<PAGE>
Registration Nos. 333-17217
811-07953
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON April 22, 1998.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 /x/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 6 /x/
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No. 8 /x/
(Check appropriate box or boxes)
EQ ADVISORS TRUST
(formerly 787 Trust)
(Exact name of registrant as specified in charter)
1290 Avenue of the Americas
New York, New York 10104
(Address of principal executive offices)
Registrant's Telephone Number, including area code: (212) 554-1234
Peter D. Noris, Executive Vice President and
Chief Investment Officer
The Equitable Life Assurance Society of the United States
1290 Avenue of the Americas
New York, New York 10104
(Name and address of agent for service)
Please send copies of all communications to:
Jane A. Kanter Mary P. Breen
Dechert Price & Rhoads Vice President & Associate General Counsel
1775 Eye Street, N.W. The Equitable Life Assurance Society
Washington, D.C. 20006-2401 of the United States
1290 Avenue of the Americas
New York, New York 10104
It is proposed that this filing will become effective:
X immediately upon filing pursuant to paragraph (b)
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on [date] pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)
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on [date] pursuant to paragraph (a) of Rule 485
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75 days after filing pursuant to paragraph (a)
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<PAGE>
EQ ADVISORS TRUST
Contents of Registration Statement
This registration statement consists of the following papers and documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheet
Part A - Prospectuses
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
EQ ADVISORS TRUST
CROSS REFERENCE SHEET
POST-EFFECTIVE AMENDMENT NO. 6
<TABLE>
<CAPTION>
<S> <C>
PART A. ITEM NO. AND CAPTIONS CAPTION IN PROSPECTUS
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant The Trust; Description of the Trust
and Trust's Shares -- The Trust
5. Management of the Fund Management of the Trust
5A. Management's Discussion of Fund Not Applicable
Performance
6. Capital Stock and Other Securities Description of the Trust and Trust's
Shares--Characteristics of Trust's
Shares; Dividends, Distributions And
Taxes
7. Purchase of Securities Being Offered Description of the Trust and Trust's
Shares - Purchase and Redemption of
Shares
8. Redemption or Repurchase Description of the Trust and Trust's
Shares - Purchase and Redemption of
Shares
9. Pending Legal Proceedings Not Applicable
PART B. ITEM NO. AND CAPTIONS CAPTION IN STATEMENT OF
ADDITIONAL INFORMATION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History General Information and History
13. Investment Objectives and Policies Description of Certain Securities In
Which the Portfolios May Invest;
Investment Restrictions
14. Management of the Fund Management of the Trust
15. Control Persons and Principal Holders General Information and History
of Securities
16. Investment Advisory and Other Investment Management and Other
Services Services
<PAGE>
17. Brokerage Allocation and Other Brokerage Allocation
Practices
18. Capital Stock and Other Securities General Information and History
19. Purchase, Redemption, and Pricing of Purchase and Pricing of Securities;
Securities Being Offered Redemption of Shares
20. Tax Status Certain Tax Considerations
21. Underwriters Investment Management and Other
Services
22. Calculation of Performance Data Portfolio Performance
23. Financial Statements Financial Statements
</TABLE>
PART C Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration
Statement.
<PAGE>
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 eighteen Portfolios currently offered
by the Trust.
* 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
* Merrill Lynch Basic Value Equity Portfolio
* Lazard Large Cap Value Portfolio
* Lazard Small Cap Value Portfolio
* JPM Core Bond Portfolio
* BT Small Company Index Portfolio
* BT International Equity Index Portfolio
* BT Equity 500 Index Portfolio
The Trust offers two classes of shares on behalf of each Portfolio: Class IA
shares offered hereby and Class IB shares offered pursuant to another
prospectus.
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, 1998 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.
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below for the period May 1,
1997* (unless otherwise noted) to December 31, 1997 relates only to
the Class IB shares of the Trust and has been derived from
financial statements of the Trust which have been audited by Price
Waterhouse LLP, independent public accountants. Price Waterhouse
LLP's report on the Trust's financial statements as of December 31,
1997 appears in the Trust's Annual Report. The information listed
below should be read in conjunction with the financial statements
contained in the Trust's Annual Report which are incorporated by
reference into the Trust's Statement of Additional Information. The
Annual Report includes more information about the Trust's
performance and is available without charge upon request.
<TABLE>
<CAPTION>
- --------------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
Net asset Net Investment Net realized Total from Dividends Dividends in
value, Income and investment from net excess of net
beginning of unrealized operations investment investment
period gain (loss) income income
on
investments
and foreign
currency
transactions
- --------------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
T. Rowe Price $10.00 $0.02 $(0.17) $(0.15)
International Stock
Portfolio
- --------------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
T. Rowe Price $10.00 $0.10 $2.11 $2.21 $(0.09)
Equity Income
Portfolio
- --------------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
EQ/Putnam Growth & $10.00 $0.06 $1.56 $1.62 $(0.06)
Income Value
Portfolio
- --------------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
EQ/Putnam Balanced $10.00 $0.14 $1.30 $1.44 $(0.13) $(0.01)
Portfolio
- --------------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
</TABLE>
(Table Restubbed from above)
<TABLE>
<CAPTION>
- --------------------- ----------------- ----------------- ----------------- ----------- --------------- ---------------------
Distributions Distributions Total dividends Net asset Total return Net assets, end of
from realized in excess of and value, (b) period (000's)
gains realized gains distributions end of
period
- --------------------- ----------------- ----------------- ----------------- ----------- --------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
T. Rowe Price $9.85 (1.49)% $69,572
International Stock
Portfolio
- --------------------- ----------------- ----------------- ----------------- ----------- --------------- ---------------------
T. Rowe Price $(0.04) $(0.13) $12.08 22.11% $99,947
Equity Income
Portfolio
- --------------------- ----------------- ----------------- ----------------- ----------- --------------- ---------------------
EQ/Putnam Growth & $(0.01) $(0.03) $(0.10) $11.52 16.23% $150,260
Income Value
Portfolio
- --------------------- ----------------- ----------------- ----------------- ----------- --------------- ---------------------
EQ/Putnam Balanced $(0.09) $(0.23) $11.21 14.38% $25,854
Portfolio
- --------------------- ----------------- ----------------- ----------------- ----------- --------------- ---------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
- --------------------- ------------- ---------------- -------------------- --------------- ---------------- ---------------
Net asset Net Investment Net realized and Total from Dividends from Dividends in
value, Income unrealized gain investment net investment excess of net
beginning (loss) on operations income investment
of period investments and income
foreign currency
transactions
- --------------------- ------------- ---------------- -------------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
EQ/Putnam $10.00 $0.03 $0. 93 $0.96 $(0.02)
International
Equity Portfolio
- --------------------- ------------- ---------------- -------------------- --------------- ---------------- ---------------
EQ/Putnam Investors $10.00 $0.02 $2.45 $2.47 $(0.03)
Growth Portfolio
- --------------------- ------------- ---------------- -------------------- --------------- ---------------- ---------------
MFS Research $10.00 $0.02 $1.58 $1.60 $(0.02)
Portfolio
- --------------------- ------------- ---------------- -------------------- --------------- ---------------- ---------------
MFS Emerging Growth $10.00 $0.02 $2.21 $2.23 $(0.02)
Companies Portfolio
- --------------------- ------------- ---------------- -------------------- --------------- ---------------- ---------------
Warburg Pincus $10.00 $0.01 $1.90 $1.91 $(0.01)
Small Company Value
Portfolio
- --------------------- ------------- ---------------- -------------------- --------------- ---------------- ---------------
Merrill Lynch World $10.00 $0.08 $0.39 $0.47 $(0.05)
Strategy Portfolio
- --------------------- ------------- ---------------- -------------------- --------------- ---------------- ---------------
Merrill Lynch Basic $10.00 $0.06 $1.64 $1.70 $(0.06)
Value Equity
Portfolio
- --------------------- ------------- ---------------- -------------------- --------------- ---------------- ---------------
Morgan Stanley $10.00 $0.04 $(2.06) $(2.02) $(0.02)
Emerging Markets
Equity Portfolio
- --------------------- ------------- ---------------- -------------------- --------------- ---------------- ---------------
</TABLE>
(Table Restubbed from Above)
<TABLE>
<CAPTION>
- --------------------- ----------------- ----------------- ----------------- -------------- -------------- -----------------
Distributions Distributions Total dividends Net asset Total return Net assets, end
from realized in excess of and value, end (b) of period
gains realized gains distributions of period (000's)
- --------------------- ----------------- ----------------- ----------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
EQ/Putnam $(0.01) $(0.04) $(0.07) $10.89 9.58% $55,178
International
Equity Portfolio
- --------------------- ----------------- ----------------- ----------------- -------------- -------------- -----------------
EQ/Putnam Investors $(0.04) $(0.07) $(0.14) $12.33 24.70% $39,695
Growth Portfolio
- --------------------- ----------------- ----------------- ----------------- -------------- -------------- -----------------
MFS Research $(0.01) $(0.09) $(0.12) $11.48 16.07% $114,754
Portfolio
- --------------------- ----------------- ----------------- ----------------- -------------- -------------- -----------------
MFS Emerging Growth $(0.18) $(0.11) $(0.31) $11.92 22.42% $99,317
Companies Portfolio
- --------------------- ----------------- ----------------- ----------------- -------------- -------------- -----------------
Warburg Pincus $(0.05) $(0.06) $11.85 19.15% $120,880
Small Company Value
Portfolio
- --------------------- ----------------- ----------------- ----------------- -------------- -------------- -----------------
Merrill Lynch World $(0.11) $(0.16) $10.31 4.70% $18,210
Strategy Portfolio
- --------------------- ----------------- ----------------- ----------------- -------------- -------------- -----------------
Merrill Lynch Basic $(0.05) $(0.01) $(0.12) $11.58 16.99% $49,495
Value Equity
Portfolio
- --------------------- ----------------- ----------------- ----------------- -------------- -------------- -----------------
Morgan Stanley $(0.02) $7.96 (20.16%) $21,433
Emerging Markets
Equity Portfolio
- --------------------- ----------------- ----------------- ----------------- -------------- -------------- -----------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
- ------------------- ----------------------------- ------------------ ----------------------- --------------------
Ratio of expenses to Ratio of Ratio of net Ratio of net
average net assets after expenses to investment income to investment income
waivers (a)(c) average net average net assets to average net
assets before after waivers (a)(c) assets before
waivers (a)(c) waivers (a)(c)
- ------------------- ----------------------------- ------------------ ----------------------- --------------------
<S> <C> <C> <C> <C>
T. Rowe Price 1.20% 2.56% 0.45% (0.91)%
International
Stock Portfolio
- ------------------- ----------------------------- ------------------ ----------------------- --------------------
T. Rowe Price 0.85% 1.74% 2.49% 1.60%
Equity Income
Portfolio
- ------------------- ----------------------------- ------------------ ----------------------- --------------------
EQ/Putnam Growth 0.85% 1.75% 1.67% 0.77%
& Income Value
Portfolio
- ------------------- ----------------------------- ------------------ ----------------------- --------------------
EQ/Putnam 0.90% 2.55% 3.19% 1.54%
Balanced Portfolio
- ------------------- ----------------------------- ------------------ ----------------------- --------------------
EQ/Putnam 1.20% 2.53% 0.74% (0.59)%
International
Equity Portfolio
- ------------------- ----------------------------- ------------------ ----------------------- --------------------
EQ/Putnam 0.85% 2.13% 0.58% (0.70)%
Investors Growth
Portfolio
- ------------------- ----------------------------- ------------------ ----------------------- --------------------
MFS Research 0.85% 1.78% 0.65% (0.28)%
Portfolio
- ------------------- ----------------------------- ------------------ ----------------------- --------------------
MFS Emerging 0.85% 1.82% 0.61% (0.36)%
Growth Companies
Portfolio
- ------------------- ----------------------------- ------------------ ----------------------- --------------------
Warburg Pincus 1.00% 1.70% 0.26% (0.44)%
Small Company
Value Portfolio
- ------------------- ----------------------------- ------------------ ----------------------- --------------------
Merrill Lynch 1.20% 3.05% 1.89% 0.04%
World Strategy
Portfolio
- ------------------- ----------------------------- ------------------ ----------------------- --------------------
Merrill Lynch 0.85% 1.89% 1.91% 0.87%
Basic Value
Equity Portfolio
- ------------------- ----------------------------- ------------------ ----------------------- --------------------
Morgan Stanley 1.75% 2.61% 1.96% 1.10%
Emerging Markets
Equity Portfolio
- ------------------- ----------------------------- ------------------ ----------------------- --------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------- ------------- ---------------- ------------------
Portfolio Average Per share benefit
turnover commission to net investment
rate rate paid income(c)
- ------------------- ------------- ---------------- ------------------
<S> <C> <C> <C>
T. Rowe Price 17% $0.0034 $0.05
International
Stock Portfolio
- ------------------- ------------- ---------------- ------------------
T. Rowe Price 9% $0.0293 $0.03
Equity Income
Portfolio
- ------------------- ------------- ---------------- ------------------
EQ/Putnam Growth 61% $0.0376 $0.03
& Income Value
Portfolio
- ------------------- ------------- ---------------- ------------------
EQ/Putnam 117% $0.0346 $0.07
Balanced Portfolio
- ------------------- ------------- ---------------- ------------------
EQ/Putnam 43% $0.0153 $0.05
International
Equity Portfolio
- ------------------- ------------- ---------------- ------------------
EQ/Putnam 47% $0.0338 $0.05
Investors Growth
Portfolio
- ------------------- ------------- ---------------- ------------------
MFS Research 51% $0.0471 $0.03
Portfolio
- ------------------- ------------- ---------------- ------------------
MFS Emerging 116% $0.0422 $0.04
Growth Companies
Portfolio
- ------------------- ------------- ---------------- ------------------
Warburg Pincus 44% $0.0545 $0.03
Small Company
Value Portfolio
- ------------------- ------------- ---------------- ------------------
Merrill Lynch 58% $0.0299 $0.08
World Strategy
Portfolio
- ------------------- ------------- ---------------- ------------------
Merrill Lynch 25% $0.0566 $0.03
Basic Value
Equity Portfolio
- ------------------- ------------- ---------------- ------------------
Morgan Stanley 25% $0.0011 $0.02
Emerging Markets
Equity Portfolio
- ------------------- ------------- ---------------- ------------------
</TABLE>
- --------------
*Commencement of Operations. The Morgan Stanley Emerging Markets Equity
Portfolio commenced operations on August 20, 1997. No financial highlights are
presented for the Lazard Large Cap Value Portfolio, Lazard Small Cap Value
Portfolio, JPM Core Bond Portfolio, BT Small Company Index Portfolio, BT
International Equity Index Portfolio and BT Equity 500 Index Portfolio, each of
which received initial capital on December 31, 1997.
(a) Annualized.
(b) Total return calculated for a period of less than one year is not
annualized.
(c) For further information concerning fee waivers, see the section entitled
"Expense Limitation Agreements" in the Prospectus.
-4-
<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 eighteen Portfolios. 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, the
Merrill Lynch World Strategy Portfolio and the Lazard Small Cap Value
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 Asset Management, Inc., Merrill Lynch
Asset Management, L.P., Lazard Asset Management, a division of Lazard Freres &
Co. LLC, J.P. Morgan Investment Management Inc., and Bankers Trust Company
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 & 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.
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 Equity Portfolio Morgan Stanley Asset Management Inc.
Warburg Pincus Small Company Value Portfolio Warburg Pincus Asset Management, Inc.
Merrill Lynch World Strategy Portfolio Merrill Lynch Asset Management, L.P.
Merrill Lynch Basic Value Equity Portfolio Merrill Lynch Asset Management, L.P.
Lazard Large Cap Value Portfolio Lazard Asset Management
Lazard Small Cap Value Portfolio Lazard Asset Management
JPM Core Bond Portfolio J.P. Morgan Investment Management Inc.
BT Small Company Index Portfolio Bankers Trust Company
BT International Equity Index Portfolio Bankers Trust Company
BT Equity 500 Index Portfolio Bankers Trust Company
</TABLE>
5
<PAGE>
The Manager has the ultimate responsibility to oversee each of the Advisers and
to recommend their hiring, termination and replacement. The Trust and the
Manager have received exemptive relief from the Securities and Exchange
Commission that permits the Manager, subject to approval by the Board of
Trustees, to (i) select Advisers for each of the Trust's Portfolios and (ii)
materially modify existing investment advisory agreements without obtaining
shareholder approval.
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 IA shares
of the Trust offered by this Prospectus as well as one of the distributors for
the Class IB shares. Equitable Distributors, Inc. ("EDI") serves as the other
distributor for the Class IA shares of the Trust as well as the Class IB
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
Life"). Both classes of shares are offered and redeemed at their net asset
value without of any sales load.
Class IB shares are offered pursuant to another prospectus and are subject to
the same expenses as the Class IA shares, but unlike the Class IA shares they
are subject to distribution fees imposed pursuant to a distribution plan
("Distribution Plan") adopted pursuant to Rule 12b-1 under the 1940
Act.Inquiries regarding Class IB shares should be addressed to Equitable Life,
at 1290 Avenue of the Americas, New York, NY 10104 or by calling
(212)-314-4300.
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 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% for each of
those countries). 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
6
<PAGE>
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.
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, 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.
7
<PAGE>
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 the 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").
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, 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.
8
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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, passive foreign investment companies, 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.
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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.
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, borrowings, derivatives,
repurchase agreements, futures contracts, foreign securities, forward
commitments, foreign currency transactions, 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.
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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 appears 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.
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.
The Portfolio may also engage in a variety of investment management practices
such as buying and selling options and futures contracts and entering into
foreign currency exchange contracts.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, borrowings, futures
contracts, 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 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 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.
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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, illiquid securities, zero-coupon bonds,
payment-in-kind bonds, derivatives, 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.
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,
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
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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, 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.
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.
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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 market
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, Bulgaria, Chile, China
(mainland and Hong Kong), Colombia, Egypt, Ghana, Greece, Hungary, India,
Indonesia, Israel, Jamaica, Jordan, Kenya, Malaysia, Mexico, Morocco, Nigeria,
Pakistan, Peru, Philippines, Poland, Portugal, Russia, Singapore, 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.
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 20% 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 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
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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, collateralized mortgage obligations, asset-backed securities,
floaters, inverse floaters, foreign currency transactions, loan participations,
repurchase agreements, 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 stock, 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.
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 A2 by Standard &
Poor's Rating Service ("S&P") or Prime2 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.
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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 United
States 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 rated
BBB or better by S&P or Baa or better by Moody's or of comparable quality. The
Portfolio 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.
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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, floaters, 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 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
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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, convertible securities, United States Government
securities, repurchase agreements, securities loans, foreign securities,
borrowings, and illiquid securities) are discussed under the caption
"Investment Strategies" below and in the Statement of Additional Information.
LAZARD LARGE CAP VALUE PORTFOLIO
The investment objective of the Lazard Large Cap Value Portfolio is to seek
capital appreciation by investing primarily in equity securities of companies
with relatively large capitalizations (i.e., companies having market
capitalizations of at least $1 billion at the time of initial purchase) that
appear to the Adviser to be inexpensively priced relative to the return on
total capital or equity. In managing the Portfolio, the Adviser engages in a
value-oriented search for equity securities. The Adviser attempts to identify
inexpensive securities through traditional measures of value, including low
price to earnings ratio, high yield, unrecognized assets, potential for
management change, and/or the potential to improve profitability. The Adviser
focuses on individual stock selection (a "bottom-up" approach) rather than on
forecasting stock market trends (a "top-down" approach). Risk is tempered by
diversification of investments.
Under normal market conditions, the Portfolio will invest at least 80% of its
total assets in equity securities, including common stocks, preferred stocks
and securities convertible into or exchangeable for common stocks. In addition,
at times judged by the Adviser to be appropriate, the Portfolio may hold up to
20% of its total assets in United States Government securities and investment
grade debt obligations of domestic corporations rated BBB or better by S&P or
Baa or better by Moody's. The Portfolio may also invest without limitation in
high-quality short-term money market instruments, including United States
Government securities, repurchase agreements, certificates of deposits, time
deposits and other short-term obligations issued by banks, commercial paper and
loan participations. In addition, the Portfolio may invest up to 10% of its
total assets at the time of purchase in foreign equity or debt securities
trading in United States markets or listed on a domestic securities exchange or
represented by ADRs or Global Depositary Receipts ("GDRs"). The Portfolio may
also engage in various investment techniques, such as options transactions and,
although it has no present intention to do so, leveraging and lending portfolio
securities.
Securities owned by the Portfolio are kept under continuing supervision, and
changes may be made whenever such securities no longer seem to meet the
Portfolio's objective. Changes in the securities owned by the Portfolio also
may be made to increase or decrease investments in anticipation of changes in
security prices in general or to provide funds required for redemptions,
distributions to shareholders or other corporate purposes.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as securities loans, borrowing, loan participations,
derivatives, options, mortgage-related securities, forward commitments,
convertible securities, floaters, illiquid securities, foreign securities,
investment grade fixed income securities, United States Government securities,
and repurchase agreements) are discussed under the caption "Investment
Strategies" below and in the Statement of Additional Information.
LAZARD SMALL CAP VALUE PORTFOLIO
The investment objective of the Lazard Small Cap Value Portfolio is to seek
capital appreciation by investing primarily in equity securities of United
States companies with small market capitalizations (i.e., companies in the
range of companies represented in the Russell 2000 Index) that the Adviser
considers inexpensively priced relative to the return on total capital or
equity. The Russell 2000 Index is composed of selected common stocks of small,
generally unseasoned United States companies with market capitalizations
ranging between $100 million and $1 billion. The equity securities in which the
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Portfolio may invest include: common stocks, preferred stocks, securities
convertible into or exchangeable for common stocks, rights and warrants.
Investments are generally made in equity securities of companies that in the
Adviser's opinion have one or more of the following characteristics: (i) are
undervalued relative to their earnings power, cash flow, and/or asset values;
(ii) have an attractive price/value relationship (i.e., have high returns on
equity and/or assets with correspondingly low price-to-book and/or
price-to-asset value as compared to the market generally or the companies'
industry groups in particular) with the expectation that some catalyst will
cause the perception of value to change within a 24-month time horizon; (iii)
have experienced significant relative underperformance and are out of favor due
to a set of circumstances that are unlikely to harm a company's franchise or
earnings power over the longer term; (iv) have low projected price-to-earnings
or price-to-cash-flow multiples relative to their industry peer group and/or
the market in general; (v) have the prospect, or the industry in which the
company operates has the prospect, to allow it to become a larger factor in the
business and receive a higher valuation as such; (vi) have significant
financial leverage but have high levels of free cash flow that may be used to
reduce leverage and enhance shareholder value; and (vii) have a relatively
short corporate history with the expectation that the business may grow to
generate meaningful cash flow and earnings over a reasonable investment
horizon.
Under normal market conditions, the Portfolio will invest at least 80% of the
value of its total assets in the small capitalization equity securities
described above. Assets not invested in such small capitalization equity
securities generally will be invested in larger capitalization equity
securities or debt securities, including cash equivalents.
The Adviser believes that issuers of small capitalization stocks often have
sales and earnings growth rates that exceed those of larger companies, and that
such growth rates may, in turn, be reflected in more rapid share price
appreciation. However, investing in smaller capitalization stocks can involve
greater risk than is customarily associated with larger, more established
companies. (Such risks are discussed under the caption "Investment Strategies
- -- Small Company Securities" below).
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.
The Adviser continually evaluates the securities owned by the Portfolio, and
changes may be made whenever the Adviser determines such securities no longer
meet the Portfolio's objective. Changes in Portfolio holdings may also be made
to increase or decrease investments in anticipation of changes in security
prices in general or to provide funds required for redemptions, distributions
to shareholders or other corporate purposes.
When, in the judgment of the Adviser, business or financial conditions warrant,
the Portfolio may assume a temporary defensive position and invest without
limitation in large capitalization companies or short-term money market
instruments, or hold its assets in cash.
Certain investment strategies and investments which may be employed by the
Portfolio (such as securities loans, borrowings, loan participations,
derivatives, mortgage-related securities, convertible securities, floaters,
illiquid securities, investment grade fixed income securities, forward
commitments, United States Government securities, repurchase agreements, and
small company securities) are discussed under the caption "Investment
Strategies" below and in the Statement of Additional Information.
JPM CORE BOND PORTFOLIO
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The investment objective of the JPM Core Bond Portfolio is to provide a high
total return consistent with moderate risk of capital and maintenance of
liquidity. Total return will consist of income plus realized and unrealized
capital gains and losses. Although the net asset value of the Portfolio will
fluctuate, the Portfolio attempts to preserve the value of its investments to
the extent consistent with its objective.
It is the current policy of the Portfolio that, under normal circumstances, all
of the Portfolio's assets will, at the time of purchase, consist of investment
grade securities rated BBB or better by S&P or Baa or better by Moody's or
unrated securities of comparable quality. If the quality of the investment
later declines, the Portfolio may continue to hold the investment.
The Adviser actively manages the Portfolio's duration, the allocation of
securities across market sectors, and the selection of specific securities
within market sectors. Based on fundamental, economic and capital markets
research, the Adviser adjusts the duration of the Portfolio in light of market
conditions and the Adviser's interest rate outlook. For example, if interest
rates are expected to fall, the duration may be lengthened to take advantage of
the expected increase in bond prices. The Adviser also actively allocates the
Portfolio's assets among the broad sectors of the fixed income market
including, but not limited to, United States Government and agency securities,
corporate securities, private placements, asset-backed securities,
mortgage-related securities, and direct mortgage obligations. The Portfolio may
also invest up to 25% of its assets in securities of foreign issuers, including
up to 20% of its assets in debt secruities denominated in foreign currencies of
developed countries. In addition, the Portfolio may invest in municipal
obligations provided such securities are issued on a taxable basis or have an
attractive yield excluding tax considerations. Specific securities that the
Adviser believes are undervalued are selected for purchase within the sectors
using advanced quantitative tools, analysis of credit risk, the expertise of a
dedicated trading desk, and the judgment of fixed income portfolio managers and
analysts. Under normal circumstances, the Adviser intends to have the Portfolio
invest at least 65% of its assets in bonds. The Portfolio may to a limited
extent invest in convertible securities, including convertible debt securities
and preferred stock.
Duration is a measure of the weighted average maturity of bonds and can be used
by the Adviser as a measure of the sensitivity of the market value of the
Portfolio's bond holdings to changes in interest rates. Generally, the longer
the duration of the Portfolio's bond holdings, the more sensitive their market
value will be to changes in interest rates. Under normal market conditions the
Portfolio's duration will range between one year shorter and one year longer
than the duration of the domestic investment grade fixed income universe, as
represented by Salomon Brothers Broad Investment Grade Bond Index. Currently,
the duration of that index is approximately 4.5 years. The maturities of the
individual securities in the Portfolio may vary widely, however.
The Adviser intends to actively manage the Portfolio in pursuit of its
investment objective. Portfolio transactions are undertaken principally to
accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates. However, the Portfolio may also engage in
short-term trading consistent with its objective. To the extent the Portfolio
engages in short-term trading, it may incur increased transaction costs. The
Portfolio may purchase high-quality money market instruments to invest
temporary cash balances or to maintain liquidity to meet withdrawals. When
market or financial conditions warrant, the Portfolio may invest as a temporary
defensive measure up to 100% of its assets in money market instruments.
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, illiquid securities, zero-coupon bonds,
investment grade fixed income securities, payment-in-kind bonds, derivatives,
foreign currency transactions, repurchase agreements, reverse repurchase
agreements, forward commitments, United States Government securities,
borrowings, asset-backed securities, convertible securities, mortgage-related
securities, and swaps) are discussed under the caption "Investment Strategies"
below and in the Statement of Additional Information.
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BT SMALL COMPANY INDEX PORTFOLIO
The investment objective of the BT Small Company Index Portfolio is to
replicate as closely as possible (before deduction of Portfolio expenses) the
total return of the Russell 2000 Index ("Russell 2000"). The Russell 2000 is
composed of approximately 2,000 small-capitalization common stocks. A company's
stock market capitalization is the total market value of its floating
outstanding shares. As of June 30, 1997, the average stock market
capitalization of the Russell 2000 was $500 million and the weighted average
stock market capitalization of the Russell 2000 was $650 million. The Portfolio
is neither sponsored by nor affiliated with the Frank Russell Company, which is
the owner of the trademarks and copyrights relating to the Russell indices.
The Portfolio invests in a statistically selected sample of the 2,000 stocks
included in the Russell 2000. The stocks of the Russell 2000 to be included in
the Portfolio will be selected utilizing a statistical sampling technique known
as "optimization." This process selects stocks for the Portfolio so that
various industry weightings, market capitalizations and fundamental
characteristics (e.g., price-to-book, price-to-earnings and debt-to-asset
ratios and dividend yields) closely approximate those of the Russell 2000. For
instance, if 10% of the capitalization of the Russell 2000 consists of utility
companies with relatively small capitalizations, then the Portfolio is
constructed so that approximately 10% of the Portfolio's assets are invested in
the stocks of utility companies with relatively small capitalizations. The
stocks held by the Portfolio are weighted to make the Portfolio's aggregate
investment characteristics similar to those of the Russell 2000 as a whole.
Over time, the correlation between the performance of the Portfolio and the
Russell 2000 is expected to be 0.95 or higher before deduction of Portfolio
expenses. A correlation of 1.00 would indicate perfect correlation, which would
be achieved when the net asset value of the Portfolio, including the value of
its dividend and any capital gain distributions, increases or decreases in
exact proportion to changes in the Russell 2000. The Portfolio's ability to
track the Russell 2000 may be affected by, among other things, transaction
costs, administration and other expenses incurred by the Portfolio, changes in
either the composition of the Russell 2000 or the assets of the Portfolio, and
the timing and amount of Portfolio investor contributions and withdrawals, if
any. Because the Portfolio seeks to track the Russell 2000, the Adviser
generally will not attempt to judge the merits of any particular stock as an
investment. Under normal circumstances, the Portfolio will invest at least 80%
of its assets in the securities of the Russell 2000. The Portfolio is a
diversified fund and will not concentrate more than 25% of its assets in the
securities of issuers in the same industry. In the event that the Russell 2000
should concentrate to an extent greater than 25% in the securities of issuers
in the same industry, the Portfolio's ability to achieve its objective may be
impaired since the Portfolio is not permitted to so invest.
The Portfolio may maintain up to 20% of its assets in short-term debt
securities and money market instruments to meet redemption requests or to
facilitate investment in the securities of the Russell 2000. Securities index
futures contracts and related options, warrants and convertible securities may
be used for several reasons: to simulate full investment in the Russell 2000
while retaining a cash balance for portfolio management purposes; to facilitate
trading; to reduce transaction costs; or to seek higher investment returns when
a futures contract, option, warrant or convertible security is priced more
attractively than the underlying equity security or the Russell 2000. These
instruments may be considered derivatives. The use of derivatives for
non-hedging purposes may be considered speculative. While each of these
instruments can be used as leveraged investments, the Portfolio will not use
them to leverage its net assets. The Portfolio will not invest in derivative
instruments as part of a temporary defensive strategy (in anticipation of
declining stock prices) to protect the Portfolio against potential market
declines.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, futures contracts,
securities loans, small company securities, illiquid securities, investment
grade fixed income securities, derivatives, repurchase agreements, reverse
repurchase agreements, forward commitments, United States Government
securities, borrowings, asset-backed securities, and convertible securities)
are discussed under the caption "Investment Strategies" below and in the
Statement of Additional Information.
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BT INTERNATIONAL EQUITY INDEX PORTFOLIO
The Portfolio seeks to replicate as closely as possible (before deduction of
Portfolio expenses) the total return of the Morgan Stanley Capital
International Europe, Australia, Far East Index ("EAFE Index"). The EAFE Index
is a capitalization-weighted index containing approximately 1,100 equity
securities of companies located in countries outside the United States. The
countries currently included in the EAFE Index are Australia, Austria, Belgium,
Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia,
The Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and
The United Kingdom. The EAFE Index is the exclusive property of Morgan Stanley.
The Portfolio is not sponsored, endorsed, sold or promoted by Morgan Stanley
and Morgan Stanley makes no guarantee as to the accuracy or completeness of the
EAFE Index or any data included therein.
The Portfolio is constructed to have aggregate investment characteristics
similar to those of the EAFE Index. The Portfolio invests in a statistically
selected sample of the securities of companies included in the EAFE Index,
although not all companies within a country will be represented in the
Portfolio at the same time. Stocks are selected for inclusion in the Portfolio
based on country of origin, market capitalization, yield, volatility and
industry sector. The Adviser will manage the Portfolio using advanced
statistical techniques to determine which stocks should be purchased or sold to
replicate the EAFE Index. From time to time, adjustments may be made in the
Portfolio because of changes in the composition of the EAFE Index, but such
changes are expected to be infrequent.
Over time, the correlation between the performance of the Portfolio and the
EAFE Index is expected to be 0.95 or higher before deduction of Portfolio
expenses. A correlation of 1.00 would indicate perfect correlation, which would
be achieved when the net asset value of the Portfolio, including the value of
its dividend and any capital gain distributions, increases or decreases in
exact proportion to changes in the EAFE Index. The Portfolio's ability to track
the EAFE Index may be affected by, among other things, transaction costs,
administration and other expenses incurred by the Portfolio, changes in either
the composition of the EAFE Index or the assets of the Portfolio, and the
timing and amount of Portfolio investor contributions and withdrawals, if any.
Because the Portfolio seeks to track the EAFE Index, the Adviser generally will
not attempt to judge the merits of any particular stock as an investment. Under
normal circumstances, the Portfolio will invest at least 80% of its assets in
the securities of the EAFE Index.
The Portfolio is a diversified fund and will not concentrate more than 25% of
its assets in the securities of issuers in the same industry. In the event that
the EAFE Index should concentrate to an extent greater than 25% in the
securities of issuers in the same industry, the Portfolio's ability to achieve
its objective may be impaired since the Portfolio may not so invest.
The Portfolio may maintain up to 20% of its assets in short-term debt
securities and money market instruments to meet redemption requests or to
facilitate investment in the securities of the EAFE Index. Securities index
futures contracts and related options, warrants and convertible securities may
be used for several reasons: to simulate full investment in the EAFE Index
while retaining a cash balance for fund management purposes; to facilitate
trading; to reduce transaction costs; or to seek higher investment returns when
a futures contract, option, warrant or convertible security is priced more
attractively than the underlying equity security or EAFE Index. These
instruments may be considered derivatives. The use of derivatives for
non-hedging purposes may be considered speculative. While each of these
instruments can be used as leveraged investments, the Portfolio will not use
them to leverage its net assets. The Portfolio will not invest in such
instruments as part of a temporary defensive strategy (in anticipation of
declining stock prices) to protect the Portfolio against potential market
declines.
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, securities loans, illiquid
securities, investment grade fixed income securities, derivatives, swaps,
repurchase agreements, reverse repurchase agreements, forward commitments,
United States
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Government securities, borrowings, asset-backed securities, and convertible
securities) are discussed under the caption "Investment Strategies" below and
in the Statement of Additional Information.
BT EQUITY 500 INDEX PORTFOLIO
The Portfolio seeks to replicate as closely as possible (before deduction of
Portfolio expenses) the total return of the Standard & Poor's 500 Composite
Stock Price Index ("S&P 500"). The S&P 500 is an index of 500 common stocks of
companies from many industrial sectors representing a significant portion of
the market value of all common stocks publicly traded in the United States,
most of which trade on the New York Stock Exchange Inc. (the "NYSE"). The
Adviser believes that the performance of the S&P 500 is representative of the
performance of publicly-traded common stocks in the United States in general.
The composition of the S&P 500 is determined by Standard & Poor's and is based
on such factors as the market capitalization and trading activity on each stock
and its adequacy as a representation of stocks in a particular industry, and
may be changed from time to time. The Portfolio is not sponsored, endorsed,
sold or promoted by Standard & Poor's and Standard & Poor's makes no guarantee
as to the accuracy and/or completeness of the S&P 500 or any data included
therein. In seeking to replicate the performance of the S&P 500, before
deduction of Portfolio expenses, the Adviser will attempt over time to allocate
the Portfolio's investment among common stocks included in the S&P 500 in
approximately the same proportions as they are represented in the S&P 500,
beginning with the heaviest weighted stocks that make up a larger portion of
the index's value. The Adviser utilizes a two-stage sampling approach in
seeking to achieve its objective. Stage one, which encompasses large
capitalization stocks, maintains the stock holdings at or near their benchmark
weights. Large capitalization stocks are defined as those securities which
represent 0.10% or more of the S&P 500. In stage two, smaller stocks are
analyzed and selected using risk characteristics and industry weights in order
to match the sector and risk characteristics of the smaller companies in the
S&P 500. This approach helps to increase the Portfolio's liquidity while
reducing costs.
The Adviser generally will seek to match the composition of the S&P 500 but
usually will not invest the Portfolio's stock portfolio to mirror the S&P 500
exactly. Because of the difficulty and cost of executing relatively small stock
transactions, the Portfolio may not always be invested in the less heavily
weighted S&P 500 stocks, and may at times have its portfolio weighted
differently than the S&P 500, particularly if the Portfolio has a low level of
assets. In addition, the Portfolio may omit or remove any S&P 500 stock from
the Portfolio if, following objective criteria, the Adviser judges the stock to
be insufficiently liquid or believes the merit of the investment has been
substantially impaired by extraordinary events or financial conditions. The
Portfolio will not purchase the stock of Bankers Trust New York Corporation,
which is included in the S&P 500, and instead will overweight its holdings of
companies engaged in similar businesses.
Over time, the correlation between the performance of the Portfolio and the S&P
500 is expected to be 0.95 or higher before deduction of Portfolio expenses. A
correlation of 1.00 would indicate perfect correlation, which would be achieved
when the net asset value of the Portfolio, including the value of its dividend
and any capital gain distributions, increases or decreases in exact proportion
to changes in the S&P 500. The Portfolio's ability to track the S&P 500 may be
affected by, among other things, transaction costs, administration and other
expenses incurred by the Portfolio, changes in either the composition of the
S&P 500 or the assets of the Portfolio, and the timing and amount of Portfolio
investor contributions and withdrawals, if any. Because the Portfolio seeks to
track the S&P 500, the Adviser generally will not attempt to judge the merits
of any particular stock as an investment. Under normal circumstances, the
Portfolio will invest at least 80% of its assets in the securities of the S&P
500.
The Portfolio is a diversified fund and will not concentrate more than 25% of
its assets in the securities of issuers in the same industry. In the unlikely
event that the S&P 500 should concentrate to an extent greater than 25% in the
securities of issuers in the same industry, the Portfolio's ability to achieve
its objective may be impaired since the Portfolio may not so invest.
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The Portfolio may maintain up to 20% of its assets in short-term debt
securities and money market instruments to meet redemption requests or to
facilitate investment in the securities of the S&P 500. Securities index
futures contracts and related options, warrants and convertible securities may
be used for several reasons: to simulate full investment in the S&P 500 while
retaining a cash balance for fund management purposes; to facilitate trading;
to reduce transaction costs; or to seek higher investment returns when a
futures contract, option, warrant or convertible security is priced more
attractively than the underlying equity security or S&P 500. These instruments
may be considered derivatives. The use of derivatives for non-hedging purposes
may be considered speculative. While each of these instruments can be used as
leveraged investments, the Portfolio may not use them to leverage its net
assets. The Portfolio may not invest in such instruments as part of a temporary
defensive strategy (in anticipation of declining stock prices) to protect the
Portfolio against potential market declines.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, futures contracts,
securities loans, illiquid securities, investment grade fixed income
securities, derivatives, repurchase agreements, reverse repurchase agreements,
forward commitments, United States Government securities, borrowings,
asset-backed securities, and convertible 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 and below, each of the Portfolios, for example, may purchase
and sell call and put options (except for MFS Research Portfolio and Lazard
Small Cap Value Portfolio), engage in transactions in futures contracts and
related options (except for Lazard Large Cap Value Portfolio and Lazard Small
Cap Value Portfolio), and engage in forward foreign currency exchange
transactions (except for MFS Research Portfolio, Lazard Large Cap Value
Portfolio, Lazard Small Cap Value Portfolio, BT Small Company Index Portfolio,
and BT Equity 500 Index Portfolio). They may also enter into repurchase
agreements, 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 instrument 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, Morgan Stanley Emerging Markets Equity Portfolio, JPM Core
Bond Portfolio, BT Small Company Index Portfolio, BT International Equity Index
Portfolio and BT Equity 500 Index 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
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each Portfolio's investment objective and program. The Lazard Large Cap Value
Portfolio may borrow for leveraging purposes (in order to increase its
investment in portfolio securities) to the extent that the amount so borrowed
does not exceed 33 1/3% of the Portfolio's total assets. Leveraging exaggerates
the effect on net asset value of any increase or decrease in market value of
the Lazard Large Cap Value Portfolio's investment. In addition, such borrowings
would be subject to interest costs which may or may not be recovered by
appreciation of securities purchased. The Lazard Large Cap Value Portfolio may
also borrow up to 10% of its total assets for temporary or emergency purposes.
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, Merrill Lynch Basic Value Equity Portfolio, JPM Core
Bond Portfolio, BT Small Company Index Portfolio, BT International Equity Index
Portfolio and BT Equity 500 Index 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. Borrowing for the
Lazard Small Cap Value Portfolio may not exceed 15% of its total assets for
temporary or emergency purposes, including to meet redemptions (otherwise such
borrowings may not exceed 5% of the value of the Portfolio's total assets).
Borrowings for the EQ/Putnam Growth & Income Value Portfolio, EQ/Putnam
International Equity Portfolio, EQ/Putnam Investors Growth 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, except the Lazard Large Cap Value 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
nonconvertible 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, Morgan Stanley
Emerging Markets Equity Portfolio, Lazard Large Cap Value Portfolio and the
Lazard Small Cap Value 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
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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 CMO 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 (except the
Lazard Small Cap Value Portfolio, BT Small Company Index Portfolio and BT
Equity 500 Index Portfolio) 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.
Currency exchange rates may be affected unpredictably by intervention (or the
failure to intervene) by U.S. or foreign governments or central banks, by
currency controls or political development in the U.S. or abroad. For example,
significant uncertainty surrounds the proposed introduction of the euro (a
common currency for the European Union) in January 1999 and its effect on the
value of securities denominated in local European currencies.
These and other currencies in which a Portfolio's assets are denominated may be
devalued against the U.S. dollar, resulting in a loss to the Portfolio.
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
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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 EQ/Putnam Balanced Portfolio, MFS Emerging Growth Companies
Portfolio, Morgan Stanley Emerging Markets Equity Portfolio, and the JPM Core
Bond 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. Each 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 (except the Lazard Small Cap Value
Portfolio, BT Small Company Index Portfolio and the BT Equity 500 Index
Portfolio) 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
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denominated in the same currency as the underlying securities. Depositary
receipts include ADRs and 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 Lazard Small
Cap Value Portfolio, BT Small Company Index Portfolio and BT Equity 500 Index
Portfolio) may purchase foreign currency on a spot (or cash) basis. In
addition, each of the Portfolios (except the MFS Research Portfolio, Lazard
Large Cap Value Portfolio, Lazard Small Cap Value Portfolio, BT Small Company
Index Portfolio and BT Equity 500 Index Portfolio) 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, Lazard Large Cap
Value Portfolio, Lazard Small Cap Value Portfolio, BT Small Company Index
Portfolio and BT Equity 500 Index 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, EQ/Putnam Balanced Portfolio,
MFS Emerging Growth Companies Portfolio, Morgan Stanley Emerging Markets Equity
Portfolio, Merrill Lynch World Strategy Portfolio, JPM Core Bond Portfolio and
BT International Equity Index Portfolio may engage in over-the-counter ("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, Lazard Small Cap Value
Portfolio, BT Small Company Index Portfolio and BT Equity 500 Index 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 OTC 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
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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 contracts 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, Lazard
Large Cap Value Portfolio and Lazard Small Cap Value Portfolio each may invest
up to 10% of its assets and each of the other Portfolios may invest up to 15%
of its net assets in illiquid securities and other securities which are not
readily marketable, including nonnegotiable 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, except
as noted below, lower quality fixed income securities. The T. Rowe Price
International Stock Portfolio, Merrill Lynch Basic Value Equity Portfolio,
Lazard Large Cap Value Portfolio, Lazard Small Cap Value Portfolio, JPM Core
Bond Portfolio, BT Small Company Index Portfolio, BT Equity 500 Index Portfolio
and BT International Equity Index 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 or comparable quality unrated securities. Investment grade
securities 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 quality 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
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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, Morgan Stanley Emerging Markets Equity Portfolio, Lazard
Large Cap Value Portfolio, Lazard Small Cap Value Portfolio, and JPM Core Bond
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.
MORTGAGES AND MORTGAGE-RELATED SECURITIES. The EQ/Putnam Balanced Portfolio,
Morgan Stanley Emerging Markets Equity Portfolio, Lazard Large Cap Value
Portfolio, Lazard Small Cap Value Portfolio, JPM Core Bond Portfolio, BT Small
Company Index Portfolio, BT International Equity Index Portfolio and BT Equity
500 Index 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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The JPM Core Bond Portfolio may also invest in directly placed mortgages
including residential mortgages, multifamily mortgages, mortgages on
cooperative apartment buildings, commercial mortgages, and sale-leasebacks.
These investments are backed by assets such as office buildings, shopping
centers, retail stores, warehouses, apartment buildings and single-family
dwellings. In the event that the Portfolio forecloses on any non-performing
mortgage, and acquires a direct interest in the real property, the Portfolio
will be subject to the risks generally associated with the ownership of real
property. There may be fluctuations in the market value of the foreclosed
property and its occupancy rates, rent schedules and operating expenses.
MUNICIPAL SECURITIES. The Morgan Stanley Emerging Markets Equity Portfolio and
the JPM Core Bond 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, Lazard Large Cap Value Portfolio and Lazard Small Cap Value
Portfolio) may utilize futures contracts. 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. Each Portfolio (except the MFS Research
Portfolio and Lazard Small Cap Value Portfolio) may also write and purchase put
and call options. 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 that is permitted to invest in futures contracts and
related options may utilize such transactions 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. No Portfolio (other than the Warburg
Pincus Small Company Value Portfolio) will 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 BT Small Company Index
Portfolio, BT International Equity Index Portfolio and BT Equity 500 Index
Portfolio each may not at any time commit more than 20% of its assets to
options and futures contracts. The Warburg Pincus Small Company Value Portfolio
may commit up to 10% of its total assets to premiums when purchasing put or
call options. 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 International Equity Portfolio, EQ/Putnam Investors Growth
Portfolio, EQ/Putnam Balanced Portfolio, MFS Emerging Growth Companies
Portfolio, Merrill Lynch World Strategy Portfolio, Morgan Stanley Emerging
Markets Equity Portfolio and JPM Core Bond Portfolio may engage in OTC put and
call option transactions. Options
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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; to protect the value of
portfolio securities and to adjust the duration of fixed income investments.
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 T. Rowe Price International Stock
Portfolio, EQ/Putnam International Equity 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, EQ/Putnam
Balanced Portfolio, Morgan Stanley Emerging Markets Equity Portfolio and JPM
Core Bond 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, Lazard Large Cap Value Portfolio, JPM Core Bond Portfolio, BT Small
Company Index Portfolio, BT International Equity Index Portfolio and BT Equity
500 Index Portfolio may each enter
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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, Morgan Stanley Emerging
Markets Equity Portfolio and JPM Core Bond Portfolio may each seek to earn
additional income by making secured loans of portfolio securities with a value
up to 33 1/3% of their respective total assets. The MFS Emerging Growth
Companies Portfolio, BT Small Company Index Portfolio, BT International Equity
Index Portfolio and BT Equity 500 Index Portfolio may lend portfolio securities
in an amount up to 30% of their respective total assets. The EQ/Putnam Growth &
Income Value Portfolio, EQ/Putnam International Equity Portfolio, EQ/Putnam
Investors Growth Portfolio and EQ/Putnam Balanced Portfolio may lend portfolio
securities in an amount 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. The Lazard Large Cap
Value Portfolio and Lazard Small Cap Value Portfolio may each lend portfolio
securities in an amount up to 10% 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 highgrade 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. 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 International Equity Portfolio,
EQ/Putnam Balanced Portfolio, Morgan Stanley Emerging Markets Equity Portfolio,
Warburg Pincus Small Company Value Portfolio, Lazard Small Cap Value Portfolio
and BT Small Company Index 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
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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 often have limited product lines, markets or
financial resources and are typically subject to greater 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 and smaller companies may be dependent for
management on one or a few key persons. 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, JPM Core Bond
Portfolio and BT International Equity Index Portfolio may each 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, 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 Portfolio will usually enter into
swaps on a net basis, i.e., the two return 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 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, United States
Government securities, or high grade debt obligations. No Portfolio will 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 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.
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, EQ/Putnam
Balanced Portfolio, Morgan Stanley Emerging Markets Equity Portfolio and JPM
Core Bond 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 new
Portfolio's turnover rate is not expected to exceed 100% during its first year
of operation. A high turnover rate (100% or more) increases transaction costs
(e.g., brokerage commissions) which must be born by the Portfolio and its
shareholders and increases realized gains and losses. See "Financial
Highlights" above for the actual portfolio turnover rates of the Portfolios
through December 31, 1997, and also see "Dividends, Distributions and Taxes"
below.
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 1290 Avenue of
the Americas, New York, New York 10104. Besides its activities with respect to
the Trust, 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
Life, a New York stock life insurance company.
The Manager is responsible for providing general management 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
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directives of the Board of Trustees. The Manager is responsible for providing
the Trust with office space, office equipment, and personnel necessary to
operate the Trust's business, and also supervises the provision of services by
third parties such as the Trust's custodian and administrator.
As compensation for managing the T. Rowe Price Equity Income Portfolio,
EQ/Putnam Growth & Income Value Portfolio, EQ/Putnam Investors Growth
Portfolio, EQ/Putnam Balanced Portfolio, MFS Research Portfolio, MFS Emerging
Growth Companies Portfolio, Merrill Lynch Basic Value Equity Portfolio and
Lazard Large Cap Value 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
EQ/Putnam International Equity Portfolio and Merrill Lynch World Strategy
Portfolio, the Trust pays the Manager a monthly fee at the annual rate of .70%
of the respective 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 the 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 the annual
rate of .65% of the Portfolio's average daily net assets. As compensation for
managing the Lazard Small Cap Value Portfolio, the Trust pays the Manager a
monthly fee at the annual rate of .80% of the Portfolio's average daily net
assets. As compensation for managing the JPM Core Bond Portfolio, the Trust
pays the Manager a monthly fee at the annual rate of .45% of the Portfolio's
average daily net assets. As compensation for managing the BT Small Company
Index Portfolio and the BT Equity 500 Index Portfolio, the Trust pays the
Manager a monthly fee at the annual rate of .25% of the respective Portfolio's
average daily net assets. As compensation for managing the BT International
Equity Index Portfolio, the Trust pays the Manager a monthly fee at the annual
rate of .35% 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 accountants 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.
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, pursuant to a distribution plan for the Class IB shares adopted
pursuant to Rule 12b-1 under the 1940 Act..
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
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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 received an exemptive order from the Securities and Exchange
Commission ("SEC") that permits 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.
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 an annual rate equal to .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, 1997, T. Rowe Price and its affiliates managed more
than $126 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 since the Portfolio commenced its operations. As
compensation for services as the Portfolio's Adviser, the Manager pays
Price-Fleming a monthly fee at an 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, 1997, Price-Fleming managed the United States dollar equivalent of
approximately $30 billion. Flemings was incorporated in 1974 in the United
Kingdom 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.
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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, Mark B. Smith, Mark J. T. Edwards, John R. Ford, James
B. M. Seddon 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.) Mark Edwards joined Price-Fleming in 1986 and has 16 years of
experience in financial analysis. John Ford joined Price-Fleming in 1982 and
has 18 years of experience with the Fleming Group in research and portfolio
management. James Seddon joined Price-Fleming in 1987 and has 11 years of
experience in investment management. David Warren joined Price-Fleming in 1984
and has 17 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, EQ/Putnam International
Equity Portfolio, EQ/Putnam Investors Growth Portfolio and EQ/Putnam Balanced
Portfolio since each Portfolio commenced operations. As compensation for
services as the Adviser to the EQ/Putnam Growth & Income Value Portfolio,
EQ/Putnam Investors Growth 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. As compensation
for services as the EQ/Putnam International Equity Portfolio's Adviser, the
Manager pays Putnam Management a monthly fee at an 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,
1997, Putnam Management and its affiliates managed more than $235 billion of
assets. Putnam Management is a subsidiary of Putnam Investments, Inc. which,
other than a minority of shares owned by employees, 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. Messrs.
Edward P. Bousa, David L. Waldman, James M. Prusko and Jeffrey J. Kobylarz 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. Waldman has been employed by
Putnam Management as an investment professional since 1997. Mr. Prusko has been
employed by Putnam Management as an investment professional since 1992. Mr.
Kobylarz has been employed by Putnam Management as an investment professional
since 1993.
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
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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 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 December
31, 1997, MFS managed more than $70.2 billion on behalf of over 2.7 million
investors accounts. MFS is a subsidiary of Sun Life of Canada (United States)
Financial Services Holdings Inc., which, in turn, is an indirect wholly-owned
subsidiary of Sun Life Assurance Company of Canada. 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, an Executive 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 serves as an investment adviser to numerous open-end and
closed-end investment companies. As of December 31, 1997, MSAM, together with
its affiliated institutional investment management companies, had approximately
$146 billion in assets under management and fiduciary care. In 1997, Morgan
Stanley Group Inc. and Dean Witter, Discover & Co. completed a merger to form
Morgan Stanley, Dean Witter & Co. , a preeminent financial services company
that maintains leading market positions in each of its three primary businesses
- - securities, asset management and credit services.
Madhav Dhar has 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"), Mr. Dhar joined MSAM in 1984. Mr. Robert Meyer is also
responsible for the day to day management of the Morgan Stanley Emerging
Markets Equity Portfolio. Mr. Meyer joined MSAM in 1989, is a Managing Director
of MSAM and Morgan Stanley and has primary responsibility for MSAM's equity
investments in Latin America. Prior to joining MSAM's Latin American Group, Mr.
Meyer worked in MSAM's U.S. Equity Group.
Warburg Pincus Asset Management, Inc. ("WPAM") has been the Adviser to the
Warburg Pincus Small Company Value Portfolio since the Portfolio commenced
operations. WPAM is located at 466 Lexington Avenue, New York, New York
10017-3147. As compensation for services as the Portfolio's Adviser, the
Manager pays WPAM a monthly fee at an annual rate equal to .50% of the
Portfolio's average daily net assets.
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WPAM is a professional investment advisory firm that provides investment
services to investment companies, employee benefit plans, endowment funds,
foundations and other institutions and individuals. As of December 31, 1997,
WPAM managed approximately $19.7 billion in assets. WPAM, incorporated in 1970,
is indirectly controlled by Warburg, Pincus & Co. ("WP&Co."), a New York
partnership which has no business other than being a holding company of WPAM
and its affiliates. Lionel Pincus, the managing partner of WP&Co., may be
deemed to control both WP&Co. and WPAM.
Kyle F. Frey, a senior vice president of WPAM, has been responsible for the day
to day management of Warburg Pincus Small Company Value Portfolio's securities
portfolio since the Portfolio commenced operations. Mr. Frey has been with WPAM
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 100 registered investment
companies. MLAM also offers portfolio management and portfolio analysis
services to individuals and institutions. As of December 31, 1997, the Adviser
and its affiliates had a total of approximately $278 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.
Lazard Asset Management ("LAM") has been the Adviser to the Lazard Large Cap
Value Portfolio and Lazard Small Cap Value Portfolio since each Portfolio
commenced operations. As compensation for services as the Adviser to the Lazard
Large Cap Value Portfolio, the Manager pays LAM a monthly fee at an annual rate
equal to: .425% of the Portfolio's average daily net assets up to and including
$50 million; .40% of the Portfolio's average daily net assets over $50 million
and up to and including $250 million; .375% of the Portfolio's average daily
net assets over $250 million and up to and including $400 million; and .35% of
the Portfolio's average daily net assets in excess of $400 million. As
compensation for services as the Adviser to the Lazard Small Cap Value
Portfolio, the Manager pays LAM a monthly fee at an annual rate equal to: .65%
of the Portfolio's average daily net assets up to and including $250 million;
.55% of the Portfolio's average daily net assets over $250 million and up to
and including $500 million; and .50% of the Portfolio's average daily net
assets in excess of $500 million.
LAM is a division of Lazard Freres & Co. LLC ("Lazard Freres"), a New York
limited liability company, which is registered as an investment adviser with
the SEC and is a member of the New York, American and Midwest Stock Exchanges.
Lazard Freres, 30 Rockefeller Plaza, New York, New York 10112, provides its
clients with a wide variety of investment banking and related services,
including investment
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management. It is a major underwriter of corporate securities, conducts a broad
range of trading and brokerage activities in corporate and governmental bonds
and stocks and acts as a financial adviser to utilities. LAM and its affiliates
provide investment management services to client discretionary accounts with
assets as of December 31, 1997 totaling approximately $53.0 billion. Its
clients are both individuals and institutions, some of whose accounts have
investment policies similar to the Portfolios.
Herbert W. Gullquist and Michael S. Rome have been responsible for the day to
day management of the Lazard Large Cap Value Portfolio, which includes
investment decisions made on behalf of the Portfolio, since the Portfolio
commenced operations. Eileen Alexanderson, Herbert W. Gullquist, Bradley
Purcell, Michael S. Rome and Leonard M. Wilson have been responsible for the
day to day management of the Lazard Small Cap Value Portfolio, which includes
investment decisions made on behalf of the Portfolio, since the Portfolio
commenced operations. Ms. Alexanderson is a Managing Director of the Adviser
and has been with the Adviser since 1979. Mr. Gullquist is a Managing Director
of the Adviser and has been with the Adviser since 1982. Mr. Purcell is a Vice
President of the Adviser and has been with the Adviser since 1991. Mr. Rome is
also a Managing Director of the Adviser and has been with the Adviser since
1991. Mr. Wilson is a Director of the Adviser and has been with the Adviser
since 1988.
J.P. Morgan Investment Management Inc. ("J.P. Morgan") has been the Adviser to
the JPM Core Bond Portfolio since the Portfolio commenced operations. As
compensation for services as the Adviser to the JPM Core Bond Portfolio, the
Manager pays J.P. Morgan a monthly fee at an annual rate equal to: .30% of the
Portfolio's average daily net assets up to and including $125 million; .25% of
the Portfolio's average daily net assets over $125 million and up to and
including $200 million; .22% of the Portfolio's average daily net assets over
$200 million and up to and including $350 million; and .15% of the Portfolio's
average daily net assets in excess of $350 million.
J.P. Morgan is a Delaware corporation and a registered investment adviser. It
is a wholly owned subsidiary of J.P. Morgan & Co. Incorporated ("JPM & Co."), a
bank holding company organized under the laws of the state of Delaware. JPM &
Co. through J.P. Morgan and other subsidiaries, offers a wide range of services
to governmental, institutional, corporate and individual customers and acts as
investment adviser to individual and institutional clients with combined assets
under management as of December 31, 1997 of over $255 billion. In particular,
J.P. Morgan, 522 Fifth Avenue, New York, New York 10036, provides investment
management services to public, corporate and union employee benefit plans, as
well as foundations, endowments, insurance companies, state and local
governments and their agencies, and affiliates of J.P. Morgan.
J.P. Morgan uses a sophisticated, disciplined, collaborative process for
managing all asset classes. For fixed income portfolios, this process focuses
on the systematic analysis of real interest rates, sector diversification and
quantitative and credit analysis. The portfolio managers making investments
work in conjunction with fixed income, credit, capital markets and economic
research analysts, as well as traders and administrative officers. The
following persons have been primarily responsible for the day to day management
and implementation of J.P. Morgan's process for the Portfolio, since the
Portfolio commenced operations: Paul L. Zemsky and Robert J. Teatom. Mr. Zemsky
is a Managing Director of J.P. Morgan and a portfolio manager specializing in
quantitative techniques. Mr. Zemsky joined J.P. Morgan in 1985. Robert J.
Teatom is a Managing Director of J.P. Morgan and Co-head of its U.S. Fixed
Income Group. Mr. Teatom joined J.P. Morgan in 1975.
Bankers Trust Company ("Bankers Trust") has been the Adviser to the BT Small
Company Index Portfolio, BT International Equity Index Portfolio and BT Equity
500 Index Portfolio since each Portfolio commenced operations. As compensation
for services as the Adviser to the BT Small Company Index Portfolio and BT
Equity 500 Index Portfolio, the Manager pays Bankers Trust a monthly fee at an
annual rate equal to .05% of the respective Portfolio's average daily net
assets. As compensation for services as the Adviser to the BT International
Equity Index Portfolio, the Manager pays Bankers Trust a monthly fee at an
annual rate equal to .15% of the Portfolio's average daily net assets.
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Bankers Trust is a New York banking corporation with executive offices at 130
Liberty Street (One Bankers Trust Plaza), New York, New York 10006. Bankers
Trust is a wholly-owned subsidiary of Bankers Trust New York Corporation.
Bankers Trust conducts a variety of general banking and trust activities and is
a major wholesale supplier of financial services to the international and
domestic institutional markets. Investment management is a core business of
Bankers Trust built on a tradition of excellence from its roots as a trust bank
founded in 1903. The scope of Bankers Trust's management capability is unique
due to its leadership positions in both active and passive quantitative
management and its presence in major equity and fixed income markets around the
world. Bankers Trust is one of the nation's largest and most experienced
investment managers with approximately $317.8 billion in assets under
management as of December 31, 1997.
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 next $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 $8.0 billion; provided, however, that the annual fee
payable to Chase with respect to any Portfolio which commences operations after
July 1, 1997 and whose assets do not exceed $200 million shall be computed at
the annual rate of .0525% of 1% of the Portfolio's total assets plus $25,000.
THE TRANSFER AGENT
Equitable Life serves as the transfer agent and dividend disbursing agent of
the Trust and receives no compensation for serving in such capacity.
EXPENSE LIMITATION AGREEMENT
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 Agreement"), 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 other than interest, taxes,
brokerage commissions, other expenditures which are capitalized in accordance
with generally accepted accounting principles, other extradorinary expenses not
incurred in the ordinary course of each Portfolio's business and amounts
payable pursuant to a plan adopted in accordance with Rule 12b-1 under the 1940
Act, are limited to: .60% 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; .65% of the respective average daily net assets
of the EQ/Putnam Balanced and Lazard Large Cap Value Portfolios; .75% of the
Warburg Pincus Small Company Value Portfolio's average daily net assets; .95%
of the respective average daily net assets of the T. Rowe Price International
Stock, EQ/Putnam International Equity, Merrill Lynch World Strategy and Lazard
Small Cap Value Portfolios; 1.50% of the Morgan Stanley Emerging Markets Equity
Portfolio's average daily net assets; .55% of the respective average daily net
assets of the JPM Core Bond
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and BT International Equity Index Portfolios; .35% of the average daily net
assets of the BT Small Company Index Portfolio; and .30% of the average daily
net assets of the BT Equity 500 Index 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 Life 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.
T. Rowe Price and Price-Fleming, the Advisers to the T. Rowe Price
International Stock and T. Rowe Price Equity Income Portfolios, may execute
portfolio transactions through certain affiliates of Fleming and Jardine
Fleming, which are persons indirectly related to the Advisers, acting as an
agent in accordance with procedures established by the Trust's Board of
Trustees. MLAM the Adviser to the Merrill Lynch World Strategy Portfolio and
Merrill Lynch Basic Value Equity Portfolio, may execute portfolio transactions
through certain affiliates of MLAM. MSAM, the Adviser to the Morgan Stanley
Emerging Markets Equity Portfolio, may execute portfolio transactions through
certain affiliates of MSAM. LAM, the Adviser to the Lazard Large Cap Value
Portfolio, and Lazard Small Cap Value Portfolio, may execute portfolio
transactions through certain affiliates of LAM. J.P. Morgan, the Adviser to the
JPM Core Bond Portfolio, may execute portfolio transactions through certain
affiliates of J.P. Morgan. Bankers Trust, the Adviser to BT Small Company Index
Portfolio, BT International Equity Index Portfolio and BT Equity 500 Index
Portfolio, may execute portfolio transactions through certain affiliates of
Bankers Trust.
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 does not consider broker-dealer affiliates of an
Adviser to one Portfolio to be an affiliate of the Advisers to other Portfolios
for which such Adviser does not provide investment advice. 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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YEAR 2000
Like other mutual funds, the Trust and the service providers for the Trust and
each of its Portfolios rely heavily on the reasonably consistent operation of
their computer systems. Many software programs and certain computer hardware in
use today, cannot properly process information after December 31, 1999 because
of the method by which dates are encoded and calculated in such programs and
hardware. This problem, commonly referred to as the "Year 2000 Issue," could,
among other things, negatively impact the processing of trades, the
distribution of securities, the pricing of securities and other
investment-related and settlement activities. The Trust is currently obtaining
information with respect to the actions that have been taken and the actions
that are planned to be taken by each of its service providers to prepare their
computer systems for the Year 2000. While the Trust expects that each of the
Trust's service providers will have adapted their computer systems to address
the Year 2000 Issue, there can be no assurance that this will be the case or
that the steps taken by the Trust will be sufficient to avoid any adverse
impact to the Trust and each of its Portfolios.
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. The Trust currently
is divided into eighteen 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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As of March 31, 1998, Equitable Life owned 100% of the outstanding shares of
the Trust.
PURCHASE AND REDEMPTION OF SHARES
EQ Financial, 1290 Avenue of the Americas, New York, New York, 10104, formerly
Equico Securities, Inc., a wholly-owned subsidiary of Equitable Life, serves as
one of the Distributors for the Trust's Class IA 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 Life also serves as one of the Distributors for the
Trust's Class IA shares pursuant to a distribution agreement with the Trust.
Class IA 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 IB shares with EQ
Financial and EDI pursuant to which each of them acts as the Distributor for
the Class IB shares of the Trust.
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.
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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 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. Should any Portfolio 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.
The total return on Class IB shares of each Portfolio for the period from May
1, 1997 (unless otherwise noted) to December 31, 1997 was as follows:
Portfolio Total Return*
--------- -------------
T. Rowe Price International Stock Portfolio (1.49%)
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T. Rowe Price Equity Income Portfolio 22.11%
EQ/Putnam Growth & Income Value Portfolio 16.23%
EQ/Putnam International Equity Portfolio 9.58%
EQ/Putnam Investors Growth Portfolio 24.70%
EQ/Putnam Balanced Portfolio 14.38%
MFS Research Portfolio 16.07%
MFS Emerging Growth Companies Portfolio 22.42%
Morgan Stanley Emerging Markets Equity Portfolio** (20.16%)
Warburg Pincus Small Company Value Portfolio 19.15%
Merrill Lynch World Strategy Portfolio 4.70%
Merrill Lynch Basic Value Equity Portfolio 16.99%
- -------------
* The total return is not annualized.
** For the period from August 20, 1997 (inception) to December 31, 1997.
Total return information is not provided for the Lazard Large Cap Value, Lazard
Small Cap Value, JPM Core Bond, BT Small Company Index, BT International Equity
Index and BT Equity 500 Index Portfolios because they had no operations as of
December 31, 1997 except for the issuance of Class IB shares. In addition,
total return information is not provided for Class IA shares of the Trust as no
Class IA shares were issued as of December 31, 1997. The total return on Class
IA shares of each Portfolio would be different than the total return on Class IB
shares because Class IB shares are subject to distribution related expenses to
which Class IA shares are not subject.
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) or other institutional
private account managed by each Adviser, that has investment objectives,
policies, strategies and risks substantially similar to those of the respective
Portfolio(s) of the Trust for which it serves as Adviser. 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 for other registered investment
companies or series thereof 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
47
<PAGE>
will fluctuate reflecting market conditions as well as changes in
company-specific fundamentals of portfolio securities. Composite performance
data relating to the historical performance of institutional private accounts
managed by the relevant Adviser was calculated in accordance with recommended
standards of the Association for Investment Management and Research ("AIMR")
retroactively applied to all time periods. All returns present were calculated
on a total return basis and include all losses. All returns reflect the
deduction of investment advisory fees, brokerage commissions and execution
costs paid by the relevant Adviser's institutional private accounts, without
provision for federal or state income taxes. Custodial fees, if any, were not
included in the calculation. The Composite includes all actual, fee-paying,
discretionary institutional private accounts managed by the relevant Adviser
that have investment objectives, policies, strategies and risks substantially
similar to those of the relevant Portfolio. Securities transactions are
accounted for on the trade date and accrual accounting is utilized. Cash and
equivalents are included in performance returns.
48
<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 the T. Rowe Price International Stock
Portfolio. However, the 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 expense.
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.
T. ROWE PRICE
YEAR ENDED INTERNATIONAL STOCK
12/31/97 FUND1 MSCI EAFE INDEX2
---------- ------------------- -----------------
One Year3 2.70% 1.78%
Five Years3 13.03% 11.39%
Ten Years3 10.62% 6.25%
- -------------------
1 Average annual total return reflects changes in share prices and
einvestment of dividends and distributions and is net of fund expenses.
2 The Morgan Stanley Capital International EAFE Index ("MSCI EAFE ") is
an unmanaged capitalization-weighted measure of stock markets in
Europe, Australia and the Far East. MSCI EAFE 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.
49
<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
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.
YEAR ENDED T. ROWE PRICE S&P 500
12/31/97 EQUITY INCOME FUND1 INDEX2
---------- ------------------- ---------
One Year3 28.82% 33.36%
Five Years3 19.99% 20.27%
Ten Years3 16.99% 18.05%
- ----------------------------------
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 ("S & P 500") 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 S & P 500 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.
50
<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 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
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 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.
YEAR ENDED 12/31/97 S&P 500
PUTNAM GROWTH & INCOME FUND II1 INDEX2
------------------- ------------------------------- --------
One Year3 24.86% 33.36%
Since inception3 26.54% 31.19%
- -------------------------
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 ("S & P 500") 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 S & P 500 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 5, 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.
51
<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 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
contracts. 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.
PUTNAM INTERNATIONAL GROWTH MSCI EAFE
YEAR ENDED 12/31/97 FUND1 INDEX2
------------------- --------------------------- ---------
One Year3 17.78% 1.78%
Five Years3 17.59% 11.39%
Since inception3 12.43% 6.93%
- ----------------------------
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 EAFE Index ("MSCI EAFE") is
an unmanaged capitalization-weighted measure of stock markets in Europe,
Australia and the Far East, MSCI EAFE returns assume dividends reinvested
net of withholding tax and do not reflect any fees or expenses.
3 Annualized performance for 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%.
52
<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 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 contracts. The performance
results presented below do not reflect any insurancerelated 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.
S&P 500
YEAR ENDED 12/31/97 PUTNAM INVESTORS FUND1 INDEX2
------------------- ---------------------- -------
One Year3 34.49% 33.36%
Five Years3 20.71% 20.27%
Ten Years3 17.40% 18.05%
- ----------------------
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 ("S & P 500") 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 S & P 500 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.
53
<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
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 contracts. 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.
YEAR ENDED 12/31/97 THE GEORGE PUTNAM S&P 500
FUND OF BOSTON1 INDEX2
------------------- ----------------- --------
One Year3 21.02% 33.36%
Five Years3 15.13% 20.27%
Ten Years3 13.92% 18.05%
- ----------------------
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 ("S & P 500") 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 S & P 500 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.
54
<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 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.
S&P 500
YEAR ENDED 12/31/97 MFS RESEARCH FUND1 INDEX2
------------------- ------------------ --------
One Year3 20.53% 33.36%
Five Years3 20.40% 20.27%
Ten Years3 17.17% 18.05%
- ----------------------
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 ("S & P 500") 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 S & P 500 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.
55
<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
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.
RUSSELL 2000
YEAR ENDED 12/31/97 MFS EMERGING GROWTH FUND1 INDEX2
------------------- ------------------------- ------------
One Year3 19.73% 22.36%
Five Years3 19.75% 16.40%
Ten Years3 21.30% 15.77%
- ----------------------
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
sales charges 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.
56
<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 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.
IFC GLOBAL TOTAL
YEAR ENDED MSIF EMERGING RETURN COMPOSITE
12/31/97 MARKETS PORTFOLIO1, 2 INDEX3
---------- --------------------- ------------------
One Year4 (1.03)% (14.42)%
Five Years4 10.23% 6.16%
Since inception4 10.13% 6.93%
- -------------------------
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 been 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.
57
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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 Warburg Pincus Asset Management, 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 Fund 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.
WARBURG PINCUS SMALL COMPANY RUSSELL 2000
YEAR ENDED 12/31/97 VALUE FUND1, 2 INDEX3
------------------- ---------------------------- ------------
One Year4 19.16% 22.36%
Since inception4 36.19% 16.35%
- ---------------------------
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 0.94% 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.
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<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.
MERRILL LYNCH VARIABLE
YEAR ENDED SERIES FUNDS, INC. - MERRILL LYNCH MSCI EAFE
12/31/97 GLOBAL STRATEGY FOCUS FUND1 INDEX2
---------- ---------------------------------- ----------
One Year3 11.94% 1.78%
Five Years3 10.82% 11.39%
Since inception3 9.67% 8.35%
- --------------------------
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 EAFE Index ("MSCI EAFE") is
an unmanaged capitalization-weighted measure of stock markets in Europe,
Australia and the Far East. MSCI EAFE 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.
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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.
MERRILL LYNCH VARIABLE SERIES
FUNDS, INC. - MERRILL LYNCH S&P 500
YEAR ENDED 12/31/97 BASIC VALUE FOCUS FUND 1 INDEX2
------------------- ------------------------ ------
One Year3 20.62% 33.36%
Since inception3 17.26% 21.57%
- ----------------------
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 ("S & P 500") 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 S & P 500 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.
60
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LAZARD LARGE CAP VALUE PORTFOLIO
In the table below, the only account which is included is a series of another
registered investment company, i.e. the Lazard Equity Portfolio, a series of
The Lazard Funds, Inc., which is managed by Lazard Asset Management, and whose
investment policies are substantially similar to the Lazard Large Cap Value
Portfolio. However, the Lazard Equity Portfolio will be subject to different
expenses than the Lazard Large Cap Value Portfolio. In addition, holders of
variable insurance contracts representing interests in the Lazard Large Cap
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 the Lazard Equity Portfolio presented below are
unaudited and are not intended to predict or suggest the future returns that
might be experienced by the Lazard Large Cap Value Portfolio or an individual
investor investing in the Lazard Large Cap Value Portfolio.
S&P 500
YEAR ENDED 12/31/97 LAZARD EQUITY PORTFOLIO1 INDEX2
------------------- ------------------------ -------
One Year 25.13% 33.36%
Five Years 20.63% 20.27%
Ten years 17.14% 18.05%
- ----------------------
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 ("S & P 500") 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 S & P 500 reflects the reinvestment of income dividends and capital
gain distributions, if any, but does not reflect fees, brokerage
commissions, or other expenses of investing.
61
<PAGE>
LAZARD SMALL CAP VALUE PORTFOLIO
In the table below, the only account which is included is a series of another
registered investment company, i.e., Lazard Small Cap Portfolio, a series of
The Lazard Funds, Inc., which is managed by Lazard Asset Management, and whose
investment policies are substantially similar to the Lazard Small Cap Value
Portfolio. However, the Lazard Small Cap Portfolio will be subject to different
expenses than the Lazard Small Cap Value Portfolio. In addition, holders of
variable insurance contracts representing interests in the Lazard Small Cap
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 the Lazard Small Cap Portfolio presented below are
unaudited and are not intended to predict or suggest the future returns that
might be experienced by the Lazard Small Cap Value Portfolio or an individual
investor investing in the Lazard Small Cap Value Portfolio.
YEAR ENDED 12/31/97 LAZARD SMALL CAP PORTFOLIO1 RUSSELL 2000 INDEX2
------------------- --------------------------- -------------------
One Year3 28.06% 22.36%
Five Years3 20.68% 16.40%
Since inception3 21.57% 16.80%
- ------------------------
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 2,000 small-cap stocks, and includes reinvestment of
dividends. It is compiled by the Frank Russell Company.
3 The inception date for Lazard Small Cap Portfolio was October 1, 1991.
62
<PAGE>
JPM CORE BOND PORTFOLIO
In the table below, the institutional private accounts that are included in the
Adviser's composite are not subject to the same types of expenses to which the
JPM Core Bond Portfolio is subject or to the diversification requirements,
specific tax restrictions and investment limitations imposed on the JPM Core
Bond Portfolio by the 1940 Act or Subchapter M of the Internal Revenue Code.
Consequently, the performance results for the composite could have been
adversely affected if the institutional private accounts included in the
composite had been regulated as investment companies under the federal
securities laws. Moreover, holders of variable insurance contracts representing
interests in the JPM Core Bond Portfolio will be subject to charges and
expenses relating to such insurance contracts. The performance results
presented below do not reflect any insurance related charges.
The investment results presented below are not intended to predict or suggest
the returns that might be experienced by the JPM Core Bond Portfolio or an
individual investing in such Portfolio. Investors should also be aware that the
use of a methodology different from that used below to calculate performance
could result in different performance data.
SALOMON BROTHERS
YEAR ENDED J.P. MORGAN ACTIVE FIXED BROAD INVESTMENT
12/31/97 INCOME COMPOSITE1 GRADE BOND INDEX2
---------- ------------------------ ------------------
One Year 9.25% 9.62%
Five Years 7.97% 7.53%
Ten Years 9.63% 9.23%
- -----------------
1 Through December 31, 1997. The inception date for the J.P. Morgan Active
Fixed Income Composite was May 31, 1977.
2 The Salomon Brothers Broad Investment Grade Bond Index is an unmanaged,
market-weighted index which contains approximately 4,700 individually
priced investment grade bonds. The index does not include fees or
operating expenses and is not available for actual investment.
63
<PAGE>
BT EQUITY 500 INDEX PORTFOLIO
In the table below, the only account which is included is a series of another
registered investment company, i.e., Equity 500 Index Fund, a series of BT
Institutional Funds, which is managed by Bankers Trust Company, and whose
investment policies are substantially similar to the BT Equity 500 Index
Portfolio. However, the BT Equity 500 Index Portfolio will be subject to higher
expenses than the Equity 500 Index Fund. In addition, holders of variable
insurance contracts representing interests in the BT Equity 500 Index 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 Equity 500 Index Fund presented below are
unaudited and are not intended to predict or suggest the returns that might be
experienced by the BT Equity 500 Index Portfolio or an individual investor
investing in the BT Equity 500 Index Portfolio.
YEAR ENDED EQUITY 500 INDEX FUND S&P 500 COMPOSITE
12/31/97 INSTITUTIONAL CLASS1 STOCK INDEX2
- --------- --------------------- -------------
One Year 33.23% 33.36%
Since inception 20.17% 20.27%
- ---------------
1 Through December 31, 1997. The inception date for the Equity 500
Index Fund-- Institutional Class was December 31, 1992.
2 The S&P 500 Index ("S & P 500") 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 S & P 500 reflects the reinvestment of income dividends and capital
gain distributions, if any, but does not reflect fees, brokerage
commissions, or other expenses of investing.
64
<PAGE>
BT SMALL COMPANY INDEX PORTFOLIO
In the table below, the only account which is included is a series of another
registered investment company, i.e., Small Cap Index Fund - Institutional
Class, a series of BT Advisors Funds, which is managed by Bankers Trust
Company, and whose investment policies are substantially similar to the BT
Small Company Index Portfolio. However, the BT Small Company Index Portfolio
will be subject to higher expenses than the Small Cap Index Fund Institutional
Class. In addition, holders of variable insurance contracts representing
interests in the BT Small Company Index 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 Small Cap Index Fund - Institutional Class
presented below are unaudited and are not intended to predict or suggest the
returns that might be experienced by the BT Small Company Index Portfolio or an
individual investor investing in the BT Small Company Index Portfolio.
YEAR ENDED SMALL CAP INDEX FUND - RUSSELL 2000
12/31/97 INSTITUTIONAL CLASS1 INDEX2
- --------- -------------------- -------
One Year 23.00% 22.36%
Since inception 22.34% 23.28%
- ----------------
1 Through December 31, 1997. The inception date for the Small Cap Index
Fund--Institutional Class was July 10, 1996.
2 The Russell 2000 Index is an unmanaged index composed of approximately
2,000 small-capitalization stocks and includes reinvestments of
dividends. The index does not include fees or operating expenses and is
not available for actual investment. It is compiled by the Frank Russell
Company.
65
<PAGE>
BT INTERNATIONAL EQUITY INDEX PORTFOLIO
In the table below, the only account which is included is a series of another
registered investment company, i.e., EAFE Equity Index Fund - Institutional
Class, a series of BT Advisor Funds, which is managed by Bankers Trust Company,
and whose investment policies are substantially similar to the BT International
Equity Index Portfolio. However, the BT International Equity Index Portfolio
will be subject to higher expenses than the EAFE Equity Index Fund -
Institutional Class. In addition, holders of variable insurance contracts
representing interests in the BT International Equity Index 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 EAFE Equity Index Fund - Institutional Class
presented below are unaudited and are not intended to predict or suggest the
returns that might be experienced by the BT International Equity Index
Portfolio or an individual investor investing in the BT International Equity
Index Portfolio.
YEAR ENDED EAFE EQUITY INDEX FUND -
12/31/97 INSTITUTIONAL CLASS1 MSCI EAFE INDEX2
---------- ----------------------- ----------------
One Year3 2.11% 1.78%
Since inception3 4.79% 4.70%
- -----------------
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 EAFE Index ("MSCI EAFE Index")
is an unmanaged capitalization-weighted measure of stock markets in
Europe, Australia and the Far East. The MSCI EAFE returns assume dividends
reinvested net of withholding tax and do not reflect any fees or operating
expenses. The index does not include fees or operating expenses and is not
available for actual investment.
3 The inception date for the EAFE Equity Index Fund--Institutional Class was
January 24, 1996.
66
<PAGE>
APPENDIX A
The following table summarizes the historical performance information of
certain other registered investment companies or accounts that appears on pages
50 through 67 of this Prospectus. Each other registered investment company or
account 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 7 through 25
of this Prospectus.
ANNUALIZED RATES OF RETURN
PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------- ------- -------- -------- ---------------
FUND NAME 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
==================================================================================================
<S> <C> <C> <C> <C>
BT EAFE EQUITY INDEX FUND - INSTITUTIONAL CLASS 2.11% -- -- 4.79%
- -------------------------------------------------------- ------- -------- -------- --------
MSCI EAFE INDEX 1.78% -- -- 4.70%
- -------------------------------------------------------- ------- -------- -------- --------
BT EQUITY 500 INDEX FUND 33.23% -- -- 20.17%
- -------------------------------------------------------- ------- -------- -------- --------
S&P 500 INDEX 33.36% -- -- 20.27%
- -------------------------------------------------------- ------- -------- -------- --------
BT SMALL CAP INDEX FUND 23.00% -- -- 22.34%
- -------------------------------------------------------- ------- -------- -------- --------
RUSSELL 2000 INDEX 22.36% -- -- 23.28%
- -------------------------------------------------------- ------- -------- -------- --------
J.P. MORGAN ACTIVE FIXED INCOME COMPOSITE 9.25% 7.97% 9.63% --
- -------------------------------------------------------- ------- -------- -------- --------
SALOMON BROTHERS BROAD INVESTMENT GRADE BOND INDEX 9.62% 7.53% 9.23% --
- -------------------------------------------------------- ------- -------- -------- --------
LAZARD EQUITY PORTFOLIO 25.13% 20.63% 17.14% --
- -------------------------------------------------------- ------- -------- -------- --------
S&P 500 INDEX 33.36% 20.27% 18.05% --
- -------------------------------------------------------- ------- -------- -------- --------
LAZARD SMALL CAP PORTFOLIO 28.06% 20.68% -- 21.57%
- -------------------------------------------------------- ------- -------- -------- --------
RUSSELL 2000 INDEX 22.36% 16.40% -- 16.80%
- -------------------------------------------------------- ------- -------- -------- --------
MERRILL LYNCH BASIC VALUE FOCUS FUND 20.62% -- -- 17.26%
- -------------------------------------------------------- ------- -------- -------- --------
S&P 500 INDEX 33.36% -- -- 21.57%
- -------------------------------------------------------- ------- -------- -------- --------
MERRILL LYNCH GLOBAL STRATEGY 11.94% 10.82% -- 9.67%
- -------------------------------------------------------- ------- -------- -------- --------
67
<PAGE>
- ----------------------------------------------------- ------- -------- -------- ---------------
FUND NAME 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
===============================================================================================
<S> <C> <C> <C> <C>
MSCI EAFE INDEX 1.78% 11.39% -- 8.35%
- ----------------------------------------------------- ------- ------- -------- --------
MFS EMERGING GROWTH FUND 19.73% 19.75% 21.30% --
- ----------------------------------------------------- ------- ------- -------- --------
RUSSELL 2000 INDEX 22.36% 16.40% 15.77% --
- ----------------------------------------------------- ------- ------- -------- --------
MFS RESEARCH FUND 20.53% 20.40% 17.17% --
- ----------------------------------------------------- ------- ------- -------- --------
S&P 500 INDEX 33.36% 20.27% 18.05% --
- ----------------------------------------------------- ------- ------- -------- --------
MSIF EMERGING MARKETS PORTFOLIO (1.03)% 10.23% -- 10.13%
- ----------------------------------------------------- ------- ------- -------- --------
IFC GLOBAL TOTAL RETURN COMPOSITE INDEX (14.42)% 6.16% -- 6.93%
- ----------------------------------------------------- ------- ------- -------- --------
THE GEORGE PUTNAM FUND OF BOSTON 21.02% 15.13% 13.92% --
- ----------------------------------------------------- ------- ------- -------- --------
S&P 500 INDEX 33.36% 20.27% 18.05% --
- ----------------------------------------------------- ------- ------- -------- --------
PUTNAM GROWTH & INCOME FUND II 24.86% -- -- 26.54%
- ----------------------------------------------------- ------- ------- -------- --------
S&P 500 INDEX 33.36% -- -- 31.19%
- ----------------------------------------------------- ------- ------- -------- --------
PUTNAM INTERNATIONAL GROWTH FUND 17.78% 17.59% -- 12.43%
- ----------------------------------------------------- ------- ------- -------- --------
MSCI EAFE INDEX 1.78% 11.39% -- 6.93%
- ----------------------------------------------------- ------- ------- -------- --------
PUTNAM INVESTORS FUND 34.49% 20.71% 17.40% --
- ----------------------------------------------------- ------- ------- -------- --------
S&P 500 INDEX 33.36% 20.27% 18.05% --
- ----------------------------------------------------- ------- ------- -------- --------
T. ROWE PRICE EQUITY INCOME FUND 28.82% 19.99% 16.99% --
- ----------------------------------------------------- ------- ------- -------- --------
S&P 500 INDEX 33.36% 20.27% 18.05% --
- ----------------------------------------------------- ------- ------- -------- --------
T. ROWE PRICE INTERNATIONAL STOCK FUND 2.70% 13.03% 10.62% --
- ----------------------------------------------------- ------- ------- -------- --------
MSCI EAFE INDEX 1.78% 11.39% 6.25% --
- ----------------------------------------------------- ------- ------- -------- --------
WARBURG PINCUS SMALL COMPANY VALUE FUND 19.16% -- -- 36.19%
- ----------------------------------------------------- ------- ------- -------- --------
RUSSELL 2000 INDEX 22.36% -- -- 16.35%
- ----------------------------------------------------- ------- ------- -------- --------
</TABLE>
68
<PAGE>
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 eighteen Portfolios currently offered
by the Trust.
* 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
* Merrill Lynch Basic Value Equity Portfolio
* Lazard Large Cap Value Portfolio
* Lazard Small Cap Value Portfolio
* JPM Core Bond Portfolio
* BT Small Company Index Portfolio
* BT International Equity Index Portfolio
* BT Equity 500 Index 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, 1998 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.
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below for the period May 1,
1997* (unless otherwise noted) to December 31, 1997 has been derived
from financial statements of the Trust which have been audited by
Price Waterhouse LLP, independent public accountants. Price Waterhouse
LLP's report on the Trust's financial statements as of December 31,
1997 appears in the Trust's Annual Report. The information listed below
should be read in conjunction with the financial statements contained in
the Trust's Annual Report which are incorporated by reference into the
Trust's Statement of Additional Information. The Annual Report includes
more information about the Trust's performance and is available without
charge upon request.
<TABLE>
<CAPTION>
- ---------------- ----------- ----------- ----------- ----------- ----------- ----------- ------------ ------------- ------------
Net asset Net Net Total Dividends Dividends Distributions Distributions Total
value, Investment realized from from net in excess from in excess dividends
beginning Income and investment investment of net realized of realized and
of period unrealized operations income investment gains gains distributions
gain income
(loss) on
investments
and
foreign
currency
transactions
- ---------------- ----------- ----------- ----------- ----------- ----------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
T. Rowe Price $10.00 $0.02 $(0.17) $(0.15)
International
Stock Portfolio
- ---------------- ----------- ----------- ----------- ----------- ----------- ----------- ------------ ------------- ------------
T. Rowe Price $10.00 $0.10 $2.11 $2.21 $(0.09) $(0.04) $(0.13)
Equity Income
Portfolio
- ---------------- ----------- ----------- ----------- ----------- ----------- ----------- ------------ ------------- ------------
EQ/Putnam $10.00 $0.06 $1.56 $1.62 $(0.06) $(0.01) $(0.03) $(0.10)
Growth &
Income Value
Portfolio
- ---------------- ----------- ----------- ----------- ----------- ----------- ----------- ------------ ------------- ------------
EQ/Putnam $10.00 $0.14 $1.30 $1.44 $(0.13) $(0.01) $(0.09) $(0.23)
Balanced
Portfolio
- ---------------- ----------- ----------- ----------- ----------- ----------- ----------- ------------ ------------- ------------
<PAGE>
<CAPTION>
- ---------------- ------- ------------ --------------
Net Total Net assets,
asset return (b) end of
value, period
end (000's)
of
period
- ---------------- ------- ------------ --------------
<S> <C> <C> <C>
T. Rowe Price $9.85 (1.49)% $69,572
International
Stock Portfolio
- ---------------- ------- ------------ --------------
T. Rowe Price $12.08 22.11% $99,947
Equity Income
Portfolio
- ---------------- ------- ------------ --------------
EQ/Putnam $11.52 16.23% $150,260
Growth &
Income Value
Portfolio
- ---------------- ------- ------------ --------------
EQ/Putnam $11.21 14.38% $25,854
Balanced
Portfolio
- ---------------- ------- ------------ --------------
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
- ---------------- --------- ----------- --------------- ----------- ----------- ----------- ------------ ------------ ------------
Net Net Net realized Total Dividends Dividends Distributions Distributions Total
asset Investment and from from net in excess from in excess dividends
value, Income unrealized investment investment of net realized of and
beginning gain (loss) operations income investment gains realized distributions
of on income gains
period investments
and foreign
currency
transactions
- ---------------- --------- ----------- --------------- ----------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EQ/Putnam $10.00 $0.03 $0.93 $0.96 $(0.02) $(0.01) $(0.04) $(0.07)
International
Equity
Portfolio
- ---------------- --------- ----------- --------------- ----------- ----------- ----------- ------------ ------------ ------------
EQ/Putnam $10.00 $0.02 $2.45 $2.47 $(0.03) $(0.04) $(0.07) $(0.14)
Investors
Growth
Portfolio
- ---------------- --------- ----------- --------------- ----------- ----------- ----------- ------------ ------------ ------------
MFS Research $10.00 $0.02 $1.58 $1.60 $(0.02) $(0.01) $(0.09) $(0.12)
Portfolio
- ---------------- --------- ----------- --------------- ----------- ----------- ----------- ------------ ------------ ------------
MFS Emerging $10.00 $0.02 $2.21 $2.23 $(0.02) $(0.18) $(0.11) $(0.31)
Growth
Companies
Portfolio
- ---------------- --------- ----------- --------------- ----------- ----------- ----------- ------------ ------------ ------------
Warburg Pincus $10.00 $0.01 $1.90 $1.91 $(0.01) $(0.05) $(0.06)
Small Company
Value Portfolio
- ---------------- --------- ----------- --------------- ----------- ----------- ----------- ------------ ------------ ------------
Merrill Lynch $10.00 $0.08 $0.39 $0.47 $(0.05) $(0.11) $(0.16)
World Strategy
Portfolio
- ---------------- --------- ----------- --------------- ----------- ----------- ----------- ------------ ------------ ------------
Merrill Lynch $10.00 $0.06 $1.64 $1.70 $(0.06) $(0.05) $(0.01) $(0.12)
Basic Value
Equity
Portfolio
- ---------------- --------- ----------- --------------- ----------- ----------- ----------- ------------ ------------ ------------
Morgan Stanley $10.00 $0.04 $(2.06) $(2.02) $(0.02) $(0.02)
Emerging
Markets Equity
Portfolio
- ---------------- --------- ----------- --------------- ----------- ----------- ----------- ------------ ------------ ------------
[Following table restubbed from above]
<PAGE>
<CAPTION>
- ---------------- ---------- ---------- ------------
Net Total Net
asset return assets,
value, (b) end of
end of period
period (000's)
- ---------------- ---------- ---------- ------------
<S> <C> <C> <C>
EQ/Putnam $10.89 9.58% $55,178
International
Equity
Portfolio
- ---------------- ---------- ---------- ------------
EQ/Putnam $12.33 24.70% $39,695
Investors
Growth
Portfolio
- ---------------- ---------- ---------- ------------
MFS Research $11.48 16.07% $114,754
Portfolio
- ---------------- ---------- ---------- ------------
MFS Emerging $11.92 22.42% $99,317
Growth
Companies
Portfolio
- ---------------- ---------- ---------- ------------
Warburg Pincus $11.85 19.15% $120,880
Small Company
Value Portfolio
- ---------------- ---------- ---------- ------------
Merrill Lynch $10.31 4.70% $18,210
World Strategy
Portfolio
- ---------------- ---------- ---------- ------------
Merrill Lynch $11.58 16.99% $49,495
Basic Value
Equity
Portfolio
- ---------------- ---------- ---------- ------------
Morgan Stanley $7.96 (20.16)% $21,433
Emerging
Markets Equity
Portfolio
- ---------------- ---------- ---------- ------------
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
- --------------- -------------------- ------------- ----------------- -------------- --------- ------------ -------------
Ratio of expenses Ratio of Ratio of net Ratio of net Portfolio Average Per share
to average net expenses to investment investment turnover commission benefit
assets after average net income to income to rate rate paid to net
waivers (a)(c) assets average net average net investment
before assets after assets income(c)
waivers waivers (a)(c) before
(a)(c) waivers
(a)(c)
- --------------- -------------------- ------------- ----------------- -------------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
T. Rowe Price 1.20% 2.56% 0.45% (0.91)% 17% $0.0034 $0.05
International
Stock
Portfolio
- --------------- -------------------- ------------- ----------------- -------------- --------- ------------ -------------
T. Rowe Price 0.85% 1.74% 2.49% 1.60% 9% $0.0293 $0.03
Equity Income
Portfolio
- --------------- -------------------- ------------- ----------------- -------------- --------- ------------ -------------
EQ/Putnam 0.85% 1.75% 1.67% 0.77% 61% $0.0376 $0.03
Growth &
Income Value
Portfolio
- --------------- -------------------- ------------- ----------------- -------------- --------- ------------ -------------
EQ/Putnam 0.90% 2.55% 3.19% 1.54% 117% $0.0346 $0.07
Balanced
Portfolio
- --------------- -------------------- ------------- ----------------- -------------- --------- ------------ -------------
EQ/Putnam 1.20% 2.53% 0.74% (0.59)% 43% $0.0153 $0.05
International
Equity
Portfolio
- --------------- -------------------- ------------- ----------------- -------------- --------- ------------ -------------
EQ/Putnam 0.85% 2.13% 0.58% (0.70)% 47% $0.0338 $0.05
Investors
Growth
Portfolio
- --------------- -------------------- ------------- ----------------- -------------- --------- ------------ -------------
MFS Research 0.85% 1.78% 0.65% (0.28)% 51% $0.0471 $0.03
Portfolio
- --------------- -------------------- ------------- ----------------- -------------- --------- ------------ -------------
MFS Emerging 0.85% 1.82% 0.61% (0.36)% 116% $0.0422 $0.04
Growth
Companies
Portfolio
- --------------- -------------------- ------------- ----------------- -------------- --------- ------------ -------------
Warburg 1.00% 1.70% 0.26% (0.44)% 44% $0.0545 $0.03
Pincus Small
Company Value
Portfolio
- --------------- -------------------- ------------- ----------------- -------------- --------- ------------ -------------
Merrill Lynch 1.20% 3.05% 1.89% 0.04% 58% $0.0299 $0.08
World
Strategy
Portfolio
- --------------- -------------------- ------------- ----------------- -------------- --------- ------------ -------------
Merrill Lynch 0.85% 1.89% 1.91% 0.87% 25% $0.0566 $0.03
Basic Value
Equity
Portfolio
- --------------- -------------------- ------------- ----------------- -------------- --------- ------------ -------------
Morgan 1.75% 2.61% 1.96% 1.10% 25% $0.0011 $0.02
Stanley
Emerging
Markets
Equity
Portfolio
- --------------- -------------------- ------------- ----------------- -------------- --------- ------------ -------------
</TABLE>
*Commencement of Operations. The Morgan Stanley Emerging Markets Equity
Portfolio commenced operations on August 20, 1997. No financial highlights are
presented for the Lazard Large Cap Value Portfolio, Lazard Small Cap Value
Portfolio, JPM Core Bond Portfolio, BT Small Company Index Portfolio,
BT International Equity Index Portfolio and BT Equity 500 Index Portfolio, each
of which received initial capital on December 31, 1997.
(a) Annualized.
(b) Total return calculated for a period of less than one year is not
annualized.
(c) For further information concerning fee waivers, see the section entitled
"Expense Limitation Agreements" in the Prospectus.
-4-
<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 eighteen Portfolios. 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, the
Merrill Lynch World Strategy Portfolio and the Lazard Small Cap Value
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 Asset Management, Inc., Merrill Lynch
Asset Management, L.P., Lazard Asset Management, a division of Lazard Freres &
Co. LLC, J.P. Morgan Investment Management Inc., and Bankers Trust Company
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 & 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.
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 Equity Morgan Stanley Asset Management Inc.
Portfolio
Warburg Pincus Small Company Value Portfolio Warburg Pincus Asset Management, Inc.
Merrill Lynch World Strategy Portfolio Merrill Lynch Asset Management, L.P.
Merrill Lynch Basic Value Equity Portfolio Merrill Lynch Asset Management, L.P.
Lazard Large Cap Value Portfolio Lazard Asset Management
Lazard Small Cap Value Portfolio Lazard Asset Management
JPM Core Bond Portfolio J.P. Morgan Investment Management Inc.
BT Small Company Index Portfolio Bankers Trust Company
BT International Equity Index Portfolio Bankers Trust Company
BT Equity 500 Index Portfolio Bankers Trust Company
</TABLE>
-5-
<PAGE>
The Manager has the ultimate responsibility to oversee each of the Advisers and
to recommend their hiring, termination and replacement. The Trust and the
Manager have received exemptive relief from the Securities and Exchange
Commission that permits the Manager, subject to approval by the Board of
Trustees, to (i) select Advisers for each of the Trust's Portfolios and (ii)
materially modify existing investment advisory agreements without obtaining
shareholder approval.
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 as well as one of the distributors for
the Class IA shares. Equitable Distributors, Inc. ("EDI") serves as the other
distributor for the Class IB shares of the Trust as well as 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
Life"). Both classes of shares are offered and redeemed at their net asset
value without any sales load.
Class IA shares may be 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.
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 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% for each of
those countries). 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
-6-
<PAGE>
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.
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, 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.
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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 the 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").
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, 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
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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, passive foreign investment companies, 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. 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, borrowings, derivatives,
repurchase agreements, futures contracts, foreign securities, forward
commitments, foreign currency transactions, 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 appears 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.
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)
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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.
The Portfolio may also engage in a variety of investment management practices
such as buying and selling options and futures contracts and entering into
foreign currency exchange contracts.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, borrowings, futures
contracts, 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 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 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, illiquid securities, zero-coupon bonds,
payment-in-kind bonds, derivatives, 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
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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,
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
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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, 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.
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 market
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, Bulgaria, Chile, China
(mainland and Hong Kong), Colombia, Egypt, Ghana, Greece, Hungary, India,
Indonesia, Israel, Jamaica, Jordan, Kenya, Malaysia, Mexico, Morocco, Nigeria,
Pakistan, Peru, Philippines, Poland, Portugal, Russia, Singapore, 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.
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 20% of
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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 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, collateralized mortgage obligations, asset-backed securities,
floaters, inverse floaters, foreign currency transactions, loan participations,
repurchase agreements, 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 stock, 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.
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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.
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 A2 by Standard &
Poor's Rating Service ("S&P") or Prime2 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 United
States 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
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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 rated
BBB or better by S&P or Baa or better by Moody's or of comparable quality. The
Portfolio 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 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, floaters, 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
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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, convertible securities, United States Government
securities, repurchase agreements, securities loans, foreign securities,
borrowings, and illiquid securities) are discussed under the caption "Investment
Strategies" below and in the Statement of Additional Information.
LAZARD LARGE CAP VALUE PORTFOLIO
The investment objective of the Lazard Large Cap Value Portfolio is to seek
capital appreciation by investing primarily in equity securities of companies
with relatively large capitalizations (i.e., companies having market
capitalizations of at least $1 billion at the time of initial purchase) that
appear to the Adviser to be inexpensively priced relative to the return on
total capital or equity. In managing the Portfolio, the Adviser engages in a
value-oriented search for equity securities. The Adviser attempts to identify
inexpensive securities through traditional measures of value, including low
price to earnings ratio, high yield, unrecognized assets, potential for
management change, and/or the potential to improve profitability. The Adviser
focuses on individual stock selection (a "bottom-up" approach) rather than on
forecasting stock market trends (a "top-down" approach). Risk is tempered by
diversification of investments.
Under normal market conditions, the Portfolio will invest at least 80% of its
total assets in equity securities, including common stocks, preferred stocks
and securities convertible into or exchangeable for common stocks. In addition,
at times judged by the Adviser to be appropriate, the Portfolio may hold up to
20% of its total assets in United States Government securities and investment
grade debt obligations of domestic corporations rated BBB or better by S&P or
Baa or better by Moody's. The Portfolio may also invest without limitation in
high-quality short-term money market instruments, including United States
Government securities, repurchase agreements, certificates of deposits, time
deposits and other short-term obligations issued by banks, commercial paper and
loan participations. In addition, the Portfolio may invest up to 10% of its
total assets at the time of purchase in foreign equity or debt securities
trading in United States markets or listed on a domestic securities exchange or
represented by ADRs or Global Depositary Receipts ("GDRs"). The Portfolio may
also engage in various investment techniques, such as options transactions and,
although it has no present intention to do so, leveraging and lending portfolio
securities.
Securities owned by the Portfolio are kept under continuing supervision, and
changes may be made whenever such securities no longer seem to meet the
Portfolio's objective. Changes in the securities owned by the Portfolio also
may be made to increase or decrease investments in anticipation of changes in
security
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prices in general or to provide funds required for redemptions, distributions
to shareholders or other corporate purposes.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as securities loans, borrowing, loan participations,
derivatives, options, mortgage-related securities, forward commitments,
convertible securities, floaters, illiquid securities, foreign securities,
investment grade fixed income securities, United States Government securities,
and repurchase agreements) are discussed under the caption "Investment
Strategies" below and in the Statement of Additional Information.
LAZARD SMALL CAP VALUE PORTFOLIO
The investment objective of the Lazard Small Cap Value Portfolio is to seek
capital appreciation by investing primarily in equity securities of United
States companies with small market capitalizations (i.e., companies in the
range of companies represented in the Russell 2000 Index) that the Adviser
considers inexpensively priced relative to the return on total capital or
equity. The Russell 2000 Index is composed of selected common stocks of small,
generally unseasoned United States companies with market capitalizations
ranging between $100 million and $1 billion. The equity securities in which the
Portfolio may invest include: common stocks, preferred stocks, securities
convertible into or exchangeable for common stocks, rights and warrants.
Investments are generally made in equity securities of companies that in the
Adviser's opinion have one or more of the following characteristics: (i) are
undervalued relative to their earnings power, cash flow, and/or asset values;
(ii) have an attractive price/value relationship (i.e., have high returns on
equity and/or assets with correspondingly low price-to-book and/or
price-to-asset value as compared to the market generally or the companies'
industry groups in particular) with the expectation that some catalyst will
cause the perception of value to change within a 24-month time horizon; (iii)
have experienced significant relative underperformance and are out of favor due
to a set of circumstances that are unlikely to harm a company's franchise or
earnings power over the longer term; (iv) have low projected price-to-earnings
or price-to-cash-flow multiples relative to their industry peer group and/or
the market in general; (v) have the prospect, or the industry in which the
company operates has the prospect, to allow it to become a larger factor in the
business and receive a higher valuation as such; (vi) have significant
financial leverage but have high levels of free cash flow that may be used to
reduce leverage and enhance shareholder value; and (vii) have a relatively
short corporate history with the expectation that the business may grow to
generate meaningful cash flow and earnings over a reasonable investment
horizon.
Under normal market conditions, the Portfolio will invest at least 80% of the
value of its total assets in the small capitalization equity securities
described above. Assets not invested in such small capitalization equity
securities generally will be invested in larger capitalization equity
securities or debt securities, including cash equivalents.
The Adviser believes that issuers of small capitalization stocks often have
sales and earnings growth rates that exceed those of larger companies, and that
such growth rates may, in turn, be reflected in more rapid share price
appreciation. However, investing in smaller capitalization stocks can involve
greater risk than is customarily associated with larger, more established
companies. (Such risks are discussed under the caption "Investment Strategies
- -- Small Company Securities" below).
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.
The Adviser continually evaluates the securities owned by the Portfolio, and
changes may be made whenever the Adviser determines such securities no longer
meet the Portfolio's objective. Changes in
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Portfolio holdings may also be made to increase or decrease investments in
anticipation of changes in security prices in general or to provide funds
required for redemptions, distributions to shareholders or other corporate
purposes.
When, in the judgment of the Adviser, business or financial conditions warrant,
the Portfolio may assume a temporary defensive position and invest without
limitation in large capitalization companies or short-term money market
instruments, or hold its assets in cash.
Certain investment strategies and investments which may be employed by the
Portfolio (such as securities loans, borrowings, loan participations,
derivatives, mortgage-related securities, convertible securities, floaters,
illiquid securities, investment grade fixed income securities, forward
commitments, United States Government securities, repurchase agreements, and
small company securities) are discussed under the caption "Investment
Strategies" below and in the Statement of Additional Information.
JPM CORE BOND PORTFOLIO
The investment objective of the JPM Core Bond Portfolio is to provide a high
total return consistent with moderate risk of capital and maintenance of
liquidity. Total return will consist of income plus realized and unrealized
capital gains and losses. Although the net asset value of the Portfolio will
fluctuate, the Portfolio attempts to preserve the value of its investments to
the extent consistent with its objective.
It is the current policy of the Portfolio that, under normal circumstances, all
of the Portfolio's assets will, at the time of purchase, consist of investment
grade securities rated BBB or better by S&P or Baa or better by Moody's or
unrated securities of comparable quality. If the quality of the investment
later declines, the Portfolio may continue to hold the investment.
The Adviser actively manages the Portfolio's duration, the allocation of
securities across market sectors, and the selection of specific securities
within market sectors. Based on fundamental, economic and capital markets
research, the Adviser adjusts the duration of the Portfolio in light of market
conditions and the Adviser's interest rate outlook. For example, if interest
rates are expected to fall, the duration may be lengthened to take advantage of
the expected increase in bond prices. The Adviser also actively allocates the
Portfolio's assets among the broad sectors of the fixed income market
including, but not limited to, United States Government and agency securities,
corporate securities, private placements, asset-backed securities,
mortgage-related securities, and direct mortgage obligations. The Portfolio may
also invest up to 25% of its assets in securities of foreign issuers, including
up to 20% of its assets in debt secruities denominated in foreign currencies of
developed countries. In addition, the Portfolio may invest in municipal
obligations provided such securities are issued on a taxable basis or have an
attractive yield excluding tax considerations. Specific securities that the
Adviser believes are undervalued are selected for purchase within the sectors
using advanced quantitative tools, analysis of credit risk, the expertise of a
dedicated trading desk, and the judgment of fixed income portfolio managers and
analysts. Under normal circumstances, the Adviser intends to have the Portfolio
invest at least 65% of its assets in bonds. The Portfolio may to a limited
extent invest in convertible securities, including convertible debt securities
and preferred stock.
Duration is a measure of the weighted average maturity of bonds and can be used
by the Adviser as a measure of the sensitivity of the market value of the
Portfolio's bond holdings to changes in interest rates. Generally, the longer
the duration of the Portfolio's bond holdings, the more sensitive their market
value will be to changes in interest rates. Under normal market conditions the
Portfolio's duration will range between one year shorter and one year longer
than the duration of the domestic investment grade fixed income universe, as
represented by Salomon Brothers Broad Investment Grade Bond Index. Currently,
the duration of that index is approximately 4.5 years. The maturities of the
individual securities in the Portfolio may vary widely, however.
The Adviser intends to actively manage the Portfolio in pursuit of its
investment objective. Portfolio transactions are undertaken principally to
accomplish the Portfolio's objective in relation to expected
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movements in the general level of interest rates. However, the Portfolio may
also engage in short-term trading consistent with its objective. To the extent
the Portfolio engages in short-term trading, it may incur increased transaction
costs. The Portfolio may purchase high-quality money market instruments to
invest temporary cash balances or to maintain liquidity to meet withdrawals.
When market or financial conditions warrant, the Portfolio may invest as a
temporary defensive measure up to 100% of its assets in money market
instruments.
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, illiquid securities, zero-coupon bonds,
investment grade fixed income securities, payment-in-kind bonds, derivatives,
foreign currency transactions, repurchase agreements, reverse repurchase
agreements, forward commitments, United States Government securities,
borrowings, asset-backed securities, convertible securities, mortgage-related
securities, and swaps) are discussed under the caption "Investment Strategies"
below and in the Statement of Additional Information.
BT SMALL COMPANY INDEX PORTFOLIO
The investment objective of the BT Small Company Index Portfolio is to
replicate as closely as possible (before deduction of Portfolio expenses) the
total return of the Russell 2000 Index ("Russell 2000"). The Russell 2000 is
composed of approximately 2,000 small-capitalization common stocks. A company's
stock market capitalization is the total market value of its floating
outstanding shares. As of June 30, 1997, the average stock market capitalization
of the Russell 2000 was $500 million and the weighted average stock market
capitalization of the Russell 2000 was $650 million. The Portfolio is neither
sponsored by nor affiliated with the Frank Russell Company, which is the owner
of the trademarks and copyrights relating to the Russell indices.
The Portfolio invests in a statistically selected sample of the 2,000 stocks
included in the Russell 2000. The stocks of the Russell 2000 to be included in
the Portfolio will be selected utilizing a statistical sampling technique known
as "optimization." This process selects stocks for the Portfolio so that
various industry weightings, market capitalizations and fundamental
characteristics (e.g., price-to-book, price-to-earnings and debt-to-asset
ratios and dividend yields) closely approximate those of the Russell 2000. For
instance, if 10% of the capitalization of the Russell 2000 consists of utility
companies with relatively small capitalizations, then the Portfolio is
constructed so that approximately 10% of the Portfolio's assets are invested in
the stocks of utility companies with relatively small capitalizations. The
stocks held by the Portfolio are weighted to make the Portfolio's aggregate
investment characteristics similar to those of the Russell 2000 as a whole.
Over time, the correlation between the performance of the Portfolio and the
Russell 2000 is expected to be 0.95 or higher before deduction of Portfolio
expenses. A correlation of 1.00 would indicate perfect correlation, which would
be achieved when the net asset value of the Portfolio, including the value of
its dividend and any capital gain distributions, increases or decreases in
exact proportion to changes in the Russell 2000. The Portfolio's ability to
track the Russell 2000 may be affected by, among other things, transaction
costs, administration and other expenses incurred by the Portfolio, changes in
either the composition of the Russell 2000 or the assets of the Portfolio, and
the timing and amount of Portfolio investor contributions and withdrawals, if
any. Because the Portfolio seeks to track the Russell 2000, the Adviser
generally will not attempt to judge the merits of any particular stock as an
investment. Under normal circumstances, the Portfolio will invest at least 80%
of its assets in the securities of the Russell 2000. The Portfolio is a
diversified fund and will not concentrate more than 25% of its assets in the
securities of issuers in the same industry. In the event that the Russell 2000
should concentrate to an extent greater than 25% in the securities of issuers
in the same industry, the Portfolio's ability to achieve its objective may be
impaired since the Portfolio is not permitted to so invest.
The Portfolio may maintain up to 20% of its assets in short-term debt
securities and money market instruments to meet redemption requests or to
facilitate investment in the securities of the Russell 2000. Securities index
futures contracts and related options, warrants and convertible securities may
be used for several reasons: to simulate full investment in the Russell 2000
while retaining a cash balance for portfolio
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management purposes; to facilitate trading; to reduce transaction costs; or to
seek higher investment returns when a futures contract, option, warrant or
convertible security is priced more attractively than the underlying equity
security or the Russell 2000. These instruments may be considered derivatives.
The use of derivatives for non-hedging purposes may be considered speculative.
While each of these instruments can be used as leveraged investments, the
Portfolio will not use them to leverage its net assets. The Portfolio will not
invest in derivative instruments as part of a temporary defensive strategy (in
anticipation of declining stock prices) to protect the Portfolio against
potential market declines.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, futures contracts,
securities loans, small company securities, illiquid securities, investment
grade fixed income securities, derivatives, repurchase agreements, reverse
repurchase agreements, forward commitments, United States Government
securities, borrowings, asset-backed securities, and convertible securities)
are discussed under the caption "Investment Strategies" below and in the
Statement of Additional Information.
BT INTERNATIONAL EQUITY INDEX PORTFOLIO
The Portfolio seeks to replicate as closely as possible (before deduction of
Portfolio expenses) the total return of the Morgan Stanley Capital
International Europe, Australia, Far East Index ("EAFE Index"). The EAFE Index
is a capitalization-weighted index containing approximately 1,100 equity
securities of companies located in countries outside the United States. The
countries currently included in the EAFE Index are Australia, Austria, Belgium,
Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia,
The Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and
The United Kingdom. The EAFE Index is the exclusive property of Morgan Stanley.
The Portfolio is not sponsored, endorsed, sold or promoted by Morgan Stanley
and Morgan Stanley makes no guarantee as to the accuracy or completeness of the
EAFE Index or any data included therein.
The Portfolio is constructed to have aggregate investment characteristics
similar to those of the EAFE Index. The Portfolio invests in a statistically
selected sample of the securities of companies included in the EAFE Index,
although not all companies within a country will be represented in the
Portfolio at the same time. Stocks are selected for inclusion in the Portfolio
based on country of origin, market capitalization, yield, volatility and
industry sector. The Adviser will manage the Portfolio using advanced
statistical techniques to determine which stocks should be purchased or sold to
replicate the EAFE Index. From time to time, adjustments may be made in the
Portfolio because of changes in the composition of the EAFE Index, but such
changes are expected to be infrequent.
Over time, the correlation between the performance of the Portfolio and the
EAFE Index is expected to be 0.95 or higher before deduction of Portfolio
expenses. A correlation of 1.00 would indicate perfect correlation, which would
be achieved when the net asset value of the Portfolio, including the value of
its dividend and any capital gain distributions, increases or decreases in
exact proportion to changes in the EAFE Index. The Portfolio's ability to track
the EAFE Index may be affected by, among other things, transaction costs,
administration and other expenses incurred by the Portfolio, changes in either
the composition of the EAFE Index or the assets of the Portfolio, and the
timing and amount of Portfolio investor contributions and withdrawals, if any.
Because the Portfolio seeks to track the EAFE Index, the Adviser generally will
not attempt to judge the merits of any particular stock as an investment. Under
normal circumstances, the Portfolio will invest at least 80% of its assets in
the securities of the EAFE Index.
The Portfolio is a diversified fund and will not concentrate more than 25% of
its assets in the securities of issuers in the same industry. In the event that
the EAFE Index should concentrate to an extent greater than 25% in the
securities of issuers in the same industry, the Portfolio's ability to achieve
its objective may be impaired since the Portfolio may not so invest.
The Portfolio may maintain up to 20% of its assets in short-term debt
securities and money market instruments to meet redemption requests or to
facilitate investment in the securities of the EAFE Index.
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Securities index futures contracts and related options, warrants and
convertible securities may be used for several reasons: to simulate full
investment in the EAFE Index while retaining a cash balance for fund management
purposes; to facilitate trading; to reduce transaction costs; or to seek higher
investment returns when a futures contract, option, warrant or convertible
security is priced more attractively than the underlying equity security or
EAFE Index. These instruments may be considered derivatives. The use of
derivatives for non-hedging purposes may be considered speculative. While each
of these instruments can be used as leveraged investments, the Portfolio will
not use them to leverage its net assets. The Portfolio will not invest in such
instruments as part of a temporary defensive strategy (in anticipation of
declining stock prices) to protect the Portfolio against potential market
declines.
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, securities loans, illiquid
securities, investment grade fixed income securities, derivatives, swaps,
repurchase agreements, reverse repurchase agreements, forward commitments,
United States Government securities, borrowings, asset-backed securities, and
convertible securities) are discussed under the caption "Investment Strategies"
below and in the Statement of Additional Information.
BT EQUITY 500 INDEX PORTFOLIO
The Portfolio seeks to replicate as closely as possible (before deduction of
Portfolio expenses) the total return of the Standard & Poor's 500 Composite
Stock Price Index ("S&P 500"). The S&P 500 is an index of 500 common stocks of
companies from many industrial sectors representing a significant portion of
the market value of all common stocks publicly traded in the United States,
most of which trade on the New York Stock Exchange Inc. (the "NYSE"). The
Adviser believes that the performance of the S&P 500 is representative of the
performance of publicly-traded common stocks in the United States in general.
The composition of the S&P 500 is determined by Standard & Poor's and is based
on such factors as the market capitalization and trading activity on each stock
and its adequacy as a representation of stocks in a particular industry, and
may be changed from time to time. The Portfolio is not sponsored, endorsed,
sold or promoted by Standard & Poor's and Standard & Poor's makes no guarantee
as to the accuracy and/or completeness of the S&P 500 or any data included
therein. In seeking to replicate the performance of the S&P 500, before
deduction of Portfolio expenses, the Adviser will attempt over time to allocate
the Portfolio's investment among common stocks included in the S&P 500 in
approximately the same proportions as they are represented in the S&P 500,
beginning with the heaviest weighted stocks that make up a larger portion of
the index's value. The Adviser utilizes a two-stage sampling approach in
seeking to achieve its objective. Stage one, which encompasses large
capitalization stocks, maintains the stock holdings at or near their benchmark
weights. Large capitalization stocks are defined as those securities which
represent 0.10% or more of the S&P 500. In stage two, smaller stocks are
analyzed and selected using risk characteristics and industry weights in order
to match the sector and risk characteristics of the smaller companies in the
S&P 500. This approach helps to increase the Portfolio's liquidity while
reducing costs.
The Adviser generally will seek to match the composition of the S&P 500 but
usually will not invest the Portfolio's stock portfolio to mirror the S&P 500
exactly. Because of the difficulty and cost of executing relatively small stock
transactions, the Portfolio may not always be invested in the less heavily
weighted S&P 500 stocks, and may at times have its portfolio weighted
differently than the S&P 500, particularly if the Portfolio has a low level of
assets. In addition, the Portfolio may omit or remove any S&P 500 stock from
the Portfolio if, following objective criteria, the Adviser judges the stock to
be insufficiently liquid or believes the merit of the investment has been
substantially impaired by extraordinary events or financial conditions. The
Portfolio will not purchase the stock of Bankers Trust New York Corporation,
which is included in the S&P 500, and instead will overweight its holdings of
companies engaged in similar businesses.
Over time, the correlation between the performance of the Portfolio and the S&P
500 is expected to be 0.95 or higher before deduction of Portfolio expenses. A
correlation of 1.00 would indicate perfect correlation,
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which would be achieved when the net asset value of the Portfolio, including
the value of its dividend and any capital gain distributions, increases or
decreases in exact proportion to changes in the S&P 500. The Portfolio's
ability to track the S&P 500 may be affected by, among other things,
transaction costs, administration and other expenses incurred by the Portfolio,
changes in either the composition of the S&P 500 or the assets of the
Portfolio, and the timing and amount of Portfolio investor contributions and
withdrawals, if any. Because the Portfolio seeks to track the S&P 500, the
Adviser generally will not attempt to judge the merits of any particular stock
as an investment. Under normal circumstances, the Portfolio will invest at
least 80% of its assets in the securities of the S&P 500.
The Portfolio is a diversified fund and will not concentrate more than 25% of
its assets in the securities of issuers in the same industry. In the unlikely
event that the S&P 500 should concentrate to an extent greater than 25% in the
securities of issuers in the same industry, the Portfolio's ability to achieve
its objective may be impaired since the Portfolio may not so invest.
The Portfolio may maintain up to 20% of its assets in short-term debt
securities and money market instruments to meet redemption requests or to
facilitate investment in the securities of the S&P 500. Securities index
futures contracts and related options, warrants and convertible securities may
be used for several reasons: to simulate full investment in the S&P 500 while
retaining a cash balance for fund management purposes; to facilitate trading;
to reduce transaction costs; or to seek higher investment returns when a
futures contract, option, warrant or convertible security is priced more
attractively than the underlying equity security or S&P 500. These instruments
may be considered derivatives. The use of derivatives for non-hedging purposes
may be considered speculative. While each of these instruments can be used as
leveraged investments, the Portfolio may not use them to leverage its net
assets. The Portfolio may not invest in such instruments as part of a temporary
defensive strategy (in anticipation of declining stock prices) to protect the
Portfolio against potential market declines.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, futures contracts,
securities loans, illiquid securities, investment grade fixed income
securities, derivatives, repurchase agreements, reverse repurchase agreements,
forward commitments, United States Government securities, borrowings,
asset-backed securities, and convertible 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 and below, each of the Portfolios, for example, may purchase
and sell call and put options (except for MFS Research Portfolio and Lazard
Small Cap Value Portfolio), engage in transactions in futures contracts and
related options (except for Lazard Large Cap Value Portfolio and Lazard Small
Cap Value Portfolio), and engage in forward foreign currency exchange
transactions (except for MFS Research Portfolio, Lazard Large Cap Value
Portfolio, Lazard Small Cap Value Portfolio, BT Small Company Index Portfolio,
and BT Equity 500 Index Portfolio). They may also enter into repurchase
agreements, 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 instrument 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, Morgan Stanley Emerging Markets Equity Portfolio, JPM Core
Bond Portfolio, BT Small Company Index Portfolio, BT International Equity Index
Portfolio and BT Equity 500 Index Portfolio may invest in asset-backed
securities. These asset-backed securities, issued by trusts and special
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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. The Lazard Large Cap Value Portfolio may borrow for leveraging
purposes (in order to increase its investment in portfolio securities) to the
extent that the amount so borrowed does not exceed 33 1/3% of the Portfolio's
total assets. Leveraging exaggerates the effect on net asset value of any
increase or decrease in market value of the Lazard Large Cap Value Portfolio's
investment. In addition, such borrowings would be subject to interest costs
which may or may not be recovered by appreciation of securities purchased. The
Lazard Large Cap Value Portfolio may also borrow up to 10% of its total assets
for temporary or emergency purposes. 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,
Merrill Lynch Basic Value Equity Portfolio, JPM Core Bond Portfolio, BT Small
Company Index Portfolio, BT International Equity Index Portfolio and BT Equity
500 Index 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. Borrowing for the Lazard Small Cap Value
Portfolio may not exceed 15% of its total assets for temporary or emergency
purposes, including to meet redemptions (otherwise such borrowings may not
exceed 5% of the value of the Portfolio's total assets). Borrowings for the
EQ/Putnam Growth & Income Value Portfolio, EQ/Putnam International Equity
Portfolio, EQ/Putnam Investors Growth 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, except the
Lazard Large Cap Value 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
nonconvertible 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
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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, Morgan Stanley
Emerging Markets Equity Portfolio, Lazard Large Cap Value Portfolio and the
Lazard Small Cap Value 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 CMO 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 (except the
Lazard Small Cap Value Portfolio, BT Small Company Index Portfolio and BT
Equity 500 Index Portfolio) 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.
Currency exchange rates may be affected unpredictably by intervention (or the
failure to intervene) by U.S. or foreign governments or central banks, by
currency controls or political developments in the U.S. or abroad. For example,
significant uncertainty surrounds the proposed introduction of the Euro (a
common currency for the European Union) in January 1999 and its effect on the
value of securities denominated in local European currencies. These and other
currencies in which a Portfolio's assets are denominated may be devalued against
the U.S. dollar, resulting in a loss to the Portfolio.
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
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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 EQ/Putnam Balanced Portfolio, MFS Emerging Growth Companies
Portfolio, Morgan Stanley Emerging Markets Equity Portfolio, and the JPM Core
Bond 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. Each 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 (except the Lazard Small Cap Value
Portfolio, BT Small Company Index Portfolio and the BT Equity 500 Index
Portfolio) 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 GDRs and other types of depositary
receipts (which, together with ADRs and GDRs, are hereinafter collectively
referred to as
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"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 Lazard Small
Cap Value Portfolio, BT Small Company Index Portfolio and BT Equity 500 Index
Portfolio) may purchase foreign currency on a spot (or cash) basis. In
addition, each of the Portfolios (except the MFS Research Portfolio, Lazard
Large Cap Value Portfolio, Lazard Small Cap Value Portfolio, BT Small
Company Index Portfolio and BT Equity 500 Index Portfolio) 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, Lazard
Large Cap Value Portfolio, Lazard Small Cap Value Portfolio, BT Small Company
Index Portfolio and BT Equity 500 Index 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, EQ/Putnam
Balanced Portfolio, MFS Emerging Growth Companies Portfolio, Morgan Stanley
Emerging Markets Equity Portfolio, Merrill Lynch World Strategy Portfolio,
JPM Core Bond Portfolio and BT International Equity Index Portfolio may
engage in over-the-counter ("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, Lazard Small Cap Value
Portfolio, BT Small Company Index Portfolio and BT Equity 500 Index 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 OTC 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
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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 contracts 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, Lazard
Large Cap Value Portfolio and Lazard Small Cap Value Portfolio each may invest
up to 10% of its assets and each of the other Portfolios may invest up to 15%
of its net assets in illiquid securities and other securities which are not
readily marketable, including nonnegotiable 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, except
as noted below, lower quality fixed income securities. The T. Rowe Price
International Stock Portfolio, Merrill Lynch Basic Value Equity Portfolio,
Lazard Large Cap Value Portfolio, Lazard Small Cap Value Portfolio, JPM Core
Bond Portfolio, BT Small Company Index Portfolio, BT Equity 500 Index Portfolio
and BT International Equity Index 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 or comparable quality unrated securities. Investment grade
securities 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 quality 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
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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, Morgan Stanley Emerging Markets Equity Portfolio, Lazard
Large Cap Value Portfolio, Lazard Small Cap Value Portfolio, and JPM Core
Bond 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.
MORTGAGES AND MORTGAGE-RELATED SECURITIES. The EQ/Putnam Balanced Portfolio,
Morgan Stanley Emerging Markets Equity Portfolio, Lazard Large Cap Value
Portfolio, Lazard Small Cap Value Portfolio, JPM Core Bond Portfolio, BT
Small Company Index Portfolio, BT International Equity Index Portfolio and BT
Equity 500 Index 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.
The JPM Core Bond Portfolio may also invest in directly placed mortgages
including residential mortgages, multifamily mortgages, mortgages on
cooperative apartment buildings, commercial mortgages, and sale-leasebacks.
These investments are backed by assets such as office buildings, shopping
centers, retail stores, warehouses, apartment buildings and single-family
dwellings. In the event that the Portfolio
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forecloses on any non-performing mortgage, and acquires a direct interest in
the real property, the Portfolio will be subject to the risks generally
associated with the ownership of real property. There may be fluctuations in
the market value of the foreclosed property and its occupancy rates, rent
schedules and operating expenses.
MUNICIPAL SECURITIES. The Morgan Stanley Emerging Markets Equity Portfolio and
the JPM Core Bond 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, Lazard Large Cap Value Portfolio and Lazard Small Cap Value
Portfolio) may utilize futures contracts. 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. Each Portfolio (except the MFS Research
Portfolio and Lazard Small Cap Value Portfolio) may also write and purchase put
and call options. 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 that is permitted to invest in futures contracts and
related options may utilize such transactions 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. No Portfolio (other than the Warburg
Pincus Small Company Value Portfolio) will 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 BT Small Company Index
Portfolio, BT International Equity Index Portfolio and BT Equity 500 Index
Portfolio each may not at any time commit more than 20% of its assets to
options and futures contracts. The Warburg Pincus Small Company Value Portfolio
may commit up to 10% of its total assets to premiums when purchasing put or
call options. 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 International Equity Portfolio, EQ/Putnam Investors Growth
Portfolio, EQ/Putnam Balanced Portfolio, MFS Emerging Growth Companies
Portfolio, Merrill Lynch World Strategy Portfolio, Morgan Stanley Emerging
Markets Equity Portfolio and JPM Core Bond 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.
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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; to protect the value of
portfolio securities and to adjust the duration of fixed income investments.
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 T. Rowe Price International Stock
Portfolio, EQ/Putnam International Equity 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,
EQ/Putnam Balanced Portfolio, Morgan Stanley Emerging Markets Equity
Portfolio and JPM Core Bond 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, Lazard Large Cap Value Portfolio, JPM Core Bond Portfolio,
BT Small Company Index Portfolio, BT International Equity Index Portfolio and
BT Equity 500 Index Portfolio may each 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
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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, Morgan Stanley Emerging
Markets Equity Portfolio and JPM Core Bond Portfolio may each seek to earn
additional income by making secured loans of portfolio securities with a value
up to 33 1/3% of their respective total assets. The MFS Emerging Growth
Companies Portfolio, BT Small Company Index Portfolio, BT International Equity
Index Portfolio and BT Equity 500 Index Portfolio may lend portfolio securities
in an amount up to 30% of their respective total assets. The EQ/Putnam Growth &
Income Value Portfolio, EQ/Putnam International Equity Portfolio, EQ/Putnam
Investors Growth Portfolio and EQ/Putnam Balanced Portfolio may lend portfolio
securities in an amount 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. The Lazard Large Cap
Value Portfolio and Lazard Small Cap Value Portfolio may each lend portfolio
securities in an amount up to 10% 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 highgrade 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. 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 International Equity Portfolio,
EQ/Putnam Balanced Portfolio, Morgan Stanley Emerging Markets Equity Portfolio,
Warburg Pincus Small Company Value Portfolio, Lazard Small Cap Value Portfolio
and BT Small Company Index 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 often have limited
product lines, markets or financial resources and are typically subject to
greater 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 and smaller
companies may be dependent for management on one or a few key persons.
Therefore, an investment in these Portfolios may involve a greater degree of
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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, JPM Core Bond
Portfolio and BT International Equity Index Portfolio may each 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, 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 Portfolio will usually
enter into swaps on a net basis, i.e., the two return 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 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, United States
Government securities, or high grade debt obligations. No Portfolio will 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 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.
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
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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, Morgan Stanley Emerging Markets Equity Portfolio and JPM
Core Bond 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 new
Portfolio's turnover rate is not expected to exceed 100% during its first year
of operation. A high turnover rate (100% or more) increases transaction costs
(e.g., brokerage commissions) which must be born by the Portfolio and its
shareholders and increases realized gains and losses. See "Financial
Highlights" above for the actual portfolio turnover rates of the Portfolios
through December 31, 1997, and also see "Dividends, Distributions and Taxes"
below.
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 1290 Avenue of
the Americas, New York, New York 10104. Besides its activities with respect to
the Trust, 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
Life, a New York stock life insurance company.
The Manager is responsible for providing general management 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 the Trust's business, and also supervises the
provision of services by third parties such as the Trust's custodian and
administrator.
As compensation for managing the T. Rowe Price Equity Income Portfolio,
EQ/Putnam Growth & Income Value Portfolio, EQ/Putnam Investors Growth
Portfolio, EQ/Putnam Balanced Portfolio, MFS Research Portfolio, MFS Emerging
Growth Companies Portfolio, Merrill Lynch Basic Value Equity Portfolio and
Lazard Large Cap Value 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
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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 EQ/Putnam International Equity Portfolio and
Merrill Lynch World Strategy Portfolio, the Trust pays the Manager a monthly
fee at the annual rate of .70% of the respective 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 the 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 the annual rate of .65% of the Portfolio's average daily net
assets. As compensation for managing the Lazard Small Cap Value Portfolio, the
Trust pays the Manager a monthly fee at the annual rate of .80% of the
Portfolio's average daily net assets. As compensation for managing the JPM Core
Bond Portfolio, the Trust pays the Manager a monthly fee at the annual rate of
.45% of the Portfolio's average daily net assets. As compensation for managing
the BT Small Company Index Portfolio and the BT Equity 500 Index Portfolio, the
Trust pays the Manager a monthly fee at the annual rate of .25% of the
respective Portfolio's average daily net assets. As compensation for managing
the BT International Equity Index Portfolio, the Trust pays the Manager a
monthly fee at the annual rate of .35% 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 accountants 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.
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The Trust has received an exemptive order from the Securities and Exchange
Commission ("SEC") that permits 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.
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 an annual rate equal to .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, 1997, T. Rowe Price and its affiliates managed more
than $126 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 since the Portfolio commenced its operations. As
compensation for services as the Portfolio's Adviser, the Manager pays
Price-Fleming a monthly fee at an 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, 1997, Price-Fleming managed the United States dollar equivalent of
approximately $30 billion. Flemings was incorporated in 1974 in the United
Kingdom 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, Mark B. Smith, Mark J. T. Edwards, John R. Ford, James
B. M. Seddon 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.) Mark Edwards joined Price-Fleming in 1986 and has 16 years of
experience in financial analysis. John Ford joined Price-Fleming in 1982 and
has 18 years of experience with the Fleming Group in research and portfolio
management. James Seddon joined Price-Fleming in 1987 and has 11 years of
experience in investment management. David Warren joined Price-Fleming in 1984
and has 17 years of experience in equity research, fixed income research and
portfolio management.
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Putnam Investment Management, Inc. ("Putnam Management") has been the Adviser
to the EQ/Putnam Growth & Income Value Portfolio, EQ/Putnam International
Equity Portfolio, EQ/Putnam Investors Growth Portfolio and EQ/Putnam Balanced
Portfolio since each Portfolio commenced operations. As compensation for
services as the Adviser to the EQ/Putnam Growth & Income Value Portfolio,
EQ/Putnam Investors Growth 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. As
compensation for services as the EQ/Putnam International Equity Portfolio's
Adviser, the Manager pays Putnam Management a monthly fee at an 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,
1997, Putnam Management and its affiliates managed more than $235 billion of
assets. Putnam Management is a subsidiary of Putnam Investments, Inc. which,
other than a minority of shares owned by employees, 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. Messrs.
Edward P. Bousa, David L. Waldman, James M. Prusko and Jeffrey J. Kobylarz 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. Waldman has been employed by
Putnam Management as an investment professional since 1997. Mr. Prusko has been
employed by Putnam Management as an investment professional since 1992. Mr.
Kobylarz has been employed by Putnam Management as an investment professional
since 1993.
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 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 December
31, 1997, MFS managed more than $70.2 billion on behalf of over 2.7 million
investors accounts. MFS is a subsidiary of Sun Life of Canada (United States)
Financial Services Holdings Inc., which, in turn, is an
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indirect wholly-owned subsidiary of Sun Life Assurance Company of Canada. 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,
an Executive 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 serves as an investment adviser to numerous open-end and
closed-end investment companies. As of December 31, 1997, MSAM, together with
its affiliated institutional investment management companies, had approximately
$146 billion in assets under management and fiduciary care. In 1997, Morgan
Stanley Group Inc. and Dean Witter, Discover & Co. completed a merger to form
Morgan Stanley, Dean Witter & Co. , a preeminent financial services company
that maintains leading market positions in each of its three primary businesses
- - securities, asset management and credit services.
Madhav Dhar has 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"). Mr. Dhar joined MSAM in 1984. Mr. Robert Meyer is also
responsible for the day to day management of the Morgan Stanley Emerging
Markets Equity Portfolio. Mr. Meyer joined MSAM in 1989, is a Managing Director
of MSAM and Morgan Stanley and has primary responsibility for MSAM's equity
investments in Latin America. Prior to joining MSAM's Latin American Group, Mr.
Meyer worked in MSAM's U.S. Equity Group.
Warburg Pincus Asset Management, Inc. ("WPAM") has been the Adviser to the
Warburg Pincus Small Company Value Portfolio since the Portfolio commenced
operations. WPAM is located at 466 Lexington Avenue, New York, New York
10017-3147. As compensation for services as the Portfolio's Adviser, the
Manager pays WPAM a monthly fee at an annual rate equal to .50% of the
Portfolio's average daily net assets.
WPAM is a professional investment advisory firm that provides investment
services to investment companies, employee benefit plans, endowment funds,
foundations and other institutions and individuals. As of December 31, 1997,
WPAM managed approximately $19.7 billion in assets. WPAM, incorporated in 1970,
is indirectly controlled by Warburg, Pincus & Co. ("WP&Co."), a New York
partnership which has no business other than being a holding company of WPAM
and its affiliates. Lionel Pincus, the managing partner of WP&Co., may be
deemed to control both WP&Co. and WPAM.
Kyle F. Frey, a senior vice president of WPAM, has been responsible for the day
to day management of Warburg Pincus Small Company Value Portfolio's securities
portfolio since the Portfolio commenced operations. Mr. Frey has been with WPAM
since 1989.
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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 100 registered investment
companies. MLAM also offers portfolio management and portfolio analysis
services to individuals and institutions. As of December 31, 1997, the Adviser
and its affiliates had a total of approximately $278 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.
Lazard Asset Management ("LAM") has been the Adviser to the Lazard Large Cap
Value Portfolio and Lazard Small Cap Value Portfolio since each Portfolio
commenced operations. As compensation for services as the Adviser to the Lazard
Large Cap Value Portfolio, the Manager pays LAM a monthly fee at an annual rate
equal to: .425% of the Portfolio's average daily net assets up to and including
$50 million; .40% of the Portfolio's average daily net assets over $50 million
and up to and including $250 million; .375% of the Portfolio's average daily
net assets over $250 million and up to and including $400 million; and .35% of
the Portfolio's average daily net assets in excess of $400 million. As
compensation for services as the Adviser to the Lazard Small Cap Value
Portfolio, the Manager pays LAM a monthly fee at an annual rate equal to: .65%
of the Portfolio's average daily net assets up to and including $250 million;
.55% of the Portfolio's average daily net assets over $250 million and up to
and including $500 million; and .50% of the Portfolio's average daily net
assets in excess of $500 million.
LAM is a division of Lazard Freres & Co. LLC ("Lazard Freres"), a New York
limited liability company, which is registered as an investment adviser with
the SEC and is a member of the New York, American and Midwest Stock Exchanges.
Lazard Freres, 30 Rockefeller Plaza, New York, New York 10112, provides its
clients with a wide variety of investment banking and related services,
including investment management. It is a major underwriter of corporate
securities, conducts a broad range of trading and brokerage activities in
corporate and governmental bonds and stocks and acts as a financial adviser to
utilities. LAM and its affiliates provide investment management services to
client discretionary accounts with assets as of December 31, 1997 totaling
approximately $53.0 billion. Its clients are both individuals and institutions,
some of whose accounts have investment policies similar to the Portfolios.
Herbert W. Gullquist and Michael S. Rome have been responsible for the day to
day management of the Lazard Large Cap Value Portfolio, which includes
investment decisions made on behalf of the Portfolio, since the Portfolio
commenced operations. Eileen Alexanderson, Herbert W. Gullquist, Bradley
Purcell, Michael S. Rome and Leonard M. Wilson have been responsible for the
day to day management of the Lazard Small Cap Value Portfolio, which includes
investment decisions made on behalf of the Portfolio, since the Portfolio
commenced operations. Ms. Alexanderson is a Managing Director of the Adviser
and
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has been with the Adviser since 1979. Mr. Gullquist is a Managing Director of
the Adviser and has been with the Adviser since 1982. Mr. Purcell is a Vice
President of the Adviser and has been with the Adviser since 1991. Mr. Rome is
also a Managing Director of the Adviser and has been with the Adviser since
1991. Mr. Wilson is a Director of the Adviser and has been with the Adviser
since 1988.
J.P. Morgan Investment Management Inc. ("J.P. Morgan") has been the Adviser to
the JPM Core Bond Portfolio since the Portfolio commenced operations. As
compensation for services as the Adviser to the JPM Core Bond Portfolio, the
Manager pays J.P. Morgan a monthly fee at an annual rate equal to: .30% of the
Portfolio's average daily net assets up to and including $125 million; .25% of
the Portfolio's average daily net assets over $125 million and up to and
including $200 million; .22% of the Portfolio's average daily net assets over
$200 million and up to and including $350 million; and .15% of the Portfolio's
average daily net assets in excess of $350 million.
J.P. Morgan is a Delaware corporation and a registered investment adviser. It
is a wholly owned subsidiary of J.P. Morgan & Co. Incorporated ("JPM & Co."), a
bank holding company organized under the laws of the state of Delaware. JPM &
Co. through J.P. Morgan and other subsidiaries, offers a wide range of services
to governmental, institutional, corporate and individual customers and acts as
investment adviser to individual and institutional clients with combined assets
under management as of December 31, 1997 of over $255 billion. In particular,
J.P. Morgan, 522 Fifth Avenue, New York, New York 10036, provides investment
management services to public, corporate and union employee benefit plans, as
well as foundations, endowments, insurance companies, state and local
governments and their agencies, and affiliates of J.P. Morgan.
J.P. Morgan uses a sophisticated, disciplined, collaborative process for
managing all asset classes. For fixed income portfolios, this process focuses
on the systematic analysis of real interest rates, sector diversification and
quantitative and credit analysis. The portfolio managers making investments
work in conjunction with fixed income, credit, capital markets and economic
research analysts, as well as traders and administrative officers. The
following persons have been primarily responsible for the day to day management
and implementation of J.P. Morgan's process for the Portfolio, since the
Portfolio commenced operations: Paul L. Zemsky and Robert J. Teatom. Mr. Zemsky
is a Managing Director of J.P. Morgan and a portfolio manager specializing in
quantitative techniques. Mr. Zemsky joined J.P. Morgan in 1985. Robert J.
Teatom is a Managing Director of J.P. Morgan and Co-head of its U.S. Fixed
Income Group. Mr. Teatom joined J.P. Morgan in 1975.
Bankers Trust Company ("Bankers Trust") has been the Adviser to the BT Small
Company Index Portfolio, BT International Equity Index Portfolio and BT Equity
500 Index Portfolio since each Portfolio commenced operations. As compensation
for services as the Adviser to the BT Small Company Index Portfolio and BT
Equity 500 Index Portfolio, the Manager pays Bankers Trust a monthly fee at an
annual rate equal to .05% of the respective Portfolio's average daily net
assets. As compensation for services as the Adviser to the BT International
Equity Index Portfolio, the Manager pays Bankers Trust a monthly fee at an
annual rate equal to .15% of the Portfolio's average daily net assets.
Bankers Trust is a New York banking corporation with executive offices at 130
Liberty Street (One Bankers Trust Plaza), New York, New York 10006. Bankers
Trust is a wholly-owned subsidiary of Bankers Trust New York Corporation.
Bankers Trust conducts a variety of general banking and trust activities and is
a major wholesale supplier of financial services to the international and
domestic institutional markets. Investment management is a core business of
Bankers Trust built on a tradition of excellence from its roots as a trust bank
founded in 1903. The scope of Bankers Trust's management capability is unique
due to its leadership positions in both active and passive quantitative
management and its presence in major equity and fixed income markets around the
world. Bankers Trust is one of the
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nation's largest and most experienced investment managers with approximately
$317.8 billion in assets under management as of December 31, 1997.
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 next $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 $8.0 billion; provided, however, that the annual fee
payable to Chase with respect to any Portfolio which commences operations after
July 1, 1997 and whose assets do not exceed $200 million shall be computed at
the annual rate of .0525% of 1% of the Portfolio's total assets plus $25,000.
THE TRANSFER AGENT
Equitable Life serves as the transfer agent and dividend disbursing agent of
the Trust and receives no compensation for serving in such capacity.
EXPENSE LIMITATION AGREEMENT
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 Agreement"), 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 other than interest, taxes,
brokerage commissions, other expenditures which are capitalized in accordance
with generally accepted accounting principles, other extradorinary expenses not
incurred in the ordinary course of each Portfolio's business and amounts
payable pursuant to a plan adopted in accordance with Rule 12b-1 under the 1940
Act, are limited to: .60% 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; .65% of the respective average daily net assets
of the EQ/Putnam Balanced and Lazard Large Cap Value Portfolios; .75% of the
Warburg Pincus Small Company Value Portfolio's average daily net assets; .95%
of the respective average daily net assets of the T. Rowe Price International
Stock, EQ/Putnam International Equity, Merrill Lynch World Strategy and Lazard
Small Cap Value Portfolios; 1.50% of the Morgan Stanley Emerging Markets Equity
Portfolio's average daily net assets; .55% of the respective average daily net
assets of the JPM Core Bond and BT International Equity Index Portfolios; .35%
of the average daily net assets of the BT Small Company Index Portfolio; and
.30% of the average daily net assets of the BT Equity 500 Index 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
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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 Life 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.
T. Rowe Price and Price-Fleming, the Advisers to the T. Rowe Price
International Stock and T. Rowe Price Equity Income Portfolios, may execute
portfolio transactions through certain affiliates of Fleming and Jardine
Fleming, which are persons indirectly related to the Advisers, acting as an
agent in accordance with procedures established by the Trust's Board of
Trustees. MLAM the Adviser to the Merrill Lynch World Strategy Portfolio and
Merrill Lynch Basic Value Equity Portfolio, may execute portfolio transactions
through certain affiliates of MLAM. MSAM, the Adviser to the Morgan Stanley
Emerging Markets Equity Portfolio, may execute portfolio transactions through
certain affiliates of MSAM. LAM, the Adviser to the Lazard Large Cap Value
Portfolio and Lazard Small Cap Value Portfolio, may execute portfolio
transactions through certain affiliates of LAM. J.P. Morgan, the Adviser to the
JPM Core Bond Portfolio, may execute portfolio transactions through certain
affiliates of J.P. Morgan. Bankers Trust, the Adviser to BT Small Company Index
Portfolio, BT International Equity Index Portfolio and BT Equity 500 Index
Portfolio, may execute portfolio transactions through certain affiliates of
Bankers Trust.
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 does not consider broker-dealer affiliates of an
Adviser to one Portfolio to be an affiliate of the Advisers to other Portfolios
for which such Adviser does not provide investment advice. 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.
YEAR 2000
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Like other mutual funds, the Trust and the service providers for the Trust and
each of its Portfolios rely heavily on the reasonably consistent operation of
their computer systems. Many software programs and certain computer hardware
in use today, cannot properly process information after December 31, 1999
because of the method by which dates are encoded and calculated in such
programs and hardware. This problem, commonly referred to as the "Year 2000
Issue," could, among other things, negatively impact the processing of trades,
the distribution of securities, the pricing of securities and other
investment-related and settlement activities. The Trust is currently obtaining
information with respect to the actions that have been taken and the actions
that are planned to be taken by each of its service providers to prepare their
computer systems for the Year 2000. While the Trust expects that each of the
Trust's service providers will have adapted their computer systems to address
the Year 2000 Issue, there can be no assurance that this will be the case or
that the steps taken by the Trust will be sufficient to avoid any adverse
impact to the Trust and each of its Portfolios.
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. The Trust currently
is divided into eighteen 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.
As of March 31, 1998, Equitable Life owned 100% of the outstanding shares of
the Trust.
PURCHASE AND REDEMPTION OF SHARES
EQ Financial, 1290 Avenue of the Americas, New York, New York, 10104, formerly
Equico Securities, Inc., a wholly-owned subsidiary of Equitable Life, serves as
one of the Distributors for the Trust's Class IB
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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 Life 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 determine 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
-44-
<PAGE>
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 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. Should any Portfolio 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.
-45-
<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 total return on Class IB shares of each Portfolio for the period from May
1, 1997 (unless otherwise noted) to December 31, 1997 was as follows:
<TABLE>
<CAPTION>
Portfolio Total Return*
<S> <C>
T. Rowe Price International Stock Portfolio (1.49%)
-------------------------------------------
T. Rowe Price Equity Income Portfolio 22.11%
-------------------------------------
EQ/Putnam Growth & Income Value Portfolio 16.23%
-----------------------------------------
EQ/Putnam International Equity Portfolio 9.58%
----------------------------------------
EQ/Putnam Investors Growth Portfolio 24.70%
------------------------------------
EQ/Putnam Balanced Portfolio 14.38%
----------------------------
MFS Research Portfolio 16.07%
----------------------
MFS Emerging Growth Companies Portfolio 22.42%
---------------------------------------
Morgan Stanley Emerging Markets Equity Portfolio** (20.16%)
- --------------------------------------------------
Warburg Pincus Small Company Value Portfolio 19.15%
--------------------------------------------
Merrill Lynch World Strategy Portfolio 4.70%
--------------------------------------
Merrill Lynch Basic Value Equity Portfolio 16.99%
------------------------------------------
</TABLE>
* The total return is not annualized.
** For the period from August 20, 1997 (inception) to December 31, 1997.
Total return information is not provided for the Lazard Large Cap Value, Lazard
Small Cap Value, JPM Core Bond, BT Small Company Index, BT International Equity
Index and BT Equity 500 Index Portfolios because they had no operations as of
December 31, 1997 except for the issuance of Class IB shares. In addition,
total return information is not provided for Class IA shares of the Trust as no
Class IA shares were issued as of December 31, 1997.
-46-
<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) or other institutional
private account managed by each Adviser, that has investment objectives,
policies, strategies and risks substantially similar to those of the respective
Portfolio(s) of the Trust for which it serves as Adviser. 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 for other registered investment
companies or series thereof 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. Composite performance
data relating to the historical performance of institutional private accounts
managed by the relevant Adviser was calculated in accordance with recommended
standards of the Association for Investment Management and Research ("AIMR")
retroactively applied to all time periods. All returns present were calculated
on a total return basis and include all losses. All returns reflect the
deduction of investment advisory fees, brokerage commissions and execution
costs paid by the relevant Adviser's institutional private accounts, without
provision for federal or state income taxes. Custodial fees, if any, were not
included in the calculation. The Composite includes all actual, fee-paying,
discretionary institutional private accounts managed by the relevant Adviser
that have investment objectives, policies, strategies and risks substantially
similar to those of the relevant Portfolio. Securities transactions are
accounted for on the trade date and accrual accounting is utilized. Cash and
equivalents are included in performance returns.
-47-
<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 the T. Rowe Price International Stock
Portfolio. However, the 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 expense.
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
YEAR ENDED INTERNATIONAL STOCK MSCI EAFE
12/31/97 FUND(1) INDEX(2)
---------- -------------------- ---------
<S> <C> <C>
One Year(3) 2.70% 1.78%
Five Years(3) 13.03% 11.39%
Ten Years(3) 10.62% 6.25%
</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 EAFE Index
("MSCI EAFE") is an unmanaged capitalization-weighted measure of
stock markets in Europe, Australia and the Far East. MSCI EAFE
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.
-48-
<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
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>
YEAR ENDED T. ROWE PRICE S&P 500
12/31/97 EQUITY INCOME FUND(1) INDEX(2)
-------- --------------------- --------
<S> <C> <C>
One Year(3) 28.82% 33.36%
Five Years(3) 19.99% 20.27%
Ten Years(3) 16.99% 18.05%
</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 ("S&P 500") 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 S&P 500 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.
-49-
<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 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
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 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>
S&P 500
YEAR ENDED 12/31/97 PUTNAM GROWTH & INCOME FUND II(1) INDEX(2)
------------------- --------------------------------- --------
<S> <C> <C>
One Year(3) 24.86% 33.36%
Since inception(3) 26.54% 31.19%
</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 ("S&P 500") 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 S&P 500 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 5, 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.
-50-
<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 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
contracts. 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 GROWTH MSCI EAFE
YEAR ENDED 12/31/97 FUND(1) INDEX(2)
------------------- --------------------------- ----------
<S> <C> <C>
One Year(3) 17.78% 1.78%
Five Years(3) 17.59% 11.39%
Since inception(3) 12.43% 6.93%
</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 EAFE Index ("MSCI EAFE") is an
unmanaged capitalization-weighted measure of stock markets in Europe,
Australia and the Far East. MSCI EAFE returns assume dividends reinvested
net of withholding tax and do not reflect any fees or expenses.
(3) Annualized performance for 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%.
-51-
<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 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 contracts. 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>
S&P 500
YEAR ENDED 12/31/97 PUTNAM INVESTORS FUND(1) INDEX(2)
------------------- ------------------------ --------
<S> <C> <C>
One Year(3) 34.49% 33.36%
Five Years(3) 20.71% 20.27%
Ten Years(3) 17.40% 18.05%
</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 ("S&P 500") 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 S&P 500 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.
-52-
<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
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 contracts. 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>
YEAR ENDED THE GEORGE PUTNAM S&P 500
12/31/97 FUND OF BOSTON(1) INDEX(2)
---------- ------------------ --------
<S> <C> <C>
One Year(3) 21.02% 33.36%
Five Years(3) 15.13% 20.27%
Ten Years(3) 13.92% 18.05%
</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 ("S&P 500") 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 S&P 500 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.
-53-
<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 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>
S&P 500
YEAR ENDED 12/31/97 MFS RESEARCH FUND(1) INDEX(2)
------------------- -------------------- --------
<S> <C> <C>
One Year(3) 20.53 % 33.36 %
Five Years(3) 20.40 % 20.27 %
Ten Years(3) 17.17 % 18.05 %
</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 ("S&P 500") 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 S&P 500 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.
-54-
<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
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>
YEAR ENDED 12/31/97 MFS EMERGING GROWTH FUND(1) INDEX(2)
------------------- ------------------------- -------------
<S> <C> <C>
One Year(3) 19.73 % 22.36 %
Five Years(3) 19.75 % 16.40 %
Ten Years(3) 21.30 % 15.77 %
</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 sales
charges 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.
-55-
<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 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>
YEAR ENDED MSIF EMERGING IFC GLOBAL TOTAL RETURN
12/31/97 MARKETS PORTFOLIO(1), (2) COMPOSITE INDEX(3)
-------- ------------------------- ------------------
<S> <C> <C>
One Year(4) (1.03)% (14.42)%
Five Years(4) 10.23% 6.16%
Since inception(4) 10.13% 6.93%
</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 been 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.
-56-
<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 Warburg Pincus Asset Management, 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 Fund
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>
RUSSELL 2000
YEAR ENDED 12/31/97 WARBURG PINCUS SMALL COMPANY VALUE FUND(1), (2) INDEX(3)
------------------- ----------------------------------------------- --------
<S> <C> <C>
One Year(4) 19.16% 22.36%
Since inception(4) 36.19% 16.35%
</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 0.94% 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.
-57-
<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 ENDED 12/31/97 GLOBAL STRATEGY FOCUS FUND(1) INDEX(2)
------------------- ---------------------------------- ---------
<S> <C> <C>
One Year(3) 11.94 % 1.78 %
Five Years(3) 10.82 % 11.39 %
Since inception(3) 9.67 % 8.35 %
</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 EAFE Index ("MSCI EAFE")
is an unmanaged capitalization-weighted measure of
stock markets in Europe, Australia and the Far East. MSCI EAFE
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.
-58-
<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 ENDED 12/31/97 BASIC VALUE FOCUS FUND(1) INDEX(2)
------------------- ------------------------- --------
<S> <C> <C>
One Year(3) 20.62 % 33.36 %
Since inception(3) 17.26 % 21.57 %
</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 ("S&P 500") 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 S&P 500 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.
-59-
<PAGE>
LAZARD LARGE CAP VALUE PORTFOLIO
In the table below, the only account which is included is a series of another
registered investment company, i.e. the Lazard Equity Portfolio, a series of
The Lazard Funds, Inc., which is managed by Lazard Asset Management, and whose
investment policies are substantially similar to the Lazard Large Cap Value
Portfolio. However, the Lazard Equity Portfolio will be subject to different
expenses than the Lazard Large Cap Value Portfolio. In addition, holders of
variable insurance contracts representing interests in the Lazard Large Cap
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 the Lazard Equity Portfolio presented below are
unaudited and are not intended to predict or suggest the future returns that
might be experienced by the Lazard Large Cap Value Portfolio or an individual
investor investing in the Lazard Large Cap Value Portfolio.
<TABLE>
<CAPTION>
YEAR ENDED LAZARD EQUITY S&P 500
12/31/97 PORTFOLIO(1) INDEX(2)
---------- ------------- ---------
<S> <C> <C>
One Year 25.13% 33.36%
Five Years 20.63% 20.27%
Ten years 17.14% 18.05%
</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 ("S&P 500") 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 S&P 500 reflects the reinvestment of income dividends and capital gain
distributions, if any, but does not reflect fees, brokerage commissions,
or other expenses of investing.
-60-
<PAGE>
LAZARD SMALL CAP VALUE PORTFOLIO
In the table below, the only account which is included is a series of another
registered investment company, i.e., Lazard Small Cap Portfolio, a series of
The Lazard Funds, Inc., which is managed by Lazard Asset Management, and whose
investment policies are substantially similar to the Lazard Small Cap Value
Portfolio. However, the Lazard Small Cap Portfolio will be subject to different
expenses than the Lazard Small Cap Value Portfolio. In addition, holders of
variable insurance contracts representing interests in the Lazard Small Cap
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 the Lazard Small Cap Portfolio presented below are
unaudited and are not intended to predict or suggest the future returns that
might be experienced by the Lazard Small Cap Value Portfolio or an individual
investor investing in the Lazard Small Cap Value Portfolio.
<TABLE>
<CAPTION>
YEAR ENDED LAZARD SMALL CAP RUSSELL 2000
12/31/97 PORTFOLIO(1) INDEX(2)
---------- ---------------- -------------
<S> <C> <C>
One Year(3) 28.06% 22.36%
Five Years(3) 20.68% 16.40%
Since inception(3) 21.57% 16.80%
</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 2,000 small-cap stocks, and includes reinvestment of
dividends. It is compiled by the Frank Russell Company.
(3) The inception date for Lazard Small Cap Portfolio was October 1, 1991.
-61-
<PAGE>
JPM CORE BOND PORTFOLIO
In the table below, the institutional private accounts that are included in the
Adviser's composite are not subject to the same types of expenses to which the
JPM Core Bond Portfolio is subject or to the diversification requirements,
specific tax restrictions and investment limitations imposed on the JPM Core
Bond Portfolio by the 1940 Act or Subchapter M of the Internal Revenue Code.
Consequently, the performance results for the composite could have been
adversely affected if the institutional private accounts included in the
composite had been regulated as investment companies under the federal
securities laws. Moreover, holders of variable insurance contracts representing
interests in the JPM Core Bond Portfolio will be subject to charges and
expenses relating to such insurance contracts. The performance results presented
below do not reflect any insurance related charges.
The investment results presented below are not intended to predict or suggest
the returns that might be experienced by the JPM Core Bond Portfolio or an
individual investing in such Portfolio. Investors should also be aware that the
use of a methodology different from that used below to calculate performance
could result in different performance data.
<TABLE>
<CAPTION>
SALOMON BROTHERS
YEAR ENDED J.P. MORGAN ACTIVE FIXED BROAD INVESTMENT
12/31/97 INCOME COMPOSITE(1) GRADE BOND INDEX(2)
- ---------- ------------------------- ------------------
<S> <C> <C>
One Year 9.25% 9.62%
Five Years 7.97% 7.53%
Ten Years 9.63% 9.23%
</TABLE>
- ----------------------
(1) Through December 31, 1997. The inception date for the J.P. Morgan Active
Fixed Income Composite was May 31, 1977.
(2) The Salomon Brothers Broad Investment Grade Bond Index is an unmanaged,
market-weighted index which contains approximately 4,700 individually
priced investment grade bonds. The index does not include fees or
operating expenses and is not available for actual investment.
-62-
<PAGE>
BT EQUITY 500 INDEX PORTFOLIO
In the table below, the only account which is included is a series of another
registered investment company, i.e., Equity 500 Index Fund, a series of BT
Institutional Funds, which is managed by Bankers Trust Company, and whose
investment policies are substantially similar to the BT Equity 500 Index
Portfolio. However, the BT Equity 500 Index Portfolio will be subject to higher
expenses than the Equity 500 Index Fund. In addition, holders of variable
insurance contracts representing interests in the BT Equity 500 Index 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 Equity 500 Index Fund presented below are
unaudited and are not intended to predict or suggest the returns that might
be experienced by the BT Equity 500 Index Portfolio or an individual investor
investing in the BT Equity 500 Index Portfolio.
<TABLE>
<CAPTION>
YEAR ENDED EQUITY 500 INDEX FUND S&P 500 COMPOSITE
12/31/97 INSTITUTIONAL CLASS(1) STOCK INDEX(2)
- ---------- --------------------- ------------------
<S> <C> <C>
One Year 33.23% 33.36%
Since inception 20.17% 20.27%
</TABLE>
- -------------------
(1) Through December 31, 1997. The inception date for the Equity 500 Index
Fund--Institutional Class was December 31, 1992.
(2) The S&P 500 Index ("S&P 500") 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 S&P 500 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.
-63-
<PAGE>
BT SMALL COMPANY INDEX PORTFOLIO
In the table below, the only account which is included is a series of another
registered investment company, i.e., Small Cap Index Fund - Institutional
Class, a series of BT Advisors Funds, which is managed by Bankers Trust
Company, and whose investment policies are substantially similar to the BT
Small Company Index Portfolio. However, the BT Small Company Index Portfolio
will be subject to higher expenses than the Small Cap Index Fund -
Institutional Class. In addition, holders of variable insurance contracts
representing interests in the BT Small Company Index 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 Small Cap Index Fund - Institutional Class
presented below are unaudited and are not intended to predict or suggest the
returns that might be experienced by the BT Small Company Index Portfolio or an
individual investor investing in the BT Small Company Index Portfolio.
<TABLE>
<CAPTION>
YEAR ENDED SMALL CAP INDEX FUND - RUSSELL 2000
12/31/97 INSTITUTIONAL CLASS(1) INDEX(2)
- ---------- ---------------------- -------------
<S> <C> <C>
One Year 23.00% 22.36%
Since inception 22.34% 23.28%
</TABLE>
- --------------------
(1) Through December 31, 1997. The inception date for the Small Cap Index
Fund--Institutional Class was July 10, 1996.
(2) The Russell 2000 Index is an unmanaged index composed of approximately
2,000 small- capitalization stocks and includes reinvestments of
dividends. The index does not include fees or operating expenses and is
not available for actual investment. It is compiled by the Frank Russell
Company.
-64-
<PAGE>
BT INTERNATIONAL EQUITY INDEX PORTFOLIO
In the table below, the only account which is included is a series of another
registered investment company, i.e., EAFE Equity Index Fund - Institutional
Class, a series of BT Advisor Funds, which is managed by Bankers Trust Company,
and whose investment policies are substantially similar to the BT International
Equity Index Portfolio. However, the BT International Equity Index Portfolio
will be subject to higher expenses than the EAFE Equity Index Fund -
Institutional Class. In addition, holders of variable insurance contracts
representing interests in the BT International Equity Index 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 EAFE Equity Index Fund - Institutional Class
presented below are unaudited and are not intended to predict or suggest the
returns that might be experienced by the BT International Equity Index
Portfolio or an individual investor investing in the BT International Equity
Index Portfolio.
<TABLE>
<CAPTION>
YEAR ENDED EAFE EQUITY INDEX FUND -
12/31/97 INSTITUTIONAL CLASS(1) MSCI EAFE INDEX(2)
- ----------- ------------------------- -----------------
<S> <C> <C>
One Year(3) 2.11 % 1.78 %
Since inception(3) 4.79 % 4.70 %
</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 EAFE Index ("MSCI EAFE") is an
unmanaged capitalization-weighted measure of stock markets in Europe,
Australia and the Far East. MSCI EAFE returns assume dividends
reinvested net of withholding tax and do not reflect any fees or operating
expenses. The index does not include fees or operating expenses and is not
available for actual investment.
(3) The inception date for the EAFE Equity Index Fund--Institutional Class was
January 24, 1996.
-65-
<PAGE>
APPENDIX A
The following table summarizes the historical performance information of
certain other registered investment companies or accounts that appears on
pages 48 through 65 of this Prospectus. Each other registered investment
company or account 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
6 through 23 of this Prospectus.
ANNUALIZED RATES OF RETURN
PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
FUND NAME 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
BT EAFE EQUITY INDEX FUND - INSTITUTIONAL CLASS 2.11% -- -- 4.79%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
MSCI EAFE INDEX 1.78% -- -- 4.70%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
BT EQUITY 500 INDEX FUND 33.23% -- -- 20.17%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
S&P 500 INDEX 33.36% -- -- 20.27%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
BT SMALL CAP INDEX FUND 23.00% -- -- 22.34%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
RUSSELL 2000 INDEX 22.36% -- -- 23.28%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
J.P. MORGAN ACTIVE FIXED INCOME COMPOSITE 9.25% 7.97% 9.63% --
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
SALOMON BROTHERS BROAD INVESTMENT GRADE BOND INDEX 9.62% 7.53% 9.23% --
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
LAZARD EQUITY PORTFOLIO 25.13% 20.63% 17.14% --
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
S&P 500 INDEX 33.36% 20.27% 18.05% --
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
LAZARD SMALL CAP PORTFOLIO 28.06% 20.68% -- 21.57%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
RUSSELL 2000 INDEX 22.36% 16.40% -- 16.80%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
MERRILL LYNCH BASIC VALUE FOCUS FUND 20.62% -- -- 17.26%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
S&P 500 INDEX 33.36% -- -- 21.57%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
MERRILL LYNCH GLOBAL STRATEGY FOCUS FUND 11.94% 10.82% -- 9.67%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
-66-
<PAGE>
<CAPTION>
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
FUND NAME 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
MSCI EAFE INDEX 1.78% 11.39% -- 8.35%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
MFS EMERGING GROWTH FUND 19.73% 19.75% 21.30% --
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
RUSSELL 2000 INDEX 22.36% 16.40% 15.77% --
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
MFS RESEARCH FUND 20.53% 20.40% 17.17% --
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
S&P 500 INDEX 33.36% 20.27% 18.05%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
MSIF EMERGING MARKETS PORTFOLIO (1.03)% 10.23% --- 10.13%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
IFC GLOBAL TOTAL RETURN COMPOSITE INDEX (14.42)% 6.16% --- 6.93%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
THE GEORGE PUTNAM FUND OF BOSTON 21.02% 15.13% 13.92% --
- ------------------------------------------------------ ---------------- ------------ ----------------- ---------------------------
S&P 500 INDEX 33.36% 20.27% 18.05% --
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
PUTNAM GROWTH & INCOME FUND II 24.86% --- --- 26.54%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
S&P 500 INDEX 33.36% --- --- 31.19%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
PUTNAM INTERNATIONAL GROWTH FUND 17.78% 17.59% --- 12.43%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
MSCI EAFE INDEX 1.78% 11.39% --- 6.93%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
PUTNAM INVESTORS FUND 34.49% 20.71% 17.40% ---
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
S&P 500 INDEX 33.36% 20.27% 18.05% ---
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
T. ROWE PRICE EQUITY INCOME FUND 28.82% 19.99% 16.99% ---
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
S&P 500 INDEX 33.36% 20.27% 18.05% ---
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
T. ROWE PRICE INTERNATIONAL STOCK FUND 2.70% 13.03% 10.62% ---
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
MSCI EAFE INDEX 1.78% 11.39% 6.25% ---
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
WARBURG PINCUS SMALL COMPANY VALUE FUND 19.16% --- --- 36.19%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
RUSSELL 2000 INDEX 22.36% --- --- 16.35%
- ------------------------------------------------------- --------------- ------------ ----------------- ---------------------------
</TABLE>
-67-
<PAGE>
EQ ADVISORS TRUST
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1998
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, 1998, 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.................................................. 4
DESCRIPTION OF CERTAIN SECURITIES IN WHICH THE PORTFOLIOS MAY INVEST..... 9
MANAGEMENT OF THE TRUST..................................................35
INVESTMENT MANAGEMENT AND OTHER SERVICES.................................40
BROKERAGE STRATEGY.......................................................49
PURCHASE AND PRICING OF SHARES...........................................53
REDEMPTION OF SHARES.....................................................55
CERTAIN TAX CONSIDERATIONS...............................................55
PORTFOLIO PERFORMANCE....................................................58
OTHER SERVICES...........................................................59
FINANCIAL STATEMENTS.....................................................60
APPENDIX
-1-
<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, Merrill Lynch Basic
Value Equity Portfolio, Lazard Large Cap Value Portfolio, Lazard Small Cap
Value Portfolio, JPM Core Bond Portfolio, BT Small Company Index Portfolio, BT
International Equity Index Portfolio and BT Equity 500 Index 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 offered under the Trust's multi-class
distribution system, 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 Life"). Equitable Life may be deemed to be a control person with
respect to the Trust by virtue of its ownership of 100% of the Trust's shares
as of March 31, 1998. Equitable Life is organized as a New York Stock life
insurance company and is a wholly owned subsidiary of The Equitable Companies,
Incorporated, a subsidiary of AXA, a French insurance holding company.
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
-2-
<PAGE>
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 Life, as well as to tax-qualified
retirement plans. The Trust does not currently foresee any disadvantages to
Contract owners 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 Contract owners 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
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"), Rowe Price-Fleming
International, Inc. ("Price Fleming"), Putnam Investment Management, Inc.
("Putnam Management"), Massachusetts Financial Services Company ("MFS"), Morgan
Stanley Asset Management Inc. ("MSAM"), Warburg Pincus Asset Management, Inc.
("Warburg") , Merrill Lynch Asset Management, L.P. ("MLAM"), Lazard Asset
Management ("LAM"), a division of Lazard Freres and Company, LLC, J.P. Morgan
Investment Management Inc. ("J.P. Morgan") and Bankers Trust Company ("Bankers
Trust") (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.
-3-
<PAGE>
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, the Merrill Lynch World
Strategy Portfolio and the Lazard Small Cap Value 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 (except the Lazard Large Cap Value Portfolio,
which may also borrow for leveraging 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;
b. as a matter of non-fundamental operating policy, no Portfolio, except
the Lazard Large Cap Value 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,
EQ/Putnam Balanced Portfolio and Lazard Large Cap Value 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
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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 made
for the purposes specified above before any additional investments
are purchased. In addition, the Lazard Large Cap Value Portfolio may
borrow for leveraging purposes (in order to increase its investment
in portfolio securities) and to the extent that the amount so
borrowed does not exceed 33 1/3% of the Portfolio's total assets
(including the amount borrowed) less liabilities (other than
borrowings).
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;
e. the Lazard Small Cap Value Portfolio, 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 15% of the Portfolio's net assets, not including the amount
borrowed, at the time the borrowing is made. The Lazard Small Cap
Value Portfolio will repay borrowings before any additional
investments are purchased.
f. the Warburg Pincus Small Company Value Portfolio and JPM Core Bond
Portfolio, each as a matter of non-fundamental operating policy, may
borrow only from banks for extraordinary or emergency purposes,
provided such amount shall not exceed 30% of the respective
Portfolio's total assets, not including the amount borrowed, at the
time the borrowing is made.
(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
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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. For purposes of this
restriction, each Portfolio will treat purchases of loan
participations and other direct indebtedness, including investments
in mortgages, as not subject to this limitation;
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, BT Small Company Index
Portfolio, BT International Equity Index Portfolio, and BT Equity 500
Index Portfolio, as a matter of non-fundamental operating policy, may
each 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
such Portfolio's 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 each 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);
e. the Lazard Large Cap Value Portfolio and the Lazard Small Cap Value
Portfolio, as a matter of non-fundamental policy, may each lend its
portfolio securities provided that no such loan may be made if, as a
result, the aggregate of such loans would exceed 10% of such
Portfolio's total assets (taken at market value);
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(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 United States
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 United States Government,
its agencies or instrumentalities);*
(7) Purchase or sell real estate, except that:
a. each Portfolio except the JPM Core Bond 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;
b. the JPM Core Bond Portfolio may (i) invest in securities of issuers
that invest in real estate or interests therein, (ii) invest in
securities that are secured by real estate or interests therein (iii)
make direct investments in mortgages, (iv) purchase and sell
mortgage-related securities and (v) hold and sell real estate
acquired by the Portfolio as a result of the ownership of securities
including mortgages.
(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.
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* The Morgan Stanley Emerging Markets Equity Portfolio, Merrill Lynch World
Strategy Portfolio and Lazard Small Cap Value Portfolio are classified
as non-diversified investment companies under the 1940 Act and therefore
these restrictions are not applicable to these Portfolios.
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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 (10%
for the Warburg Pincus Small Company Value Portfolio, Lazard Large Cap
Value Portfolio and Lazard Small Cap Value Portfolio) 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 as specified below
for the EQ/Putnam International Equity Portfolio, Merrill Lynch World
Strategy Portfolio, and the Merrill Lynch Basic Value Equity Portfolio );
and may not exceed 15% of EQ/Putnam International Equity Portfolio's total
assets; and 10% of each of 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;
(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, Merrill Lynch Basic Value Equity Portfolio and the JPM Core
Bond 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
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(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
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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 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
United States 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 United States 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 United States
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
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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 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 United States
dollars, it does not intend to convert its holdings of foreign currencies into
United States 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, if permitted in the Prospectus, 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, United States 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
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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-United
States 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
United States 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.
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 31.
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 United
States 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
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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 United States 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 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.
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 United States 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 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.
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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 United States 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.
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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.
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.
SPECIAL CONSIDERATIONS CONCERNING THE PACIFIC BASIN. Many Asian countries may
be subject to a greater degree of social, political and economic instability
than is the case in the United States and European countries. Such instability
may result from (i) authoritarian governments or military involvement in
political and economic decision-making; (ii) popular unrest associated with
demands for improved political, economic and social conditions; (iii) internal
insurgencies; (iv) hostile relations with neighboring countries; and (v)
ethnic, religious and racial disaffection.
The economies of most of the Asian countries are heavily dependent on
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally, the United
States, Japan, China and the European Community. The enactment by the United
States or other principal trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the securities markets of the Asian countries.
The securities markets in Asia are substantially smaller, less liquid and more
volatile than the major securities markets in the United States. A high
proportion of the shares of many issuers may be held by a limited number of
persons and financial institutions,which may limit the number of shares
available for investment by a Portfolio. Similarly, volume and liquidity in the
bond markets in Asia are less than in the United States and, at times, price
volatility can be greater than in the United States. A limited number of
issuers in Asian securities markets may represent a disproportionately large
percentage of market capitalization and trading value. The limited liquidity of
securities markets in Asia may also affect a Portfolio's ability to acquire or
dispose of securities at the price and time it wishes to do so. In addition,
the Asian securities markets are susceptible to being influenced by large
investors trading significant blocks of securities.
Many stock markets are undergoing a period of growth and change which may
result in trading volatility and difficulties in the settlement and recording
of transactions, and in interpreting and applying the relevant law and
regulations. With respect to investments in the currencies of Asian countries,
changes in the value of those currencies against the United States dollar will
result in corresponding changes in the United States dollar value of a
Portfolio's assets denominated in those currencies.
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EURODOLLAR AND YANKEE DOLLAR OBLIGATIONS. Eurodollar bank obligations are
United States dollar-denominated certificates of deposit and time deposits
issued outside the United States capital markets by foreign branches of United
States banks and by foreign banks. Yankee dollar bank obligations are United
States dollar-denominated obligations issued in the United States 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
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which have been set aside in order to meet redemptions. In addition, if a
Portfolio determines it is advisable as a matter of investment strategy to sell
the forward commitment or when-issued or delayed delivery securities before
delivery, that Portfolio may incur a gain or loss because of market
fluctuations since the time the commitment to purchase such securities was
made. Any such gain or loss would be treated as a capital gain or loss and
would be treated for tax purposes as such. When the time comes to pay for the
securities to be purchased under a forward commitment or on a when-issued or
delayed delivery basis, a Portfolio will meet its obligations from the then
available cash flow or the sale of securities, or, although it would not
normally expect to do so, from the sale of the forward commitment or
when-issued or delayed delivery securities themselves (which may have a value
greater or less than a Portfolio's payment obligation).
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
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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 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 or excepted 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.
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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.
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
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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 31.
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 depositary instrument ("Hybrid Instruments"). Generally, a Hybrid
Instrument will be a debt security, preferred stock, depositary 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 United States 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
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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 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 United States, the
SEC, which regulates the offer and sale of securities by and to persons in the
United States, 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.
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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 investment
company and limits such investments to no more than 5% of the Portfolio's total
assets in any investment company and no more than 10% in any combination of
unaffiliated investment companies. The 1940 Act also prohibits a Portfolio from
acquiring shares of an open-end investment company whose investment manager or
investment adviser is the Adviser or an affiliate of the Adviser to the
Portfolio purchasing such securities. The 1940 Act further 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 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
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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 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
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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 AND 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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As specified in the Prospectus, certain Portfolios 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 United States 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
United States Government or its agencies or instrumentalities, these CMOs
represent obligations solely of the private issuer and are not insured or
guaranteed by the United States 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 United States 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.
The JPM Core Bond Portfolio may also invest in directly placed mortgages
including residential mortgages, multifamily mortgages, mortgages on
cooperative apartment buildings, commercial mortgages, and sale-leasebacks.
Investment in direct mortgages involve many of the same risks as
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investments in mortgage-related securities. In addition, in the event that the
Portfolio forecloses on any non-performing mortgage, and acquires a direct
interest in the real property, the Portfolio will be subject to the risks
generally associated with the ownership of real property. There may be
fluctuations in the market value of the foreclosed property and its occupancy
rates, rent schedules and operating expenses. There may also be adverse changes
in local, regional or general economic conditions, deterioration of the real
estate market and the financial circumstances of tenants and sellers,
unfavorable changes in zoning, building, environmental and other laws,
increased real property taxes, rising interest rates, reduced availability and
increased cost of mortgage borrowings, the need for anticipated renovations,
unexpected increases in the cost of energy, environmental factors, acts of God
and other factors which are beyond the control of the Portfolio or the Adviser.
Hazardous or toxic substances may be present on, at or under the mortgaged
property and adversely affect the value of the property. In addition, the
owners of the property containing such substances may be held responsible,
under various laws, for containing, monitoring, removing or cleaning up such
substances. The presence of such substances may also provide a basis for other
claims by third parties. Costs of clean-up or of liabilities to third parties
may exceed the value of the property. In addition, these risks may be
uninsurable. In light of these and similar risks, it may be impossible to
dispose profitably of properties in foreclosure.
MORTGAGE DOLLAR ROLLS
The JPM Core Bond Portfolio may enter into mortgage dollar rolls in which the
Portfolio sells securities for delivery in the current month and simultaneously
contracts with the same counterparty to repurchase similar (same type, coupon
and maturity) but not identical securities on a specified future date. During
the roll period, the Portfolio loses the right to receive principal (including
prepayments of principal) and interest paid on the securities sold. However,
the Portfolio may benefit from the interest earned on the cash proceeds of the
securities sold until the settlement date of the forward purchase. The
Portfolio will hold and maintain in a segregated account until the settlement
date cash or liquid securities in an amount equal to the forward purchase
price. The benefits derived from the use of mortgage dollar rolls depend upon
the Adviser's ability to manage mortgage prepayments. There is no assurance
that mortgage dollar rolls can be successfully employed.
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
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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,
United States 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 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
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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. 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 31.
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.
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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 United States Government obligations, certificates
of deposit, or bankers' acceptances) with registered brokers-dealers, United
States 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 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
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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.
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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 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,
specified in the Prospectus, 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.
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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 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, United States 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.
STRUCTURED NOTES
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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.
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
-34-
<PAGE>
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. A 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
lower credit ratings.
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.
MANAGEMENT OF THE TRUST
As of March 31, 1998 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.
-35-
<PAGE>
THE TRUSTEES
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- --------------------- --------------------------------------------
<S> <C>
Peter D. Noris* (42) Executive Vice President and Chief Investment Officer, Equitable
Equitable Life Life since May 1995; prior thereto, Vice President, Salomon Brothers
1290 Avenue of the Americas Inc., 1992 to 1995. Principal, Equity Division, Morgan Stanley &
New York, New York 10104 Co., Inc., 1984 to 1992. Director, 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 (51) Partner and Consultant, Syrus Associates since 1986. Trustee,
Syrus Associates Provident 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. (62) President, W.M. Kearns & Co., Inc., a private investment company,
W.M. Kearns & Co., Inc. since 1994; Director, Kuhlman Corporation, Malibu Entertainment
310 South Street Worldwide, Inc., Selective Insurance Group, Inc., as well as a
Morristown, NJ 07960 number of private and venture-backed companies; Managing Director,
Lehman Brothers, Inc. and predecessor firms, 1969-1992; Advisory
Director, Lehman Borthers, Inc. 1992-1994.
Christopher P.A. Komisarjevsky (53) President and Chief Executive Officer, Burson-Marsteller USA since
Burson-Marsteller 1996. President and Chief Executive Officer, Burson-Marsteller New
230 Park Avenue South York, 1995 to 1996. President and Chief Executive Officer, Gavin
New York, NY 10003-1566 Anderson & Company New York, 1994 to 1995. Prior thereto, he held
various positions with Hill and Knowlton, Inc. for twenty years.
Harvey Rosenthal (55) Independent Director and Investor since 1996. President and Chief
60 State Street Operating Officer, CVS Corporation (formerly Melville Corporation)
Suite 700 from 1994 to 1996. Prior thereto, he held various positions with
Boston, MA 02109 CVS Division of Melville Corporation for twenty-seven years.
William T. McCaffrey* (61) Director, Senior Executive Vice President and Chief Operating
89-25 63rd Avenue Officer, Equitable Life to March 1998. Executive Vice President
Rego Park, New York 11374 and Chief Administrative Officer, The Equitable Companies
Incorporated since 1994. Director, Equitable Foundation and Equitable
Distributors, Inc. since May 1996.
-36-
<PAGE>
Michael Hegarty* (53) Director, President and Chief Operating Officer, Equitable Life since
Equitable Life April 1, 1998. Vice Chairman, Chase Manhattan Corporation from 1996 to 1998.
1290 Avenue of the Americas Vice Chairman, Chemical Bank, 1995 to 1996 (Chase Manhattan Corporation and
New York, New York 10104 Chemical Bank merged in 1996). Senior Executive Vice President, Chemical Bank,
1991-1995. Executive Vice President, Group Executive and other various
positions, Manufacturers Hanover Trust.
</TABLE>
* Mr. Noris, Mr. McCaffrey and Mr. Hegarty are "interested persons" (as
defined in the 1940 Act) of the Trust. Mr. Noris, Mr. McCaffrey and Mr.
Hegarty are deemed "interested persons" of the Trust by virtue of their
position as officers of Equitable Life.
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 accountants 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 accountants for professional services. In addition, the
committee meets with the independent accountants 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 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.
-37-
<PAGE>
TRUSTEE COMPENSATION TABLE*
<TABLE>
<CAPTION>
TRUSTEE AGGREGATE PENSION OR TOTAL COMPENSATION
COMPENSATION FROM RETIREMENT FROM FUND COMPLEX
THE TRUST BENEFITS ACCRUED
AS PART OF TRUST
EXPENSES
<S> <C> <C> <C>
Peter D. Noris $-0- $-0- $-0-
Jettie M. Edwards $30,000 $-0- $30,000
William M. Kearns, Jr. $30,000 $-0- $30,000
Christopher P.A.
Komisarjevsky $30,000** -0- $30,000**
Harvey Rosenthal $30,000 $-0- $30,000
William T. McCaffrey $-0- $-0- $-0-
Michael Hegarty*** $-0- $-0- $-0-
</TABLE>
* For the initial fiscal year.
** Mr. Komisarjevsky has elected to participate in the Trust's deferred
compensation plan. As of December 31, 1997, Mr. Komisarjevsky had accrued
$30,362 (including interest).
*** Mr. Hegarty joined the Board of Trustees on March 3, 1998.
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 or her 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.
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"), Equitable Life or Chase Global Funds Services Company. The
Trust's principal officers are:
-38-
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND POSITION WITH TRUST PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- --------------------------------- -------------------------------------------
<S> <C>
Peter D. Noris (42) (see above)
President
Norman Abrams (49) Vice President and Associate General
Vice President and Assistant Counsel, Equitable Life since January 1997.
Secretary Vice President and Counsel, Equitable Life
from October 1991 to December 1996.
Counsel, Equitable Life from September 1991
to October 1991.
Harvey Blitz (51) Senior Vice President, Equitable Life since
Vice President and Chief September 1987. Deputy Chief Financial
Financial Officer Officer, Equitable Life 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 Associate General
Vice President and Counsel, Equitable Life since October 1996.
Secretary Vice President and Counsel, Equitable Life,
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, The Equitable
Vice President and Companies Incorporated and Equitable Life.
Treasurer Treasurer, Frontier Trust Company and
EquiSource. Vice President and Treasurer,
Equitable Casualty Insurance Company.
Michael S. Martin (51) Senior Vice President and Chief, The
Vice President Marketing Group in Agency Operations,
Equitable Life. 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).
Robin K. Murray (42) Vice President, Office of the Chief
First Vice President Investment Officer, and First Vice
President, Equitable Financial Consultants,
Inc. since May 1997. Vice President, Office
of the President, Equitable Life since
1996. Vice President, Income Management
Group, Equitable Life since 1994; Assistant
Vice President of Marketing, Equitable Life
from 1989 to 1994.
Samuel B. Shlesinger (51) Senior Vice President, Equitable Life.
Vice President 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).
-39-
<PAGE>
<CAPTION>
NAME, AGE AND POSITION WITH TRUST PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- --------------------------------- -------------------------------------------
<S> <C>
Martin J. Telles (49) Executive Vice President and Chief
Vice President Marketing Officer, Equico Securities since
1993. Director, Royal Alliance.
Stanley B. Tulin (47) Senior Vice President and Chief Financial
Vice President Officer, Equitable Life since 1996.
Co-Chairman, Insurance Industry Practice
Group, Coopers & Lybrand, 1988 to 1996.
Naomi J. Weinstein (45) Vice President, Income Management Group,
Vice President Equitable Life since 1996. Vice President,
Center Head for Association Plans,
Equitable Life from 1991 to present.
Allen T. Zabusky (46) Vice President and Deputy Controller,
Vice President and Equitable Life since 1990. Controller, The
Controller Equitable of Colorado, Inc. since 1996.
Mary E. Cantwell (36) Assistant Vice President, Office of the
Assistant Vice President Chief Investment Officer, Equitable Life
since September 1997. Assistant Vice
President, Equitable Financial Consultants,
Inc. since September 1997. Marketing
Director, Income Management Group,
Equitable Life since 1994. Marketing
Manager, Equitable Life since 1991.
Paul Roselli (33) Vice President, Fund Administration, Chase
Assistant Treasurer Global Funds Services Company since March
1997. Assistant Manager of Fund Accounting
, Brown Brothers Harriman from July 1993 to
March 1997. Audit Manager, Ernst & Young
LLP from August 1987 to July 1993.
Karl O. Hartmann (42) Senior Vice President and General Counsel,
Assistant Secretary Chase Global Funds Services Company.
Lloyd Lipsett (33) Vice President and Associate General
Assistant Secretary 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>
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 Life.
Equitable Life, 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
-40-
<PAGE>
of The Equitable Companies and Equitable Life are located at 1290 Avenue of the
Americas, New York, New York 10104.
AXA, a French insurance holding company, currently owns approximately 59% 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 Life and their subsidiaries. AXA is the holding
company for an international group of insurance and related financial services
companies. AXA is among the world's largest insurance groups with worldwide
revenues in 1997 of $60.8 billion. AXA is also the world's largest
insurer-based investment manager with $531 billion in assets under management
as of December 31, 1997. 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"). This was initially approved by the Board of Trustees
on March 31, 1997. The Management Agreement obligates the Manager to: (i)
provide investment management 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).
Each Portfolio pays a fee to the Manager as described in the Prospectus for the
investment management services the Manager provides each Portfolio. The Manager
and the Trust have also entered into an expense limitation agreement with
respect to each Portfolio ("Expense Limitation Agreement"), 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 (with certain exceptions described
in the Prospectus) of each Portfolio are limited to the extent described in the
"Expense Limitation Agreement" section of the Prospectus. The table below shows
the fees paid by each Portfolio to the Manager during the fiscal year ended
December 31, 1997. The first column shows each fee without fee waivers, the
next column shows the fees actually paid to the Manager after fee waivers and
the third column shows the total amount of fees waived by the Manager and other
expenses of each Portfolio assumed by the Manager pursuant to the Expense
Limitation Agreement.
-41-
<PAGE>
<TABLE>
<CAPTION>
Total Amount of Fees
Management Fee Paid to Waived and other Expenses
Portfolio Management Fee Manager After Fee Waiver Assumed by Manager
--------- -------------- ------------------------ ------------------------
<S> <C> <C> <C>
Merrill Lynch Basic Value
Equity Portfolio $73,477 $0 $121,460
Merrill Lynch World $49,425 $0 $115,763
Strategy Portfolio
MFS Emerging Growth $169,781 $0 $280,111
Companies Portfolio
MFS Research Portfolio $186,533 $0 $292,185
EQ/Putnam Balanced Portfolio $50,946 $0 $137,739
EQ/Putnam Growth & Income $227,936 $0 $350,861
Value Portfolio
EQ/Putnam International $130,202 $0 $228,427
Equity Portfolio
EQ/Putnam Investors Growth $67,578 $0 $141,578
Portfolio
T. Rowe Price Equity Income $166,401 $0 $250,098
Portfolio
T. Rowe Price International $213,839 $0 $365,096
Stock Portfolio
Warburg Pincus Small $252,178 $5,693 $246,485
Company Value Portfolio
Morgan Stanley Emerging $66,404 $23,496 $49,338
Markets Equity Portfolio
</TABLE>
-42-
<PAGE>
The BT Equity 500 Index, BT International Equity Index, BT Small Company Index,
JPM Core Bond, Lazard Large Cap Value and Lazard Small Cap Value Portfolios are
not included in the above table because they had no operations during the
fiscal year ended December 31, 1997 except for the issuance of Class IB shares.
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 PriceFleming,
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
Agreements on behalf of Morgan Stanley Emerging Markets Equity Portfolio and
Warburg Pincus Small Company Value Portfolio with MSAM and Warburg,
respectively. The Manager has entered into Advisory Agreements on behalf of
Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity
Portfolio with MLAM. In addition, the Manager has entered into an Advisory
Agreement on behalf of Lazard Large Cap Value Portfolio and Lazard Small Cap
Value Portfolio with LAM. The Manager has also entered into an Advisory
Agreement on behalf of the JPM Core Bond Portfolio with J.P. Morgan. Finally,
the Manager has entered into an Advisory Agreement on behalf of BT Small
Company Index Portfolio, BT International Equity Index Portfolio and BT Equity
500 Index Portfolio with Bankers Trust. The Advisory Agreements obligate T.
Rowe Price, PriceFleming, Putnam Management, MFS, Warburg, MSAM, MLAM, LAM,
J.P. Morgan and Bankers Trust 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.
During the fiscal year ended December 31, 1997, the Manager paid the following
fees to each Adviser with respect to the Portfolios listed below pursuant to
the Investment Advisory Agreements:
<TABLE>
<CAPTION>
Portfolio Advisory Fee Paid
--------- -----------------
<S> <C>
Merrill Lynch Basic Value Equity Portfolio $53,462
Merrill Lynch World Strategy Portfolio $35,301
MFS Emerging Growth Companies Portfolio $123,543
MFS Research Portfolio $135,730
-43-
<PAGE>
EQ/Putnam Balanced Portfolio $46,342
EQ/Putnam Growth & Income Value Portfolio $207,320
EQ/Putnam International Equity Portfolio $120,864
EQ/Putnam Investors Growth Portfolio $61,471
T. Rowe Price Equity Income Portfolio $121,142
T. Rowe Price International Stock Portfolio $185,338
Warburg Pincus Small Company Value Portfolio $193,934
Morgan Stanley Emerging Markets Equity Portfolio $66,277
</TABLE>
No advisory fees were paid to Bankers Trust, JP Morgan or LAM during the fiscal
year ended December 31, 1997.
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 received an exemptive order from the SEC that permits 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, the Manager is 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
-44-
<PAGE>
transactions for a Portfolio and receive brokerage commissions in connection
therewith as permitted by Section17(e) of the 1940 Act.
THE ADMINISTRATOR
Pursuant to an administrative agreement ("Mutual Funds Services Agreement"),
Chase Global Funds Services Company ("Administrator") provides the Trust with
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 was reapproved by the Board of Trustees on March 3,
1998 and will continue in effect from year to year unless terminated by any
party upon not less than ninety (90) days' prior written notice to the other
party.
During the fiscal year ended December 31, 1997, the Administrator was paid the
following fees with respect to each Portfolio:
<TABLE>
<CAPTION>
Portfolio Administration Fee
--------- ------------------
<S> <C>
Merrill Lynch Basic Value Equity $11,213
Portfolio
Merrill Lynch World Strategy Portfolio $13,633
MFS Emerging Growth Companies $17,902
Portfolio
MFS Research Portfolio $18,033
EQ/Putnam Balanced Portfolio $12,451
EQ/Putnam Growth & Income Value $19,904
Portfolio
EQ/Putnam International Equity $16,721
Portfolio
EQ/Putnam Investors Growth Portfolio $11,247
T. Rowe Price Equity Income Portfolio $17,376
-45-
<PAGE>
T. Rowe Price International Stock $30,599
Portfolio
Warburg Pincus Small Company Value $17,213
Portfolio
Morgan Stanley Emerging Markets $9,652
Equity Portfolio
</TABLE>
The BT Equity 500 Index, BT International Equity Index, BT Small Company Index,
JPM Core Bond, Lazard Large Cap Value and Lazard Small Cap Value Portfolios did
not pay a fee to the Administrator during the fiscal year ended December 31,
1997.
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 Life. The address for EDI
is 1290 Avenue of the Americas, New York, New York 10104, and that for EQ
Financial Consultants, Inc. is 1290 Avenue of the Americas, New York, New York
10104. 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 and 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") was
reapproved by the Board of Trustees on March 3, 1998 and will remain in effect
from year to year provided 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 their 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
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connection with their respective 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 3, 1998, the Board of Trustees of
the Trust, including the disinterested Trustees, unanimously voted to reapprove
the Distribution Plan. In connection with its consideration of the Distribution
Plan, the Board of Trustees was furnished with a copy of the Distribution Plan
and the related materials, including information related to the advantages and
disadvantages of the Distribution Plan. Legal counsel for the Trustees who are
not "interested persons" of the Trust (as defined in the 1940 Act) discussed
the legal and regulatory considerations in readopting the Distribution Plan.
The Board of Trustees considered various factors in connection with its
decision as to whether to reapprove the Distribution Plan, including: (i) the
nature and causes of the circumstances which makes continuation of the
Distribution Plan necessary and appropriate; (ii) the way in which the
Distribution Plan would continue to 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, including the disinterested Trustees, unanimously determined, in the
exercise of its business judgment, that the Distribution Plan is reasonably
likely to continue 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 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
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distribution of Class IB shares of a Portfolio without the approval of Class IB
shareholders of that Portfolio.
The table below shows the amount paid by each Portfolio to each of the
Distributors pursuant to the Distribution Plan for the fiscal year ended
December 31, 1997:
<TABLE>
<CAPTION>
Distribution Fee Paid Distribution Fee Paid
Portfolio to EQF to EDI Total Distribution Fees
--------- ---------------------- --------------------- -----------------------
<S> <C> <C> <C>
Merrill Lynch Basic Value $22,070 $11,329 $33,399
Equity Portfolio
Merrill Lynch World $14,675 $2,977 $17,652
Strategy Portfolio
MFS Emerging Growth $40,631 $36,542 $77,173
Companies Portfolio
MFS Research Portfolio $35,342 $49,446 $84,788
EQ/Putnam Balanced Portfolio $19,137 $4,020 $23,157
EQ/Putnam Growth & Income $30,456 $73,151 $103,607
Value Portfolio
EQ/Putnam International $0 $46,501 $46,501
Equity Portfolio
EQ/Putnam Investors Growth $0 $30,717 $30,717
Portfolio
T. Rowe Price Equity Income $61,824 $13,813 $75,637
Portfolio
T. Rowe Price International $60,887 $10,392 $71,279
Stock Portfolio
Warburg Pincus Small $78,139 $18,853 $96,992
Company Value Portfolio
Morgan Stanley Emerging $13,284 $1,152 $14,436
Markets Equity Portfolio
</TABLE>
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The BT Equity 500 Index, BT International Equity Index, BT Small Company Index,
JPM Core Bond, Lazard Large Cap Value and Lazard Small Cap Value Portfolios did
not pay any distribution fees during the fiscal year ended December 31, 1997.
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 United States, 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 Life, 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.
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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.
During the fiscal year ended December 31, 1997, the Portfolios paid the amounts
indicated in brokerage commisions:
<TABLE>
<CAPTION>
Portfolio Brokerage Commissions Paid
--------- ---------------------------
<S> <C>
Merrill Lynch Basic Value Equity $75,654
Portfolio
Merrill Lynch World Strategy Portfolio $43,547
MFS Emerging Growth Companies Portfolio $146,321
MFS Research Portfolio $146,977
EQ/Putnam Balanced Portfolio $15,797
EQ/Putnam Growth & Income Value $109,815
Portfolio
EQ/Putnam International Equity $164,293
Portfolio
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EQ/Putnam Investors Growth Portfolio $25,284
T. Rowe Price Equity Income Portfolio $67,627
T. Rowe Price International Stock $244,072
Portfolio
Warburg Pincus Small Company Value $220,138
Portfolio
Morgan Stanley Emerging Markets Equity $64,176
Portfolio
</TABLE>
The BT Equity 500 Index, BT International Equity Index, BT Small Company Index,
JPM Core Bond, Lazard Large Cap Value and Lazard Small Cap Value Portfolios did
not pay any brokerage commissions during the fiscal year ended December 31,
1997.
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
brokers that are affiliates of an Adviser to a Portfolio for which that Adviser
provides investment advice 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.
During the fiscal year ended December 31, 1997, the following Portfolios paid
the amounts indicated to the affiliated broker-dealers of the Manager or
affiliates of the Adviser to each such Portfolio.
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<TABLE>
<CAPTION>
Aggregate Percentage of
Affiliated Broker- Brokerage Commissions Percentage of Total Transactions (Based on
Portfolio Dealer Paid Brokerage Commissions Dollar Amounts)
--------- ------------------- ---------------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
Merrill Lynch Basic Value Donaldson, Lufkin & $1,444 1.91% 1.48%
Equity Portfolio Jenrette Securities
Corporation ("DLJ")
Merrill Lynch, Pierce $7,984 10.55% 10.93%
Fenner & Smith
Incorporated
("Merrill Lynch")
Merrill Lynch World DLJ $166 0.38% 0.74%
Strategy Portfolio Merrill Lynch $2,622 6.02% 5.72%
MFS Emerging Growth Pershing Trading $72 0.05% 0.05%
Companies Portfolio Company, L.P.
EQ/Putnam Balanced Equico Securities $75 0.47% 0.33%
Portfolios Corporation
EQ/Putnam Growth & Income Equico Securities $363 0.33% 0.23%
Value Portfolio Corporation
T. Rowe Price Equity DLJ $694 1.03% 0.55%
Income Portfolio
T. Rowe Price Jardine Fleming $454 0.19% 0.18%
International Stock Securities Limited
Portfolio Robert Fleming $2,210 0.91% 1.29%
Securities Limited
Fleming Martin Limited $69 0.03% 0.04%
</TABLE>
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The BT Equity 500 Index, BT International Equity Index, BT Small Company Index,
JPM Core Bond, Lazard Large Cap Value and Lazard Small Cap Value Portfolios did
not pay any brokerage commissions during the fiscal year ended December 31,
1997.
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." 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 12:00 p.m. Eastern Time.
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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 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 United States, are valued at
representative quoted prices in the currency of the country
of origin. Foreign currency is converted into United States
dollar equivalent at current exchange rates.
o United States Treasury securities and other obligations
issued or guaranteed by the United States 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.
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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 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
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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.
For purposes of this test, 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 generally 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. 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
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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 United States
Government securities (including any security that is issued, guaranteed or
insured by the United States or an instrumentality of the United States) each
United States 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.
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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
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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 ACCOUNTANT
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 statements of the Trust.
CUSTODIAN
The Chase Manhattan Bank, 1211 Avenue of the Americas, New York, New York 10036
serves as custodian of the Trust's portfolio securities and other assets. Under
the terms of the custody agreement between the Trust and The Chase Manhattan
Bank, The Chase Manhattan Bank maintains and deposits in separate accounts,
cash, securities and other assets of the Portfolios. The Chase Manhattan Bank
is also required, upon the order of the Trust, to deliver securities held by
The Chase Manhattan Bank, and to make payments for securities purchased by the
Trust. The 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 United States are maintained in the
custody of these entities.
TRANSFER AGENT
Equitable Life serves as the transfer agent and dividend disbursing agent for
the Trust. Equitable Life receives no compensation for providing such services
for the Trust.
COUNSEL
Dechert, Price & Rhoads, 1775 Eye Street, N.W. Washington, D.C. 20006, serves
as counsel to the Trust.
Sullivan & Worcester, LLP, 1025 Connecticut Avenue, N.W., Suite 1000,
Washington, D.C. 20036, serves as counsel to the independent Trustees of the
Trust.
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FINANCIAL STATEMENTS
The audited financial statements for the period ended December 31, 1997,
including the financial highlights, appearing in the Trust's Annual Report to
Shareholders are incorporated by reference and made a part of this document.
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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; 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:
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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.
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
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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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PART C: OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements: The information in response to Item 24 (b) is
incorporated herein by reference from the filing of the audited Annual
Report for the Trust for the fiscal year ended December 31, 1997, made
to the Commission on March 5, 1998 (Accession Number:
0000950136-98-000450).
Part A - Prospectus:
Financial Highlights
Part B - Statement of Additional Information:
The following audited financial statements with respect to
each Portfolio are incorporated into the Statement of
Additional Information by reference to the Trust's Annual
Report for the fiscal year ended December 31, 1997, and filed
with the Commission on March 5, 1998 (Accession Number:
0000950136-98-000450):
Statements of Assets and Liabilities as of December 31, 1997
Statements of Operations as of December 31, 1997
Statements of Changes in Net Assets as of December 31, 1997
Portfolio of Investments as of December 31, 1997
Notes to Financial Statements
Financial Highlights as of December 31, 1997
Report of Independent Accountants dated February 23, 1998
(b) Exhibits:
1(a). Agreement and Declaration of Trust.(1)
1(b). Amended and Restated Agreement and Declaration of Trust.(2)
1(c). Certificate of Trust.(1)
1(d). Certificate of Amendment.(2)
2. By-Laws of the Trust.(1)
3. Not applicable.
4. None other than Exhibit 1.
5(a)(1). Investment Management Agreement between EQ Advisors Trust
and EQ Financial Consultants, Inc. dated April 14, 1997 and
Appendices A and B dated April 14, 1997.(4)
5(a)(2). Amendment No. 1 dated December 9, 1997 to Investment
Management Agreement between EQ Advisors Trust and EQ
Financial Consultants, Inc. dated April 14, 1997 and
Appendices A and B dated April 14, 1997.(7)
5(b). Investment Advisory Agreement between EQ Financial
Consultants, Inc. and T. Rowe Price Associates, Inc. dated
April, 1997 and Appendix A dated April, 1997.(4)
5(c). Investment Advisory Agreement between EQ Financial
Consultants, Inc. and Rowe Price-Fleming International, Inc.
dated April, 1997 and Appendix A dated April, 1997.(4)
5(d). Investment Advisory Agreement between, EQ Financial
Consultants, Inc. and Putnam Investment Management, Inc.
dated April, 1997 and Appendix A dated April, 1997.(4)
5(e). Investment Advisory Agreement between, EQ Financial
Consultants, Inc. and Massachusetts Financial Services
Company dated April, 1997 and Appendix A dated
April, 1997.(4)
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<PAGE>
5(f). Investment Advisory Agreement between EQ Financial
Consultants, Inc. and Morgan Stanley Asset Management Inc.
dated April, 1997 and Appendix A dated April, 1997.(4)
5(g). Investment Advisory Agreement between EQ Financial
Consultants, Inc. and Warburg, Pincus Counsellors, Inc.
dated April, 1997 and Appendix A dated April, 1997.(4)
5(h). Investment Advisory Agreement between EQ Financial
Consultants, Inc. and Merrill Lynch Asset Management, L.P.
dated April, 1997 and Appendix A dated April, 1997.(4)
5(i). Investment Advisory Agreement between EQ Financial
Consultants, Inc. and Lazard Freres & Co. LLC dated
December 9, 1997.(7)
5(j). Investment Advisory Agreement between EQ Financial
Consultants, Inc. and J.P. Morgan Investment Management,
Inc. dated December 9, 1997 and Appendix A dated
December 9, 1997.(7)
5(k). Investment Advisory Agreement between EQ Financial
Consultants, Inc. and Bankers Trust Global Investment
Management, a unit of Bankers Trust Company, dated
December 9, 1997.(7)
6(a)(1). Distribution Agreement between EQ Advisors Trust and EQ
Financial Consultants, Inc. with respect to the Class IA
shares dated April 14, 1997 and Schedule A dated
April 14, 1997.(4)
6(a)(2). Amendment No. 1 dated December 9, 1997 to the Distribution
Agreement between EQ Advisors Trust and EQ Financial
Consultants, Inc. with respect to the Class IA shares dated
April 14, 1997 and Schedule A dated April 14, 1997.(7)
6(b)(1). Distribution Agreement between EQ Advisors Trust and EQ
Financial Consultants, Inc. with respect to the Class IB
shares dated April 14, 1997 and Schedule A dated
April 14, 1997.(4)
6(b)(2). Amendment No. 1 dated December 9, 1997 to the Distribution
Agreement between EQ Advisors Trust and EQ Financial
Consultants, Inc. with respect to the Class IB shares dated
April 14, 1997 and Schedule A dated April 14, 1997.(7)
6(c)(1). Distribution Agreement between EQ Advisors Trust and
Equitable Distributors, Inc. with respect to the Class IA
shares dated April 14, 1997 and Schedule A dated
April 14, 1997.(4)
6(c)(2). Amendment No. 1 dated December 9, 1997 to the Distribution
Agreement between EQ Advisors Trust and Equitable
Distributors, Inc. with respect to the Class IA shares dated
April 14, 1997 and Schedule A dated April 14, 1997.(7)
6(d)(1). Distribution Agreement between EQ Advisors Trust and
Equitable Distributors, Inc. with respect to the Class IB
shares dated April 14, 1997 and Schedule A dated
April 14, 1997.(4)
6(d)(2). Amendment No. 1 dated December 9, 1997 to the Distribution
Agreement between EQ Advisors Trust and Equitable
Distributors, Inc. with respect to the Class IB shares dated
April 14, 1997 and Schedule A dated April 14, 1997.(7)
7. Form of Deferred Compensation Plan.(3)
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<PAGE>
8(a)(1). Custody Agreement between EQ Advisors Trust and North
American Insurance Securities Division of the Chase
Manhattan Bank dated April 17, 1997 and Appendix A dated
April 17, 1997.(4)
8(a)(2). Amendment No. 1 dated December 9, 1997 to the Custody
Agreement between EQ Advisors Trust and North American
Insurance Securities Division of the Chase Manhattan Bank
dated April 17, 1997 and Appendix A dated April 17, 1997.(7)
9(a). Mutual Fund Services Agreement between EQ Advisors Trust and
Chase Global Funds Services Company dated April 25, 1997 and
Schedule A dated April 25, 1997.(4)
9(b)(1). Amended and Restated Expense Limitation Agreement between EQ
Advisors Trust and EQ Financial Consultants, Inc. dated
March 3, 1998 and Schedule A dated March 3, 1998.
9(c)(1). Organizational Expense Reimbursement Agreement between EQ
Advisors Trust, on behalf of each series of the Trust except
for the Lazard Large Cap Value Portfolio, Lazard Small Cap
Value Portfolio, the JPM Core Bond Portfolio, BT Small
Company Index Portfolio, BT International Equity Index
Portfolio and BT Equity 500 Index Portfolio and EQ Financial
Consultants, Inc. dated April 14, 1997.(4)
9(c)(2). Organizational Expense Reimbursement Agreement between EQ
Advisors Trust, on behalf of the Lazard Large Cap Value
Portfolio, Lazard Small Cap Value Portfolio, and JPM Core
Bond Portfolio, BT Small Company Index Portfolio, BT
International Equity Index Portfolio, and BT Equity 500
Index Portfolio and EQ Financial Consultants, Inc. dated
December 9, 1997.(7)
9(d)(1). Participation Agreement dated April 14, 1997 and Schedule B
dated April 14, 1997.(4)
9(d)(2). Amendment No. 1 dated December 9, 1997 to the Participation
Agreement dated April 14, 1997 and Schedule B dated
April 14, 1997.(7)
9(e). License Agreement Relating to Use of Name between Merrill
Lynch & Co., Inc., and EQ Advisors Trust dated
April 28, 1997.
10(a). Opinion and Consent of Katten Muchin & Zavis regarding the
legality of the securities being registered.(1)
10(b). Opinion and Consent of Dechert, Price & Rhoads regarding the
legality of the securities being registered with respect to
the Lazard Large Cap Value Portfolio, Lazard Small Cap Value
Portfolio, and JPM Core Bond Portfolio.(5)
10(c). Opinion and Consent of Dechert, Price & Rhoads regarding the
legality of the securities being registered with respect to
the BT Small Company Index Portfolio, BT International
Equity Index Portfolio, and BT Equity 500 Index
Portfolio.(6)
11. Consent of Price Waterhouse, LLP, Independent Public
Accountants.
12. Not applicable.
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13. Stock Subscription Agreement between the Trust, on behalf of
the T. Rowe Price Equity Income Portfolio, and Separate
Account FP.(3)
14. Not Applicable.
15. Distribution Plan Pursuant to Rule 12b-1 for the Trust's
Class IB shares.(4)
16. Schedule for Computation of each Performance Quotation.
18. Plan Pursuant to Rule 18f-3 under the 1940 Act.(4)
19. Not Applicable.
20.(a) Power of Attorney.(3)
20.(b) Power of Attorney for Michael Hegarty.
27. Financial Data Schedules.
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(1) Incorporated herein by reference to Registrant's Registration Statement
on Form N-1A filed on December 3, 1996 (File No.333-17217).
(2) Incorporated herein by reference to Registrant's Registration Statement
on Form N-1A filed on January 23, 1997 (File No. 333-17217).
(3) Incorporated herein by reference to Registrant's Registration Statement
on Form N-1A filed on April 7, 1997 (File No. 333-17217).
(4) Incorporated herein by reference to Registrant's Registration Statement
on Form N-1A filed on August 28, 1997 (File No. 333-17217).
(5) Incorporated herein by reference to Registrant's Registration Statement
on Form N-1A filed on October 15, 1997 (File No. 333-17217).
(6) Incorporated herein by reference to Registrant's Registration Statement
on Form N-1A filed on October 31, 1997 (File No. 333-17217).
(7) Incorporated herein by reference to Registrant's Registration Statement
on Form N-1A filed on December 29, 1997 (File No. 333-17217).
Item 25. Persons Controlled by or under Common Control with Registrant
The Equitable Life Assurance Society of the United States
("Equitable") controls the Trust by virtue of its ownership of 100% of the
Trust's shares as of March 31, 1998. All EQ Advisors Trust shareholders are
required to solicit instructions from their respective contract owners as to
certain matters. EQ Advisors Trust may in the future offer its shares to
insurance companies unaffiliated with Equitable Life.
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<PAGE>
On July 22, 1992, Equitable converted from a New York mutual life
insurance company to a publicly-owned New York stock life insurance company. At
that time Equitable became a wholly-owned subsidiary of The Equitable Companies
Incorporated ("Holding Company"). The Holding Company continues to own 100% of
Equitable's common stock as well as approximately 72% of the common stock of
Donaldson, Lufkin & Jenrette, Inc., a registered broker-dealer.
AXA, a French insurance holding company, currently owns approximately
59% 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 of insurance and related
financial services companies. AXA is among the world's largest insurance groups
with worldwide revenues in 1997 of $60.8 billion and is also the world's
largest insurer-based investment manager with $531 billion in assets under
management as of December 31, 1997. 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.
Item 26. Number of Holders of Securities
NUMBER OF RECORD HOLDERS
TITLE OF CLASS AS OF MARCH 31, 1998
-------------- --------------------
Class IA Shares of beneficial interest None
Class IB Shares of beneficial interest 1
Item 27. Indemnification
Amended and Restated Agreement and Declaration of Trust ("Declaration
of Trust") and By-Laws.
Article VII, Section 2 of the Trust's Declaration of Trust of EQ
Advisors Trust ("Trust") states, in relevant part, that a "Trustee, when acting
in such capacity, shall not be personally liable to any Person, other than the
Trust or a Shareholder to the extent provided in this Article VII, for any act,
omission or obligation of the Trust, of such Trustee or of any other Trustee.
The Trustees shall not be responsible or liable in any event for any neglect or
wrongdoing of any officer, agent, employee, Manager, or Principal Underwriter
of the Trust. The Trust shall indemnify each Person who is serving or has
served at the Trust's request as a director, officer, trustee, employee, or
agent of another organization in which the Trust has any interest as a
shareholder, creditor, or otherwise to the extent and in the manner provided in
the By-Laws." Article VII, Section 4 of the Trust's Declaration of Trust
further states, in relevant part, that the "Trustees shall be entitled and
empowered to the fullest extent permitted by law to purchase with Trust assets
insurance for liability and for all expenses reasonably incurred or paid or
expected to be paid by a Trustee, officer, employee, or agent of the Trust in
connection with any claim, action, suit, or proceeding in which he or she may
become involved by virtue of his or her capacity or former capacity as a
Trustee of the Trust."
Article VI, Section 2 of the Trust's By-Laws states, in relevant part,
that "[s]ubject to the exceptions and limitations contained in Section 3 of
this Article VI, every [Trustee, officer, employee or other agent of the Trust]
shall be indemnified by the Trust to the fullest extent permitted by law
against all liabilities and against all expenses reasonably incurred or paid by
him or her in connection with any proceeding in which he or she becomes
involved as a party or otherwise by virtue of his or her being or
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<PAGE>
having been an agent." Article VI, Section 3 of the Trust's By-Laws further
states, in relevant part, that "[n]o indemnification shall be provided
hereunder to [a Trustee, officer, employee or other agent of the Trust]: (a)
who shall have been adjudicated, by the court or other body before which the
proceeding was brought, to be liable to the Trust or its Shareholders by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his or her office (collectively,
"disabling conduct"); or (b) with respect to any proceeding disposed of
(whether by settlement, pursuant to a consent decree or otherwise) without an
adjudication by the court or other body before which the proceeding was brought
that such [Trustee, officer, employee or other agent of the Trust] was liable
to the Trust or its Shareholders by reason of disabling conduct, unless there
has been a determination that such [Trustee, officer, employee or other agent
of the Trust] did not engage in disabling conduct: (i) by the court or other
body before which the proceeding was brought; (ii) by at least a majority of
those Trustees who are neither Interested Persons of the Trust nor are parties
to the proceeding based upon a review of readily available facts (as opposed to
a full trial-type inquiry); or (iii) by written opinion of independent legal
counsel based upon a review of readily available facts (as opposed to a full
trial-type inquiry); provided, however, that indemnification shall be provided
hereunder to [a Trustee, officer, employee or other agent of the Trust] with
respect to any proceeding in the event of (1) a final decision on the merits by
the court or other body before which the proceeding was brought that the
[Trustee, officer, employee or other agent of the Trust] was not liable by
reason of disabling conduct, or (2) the dismissal of the proceeding by the
court or other body before which it was brought for insufficiency of evidence
of any disabling conduct with which such [Trustee, officer, employee or other
agent of the Trust] has been charged." Article VI, Section 4 of the Trust's
By-Laws also states that the "rights of indemnification herein provided (i) may
be insured against by policies maintained by the Trust on behalf of any
[Trustee, officer, employee or other agent of the Trust], (ii) shall be
severable, (iii) shall not be exclusive of or affect any other rights to which
any [Trustee, officer, employee or other agent of the Trust] may now or
hereafter be entitled and (iv) shall inure to the benefit of [such party's]
heirs, executors and administrators."
UNDERTAKING
Insofar as indemnification for liability arising under the Securities
Act of 1933 (the "Act") may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of the Manager and Advisers
The description of EQ Financial Consultants, Inc. under the caption of
"Management of the Trust" in the Prospectus and under the caption "Investment
Management and Other Services" in the Statement of Additional Information
constituting Parts A and B, respectively, of this Registration Statement are
incorporated by reference herein.
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<PAGE>
The information as to the directors and officers of EQ Financial Consultants,
Inc. is set forth in EQ Financial Consultants, Inc.'s Form ADV filed with the
Securities and Exchange Commission on July 1, 1996 (File No. 801-14065) and
amended through the date hereof, is incorporated by reference.
The information as to the directors and officers of T. Rowe Price Associates,
Inc., is set forth in T. Rowe Price Associates, Inc.'s Form ADV filed with the
Securities and Exchange Commission on March 31, 1997 (File No. 801-00856) and
amended through the date hereof, is incorporated by reference.
The information as to the directors and officers of Rowe Price-Fleming
International, Inc. is set forth in Rowe Price-Fleming International, Inc.'s
Form ADV filed with the Securities and Exchange Commission on March 31, 1997
(File No. 801-14713) and amended through the date hereof, is incorporated by
reference.
The information as to the directors and officers of Putnam Investment
Management, Inc. is set forth in Putnam Investment Management, Inc.'s Form ADV
filed with the Securities and Exchange Commission on April 2, 1996 (File No.
801-07974) and amended through the date hereof, is incorporated by reference.
The information as to the directors and officers of Massachusetts Financial
Services Company is set forth in Massachusetts Financial Services Company's
Form ADV filed with the Securities and Exchange Commission on March 31, 1998
(File No. 801-17352) and amended through the date hereof, is incorporated by
reference.
The information as to the directors and officers of Morgan Stanley Asset
Management Inc. is set forth in Morgan Stanley Asset Management Inc.'s Form ADV
filed with the Securities and Exchange Commission on August 1, 1997 (File No.
801-15757) and amended through the date hereof, is incorporated by reference.
The information as to the directors and officers of Warburg Pincus Asset
Management is set forth in Warburg Pincus Asset Management,Inc.'s Form ADV
filed with the Securities and Exchange Commission on March 31, 1997 (File No.
801-07321) and amended through the date hereof, is incorporated by reference.
The information as to the directors and officers of Merrill Lynch Asset
Management, L.P. is set forth in Merrill Lynch Asset Management, L.P.'s Form
ADV filed with the Securities and Exchange Commission on March 25, 1998
(File No. 801-11583) and amended through the date hereof, is incorporated by
reference.
The information as to the directors and officers of Lazard Asset Management (a
division of Lazard Freres & Co. LLC) is set forth in Lazard Freres & Co. LLC's
Form ADV filed with the Securities and Exchange Commission on June 9, 1997
(File No. 801-6568) and amended through the date hereof, is incorporated by
reference.
The information as to the directors and officers of the J. P. Morgan Investment
Management Inc. is set forth in the J.P. Morgan Investment Management Inc.'s
Form ADV filed with the Securities and Exchange Commission on March 27, 1998
(File No. 801-21011) and amended through the date hereof, is incorporated by
reference.
The information as to the directors and officers of Bankers Trust Company is
set forth below. To the knowledge of the Trust, none of the directors or
officers of Bankers Trust, except those set forth below, is or has been at
anytime during the past two fiscal years engaged in any other business,
profession, vocation or employment of a substantial nature, except that certain
directors and officers also hold various positions with and engage in business
for Bankers Trust New York Corporation.
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<PAGE>
SET FORTH BELOW ARE THE NAMES AND PRINCIPAL BUSINESSES OF THE DIRECTORS AND
OFFICERS OF BANKERS TRUST WHO ARE OR DURING THE PAST TWO FISCAL YEARS HAVE BEEN
ENGAGED IN ANY OTHER BUSINESS, PROFESSION, VOCATION OR EMPLOYMENT OF A
SUBSTANTIAL NATURE.
These persons may be contacted c/o Bankers Trust Company, 130 Liberty Street,
New York, New York 10006.
Lee A. Ault III, Private Investor. Director of Bankers Trust Company. Former
Chairman and Chief Executive Officer, Telecredit, Inc. Also a director of
Equifax, Inc., Sunrise Medical Inc., Viking Office Products, Inc. and Pacific
Crest Outward Bound School.
Neil R. Austrian, President and Chief Operating Officer, National Football
League. Director of Bankers Trust Company. Also a director of Rafac Technology
and Viking Office Products, Inc.; and trustee of Swarthmore College.
George B. Beitzel, Director of Various Corporations. Director of Bankers
Trust Company. Retired Senior Vice President and Director, International
Business Machines Corporation. Also a director of Computer Task Group, Phillips
Petroleum Company, Rohm and Haas Company and TIG Holdings; chairman emeritus of
Amherst College; and chairman of the Colonial Williamsburg Foundation.
Richard H. Daniel, Bankers Trust Company, 130 Liberty Street, New York, New
York 10006. Vice chairman and chief financial officer, Bankers Trust Company
and Bankers Trust New York Corporation; Beneficial owner, general partner,
Daniel Brothers, Daniel Lingo & Assoc., Daniel Pelt & Assoc.; and Beneficial
owner, Rhea C. Daniel Trust.
Phillip A. Griffiths, Director, Institute for Advanced Study. Director of
Bankers Trust Company. Chairman, Committee on Science, Engineering and Public
Policy of the National Academies of Sciences and Engineering & the Institute
of Medicine; member, National Academy of Sciences, American Academy of Arts
and Sciences and American Philosophical Society; and trustee of North Carolina
School of Science and Mathematics and the Woodward Academy. Former member of
the board of directors, Research Triangle Insitute.
William R. Howell, Chairman Emeritus, J.C. Penney Company, Inc. Director of
Bankers Trust Company. Also a director of Exxon Corporation, Halliburton
Company, Warner-Lambert Company, Williams, Inc., Central & South West Corp.;
and the National Retail Federation.
Vernon E. Jordan, Jr., Senior Partner, Akin, Gump, Strauss, Hauer & Feld, LLP,
Attorneys-at-law, Washington, D.C. and Dallas, Texas. Director of Bankers
Trust Company. Former President of the National Urban League, Inc. Also a
director of American Express Company, Chancellor Media Corporation, Dow Jones,
Inc., J.C. Penney Company, Inc., Revlon Group Incorporated, Ryder System,
Inc., Sara Lee Corporation, Union Carbide Corporation and Xerox Corporation;
and a trustee of Brookings Institution, The Ford Foundation and Howard
University.
David Marshall, 130 Liberty Street, New York, New York 10006. Chief Information
Officer and Executive Vice President, Bankers Trust New York Corporation; and
Senior Managing Director, Bankers Trust Company.
Hamish Maxwell, Retired Chairman and Chief Executive Officer, Philip Morris
Companies Inc. Director of Bankers Trust Company. Also a director of Sola
International Inc., and Chairman of WPP Group plc.
Frank N. Newman, Chairman of the Board, Chief Executive Officer and President
of Bankers Trust New York Corporation and Bankers Trust Company. Former Deputy
Secretary of the United States Treasury and former Vice Chairman of the Board
and director of BankAmerica Corporation and Bank of America NT&SA. Also a
director of Dow Jones, Inc.; trustee of Carnegie Hall; a member, Board of
Overseers of Cornell University Medical College and the Graduate School of
Medical Sciences.
N.J. Nicholas Jr., Investor. Director of Bankers Trust Company. Former Co-chief
Executive Officer of Time Warner Inc. Also a director of Boston Scientific
Corporation and Xerox Corporation.
Russell E. Palmer, Chairman and Chief Executive Officer, The Palmer Group.
Director of Bankers Trust Company. Former Dean of the Wharton School,
University of Pennsylvania and former Chief Executive Officer of Touche Ross &
Co. (now Deloitte & Touche). Also a director of Allied-Signal Inc., Federal
Home Loan Mortgage Corportion, GTE Corportion, The May Department Stores
Company and Safeguard Scientifics, Inc,; and a trustee, the University of
Pennsylvania.
Donald L. Staheli, Retired Chairman of the Board and Chief Executive Officer,
Continental Grain Company. Director of Bankers Trust Company. Also a director
of Continental Grain Company, ContiFinancial Corporation, Prudential Insurance
Company of America, Fresenius Medical Care, A.G., National Committee on United
States-China Relations and America's Promise; member, Council on Foreign
Relations; and chairman of The Points of Light Foundation.
Patricia Carry Stewart, Former Vice President, The Edna McConnell Clark
Foundation (a charitable foundation). Director of Bankers Trust Company. Also
a director of CVS Corporation and of the Community Foundation for Palm Beach
and Martin Counties; and a trustee emerita of Cornell University.
G. Richard Thoman, President, Chief Operating Officer and Director, Xerox
Corporation. Director of Bankers Trust Company. Also a director of Fuji
Xerox Company, Ltd. and Union Bancaire Privee (Switzerland); member, General
Electric Investments Equity Advisory Board, Yale School of Management Advisory
Board, Fletcher School of Law and Diplomacy Advisory Board, and the INSEAD U.S.
Advisory Board; director, The Americas Society; and member, Council on Foreign
Relations.
George J. Vojta, Vice Chairman of the Board of Bankers Trust New York
Corporation and Bankers Trust Company. Also a director of Alicorp, S.A.,
Northwest Airlines and Private Export Funding Corp.; member of the New York
State Banking Board; vice chairman of the Board of Trustees of St. Luke's-
Roosevelt Hospital Center; a partner of New York City Partnership; chairman,
Wharton Financial Services Center; and a member of the Bretton Woods Committee.
Paul A. Volcker, Director of Various Corporations, Director of Bankers Trust
Company. Former Chairman and Chief Executive Officer of Wolfensohn & Co., Inc.
and former Chairman of the Board of Governors of the Federal Reserve System.
Also a director of the American Stock Exchange, Nestle S.A., Prudential
Insurance Company of America and UAL Corporation and an overseer of TIAA-CREF;
director of American Council on Germany, Council on Foreign Relations and The
Japan Society; trustee of The American Assembly; and member of the advisory
boards of several international corporations.
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Melvin A. Yellin, Bankers Trust Company, 130 Liberty Street, New York, New York
10006. Senior Managing Director and General Counsel of Bankers Trust New York
Corporation and Bankers Trust Company; Director, 1136 Tenants Corporation; and
Director, ABA Securities Association.
Item 29. Principal Underwriters.
(a) EQ Financial Consultants, Inc. is a principal underwriter of the
Trust's Class IA shares and Class IB shares, and Equitable Distributors, Inc.
is also a principal underwriter of the Trust's Class IA shares and Class IB
shares. EQ Financial Consultants Inc. also serves as the principal underwriter
for the following entities: the Class IA shares of The Hudson River Trust and
Separate Accounts A, I, FP, 45, No. 66 and No. 301. Equitable Distributors,
Inc. also serves as principal underwriter for the Class IB shares of The Hudson
River Trust and Separate Account No. 45 and Separate Account No. 49.
C-9
<PAGE>
(b) Set forth below is certain information regarding the directors and
officers of EQ Financial Consultants, Inc., and of Equitable Distributors,
Inc., the principal underwriters of the Trust's Class IA and Class IB shares.
The business address of the persons whose names are preceded by a single
asterisk is 1290 Avenue of the Americas, New York, New York 10104. The business
address of the persons whose names are preceded by a double asterisk is 660
Newport Center Drive, Suite 1200, Newport Beach, CA 92660. Mr. Laughlin's
business address is 1345 Avenue of the Americas, 39th Floor, New York, New York
10105. Mr. Kornweiss's business address is 4251 Crums Mill Road, Harrisburg, PA
17112. The business address of Mr. Bullen and Ms. Fazio is 200 Plaza Drive,
Secaucus, New Jersey 07096.
C-10
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================================================
NAME AND PRINCIPAL WITH POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH EQ FINANCIAL WITH REGISTRANT
CONSULTANTS, INC. (EQ ADVISORS TRUST)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DIRECTORS
* Derry E. Bishop Director
* Harvey E. Blitz Director Chief Financial Officer and
Vice President
Michael J. Laughlin Director Vice President
* Michael S. Martin Director
* Michael F. McNelis Director
* Richard V. Silver Director
* Mark R. Wutt Director
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS
* Michael S. Martin Chairman of the Board and Chief Vice President
Executive Officer
* Michael F. McNelis President and Chief Operating
Officer
* Martin J. Telles Executive Vice President and Chief Vice President
Marketing Officer
* Derry E. Bishop Executive Vice President
* Harvey Blitz Executive Vice President Chief Financial Officer and
Vice President
* Thomas J. Duddy, Jr. Executive Vice President
* Fred A. Folco Executive Vice President
* William J. Green Executive Vice President
* Edward J. Hayes Executive Vice President
* Peter D. Noris Executive Vice President President
* Robert McKenna Senior Vice President and Chief
Financial Officer
* Theresa A. Nurge-Alws Senior Vice President
* Mary P. Breen Vice President and Counsel Vice President and Secretary
* Ronald Boswell First Vice President
* Donna M. Dazzo First Vice President
* Robin K. Murray First Vice President First Vice President
* Michael Brzozowski Vice President and Compliance
Director
* Raymond T.Barry Vice President
* Claire A. Comerford Vice President
* Amy Franceschini Vice President
* Linda Funigiello Vice President
* James Furlong Vice President
Peter R. Kornweiss Vice President
* Frank Lupo Vice President
* Rosemary Magee Vice President
* T.S. Narayanan Vice President
* Laura A. Pellegrini Vice President
* Mary E. Cantwell Assistant Vice President Assistant Vice President
* Janet E. Hannon Secretary
* Linda J. Galasso Assistant Secretary
=====================================================================================================================
</TABLE>
C-11
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================================================
NAME AND PRINCIPAL WITH POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH EQ FINANCIAL WITH REGISTRANT
CONSULTANTS, INC. (EQ ADVISORS TRUST)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DIRECTORS
** Greg Brakovich Director
* Edward J.Hayes Director
** James A. Shepherdson, III Director
* Jose S. Suquet Director
* Charles Wilder Director
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS
* Jose S. Suquet Chairman of the Board
** Greg Brakovich Co-President and Co-Chief
Executive Officer and
Managing Director
** James A. Shepherdson, III Co-President and Co-Chief
Executive Officer and Managing
Director
** Hunter Allen Senior Vice President
* Elizabeth Forget Senior Vice President
** Jennifer Hall Senior Vice President
** Al Haworth Senior Vice President
** Stuart Hutchins Senior Vice President
** Ken Jaffe Senior Vice President
** Michael McDaniel Senior Vice President
** Debora Buffington Chief Compliance Officer
* Mary P. Breen Vice President and Counsel Vice President and Secretary
* Mark A. Silberman Vice President and Chief Financial
Officer
** Mark Brandenberger Vice President
Thomas D. Bullen Vice President
Angela Fazio Vice President
** Dave Hughes Vice President
** Marty Krager Vice President
** Michelle O'Haren Vice President
* Ronald R. Quist Treasurer
* Janet Hannon Secretary
* Linda J. Galasso Assistant Secretary
=====================================================================================================================
</TABLE>
C-12
<PAGE>
(c) Inapplicable.
Item 30. Location of Accounts and Records
Books or other documents required to be maintained by Section 31(a) of
the Investment Company Act of 1940, and the Rules promulgated thereunder, are
maintained as follows:
(a) With respect to Rules 31a-1(a); 31a-1(b)(1); (2)(a) and (b); (3); (6);
(8); (12); and 31a-1(d), the required books and records are maintained
at the offices of Registrant's Custodian:
1211 Avenue of the Americas
New York, New York 10036
(b) With respect to Rules 31a-1(a); 31a-1(b)(1), (4); (2)(C) and (D); (4);
(5); (6); (8); (9); (10); (11) and 31a-1(f), the required books and
records are currently maintained at the offices of the Registrant's
Administrator:
73 Tremont Street
Boston, Massachusetts 02108
(c) With respect to Rules 31a-1(b)(5), (6), (9) and (10) and 31a-1(f), the
required books and records are maintained at the principal offices of
the Registrant's Manager or Advisers:
EQ Financial Consultants, Inc. T. Rowe Price Associates, Inc.
1290 Avenue of the Americas 100 East Pratt St.
New York, New York 10104 Baltimore, MD 21202
Rowe Price-Fleming International, Inc. Putnam Investment Management, Inc.
100 East Pratt Street One Post Office Square
Baltimore, MD 21202 Boston, MA 02109
Massachusetts Financial Services Company Merrill Lynch Asset Management, L.P.
500 Boylston Street 800 Scudders Mill Road
Boston, MA 02116 Plainsboro, New Jersey 08543-9011
Warburg Pincus Asset Management, Inc. Morgan Stanley Asset Management Inc.
466 Lexington Avenue 1221 Avenue of the Americas
New York, New York 10017-3147 New York, New York 10020
Lazard Asset Management J.P Morgan Investment Management Inc.
30 Rockefeller Plaza 522 Fifth Avenue
New York, New York 10020 New York, New York 10036
Bankers Trust Company
C-13
<PAGE>
130 Liberty Street
One Bankers Trust Plaza
New York, New York 10006
Item 31. Management Services: None.
Item 32. Undertakings
(a) Inapplicable.
(b) Inapplicable.
(c) The Registrant hereby undertakes to furnish each person to
whom a prospectus is delivered with a copy of the Registrant's latest annual
report to shareholders upon request and without charge.
C-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, ("1933
Act") and the Investment Company Act of 1940, as amended, the Registrant
certifies that this filing meets all of the requirements for effectiveness
pursuant to Rule 485(b) under the 1933 Act and the Registrant has duly caused
this Post-Effective Amendment No. 6 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, and the State of New York on the 21 day of April, 1998.
EQ ADVISORS TRUST
By: /s/ Peter D. Noris
--------------------------
Peter D. Noris
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment No. 6 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Peter D. Noris President and Trustee April 21, 1998
- ----------------------------------
Peter D. Noris
* Trustee April 21, 1998
- ----------------------------------
William T. McCaffrey
* Trustee April 21,1998
- ----------------------------------
Michael Hegarty
* Trustee April 21, 1998
- ----------------------------------
Jettie M. Edwards
* Trustee April 21, 1998
- ----------------------------------
William M. Kearns, Jr.
* Trustee April 21,1998
- ----------------------------------
Christopher P.A. Komisarjevsky
* Trustee April 21, 1998
- ----------------------------------
Harvey Rosenthal
* Chief Financial Officer April 21, 1998
- ----------------------------------
Harvey Blitz
* By: /s/ Peter D. Noris
----------------------------------
C-15
<PAGE>
Peter D. Noris
(Attorney-in-Fact)
EXHIBIT LIST
EXHIBIT
NUMBER DESCRIPTION
9(b)(1). Amended and Restated Expense Limitation Agreement.
11. Consent of Price Waterhouse, LLP, Independent Public Accountants.
16. Schedule for Computation of each Performance Quotation.
20(b). Power of Attorney for Michael Hegarty.
27. Financial Data Schedules.
C-16
<PAGE>
AMENDED AND RESTATED EXPENSE LIMITATION AGREEMENT
EQ ADVISORS TRUST
EXPENSE LIMITATION AGREEMENT, effective as of March 3, 1998 by and
between EQ Financial Consultants, Inc. (the "Manager") and EQ Advisors Trust
(the "Trust"), on behalf of each series of the Trust set forth in Schedule A
(each a "Portfolio," and collectively, the "Portfolios").
WHEREAS, the Trust is a Delaware business trust organized under the
Amended and Restated Agreement and Declaration of Trust ("Declaration of
Trust"), and is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"), as an open-end management company of the series type, and
each Portfolio is a series of the Trust; and
WHEREAS, the Trust and the Manager have entered into an Investment
Management Agreement (the "Management Agreement"), pursuant to which the
Manager will render investment management services to each Portfolio for
compensation based on the value of the average daily net assets of each such
Portfolio; and
WHEREAS, the Trust and the Manager have determined that it is
appropriate and in the best interests of each Portfolio and its shareholders to
maintain the expenses of each Portfolio at a level below the level to which
each such Portfolio would normally be subject during its start-up period.
NOW THEREFORE, the parties hereto agree as follows:
1. Expense Limitation.
-------------------
1.1. Applicable Expense Limit. To the extent that the aggregate
expenses of every character incurred by a Portfolio in any fiscal year,
including but not limited to investment management fees of the Manager (but
excluding interest, taxes, brokerage commissions, other expenditures which are
capitalized in accordance with generally accepted accounting principles, other
extraordinary expenses not incurred in the ordinary course of such Portfolio's
business and amounts payable pursuant to a plan adopted in accordance with Rule
12b-1 under the 1940 Act) ("Portfolio Operating Expenses"), exceed the
Operating Expense Limit, as defined in Section 1.2 below, such excess amount
(the "Excess Amount") shall be the liability of the Manager.
1.2. Operating Expense Limit. The maximum Operating Expense Limit in
any year with respect to each Portfolio shall be the amount specified in
Schedule A based on a percentage of the average daily net assets of each
Portfolio.
1.3. Method of Computation. To determine the Manager's liability with
respect to the Excess Amount, each month the Portfolio Operating Expenses for
each Portfolio shall be annualized as of the last day of the month. If the
annualized Portfolio Operating Expenses for any month of a Portfolio exceed the
Operating Expense Limit of such Portfolio, the Manager shall first waive or
reduce its investment management fee for such month by an amount sufficient to
reduce the annualized Portfolio Operating Expenses to an amount no higher than
the Operating
<PAGE>
Expense Limit. If the amount of the waived or reduced investment management fee
for any such month is insufficient to pay the Excess Amount, the Manager may
also remit to the appropriate Portfolio or Portfolios an amount that, together
with the waived or reduced investment management fee, is sufficient to pay such
Excess Amount.
1.4. Year-End Adjustment. If necessary, on or before the last day of
the first month of each fiscal year, an adjustment payment shall be made by the
appropriate party in order that the amount of the investment management fees
waived or reduced and other payments remitted by the Manager to the Portfolio
or Portfolios with respect to the previous fiscal year shall equal the Excess
Amount.
2. Reimbursement of Fee Waivers and Expense Reimbursements.
---------------------------------------------------------
2.1. Reimbursement. If in any year during which the total assets of a
Portfolio are greater than $100 million and in which the Management Agreement
is still in effect, the estimated aggregate Portfolio Operating Expenses of
such Portfolio for the fiscal year are less than the Operating Expense Limit
for that year, subject to quarterly approval by the Trust's Board of Trustees
as provided in Section 2.2 below, the Manager shall be entitled to
reimbursement by such Portfolio, in whole or in part as provided below, of the
investment management fees waived or reduced and other payments remitted by the
Manager to such Portfolio pursuant to Section 1 hereof. The total amount of
reimbursement to which the Manager may be entitled (the "Reimbursement Amount")
shall equal, at any time, the sum of all investment management fees previously
waived or reduced by the Manager and all other payments remitted by the Manager
to the Portfolio, pursuant to Section 1 hereof, during any of the previous two
(2) fiscal years, less any reimbursement previously paid by such Portfolio to
the Manager, pursuant to Sections 2.2 or 2.3 hereof, with respect to such
waivers, reductions, and payments. The Reimbursement Amount shall not include
any additional charges or fees whatsoever, including, e.g., interest accruable
on the Reimbursement Amount.
2.2. Board Approval. No reimbursement shall be paid to the Manager
with respect to any Portfolio pursuant to this provision in any fiscal quarter,
unless the Trust's Board of Trustees has determined that the payment of such
reimbursement is in the best interests of such Portfolio and its shareholders.
The Trust's Board of Trustees shall determine quarterly in advance whether any
reimbursement may be paid to the Manager with respect to any Portfolio in such
quarter.
2.3. Method of Computation. To determine each Portfolio's payments, if
any, to reimburse the Manager for the Reimbursement Amount, each month the
Portfolio Operating Expenses of each Portfolio shall be annualized as of the
last day of the month. If the annualized Portfolio Operating Expenses of a
Portfolio for any month are less than the Operating Expense Limit of such
Portfolio, such Portfolio, only with the prior approval of the Trust's Board of
Trustees, shall pay to the Manager an amount sufficient to increase the
annualized Portfolio Operating Expenses of that Portfolio to an amount no
greater than the Operating Expense Limit of that Portfolio, provided that such
amount paid to the Manager will in no event exceed the total Reimbursement
Amount.
-2-
<PAGE>
2.4. Year-End Adjustment. If necessary, on or before the last day of
the first month of each fiscal year, an adjustment payment shall be made by the
appropriate party in order that the actual Portfolio Operating Expenses of a
Portfolio for the prior fiscal year (including any reimbursement payments
hereunder with respect to such fiscal year) do not exceed the Operating Expense
Limit.
3. Term and Termination of Agreement.
----------------------------------
This Agreement shall continue in effect for a period of one year from
the date of its execution and from year to year thereafter provided such
continuance is specifically approved by a majority of the Trustees of the Trust
who (i) are not "interested persons" of the Trust or any other party to this
Agreement, as defined in the 1940 Act, and (ii) have no direct or indirect
financial interest in the operation of this Agreement ("Non-Interested
Trustees"). Nevertheless, this Agreement may be terminated by either party
hereto, without payment of any penalty, upon ninety (90) days' prior written
notice to the other party at its principal place of business; provided that, in
the case of termination by the Trust, such action shall be authorized by
resolution of a majority of the Non-Interested Trustees of the Trust or by a
vote of a majority of the outstanding voting securities of the Trust.
4. Miscellaneous.
4.1. Captions. The captions in this Agreement are included for
convenience of reference only and in no other way define or delineate any of
the provisions hereof or otherwise affect their construction or effect.
4.2. Interpretation. Nothing herein contained shall be deemed to
require the Trust or the Portfolios to take any action contrary to the Trust's
Declaration of Trust or By-Laws, or any applicable statutory or regulatory
requirement to which it is subject or by which it is bound, or to relieve or
deprive the Trust's Board of Trustees of its responsibility for and control of
the conduct of the affairs of the Trust or the Portfolios.
4.3. Definitions. Any question of interpretation of any term or
provision of this Agreement, including but not limited to the investment
management fee, the computations of net asset values, and the allocation of
expenses, having a counterpart in or otherwise derived from the terms and
provisions of the Management Agreement or the 1940 Act, shall have the same
meaning as and be resolved by reference to such Management Agreement or the
1940 Act.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
signed by their respective officers thereunto duly authorized and their
respective corporate seals to be hereunto affixed, as of the day and year first
above written.
EQ ADVISORS TRUST
ON BEHALF OF
EACH OF ITS SERIES
By:/s/Peter D. Noris
--------------------------------
Peter D. Noris
President and Trustee
EQ FINANCIAL CONSULTANTS, INC.
By: /s/Peter D. Noris
--------------------------------
Peter D. Noris
Executive Vice President
-4-
<PAGE>
SCHEDULE A
OPERATING EXPENSE LIMITS
This Agreement relates to the following Portfolios of the Trust:
Maximun Operating
Name of Portfolio Expense Limit
- ----------------- ----------------
T. Rowe Price International Stock Portfolio .95%
T. Rowe Price Equity Income Portfolio .60%
EQ/Putnam Growth & Income Value Portfolio .60%
EQ/Putnam International Equity Portfolio .95%
EQ/Putnam Investors Growth Portfolio .60%
EQ/Putnam Balanced Portfolio .65%
MFS Research Portfolio .60%
MFS Emerging Growth Companies Portfolio .60%
Morgan Stanley Emerging Markets Equity Portfolio 1.50%
Warburg Pincus Small Company Value Portfolio .75%
Merrill Lynch World Strategy Portfolio .95%
Merrill Lynch Basic Value Equity Portfolio .60%
Lazard Small Cap Value Portfolio .95%
Lazard Large Cap Value Portfolio .65%
JPM Core Bond Portfolio .55%
BT Small Company Index Portfolio .35%
BT International Equity Index Portfolio .55%
BT Equity 500 Index Portfolio .30%
-5-
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Prospectuses and Statement of Additional Information constituting parts of this
Post-Effective Amendment No. 6 to the registration statement on Form N-1A (the
"Registration Statement") of our report dated February 23, 1998, relating to
the financial statements and financial highlights appearing in the December 31,
1997 Annual Report to Shareholders of EQ Advisors Trust, which are also
incorporated by reference into the Registration Statement. We also consent to
the reference to us under the heading "Financial Highlights" in the
Prospectuses and under the heading "Other Services-Independent Accountant" in
the Statement of Additional Information.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
April 16, 1998
<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
MERRILL BASIC VALUE EQUITY PORTFOLIO
EXHIBIT 16
Total Return (As of December 31, 1997)
at Maximum Offering Price
N
P (1 + T) = ERV
Where: P = A hypothetical initial payment of $1,000
T = Total Return
N = number of years
ERV = ending redeemable value at end of the period
Since Inception
05/01/97
--------
P = $ 1,000
T = 16.990%
N = 0.67 years
ERV = $ 1,111
<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
MERRILL LYNCH WORLD STRATEGY PORTFOLIO
EXHIBIT 16
Total Return (As of December 31, 1997)
at Maximum Offering Price
N
P (1 + T) = ERV
Where: P = A hypothetical initial payment of $1,000
T = Total Return
N = number of years
ERV = ending redeemable value at end of the period
Since Inception
05/01/97
--------
P = $1,000
T = 4.70%
N = 0.67 years
ERV = $1,031
<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
MFS EMERGING GROWTH COMPANIES PORTFOLIO
EXHIBIT 16
Total Return (As of December 31, 1997)
at Maximum Offering Price
N
P (1 + T) = ERV
Where: P = A hypothetical initial payment of $1,000
T = Total Return
N = number of years
ERV = ending redeemable value at end of the period
Since Inception
05/01/97
--------
P = $ 1,000
T = 22.42%
N = 0.67 years
ERV = $ 1,145
<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
MFS RESEARCH PORTFOLIO
EXHIBIT 16
Total Return (As of December 31, 1997)
at Maximum Offering Price
N
P (1 + T) = ERV
Where: P = A hypothetical initial payment of $1,000
T = Total Return
N = number of years
ERV = ending redeemable value at end of the period
Since Inception
05/01/97
--------
P = $ 1,000
T = 16.07%
N = 0.67 years
ERV = $ 1,105
<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
EQ/PUTNAM BALANCED PORTFOLIO
EXHIBIT 16
Total Returen (As of December 31, 1997)
at Maximum Offering Price
N
P (1 + T) = ERV
Where: P = A hypothetical initial payment of $ 1,000
T = Total Return
N = number of years
ERV = ending redeemable value at end of the period
Since Inception
05/01/97
--------
P = $1,000
T = 14.38%
N = 0.67 years
ERV = $1,094
<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
EQ/PUTNAM GROWTH & INCOME VALUE PORTFOLIO
EXHIBIT 16
Total Return (As of December 31, 1997)
at Maximum Offering Price
N
P (1 + T) = ERV
Where: P = A hypothetical initial payment of $1,000
T = Total Return
N = number of years
ERV = ending redeemable value at end of the period
Since Inception
05/01/97
--------
P = $1,000
T = 16.23%
N = 0.67 years
ERV = $1,106
<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
EQ/PUTNAM INTERNATIONAL EQUITY PORTFOLIO
EXHIBIT 16
Total Return (As of December 31, 1997)
at Maximum Offering Price
N
P (1 + T) = ERV
Where: P = A hypothetical initial payment of $1,000
T = Total Return
N = number of years
ERV = ending redeemable value at end of the period
Since Inception
05/01/97
--------
P = $1,000
T = 9.58%
N = 0.67 years
ERV = $1,063
<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
EQ/PUTNAM INVESTORS GROWTH PORTFOLIO
EXHIBIT 16
Total Return (As of December 31, 1997)
at Maximum Offering Price
N
P (1 + T) = ERV
Where: P = A hypothetical initial payment of $1,000
T = Total Return
N = number of years
ERV = ending redeemable value at end of the period
Since Inception
05/01/97
--------
P = $1,000
T = 24.70%
N = 0.67 years
ERV = $1,160
<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
T. ROWE PRICE EQUITY INCOME PORTFOLIO
EXHIBIT 16
Total Return (As of December 31,1997)
at Maximum Offering Price
N
P (1 + T) = ERV
Where: P = A hypothetical initial payment of $1,000
T = Total Return
N = number of years
ERV = ending redeemable value at end of the period
Since Inception
05/01/97
--------
P = $ 1,000
T = 22.11%
N = 0.67 years
ERV = $ 1,143
<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO
EXHIBIT 16
Total Return (As of December 31, 1997)
at Maximum Offering Price
N
P (1 + T) = ERV
Where: P = A hypothetical initial payment of $1,000
T = Total Return
N = number of years
ERV = ending redeemable value at end of the period
Since Inception
05/01/97
--------
P = $1,000
T = (1.49)%
N = 0.67 years
ERV = $990
<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
WARBURG PINCUS SMALL COMPANY VALUE PORTFOLIO
EXHIBIT 16
Total Return (As of December 31, 1997)
at Maximum Offering Price
N
P (1 + T) = ERV
Where: P = A hypothetical initial payment of $1,000
T = Total Return
N = number of years
ERV = ending redeemable value at end of the period
Since Inception
05/01/97
--------
P = $1,000
T = 19.15%
N = 0.67 years
ERV = $1,125
<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
MORGAN STANLEY EMERGING MARKETS EQUITY PORTFOLIO
EXHIBIT 16
Total Return (As of December 31, 1997)
at Maximum Offering Price
N
P (1 + T) = ERV
Where: P = A hypothetical initial payment of $1,000
T = Total Return
N = number of years
ERV = ending redeemable value at end of the period
Since Inception
08/20/97
--------
P = $ 1,000
T = (20.16)%
N = 0.37 years
ERV = $921
<PAGE>
POWER OF ATTORNEY
The undersigned Trustee of the EQ Advisors Trust, whose signature
appears below, hereby makes, constitutes and appoints Peter D. Noris, Mary
Breen and Jane A. Kanter, and each of them acting individually, to be his true
and lawful attorneys and agents, each of them with the power to act without any
other and with full power of substitution, to execute, deliver and file in the
undersigned capacity as shown below, any and all instruments that said
attorneys and agents may deem necessary or advisable to enable the EQ Advisors
Trust to comply with the Securities Act of 1933, as amended, including any and
all amendments to the EQ Advisors Trust's registration statement, and any
rules, regulations, orders or other requirements of the Securities and Exchange
Commission thereunder in connection with the registration of shares or
additional shares of beneficial interest of the EQ Advisors Trust or any of its
series or classes thereof, and the registration of the EQ Advisors Trust or any
of its series under the Investment Company Act of 1940, as amended, including
any and all amendments to the EQ Advisors Trust's registration statement; and
without limitation of the foregoing, the power and authority to sign the name
of the EQ Advisors Trust on its behalf, and to sign said Trustee's name on his
behalf, and said Trustee hereby grants to said attorney or attorneys, full
power and authority to do and perform each and every act and thing whatsoever
as said attorney or attorneys may deem necessary or advisable to carry out
fully the intent of this Power of Attorney to the same extent and with the same
effect as of said Trustee might or could do personally in his capacity as
aforesaid and said Trustee ratifies, confirms and approves all acts and things
which said attorney or attorneys might do or cause to be done by virtue of this
Power of Attorney and his signature as the same may be signed by said attorney
or attorneys.
Signature Title Date
/s/ Michael Hegarty Trustee April __, 1998
- -----------------------
Michael Hegarty
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001027263
<NAME> EQ ADVISORS TRUST
<SERIES>
<NUMBER> 1
<NAME> T. ROWE PRICE EQUITY INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAY-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 96,071,224
<INVESTMENTS-AT-VALUE> 101,517,669
<RECEIVABLES> 1,582,865
<ASSETS-OTHER> 1,445
<OTHER-ITEMS-ASSETS> 25,262,801
<TOTAL-ASSETS> 128,364,780
<PAYABLE-FOR-SECURITIES> 2,539,086
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 25,878,384
<TOTAL-LIABILITIES> 28,417,470
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 94,408,169
<SHARES-COMMON-STOCK> 8,272,803
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 2,001
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<NAME> EQ/PUTNAM GROWTH & INCOME VALUE PORTFOLIO
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<NAME> EQ ADVISORS TRUST
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<CIK> 0001027263
<NAME> EQ ADVISORS TRUST
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<NAME> EQ/PUTNAM INVESTORS GROWTH PORTFOLIO
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<CIK> 0001027263
<NAME> EQ ADVISORS TRUST
<SERIES>
<NUMBER> 6
<NAME> EQ/PUTNAM BALANCED PORTFOLIO
<S> <C>
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<CIK> 0001027263
<NAME> EQ ADVISORS TRUST
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<NAME> MFS RESEARCH PORTFOLIO
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<CIK> 0001027263
<NAME> EQ ADVISORS
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<NAME> MFS EMERGING GROWTH COMPANIES PORTFOLIO
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<CIK> 0001027263
<NAME> EQ ADVISORS TRUST
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<NAME> MORGAN STANLEY EMERGING MARKETS EQUITY PORTFOLIO
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<PER-SHARE-GAIN-APPREC> (2.06)
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</TABLE>
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<PAGE>
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<CIK> 0001027263
<NAME> EQ ADVISORS TRUST
<SERIES>
<NUMBER> 10
<NAME> WARBURG PINCUS SMALL COMPANY VALUE PORTFOLIO
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAY-01-1997
<PERIOD-END> DEC-31-1997
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<NET-ASSETS> 120,879,674
<DIVIDEND-INCOME> 260,345
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<NET-INVESTMENT-INCOME> 99,305
<REALIZED-GAINS-CURRENT> (937,026)
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<NUMBER-OF-SHARES-SOLD> 14,177,457
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</TABLE>
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<PAGE>
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<CIK> 0001027263
<NAME> EQ ADVISORS TRUST
<SERIES>
<NUMBER> 11
<NAME> MERRILL LYNCH WORLD STRATEGY PORTFOLIO
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAY-01-1997
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<NET-ASSETS> 18,210,450
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<NET-INVESTMENT-INCOME> 133,437
<REALIZED-GAINS-CURRENT> (294,596)
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<NUMBER-OF-SHARES-SOLD> 2,241,153
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<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.08
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001027263
<NAME> EQ ADVISORS TRUST
<SERIES>
<NUMBER> 12
<NAME> MERRILL LYNCH BASIC VALUE EQUITY PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAY-01-1997
<PERIOD-END> DEC-31-1997
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<ACCUM-APPREC-OR-DEPREC> (47,430)
<NET-ASSETS> 49,495,044
<DIVIDEND-INCOME> 158,359
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<NUMBER-OF-SHARES-SOLD> 4,633,508
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<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.06
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001027263
<NAME> EQ ADVISORS TRUST
<SERIES>
<NUMBER> 13
<NAME> BT EQUITY 500 INDEX PORTFOLIO
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-31-1997
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<PAGE>
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<CIK> 0001027263
<NAME> EQ ADVISORS TRUST
<SERIES>
<NUMBER> 14
<NAME> BT INTERNATIONAL EQUITY INDEX PORTFOLIO
<S> <C>
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<PAGE>
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<CIK> 0001027263
<NAME> EQ ADVISORS TRUST
<SERIES>
<NUMBER> 15
<NAME> BT SMALL COMPANY INDEX P0RTFOLIO
<S> <C>
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<TABLE> <S> <C>
<PAGE>
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<CIK> 0001027263
<NAME> EQ ADVISORS TRUST
<SERIES>
<NUMBER> 16
<NAME> JPM CORE BOND PORTFOLIO
<S> <C>
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<PAGE>
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<CIK> 0001027263
<NAME> EQ ADVISORS TRUST
<SERIES>
<NUMBER> 17
<NAME> LAZARD LARGE CAP VALUE PORTFOLIO
<S> <C>
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<PAGE>
<ARTICLE> 6
<CIK> 0001027263
<NAME> EQ ADVISORS TRUST
<SERIES>
<NUMBER> 18
<NAME> LAZARD SMALL CAP VALUE PORTFOLIO
<S> <C>
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<NET-ASSETS> 1,000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 100
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,000
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
