolio could be
required, at times, to liquidate other investments in order to satisfy its
distribution requirements.
Portfolio Turnover. The length of time a Portfolio has held a particular
security is not generally a consideration in investment decisions. A change
in the securities held by a Portfolio is known as "portfolio turnover." Each
Portfolio's turnover rate is not expected to exceed 100% during its first
year of operation. A high turnover rate increases transaction costs (e.g.,
brokerage commissions) and increases realized gains and losses.
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MANAGEMENT OF THE TRUST
THE BOARD OF TRUSTEES
The Board of Trustees of the Trust provides broad supervision over the
business and affairs of the Portfolios and the Trust as provided in the
Trust's Amended and Restated Declaration of Trust and By-Laws.
THE MANAGER
The Trust is managed by EQ Financial Consultants, Inc. which, subject to the
supervision and direction of the Trustees of the Trust, has overall
responsibility for the general management and administration of the Trust.
The Manager is an investment adviser registered under the Investment Advisers
Act of 1940, as amended, and a broker-dealer registered under the Securities
Exchange Act of 1934, as amended ("1934 Act"). It is located at 1755
Broadway, New York, New York 10019. The Manager currently furnishes
specialized investment advice to other clients, including individuals,
pension and profit sharing plans, trusts, charitable organizations,
corporations and other business entities. The Manager is a Delaware
corporation and an indirect, wholly-owned subsidiary of Equitable, a New York
stock life insurance company.
The Manager is responsible for providing investment management and
administrative services to the Trust and in the exercise of such
responsibility selects, subject to review and approval by the Trustees, the
investment advisers for the Trust's Portfolios and monitors the Advisers'
investment programs and results, reviews brokerage matters, oversees
compliance by the Trust with various federal and state statutes, and carries
out the directives of the Board of Trustees. The Manager is responsible for
providing the Trust with office space, office equipment, and personnel
necessary to operate and administer the Trust's business, and also supervises
the provision of services by third parties such as the Trust's custodian.
As compensation for managing the T. Rowe Price Equity Income Portfolio,
EQ/Putnam Growth & Income Value Portfolio, EQ/Putnam Balanced Portfolio, MFS
Research Portfolio, MFS Emerging Growth Companies Portfolio and Merrill Lynch
Basic Value Equity Portfolio the Trust pays the Manager a monthly fee at the
annual rate of .55% of the respective Portfolio's average daily net assets.
As compensation for managing the T. Rowe Price International Stock Portfolio,
the Trust pays the Manager a monthly fee at the annual rate of .75% of the
Portfolio's average daily net assets. As compensation for managing the
Merrill Lynch World Strategy Portfolio, the Trust pays the Manager a monthly
fee at an annual rate of .70% of the Portfolio's average daily net assets. As
compensation for managing the Morgan Stanley Emerging Markets Equity
Portfolio, the Trust pays the Manager a monthly fee at an annual rate of
1.15% of the Portfolio's average daily net assets. As compensation for
managing the Warburg Pincus Small Company Value Portfolio, the Trust pays the
Manager a monthly fee at an annual rate of .65% of the Portfolio's average
daily net assets.
The Manager pays the expenses of providing investment advisory services to
the Portfolios, including the fees of the Adviser of each Portfolio.
In addition to the management fees, the Trust pays all expenses not assumed
by the Manager, including, without limitation: the fees and expenses of its
independent auditors and of its legal counsel; the costs of printing and
mailing annual and semi-annual reports to shareholders, proxy statements,
prospectuses, prospectus supplements and statements of additional
information, all to the extent they are sent to existing Contract owners; the
costs of printing registration statements; bank transaction charges and
custodian's fees; any proxy solicitors' fees and expenses; filing fees; any
federal, state or local income or other taxes; any interest; any membership
fees of the Investment Company Institute and similar organizations; fidelity
bond and Trustees' liability insurance premiums; and any extraordinary
expenses, such as indemnification payments or damages awarded in litigation
or settlements made. All general Trust expenses are allocated among and
charged to the assets of the Portfolios of the Trust on a basis that the
Trustees deem fair and equitable, which may be on the basis of relative net
assets of each Portfolio or the nature of the services performed and relative
applicability to each Portfolio. As discussed in greater detail below, under
"Distribution of the Trust's Shares," the Class IB shares may pay for certain
distribution related expenses in connection with activities primarily
intended to result in the sale of its shares.
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THE ADVISERS
Pursuant to an investment advisory agreement with the Manager, each Adviser
to a Portfolio furnishes continuously an investment program for the
Portfolio, makes investment decisions on behalf of the Portfolio, places all
orders for the purchase and sale of investments for the Portfolio's account
with brokers or dealers selected by such Adviser and may perform certain
limited related administrative functions in connection therewith.
For its services, the Manager pays each Adviser an advisory fee based on a
percentage of the average daily net assets of the Portfolio that it advises.
Monthly, with respect to each Portfolio, each Adviser is paid the pro rata
portion of an annual fee, based on the monthly average of the assets of the
Portfolio for which it serves as the Adviser. The Manager will retain, as
compensation for the services described under "The Manager" and to pay its
expenses, the difference between the fees paid to each Adviser and the
management fee of the applicable Portfolio. Each Adviser has agreed that once
the Portfolio has paid the Manager its management fee the Adviser will look
only to the Manager as the party responsible for making the payment of its
advisory fee.
The Advisers are employed for management of the assets of a Portfolio
pursuant to investment advisory agreements approved by the Board of Trustees
of the Trust (including a majority of certain Trustees who are not interested
persons of the Trust or the Manager), and an Adviser's services may be
terminated at any time by the Manager, the Board of Trustees, or the
shareholders of an affected Portfolio.
The Trust has submitted an application requesting an exemptive order from the
Securities and Exchange Commission ("SEC") that would permit the Manager,
subject to certain conditions, and without the approval of shareholders to:
(a) employ a new Adviser or Advisers for any Portfolio pursuant to the terms
of a new Advisory Agreement, in each case either as a replacement for an
existing Adviser or as an additional Adviser; (b) change the terms of any
Advisory Agreement; and (c) continue the employment of an existing Adviser on
the same advisory contract terms where a contract has been assigned because
of a change in control of the Adviser. In such circumstances, shareholders
would receive notice of such action, including the information concerning the
Adviser that normally is provided in the Prospectus. It is uncertain at this
time whether such exemptive relief will be granted by the SEC.
T. Rowe Price Associates, Inc. ("T. Rowe Price"), 100 East Pratt Street,
Baltimore, MD 21202, has been the Adviser to the T. Rowe Price Equity Income
Portfolio since the Portfolio commenced its operations. As compensation for
services as the Portfolio's Adviser, the Manager pays T. Rowe Price a monthly
fee at the annual rate of .40% of the Portfolio's average daily net assets.
T. Rowe Price was incorporated in Maryland in 1947 as successor to the
investment counseling business founded by the late Thomas Rowe Price, Jr., in
1937. As of December 31, 1996, T. Rowe Price and its affiliates managed more
than $95 billion of assets. T. Rowe Price serves as investment manager to a
variety of individual and institutional investor accounts, including limited
and real estate partnerships and other mutual funds. Investment decisions
with respect to the T. Rowe Price Equity Income Portfolio are made by an
Investment Advisory Committee composed of the following members: Brian C.
Rogers, Chairman, Thomas H. Broadus, Jr., Richard P. Howard, and William J.
Stromberg. The Committee Chairman has day-to-day responsibility for managing
the Portfolio and works with the Committee in developing and executing the
Portfolio's investment program. Mr. Rogers has been Chairman of the Committee
since 1993. He joined T. Rowe Price in 1982 and has been managing investments
since 1983.
Rowe Price-Fleming International, Inc. ("Price-Fleming"), 100 East Pratt
Street, Baltimore, MD 21202, has been the Adviser to the T. Rowe Price
International Stock Portfolio. As compensation for services as the
Portfolio's Adviser, the Manager pays Price-Fleming a monthly fee at the
annual rate equal to: .75% of the Portfolio's average daily net assets up to
and including $20 million; .60% of the Portfolio's average daily net assets
over $20 million and up to and including $50 million; and .50% of the
Portfolio's average daily net assets in excess of $50 million.
Price-Fleming was incorporated in Maryland in 1979 as a joint venture between
T. Rowe Price and Robert Fleming Holdings Limited ("Flemings"). As of
December 31, 1996, Price-Fleming managed the United States equivalent of
approximately $25 billion. Flemings was incorporated in 1974 in the United
Kingdom
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as successor to the business founded by Robert Fleming in 1873. Flemings is a
diversified investment organization which participates in a global network of
regional investment offices in New York, London, Zurich, Geneva, Tokyo, Hong
Kong, Manila, Kuala Lumpur, South Korea and Taiwan. The common stock of
Price-Fleming is 50% owned by a wholly-owned subsidiary of T. Rowe Price, 25%
by a subsidiary of Flemings and 25% by Jardine Fleming Group Limited
("Jardine Fleming"). (Half of Jardine Fleming is owned by Flemings and half
by Jardine Matheson Holdings Limited.) T. Rowe Price has the right to elect a
majority of the board of directors of Price-Fleming, and Flemings has the
right to elect the remaining directors, one of whom will be nominated by
Jardine Fleming.
Investment decisions with respect to the T. Rowe Price International Stock
Portfolio are made by an investment advisory group composed of the following
members: Martin G. Wade, Christopher D. Alderson, Peter B. Askew, Richard J.
Bruce, Mark J. T. Edwards, John R. Ford, Robert C. Howe, James B. M. Seddon,
Benedict R. F. Thomas and David J. L. Warren. Martin Wade joined
Price-Fleming in 1979 and has 27 years of experience with the Fleming Group
in research, client service and investment management. (Fleming Group
includes Flemings and/or Jardine Fleming.) Christopher Alderson joined
Price-Fleming in 1988 and has 10 years of experience with the Fleming Group
in research and portfolio management. Peter Askew joined Price-Fleming in
1988 and has 21 years of experience managing multi-currency fixed income
portfolios. Richard Bruce joined Price-Fleming in 1991 and has eight years of
experience in investment management with the Fleming Group in Tokyo. Mark
Edwards joined Price-Fleming in 1986 and has 15 years of experience in
financial analysis. John Ford joined Price-Fleming in 1982 and has 16 years
of experience with the Fleming Group in research and portfolio management.
Robert Howe joined Price Fleming in 1986 and has 15 years of experience in
economic research, company research and portfolio management. James Seddon
joined Price-Fleming in 1987 and has nine years of experience in investment
management. Benedict Thomas joined Price-Fleming in 1988 and has seven years
of portfolio management experience. David Warren joined Price-Fleming in 1984
and has 16 years of experience in equity research, fixed income research and
portfolio management.
Putnam Investment Management, Inc. ("Putnam Management") has been the Adviser
to the EQ/Putnam Growth & Income Value Portfolio and EQ/Putnam Balanced
Portfolio since each Portfolio commenced operations. As compensation for
services as the Adviser to the EQ/Putnam Growth & Income Portfolio and
EQ/Putnam Balanced Portfolio, the Manager pays Putnam Management a monthly
fee at an annual rate equal to: .50% of the respective Portfolio's average
daily net assets up to and including $150 million; .45% of the respective
Portfolio's average daily net assets over $150 million and up to and
including $300 million; and .35% of the respective Portfolio's average daily
net assets in excess of $300 million.
Putnam Management has been managing mutual funds since 1937. Putnam
Management is located at One Post Office Square, Boston, MA 02109. As of
December 31, 1996, Putnam Management and its affiliates managed more than
$173 billion of assets. Putnam Management is a subsidiary of Putnam
Investments, Inc., which is wholly owned by Marsh & McLennan Companies, Inc.,
a publicly-owned holding company whose principal businesses are international
insurance and reinsurance brokerage, employee benefit consulting and
investment management. Anthony I. Kreisel has been responsible for the day to
day management of the EQ/Putnam Growth & Income Value Portfolio since the
Portfolio commenced operations, which includes investment decisions made on
behalf of the Portfolio. Mr. Kreisel has been employed by Putnam Management
as an investment professional since 1986. Messrs. Edward P. Bousa, Kenneth J.
Taubes and Robert M. Paine are responsible for the day to day management of
the EQ/Putnam Balanced Portfolio, which includes investment decisions made on
behalf of the Portfolio. Mr. Bousa has been employed by Putnam Management as
an investment professional since October, 1992. Prior to October, 1992, Mr.
Bousa was Vice President and Portfolio Manager at Fidelity Investments. Mr.
Taubes has been employed by Putnam Management as an investment professional
since 1991. Mr. Paine has been employed by Putnam Management as an investment
professional since 1987.
Massachusetts Financial Services Company ("MFS") has been the Adviser to the
MFS Research Portfolio and the MFS Emerging Growth Companies Portfolio since
each Portfolio commenced operations. As compensation for services as the
Adviser to each of those Portfolios, the Manager pays MFS a monthly fee at an
annual rate equal to: .40% of the respective Portfolio's average daily net
assets up to and
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including $150 million; .375% of the respective Portfolio's average daily net
assets over $150 million and up to and including $300 million; and .35% of
the respective Portfolio's average daily net assets in excess of $300
million. MFS has agreed to waive its advisory fees for the first six months
after the commencement of each Portfolio's investment operations.
MFS is America's oldest mutual fund organization. MFS is located at 500
Boylston Street, Boston, MA 02116. MFS and its predecessor organizations have
a history of money management dating from 1924 and the founding of the first
mutual fund in the United States, Massachusetts Investors Trust. As of
January 31, 1997, MFS managed more than $54.0 billion on behalf of over 2.3
million investors accounts. MFS is a subsidiary of Sun Life of Canada (United
States), which, in turn, is a wholly-owned subsidiary of Sun Life Assurance
Company of Canada. MFS has established a strategic alliance with Foreign &
Colonial Management Ltd. ("Foreign & Colonial"). Foreign & Colonial is a
subsidiary of two of the world's oldest financial services institutions, the
London-based Foreign & Colonial Investment Trust PLC, which pioneered the
idea of investment management in 1868, and HYPO-BANK (Bayerische
Hypotheken-und Weschsel-Bank AG), the oldest publicly listed bank in Germany,
founded in 1835. As part of this alliance, the portfolio managers and
investment analysts of MFS and Foreign & Colonial share their views on a
variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other
portfolio management matters. The portfolio securities of the MFS Research
Portfolio are selected by a committee of investment research analysts. This
committee includes investment analysts employed not only by MFS but also by
MFS International (U.K.) Limited, a wholly owned subsidiary of MFS. The
assets of the MFS Research Portfolio are allocated among industries by the
analysts acting together as a group. Individual analysts are then responsible
for selecting what they view as the securities best suited to meet the
investment objectives of the MFS Research Portfolio within their assigned
industry responsibility. Since it commenced operations the MFS Emerging
Growth Companies Portfolio has been managed by John W. Ballen, a Senior Vice
President of MFS, who has been employed by the Adviser as a portfolio manager
since 1984, and Toni K. Shimura, a Vice President of MFS, who has been
employed as a portfolio manager by the Adviser since 1987.
Morgan Stanley Asset Management Inc. ("MSAM") has been the Adviser to the
Morgan Stanley Emerging Markets Equity Portfolio since the Portfolio
commenced operations. MSAM is located at 1221 Avenue of the Americas, New
York, NY 10020. As compensation for services as the Portfolio's Adviser, the
Manager pays MSAM a monthly fee at an annual rate equal to: 1.15% of the
Portfolio's average daily net assets up to and including $100 million; .90%
of the Portfolio's average daily net assets over $100 million and up to and
including $150 million; .80% of the Portfolio's average daily net assets over
$150 million and up to and including $200 million; .60% of the Portfolio's
average daily net assets over $200 million and up to and including $500
million; and .40% of the Portfolio's average daily net assets in excess of
$500 million.
MSAM conducts a worldwide investment management business, providing a broad
range of portfolio management services to customers in the United States and
abroad. MSAM is a wholly owned subsidiary of Morgan Stanley Group Inc., which
is a publicly owned financial services corporation listed on the New York,
London and Pacific stock exchanges. MSAM serves an investment adviser to
numerous open-end and closed-end investment companies. As of December 31,
1996, MSAM, together with its affiliated asset management companies, had
approximately $172 billion in assets under management and fiduciary care. On
February 5, 1997, Morgan Stanley Group Inc. and Dean Witter, Discover & Co.
announced that they had entered into an Agreement and Plan of Merger to form
Morgan Stanley, Dean Witter, Discover & Co. Morgan Stanley Group Inc. is the
direct parent of MSAM. It is currently anticipated that the transaction will
close in mid-1997. Thereafter, MSAM will be a subsidiary of Morgan Stanley,
Dean Witter, Discover & Co. Dean Witter, Discover & Co. is a financial
services company with three major businesses: full service brokerage, credit
services and asset management.
Madhav Dhar and Marianne L. Hay have been responsible for the day to day
management of the Morgan Stanley Emerging Markets Equity Portfolio, which
includes investment decisions made on behalf of the Portfolio, since the
Portfolio commenced operations. Mr. Dhar is a Managing Director of MSAM and
Morgan Stanley & Co. Incorporated ("Morgan Stanley") and a Director of the
Morgan Stanley Emerging
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Markets Fund, Inc. He joined MSAM in 1984. Ms. Hay is a Managing Director of
MSAM and Morgan Stanley. She joined MSAM in June 1993. Prior to joining MSAM,
she was a director of Martin Currie Investment Management, Ltd., where her
responsibilities included geographic asset allocation and portfolio
management for global and emerging markets funds.
Warburg, Pincus Counsellors, Inc. ("WPC") has been the Adviser to the Warburg
Pincus Small Company Value Portfolio since the Portfolio commenced
operations. WPC is located at 466 Lexington Avenue, New York, New York
10017-3147. As compensation for services as the Portfolio's Adviser, the
Manager pays WPC a monthly fee at an annual rate of .50% of the Portfolio's
average daily net assets.
WPC is a professional investment counselling firm that provides investment
services to investment companies, employee benefit plans, endowment funds,
foundations and other institutions and individuals. As of January 31, 1997,
WPC managed approximately $17.9 billion in assets. WPC, incorporated in 1970,
is a wholly-owned subsidiary of Warburg, Pincus Counsellors G.P. ("Warburg
G.P."), a New York general partnership, which itself is controlled by
Warburg, Pincus & Co. ("WP&Co."), also a New York general partnership. Lionel
I. Pincus, the managing partner of WP&Co., may be deemed to control both
WP&Co. and WPC. Warburg G. P. has no business other than being a holding
company of WPC and its subsidiaries.
George U. Wyper has been responsible for the day to day management of the
Warburg Pincus Small Company Value Portfolio, which includes investment
decisions made on behalf of the Portfolio, since the Portfolio commenced
operations. Mr. Wyper is a managing director of WPC, which he joined in
August, 1994. Before joining WPC, he was chief investment officer of White
River Corporation and president of Hanover Advisors, Inc. from 1993 to
August, 1994. Prior to that position, he was chief investment officer of Fund
American Enterprises, Inc. from 1990 to 1993. Kyle F. Frey, a senior vice
president of WPC, is associate portfolio manager and research analyst of the
Portfolio. Mr. Frey has been with WPC since 1989.
Merrill Lynch Asset Management, L.P. ("MLAM") has been the Adviser to the
Merrill Lynch World Strategy Portfolio and the Merrill Lynch Basic Value
Equity Portfolio since each Portfolio commenced operations. MLAM is located
at 800 Scudders Mill Road, Plainsboro, New Jersey 08543-9011. As compensation
for services as the Merrill Lynch World Strategy Portfolio's Adviser, the
Manager pays MLAM a monthly fee at an annual rate equal to: .50% of the
Portfolio's average daily net assets up to and including $100 million; .45%
of the Portfolio's average daily net assets over $100 million and up to and
including $300 million; and .35% of the Portfolio's average daily net assets
in excess of $300 million. As compensation for services as the Merrill Lynch
Basic Value Equity Portfolio's Adviser, the Manager pays MLAM a monthly fee
at an annual rate equal to: .40% of the Portfolio's average daily net assets
up to and including $100 million; .375% of the Portfolio's average daily net
assets over $100 million and up to and including $300 million; and .35% of
the Portfolio's average daily net assets in excess of $300 million.
MLAM is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc., a
financial services holding company and the parent of Merrill Lynch, Pierce,
Fenner & Smith Incorporated. The general partner of MLAM is Princeton
Services, Inc., a wholly-owned subsidiary of Merrill Lynch & Co., Inc. MLAM
and its affiliates act as the manager for more than 130 registered investment
companies. MLAM also offers portfolio management and portfolio analysis
services to individuals and institutions. As of December 31, 1996, the
Adviser and its affiliates had a total of approximately $234 billion in
investment company and other portfolio assets under management, including
assets of certain affiliates of MLAM.
Thomas R. Robinson is the portfolio manager of the Merrill Lynch World
Strategy Portfolio. Mr. Robinson has served as a Senior Portfolio Manager of
MLAM since 1995. Mr. Robinson has been primarily responsible for the day to
day management of the Portfolio's securities portfolio since it commenced
operations. Kevin Rendino is the portfolio manager of the Merrill Lynch Basic
Value Equity Portfolio. Mr. Rendino has been a Vice President of MLAM since
1993 and was a Senior Research Analyst of MLAM from 1990 to 1992. Mr. Rendino
has been primarily responsible for the day to day management of the
Portfolio's securities portfolio since it commenced operations.
THE ADMINISTRATOR
Pursuant to an agreement ("Mutual Funds Service Agreement"), Chase Global
Funds Services Company (the "Administrator") assists the Manager in the
performance of its administrative responsibilities to the
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Trust and provides the Trust with other necessary administrative, fund
accounting and compliance services. In addition, the Administrator makes
available the office space, equipment, personnel and facilities required to
provide such services to the Trust. For these services, the Trust pays the
Administrator a monthly fee at the annual rate of .0525 of 1% of the total
Trust assets, plus $25,000 for each Portfolio, until the total Trust assets
reach $2.0 billion, and when the total Trust assets exceed $2.0 billion:
.0425 of 1% of the first $0.5 billion of the total Trust assets; .035 of 1%
of the next $2.0 billion of the total Trust assets; .025 of 1% of the next
$1.0 billion of the total Trust assets; .015 of 1% of the next $2.5 billion
of the total Trust assets; .01 of 1% of the total Trust assets in excess of
$6.0 billion; and except that the annual fee payable to Chase with respect to
any Portfolio which commences operation after July 1, 1997 and whose assets
do not exceed $200 million shall be computed at the annual rate of .0525% of
the Portfolio's total assets plus $25,000.
THE TRANSFER AGENT
Equitable serves as the transfer agent and dividend disbursing agent of the
Trust and receives no compensation for serving in such capacity.
EXPENSE LIMITATION AGREEMENTS
In the interest of limiting expenses of the Portfolios, the Manager has
entered into an expense limitation agreement with the Trust, with respect to
each Portfolio ("Expense Limitation Agreements"), pursuant to which the
Manager has agreed to waive or limit its fees and to assume other expenses so
that the total annual operating expenses of each Portfolio are limited to:
.85% of the respective average daily net assets of the T. Rowe Price Equity
Income, EQ/Putnam Growth & Income Value, MFS Research, MFS Emerging Growth
Companies and Merrill Lynch Basic Value Equity Portfolios; .90% of the
EQ/Putnam Balanced Portfolio's average daily net assets; 1.00% of the Warburg
Pincus Small Company Value Portfolio's average daily net assets; 1.20% of the
respective average daily net assets of the T. Rowe Price International Stock
and Merrill Lynch World Strategy Portfolios; and 1.75% of the Morgan Stanley
Emerging Markets Equity Portfolio's average daily net assets.
Each Portfolio may at a later date reimburse to the Manager the management
fees waived or limited and other expenses assumed and paid by the Manager
pursuant to the Expense Limitation Agreement provided such Portfolio has
reached a sufficient asset size to permit such reimbursement to be made
without causing the total annual expense ratio of each Portfolio to exceed
the percentage limits stated above. Consequently, no reimbursement by a
Portfolio will be made unless: (i) the Portfolio's assets exceed $100
million; (ii) the Portfolio's total annual expense ratio is less than the
respective percentages stated above; and (iii) the payment of such
reimbursement has been approved by the Trust's Board of Trustees on a
quarterly basis.
BROKERAGE PRACTICES
In selecting brokers and dealers, the Manager and each Adviser may consider
research and brokerage services furnished to either company and their
affiliates. Subject to seeking the most favorable net price and execution
available, the Manager and each Adviser may also consider sales of shares of
the Trust as a factor in the selection of brokers and dealers.
TRANSACTIONS WITH AFFILIATES
In December 1984, Equitable acquired Donaldson, Lufkin & Jenrette, Inc.
("DLJ"). A DLJ subsidiary, Donaldson, Lufkin & Jenrette Securities
Corporation, is one of the nation's largest investment banking and securities
firms. Another DLJ subsidiary, Autranet, Inc., is a securities broker that
markets independently originated research to institutions. Through the
Pershing Division of Donaldson, Lufkin & Jenrette Securities Corporation, DLJ
supplies security execution and clearance services to financial
intermediaries including broker-dealers and banks. To the extent permitted by
law, the Trust may engage in securities and other transactions with the above
entities or may invest in shares of the investment companies with which those
entities have affiliations. The Adviser to the T. Rowe Price International
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Stock and T. Rowe Price Equity Income Portfolios may execute portfolio
transactions through certain affiliates of Robert Fleming Holdings Limited
and Jardine Fleming Group Limited, which are persons indirectly related to
the Adviser, acting as an agent in accordance with procedures established by
the Trust's Board of Trustees. The Adviser to the Merrill Lynch World
Strategy Portfolio and Merrill Lynch Basic Value Equity Portfolio may execute
portfolio transactions through certain of the Adviser's affiliates. The
Adviser to the Morgan Stanley Emerging Markets Equity Portfolio may execute
portfolio transactions through certain affiliates.
The 1940 Act generally prohibits the Trust from engaging in principal
securities transactions with an affiliate of the Manager or Advisers unless
pursuant to an exemptive order from the SEC. The Trust may apply for such
exemptive relief. The Trust has adopted procedures, prescribed by Section
17(e)(2)(A) of the 1940 Act and Rule 17e-1 thereunder, which are reasonably
designed to provide that any commission it pays to affiliates of the Manager
or Advisers does not exceed the usual and customary broker's commission. In
addition, the Trust will adhere to Section 11(a) of the 1934 Act and any
applicable rules thereunder governing floor trading. The Trust has adopted
procedures permitting it to purchase securities, under certain restrictions
prescribed by a rule under the 1940 Act, in a public offering in which an
affiliate of the Manager or Advisers is an underwriter.
DESCRIPTION OF THE TRUST AND TRUST'S SHARES
THE TRUST
The Trust is a registered open-end management investment company that was
organized as a Delaware business trust on October 31, 1996. As of May 1,
1997, Separate Account FP, a separate account of Equitable, owned 100% of the
shares of the T. Rowe Price Equity Income Portfolio and through such
ownership may be deemed a controlling person of each Portfolio. The Trust
currently is divided into twelve portfolios, each of which has Class IA and
Class IB shares. The Board of Trustees may establish additional portfolios
and additional classes of shares.
CHARACTERISTICS OF TRUST'S SHARES
The Board of Trustees of the Trust has authority to issue an unlimited number
of shares of beneficial interest, without par value. Each share of each class
of a Portfolio shall be entitled to one vote (or fraction thereof in respect
of a fractional share) on matters that such shares (or class of shares) shall
be entitled to vote. Shareholders of each Portfolio shall vote together on
any matter, except to the extent otherwise required by the 1940 Act, or when
the Board of Trustees of the Trust has determined that the matter affects
only the interest of shareholders of one or more classes, in which case only
the shareholders of such class or classes shall be entitled to vote thereon.
Any matter shall be deemed to have been effectively acted upon with respect
to each Portfolio if acted upon as provided in Rule 18f-2 under the 1940 Act,
or any successor rule, and in the Amended and Restated Declaration of Trust.
The Trust is not required to hold annual shareholder meetings, but special
meetings may be called for purposes such as electing or removing Trustees,
changing fundamental policies or approving an investment management or
advisory agreement.
Under the Trust's multi-class system, shares of each class of a Portfolio
represent an equal pro rata interest in that Portfolio and, generally, shall
have identical voting, dividend, liquidation, and other rights, preferences,
powers, restrictions, limitations, qualifications and terms and conditions,
except that: (a) each class shall have a different designation; (b) each
class of shares shall bear its "Class Expenses;" (c) each class shall have
exclusive voting rights on any matter submitted to shareholders that relates
solely to its distribution arrangements; (d) each class shall have separate
voting rights on any matter submitted to shareholders in which the interests
of one class differ from the interests of any other class; (e) each class may
have separate exchange privileges, although exchange privileges are not
currently contemplated; and (f) each class may have different conversion
features, although a conversion feature is not currently contemplated.
Expenses currently designated as "Class Expenses" by the Trust's Board of
Trustees under the plan pursuant to Rule 18f-3 are currently limited to
payments made to the Distributors for the Class IB shares, pursuant to the
Distribution Plan for the Class IB shares adopted pursuant to Rule 12b-1
under the 1940 Act.
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PURCHASE AND REDEMPTION OF SHARES
EQ Financial, 1755 Broadway, New York, New York, 10019, formerly Equico
Securities, Inc., a wholly-owned subsidiary of Equitable, serves as one of
the Distributors for the Trust's Class IB shares pursuant to a distribution
agreement with the Trust. EDI, 1290 Avenue of the Americas, New York, New
York, 10104, a Delaware corporation and an indirect wholly-owned subsidiary
of Equitable, also serves as one of the Distributors for the Trust's Class IB
shares pursuant to a distribution agreement with the Trust. Class IB shares
are offered and redeemed without a sales charge, at net asset value. The
price at which a purchase or redemption is effected is based on the next
calculation of net asset value after an order is placed by an insurance
company investing in or redeeming from the Trust. Net asset value per share
is calculated for purchases and redemption of shares of each Portfolio by
dividing the value of total Portfolio assets, less liabilities (including
Trust expenses, which are accrued daily), by the total number of outstanding
shares of that Portfolio. The net asset value per share of each Portfolio is
determined each business day at 4:00 p.m. Eastern time. Net asset value per
share is not calculated on national business holidays.
The Trust also has distribution agreements for its Class IA shares with EQ
Financial and EDI pursuant to which each of them acts as the Distributor for
the Class IA shares of the Trust.
The Trust has adopted the Distribution Plan pursuant to Rule 12b-1 under the
1940 Act for the Class IB shares of the Trust. Pursuant to the Distribution
Plan, the Trust compensates the Distributors from assets attributable to the
Class IB shares for services rendered and expenses borne in connection with
activities primarily intended to result in the sale of the Trust's Class IB
shares. It is anticipated that a portion of the amounts received by the
Distributors will be used to defray various costs incurred or paid by the
Distributors in connection with the printing and mailing of Trust
prospectuses, statements of additional information, any supplements thereto
and shareholder reports and holding seminars and sales meetings with
wholesale and retail sales personnel designed to promote the distribution of
Class IB shares. The Distributors may also use a portion of the amounts
received to provide compensation to financial intermediaries and third-party
broker-dealers for their services in connection with the distribution of
Class IB shares.
The Distribution Plan provides that the Trust, on behalf of each Portfolio,
may pay annually up to 0.50% of the average daily net assets of a Portfolio
attributable to its Class IB shares in respect of activities primarily
intended to result in the sale of Class IB shares. However, under the
Distribution Agreements, payments to the Distributors for activities pursuant
to the Distribution Plan are limited to payments at an annual rate equal to
0.25% of average daily net assets of a Portfolio attributable to its Class IB
shares. Under terms of the Distribution Plan and the Distribution Agreements,
each Portfolio is authorized to make payments monthly to the Distributors
which may be used to pay or reimburse entities providing distribution and
shareholder servicing with respect to the Class IB shares for such entities'
fees or expenses incurred or paid in that regard.
The Distribution Plan is of a type known as a "compensation" plan because
payments are made for services rendered to the Trust with respect to Class IB
shares regardless of the level of expenditures by the Distributors. The
Trustees will, however, take into account such expenditures for purposes of
reviewing operations under the Distribution Plan and in connection with their
annual consideration of the Plan's renewal. The Distributors have indicated
that they expect their expenditures to include, without limitation: (a) the
printing and mailing of Trust prospectuses, statements of additional
information, any supplements thereto and shareholder reports for prospective
Contract owners with respect to the Class IB shares of the Trust; (b) those
relating to the development, preparation, printing and mailing of
advertisements, sales literature and other promotional materials describing
and/or relating to the Class IB shares of the Trust; (c) holding seminars and
sales meetings designed to promote the distribution of Trust Class IB shares;
(d) obtaining information and providing explanations to wholesale and retail
distributors of Contracts regarding Trust investment objectives and policies
and other information about the Trust and its Portfolios, including the
performance of the Portfolios; (e) training sales personnel regarding the
Class IB shares of the Trust; and (f) financing any other activity that the
Distributors determines is primarily intended to result in the sale of Class
IB shares.
29
<PAGE>
All shares are purchased and redeemed in accordance with the Trust's Amended
and Restated Declaration of Trust and By-Laws. Sales and redemptions of
shares of the same class by the same shareholder on the same day will be
netted for each Portfolio. All redemption requests will be processed and
payment with respect thereto will normally be made within seven days after
tenders. The Trust may suspend redemption, if permitted by the 1940 Act, for
any period during which the New York Stock Exchange is closed or during which
trading is restricted by the SEC or the SEC declares that an emergency
exists. Redemption may also be suspended during other periods permitted by
the SEC for the protection of the Trust's shareholders. If the Board of
Trustees determines that it would be detrimental to the best interest of the
Trust's remaining shareholders to make payment in cash, the Trust may pay
redemption proceeds in whole or in part by a distribution-in-kind of readily
marketable securities.
HOW ASSETS ARE VALUED
Values are determined according to accepted accounting practices and all laws
and regulations that apply. The assets of each Portfolio are generally valued
as follows:
o Stocks and debt securities which mature in more than 60 days are
valued on the basis of market quotations.
o Foreign securities not traded directly in the United States are
valued at representative quoted prices in the currency of the
country of origin. Foreign currency amounts are translated into
United States dollars at the bid price last quoted by a composite
list of major United States banks.
o Short-term debt securities in the Portfolios which mature in 60
days or less are valued at amortized cost, which approximates
market value.
o Other securities and assets for which market quotations are not
readily available or for which valuation cannot be provided are
valued in good faith by the Valuation Committee of the Board of
Trustees of the Trust using its best judgment.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Under current federal income tax law, the Trust believes that each Portfolio
is entitled, and the Trust intends that each Portfolio shall qualify each
year and elect, to be treated as a regulated investment company ("RIC") under
Subchapter M of the Code. As a RIC, a Portfolio will not be subject to
federal tax on its net investment income and net realized capital gains to
the extent such income and gains are timely distributed to its insurance
company shareholders. Accordingly, each Portfolio intends to distribute all
of its net investment income and net realized capital gains to its
shareholders. An insurance company that is a shareholder of a Portfolio will
generally not be taxed on distributions from that Portfolio. All dividend
distributions will be reinvested in full and fractional shares of the
Portfolio to which they relate.
Although the Trust intends that it and the Portfolios will be operated so
that they will have no federal income or excise tax liability, if any such
liability is nevertheless incurred, the investment performance of the
Portfolio or Portfolios incurring such liability will be adversely affected.
In addition, Portfolios investing in foreign securities and currencies may be
subject to foreign taxes which could reduce the investment performance of
such Portfolio.
In addition to meeting investment diversification rules applicable to
regulated investment companies under Subchapter M of the Code, each Portfolio
will also comply with the investment diversification requirements of
Subchapter L of the Code. Were any Portfolio to fail to comply with those
requirements, owners of Contracts (other than "pension plan contracts")
funded through the Trust would be taxed immediately on the accumulated
investment earnings under their Contracts and would thereby lose any benefit
of tax deferral. Compliance is therefore carefully monitored by the
Administrator and the Manager.
Certain additional tax information appears in the Statement of Additional
Information.
For more information regarding the tax implications for owners of Contracts
investing in the Trust, refer to the prospectuses for those Contracts.
30
<PAGE>
PERFORMANCE INFORMATION
From time to time, the Trust may advertise the "average annual or cumulative
total return" and may compare the performance of the Portfolios with that of
other mutual funds with similar investment objectives as listed in rankings
prepared by Lipper Analytical Services, Inc., or similar independent services
monitoring mutual fund performance, and with appropriate securities or other
relevant indices. The "average annual total return" of a Portfolio refers to
the average annual compounded rate of return over the stated period that
would equate an initial investment in that Portfolio at the beginning of the
period to its ending redeemable value, assuming reinvestment of all dividends
and distributions and deduction of all recurring charges, other than charges
and deductions which may be imposed under the Contracts. Performance figures
will be given for the recent one, five and ten year periods and for the life
of the Portfolio if it has not been in existence for any such periods. When
considering "average annual total return" figures for periods longer than one
year, it is important to note that a Portfolio's annual total return for any
given year might have been greater or less than its average for the entire
period. "Cumulative total return" represents the total change in value of an
investment in a Portfolio for a specified period (again reflecting changes in
Portfolio share prices and assuming reinvestment of Portfolio distributions).
The methods used to calculate "average annual and cumulative total return"
are described further in the Statement of Additional Information.
The performance of each Portfolio will vary from time to time in response to
fluctuations in market conditions, interest rates, the composition of the
Portfolio's investments and expenses. Consequently, a Portfolio's performance
figures are historical and should not be considered representative of the
performance of the Portfolio for any future period. Such performance does not
reflect fees and charges imposed under the Contracts, which fees and charges
will reduce such performance figures; therefore, these figures may be of
limited use for comparative purposes. No Portfolio will use information
concerning its investment performance in advertisements or sales materials
unless appropriate information concerning the relevant separate account is
also included.
PRIOR PERFORMANCE OF EACH ADVISER
The following tables provide information concerning the historical
performance of another registered investment company (or series) managed by
each Adviser, that has investment objectives, policies, strategies and risks
substantially similar to those of its respective Portfolio(s) of the Trust.
The data is provided to illustrate the past performance of each Adviser in
managing a substantially similar investment vehicle as measured against
specified market indices and does not represent the past performance of any
of the Portfolios or the future performance of any Portfolio or its Adviser.
Consequently, potential investors should not consider this performance data
as an indication of the future performance of any Portfolio of the Trust or
of its Adviser.
Each Adviser's performance data shown below was calculated in accordance with
standards prescribed by the SEC for the calculation of average annual total
return information for registered investment companies. Share prices and
investment returns will fluctuate reflecting market conditions as well as
changes in company-specific fundamentals of portfolio securities.
31
<PAGE>
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO
In the table below, the only account which is included is another registered
investment company, i.e., T. Rowe Price International Stock Fund, which is
managed by Rowe Price-Fleming International, Inc., and whose investment
policies are substantially similar to T. Rowe Price International Stock
Portfolio. However, T. Rowe Price International Stock Fund will be subject to
different expenses than the T. Rowe Price International Stock Portfolio. In
addition, holders of variable insurance contracts representing interests in
the T. Rowe Price International Stock Portfolio will be subject to charges
and expenses relating to such insurance contracts. The performance results
presented below do not reflect any insurance related expenses.
The investment results of T. Rowe Price International Stock Fund presented
below are unaudited and are not intended to predict or suggest the returns
that might be experienced by the T. Rowe Price International Stock Portfolio
or an individual investor investing in the T. Rowe Price International Stock
Portfolio.
<TABLE>
<CAPTION>
T. ROWE PRICE
INTERNATIONAL STOCK MSCI EAFE
YEAR ENDING 3/31/97 FUND(1) INDEX(2)
- ------------------- ------------------------- -----------
<S> <C> <C>
One Year(3) ........ 9.71% 1.75%
Five Years(3) ...... 12.19% 10.91%
Ten Years(3) ....... 10.05% 6.36%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The Morgan Stanley Capital International Europe, Australia, and Far East
Indes ("MSCI EAFE Index") is an unmanaged capitalization-weighted
measure of stock markets in Europe, Australia, the Far East and Canada.
MSCI EAFE Index returns assume dividends reinvested net of withholding
tax and do not reflect any fees or expenses.
(3) Annualized performance for the shares of the T. Rowe Price International
Stock Fund.
32
<PAGE>
T. ROWE PRICE EQUITY INCOME PORTFOLIO
In the table below, the only account which is included is another registered
investment company, i.e., T. Rowe Price Equity Income Fund, which is managed
by the T. Rowe Price Associates, Inc. and whose investment policies are
substantially similar to the T. Rowe Price Equity Income Portfolio. However,
the T. Rowe Price Equity Income Fund will be subject to different expenses
than the T. Rowe Price Equity Income Portfolio. In addition, holders of
variable insurance contracts representing interests in the T. Rowe Equity
Income Portfolio will be subject to charges and expenses relating to such
insurance contracts. The performance results presented below do not reflect
any insurance related expenses.
The investment results of T. Rowe Price Equity Income Fund presented below
are unaudited and are not intended to predict or suggest the returns that
might be experienced by the T. Rowe Price Equity Income Portfolio or an
individual investor investing in the T. Rowe Price Equity Income Portfolio.
<TABLE>
<CAPTION>
T. ROWE PRICE
EQUITY INCOME S&P 500
YEAR ENDING 3/31/97 FUND(1) INDEX(2)
- ------------------- ------------------- ---------
<S> <C> <C>
One Year(3) ........ 18.06% 19.82%
Five Years(3) ...... 16.95% 16.40%
Ten Years(3) ....... 13.35% 13.36%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The S&P 500 Index ("Index") is an unmanaged index containing common
stocks of 500 industrial, transportation, utility and financial
companies, regarded as generally representative of the United States
stock market. The Index reflects the reinvestment of income dividends
and capital gain distributions, if any, but does not reflect fees,
brokerage commissions, or other expenses of investing.
(3) Annualized performance for the shares of the T. Rowe Price Equity Income
Fund. The investment advisory fee applicable to the T. Rowe Price Equity
Income Fund was capped at 1.00% in 1986 and capped at the maximum
state-allowed fee in 1987.
33
<PAGE>
EQ/PUTNAM GROWTH & INCOME VALUE PORTFOLIO
The table below sets forth performance history for another registered
investment company, i.e., the Putnam Growth & Income Fund II, which is
managed by the Putnam Investment Management, Inc., and whose investment
policies are substantially similar to those of EQ/Putnam Growth & Income
Value Portfolio. Putnam Growth & Income Fund II will be subject to different
expenses than the EQ/Putnam Growth & Income Value Portfolio. In addition,
holders of variable insurance contracts representing interests in EQ/Putnam
Growth & Income Value will be subject to charges and expenses relating to
such insurance contract. The performance results presented below do not
reflect any insurance related expenses.
The investment results of Putnam Growth & Income Fund II presented below are
unaudited and are not intended to predict or suggest the returns that might
be experienced by the EQ/Putnam Growth & Income Value Portfolio or an
individual investor investing in the EQ/Putnam Growth & Income Value
Portfolio.
<TABLE>
<CAPTION>
PUTNAM GROWTH &
INCOME FUND S&P 500
YEAR ENDING 3/31/97 II(1) INDEX(2)
- ------------------- --------------- ---------
<S> <C> <C>
One Year(3) ........ 17.16% 19.82%
Since inception(3).. 25.44% 27.88
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The S&P 500 Index ("Index") is an unmanaged index containing common
stocks of 500 industrial, transportation, utility and financial
companies, regarded as generally representative of the United States
stock market. The Index reflects the reinvestment of income dividends
and capital gain distributions, if any, but does not reflect fees,
brokerage commissions, or other expenses of investing.
(3) Annualized performance for the Class A shares of the Putnam Growth &
Income Fund II. The inception date for the Putnam Growth & Income Fund
II was January, 1995. The Class A shares are subject to a front-end
sales charge of up to 5.75%. Other share classes have different expenses
and their performance will vary.
34
<PAGE>
EQ/PUTNAM BALANCED PORTFOLIO
The table below, sets forth performance history for another registered
investment company, i.e., The George Putnam Fund of Boston, which is managed
by the Putnam Investment Management, Inc., and whose investment policies are
substantially similar to those of EQ/Putnam Balanced Portfolio. The George
Putnam Fund of Boston will be subject to different expenses than the
EQ/Putnam Balanced Portfolio. In addition, holders of variable insurance
contracts representing interests in EQ/Putnam Balanced Portfolio will be
subject to charges and expenses relating to such insurance contract. The
performance results presented below do not reflect any insurance related
expenses.
The investment results of The George Putnam Fund of Boston presented below
are unaudited and are not intended to predict or suggest the returns that
might be experienced by the EQ/Putnam Balanced Portfolio or an individual
investor investing in the EQ/Putnam Balanced Portfolio.
<TABLE>
<CAPTION>
THE GEORGE PUTNAM S&P 500
YEAR ENDING 3/31/97 FUND OF BOSTON(1) INDEX(2)
- ------------------- ----------------- ---------
<S> <C> <C>
One Year(3) ........ 14.99% 19.82%
Five Years(3) ...... 13.11% 16.40%
Ten Years(3) ....... 10.97% 13.36%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The S&P 500 Index ("Index") is an unmanaged index containing common
stocks of 500 industrial, transportation, utility and financial
companies, regarded as generally representative of the United States
stock market. The Index reflects the reinvestment of income dividends
and capital gain distributions, if any, but does not reflect fees,
brokerage commissions, or other expenses of investing.
(3) Annualized performance for the Class A shares of The George Putnam Fund
of Boston. The Class A shares are subject to a front-end sales charge of
up to 5.75%. Other share classes have different expenses and their
performance will vary.
35
<PAGE>
MFS RESEARCH PORTFOLIO
In the table below, the only account which is included is another registered
investment company, i.e., MFS Research Fund which is managed by the
Massachusetts Financial Services Company and whose investment policies are
substantially similar to MFS Research Portfolio. However, MFS Research Fund
will be subject to different expenses than the MFS Research Portfolio. In
addition, holders of variable insurance contracts representing interests in
the MFS Research Portfolio will be subject to charges and expenses relating
to such insurance contracts. The performance results presented below do not
reflect any insurance related expenses.
The investment results of MFS Research Fund presented below are unaudited and
are not intended to predict or suggest the returns that might be experienced
by the MFS Research Portfolio or an individual investor investing in the MFS
Research Portfolio.
<TABLE>
<CAPTION>
MFS RESEARCH S&P 500
YEAR ENDING 3/31/97 FUND(1) INDEX(2)
- ------------------- ------------------ ---------
<S> <C> <C>
One Year(3) ........ 12.96% 19.82%
Five Years(3) ...... 18.13% 16.40%
Ten Years(3) ....... 12.91% 13.36%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The S&P 500 Index ("Index") is an unmanaged index containing common
stocks of 500 industrial, transportation, utility and financial
companies, regarded as generally representative of the United States
stock market. The Index reflects the reinvestment of income dividends
and capital gain distributions, if any, but does not reflect fees,
brokerage commissions, or other expenses of investing.
(3) Annualized performance for the Class A shares of the MFS Research Fund.
The results for the MFS Research Fund do not reflect any sales charge
that may be imposed on the Class A shares of the MFS Research Fund, nor
any charges that would be imposed at the insurance company separate
account level.
36
<PAGE>
MFS EMERGING GROWTH COMPANIES PORTFOLIO
In the table below, the only account which is included is another registered
investment company, i.e., MFS Emerging Growth Fund which is managed by the
Massachusetts Financial Services Company and whose investment policies are
substantially similar to MFS Emerging Growth Companies Portfolio. However,
MFS Emerging Growth Fund will be subject to different expenses than the MFS
Emerging Growth Companies Portfolio. In addition, holders of variable
insurance contracts representing interests in the MFS Emerging Growth
Companies Portfolio will be subject to charges and expenses relating to such
insurance contracts. The performance results presented below do not reflect
any insurance related expenses.
The investment results of MFS Emerging Growth Fund presented below are
unaudited and are not intended to predict or suggest the returns that might
be experienced by the MFS Emerging Growth Companies Portfolio or an
individual investor investing in the MFS Emerging Growth Companies Portfolio.
<TABLE>
<CAPTION>
MFS EMERGING RUSSELL 2000
YEAR ENDING 3/31/97 GROWTH FUND(1) INDEX(2)
- ------------------- -------------- --------------
<S> <C> <C>
One Year(3) ........ 2.32% 5.11%
Five Years(3) ...... 16.85% 12.78%
Ten Years(3) ....... 14.72% 9.42%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The Russell 2000 Index is an unmanaged index (with no defined investment
objective) of 2000 small-cap stocks and it includes reinvestments of
dividends. It is compiled by the Frank Russell Company.
(3) Annualized performance for the Class B shares of the MFS Emerging Growth
Fund. The results for the MFS Emerging Growth Fund do not reflect any
sales charge that may be imposed on the Class B shares of the MFS
Emerging Growth Fund, nor any charges that would be imposed at the
insurance company separate account level.
37
<PAGE>
MORGAN STANLEY EMERGING MARKETS EQUITY PORTFOLIO
In the table below, the only account which is included is another registered
investment company, i.e., Morgan Stanley Institutional Fund Inc.--Emerging
Markets Portfolio ("MSIF Emerging Markets Portfolio"), which is managed by
Morgan Stanley Asset Management Inc. and whose investment policies are
substantially similar to the Morgan Stanley Emerging Markets Equity
Portfolio. Operating expenses of the MSIF Emerging Markets Portfolio will be
different from the operating expenses of the Morgan Stanley Emerging Markets
Equity Portfolio. In addition, holders of variable insurance contracts
representing interests in the Morgan Stanley Emerging Markets Equity
Portfolio will be subject to charges and expenses relating to such insurance
contracts. The performance results presented below do not reflect any
insurance related expenses.
The investment results of the MSIF Emerging Markets Portfolio presented
below, which represent a Class A share outstanding for the period, are
unaudited and are not intended to predict or suggest the returns that might
be experienced by the Morgan Stanley Emerging Markets Equity Portfolio or an
individual investor investing in the Morgan Stanley Emerging Markets Equity
Portfolio.
<TABLE>
<CAPTION>
IFC GLOBAL
TOTAL RETURN
MSIF EMERGING COMPOSITE
YEAR ENDING 3/31/97 MARKETS PORTFOLIO 1, 2 INDEX(3)
- ------------------------------------------------ ---------------------- ----------------
<S> <C> <C>
One Year(4) .................................... 13.01% 11.39%
Average Annual Total Return Since inception(4).. 14.61% 14.21%
</TABLE>
- ------------
(1) In accordance with SEC regulations, the performance shown assumes that
all recurring fees (including management fees) were deducted and all
dividends and distributions were reinvested. Average annual total return
reflects changes in share prices and reinvestment of dividends and
distributions and is net of fund expenses.
(2) The expense ratio of MSIF Emerging Markets Portfolio has capped at 1.75%
since inception.
(3) The IFC Global Total Return Composite Index is an unmanaged index of
common stocks and includes developing countries in Latin America, East
and South Asia, Europe, the Middle East and Africa. The Index assumes
dividends are reinvested.
(4) Annualized performance for the Class A shares of the MSIF Emerging
Markets Portfolio. The Class B shares of the MSIF Emerging Markets
Portfolio are subject to a Rule 12b-1 fee equal to 0.25% of the
Portfolio's assets. The inception date for the MSIF Emerging Markets
Portfolio was September 25, 1992.
38
<PAGE>
WARBURG PINCUS SMALL COMPANY VALUE PORTFOLIO
In the table below, the only account which is included is another registered
investment company, i.e., Warburg Pincus Small Company Value Fund which is
managed by the Warburg, Pincus Counsellors, Inc. and whose investment
policies are substantially similar to the Warburg Pincus Small Company Value
Portfolio. However, the Warburg Pincus Small Company Value Fund will be
subject to different expenses than the Warburg Pincus Small Company Value
Portfolio. In addition, holders of variable insurance contracts representing
interests in the Warburg Pincus Small Company Value Portfolio will be subject
to charges and expenses relating to such insurance contracts. The performance
results presented below do not reflect any insurance related expenses.
The investment results of Warburg Pincus Small Company Value Portfolio
presented below are unaudited and are not intended to predict or suggest the
returns that might be experienced by the Warburg Pincus Small Company Value
Portfolio or an individual investor investing in such Portfolio and should
not be considered a substitute for the Warburg Pincus Small Company Value
Portfolio's own performance information.
<TABLE>
<CAPTION>
WARBURG PINCUS SMALL RUSSELL 2000
YEAR ENDING 3/31/97 COMPANY VALUE FUND(1, 2) INDEX(3)
- ------------------- ------------------------ --------------
<S> <C> <C>
One Year(4) ........ 30.33% 5.11%
Since inception(4) . 38.44% 10.47%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) Absent the waiver of fees by the Warburg Pincus Small Company Value
Fund's investment adviser and co-administrator, management fees of the
Warburg Pincus Small Company Value Fund would equal 1.00%, other
expenses would equal .94% and total operating expenses would equal
2.19%. The investment adviser and co-administrator of the Warburg Pincus
Small Company Value Fund are under no obligation to continue these
waivers.
(3) The Russell 2000 Index is an unmanaged index (with no defined investment
objective) of 2,000 small-cap stocks, and includes reinvestment of
dividends. It is compiled by the Frank Russell Company.
(4) Annualized performance for shares of the Warburg Pincus Small Company
Value Fund. The inception date for the Warburg Pincus Small Company
Value Fund was December 29, 1995.
39
<PAGE>
MERRILL LYNCH WORLD STRATEGY PORTFOLIO
In the table below, the only account which is included is a series of another
registered investment company, i.e., Merrill Lynch Global Strategy Focus
Fund, a series of Merrill Lynch Variable Series Funds, Inc., which is managed
by Merrill Lynch Asset Management, L.P. and whose investment policies are
substantially similar to the Merrill Lynch World Strategy Portfolio. However,
the Merrill Lynch Global Strategy Focus Fund will be subject to different
expenses than the Merrill Lynch World Strategy Portfolio. In addition,
holders of variable insurance contracts representing interests in the Merrill
Lynch World Strategy Portfolio will be subject to charges and expenses
relating to such insurance contracts. The performance results presented below
do not reflect any insurance related expenses.
The investment results of Merrill Lynch Global Strategy Focus Fund presented
below are unaudited and are not intended to predict or suggest the returns
that might be experienced by the Merrill Lynch World Strategy Portfolio or an
individual investor investing in the Merrill Lynch World Strategy Portfolio.
<TABLE>
<CAPTION>
MERRILL LYNCH
VARIABLE SERIES FUNDS, INC.--
MERRILL LYNCH MSCI EAFE
YEAR ENDING 3/31/97 GLOBAL STRATEGY FOCUS FUND(1) INDEX(2)
- ------------------- ----------------------------- -----------
<S> <C> <C>
One Year(3) ........ 13.50% 1.75%
Five Year(3)........ 9.52% 10.91%
Since inception(3) . 9.20% 8.91%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The Morgan Stanley Capital International Europe, Australia, and Far East
Index ("MSCI EAFE Index") is an unmanaged capitalization-weighted
measure of stock markets in Europe, Australia, the Far East and Canada.
MSCI EAFE Index returns assume dividends reinvested net of withholding
tax and do not reflect any fees or expenses.
(3) Annualized performance for shares of the Merrill Lynch Global Strategy
Focus Fund. The inception date for the Merrill Lynch Global Strategy
Focus Fund was February 28, 1992.
40
<PAGE>
MERRILL LYNCH BASIC VALUE EQUITY PORTFOLIO
In the table below, the only account which is included is another registered
investment company, i.e., Merrill Lynch Basic Value Focus Fund, a series of
Merrill Lynch Variable Series Funds, Inc., which is managed by Merrill Lynch
Asset Management, L.P. and whose investment policies are substantially
similar to the Merrill Lynch Basic Value Equity Portfolio. However, the
Merrill Lynch Basic Value Focus Fund will be subject to different expenses
than the Merrill Lynch Basic Value Equity Portfolio. In addition, holders of
variable insurance contracts representing interests in the Merrill Lynch
Basic Value Equity Portfolio will be subject to charges and expenses relating
to such insurance contracts. The performance results presented below do not
reflect any insurance related expenses.
The investment results of Merrill Lynch Basic Value Focus Fund presented
below are unaudited and are not intended to predict or suggest the returns
that might be experienced by the Merrill Lynch Basic Value Equity Portfolio
or an individual investor investing in the Merrill Lynch Basic Value Equity
Portfolio.
<TABLE>
<CAPTION>
MERRILL LYNCH
VARIABLE SERIES FUNDS, INC.--
MERRILL LYNCH S&P 500
YEAR ENDING 3/31/97 BASIC VALUE FOCUS FUND(1) INDEX(2)
- ------------------- ----------------------------- ---------
<S> <C> <C>
One Year(3) ........ 14.82% 19.82%
Since inception(3) . 15.39% 17.78%
</TABLE>
- ------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(2) The S&P 500 Index ("Index") is an unmanaged index containing common
stocks of 500 industrial, transportation, utility and financial
companies, regarded as generally representative of the United States
stock market. The Index reflects the reinvestment of income dividends
and capital gain distributions, if any, but does not reflect fees,
brokerage commissions, or other expenses of investing.
(3) Annualized performance for shares of the Merrill Lynch Basic Value Focus
Fund. The inception date for the Merrill Lynch Basic Value Focus Fund
was July 1, 1993.
41
<PAGE>
APPENDIX A
The following table summarizes the historical performance information of
certain other registered investment companies that appears on pages 32
through 41 of this Prospectus. Each other registered investment company is
managed by an Adviser and has investment objectives, policies, strategies and
risks substantially similar to the Portfolio managed by that Adviser. For
further information regarding each of the registered investment companies and
the indexes presented below, please refer to pages 32 through 41 of this
Prospectus.
ANNUALIZED RATES OF RETURN
PERIODS ENDING MARCH 31, 1997
<TABLE>
<CAPTION>
SINCE
FUND NAME 1 YEAR 5 YEARS 10 YEARS INCEPTION
- ----------------------------------------- -------- --------- ---------- -----------
<S> <C> <C> <C> <C>
DOMESTIC EQUITY SERIES
- ----------------------------------------- -------- --------- ---------- -----------
T. ROWE PRICE EQUITY INCOME FUND 18.06% 16.95% 13.35% --
- ----------------------------------------- -------- --------- ---------- -----------
S&P 500 Index 19.82% 16.40% 13.36% --
- ----------------------------------------- -------- --------- ---------- -----------
PUTNAM GROWTH & INCOME FUND II 17.16% -- -- 25.44%
- ----------------------------------------- -------- --------- ---------- -----------
S&P 500 Index 19.82% -- -- 27.88%
- ----------------------------------------- -------- --------- ---------- -----------
MERRILL LYNCH BASIC VALUE FOCUS FUND 14.82% -- -- 15.39%
- ----------------------------------------- -------- --------- ---------- -----------
S&P 500 Index 19.82% -- -- 17.78%
- ----------------------------------------- -------- --------- ---------- -----------
MFS RESEARCH FUND 12.96% 18.13% 12.91% --
- ----------------------------------------- -------- --------- ---------- -----------
S&P 500 Index 19.82% 16.40% 13.36% --
- ----------------------------------------- -------- --------- ---------- -----------
INTERNATIONAL EQUITY SERIES
- ----------------------------------------- -------- --------- ---------- -----------
T. ROWE PRICE INTERNATIONAL STOCK FUND 9.71% 12.19% 10.05% --
- ----------------------------------------- -------- --------- ---------- -----------
MSCI EAFE Index 1.75% 10.91% 6.32% --
- ----------------------------------------- -------- --------- ---------- -----------
MSIF EMERGING MARKETS PORTFOLIO 13.01% -- -- 14.61%
- ----------------------------------------- -------- --------- ---------- -----------
IFC Global Total Return Composite Index 11.39% -- -- 14.21%
- ----------------------------------------- -------- --------- ---------- -----------
AGGRESSIVE DOMESTIC EQUITY SERIES
- ----------------------------------------- -------- --------- ---------- -----------
WARBURG PINCUS SMALL COMPANY VALUE FUND 30.33% -- -- 38.46%
- ----------------------------------------- -------- --------- ---------- -----------
Russell 2000 Index 5.11% -- -- 10.47%
- ----------------------------------------- -------- --------- ---------- -----------
MFS EMERGING GROWTH FUND 2.32% 16.85% 14.72% --
- ----------------------------------------- -------- --------- ---------- -----------
Russell 2000 Index 5.11% 12.78% 9.42% --
- ----------------------------------------- -------- --------- ---------- -----------
ASSET ALLOCATION SERIES
- ----------------------------------------- -------- --------- ---------- -----------
THE GEORGE PUTNAM FUND OF BOSTON 14.99% 13.11% 10.97% --
- ----------------------------------------- -------- --------- ---------- -----------
S&P 500 Index 19.82% 16.40% 13.36% --
- ----------------------------------------- -------- --------- ---------- -----------
MERRILL LYNCH GLOBAL STRATEGY FOCUS FUND 13.50% 9.52% -- 9.20%
- ----------------------------------------- -------- --------- ---------- -----------
MSCI EAFE Index 1.75% 10.91% -- 8.91%
- ----------------------------------------- -------- --------- ---------- -----------
</TABLE>
A-1
<PAGE>
EQ ADVISORS TRUST
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus for the EQ Advisors Trust ("Trust")
dated May 1, 1997, which may be obtained without charge by writing to the
Trust at 1290 Avenue of the Americas, New York, New York 10104. Unless
otherwise defined herein, capitalized terms have the meanings given to them
in the Prospectus.
TABLE OF CONTENTS
PAGE
----
General Information and History......................................... 2
Investment Restrictions................................................. 3
Description of Certain Securities in which the Portfolios May Invest ... 6
Management of the Trust................................................. 26
Investment Management and Other Services................................ 30
Brokerage Strategy...................................................... 33
Purchase and Pricing of Shares.......................................... 34
Redemption of Shares ................................................... 35
Certain Tax Considerations.............................................. 36
Portfolio Performance................................................... 38
Other Services.......................................................... 38
Financial Statements.................................................... 40
Appendix ............................................................... 44
- -----------------------------------------------------------------------------
<PAGE>
GENERAL INFORMATION AND HISTORY
THE TRUST
The Trust is an open-end management investment company--a type of company
commonly known as a "mutual fund." It is registered as such under the
Investment Company Act of 1940, as amended ("1940 Act"). The Trust, organized
as a Delaware business trust, currently offers two classes of shares on
behalf of the T. Rowe Price International Stock Portfolio, T. Rowe Price
Equity Income Portfolio, EQ/Putnam Growth & Income Value Portfolio, EQ/Putnam
International Equity Portfolio, EQ/Putnam Investors Growth Portfolio,
EQ/Putnam Balanced Portfolio, MFS Research Portfolio, MFS Emerging Growth
Companies Portfolio, Morgan Stanley Emerging Markets Equity Portfolio,
Warburg Pincus Small Company Value Portfolio, Merrill Lynch World Strategy
Portfolio and Merrill Lynch Basic Value Equity Portfolio (each a "Portfolio,"
and together the "Portfolios"). Class IA shares are offered at net asset
value and are not subject to distribution fees imposed pursuant to a
distribution plan. Class IB shares are offered at net asset value and are
subject to distribution fees imposed under a distribution plan ("Distribution
Plan") adopted pursuant to Rule 12b-1 under the 1940 Act.
The two classes of shares are currently offered under the Trust's multi-class
distribution system approved by the Trust's Board of Trustees on March 31,
1997, which is designed to allow promotion of insurance products investing in
the Trust through alternative distribution channels. Under the Trust's
multi-class distribution system, shares of each class of a Portfolio
represent an equal pro rata interest in that Portfolio and, generally, will
have identical voting, dividend, liquidation, and other rights, other than
the payment of distribution fees under the Distribution Plan.
The Trust continuously offers its shares exclusively to separate accounts of
insurance companies in connection with variable life insurance contracts and
variable annuity certificates and contracts (collectively, the "Contracts").
Class IA shares and Class IB shares currently are sold only to separate
accounts of The Equitable Life Assurance Society of the United States
("Equitable"). As of April 1, 1997, Separate Account FP, a separate account
of Equitable, owned 100% of the Trust's outstanding Class IA shares and Class
IB shares and, as a result, may be deemed to be a control person with respect
to the Trust.
As a "series" type of mutual fund, the Trust issues separate series of shares
of beneficial interest with respect to each Portfolio. Each Portfolio
resembles a separate fund issuing a separate class of stock. Because of
current federal securities law requirements, the Trust expects that its
shareholders will offer to owners of the Contracts (the "Contractowners") the
opportunity to instruct them as to how shares allocable to their Contracts
will be voted with respect to certain matters, such as approval of investment
advisory agreements. To the Trust's knowledge, as of the date of this
Statement of Additional Information ("SAI"), no Contractowners owned
Contracts entitling such persons to give voting instructions regarding more
than 5% of the outstanding shares of any Portfolio.
The Trust may in the future offer its shares to separate accounts of
insurance companies unaffiliated with Equitable, as well as to the
tax-qualified retirement plans. The Trust does not currently foresee any
disadvantages to Contractowners arising from offering the Trust's shares to
separate accounts of insurance companies that are unaffiliated with each
other or to tax-qualified retirement plans. However, it is theoretically
possible that, at some time, the interests of various Contractowners
participating in the Trust through their separate accounts and tax-qualified
retirement plans might conflict. In the case of a material irreconcilable
conflict, one or more separate accounts or the tax-qualified retirement plans
might withdraw their investments in the Trust, which would possibly force the
Trust to sell portfolio securities at disadvantageous prices. The Trustees of
the Trust intend to monitor events for the existence of any material
irreconcilable conflicts between or among such separate accounts and
tax-qualified retirement plans and will take whatever remedial action may be
necessary.
EQ Financial Consultants, Inc. ("Manager") is the investment manager for each
Portfolio. T. Rowe Price Associates, Inc. ("T. Rowe Price"), Price-Fleming
International, Inc. ("Price-Fleming"), Putnam Investment Management Inc.
("Putnam Management"), Massachusetts Financial Services Company ("MFS"),
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<PAGE>
Morgan Stanley Asset Management Inc. ("MSAM"), Warburg, Pincus Counsellors,
Inc. ("Warburg"), and Merrill Lynch Asset Management, L.P. ("MLAM") (each an
"Adviser," and together the "Advisers") serve as investment advisers to one
or more of the Portfolios, as described more fully in the Prospectus.
LEGAL CONSIDERATIONS
Under Delaware law, annual election of Trustees is not required, and, in the
normal course, the Trust does not expect to hold annual meetings of
shareholders. There will normally be no meetings of shareholders for the
purpose of electing Trustees unless and until such time as less than a
majority of the Trustees holding office have been elected by shareholders, at
which time the Trustees then in office will call a shareholders' meeting for
the election of Trustees. Pursuant to the procedures set forth in Section
16(c) of the 1940 Act, shareholders of record of not less than two-thirds of
the outstanding shares of the Trust may remove a Trustee by a vote cast in
person or by proxy at a meeting called for that purpose.
Except as set forth above, the Trustees will continue to hold office and may
appoint successor Trustees. Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in the election of Trustees
can, if they choose to do so, elect all the Trustees of the Trust, in which
event the holders of the remaining shares will be unable to elect any person
as a Trustee. The Amended and Restated Declaration of Trust of the Trust
requires the affirmative vote of a majority of the outstanding shares of the
Trust.
The shares of each Portfolio, when issued, will be fully paid and
non-assessable and will have no preference, preemptive, conversion, exchange
or similar rights.
INVESTMENT RESTRICTIONS
FUNDAMENTAL RESTRICTIONS
Each Portfolio has also adopted certain investment restrictions which are
fundamental and may not be changed without approval by a "majority" vote of
the Portfolio's shareholders. Such majority is defined in the 1940 Act as the
lesser of: (i) 67% or more of the voting securities of such Portfolio present
in person or by proxy at a meeting, if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy; or (ii)
more than 50% of the outstanding voting securities of such Portfolio. Set
forth below are each of the fundamental restrictions adopted by each of the
Portfolios. Fundamental policies (5) and (6) below shall not apply to the
Morgan Stanley Emerging Markets Equity Portfolio and the Merrill Lynch World
Strategy Portfolio. Certain non-fundamental operating policies are also
described in this section because of their direct relevance to the
fundamental restrictions adopted by the Portfolios.
Each Portfolio, except as described directly above, may not as a matter of
fundamental policy:
(1) Borrow money, except that:
a. each Portfolio may (i) borrow for non-leveraging, temporary or
emergency purposes and (ii) engage in reverse repurchase agreements
and make other investments or engage in other transactions, which may
involve a borrowing, in a manner consistent with the Portfolios'
respective investment objective and program, provided that the
combination of (i) and (ii) shall not exceed 33 1/3% of the value of
the Portfolios' respective total assets (including the amount
borrowed) less liabilities (other than borrowings) or such other
percentage permitted by law (except that the Merrill Lynch World
Strategy Portfolio and the Merrill Lynch Basic Value Equity Portfolio
may purchase securities on margin to the extent permitted by
applicable law). Any borrowings which come to exceed this amount will
be reduced in accordance with applicable law. Each Portfolio may
borrow from banks or other persons to the extent permitted by
applicable law;
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b. as a matter of non-fundamental operating policy, no Portfolio will
purchase additional securities when money borrowed exceeds 5% of its
total assets;
c. the EQ/Putnam Growth & Income Value Portfolio, EQ/Putnam International
Equity Portfolio, EQ/Putnam Investors Growth Portfolio, and EQ/Putnam
Balanced Portfolio each, as a matter of non-fundamental operating
policy, may borrow only from banks (i) as a temporary measure to
facilitate the meeting of redemption requests (not for leverage) which
might otherwise require the untimely disposition of portfolio
investments or (ii) for extraordinary or emergency purposes, provided
that the combination of (i) and (ii) shall not exceed 10% of the
applicable Portfolio's net assets (taken at lower of cost or current
value), not including the amount borrowed, at the time the borrowing
is made. Each Portfolio will repay borrowings before any additional
investments are purchased; and
d. the Merrill Lynch World Strategy Portfolio, as a matter of fundamental
policy, and the Merrill Lynch Basic Value Equity Portfolio, as a
matter of non-fundamental operating policy, may to the extent
permitted by applicable law, borrow up to an additional 5% of their
respective total assets for temporary purposes;
(2) Purchase or sell physical commodities, except that it may (i) enter into
futures contracts and options thereon in accordance with applicable law
and (ii) purchase or sell physical commodities if acquired as a result of
ownership of securities or other instruments. No Portfolio will consider
currency contracts, hybrid investments, swaps or other similar
instruments to be commodities;
(3) Purchase the securities of any issuer if, as a result, more than 25% of
the value of the Portfolio's total assets would be invested in the
securities of issuers having their principal business activities in the
same industry. United States, state or local governments, or related
agencies or instrumentalities, are not considered an industry. Industries
are determined by reference to the classifications of industries set
forth in each Portfolio's semi-annual and annual reports;
(4) Make loans, except that:
a. each Portfolio may: (i) lend portfolio securities provided that no
such loan may be made if, as a result, the aggregate of such loans
would exceed 33 1/3% of the value of the Portfolio's total assets;
(ii) purchase money market securities and enter into repurchase
agreements; and (iii) acquire publicly-distributed or privately-placed
debt securities and purchase debt securities. Each Portfolio will
consider the acquisition of a debt security to include the execution
of a note or other evidence of an extension of credit with a term of
more than nine months;
b. the EQ/Putnam Growth & Income Value Portfolio and EQ/Putnam
International Equity Portfolio, as a matter of non-fundamental
operating policy, may purchase debt obligations consistent with the
respective investment objectives and policies of each of those
Portfolios: (i) by entering into repurchase agreements with respect to
not more than 25% of the Portfolios' respective total assets (taken at
current value) or (ii) through the lending of the Portfolios'
portfolio securities with respect to not more than 25% of the
Portfolios' respective total assets (taken at current value);
c. the MFS Emerging Growth Companies Portfolio, as a matter or
non-fundamental operating policy, may lend its portfolio securities
provided that no such loan may be made if, as a result, the aggregate
of such loans would exceed 30% of its total assets (taken at market
value); and
d. the Warburg Pincus Small Company Value Portfolio, the Merrill Lynch
World Strategy Portfolio and the Merrill Lynch Basic Value Equity
Portfolio, as a matter of non-fundamental policy, may lend its
portfolio securities provided that no such loan may be made if, as a
result, the aggregate of such loans would exceed 20% of such
Portfolio's total assets (taken at market value);
4
<PAGE>
(5) Purchase a security if, as a result, with respect to 75% of the value of
its total assets, more than 5% of the value of the Portfolio's total
assets would be invested in the securities of a single issuer, except
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities;*
(6) Purchase a security if, as a result, with respect to 75% of the value of
the Portfolio's total assets, more than 10% of the outstanding voting
securities of any issuer would be held by the Portfolio (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities);*
(7) Purchase or sell real estate, except each Portfolio may purchase
securities of issuers which deal in real estate, securities which are
secured by interests in real estate, and securities which represent
interests in real estate, and each Portfolio may acquire and dispose of
real estate or interests in real estate acquired through the exercise of
its rights as a holder of debt obligations secured by real estate or
interests therein;
(8) Issue senior securities except in compliance with the 1940 Act; or
(9) Underwrite securities issued by other persons, except to the extent that
the Portfolio may be deemed to be an underwriter within the meaning of
the Securities Act of 1933, as amended (the "1933 Act"), in connection
with the purchase and sale of its portfolio securities in the ordinary
course of pursuing its investment objective, policies and program.
NON-FUNDAMENTAL RESTRICTIONS
The following investment restrictions apply to each Portfolio, but are not
fundamental. They may be changed for any Portfolio without a vote of that
Portfolio's shareholders.
Each Portfolio may not:
(1) Purchase a futures contract or an option thereon if, with respect to
positions in futures or options on futures which do not represent bona
fide hedging, the aggregate initial margin and premiums on such options
would exceed 5% of the Portfolio's net asset value;
(2) Purchase (a) illiquid securities, (b) securities restricted as to resale
(excluding securities determined by the Board of Trustees to be readily
marketable), and (c) repurchase agreements maturing in more than seven
days if, as a result, more than 15% of each Portfolio's net assets would
be invested in such securities. (Securities purchased in accordance with
Rule 144A under the 1933 Act and determined to be liquid by the Trust's
Board are not subject to the limitations set forth in this investment
restriction.);
(3) Purchase securities on margin, except that each Portfolio may: (a) make
use of any short-term credit necessary for clearance of purchases and
sales of portfolio securities and (b) make initial or variation margin
deposits in connection with futures contracts, options, currencies, or
other permissible investments;
(4) Mortgage, pledge, hypothecate or, in any manner, transfer any security
owned by the Portfolio as security for indebtedness, except as may be
necessary in connection with permissible borrowings or investments; and
then such mortgaging, pledging or hypothecating may not exceed 33 1/3% of
the respective total assets of each Portfolio (except for the EQ/Putnam
International Equity Portfolio), and may not exceed 15% of EQ/Putnam
International Equity Portfolio's total assets and 10% of each the Merrill
Lynch World Strategy Portfolio's and Merrill Lynch Basic Value Equity
Portfolio's total assets (taken at the lower of cost or market value),
each taken at the time of the permissible borrowing or investment. The
deposit of underlying securities and other assets in escrow and
collateral arrangements with respect to margin accounts for futures
contracts, options, currencies or other permissible investments are not
deemed to be mortgages, pledges, or hypothecations for these purposes;
- ------------
* The Morgan Stanley Emerging Markets Equity Portfolio and Merrill Lynch
World Strategy Portfolio are classified as non-diversified investment
companies under the 1940 Act and therefore these restrictions are not
applicable to these Portfolios.
5
<PAGE>
(5) Purchase participations or other direct interests in or enter into leases
with respect to, oil, gas, or other mineral exploration or development
programs, except that the MFS Emerging Growth Companies Portfolio,
Warburg Pincus Small Company Value Portfolio, Merrill Lynch World
Strategy Portfolio, and Merrill Lynch Basic Value Equity Portfolio may
invest in securities issued by companies that engage in oil, gas or other
mineral exploration or development activities or hold mineral leases
acquired as a result of its ownership of securities;
(6) Invest in puts, calls, straddles, spreads, swaps or any combination
thereof, except to the extent permitted by the Portfolio's Prospectus and
Statement of Additional Information, as may be amended from time to time;
or
(7) Effect short sales of securities unless at all times when a short
position is open the Portfolio owns an equal amount of such securities or
owns securities which, without payment of any further consideration, are
convertible into or exchangeable for securities of the same issue as, and
at least equal in amount to, the securities sold short. Permissible
futures contracts, options, or currency transactions will not be deemed
to constitute selling securities short.
In addition to the restrictions described above, some foreign countries
limit, or prohibit, all direct foreign investment in the securities of
companies domiciled therein. However, the governments of some countries have
authorized the organization of investment funds to permit indirect foreign
investment in such securities. For tax purposes these funds may be known as
passive foreign investment companies ("PFICs"). The Portfolios are subject to
certain percentage limitations under the 1940 Act relating to the purchase of
securities of investment companies, and, consequently, each Portfolio may
have to subject any of its investments in other investment companies,
including passive foreign investment companies, to the limitation that no
more than 10% of the value of the Portfolio's total assets may be invested in
such securities.
DESCRIPTION OF CERTAIN SECURITIES IN WHICH THE PORTFOLIOS MAY INVEST
ASSET-BACKED SECURITIES
Asset-backed securities, issued by trusts and special purpose corporations,
are backed by a pool of assets, such as credit card and automobile loan
receivables, representing the obligations of a number of different parties.
Asset-backed securities present certain risks. For instance, in the case of
credit card receivables, these securities may not have the benefit of any
security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If
the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders
of the related automobile receivables. In addition, because of the large
number of vehicles involved in a typical issuance and technical requirements
under state laws, the trustee for the holders of the automobile receivables
may not have a proper security interest in all of the obligations backing
such receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities. The underlying assets (e.g., loans) are also
subject to prepayments which shorten the securities' weighted average life
and may lower their return.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of
failures by obligors on underlying assets to make payments, the securities
may contain elements of credit support which fall into two categories: (i)
liquidity protection and (ii) protection against losses resulting from
ultimate default by an obligor on the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity administering
the pool of assets, to ensure that the receipt of payments on the underlying
pool occurs in a timely fashion. Protection against losses resulting from
ultimate default ensures payment through insurance policies or letters of
credit obtained by the issuer or sponsor from third parties. A Portfolio will
not pay any additional or
6
<PAGE>
separate fees for credit support. The degree of credit support provided for
each issue is generally based on historical information respecting the level
of credit risk associated with the underlying assets. Delinquency or loss in
excess of that anticipated or failure of the credit support could adversely
affect the return on an investment in such a security.
FOREIGN CURRENCY TRANSACTIONS
Forward Foreign Currency Transactions. A forward foreign currency exchange
contract ("forward contract") involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. These contracts are principally traded in the
interbank market conducted directly between currency traders (usually large,
commercial banks) and their customers. A forward contract generally has no
margin deposit requirement, and no commissions are charged at any stage for
trades.
A Portfolio may enter into forward contracts for a variety of purposes in
connection with the management of the foreign securities portion of its
portfolio. The Portfolio's use of such contracts will include, but not be
limited to, the following situations.
First, when the Portfolio enters into a contract for the purchase or sale of
a security denominated in a foreign currency, it may desire to "lock in" the
U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transactions, the Portfolio will
be able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, when a Portfolio's Adviser believes that one currency may experience
a substantial movement against another currency, including the U.S. dollar,
it may enter into a forward contract to sell or buy the amount of the former
foreign currency, approximating the value of some or all of the Portfolio's
portfolio securities denominated in such foreign currency. Alternatively,
where appropriate, the Portfolio may hedge all or part of its foreign
currency exposure through the use of a basket of currencies, multinational
currency units, or a proxy currency where such currency or currencies act as
an effective proxy for other currencies. In such a case, the Portfolio may
enter into a forward contract where the amount of the foreign currency to be
sold exceeds the value of the securities denominated in such currency. The
use of this basket hedging technique may be more efficient and economical
than entering into separate forward contracts for each currency held in the
Portfolio.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward
contract is entered into and the date it matures. The projection of
short-term currency market movement is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain.
Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the diversification strategies. However,
the Adviser to the Portfolio believes that it is important to have the
flexibility to enter into such forward contracts when it determines that the
best interests of the Portfolio will be served.
A Portfolio may enter into forward contracts for any other purpose consistent
with the Portfolio's investment objective and program. However, the Portfolio
will not enter into a forward contract, or maintain exposure to any such
contract(s), if the amount of foreign currency required to be delivered
thereunder would exceed the Portfolio's holdings of liquid, securities and
currency available for cover of the forward contract(s). In determining the
amount to be delivered under a contract, the Portfolio may net offsetting
positions.
At the maturity of a forward contract, a Portfolio may sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and either extend the maturity of the forward contract (by "rolling"
that contract forward) or may initiate a new forward contract. If a Portfolio
retains the portfolio security and engages in an offsetting transaction, the
Portfolio will incur a gain or a loss (as described
7
<PAGE>
below) to the extent that there has been movement in forward contract prices.
If the Portfolio engages in an offsetting transaction, it may subsequently
enter into a new forward contract to sell the foreign currency.
Should forward prices decline during the period between the Portfolio's
entering into a forward contract for the sale of a foreign currency and the
date it enters into an offsetting contract for the purchase of the foreign
currency, the Portfolio will realize a gain to the extent the price of the
currency it has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should forward prices increase, the Portfolio will suffer
a loss to the extent the price of the currency it has agreed to purchase
exceeds the price of the currency it has agreed to sell.
Although the Portfolio values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. The Portfolio will do so from time to time, and
investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize
a profit based on the difference ("spread") between the prices at which they
are buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to a Portfolio at one rate, while offering a lesser rate of
exchange should the Portfolio desire to resell that currency to the dealer.
Foreign Currency Options, Foreign Currency Futures Contracts and Options on
Futures. Each Portfolio (except for the MFS Research Portfolio and Merrill
Lynch Basic Value Equity Portfolio) may purchase or sell exchange-traded
foreign currency options, foreign currency futures contracts and related
options on foreign currency futures contracts as a hedge against possible
variations in foreign exchange rates. The Portfolios will write options on
foreign currency or on foreign currency futures contracts only if they are
"covered." A put on a foreign currency or on a foreign currency futures
contract written by a Portfolio will be considered "covered" if, so long as
the Portfolio is obligated as the writer of the put, it segregates with the
Portfolio's custodian cash, U.S. Government securities or other liquid
high-grade debt securities equal at all times to the aggregate exercise price
of the put. A call on a foreign currency or on a foreign currency future
contract written by the Portfolio will be considered "covered" only if the
Portfolio owns short term debt securities with a value equal to the face
amount of the option contract and denominated in the currency upon which the
call is written. Option transactions may be effected to hedge the currency
risk on non-U.S. dollar-denominated securities owned by a Portfolio, sold by
a Portfolio but not yet delivered or anticipated to be purchased by a
Portfolio. As an illustration, a Portfolio may use such techniques to hedge
the stated value in U.S. dollars of an investment in a Japanese
yen-denominated security. In these circumstances, a Portfolio may purchase a
foreign currency put option enabling it to sell a specified amount of yen for
dollars at a specified price by a future date. To the extent the hedge is
successful, a loss in the value of the dollar relative to the yen will tend
to be offset by an increase in the value of the put option.
Certain differences exist between foreign currency hedging instruments.
Foreign currency options provide the holder the right to buy or to sell a
currency at a fixed price on or before a future date. Listed options are
third-party contracts (performance is guaranteed by an exchange or clearing
corporation) which are issued by a clearing corporation, traded on an
exchange and have standardized prices and expiration dates. Over-the-counter
options are two-party contracts and have negotiated prices and expiration
dates. A futures contract on a foreign currency is an agreement between two
parties to buy and sell a specified amount of the currency for a set price on
a future date. Futures contracts and listed options on futures contracts are
traded on boards of trade or futures exchanges. Options traded in the
over-the-counter market may not be as actively traded as those on an
exchange, so it may be more difficult to value such options. In addition, it
may be difficult to enter into closing transactions with respect to options
traded over-the-counter. See "Options"--"Over-the-Counter Options," below.
A Portfolio will not speculate in foreign currency options, futures or
related options. Accordingly, a Portfolio will not hedge a currency
substantially in excess of the market value of the securities denominated in
that currency which it owns or the expected acquisition price of securities
which it anticipates purchasing.
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For information concerning the risks associated with utilizing options,
futures contracts, and forward foreign currency exchange contracts, please
see "Risks of Transactions in Options, Futures Contracts and Forward Currency
Contracts" on page 22.
FOREIGN SECURITIES
Foreign securities involve currency risks. The value of a foreign security
denominated in foreign currency changes with variations in the exchange
rates. Fluctuations in exchange rates may also affect the earning power and
asset value of the foreign entity issuing a security, even one denominated in
U.S. dollars. Dividend and interest payments will be repatriated based on the
exchange rate at the time of disbursement, and restrictions on capital flows
may be imposed.
Foreign securities may be subject to foreign government taxes which reduce
their attractiveness. Other risks of investing in such securities include
political or economic instability in the country involved, the difficulty of
predicting international trade patterns and the possibility of imposition of
exchange controls. The prices of such securities may be more volatile than
those of domestic securities. In addition, there may be less publicly
available information about a foreign issuer than about a domestic issuer.
Foreign issuers generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
issuers. There is generally less regulation of stock exchanges, brokers,
banks and listed companies abroad than in the United States, and settlements
may be slower and may be subject to failure. With respect to certain foreign
countries, there is a possibility of expropriation of assets or
nationalization, imposition of withholding taxes on dividend or interest
payments, difficulty in obtaining and enforcing judgments against foreign
entities or diplomatic developments which could affect investment in these
countries. Losses and other expenses may be incurred in converting between
various currencies in connection with purchases and sales of foreign
securities.
Depositary Receipts. For many foreign securities there are depositary
receipts. Depositary receipts are securities representing ownership interests
in securities of foreign companies (an "underlying issuer") and are deposited
with a securities depositary. Depositary receipts include American Depositary
Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and other types of
Depositary Receipts (which, together with ADRs and GDRs, are hereinafter
collectively referred to as "Depositary Receipts"). ADRs are
dollar-denominated Depositary Receipts typically issued by a U.S. financial
institution which evidence ownership interests in a security of pool of
securities issued by a foreign issuer. ADRs are listed and traded in the
United States. GDRs and other types of Depositary Receipts are typically
issued by foreign banks or trust companies, although they also may be issued
by U.S. financial institutions, and evidence ownership interests in a
security or pool of securities issued by either a foreign or a U.S.
corporation. Generally, Depositary Receipts in registered form are designed
for use in the U.S. securities market and Depositary Receipts in bearer form
are designed for use in securities markets outside the United States.
Depositary receipts may be "sponsored" or "unsponsored". Sponsored depositary
receipts are established jointly by a depositary and the underlying issuer,
whereas unsponsored depositary receipts may be established by a depositary
without participation by the underlying issuer. Holders of an unsponsored
depositary receipt generally bear all the costs associated with establishing
the unsponsored depositary receipt. In addition, the issuers of the
securities underlying unsponsored depositary receipts are not obligated to
disclose material information in the U.S. and, therefore, there may be less
information available regarding such issuers and there may not be a
correlation between such information and the market value of the depositary
receipts. For purposes of a Portfolio's investment policies, the Portfolio's
investment in depositary receipts will be deemed to be investments in the
underlying securities except as noted.
Eastern European and Russian Securities. The economies of Eastern European
countries are currently suffering both from the stagnation resulting from
centralized economic planning and control and the higher prices and
unemployment associated with the transition to market economics. Unstable
economic and political conditions may adversely affect security values. Upon
the accession to power of Communist regimes approximately 40 years ago, the
governments of a number of Eastern European countries
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expropriated a large amount of property. The claims of many property owners
against those governments were never finally settled. In the event of the
return to power of the Communist Party, there can be no assurance that a
Portfolio's investments in Eastern Europe would not be expropriated,
nationalized or otherwise confiscated.
The registration, clearing and settlement of securities transactions
involving Russian issuers are subject to significant risks not normally
associated with securities transactions in the United States and other more
developed markets. Ownership of equity securities in Russian companies is
evidenced by entries in a company's share register (except where shares are
held through depositories that meet the requirements of the 1940 Act) and the
issuance of extracts from the register or, in certain limited cases, by
formal share certificates. However, Russian share registers are frequently
unreliable and a Portfolio could possibly lose its registration through
oversight, negligence or fraud. Moreover, Russia lacks a centralized registry
to record shares and companies themselves maintain share registers.
Registrars are under no obligation to provide extracts to potential
purchasers in a timely manner or at all and are not necessarily subject to
effective state supervision. In addition, while registrars are liable under
law for losses resulting from their errors, it may be difficult for a
Portfolio to enforce any rights it may have against the registrar or issuer
of the securities in the event of loss of share registration. Although
Russian companies with more than 1,000 shareholders are required by law to
employ an independent company to maintain share registers, in practice, such
companies have not always followed this law. Because of this lack of
independence of registrars, management of a Russian company may be able to
exert considerable influence over who can purchase and sell the company's
shares by illegally instructing the registrar to refuse to record
transactions on the share register. Furthermore, these practices could cause
a delay in the sale of Russian securities by a Portfolio if the company deems
a purchaser unsuitable, which may expose a Portfolio to potential loss on its
investment.
In light of the risks described above, the Board of Trustees of the Trust has
approved certain procedures concerning a Portfolio's investments in Russian
securities. Among these procedures is a requirement that a Portfolio will not
invest in the securities of a Russian company unless that issuer's registrar
has entered into a contract with a Portfolio's sub-custodian containing
certain protective conditions, including, among other things, the
sub-custodian's right to conduct regular share confirmations on behalf of a
Portfolio. This requirement will likely have the effect of precluding
investments in certain Russian companies that a Portfolio would otherwise
make.
Emerging Market Securities. Investments in emerging market country securities
involve special risks. Certain emerging market countries have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate fluctuations, large amounts of external debt,
balance of payments and trade difficulties and extreme poverty and
unemployment. The issuer or governmental authority that controls the
repayment of an emerging market country's debt may not be able or willing to
repay the principal and/or interest when due in accordance with the terms of
such debt. As a result of the foregoing, a government obligor may default on
its obligations. If such an event occurs, a Portfolio may have limited legal
recourse against the issuer and/or guarantor. Remedies must, in some cases,
be pursued in the courts of the defaulting party itself, and the ability of
the holder of foreign government fixed income securities to obtain recourse
may be subject to the political climate in the relevant country. In addition,
no assurance can be given that the holders of commercial bank debt will not
contest payments to the holders of other foreign government debt obligations
in the event of default under their commercial bank loan agreements.
The economies of individual emerging market countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross
domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Further, the economies of developing countries generally are heavily
dependent upon international trade and, accordingly, have been, and may
continue to be, adversely affected by trade barriers, exchange controls,
managed adjustments in relative currency values and other protectionist
measures imposed or negotiated by the countries with which they trade. These
economies also have been, and may continue to be, adversely affected by
economic conditions in the countries with which they trade.
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Investing in emerging market countries may entail purchasing securities
issued by or on behalf of entities that are insolvent, bankrupt, in default
or otherwise engaged in an attempt to reorganize or reschedule their
obligations, and in entities that have little or no proven credit rating or
credit history. In any such case, the issuer's poor or deteriorating
financial condition may increase the likelihood that the investing Portfolio
will experience losses or diminution in available gains due to bankruptcy,
insolvency or fraud.
Eurodollar and Yankee Dollar Obligations. Eurodollar bank obligations are
U.S. dollar-denominated certificates of deposit and time deposits issued
outside the U.S. capital markets by foreign branches of U.S. banks and by
foreign banks. Yankee dollar bank obligations are U.S. dollar-denominated
obligations issued in the U.S. capital markets by foreign banks.
Eurodollar and Yankee dollar obligations are subject to the same risks that
pertain to domestic issues, notably credit risk, market risk and liquidity
risk. Additionally, Eurodollar (and to a limited extent, Yankee dollar)
obligations are subject to certain sovereign risks. One such risk is the
possibility that a sovereign country might prevent capital, in the form of
dollars, from flowing across its borders. Other risks include adverse
political and economic developments; the extent and quality of government
regulation of financial markets and institutions; the imposition of foreign
withholding taxes; and the expropriation or nationalization of foreign
issuers.
FORWARD COMMITMENTS, WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Forward commitments, when-issued and delayed delivery transactions arise when
securities are purchased by a Portfolio with payment and delivery taking
place in the future in order to secure what is considered to be an
advantageous price or yield to the Portfolio at the time of entering into the
transaction. However, the price of or yield on a comparable security
available when delivery takes place may vary from the price of or yield on
the security at the time that the forward commitment or when-issued or
delayed delivery transaction was entered into. Agreements for such purchases
might be entered into, for example, when a Portfolio anticipates a decline in
interest rates and is able to obtain a more advantageous price or yield by
committing currently to purchase securities to be issued later. When a
Portfolio purchases securities on a forward commitment, when-issued or
delayed delivery basis it does not pay for the securities until they are
received, and the Portfolio is required to create a segregated account with
the Trust's custodian and to maintain in that account cash or other liquid
securities in an amount equal to or greater than, on a daily basis, the
amount of the Portfolio's forward commitments, when-issued or delayed
delivery commitments.
A Portfolio will only enter into forward commitments and make commitments to
purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities. However, the Portfolio may
sell these securities before the settlement date if it is deemed advisable as
a matter of investment strategy. Forward commitments and when-issued and
delayed delivery transactions are generally expected to settle within three
months from the date the transactions are entered into, although the
Portfolio may close out its position prior to the settlement date by entering
into a matching sales transaction.
Although none of the Portfolios intends to make such purchases for
speculative purposes and each Portfolio intends to adhere to the policies of
the Securities and Exchange Commission ("SEC"), purchases of securities on
such a basis may involve more risk than other types of purchases. For
example, by committing to purchase securities in the future, a Portfolio
subjects itself to a risk of loss on such commitments as well as on its
portfolio securities. Also, a Portfolio may have to sell assets which have
been set aside in order to meet redemptions. In addition, if a Portfolio
determines it is advisable as a matter of investment strategy to sell the
forward commitment or when-issued or delayed delivery securities before
delivery, that Portfolio may incur a gain or loss because of market
fluctuations since the time the commitment to purchase such securities was
made. Any such gain or loss would be treated as a capital gain or loss and
would be treated for tax purposes as such. When the time comes to pay for the
securities to be purchased under a forward commitment or on a when-issued or
delayed delivery basis, a
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Portfolio will meet its obligations from the then available cash flow or the
sale of securities, or, although it would not normally expect to do so, from
the sale of the forward commitment or when-issued or delayed delivery
securities themselves (which may have a value greater or less than a
Portfolio's payment obligation).
FUTURES
Futures Transactions. A futures contract is a bilateral agreement to buy or
sell a security (or deliver a cash settlement price, in the case of a
contract relating to an index or otherwise not calling for physical delivery
at the end of trading in the contracts) for a set price in the future.
Futures contracts are designated by boards of trade which have been
designated "contracts markets" by the Commodities Futures Trading Commission
("CFTC").
No purchase price is paid or received when the contract is entered into.
Instead, a Portfolio upon entering into a futures contract (and to maintain
the Portfolio's open positions in futures contracts) would be required to
deposit with its custodian in a segregated account in the name of the futures
broker an amount of cash, United States government securities, suitable money
market instruments, or liquid, high-grade debt securities, known as "initial
margin." The margin required for a particular futures contract is set by the
exchange on which the contract is traded, and may be significantly modified
from time to time by the exchange during the term of the contract. Futures
contracts are customarily purchased and sold on margin that may range upward
from less than 5% of the value of the contract being traded. By using futures
contracts as a risk management technique, given the greater liquidity in the
futures market than in the cash market, it may be possible to accomplish
certain results more quickly and with lower transaction costs.
If the price of an open futures contract changes (by increase in the case of
a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Portfolio. These
subsequent payments called "variation margin," to and from the futures
broker, are made on a daily basis as the price of the underlying assets
fluctuate making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." The Portfolios
expect to earn interest income on their initial and variation margin
deposits.
A Portfolio will incur brokerage fees when it purchases and sells futures
contracts. Positions taken in the futures markets are not normally held until
delivery or cash settlement is required, but are instead liquidated through
offsetting transactions which may result in a gain or a loss. While futures
positions taken by a Portfolio will usually be liquidated in this manner, the
Portfolio may instead make or take delivery of underlying securities whenever
it appears economically advantageous for the Portfolio to do so. A clearing
organization associated with the exchange on which futures are traded assumes
responsibility for closing out transactions and guarantees that as between
the clearing members of an exchange, the sale and purchase obligations will
be performed with regard to all positions that remain open at the termination
of the contract.
Securities Index Futures Contracts. Purchases or sales of securities index
futures contracts may be used in an attempt to protect a Portfolio's current
or intended investments from broad fluctuations in securities prices. A
securities index futures contract does not require the physical delivery of
securities, but merely provides for profits and losses resulting from changes
in the market value of the contract to be credited or debited at the close of
each trading day to the respective accounts of the parties to the contract.
On the contract's expiration date a final cash settlement occurs and the
futures positions are simply closed out. Changes in the market value of a
particular index futures contract reflect changes in the specified index of
securities on which the future is based.
By establishing an appropriate "short" position in index futures, a Portfolio
may also seek to protect the value of its portfolio against an overall
decline in the market for such securities. Alternatively, in anticipation of
a generally rising market, a Portfolio can seek to avoid losing the benefit
of apparently low
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current prices by establishing a "long" position in securities index futures
and later liquidating that position as particular securities are in fact
acquired. To the extent that these hedging strategies are successful, the
Portfolio will be affected to a lesser degree by adverse overall market price
movements than would otherwise be the case.
Options on Futures Contracts. Each Portfolio, as specified in the Prospectus,
may purchase and write exchange-traded call and put options on futures
contracts of the type which the particular Portfolio is authorized to enter
into. These options are traded on exchanges that are licensed and regulated
by the CFTC for the purpose of options trading. A call option on a futures
contract gives the purchaser the right, in return for the premium paid, to
purchase a futures contract (assume a "long" position) at a specified
exercise price at any time before the option expires. A put option gives the
purchaser the right, in return for the premium paid, to sell a futures
contract (assume a "short" position), for a specified exercise price, at any
time before the option expires.
The Portfolios will write only options on futures contracts which are
"covered." A Portfolio will be considered "covered" with respect to a put
option it has written if, so long as it is obligated as a writer of the put,
the Portfolio segregates with its custodian cash, United States Government
securities or liquid securities at all times equal to or greater than the
aggregate exercise price of the puts it has written (less any related margin
deposited with the futures broker). A Portfolio will be considered "covered"
with respect to a call option it has written on a debt security future if, so
long as it is obligated as a writer of the call, the Portfolio owns a
security deliverable under the futures contract. A Portfolio will be
considered "covered" with respect to a call option it has written on a
securities index future if the Portfolio owns, so long as the Portfolio is
obligated as the writer of the call, a portfolio of securities the price
changes of which are, in the opinion of its Adviser, expected to replicate
substantially the movement of the index upon which the futures contract is
based.
Upon the exercise of a call option, the writer of the option is obligated to
sell the futures contract (to deliver a "long" position to the option holder)
at the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a put,
the writer of the option is obligated to purchase the futures contract
(deliver a "short" position to the option holder) at the option exercise
price which will presumably be higher than the current market price of the
contract in the futures market. When the holder of an option exercises it and
assumes a long futures position, in the case of a call, or a short futures
position, in the case of a put, its gain will be credited to its futures
margin account, while the loss suffered by the writer of the option will be
debited to its account and must be immediately paid by the writer. However,
as with the trading of futures, most participants in the options markets do
not seek to realize their gains or losses by exercise of their option rights.
Instead, the holder of an option will usually realize a gain or loss by
buying or selling an offsetting option at a market price that will reflect an
increase or a decrease from the premium originally paid.
If a Portfolio writes options on futures contracts, the Portfolio will
receive a premium but will assume a risk of adverse movement in the price of
the underlying futures contract comparable to that involved in holding a
futures position. If the option is not exercised, the Portfolio will realize
a gain in the amount of the premium, which may partially offset unfavorable
changes in the value of securities held in or to be acquired for the
Portfolio. If the option is exercised, the Portfolio will incur a loss in the
option transaction, which will be reduced by the amount of the premium it has
received, but which will offset any favorable changes in the value of its
portfolio securities or, in the case of a put, lower prices of securities it
intends to acquire.
Options on futures contracts can be used by a Portfolio to hedge
substantially the same risks as might be addressed by the direct purchase or
sale of the underlying futures contracts. If the Portfolio purchases an
option on a futures contract, it may obtain benefits similar to those that
would result if it held the futures position itself. Purchases of options on
futures contracts may present less risk in hedging than the purchase and sale
of the underlying futures contracts since the potential loss is limited to
the amount of the premium plus related transaction costs.
The purchase of put options on futures contracts is a means of hedging a
portfolio of securities against a general decline in market prices. The
purchase of a call option on a futures contract represents a means of hedging
against a market advance when a Portfolio is not fully invested.
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The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the underlying securities. If the futures
price at expiration is below the exercise price, the Portfolio will retain
the full amount of the option premium, which provides a partial hedge against
any decline that may have occurred in the value of the Portfolio's holdings
of securities. The writing of a put option on a futures contract is analogous
to the purchase of a futures contract in that it hedges against an increase
in the price of securities the Portfolio intends to acquire. However, the
hedge is limited to the amount of premium received for writing the put.
Limitations on Purchase and Sale of Futures Contracts and Options on Futures
Contracts. The Portfolios will not engage in transactions in futures
contracts and related options for speculation. In addition, the Portfolios
will not purchase or sell futures contracts or related options unless either
(1) the futures contracts or options thereon are purchased for "bona fide
hedging" purposes (as that term is defined under the CFTC regulations) or (2)
if purchased for other purposes, the sum of the amounts of initial margin
deposits on a Portfolio's existing futures and premiums required to establish
non-hedging positions would not exceed 5% of the liquidation value of the
Portfolio's total assets. In instances involving the purchase of futures
contracts or the writing of put options thereon by a Portfolio, an amount of
cash and cash equivalents, equal to the cost of such futures contracts or
options written (less any related margin deposits), will be deposited in a
segregated account with its custodian, thereby insuring that the use of such
futures contracts and options is unleveraged. In instances involving the sale
of futures contracts or the writing of call options thereon by a Portfolio,
the securities underlying such futures contracts or options will at all times
be maintained by the Portfolio or, in the case of index futures and related
options, the Portfolio will own securities the price changes of which are, in
the opinion of its Adviser, expected to replicate substantially the movement
of the index upon which the futures contract or option is based.
For information concerning the risks associated with utilizing options,
futures contracts, and forward foreign currency exchange contracts, please
see "Risks of Transactions in Options, Futures Contracts and Forward Currency
Contracts" on page 22.
HYBRID INSTRUMENTS
Hybrid instruments (a type of potentially high-risk derivative) combine the
elements of futures contracts or options with those of debt, preferred equity
or a depository instrument ("Hybrid Instruments"). Generally, a Hybrid
Instrument will be a debt security, preferred stock, depository share, trust
certificate, certificate of deposit or other evidence of indebtedness on
which a portion of or all interest payments, and/or the principal or stated
amount payable at maturity, redemption or retirement, is determined by
reference to prices, changes in prices, or differences between prices, of
securities, currencies, intangibles, goods, articles or commodities
(collectively "Underlying Assets") or by another objective index, economic
factor or other measure, such as interest rates, currency exchange rates,
commodity indices, and securities indices (collectively "Benchmarks"). Thus,
Hybrid Instruments may take a variety of forms, including, but not limited
to, debt instruments with interest or principal payments or redemption terms
determined by reference to the value of a currency or commodity or securities
index at a future point in time, preferred stock with dividend rates
determined by reference to the value of a currency, or convertible securities
with the conversion terms related to a particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing
total return. For example, a Portfolio may wish to take advantage of expected
declines in interest rates in several European countries, but avoid the
transaction costs associated with buying and currency-hedging the foreign
bond positions. One solution would be to purchase a U.S. dollar-denominated
Hybrid Instrument whose redemption price is linked to the average three year
interest rate in a designated group of countries. The redemption price
formula would provide for payoffs of greater than par if the average interest
rate was lower than a specified level, and payoffs of less than par if rates
were above the specified level. Furthermore, a Portfolio could limit the
downside risk of the security by establishing a minimum redemption price so
that the principal paid at maturity could not be below a predetermined
minimum level if interest rates were to rise significantly. The purpose of
this arrangement, known as a structured security with an embedded put option,
would be to give the Portfolio the desired European bond exposure while
avoiding currency risk, limiting downside market risk, and
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lowering transaction costs. Of course, there is no guarantee that the
strategy will be successful and a Portfolio could lose money if, for example,
interest rates do not move as anticipated or credit problems develop with the
issuer of the Hybrid Instrument.
The risks of investing in Hybrid Instruments reflect a combination of the
risks of investing in securities, options, futures and currencies. The risks
of a particular Hybrid Instrument will, of course, depend upon the terms of
the instrument, but may include, without limitation, the possibility of
significant changes in the Benchmarks or the prices of Underlying Assets to
which the instrument is linked. Such risks generally depend upon factors
which are unrelated to the operations or credit quality of the issuer of the
Hybrid Instrument and which may not be readily foreseen by the purchaser,
such as economic and political events, the supply and demand for the
Underlying Assets and interest rate movements. In recent years, various
Benchmarks and prices for Underlying Assets have been highly volatile, and
such volatility may be expected in the future.
Hybrid Instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the
Hybrid Instrument and the Benchmark or Underlying Asset may not move in the
same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid
Instrument, thereby magnifying the risk of loss as well as the potential for
gain.
Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
portfolio and the issuer of the Hybrid Instrument, the creditworthiness of
the counter party or issuer of the Hybrid Instrument would be an additional
risk factor which the Portfolio would have to consider and monitor. Hybrid
Instruments also may not be subject to regulation of the CFTC, which
generally regulates the trading of commodity futures by persons in the U.S.,
the SEC, which regulates the offer and sale of securities by and to persons
in the U.S., or any other governmental regulatory authority. The various
risks discussed above, particularly the market risk of such instruments, may
in turn cause significant fluctuations in the net asset value of the
Portfolio.
INVESTMENT COMPANY SECURITIES
Investment company securities are securities of other open-end or closed-end
investment companies. The 1940 Act generally prohibits a Portfolio from
acquiring more than 3% of the outstanding voting shares of an unaffiliated
investment company and limits such investments to no more than 5% of the
Portfolio's total assets in any unaffiliated investment company and no more
than 10% in any combination of unaffiliated investment companies. The 1940
Act also prohibits a Portfolio from acquiring in the aggregate more than 10%
of the outstanding voting shares of any registered closed-end investment
company.
INVESTMENT GRADE AND LOWER QUALITY FIXED INCOME SECURITIES
Investment grade securities rated Baa by Moody's Investors Service Inc.
("Moody's") or BBB by Standard & Poor's Ratings Service, a division of
McGraw-Hill Companies, Inc. ("S&P") and comparable unrated securities, while
normally exhibiting adequate protection parameters, have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade fixed income securities. Fixed
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income investments that are rated in the lower categories by NRSROs (i.e., Ba
or lower by Moody's or BB or lower by S&P) or are unrated securities of
comparative quality are known as "junk bonds." Such lower quality fixed
income securities or junk bonds are considered as predominantly speculative
by those rating agencies. It is the policy of each Portfolio's Adviser to not
rely exclusively on ratings issued by credit rating agencies but to
supplement such ratings with the Adviser's own independent and ongoing review
of credit quality. Junk bonds may be issued as a consequence of corporate
restructuring, such as leveraged buyouts, mergers, acquisitions, debt
recapitalizations, or similar events or by smaller or highly leveraged
companies. When economic conditions appear to be deteriorating, junk bonds
may decline in market value due to investors' heightened concern over credit
quality, regardless of prevailing interest rates. Although the growth of the
high yield securities market in the 1980s had paralleled a long economic
expansion, many issuers have been affected by adverse economic and market
conditions. It should be recognized that an economic downturn or increase in
interest rates is likely to have a negative effect on: (i) the high yield
bond market; (ii) the value of high yield securities; and (iii) the ability
of the securities' issuers to service their principal and interest payment
obligations, to meet their projected business goals or to obtain additional
financing. The market for junk bonds, especially during periods of
deteriorating economic conditions, may be less liquid than the market for
investment grade bonds. In periods of reduced market liquidity, junk bond
prices may become more volatile and may experience sudden and substantial
price declines. Also, there may be significant disparities in the prices
quoted for junk bonds by various dealers. Under such conditions, a Portfolio
may find it difficult to value its junk bonds accurately. Under such
conditions, a Portfolio may have to use subjective rather than objective
criteria to value its junk bond investments accurately and rely more heavily
on the judgment of the Trust's Board of Trustees. Prices for junk bonds also
may be affected by legislative and regulatory developments. For example,
federal rules require that savings and loans gradually reduce their holdings
of high-yield securities. Also, from time to time, Congress has considered
legislation to restrict or eliminate the corporate tax deduction for interest
payments or to regulate corporate restructuring such as takeovers, mergers or
leveraged buyouts. Such legislation, if enacted, could depress the prices of
outstanding junk bonds.
LOANS AND OTHER DIRECT INDEBTEDNESS
In purchasing a loan, a Portfolio acquires some or all of the interest of a
bank or other lending institution in a loan to a corporate borrower. Many
such loans are secured, although some may be unsecured. Such loans may be in
default at the time of purchase. Loans and other direct indebtedness that are
fully secured offer a Portfolio more protection than an unsecured loan in the
event of non-payment of scheduled interest or principal. However, there is no
assurance that the liquidation of collateral from a secured loan or other
direct indebtedness would satisfy the corporate borrower's obligation, or
that the collateral can be liquidated.
These loans and other direct indebtedness are made generally to finance
internal growth, mergers, acquisitions, stock repurchases, leveraged buyouts
and other corporate activities. Such loans and other direct indebtedness
loans are typically made by a syndicate of lending institutions, represented
by an agent lending institution which has negotiated and structured the loan
and is responsible for collecting interest, principal and other amounts due
on its own behalf and on behalf of the others in the syndicate, and for
enforcing its rights and the rights of other loan participants against the
borrower. Alternatively, such loans and other direct indebtedness may be
structured as a "novation" (i.e., a new loan) pursuant to which a Portfolio
would assume all of the rights of the lending institution in a loan, or as an
assignment, pursuant to which a Portfolio would purchase an assignment of a
portion of a lender's interest in a loan or other direct indebtedness either
directly from the lender or through an intermediary. A Portfolio may also
purchase trade or other claims against companies, which generally represent
money owed by the company to a supplier of goods or services. These claims
may also be purchased at a time when the company is in default.
Certain of the loans and other direct indebtedness acquired by a Portfolio
may involve revolving credit facilities or other standby financing
commitments that obligate a Portfolio to pay additional cash on a certain
date or on demand. These commitments may have the effect of requiring a
Portfolio to increase its investment in a company at a time when a Portfolio
might not otherwise decide to do so (including at a time when the company's
financial condition makes it unlikely that such amounts will be repaid). To
the
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extent that a Portfolio is committed to advance additional funds, it will at
all times hold and maintain in a segregated account cash or assets in an
amount sufficient to meet such commitments.
A Portfolio's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily on the
financial condition of the borrower. In selecting the loans and other direct
indebtedness that a Portfolio will purchase, the Adviser will rely upon its
own credit analysis of the borrower. As a Portfolio may be required to rely
upon another lending institution to collect and pass on to a Portfolio
amounts payable with respect to the loan and to enforce a Portfolio's rights
under the loan and other direct indebtedness, an insolvency, bankruptcy or
reorganization of the lending institution may delay or prevent a Portfolio
from receiving such amounts. In such cases, a Portfolio will also evaluate
the creditworthiness of the lending institution and will treat both the
borrower and the lending institutions as an "issuer" of the loan for purposes
of certain investment restrictions pertaining to the diversification of a
Portfolio's portfolio investments. The highly leveraged nature of many such
loans and other direct indebtedness may make such loans and other direct
indebtedness especially vulnerable to adverse changes in economic or market
conditions. Investments in such loans and other direct indebtedness may
involve additional risks to a Portfolio. For example, if a loan or other
direct indebtedness is foreclosed, a Portfolio could become part owner of any
collateral, and would bear the costs and liabilities associated with owning
and disposing of the collateral. In addition, it is conceivable that under
emerging legal theories of lender liability, a Portfolio could be held
liable. It is unclear whether loans and other forms of direct indebtedness
offer securities law protections against fraud and misrepresentation. In the
absence of definitive regulatory guidance, a Portfolio relies on the
Adviser's research in an attempt to avoid situations where fraud and
misrepresentation could adversely affect a Portfolio. In addition, loans and
other direct investments may not be in the form of securities or may be
subject to restrictions on transfer, and only limited opportunities may exist
to resell such instruments. As a result, a Portfolio may be unable to sell
such investments at an opportune time or may have to resell them at less than
fair market value. To the extent that the Adviser determines that any such
investments are illiquid, a Portfolio will include them in the investment
limitations described below.
MORTGAGE RELATED SECURITIES
Mortgage-backed securities have yield and maturity characteristics
corresponding to the underlying assets. Unlike traditional debt securities,
which may pay a fixed rate of interest until maturity, when the entire
principal amount comes due, payments on certain mortgage-backed securities
include both interest and a partial repayment of principal. Besides the
scheduled repayment of principal, repayments of principal may result from the
voluntary prepayment, refinancing, or foreclosure of the underlying mortgage
loans. If property owners make unscheduled prepayments of their mortgage
loans, these prepayments will result in early payment of the applicable
mortgage-related securities. In that event, the Portfolios may be unable to
invest the proceeds from the early payment of the mortgage-related securities
in an investment that provides as high a yield as the mortgage-related
securities. Consequently, early payment associated with mortgage-related
securities may cause these securities to experience significantly greater
price and yield volatility than that experienced by traditional fixed-income
securities. The occurrence of mortgage prepayments is affected by factors
including the level of interest rates, general economic conditions, the
location and age of the mortgage and other social and demographic conditions.
During periods of falling interest rates, the rate of mortgage prepayments
tends to increase, thereby tending to decrease the life of mortgage-related
securities. During periods of rising interest rates, the rate of mortgage
prepayments usually decreases, thereby tending to increase the life of
mortgage-related securities. If the life of a mortgage-related security is
inaccurately predicted, a Portfolio may not be liable to realize the rate of
return it expected.
Mortgage-backed securities are less effective than other types of securities
as a means of "locking in" attractive long-term interest rates. One reason is
the need to reinvest prepayments of principal; another is the possibility of
significant unscheduled prepayments resulting from declines in interest
rates. Prepayments may cause losses on securities purchased at a premium. At
times, some of the mortgage-backed securities in which a Portfolio may invest
will have higher than market interest rates and, therefore, will be purchased
at a premium above their par value. Unscheduled prepayments, which are made
at par, will cause a Portfolio to experience a loss equal to any unamortized
premium.
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The Morgan Stanley Emerging Markets Equity Portfolio may invest in
collateralized mortgage obligations ("CMOs") and stripped mortgage-backed
securities that represent a participation in, or are secured by, mortgage
loans.
CMOs may be issued by a U.S. Government agency or instrumentality or by a
private issuer. Although payment of the principal of, and interest on, the
underlying collateral securing privately issued CMOs may be guaranteed by the
U.S. Government or its agencies or instrumentalities, these CMOs represent
obligations solely of the private issuer and are not insured or guaranteed by
the U.S. Government, its agencies or instrumentalities or any other person or
entity. Prepayments could cause early retirement of CMOs. CMOs are designed
to reduce the risk of prepayment for investors by issuing multiple classes of
securities (or "tranches"), each having different maturities, interest rates
and payment schedules, and with the principal and interest on the underlying
mortgages allocated among the several classes in various ways. Payment of
interest or principal on some classes or series of CMOs may be subject to
contingencies or some classes or series may bear some or all of the risk of
default on the underlying mortgages. CMOs of different classes or series are
generally retired in sequence as the underlying mortgage loans in the
mortgage pool are repaid. If enough mortgages are repaid ahead of schedule,
the classes or series of a CMO with the earliest maturities generally will be
retired prior to their maturities. Thus, the early retirement of particular
classes or series of a CMO held by a Portfolio would have the same effect as
the prepayment of mortgages underlying other mortgage-backed securities.
Conversely, slower than anticipated prepayments can extend the effective
maturities of CMOs, subjecting them to a greater risk of decline in market
value in response to rising interest rates than traditional debt securities,
and, therefore, potentially increasing the volatility of a Portfolio that
invests in CMOs.
Prepayments may also result in losses on stripped mortgage-backed securities.
Stripped mortgage-backed securities may be issued by agencies or
instrumentalities of the U.S. Government and private originators of, or
investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
entities of the foregoing. Stripped mortgage-backed securities are usually
structured with two classes that receive different portions of the interest
and principal distributions on a pool of mortgage loans. The Portfolios may
invest in both the interest-only or "IO" class and the principal-only or "PO"
class. The yield to maturity on an IO class of stripped mortgage-backed
securities is extremely sensitive not only to changes in prevailing interest
rates but also to the rate of principal payments (including prepayments) on
the underlying assets. A rapid rate of principal prepayments may have a
measurable adverse effect on a Portfolio's yield to maturity to the extent it
invests in IOs. If the assets underlying the IO experience greater than
anticipated prepayments of principal, a Portfolio may fail to recoup fully
its initial investments in these securities. Conversely, POs tend to increase
in value if prepayments are greater than anticipated and decline if
prepayments are slower than anticipated. The secondary market for stripped
mortgage-backed securities may be more volatile and less liquid than that for
other mortgage-backed securities, potentially limiting the Portfolios'
ability to buy or sell those securities at any particular time.
NON-PUBLICLY TRADED AND ILLIQUID SECURITIES
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the 1933 Act, securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the 1933 Act are
referred to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual funds do not
typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the
marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted
securities in order to dispose of them resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
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In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on
an efficient institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for repayment. The
fact that there are contractual or legal restrictions on resale to the
general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A Securities will be considered illiquid and therefore subject to a
Portfolio's limit on the purchase of illiquid securities unless the Board or
its delegates determines that the Rule 144A Securities are liquid. In
reaching liquidity decisions, the Board of Trustees and its delegates may
consider, inter alia, the following factors: (i) the unregistered nature of
the security; (ii) the frequency of trades and quotes for the security; (iii)
the number of dealers wishing to purchase or sell the security and the number
of other potential purchasers; (iv) dealer undertakings to make a market in
the security; and (v) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer).
OPTIONS
Writing Call Options. A call option is a contract which gives the purchaser
of the option (in return for a premium paid) the right to buy, and the writer
of the option (in return for a premium received) the obligation to sell, the
underlying security at the exercise price at any time prior to the expiration
of the option, regardless of the market price of the security during the
option period. A call option on a security is covered, for example, when the
writer of the call option owns the security on which the option is written
(or on a security convertible into such a security without additional
consideration) throughout the option period.
A Portfolio will write covered call options both to reduce the risks
associated with certain of its investments and to increase total investment
return through the receipt of premiums. In return for the premium income, the
Portfolio will give up the opportunity to profit from an increase in the
market price of the underlying security above the exercise price so long as
its obligations under the contract continue, except insofar as the premium
represents a profit. Moreover, in writing the call option, the Portfolio will
retain the risk of loss should the price of the security decline. The premium
is intended to offset that loss in whole or in part. Unlike the situation in
which the Portfolio owns securities not subject to a call option, the
Portfolio, in writing call options, must assume that the call may be
exercised at any time prior to the expiration of its obligation as a writer,
and that in such circumstances the net proceeds realized from the sale of the
underlying securities pursuant to the call may be substantially below the
prevailing market price.
A Portfolio may terminate its obligation under an option it has written by
buying an identical option. Such a transaction is called a "closing purchase
transaction." The Portfolio will realize a gain or loss from a closing
purchase transaction if the amount paid to purchase a call option is less or
more than the amount received from the sale of the corresponding call option.
Also, because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the exercise or closing out of a call option is likely to be
offset in whole or part by unrealized appreciation of the underlying security
owned by the Portfolio. When an underlying security is sold from the
Portfolio's securities portfolio, the Portfolio will effect a closing
purchase transaction so as to close out any existing covered call option on
that underlying security.
Writing Put Options. The writer of a put option becomes obligated to purchase
the underlying security at a specified price during the option period if the
buyer elects to exercise the option before its expiration date. A Portfolio
which writes a put option will be required to "cover" it, for example, by
depositing and maintaining in a segregated account with its custodian cash,
U.S. Government securities or other liquid securities having a value equal to
or greater than the exercise price of the option.
The Portfolios may write put options either to earn additional income in the
form of option premiums (anticipating that the price of the underlying
security will remain stable or rise during the option period
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and the option will therefore not be exercised) or to acquire the underlying
security at a net cost below the current value (e.g., the option is exercised
because of a decline in the price of the underlying security, but the amount
paid by the Portfolio, offset by the option premium, is less than the current
price). The risk of either strategy is that the price of the underlying
security may decline by an amount greater than the premium received. The
premium which a Portfolio receives from writing a put option will reflect,
among other things, the current market price of the underlying security, the
relationship of the exercise price to that market price, the historical price
volatility of the underlying security, the option period, supply and demand
and interest rates.
A Portfolio may effect a closing purchase transaction to realize a profit on
an outstanding put option or to prevent an outstanding put option from being
exercised.
Purchasing Put and Call Options. A Portfolio may purchase put options on
securities to protect their holdings against a substantial decline in market
value. The purchase of put options on securities will enable a Portfolio to
preserve, at least partially, unrealized gains in an appreciated security in
its portfolio without actually selling the security. In addition, the
Portfolio will continue to receive interest or dividend income on the
security. The Portfolios may also purchase call options on securities to
protect against substantial increases in prices of securities that Portfolios
intend to purchase pending their ability to invest in an orderly manner in
those securities. The Portfolios may sell put or call options they have
previously purchased, which could result in a net gain or loss depending on
whether the amount received on the sale is more or less than the premium and
other transaction costs paid on the put or call option which was bought.
Securities Index Options. A Portfolio may write covered put and call options
and purchase call and put options on securities indexes for the purpose of
hedging against the risk of unfavorable price movements adversely affecting
the value of a Portfolio's securities or securities it intends to purchase.
Each Portfolio writes only "covered" options. A call option on a securities
index is considered covered, for example, if, so long as the Portfolio is
obligated as the writer of the call, it holds securities the price changes of
which are, in the opinion of a Portfolio's Adviser, expected to replicate
substantially the movement of the index or indexes upon which the options
written by the Portfolio are based. A put on a securities index written by a
Portfolio will be considered covered if, so long as it is obligated as the
writer of the put, the Portfolio segregates with its custodian cash, United
States Government securities or other liquid high-grade debt obligations
having a value equal to or greater than the exercise price of the option.
Unlike a stock option, which gives the holder the right to purchase or sell a
specified stock at a specified price, an option on a securities index gives
the holder the right to receive a cash "exercise settlement amount" equal to
(i) the difference between the exercise price of the option and the value of
the underlying stock index on the exercise date, multiplied by (ii) a fixed
"index multiplier."
A securities index fluctuates with changes in the market value of the
securities so included. For example, some securities index options are based
on a broad market index such as the S&P 500 or the NYSE Composite Index, or a
narrower market index such as the S&P 100. Indexes may also be based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index.
Over-the-Counter Options. Certain Portfolios may enter into contracts (or
amend existing contracts) with primary dealers with whom they write
over-the-counter options. The contracts will provide that each Portfolio has
the absolute right to repurchase an option it writes at any time at a
repurchase price which represents the fair market value, as determined in
good faith through negotiation between the parties, but which in no event
will exceed a price determined pursuant to a formula contained in the
contract. Although the specific details of the formula may vary between
contracts with different primary dealers, the formula will generally be based
on a multiple of the premium received by each Portfolio for writing the
option, plus the amount, if any, of the option's intrinsic value (i.e., the
amount the option is "in-the-money"). The formula will also include a factor
to account for the difference between the price of the security and the
strike price of the option if the option is written "out-of-the-money."
Although the specific details of the formula may vary with different primary
dealers, each contract will provide a formula to determine the maximum price
at which each Portfolio can repurchase the option at any time.
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The Portfolios have established standards of creditworthiness for these
primary dealers, although the Portfolios may still be subject to the risk
that firms participating in such transactions will fail to meet their
obligations. In instances in which a Portfolio has entered into agreements
with respect to the over-the-counter options it has written, and such
agreements would enable the Portfolio to have an absolute right to repurchase
at a pre-established formula price the over-the-counter option written by it,
the Portfolio would treat as illiquid only securities equal in amount to the
formula price described above less the amount by which the option is
"in-the-money," i.e., the amount by which the price of the option exceeds the
exercise price.
For information concerning the risks associated with utilizing options,
futures contracts, and forward foreign currency exchange contracts, please
see "Risks of Transactions in Options, Futures Contracts and Forward Currency
Contracts" on page 22.
REPURCHASE AGREEMENTS
Under a repurchase agreement, underlying debt instruments are acquired for a
relatively short period (usually not more than one week and never more than a
year) subject to an obligation of the seller to repurchase and the Portfolio
to resell the instrument at a fixed price and time, thereby determining the
yield during the Portfolio's holding period. This results in a fixed rate of
return insulated from market fluctuation during that holding period.
Repurchase agreements may have the characteristics of loans by a Portfolio.
During the term of the repurchase agreement, a Portfolio retains the security
subject to the repurchase agreement as collateral securing the seller's
repurchase obligation, continually monitors on a daily basis the market value
of the security subject to the agreement and requires the seller to deposit
with the Portfolio collateral equal to any amount by which the market value
of the security subject to the repurchase agreements falls below the resale
amount provided under the repurchase agreement. A Portfolio will enter into
repurchase agreements (with respect to U.S. Government obligations,
certificates of deposit, or bankers' acceptances) with registered
brokers-dealers, U.S. Government securities dealers or domestic banks whose
creditworthiness is determined to be satisfactory by the Portfolio's Adviser,
pursuant to guidelines adopted by the Board of Trustees. Generally, a
Portfolio does not invest in repurchase agreements maturing in more than
seven days. The staff of the SEC currently takes the position that repurchase
agreements maturing in more than seven days are illiquid securities.
If a seller under a repurchase agreement were to default on the agreement and
be unable to repurchase the security subject to the repurchase agreement, the
Portfolio would look to the collateral underlying the seller's repurchase
agreement, including the security subject to the repurchase agreement, for
satisfaction of the seller's obligation to the Portfolio. In the event a
repurchase agreement is considered a loan and the seller defaults, the
Portfolio might incur a loss if the value of the collateral declines and may
incur disposition costs in liquidating the collateral. In addition, if
bankruptcy proceedings are commenced with respect to the seller, realization
of the collateral may be delayed or limited and a loss may be incurred.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Reverse repurchase agreements involve the sale of securities held by the
Portfolio pursuant to its agreement to repurchase them at a mutually agreed
upon date, price and rate of interest. At the time a Portfolio enters into a
reverse repurchase agreement, it will establish and maintain a segregated
account with an approved custodian containing cash or other liquid securities
having a value not less than the repurchase price (including accrued
interest). The assets contained in the segregated account will be
marked-to-market daily and additional assets will be placed in such account
on any day in which the assets fall below the repurchase price (plus accrued
interest). A Portfolio's liquidity and ability to manage its assets might be
affected when it sets aside cash or portfolio securities to cover such
commitments. Reverse repurchase agreements involve the risk that the market
value of the securities retained in lieu of sale may decline below the price
of the securities a Portfolio has sold but is obligated to repurchase. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce a
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Portfolio's obligation to repurchase the securities, and a Portfolio's use of
the proceeds of the reverse repurchase agreement may effectively be
restricted pending such decision.
In "dollar rolls" transactions, a Portfolio sells fixed-income securities for
delivery in the current month and simultaneously contracts to repurchase
similar but not identical (same type, coupon and maturity) securities on a
specified future date. During the roll period, a Portfolio would forego
principal and interest paid on such securities. A Portfolio would be
compensated by the difference between the current sales price and the forward
price for the future purchase, as well as by the interest earned on the cash
proceeds of the initial sale. At the time a Portfolio enters into a dollar
roll transaction, it will place in a segregated account maintained with an
approved custodian cash or other liquid securities having a value not less
than the repurchase price (including accrued interest) and will subsequently
monitor the account to ensure that its value is maintained. Reverse
repurchase agreements are considered to be borrowings under the 1940 Act.
RISKS OF TRANSACTIONS IN OPTIONS, FUTURES CONTRACTS AND FORWARD
CURRENCY CONTRACTS
Options. A closing purchase transaction for exchange-traded options may be
made only on a national securities exchange ("exchange"). There is no
assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some options, such as
over-the-counter options, no secondary market on an exchange may exist. If a
Portfolio is unable to effect a closing purchase transaction, the Portfolio
will not sell the underlying security until the option expires or the
Portfolio delivers the underlying security upon exercise.
Options traded in the over-the-counter market may not be as actively traded
as those on an exchange. Accordingly, it may be more difficult to value such
options. In addition, it may be difficult to enter into closing transactions
with respect to options traded over-the-counter. The Portfolios will engage
in such transactions only with firms of sufficient credit so as to minimize
these risks. Such options and the securities used as "cover" for such options
may be considered illiquid securities.
The effectiveness of hedging through the purchase of securities index options
will depend upon the extent to which price movements in the portion of the
securities portfolio being hedged correlate with price movements in the
selected securities index. Perfect correlation is not possible because the
securities held or to be acquired by a Portfolio will not exactly match the
composition of the securities indexes on which options are written. In the
purchase of securities index options the principal risk is that the premium
and transaction costs paid by a Portfolio in purchasing an option will be
lost if the changes (increase in the case of a call, decrease in the case of
a put) in the level of the index do not exceed the cost of the option.
Futures. The prices of futures contracts are volatile and are influenced,
among other things, by actual and anticipated changes in the market and
interest rates, which in turn are affected by fiscal and monetary policies
and national and international political and economic events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular type
of futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss,
as well as gain, to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total
loss of the margin deposit, before any deduction for the transaction costs,
if the account were then closed out. A 15% decrease would result in a loss
equal to 150% of the original
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margin deposit, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in
the futures contract.
A decision of whether, when, and how to hedge involves skill and judgment,
and even a well-conceived hedge may be unsuccessful to some degree because of
unexpected market behavior, market trends or interest rate trends. There are
several risks in connection with the use by a Portfolio of futures contracts
as a hedging device. One risk arises because of the imperfect correlation
between movements in the prices of the futures contracts and movements in the
prices of the underlying instruments which are the subject of the hedge. A
Portfolio's Adviser will, however, attempt to reduce this risk by entering
into futures contracts whose movements, in its judgment, will have a
significant correlation with movements in the prices of the Portfolio's
underlying instruments sought to be hedged.
Successful use of futures contracts by a Portfolio for hedging purposes is
also subject to a Portfolio's ability to correctly predict movements in the
direction of the market. It is possible that, when a Portfolio has sold
futures to hedge its portfolio against a decline in the market, the index,
indices, or instruments underlying futures might advance and the value of the
underlying instruments held in the Portfolio's portfolio might decline. If
this were to occur, the Portfolio would lose money on the futures and also
would experience a decline in value in its underlying instruments.
Positions in futures contracts may be closed out only on an exchange or a
board of trade which provides the market for such futures. Although the
Portfolios (except for the MFS Research Portfolio) intend to purchase or sell
futures only on exchanges or boards of trade where there appears to be an
active market, there is no guarantee that such will exist for any particular
contract or at any particular time. If there is not a liquid market at a
particular time, it may not be possible to close a futures position at such
time, and, in the event of adverse price movements, a Portfolio would
continue to be required to make daily cash payments of variation margin.
However, in the event futures positions are used to hedge portfolio
securities, the securities will not be sold until the futures positions can
be liquidated. In such circumstances, an increase in the price of securities,
if any, may partially or completely offset losses on the futures contracts.
Foreign Options and Futures. Participation in foreign futures and foreign
options transactions involves the execution and clearing of trades on or
subject to the rules of a foreign board of trade. Neither the National
Futures Association nor any domestic exchange regulates activities of any
foreign boards of trade, including the execution, delivery and clearing of
transactions, or has the power to compel enforcement of the rules of a
foreign board of trade or any applicable foreign law. This is true even if
the exchange is formally linked to a domestic market so that a position taken
on the market may be liquidated by a transaction on another market. Moreover,
such laws or regulations will vary depending on the foreign country in which
the foreign futures or foreign options transaction occurs. For these reasons,
when a Portfolio trades foreign futures or foreign options contracts, it may
not be afforded certain of the protective measures provided by the Commodity
Exchange Act, the CFTC's regulations and the rules of the National Futures
Association and any domestic exchange, including the right to use reparations
proceedings before the CFTC and arbitration proceedings provided by the
National Futures Association or any domestic futures exchange. In particular,
funds received from a Portfolio for foreign futures or foreign options
transactions may not be provided the same protections as funds received in
respect of transactions on United States futures exchanges. In addition, the
price of any foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon, may be affected by any variance in the
foreign exchange rate between the time the Portfolio's order is placed and
the time it is liquidated, offset or exercised.
Foreign Currency Contracts. Hedging against a decline in the value of a
currency does not eliminate fluctuations in the prices of portfolio
securities or prevent losses if the prices of such securities decline. These
hedging transactions also preclude the opportunity for gain if the value of
the hedged currency should rise. Whether a currency hedge benefits a
Portfolio will depend on the ability of a Portfolio's Adviser to predict
future currency exchange rates.
The writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received, and a Portfolio could be
required to purchase or sell foreign currencies at
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disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements
adverse to a Portfolio's position, it may forfeit the entire amount of the
premium plus related transaction costs.
SECURITIES LOANS
Securities loans are made to broker-dealers or institutional investors or
other persons, pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value
of the loaned securities marked to market on a daily basis. The collateral
received will consist of cash, U.S. Government securities, letters of credit
or such other collateral as may be permitted under a Portfolio's investment
program. While the securities are being loaned, a Portfolio will continue to
receive the equivalent of the interest or dividends paid by the issuer on the
securities, as well as interest on the investment of the collateral or a fee
from the borrower. A Portfolio has a right to call each loan and obtain the
securities on five business days' notice or, in connection with securities
trading on foreign markets, within such longer period for purchases and sales
of such securities in such foreign markets. A Portfolio will generally not
have the right to vote securities while they are being loaned, but its
Manager or Adviser will call a loan in anticipation of any important vote.
The risks in lending portfolio securities, as with other extensions of
secured credit, consist of possible delay in receiving additional collateral
or in the recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. Loans will only be made to
firms deemed by a Portfolio's Adviser to be of good standing and will not be
made unless, in the judgment of the Adviser, the consideration to be earned
from such loans would justify the risk.
STRUCTURES NOTES
The Morgan Stanley Emerging Markets Equity Portfolio may enter into
structured notes transactions. Structured notes are interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of sovereign debt obligations. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified instruments (such as commercial bank loans) and the
issuance by that entity of one or more classes of securities and the issuance
by that entity of one or more classes of securities backed by, or
representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued structured
notes to create securities with different investment characteristics such as
varying maturities, payment priorities and interest rate provisions, and the
extent of the payment made with respect to structured notes is dependent on
the extent of the cash flow on the underlying instruments. Because structured
notes of the type in which the Portfolio may invest typically involve no
credit enhancement, their credit risk generally will be equivalent to that of
the underlying instruments. The Portfolio may invest in a class of structured
notes that is either subordinated or unsubordinated to the right of payment
of another class. Subordinated structured notes typically have higher yields
and present greater risks than unsubordinated structured notes. Certain
issuers of structured notes may be deemed to be "investment companies" as
defined in the 1940 Act. As a result, the Portfolio's investment in these
structured notes may be limited by restrictions contained in the 1940 Act.
Structured notes are typically sold in private placement transactions, and
there currently is no active trading market for structured notes.
SWAPS
A swap is an agreement to exchange the return generated by one instrument for
the return generated by another instrument. The payment streams are
calculated by reference to a specified index and agreed upon single or fixed
amount (or premium). The term "specified index" includes currencies, fixed
interest rates, prices, total return on interest rate indices, fixed income
indices, stock indices and commodity indices (as well as amounts derived from
arithmetic operations on these indices). For example, a Portfolio may agree
to swap the return generated by a fixed income index for the return generated
by a second fixed income index. The currency swaps in which a Portfolio may
enter will generally involve an agreement to pay interest streams in one
currency based on a specified index in exchange for receiving interest
streams denominated in another currency. Such swaps may involve initial and
final exchanges that correspond to the agreed upon notional amount.
24
<PAGE>
The swaps in which a Portfolio may engage may include instruments under which
one party pays a single or periodic fixed amount(s) (or premium), and the
other party pays periodic amounts based on the movement of a specified index.
Swaps do not involve the delivery of securities, other underlying assets, or
principal. Accordingly, the risk of loss with respect to swaps is limited to
the net amount of payments the Portfolio is contractually obligated to make.
If the other party to a swap defaults, Portfolio's risk of loss consists of
the net amount of payments that the Portfolio contractually entitled to
receive. Currency swaps usually involve the delivery of the entire principal
value of one designated currency in exchange for the other designated
currency. Therefore, the entire principal value of a currency swap is subject
to the risk that the other party to the swap will default on its contractual
delivery obligations. If there is a default by the counterparty, a Portfolio
may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, the
swap market has become relatively liquid. Certain swap transactions involve
more recent innovations for which standardized documentation has not yet been
fully developed and, accordingly, they are less liquid than traditional swap
transactions.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. A Portfolio's
obligations under a swap agreement will be accrued daily (offset against any
amounts owing to the Portfolio) and any accrued but unpaid net amounts owed
to a swap counterparty will be covered by the maintenance of a segregated
account consisting of unencumbered liquid assets, to avoid any potential
leveraging of a Portfolio. To the extent that these swaps are entered into
for hedging purposes, the Advisers believe such obligations do not constitute
"senior securities" under the 1940 Act and, accordingly, the Adviser will not
treat them as being subject to a Portfolio's borrowing restrictions. The
Portfolio may enter into OTC swap transactions with counterparties that are
approved by the Advisers in accordance with guidelines established by the
Board of Trustees. These guidelines provide for a minimum credit rating for
each counterparty and various credit enhancement techniques (for example,
collateralization of amounts due from counterparties) to limit exposure to
counterparties that have a S&P rating below AA.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If an Adviser is incorrect in its forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolio would be less favorable than it would have been
if this investment technique were not used.
WARRANTS
Warrants give the holder, under certain circumstances, the right to purchase
equity securities consisting of common and preferred stock. The equity
security underlying a warrant is authorized at the time the warrant is issued
or is issued together with the warrant. Investing in warrants can provide a
greater potential for profit or loss than an equivalent investment in the
underlying security, and, thus, can be a speculative investment. The value of
a warrant may decline because of a decline in the value of the underlying
security, the passage of time, changes in interest rates or in the dividend
or other policies of the company whose equity underlies the warrant or a
change in the perception as to the future priced of the underlying security,
or any combination thereof. Warrants generally pay no dividends and confer no
voting or other rights other than to purchase the underlying security.
25
<PAGE>
MANAGEMENT OF THE TRUST
As of May 1, 1997, the Trustees and officers of the Trust owned Contracts
entitling them to provide voting instructions in the aggregate with respect
to less than one percent of the Trust's shares of beneficial interest.
THE TRUSTEES
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- --------------------- -------------------------------------------
<S> <C>
*Peter D. Noris (41)................... Executive Vice President and Chief Investment Officer,
Equitable Equitable since May 1995; prior thereto, Vice President,
1290 Avenue of the Americas Salomon Brothers Inc., 1992 to 1995. Principal, Equity
New York, New York 10104 Division, Morgan Stanley & Co., Inc., 1984 to 1992. Director,
Equitable Real Estate Investment Management, Inc. since July
1995 and Alliance Capital Management Co. since July 1995.
Trustee, Hudson River Trust (investment company) since July
1995. Executive Vice President, EQ Financial Consultants, Inc.
since November 1996.
Jettie M. Edwards (50) ............... Consultant, Syrus Associates since 1986. Trustee, Provident
Syrus Associates Investment Counsel Trust (investment company) since 1992.
880 Third Avenue Director, The PBHG Funds, Inc. (investment company) since 1995.
New York, NY 10022
William M. Kearns, Jr. (61)........... President, W.M. Kearns & Co., Inc. since 1994. Advisory
W.M. Kearns & Co., Inc. Director, Lehman Brothers, 1992 to 1994.
310 South Street
Morristown, NJ 07960
Christopher P.A. Komisarjevsky (52)... President and Chief Executive Officer, Burson-Marsteller USA
Burson-Marsteller since 1996. President and Chief Executive Officer,
230 Park Avenue South Burson-Marsteller New York, 1995 to 1996. President and Chief
New York, NY 10003-1566 Executive Officer, Gavin Anderson & Company New York, 1994 to
1995. Prior thereto, he held various positions with Hill and
Knowlton, Inc. for twenty years.
Harvey Rosenthal (55) ................ Member, Board of Directors of CVS Corporation. President and
60 State Street Chief Operating Officer, CVS Corporation (formerly Melville
Suite 700 Corporation) to 1996. Prior thereto, he held various positions
Boston, MA 02109 with CVS Corporation for twenty-seven years.
*William T. McCaffrey (60)............. Director, Senior Executive Vice President and Chief Operating
Equitable Officer, Equitable since 1996. Executive Vice President and
1290 Avenue of the Americas Chief Administrative Officer, The Equitable Companies
New York, New York 10104 Incorporated since 1994. Director, Equitable Foundation and
Equitable Distributors, Inc. since May 1996.
</TABLE>
- ------------
* Mr. Noris and Mr. McCaffrey are "interested persons" (as defined in the
1940 Act) of the Trust. Mr. Noris and Mr. McCaffrey are deemed "interested
persons" of the Trust by virtue of their positions as officers of Equitable.
26
<PAGE>
COMMITTEES OF THE BOARD
The Trust has a standing audit committee consisting of all of the Trust's
disinterested Trustees. The audit committee's function is to recommend to the
Board of Trustees a firm of independent auditors to conduct the annual audit
of the Trust's financial statements; review with such firm the outline, scope
and results of this annual audit; and review the performance and fees charged
by the independent auditors for professional services. In addition, the
committee meets with the independent auditors and representatives of
management to review accounting activities and areas of financial reporting
and control.
The Trust has a valuation committee consisting of Peter D. Noris, Harvey
Blitz, Mary Breen, Kevin Byrne, and such other officers of the Trust, the
Manager, and Chase Global Funds Services Company, as well as such officers of
any investment adviser to any Portfolio as are deemed necessary by Mr. Noris
or Mr. Blitz from time to time, each of whom shall serve at the pleasure of
the Board of Trustees as members of the Valuation Committee. This committee
determines the value of any of the Trust's securities and assets for which
market quotations are not readily available or for which valuation cannot
otherwise be provided.
The Trust has a compensation committee consisting of Jettie M. Edwards,
William K. Kearns, Jr., Christopher P.A. Komisarjevsky and Harvey Rosenthal.
The compensation committee's function is to review the Trustees' compensation
arrangements.
The Trust has a conflicts committee consisting of Peter D. Noris and William
T. McCaffrey. The conflicts committee's function is to take any action
necessary to resolve conflicts among shareholders.
COMPENSATION OF THE TRUSTEES
Each Trustee, other than those who are "interested persons" of the Trust (as
defined in the 1940 Act), receives from the Trust an annual fee of $25,000
plus an additional fee of $1,000 per Board meeting and $500 per committee
meeting attended in person or by telephone.
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------
PENSION OR
AGGREGATE RETIREMENT
COMPENSATION BENEFITS ACCRUED ESTIMATED ANNUAL TOTAL
FROM THE AS PART OF TRUST BENEFITS UPON COMPENSATION FROM
TRUSTEE TRUST* EXPENSES RETIREMENT FUND COMPLEX
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Peter D. Noris $ -0- $-0- $-0- $ -0-
- --------------------------------------------------------------------------------------------------
Jettie M. Edwards $31,000 $31,000
- --------------------------------------------------------------------------------------------------
William M. Kearns, Jr. $31,000 $31,000
- --------------------------------------------------------------------------------------------------
Christopher P.A. Komisarjevsky $31,000 $31,000
- --------------------------------------------------------------------------------------------------
Harvey Rosenthal $31,000 $31,000
- --------------------------------------------------------------------------------------------------
William T. McCaffrey $ -0- $-0- $-0- $ -0-
- --------------------------------------------------------------------------------------------------
<FN>
- ------------
* For the initial fiscal year.
</TABLE>
A deferred compensation plan for the benefit of the Trustees has been adopted
by the Trust. Under the deferred compensation plan, each Trustee may defer
payment of all or part of the fees payable for such Trustee's services. Each
Trustee may defer payment of such fees until his retirement as a Trustee or
until the earlier attainment of a specified age. Fees deferred under the
deferred compensation plan, together with accrued interest thereon, will be
disbursed to a participating Trustee in monthly installments over a five to
twenty year period elected by such Trustee.
27
<PAGE>
THE TRUST'S OFFICERS
No officer of the Trust receives any compensation paid by the Trust. Each
officer of the Trust is an employee of the Manager, Equitable Distributors,
Inc. ("EDI") or Equitable. The Trust's principal officers are:
<TABLE>
<CAPTION>
NAME AND AGE POSITION WITH TRUST PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------ ------------------- -------------------------------------------
<S> <C> <C>
Peter D. Noris (41) President (see above)
Harvey Blitz (51) Vice President and Chief Senior Vice President, Equitable since September
Financial Officer 1987. Deputy Chief Financial Officer, Equitable since
September 1992. Senior Vice President, The Equitable
Companies Incorporated since July 1992. Director,
The Equitable of Colorado, Inc. since September 1992.
Director and Chairman, Frontier Trust Company since
April 1993 and September 1995, respectively.
Director, Equitable Distributors, Inc., February
1995 to May 1996. Director and Senior Vice President,
EquiSource since October 1992 and June 1993,
respectively. Director and Executive Vice President,
EQ Financial Consultants, Inc. since September 1992
and November 1996, respectively. Director, Equitable
Realty Assets Corporation since December 1996.
Mary Breen (39) Vice President and Secretary Vice President and Associate General Counsel,
Equitable since October 1996. Vice President and
Counsel, Equitable, 1992 to 1996. Vice President
and Counsel, EQ Financial Consultants, Inc. since
April 1997 and Equitable Distributors, Inc. since
March 1997.
Kevin R. Byrne (41) Vice President and Treasurer Vice President and Treasurer, The Equitable Companies
Incorporated and Equitable. Treasurer, Frontier
Trust Company and EquiSource. Vice President and
Treasurer, Equitable Casualty Insurance Company.
Gordon Dinsmore (44) Vice President Senior Vice President, Equitable. Executive Vice
President, EQ Financial Consultants, Inc. since 1994.
Chief Actuary, Equitable since 1996. Head of
Equitable's Annuity Products and Services Group,
1991 to 1996. Director, Equitable Foundation since
1991.
Michael S. Martin (50) Vice President Senior Vice President and Chief, The Marketing Group
in Agency Operations, Equitable. Chairman and Chief
Executive Officer, EQ Financial Consultants, Inc.
Director, The Equitable of Colorado, Inc., EquiSource
and Equitable Underwriting Sales Agency (Bahamas)
Ltd. Vice President, Hudson River Trust (investment
company).
28
<PAGE>
<CAPTION>
NAME AND AGE POSITION WITH TRUST PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------ ------------------- -------------------------------------------
<S> <C> <C>
Edna H. Russo (48) Vice President Vice President, Equitable since 1986. First Vice
President; EQ Financial Consultants, Inc. since 1997.
Barry A. Schub (43) Vice President Senior Vice President, Income Management Group,
Equitable since 1996. Prior thereto, he held various
positions for eighteen years with Bankers Trust
Company.
Samuel B. Shlesinger (50) Vice President Senior Vice President, Equitable. Chairman,
President and Chief Executive Officer, The Equitable
of Colorado, Inc. Director, Equitable Realty Assets
Corporation since December 1996. Vice President,
Hudson River Trust (investment company).
Martin J. Telles (48) Vice President Executive Vice President and Chief Marketing Officer,
Equico Securities since 1993. Director, Royal
Alliance.
Stanley B. Tulin (47) Vice President Senior Vice President and Chief Financial Officer,
Equitable since 1996. Co-Chairman, Insurance
Industry Practice Group, Coopers & Lybrand, 1988
to 1996.
Allen T. Zabusky (45) Vice President and Controller Vice President and Deputy Controller, Equitable since
1990. Controller, The Equitable of Colorado, Inc.
since 1996.
Rose A. Osorio (33) Assistant Vice President Vice President, EQ Financial Consultants, Inc. since
1997. Assistant Compliance Manager, Law Department,
Equitable, 1995 to 1997. Manager, Legal
Administration, Bertelsmann, Inc., 1991 to July 1995.
James Rooney (38) Assistant Treasurer Vice President/Director, Fund Admi nistration &
Compliance and Control, Chase Global Funds Services
Company since 1994. Assistant Vice President/
Manager, Fund Compliance, 1992 to 1994.
Karl O. Hartman (41) Assistant Secretary Senior Vice President and General Counsel, Chase
Global Funds Services Company.
Lloyd Lipsett (32) Assistant Secretary Vice President and Associate General Counsel, Chase
Global Funds Services Company since 1997. Associate,
Hale and Dorr (law firm), 1995 to 1997. Associate,
Choate, Hall & Stewart (law firm), 1993 to 1995.
Associate, Rogers & Wells (law firm), 1990 to 1993.
</TABLE>
29
<PAGE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
THE MANAGER
The Manager, EQ Financial Consultants, Inc., is an investment adviser
registered with the SEC under the 1940 Act and a broker-dealer registered
with the SEC under the Securities Exchange Act of 1934, as amended ("1934
Act"). The Manager has served as an investment manager to each Portfolio of
the Trust since its inception. The Manager currently furnishes specialized
investment advice to individuals, pension and profit sharing plans, trusts,
charitable organizations, corporations and other business entities. The
Manager is a wholly-owned subsidiary of Equitable Holding Corporation, a
wholly-owned subsidiary of Equitable.
Equitable, which is a New York life insurance company and one of the largest
life insurance companies in the United States, is a wholly-owned subsidiary
of The Equitable Companies Incorporated ("The Equitable Companies"), a
publicly-owned holding company. The principal offices of The Equitable
Companies and Equitable are located at 1290 Avenue of the Americas, New York,
New York 10104.
AXA, a French insurance holding company, currently owns approximately 63.9%
of the outstanding voting shares of common stock of The Equitable Companies.
As majority shareholder of the Equitable Companies, AXA is able to exercise
significant influence over the operations and capital structure of The
Equitable Companies, Equitable and their subsidiaries. AXA is the holding
company for an international group or insurance and related financial
services companies. AXA is the second largest insurance group in the world
based on worldwide revenues in 1996 and also the world's largest
insurer-based investment manager with over $450 billion in assets under
management. AXA is also engaged in asset management, investment banking,
securities trading and other financial services activities principally in the
United States, as well as in Western Europe and the Asia Pacific area.
The Trust and Manager have entered into an investment management agreement
("Management Agreement"). The Management Agreement obligates the Manager to:
(i) provide investment management and certain administrative services to the
Trust; (ii) select the Adviser for each Portfolio; (iii) monitor the
Adviser's investment programs and results; (iv) review brokerage matters; (v)
oversee compliance by the Trust with various federal and state statutes; and
(vi) carry out the directives of the Board of Trustees. The Management
Agreement requires the Manager to provide the Trust with office space, office
equipment, and personnel necessary to operate and administer the Trust's
business, and also to supervise the provision of services by third parties.
The continuance of the Management Agreement, with respect to each Portfolio,
after the first two years must be specifically approved at least annually (i)
by the Trust's Board of Trustees or by vote of a majority of the outstanding
voting securities (as defined in the 1940 Act) of such Portfolio and (ii) by
the affirmative vote of a majority of the Trustees who are not parties to the
Management Agreement or "interested persons" (as defined in the 1940 Act) of
any such party by votes cast in person at a meeting called for such purpose.
The Management Agreement with respect to each Portfolio may be terminated (i)
at any time, without the payment of any penalty, by the Trust upon the vote
of a majority of the Trustees or by vote of the majority of the outstanding
voting securities (as defined in the 1940 Act) of such Portfolio upon sixty
(60) days' written notice to the Manager or (ii) by the Manager at any time
without penalty upon sixty (60) days' written notice to the Trust. The
Management Agreement will also terminate automatically in the event of its
assignment (as defined in the 1940 Act).
THE ADVISERS
On behalf of the T. Rowe Price Equity Income Portfolio and the T. Rowe Price
International Stock Portfolio, the Manager has entered into investment
advisory agreements ("Advisory Agreements") with T. Rowe Price and
Price-Fleming, respectively. The Manager has also entered into Advisory
Agreements on behalf of EQ/Putnam Growth & Income Value Portfolio, EQ/Putnam
International Equity Portfolio, EQ/Putnam Investors Growth Portfolio and
EQ/Putnam Balanced Portfolio with Putnam Management. In addition, the Manager
has entered into Advisory Agreements on behalf of MFS Research Portfolio and
MFS Emerging Growth Companies Portfolio with MFS. Also, the Manager has
entered into Advisory
30
<PAGE>
Agreements on behalf of Morgan Stanley Emerging Markets Equity Portfolio and
Warburg Pincus Small Company Value Portfolio with MSAM and Warburg,
respectively. Finally, the Manager has entered into Advisory Agreements on
behalf of Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio with MLAM. The Advisory Agreements obligate T. Rowe
Price, Price-Fleming, Putnam Management, MFS, Warburg, MSAM and MLAM to: (i)
furnish continuously an investment program for their respective Portfolios;
(ii) place all orders for the purchase and sale of investments for their
respective Portfolios with brokers or dealers selected by the Manager or an
Adviser; and (iii) perform certain limited related administrative functions
in connection therewith.
The Manager recommends Advisers for each Portfolio to the Trustees based upon
its continuing quantitative and qualitative evaluation of each Adviser's
skills in managing assets pursuant to specific investment styles and
strategies. Unlike many other mutual funds, the Portfolios are not associated
with any one portfolio manager, and benefit from independent specialists
carefully selected from the investment management industry. Short-term
investment performance, by itself, is not a significant factor in selecting
or terminating an Adviser, and the Manager does not expect to recommend
frequent changes of Advisers. The Trust has filed an application with the SEC
requesting an exemptive order to permit the Manager, subject to certain
conditions, to enter into Advisory Agreements with Advisers approved by the
Trustees, but without the requirement of shareholder approval. Pursuant to
the terms of the SEC order, if granted, the Manager would be able, subject to
the approval of the Trustees but without shareholder approval, to employ new
Advisers for new or existing Portfolios, change the terms of particular
Advisory Agreements or continue the employment of existing Advisers after
events that under the 1940 Act and the Advisory Agreements would cause an
automatic termination of the agreement. Although shareholder approval would
not be required for the termination of Advisory Agreements, shareholders of a
Portfolio would continue to have the right to terminate such agreements for
the Portfolio at any time by a vote of a majority of outstanding voting
securities of the Portfolio.
When a Portfolio has more than one Adviser, the assets of each Portfolio are
allocated by the Manager among the Advisers selected for the Portfolio. Each
Adviser has discretion, subject to oversight by the Trustees, and the
Manager, to purchase and sell portfolio assets, consistent with each
Portfolio's investment objectives, policies and restrictions and specific
investment strategies developed by the Manager.
Generally, no Adviser provides any services to any Portfolio except asset
management and related recordkeeping services. However, an Adviser or its
affiliated broker-dealer may execute portfolio transactions for a Portfolio
and receive brokerage commissions in connection therewith as permitted by
Section 17(e) of the 1940 Act.
THE ADMINISTRATOR
Pursuant to an administrative agreement ("Mutual Funds Services Agreement"),
Chase Global Funds Services Company ("Administrator") assists the Manager in
the performance of its administrative services to the Trust and provides the
Trust with other necessary administrative services. In addition, the
Administrator makes available the office space, equipment, personnel and
facilities required to provide such administrative services to the Trust.
The Administrator was organized as a Delaware corporation. Its principal
place of business is at 73 Tremont Street, Boston, Massachusetts 02108. The
Mutual Funds Services Agreement shall remain in effect until April 14, 1997
and shall thereafter continue in effect for successive periods of one year,
unless terminated by any party upon not less than ninety (90) days' prior
written notice to the other party.
THE DISTRIBUTORS
The Trust has distribution agreements with EQ Financial Consultants, Inc. and
EDI (each also referred to as a "Distributor," and together "Distributors"),
each an indirect wholly-owned subsidiary of Equitable. The address for EDI is
1290 Avenue of the Americas, New York, New York 10104, and that
31
<PAGE>
for EQ Financial Consultants, Inc. is 1755 Broadway, Third Floor, New York,
New York 10019. EQ Financial Consultants, Inc. is the distributor for the
Trust's Class IA shares and Class IB shares and also serves as the Manager of
the Trust. EDI also serves as the distributor for the Trust's Class IA shares
Class IB shares.
The Trust's distribution agreements with respect to the Class IA shares and
Class IB shares, each dated April 14, 1997 ("Distribution Agreements"), will
remain in effect until April 14, 1999, and from year to year thereafter only
if each Distribution Agreement's continuance is approved annually by (i) a
majority of the Trustees who are not parties to such agreement or "interested
persons" (as defined in the 1940 Act) of the Trust or a Portfolio and, if
applicable, who have no direct or indirect financial interest in the
operation of the Distribution Plan or any such related agreement
("Independent Trustees") and (ii) either by vote of a majority of the
Trustees or a majority of the outstanding voting securities (as defined in
the 1940 Act) of the Trust.
The Distributors or their affiliates for the Class IA shares will pay for
printing and distributing prospectuses or reports prepared for its use in
connection with the offering of the Class IA shares to prospective investors
and preparing, printing and mailing any other literature or advertising in
connection with the offering of the Class IA shares to prospective investors.
The Trust, pursuant to the Distribution Plan, will pay for services rendered
and expenses borne in connection with the offering of the Class IB shares.
Such expenses include the printing and mailing of prospectuses, statements of
additional information and reports to prospective purchasers, as well as the
preparation, printing and mailing of advertisements and sales literature in
connection with the offering of the Class IB shares to prospective investors.
The Distributors for each class of shares will pay all fees and expenses in
connection with its qualification and registration as a broker or dealer
under federal and state laws.
In the capacity of agent, each Distributor currently offers shares of each
Portfolio on a continuous basis to the separate accounts of insurance
companies offering the Contracts in all states in which the Portfolio or the
Trust may from time to time be registered or where permitted by applicable
law. Each Distribution Agreement provides that the Distributors shall accept
orders for shares at net asset value without sales commission or load being
charged. The Distributors have made no firm commitment to acquire shares of
any Portfolio.
A description of the Distribution Plan with respect to the Class IB shares
and related services and fees thereunder is provided in the Prospectus for
the Class IB shares of the Portfolios. On March 31, 1997, the Board of
Trustees of the Trust unanimously approved the Distribution Plan. In
connection with its consideration of the Distribution Plan, the Board of
Trustees was furnished with drafts of the Distribution Plan and the related
materials, including information related to the advantages and disadvantages
of Rule 12b-1 plans currently being used in the mutual fund industry. Legal
counsel for the Trustees who are not "interested persons" of the Trust (as
defined in the 1940 Act) provided additional information, summarized the
provisions of the proposed Distribution Plan and discussed the legal and
regulatory considerations in adopting such Distribution Plan.
The Board of Trustees considered various factors in connection with its
decision as to whether to approve the Distribution Plan, including: (i) the
nature and causes of the circumstances which make implementation of the
Distribution Plan necessary and appropriate; (ii) the way in which the
Distribution Plan would address those circumstances, including the nature and
potential amount of expenditures; (iii) the nature of the anticipated
benefits; (iv) the possible benefits of the Distribution Plan to any other
person relative to those of the Trust; (v) the effect of the Distribution
Plan on existing owners of variable annuity contracts and variable life
insurance policies; (vi) the merits of possible alternative plans or pricing
structures; (vii) competitive conditions in the variable products industry;
and (viii) the relationship of the Distribution Plan to other distribution
efforts of the Trust.
Based upon its review of the foregoing factors and the materials presented to
it, and in light of its fiduciary duties under the 1940 Act, the Board of
Trustees determined, in the exercise of its business judgment, that the
Distribution Plan is reasonably likely to benefit the Trust and the
shareholders of its Portfolios.
The Distribution Plan and any Rule 12b-1 related agreement that is entered
into by the Trust or the Distributors of the Class IB shares in connection
with the Distribution Plan will continue in effect for a
32
<PAGE>
period of more than one year only so long as continuance is specifically
approved at least annually by a vote of a majority of the Trust's Board of
Trustees, and of a majority of the Independent Trustees, cast in person at a
meeting called for the purpose of voting on the Distribution Plan, or any
Rule 12b-1 related agreement, as applicable. In addition, the Distribution
Plan and any Rule 12b-1 related agreement may be terminated as to Class IB
shares of a Portfolio at any time, without penalty, by vote of a majority of
the outstanding Class IB shares of the Portfolio or by vote of a majority of
the Independent Trustees. The Distribution Plan also provides that it may not
be amended to increase materially the amount (up to .50% of average daily net
assets annually) that may be spent for distribution of Class IB shares of a
Portfolio without the approval of Class IB shareholders of that Portfolio.
BROKERAGE STRATEGY
BROKERAGE COMMISSIONS
The Portfolios are charged for securities brokers' commissions, transfer
taxes and similar fees relating to securities transactions. The Manager and
each of the Advisers, as appropriate, seek to obtain the best net price and
execution on all orders placed for the Portfolios, considering all the
circumstances except to the extent they may be permitted to pay higher
commissions as described below.
It is expected that securities will ordinarily be purchased in the primary
markets, whether over-the-counter or listed, and that listed securities may
be purchased in the over-the-counter market if that market is deemed the
primary market.
Transactions on stock exchanges involve the payment of brokerage commissions.
In transactions on stock exchanges in the U.S., these commissions are
negotiated, whereas on many foreign stock exchanges these commissions are
fixed. However, brokerage commission rates in certain countries in which the
Portfolios may invest may be discounted for certain large domestic and
foreign investors such as the Portfolios. A number of foreign banks and
brokers will be used for execution of each Portfolio's portfolio
transactions. In the case of securities traded in the foreign and domestic
over-the-counter markets, there is generally no stated commission, but the
price usually includes an undisclosed commission or mark-up. In underwritten
offerings, the price generally includes a disclosed fixed commission or
discount.
The Manager and Advisers may, as appropriate, in the allocation of brokerage
business, take into consideration research and other brokerage services
provided by brokers and dealers to Equitable, the Manager or Advisers. The
research services include economic, market, industry and company research
material. Based upon an assessment of the value of research and other
brokerage services provided, proposed allocations of brokerage for commission
transactions are periodically prepared internally. In addition, the Manager
and Advisers may allocate brokerage business to brokers and dealers that have
made or are expected to make significant efforts in facilitating the
distribution of the Trust's shares.
Commissions charged by brokers that provide research services may be somewhat
higher than commissions charged by brokers that do not provide research
services. As permitted by Section 28(e) of the 1934 Act and by policies
adopted by the Trustees, the Manager and Advisers may cause the Trust to pay
a broker-dealer that provides brokerage and research services to the Manager
and Advisers an amount of commission for effecting a securities transaction
for the Trust in excess of the commission another broker-dealer would have
charged for effecting that transaction.
The Manager and Advisers do not engage brokers and dealers whose commissions
are believed to be unreasonable in relation to brokerage and research
services provided. The overall reasonableness of commissions paid will be
evaluated by rating brokers on such general factors as execution
capabilities, quality of research (that is, quantity and quality of
information provided, diversity of sources utilized, nature and frequency of
communication, professional experience, analytical ability and professional
stature of the broker) and financial standing, as well as the net results of
specific transactions, taking into account such factors as price, promptness,
size of order and difficulty of execution. The research services obtained
will, in general, be used by the Manager and Advisers for the benefit of all
accounts for which the responsible party makes investment decisions. The
receipt of research services from brokers will tend to reduce the Manager's
and Advisers' expenses in managing the Portfolios.
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<PAGE>
BROKERAGE TRANSACTIONS WITH AFFILIATES
To the extent permitted by law, the Trust may engage in brokerage
transactions with brokers that are affiliates of the Manager and Advisers,
with brokers who are affiliates of such brokers, or with unaffiliated brokers
who trade or clear through affiliates of the Manager and Advisers. The 1940
Act generally prohibits the Trust from engaging in principal securities
transactions with brokers that are affiliates of the Manager and Advisers or
affiliates of such brokers, unless pursuant to an exemptive order from the
SEC. The Trust may apply for such exemptive relief. The Trust has adopted
procedures, prescribed by the 1940 Act, which are reasonably designed to
provide that any commissions or other remuneration it pays to brokers that
are affiliates of the Manager and Advisers or brokers that are affiliates of
such brokers do not exceed the usual and customary broker's commission. In
addition, the Trust will adhere to the requirements under the 1934 Act
governing floor trading. Also, because of securities law limitations, the
Trust will limit purchases of securities in a public offering, if such
securities are underwritten by brokers that are affiliates of the Manager and
Advisers or their affiliates.
PURCHASE AND PRICING OF SHARES
The Trust will offer and sell its shares at each Portfolio's net asset value
per share, which will be determined in the manner set forth below.
The net asset value of the shares of each class of a Portfolio of the Trust
will be determined once daily, immediately after the declaration of
dividends, if any, at the close of business on each business day. The net
asset value per share of each class of a Portfolio will be computed by
dividing the sum of the investments held by that Portfolio applicable to that
class, plus any cash or other assets, minus all liabilities, by the total
number of outstanding shares of that class of the Portfolio at such time. All
expenses borne by the Trust and each of its Classes, will be accrued daily.
The net asset value per share of each Portfolio will be determined and
computed as follows, in accordance with generally accepted accounting
principles, and consistent with the 1940 Act:
o The assets belonging to each Portfolio will include (i) all
consideration received by the Trust for the issue or sale of shares of
that particular Portfolio, together with all assets in which such
consideration is invested or reinvested, (ii) all income, earnings,
profits, and proceeds thereof, including any proceeds derived from the
sale, exchange or liquidation of such assets, (iii) any funds or
payments derived from any reinvestment of such proceeds in whatever form
the same may be, and (iv) "General Items", if any, allocated to that
Portfolio. "General Items" include any assets, income, earnings,
profits, and proceeds thereof, funds, or payments which are not readily
identifiable as belonging to any particular Portfolio. General Items
will be allocated as the Trust's Board of Trustees considers fair and
equitable.
o The liabilities belonging to each Portfolio will include (i) the
liabilities of the Trust in respect of that Portfolio, (ii) all
expenses, costs, changes and reserves attributable to that Portfolio,
and (iii) any general liabilities, expenses, costs, charges or reserves
of the Trust which are not readily identifiable as belonging to any
particular Portfolio which have been allocated as the Trust's Board of
Trustees considers fair and equitable.
The value of each Portfolio will be determined at the close of business on
each "business day," i.e., each day in which the degree of trading in the
Portfolio might materially affect the net asset value of such Portfolio.
Normally, this would be each day that the New York Stock Exchange is open and
would include some federal holidays. For stocks and options, the close of
trading is 4:00 p.m. and 4:15 p.m. Eastern Time, respectively; for bonds it
is the close of business in New York City, and for foreign securities it is
the close of business in the applicable foreign country, with exchange rates
determined at 2:00 p.m. Eastern Time.
Values are determined according to accepted accounting practices and all laws
and regulations that apply. The assets of each Portfolio are valued as
follows:
o Stocks listed on national securities exchanges and certain
over-the-counter issues traded on the NASDAQ national market system are
valued at the last sale price, or, if there is no sale, at the
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<PAGE>
latest available bid price. Other unlisted stocks are valued at their
last sale price or, if there is no reported sale during the day, at a
bid price estimated by a broker.
o Foreign securities not traded directly, or in ADRs or similar form in
the U.S., are valued at representative quoted prices in the currency of
the country of origin. Foreign currency is converted into U.S. dollar
equivalent at current exchange rates.
o U.S. Treasury securities and other obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, are valued at
representative quoted prices.
o Long-term corporate bonds are valued at prices obtained from a bond
pricing service of a major dealer in bonds when such prices are
available; however, when such prices are not available, such bonds are
valued at a bid price estimated by a broker.
o Short-term debt securities in the Portfolios which mature in 60 days or
less are valued at amortized cost, which approximates market value.
Short-term debt securities in such Portfolios which mature in more than
60 days are valued at representative quoted prices.
o Convertible preferred stocks listed on national securities exchanges are
valued as of their last sale price or, if there is no sale, at the
latest available bid price.
o Convertible bonds, and unlisted convertible preferred stocks, are valued
at bid prices obtained from one or more of the major dealers in such
bonds or stocks. Where there is a discrepancy between dealers, values
may be adjusted based on recent premium spreads to the underlying common
stocks.
o Mortgage-backed and asset-backed securities are valued at prices
obtained from a bond pricing service where available, or at a bid price
obtained from one or more of the major dealers in such securities. If a
quoted price is unavailable, an equivalent yield or yield spread quotes
will be obtained from a broker and converted to a price.
o Purchased options, including options on futures, are valued at their
last bid price. Written options are valued at their last asked price.
o Futures contracts are valued as of their last sale price or, if there is
no sale, at the latest available bid price.
o Other securities and assets for which market quotations are not readily
available or for which valuation cannot be provided are valued in good
faith by the valuation committee of the Board of Trustees using its best
judgment.
The market value of a put or call option will usually reflect, among other
factors, the market price of the underlying security.
When the Trust writes a call option, an amount equal to the premium received
by the Trust is included in the Trust's financial statements as an asset and
an equivalent liability. The amount of the liability is subsequently
marked-to-market to reflect the current market value of the option written.
When an option expires on its stipulated expiration date or the Trust enters
into a closing purchase or sale transaction, the Trust realizes a gain (or
loss) without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is extinguished. When an
option is exercised, the Trust realizes a gain or loss from the sale of the
underlying security, and the proceeds of sale are increased by the premium
originally received, or reduced by the price paid for the option.
The Manager and Advisers may, from time to time, under the general
supervision of the Board of Trustees or its valuation committee, utilize the
services of one or more pricing services available in valuing the assets of
the Trust. The Manager and Advisers will continuously monitor the performance
of these services.
REDEMPTION OF SHARES
The Trust may suspend redemption privileges or postpone the date of payment
on shares of the Portfolios for more than seven days during any period (i)
when the New York Stock Exchange is closed or trading
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<PAGE>
on the New York Stock Exchange is restricted as determined by the SEC, (ii)
when an emergency exists, as defined by the SEC, which makes it not
reasonably practicable for a Portfolio to dispose of securities owned by it
or fairly to determine the value of its assets, or (iii) as the SEC may
otherwise permit.
The value of the shares on redemption may be more or less than the
shareholder's cost, depending upon the market value of the portfolio
securities at the time of redemption.
CERTAIN TAX CONSIDERATIONS
Each Portfolio is treated for Federal income tax purposes as a separate
taxpayer. The Trust intends that each Portfolio shall qualify each year and
elect to be treated as a regulated investment company under Subchapter M of
the Code. Such qualification does not involve supervision of management or
investment practices or policies by any governmental agency or bureau.
As a regulated investment company, each Portfolio will not be subject to
federal income or excise tax on any of its net investment income or net
realized capital gains which are timely distributed to shareholders under the
Code. A number of technical rules are prescribed for computing net investment
income and net capital gains. For example, dividends are generally treated as
received on the ex-dividend date. Also, certain foreign currency losses and
capital losses arising after October 31 of a given year may be treated as if
they arise on the first day of the next taxable year.
A Portfolio investing in foreign securities or currencies may be subject to
foreign taxes which could reduce the investment performance of such
Portfolio. However, if foreign securities comprise more than 50% of the
year-end value of a Portfolio, the Portfolio may elect to pass through such
foreign taxes as a deemed dividend to shareholders. In such a case the
shareholder and not the Portfolio would be entitled to claim a federal tax
deduction or credit for foreign taxes, as appropriate. The deduction or
credit will not necessarily result in a direct or immediate benefit to
Contractowners.
To qualify for treatment as a regulated investment company, a Portfolio must,
among other things, derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stock or securities or foreign
currencies, or other income derived with respect to its business of
investing. A Portfolio must also derive less than 30% of its gross income in
each taxable year from gains from the sale or other disposition of stock or
securities held for less than three months. Other investments subject to this
three-month limit are options, futures or forward contracts (other than those
relating to foreign currency), or in certain circumstances, foreign
currencies and related options, futures and forward contracts the gains on
which are not directly related to the Portfolio's business of investing in
stock or securities. See "Federal Tax Treatment of Options, Futures Contracts
and Forward Foreign Exchange Contracts." This 30% rule may be inapplicable in
the context of certain abnormal redemptions of Portfolio shares. For purposes
of these tests, gross income is determined without regard to losses from the
sale or other dispositions of stock or securities.
In addition, the Secretary of the Treasury has regulatory authority to
exclude from qualifying income described above foreign currency gains which
are not "directly related" to a regulated investment company's "principal
business of investing" in stock, securities or related options or futures.
The Secretary of the Treasury has not to date exercised this authority.
Generally, in order to avoid a 4% nondeductible excise tax, each Portfolio
must distribute to its shareholders during the calendar year the following
amounts:
o 98% of the Portfolio's ordinary income for the calendar year;
o 98% of the Portfolio's capital gain net income (all capital gains, both
long-term and short-term, minus all such capital losses), all computed
as if the Portfolio were on a taxable year ending October 31 of the year
in question and beginning the previous November 1; and
o any undistributed ordinary income or capital gain net income for the
prior year.
The excise tax is inapplicable to any regulated investment company whose sole
shareholders are either tax-exempt pension trusts or separate accounts of
life insurance companies funding variable contracts.
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Although each Portfolio believes that it is not subject to the excise tax,
the Portfolios intend to make the distributions required to avoid the
imposition of such a tax.
Because the Trust is used to fund non-qualified Contracts, each Portfolio
must meet the diversification requirements imposed by the Code or these
Contracts will fail to qualify as life insurance and annuities. In general,
for a Portfolio to meet the investment diversification requirements of
Subchapter L of the Code, Treasury regulations require that no more than 55%
of the total value of the assets of the Portfolio may be represented by any
one investment, no more than 70% by two investments, no more than 80% by
three investments and no more than 90% by four investments. Generally, for
purposes of the regulations, all securities of the same issuer are treated as
a single investment. In the context of U.S. Government securities (including
any security that is issued, guaranteed or insured by the U.S. or an
instrumentality of the U.S.) each U.S. Government agency or instrumentality
is treated as a separate issuer. Compliance with the regulations is tested on
the first day of each calendar year quarter. There is a thirty (30) day
period after the end of each calendar year quarter in which to cure any
non-compliance.
FEDERAL TAX TREATMENT OF OPTIONS, FUTURES CONTRACTS AND FORWARD FOREIGN
EXCHANGE CONTRACTS
Certain option, futures, and forward foreign exchange contracts, including
options and futures on currencies, will be treated as Section 1256 contracts
or straddles.
Transactions which are considered Section 1256 contracts will be considered
to have been closed at the end of the Portfolio's fiscal year and any gains
or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will
generally be characterized as 60% long-term capital gain or loss and 40%
short-term capital gain or loss regardless of the holding period of the
instrument. A Portfolio will be required to distribute net gains on such
transactions to shareholders even though it may not have closed the
transaction and received cash to pay such distributions.
Options, futures and forward foreign exchange contracts, including options
and futures on currencies, which offset a foreign dollar denominated bond or
currency position may be considered straddles for tax purposes, in which case
a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of
the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. For securities offsetting a purchased
put, this adjustment of the holding period may increase the gain from sales
of securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities, excluding
certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for a Portfolio to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Future tax regulations could limit the extent that
net gain realized from option, futures or foreign forward exchange contracts
on currencies is qualifying income for purposes of the 90% requirement. In
addition, gains realized on futures or foreign forward exchange contracts on
securities or securities indexes and, in some cases, currencies, held for
less than three months, must be limited to less than 30% of the Portfolio's
annual gross income. In order to avoid realizing excessive gains on
securities or currencies held less than three months, the Portfolio may be
required to defer the closing out of option, futures or foreign forward
exchange contracts beyond the time when it would otherwise be advantageous to
do so. It is anticipated that unrealized gains on Section 1256 option,
futures and foreign forward exchange contracts, which have been open for less
than three months as of the end of the Portfolio's fiscal year and which are
recognized for tax purposes, will not be considered gains on securities or
currencies held less than three months for purposes of the 30% test.
Under Section 988 of the Code ("Code Section 988"), special rules are
provided for certain transactions in a foreign currency other than the
taxpayer's functional currency (i.e., unless certain special rules apply,
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currencies other than the U.S. dollar). In general, foreign currency gains or
losses from forward contracts, from futures contracts that are not "regulated
futures contracts", and from unlisted options will be treated as ordinary
income or loss under Code Section 988. Also, certain foreign exchange gains
or losses derived with respect to foreign fixed-income securities are also
subject to Code Section 988 treatment. In general, therefore, Code Section
988 gains or losses will increase or decrease the amount of a Portfolio's
investment company taxable income available to be distributed to shareholders
as ordinary income, rather than increasing or decreasing the amount of a
Portfolio's net capital gain. Additionally, if Code Section 988 losses exceed
other investment company taxable income during a taxable year, a Portfolio
would not be able to make any ordinary dividend distributions.
If a Portfolio invests in an entity which is classified as a "passive foreign
investment company" for U.S. tax purposes, the application of certain
technical tax provisions applying to such companies could result in the
imposition of federal income tax with respect to such investments at the
Portfolio level which could not be eliminated by distributions to
shareholders. It is not anticipated that any taxes on the Portfolio with
respect to investments in PFIC's would be significant.
PORTFOLIO PERFORMANCE
COMPUTATION OF TOTAL RETURN
Each Portfolio may provide average annual total return information calculated
according to a formula prescribed by the SEC. According to that formula,
average annual total return figures represent the average annual compounded
rate of return for the stated period. Average annual total return quotations
reflect the percentage change between the beginning value of a static account
in the Portfolio and the ending value of that account measured by the then
current net asset value of that Portfolio assuming that all dividends and
capital gains distributions during the stated period were invested in shares
of the Portfolio when paid. Total return is calculated by finding the average
annual compounded rates of return of a hypothetical investment that would
equate the initial amount invested to the ending redeemable value of such
investment, according to the following formula:
T = (ERV/P)1/n-1
where "T" equals average annual total return; where "ERV", the ending
redeemable value, is the value at the end of the applicable period of a
hypothetical $1,000 investment made at the beginning of the applicable
period; where "P" equals a hypothetical initial investment of $1,000; and
where "n" equals the number of years.
Each Portfolio's total return will vary from time to time depending upon
market conditions, the composition of each Portfolio's investment portfolio
and operating expenses of the Trust allocated to each Portfolio. Total return
should also be considered relative to changes in the value of a Portfolio's
shares and to the relative risks associated with the investment objectives
and policies of the Portfolios. These total return figures do not reflect
insurance company expenses and fees applicable to the Contracts. At any time
in the future, total return may be higher or lower than in the past and there
can be no assurance that any historical results will continue.
NON-STANDARD PERFORMANCE
In addition to the performance information described above, each Portfolio
may provide total return information with respect to the Portfolios for
designated periods, such as for the most recent six months or most recent
twelve months. This total return information is computed as described under
"Computation of Total Return" above except that no annualization is made.
OTHER SERVICES
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036,
serves as the Trust's independent accountants. Price Waterhouse LLP is
responsible for auditing the annual financial
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statements of the Trust. Price Waterhouse LLP provides a number of additional
related services to the Trust, including, from time to time, the preparation
of certain reports.
CUSTODIAN
Chase Manhattan Bank, N.A., 1211 Avenue of the Americas, New York, New York
10036 serve as custodian of the Trust's portfolio securities and other
assets. Under the terms of the custody agreement between the Trust and Chase
Manhattan Bank, Chase Manhattan Bank maintains and deposits in separate
accounts, cash, securities and other assets of the Portfolios. Chase
Manhattan Bank is also required, upon the order of the Trust, to deliver
securities held by Chase Manhattan Bank, and to make payments for securities
purchased by the Trust. Chase Manhattan Bank has also entered into
sub-custodian agreements with a number of foreign banks and clearing
agencies, pursuant to which portfolio securities purchased outside the U.S.
are maintained in the custody of these entities.
TRANSFER AGENT
Equitable serves as the transfer agent and dividend disbursing agent for the
Trust. Equitable receives no compensation for providing such services for the
Trust.
COUNSEL
Katten Muchin & Zavis, 1025 Thomas Jefferson Street, N.W., East Lobby, Suite
700, Washington, D.C. 20007, serves as counsel to the Trust.
Sullivan & Worcester, LLP, 1025 Connecticut Avenue, N.W., Suite 1000,
Washington, D.C. 20036, Boston, Massachusetts 02109, serves as counsel to the
independent Trustees of the Trust.
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FINANCIAL STATEMENTS
Set forth below is the initial audited Statement of Assets and Liabilities at
April 1, 1997 for the Trust.
EQ ADVISORS TRUST
STATEMENT OF ASSETS AND LIABILITIES
APRIL 1, 1997
<TABLE>
<CAPTION>
T. ROWE EQ/PUTNAM
PRICE T. ROWE PRICE GROWTH & EQ/PUTNAM EQ/PUTNAM
EQUITY INTERNATIONAL INCOME INTERNATIONAL INVESTORS EQ/PUTNAM
INCOME STOCK VALUE EQUITY GROWTH BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- --------------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash............................ $100,000 $ 0 $ 0 $ 0 $ 0 $ 0
Deferred organization costs
(Note 3) ...................... 28,750 28,750 28,750 28,750 28,750 28,750
======== ======= ======= ======= ======= =======
Total Assets ................ 128,750 28,750 28,750 28,750 28,750 28,750
Liabilities
Organization costs payable ..... 28,750 28,750 28,750 28,750 28,750 28,750
Commitments and contingencies
(Note 2) ......................
Net Assets
Common Stock, $.01 par value,
unlimited shares authorized,
10,000 shares of Class IA
issued and outstanding (of the
T. Rowe Price Equity Income
Portfolio)...................... 100,000
Total Net Assets............. 100,000 $ 0 $ 0 $ 0 $ 0 $ 0
======== ======= ======= ======= ======= =======
Net Asset Value per Share........ $ 10.00 $ 0 $ 0 $ 0 $ 0 $ 0
======== ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
MORGAN
MFS STANLEY WARBURG
EMERGING EMERGING PINCUS SMALL MERRILL LYNCH MERRILL LYNCH
MFS GROWTH MARKETS COMPANY WORLD BASIC VALUE
RESEARCH COMPANIES EQUITY VALUE STRATEGY EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ----------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash............................ $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Deferred organization costs
(Note 3) ...................... 28,750 28,750 28,750 28,750 28,750 28,750
======= ======= ======= ======= ======= =======
Total Assets..................... 28,750 28,750 28,750 28,750 28,750 28,750
Liabilities
Organization costs payable ..... 28,750 28,750 28,750 28,750 28,750 28,750
Commitments and contingencies
(Note 2) ......................
Net Assets
Common Stock, $.01 par value,
unlimited shares authorized,
10,000 shares of Class IA
issued and outstanding (of the
T. Rowe Price Equity Income
Portfolio)......................
Total Net Assets............. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
======= ======= ======= ======= ======= =======
Net Asset Value per Share........ $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
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NOTE 1--ORGANIZATION
EQ Advisors Trust (the "Trust") was organized as a Delaware business trust on
October 31, 1996 and is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940, as amended (the
"1940 Act"), as an open-end management investment company with diversified
and non-diversified series portfolios. Its shares are registered with the SEC
under the 1933 Act. It is anticipated that the Trust will offer twelve
portfolios (the "Portfolios") each with two classes of shares: Class IA and
Class IB. The Trust's shares are currently sold only to insurance company
separate accounts in connection with variable life insurance contracts and
variable annuity certificates and contracts issued by The Equitable Life
Assurance Society of the United States ("Equitable"), a wholly-owned
subsidiary of The Equitable Companies Incorporated. The Trust has had no
operations other than the issuance of 10,000 shares of its Class IA common
stock of the T. Rowe Price Equity Income Portfolio (the "Portfolio") to
Equitable Separate Account FP on April 1, 1997.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
NOTE 2--AGREEMENTS
The Trust intends to enter into an investment management agreement (the
"Management Agreement") with EQ Financial Consultants, Inc. (the "Manager"),
an indirect wholly-owned subsidiary of Equitable. The Management Agreement
obligates the Manager to (i) provide investment, management and certain
administrative services to the Trust; (ii) select Advisers for the
Portfolios; (iii) monitor the Advisers' investment programs and results; (iv)
review brokerage matters; (v) oversee compliance by the Trust with various
federal and state statutes; and (vi) carry out the directives of the Board of
Trustees. For its services under the Management Agreement, the Manager will
receive an annual fee for each of the Portfolios, calculated daily and
payable quarterly. The fee is calculated based on an annual rate of .55% of
average daily net assets of the T. Rowe Price Equity Income Portfolio, the
EQ/Putnam Growth & Income Value Portfolio, the EQ/Putnam Investors Growth
Portfolio, the EQ/Putnam Balanced Portfolio, the MFS Research Portfolio, the
MFS Emerging Growth Companies Portfolio and the Merrill Lynch Basic Value
Equity Portfolio; .65% of average daily net assets of the Warburg Pincus
Small Company Value Portfolio; .70% of average daily net assets of the
EQ/Putnam International Equity Portfolio and the Merrill Lynch World Strategy
Portfolio; .75% of average daily net assets of the T. Rowe Price
International Stock Portfolio, and 1.15% of average daily net assets of the
Morgan Stanley Emerging Markets Equity Portfolio.
The Trust intends to enter into distribution agreements with the Manager and
Equitable Distributors, Inc. ("EDI"), an indirect wholly-owned subsidiary of
Equitable (collectively, the "Distributors") pursuant to which the
Distributors will serve as principal underwriters of the Class IA and Class
IB shares of the Trust. Class IB shares are subject to distribution fees
imposed pursuant to a distribution plan ("Distribution Plan") adopted
pursuant to Rule 12b-1 under the 1940 Act. Under the Distribution Plan, the
Distributors will be entitled to receive a distribution fee of .25% of the
average net assets attributable to the Trust's Class IB shares. The Trust's
Class IA shares will not be subject to such fees.
On behalf of the Trust, the Manager intends to enter into investment advisory
agreements ("Advisory Agreements") with unaffiliated sub-advisers. Each of
the Advisory Agreements obligates the sub-advisers for the respective
Portfolios to: (i) continuously furnish investment programs for the
Portfolios; (ii) place all orders for the purchase and sale of investments
for the Portfolios with brokers or dealers selected by the Manager or the
respective sub-advisers; and (iii) perform certain limited related
administrative functions in connection therewith. The Manager pays the
expenses of providing investment advisory services to the Portfolios,
including the fees of the sub-advisers of each Portfolio.
The Trust intends to enter into an Administrative Agreement, with Chase
Global Funds Services Company ("Chase Global"), a subsidiary of The Chase
Manhattan Bank, ("Chase"), pursuant to which Chase Global will provide
certain transfer agent, fund accounting and administrative services to the
Trust. For such services, Chase Global will receive compensation at the
annual rate of .0525 of 1% of the total
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Trust assets, plus $25,000 for each Portfolio, until the total Trust assets
reach $2.0 billion, and when the total Trust assets exceed $2.0 billion:
.0425 of 1% of the first $500 million of the total Trust assets; .035 of 1%
of the next $2.0 billion of the total Trust assets; .025 of 1% of the next
$1.0 billion of the total Trust assets; .015 of 1% of the next $2.5 billion
of the total Trust assets; and .010 of 1% of the total Trust assets in excess
of $6.0 billion; except that the annual fee payable to Chase Global with
respect to any Portfolio which commences operation after July 1, 1997 and
whose assets do no exceed $200 million shall be computed at the rate of .0525
of 1% of the Portfolio's total assets plus $25,000.
The Trust intends to enter into a Custody Agreement with Chase. The Custody
Agreement will provide for an annual fee based on the amount of assets under
custody plus transaction charges.
In the interest of limiting expenses of each of the Portfolios, the Manager
has entered into an expense limitation agreement with the Trust, with respect
to each Portfolio, ("Expense Limitation Agreements") pursuant to which the
Manager has agreed to waive or limit its fees and to assume other expenses so
that the total annual operating expenses of each Portfolio are limited to
.85% of the respective average daily net assets of the T. Rowe Price Equity
Income, EQ/Putnam Growth & Income Value, EQ/Putnam Investors Growth, MFS
Research, MFS Emerging Growth Companies and Merrill Lynch Basic Value Equity
Portfolios; .90% of the EQ/Putnam Balanced Portfolio's average daily net
assets; 1.00% of the Warburg Pincus Small Company Value Portfolio's average
daily net assets; 1.20% of the respective average daily net assets of the T.
Rowe Price International Stock, EQ/Putnam International Equity and Merrill
Lynch World Strategy Portfolios; and 1.75% of the Morgan Stanley Emerging
Markets Equity Portfolio's average daily net assets.
Each Portfolio may at a later date reimburse to the Manager the management
fees waived or limited and other expenses assumed and paid by the Manager
pursuant to the Expense Limitation Agreement provided such Portfolio has
reached a sufficient asset size to permit such reimbursement to be made
without causing the total annual expense ratio of each Portfolio to exceed
the percentage limit stated above. Consequently, no reimbursement by a
Portfolio will be made unless: (i) the Portfolio's average daily net assets
exceed $100 million; (ii) the Portfolio's total annual expense ratio is less
than the respective percentages stated above; and (iii) the payment of such
reimbursement has been approved by the Trust's Board of Trustees on a
quarterly basis.
Certain employees of the Manager and Chase Global are officers of the Trust.
NOTE 3--ORGANIZATION COSTS
Trust organization costs estimated at $345,000 have been allocated equally to
and capitalized by each of the Portfolios and will be deferred and amortized
on a straight line basis over a 60-month period from the date the Portfolios
commence operations. In the event that any of the shares representing initial
capital of the Portfolios are redeemed by any holder thereof during the
period that the Portfolios are amortizing their organization costs, the
redemption proceeds payable to the holder thereof by the Portfolios will be
reduced by the unamortized organization costs in the same ratio as the number
of such shares being redeemed bears to the number of initial shares
outstanding immediately prior to redemption.
The Trust has entered into an Organization Expense Reimbursement Agreement
with the Manager under which the Trust is obligated to reimburse and pay to
the Manager, or affiliated companies of the Manager and its affiliates,
organizational expenses incurred prior to the Portfolios commencing
operations.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Trustees of EQ Advisers Trust
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of each of the
portfolios constituting EQ Advisors Trust (the "Fund") at April 1, 1997, in
conformity with generally accepted accounting principles. This financial
statement is the responsibility of the Fund's management; our responsibility
is to express an opinion on this financial statement based on our audit. We
conducted our audit of this financial statement in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statement is free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statement,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
April 2, 1997
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APPENDIX
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 AND PRIME-1 COMMERCIAL PAPER RATINGS
The rating A-1 (including A-1+) is the highest commercial paper rating
assigned by S&P. Commercial paper rated A-1 by S&P has the following
characteristics:
o liquidity ratios are adequate to meet cash requirements;
o long-term senior debt is rated "A" or better;
o the issuer has access to at least two additional channels of borrowing;
o basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances;
o typically, the issuer's industry is well established and the issuer has
a strong position within the industry; and
o the reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determines whether the
issuer's commercial paper is rated A-1, A-2 or A-3. Issues rated A-1 that are
determined by S&P to have overwhelming safety characteristics are designated
A-1+.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following:
o evaluation of the management of the issuer;
o economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain
areas;
o evaluation of the issuer's products in relation to competition and
customer acceptance;
o liquidity;
o amount and quality of long-term debt;
o trend of earnings over a period of ten years;
o financial strength of parent company and the relationships which exist
with the issuer; and
o recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet
such obligations.
DESCRIPTION OF BOND RATINGS
Bonds are considered to be "investment grade" if they are in one of the top
four ratings.
S&P's ratings are as follows:
o Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
o Bonds rated AA have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
o Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher
rated categories.
o Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in higher
rated categories.
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o Debt rated BB, B, CCC, CC or C is regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and
repay principal in accordance with the terms of the obligation. While
such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse debt conditions.
o The rating C1 is reserved for income bonds on which no interest is being
paid.
o Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
Moody's ratings are as follows:
o Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt-edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
o Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks
appear somewhat larger than in Aaa securities.
o Bonds which are rated A possess many favorably investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment some time in
the future.
o Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
o Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
o Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
o Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
o Bonds which are rated Ca represent obligations which are speculative to
a high degree. Such issues are often in default or have other marked
shortcomings.
o Bonds which are rated C are the lowest class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies modifiers to each rating classification from Aa through B to
indicate relative ranking within its rating categories. The modifier "1"
indicates that a security ranks in the higher end of its rating category; the
modifier "2" indicates a mid-range ranking' and the modifier "3" indicates
that the issue ranks in the lower end of its rating category.
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