<PAGE>
Registration Nos. 333-17217
811-07953
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 16, 1999.
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.9 /x/
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No.11 /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. of the United States
20006-2401 1290 Avenue of the Americas
New York, New York 10104
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
on [date] pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a) on [date] pursuant to
paragraph (a) of Rule 485 75 days after filing pursuant to paragraph
(a)
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EQ ADVISORS TRUST
PROSPECTUS
May 1, 1999
This Prospectus describes the twenty-one (21) Portfolios offered by EQ Advisors
Trust. Each Portfolio has its own investment objective and strategies that are
designed to meet different investment goals. This Prospectus contains
information you should know before investing. Please read this Prospectus
carefully before investing and keep it for future reference.
FIXED INCOME PORTFOLIOS BALANCED PORTFOLIOS
JPM Core Bond EQ/Evergreen Foundation
EQ/Putnam Balanced
Merrill Lynch World Strategy
DOMESTIC EQUITY PORTFOLIOS AGGRESSIVE EQUITY PORTFOLIOS
BT Equity 500 Index BT Small Company Index
EQ/Evergreen Lazard Small Cap Value
EQ/Putnam Growth & Income Value MFS Emerging Growth Companies
EQ/Putnam Investors Growth Warburg Pincus Small Company Value
Lazard Large Cap Value
Merrill Lynch Basic Value Equity
MFS Growth with Income
MFS Research
T. Rowe Price Equity Income
INTERNATIONAL PORTFOLIOS
BT International Equity Index
EQ/Putnam International Equity
Morgan Stanley Emerging Markets Equity
T. Rowe Price International Stock
You should be aware that the Securities and Exchange Commission has not
approved or disapproved of the investment merit of these Portfolios or
determined if this Prospectus is accurate or complete. Any representation to
the contrary is a criminal offense.
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EQ ADVISORS TRUST
This Prospectus tells you about the twenty-one current Portfolios of the EQ
Advisors Trust ("Trust") and the Class IA shares offered by the Trust on behalf
of each Portfolio. The Trust is an open-end management investment company. Each
Portfolio is a separate series of the Trust with its own investment objective,
investment strategies and risks, which are described in this Prospectus. Each
of the current Portfolios of the Trust, 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 purposes of the
Investment Company Act of 1940, as amended ("1940 Act").
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 (the "Contract" or collectively, the
"Contracts") issued by The Equitable Life Assurance Society of the United
States ("Equitable") and Equitable of Colorado, Inc. ("EOC") and to
participants in The Equitable Investment Plan for Employees, Managers and
Agents ("Equitable Plan"). The prospectus is designed to help you make informed
decisions about the Portfolios that are available under your Contract or under
the Equitable Plan. You will find information about your Contract and how it
works in the accompanying prospectus for the Contracts if you are a
Contractholder or participant under a Contract.
Each Portfolio is managed by EQ Financial Consultants, Inc. ("Manager") which
directs the day to day operations of each Portfolio. Each of the Portfolios has
its own investment adviser ("Adviser"). Information about the Adviser for each
Portfolio is contained in the description concerning that Portfolio in the
section entitled "About the Investment Portfolios." The Manager has the
ultimate responsibility to oversee each of the Advisers and to recommend their
hiring, termination and replacement. Subject to approval by the Board of
Trustees, the Manager may without obtaining shareholder approval: (i) select
Advisers for each of the Trust's Portfolios; (ii) enter into and materially
modify existing investment advisory agreements; and (iii) terminate and replace
the Advisers.
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[2nd right hand page] TABLE OF CONTENTS
PAGE
----
SUMMARY INFORMATION CONCERNING EQ ADVISORS TRUST.............. 5
SUMMARY OF PRINCIPAL RISKS.................................... 11
ABOUT THE INVESTMENT PORTFOLIOS............................... 17
FIXED INCOME PORTFOLIOS.................................... 19
JPM CORE BOND PORTFOLIO................................. 19
BALANCED PORTFOLIOS........................................ 21
EQ/EVERGREEN FOUNDATION PORTFOLIO....................... 21
EQ/PUTNAM BALANCED PORTFOLIO............................ 23
MERRILL LYNCH WORLD STRATEGY PORTFOLIO.................. 25
DOMESTIC EQUITY PORTFOLIOS................................. 28
BT EQUITY 500 INDEX PORTFOLIO........................... 28
EQ/EVERGREEN PORTFOLIO.................................. 31
EQ/PUTNAM GROWTH & INCOME VALUE PORTFOLIO............... 33
EQ/PUTNAM INVESTORS GROWTH PORTFOLIO.................... 35
LAZARD LARGE CAP VALUE PORTFOLIO........................ 37
MERRILL LYNCH BASIC VALUE EQUITY PORTFOLIO.............. 39
MFS GROWTH WITH INCOME PORTFOLIO........................ 42
MFS RESEARCH PORTFOLIO.................................. 44
T. ROWE PRICE EQUITY INCOME PORTFOLIO................... 46
AGGRESSIVE EQUITY PORTFOLIOS............................... 48
BT SMALL COMPANY INDEX PORTFOLIO........................ 48
LAZARD SMALL CAP VALUE PORTFOLIO........................ 50
MFS EMERGING GROWTH COMPANIES PORTFOLIO................. 52
WARBURG PINCUS SMALL COMPANY VALUE PORTFOLIO............ 54
INTERNATIONAL PORTFOLIOS................................... 56
BT INTERNATIONAL EQUITY INDEX PORTFOLIO................. 56
EQ/PUTNAM INTERNATIONAL EQUITY PORTFOLIO................ 58
MORGAN STANLEY EMERGING MARKETS EQUITY PORTFOLIO........ 60
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO............. 63
MANAGEMENT OF THE TRUST....................................... 66
The Trust.................................................. 66
The Manager................................................ 66
Expense Limitation Agreement............................... 67
The Advisers............................................... 68
The Administrator.......................................... 68
The Transfer Agent......................................... 68
Brokerage Practices........................................ 69
Brokerage Transactions with Affiliates..................... 69
FUND DISTRIBUTION ARRANGEMENTS................................ 69
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PURCHASE AND REDEMPTION....................................... 69
HOW ASSETS ARE VALUED......................................... 70
TAX INFORMATION............................................... 70
PRIOR PERFORMANCE OF EACH ADVISER............................. 71
FINANCIAL HIGHLIGHTS.......................................... 75
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[TWO PAGE SPREAD]
SUMMARY INFORMATION CONCERNING EQ ADVISORS TRUST
The following chart highlights the twenty-one (21) Portfolios described in this
Prospectus that you can choose as investment alternatives under your Contracts
offered by Equitable or EOC. The chart and accompanying information identify
each Portfolio's investment objective(s), principal investment strategies and
principal risks. A "Summary of Principal Risks", which describes each of the
principal risks, follows the chart.
EQ ADVISORS TRUST
FIXED INCOME PORTFOLIO
Part A
- - ------------------------------------- -----------------------------------
PORTFOLIO INVESTMENT OBJECTIVE(S)
- - ------------------------------------- -----------------------------------
JPM CORE BOND Seeks to provide a high total
return consistent with moderate risk
of capital and maintenance of
liquidity
- - ------------------------------------- ------------------------------------
EQ ADVISORS TRUST
BALANCED PORTFOLIOS
Part A
- - ------------------------------------- -----------------------------------
PORTFOLIO INVESTMENT OBJECTIVE(S)
- - ------------------------------------- -----------------------------------
EQ/EVERGREEN FOUNDATION Seeks to provide, in order of
priority, reasonable income,
conservation of capital and capital
appreciation
- - ------------------------------------- -----------------------------------
PUTNAM BALANCED Seeks to provide a balanced
investment composed of a well-
diversified portfolio of stocks
and bonds that will produce both
capital growth and current income
- - ------------------------------------- -----------------------------------
MERRILL LYNCH WORLD STRATEGY Seeks high total return by investing
primarily in a portfolio of equity
and fixed income securities,
including convertible securities,
of U.S. and foreign issuers
- - ------------------------------------- -----------------------------------
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EQ ADVISORS TRUST
FIXED INCOME PORTFOLIO
Part B
- - ------------------------------------ -------------------------------------
PRINCIPAL INVESTMENT STRATEGIES PRINCIPAL RISKS
- - ------------------------------------ -------------------------------------
Investment-grade securities rated General investment, fixed income,
BBB/Baa or better at the time of liquidity, portfolio turnover,
(including foreign issuers) purchase derivatives, and foreign
securities risks
- - ------------------------------------ -------------------------------------
EQ ADVISORS TRUST
BALANCED PORTFOLIOS
Part B
- - ------------------------------------ -------------------------------------
PRINCIPAL INVESTMENT STRATEGIES PRINCIPAL RISKS
- - ------------------------------------ -------------------------------------
Well-diversified portfolio of General investment, convertible
stocks and bonds, and negotiable securities, and fixed income risks
instruments
- - ------------------------------------ -------------------------------------
Common stocks, preferred stocks, General investment, convertible
securities convertible into or securities, fixed income,
exchangeable for common stocks, derivatives and foreign securities
corporate debt obligations, U.S. risks
Government securities and
short-term debt instruments
- - ------------------------------------ -------------------------------------
Equity and fixed income securities General investment, foreign
of U.S. and foreign companies securities, fixed income,
derivatives and non-diversification
risks
- - ------------------------------------ -------------------------------------
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EQ ADVISORS TRUST
DOMESTIC EQUITY PORTFOLIOS
Part A
- - ------------------------------------ ------------------------------------
PORTFOLIO INVESTMENT OBJECTIVE(S)
- - ------------------------------------ ------------------------------------
BT EQUITY 500 INDEX Seeks to replicate as closely as
possible (before deduction of
Portfolio expenses) the total return
of the S&P 500 Index
- - ------------------------------------ -------------------------------------
EQ/EVERGREEN Seeks capital appreciation
- - ------------------------------------ -------------------------------------
EQ/PUTNAM GROWTH & INCOME VALUE Seeks capital growth. Current income
is a secondary objective
- - ------------------------------------ -------------------------------------
EQ/PUTNAM INVESTORS GROWTH Seeks long-term growth of capital and
any increased income that results
from this growth
- - ------------------------------------ -------------------------------------
LAZARD LARGE CAP VALUE Seeks capital appreciation by
investing primarily in equity
securities of companies with relatively
large capitalizations (i.e., companies
having market capitalizations of at
least $__ 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
- - ------------------------------------ -------------------------------------
MERRILL LYNCH BASIC VALUE EQUITY Seeks capital appreciation and
secondarily, income by investing in
securities, primarily equities, that
the Adviser believes are undervalued
and therefore represent basic
investment value
- - ------------------------------------ -------------------------------------
MFS GROWTH WITH INCOME Seeks to provide reasonable current
income and long-term growth of capital
and income
- - ------------------------------------ --------------------------------------
MFS RESEARCH Seeks to provide long-term growth of
capital and future income
- - ------------------------------------ --------------------------------------
T. ROWE PRICE EQUITY INCOME Seeks to provide substantial dividend
income and also capital appreciation by
investing primarily in dividend-paying
common stocks of established companies
- - ------------------------------------ --------------------------------------
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EQ ADVISORS TRUST
DOMESTIC EQUITY PORTFOLIOS
Part B
- - ------------------------------------ -------------------------------------
PRINCIPAL INVESTMENT STRATEGIES PRINCIPAL RISKS
- - ------------------------------------ -------------------------------------
Common stocks of companies in the General investment, index-fund, and
S&P 500 Index fixed income risks
- - ------------------------------------ -------------------------------------
Common stocks offering potential for General investment, fixed income,
capital growth (plus common stocks small-cap and mid-cap company, and
offering potential for current value investing risks
income, corporate bonds, notes and
debentures, preferred stocks and
convertible securities)
- - ------------------------------------ -------------------------------------
Common stocks (plus convertible General investment, derivatives,
bonds, convertible preferred stocks, convertible securities, foreign
preferred stocks and debt securities, fixed income, and value
securities) investing risks
- - ------------------------------------ -------------------------------------
Common stocks and convertible General investment, growth investing,
securities of companies whose small-cap and mid-cap company,
earnings are believed likely to grow convertible securities, derivatives,
faster than the economy as a whole foreign securities, and fixed income
riss
- - ------------------------------------ -------------------------------------
Equity securities of companies with General investment, value investing,
relatively large capitalizations derivatives, fixed income, and foreign
that the Adviser believes are securities risks
undervalued based on their return
on equity or capital
- - ------------------------------------ --------------------------------------
Equity securities that ared General investment, small-cap and
undervalued mid-cap company, foreign securities,
and value investing risks
- - ------------------------------------ --------------------------------------
Equity securities (common stock, General investment, convertible stock,
preferred stock, convertible small-cap and mid-cap company, foreign
securities, warrants and depositary securities, and growth investing risks
receipts)
- - ------------------------------------ --------------------------------------
Common stock or securities General investment, convertible
convertible into common stock of securities, small-cap and mid-cap
companies with better than average company, foreign securities, fixed
prospects for long-term growth income, and growth investing risks
- - ------------------------------------ --------------------------------------
Dividend-paying common stocks of General investment, value investing,
established companies convertible securities, and foreign
securities risks
- - ------------------------------------ --------------------------------------
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EQ ADVISORS TRUST
AGGRESSIVE EQUITY PORTFOLIOS
Part A
- - ------------------------------------ ------------------------------------
PORTFOLIO INVESTMENT OBJECTIVE(S)
- - ------------------------------------ ------------------------------------
BT SMALL COMPANY INDEX Seeks to replicate as closely as
possible (before deduction of
Portfolio expenses) the total return
of the Russell 2000 Index
- - ------------------------------------ ------------------------------------
LAZARD SMALL CAP VALUE Seeks capital appreciation by
investing in equity securities of U.S.
companies with small market
capitalizations (i.e., companies in
the range of companies represented by
the Russell 2000 Index) that the
Adviser considers inexpensively priced
relative to the return on total
capital or equity
- - ------------------------------------ ------------------------------------
MFS EMERGING GROWTH COMPANIES Seeks to provide long-term capital
growth
- - ------------------------------------ ------------------------------------
WARBURG PINCUS SMALL COMPANY VALUE Seeks long-term capital appreciation
- - ------------------------------------ ------------------------------------
EQ ADVISORS TRUST
INTERNATIONAL EQUITY PORTFOLIOS
Part A
- - ------------------------------------- -----------------------------------
PORTFOLIO INVESTMENT OBJECTIVE(S)
- - ------------------------------------- -----------------------------------
BT INTERNATIONAL EQUITY INDEX Seeks to replicate as closely
as possible (before deduction of
Portfolio expenses) the total
return of the MSCI EAFE Index
- - ------------------------------------- -----------------------------------
EQ/PUTNAM INTERNATIONAL EQUITY Seeks capital appreciation
- - ------------------------------------- -----------------------------------
MORGAN STANLEY EMERGING MARKETS Seeks long-term capital appreciation
by investing primarily in equity
securities of emerging country
issuers
- - ------------------------------------- -----------------------------------
T. ROWE PRICE INTERNATIONAL STOCK Seeks long-term growth of capital
through investment primarily in
common stocks of established
non-U.S. companies
- - ------------------------------------- -----------------------------------
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EQ ADVISORS TRUST
INTERNATIONAL/EQUITY PORTFOLIOS
Part B
------------------------------------ -----------------------------------
PRINCIPAL INVESTMENT STRATEGIES PRINCIPAL RISKS
------------------------------------ -----------------------------------
Common stocks of small-cap companies General investment, index-fund,
in the Russell 2000 Index small-cap and mid-cap company,
convertible securities, liquidity,
derivatives, and fixed income risks
------------------------------------ -----------------------------------
Equity securities of small-cap U.S. General investment, small-cap and
companies in the range of companies mid-cap company, value investing
included in the Russell 2000 Index convertible securities, liquidity,
that the Adviser believes are non-diversification, and fixed
undervalued based on their return income risks
on equity or capital
----------------------------------- -----------------------------------
Equity securities of emerging General investment, small-cap and
growth with the potential to become mid-cap company, convertible
major enterprises securities, liquidity, foreign
securities, growth investing, and
portfolio turnover risks
----------------------------------- -----------------------------------
Equity securities of small cap U.S. General investment, small-cap and
companies mid-cap company, liquidity, foreign
securities, fixed income, and value
investing risks
------------------------------------ ------------------------------------
EQ ADVISORS TRUST
INTERNATIONAL/EQUITY PORTFOLIOS
Part B
------------------------------------ -----------------------------------
PRINCIPAL INVESTMENT STRATEGIES PRINCIPAL RISKS
------------------------------------ -----------------------------------
Equity securities of companies in General investment, index-fund,
the MSCI EAFE Index foreign securities, liquidity, and
derivatives risks
------------------------------------ -----------------------------------
Equity securities of foreign General investment, foreign
companies securities, small-cap and mid-cap
company, convertible securities,
liquidity, and derivatives risks
------------------------------------ -----------------------------------
Equity securities of emerging market General investment, foreign
country companies securities, convertible securities,
liquidity, derivatives,
non-diversification, and fixed income
risks
------------------------------------ ------------------------------------
Common stocks of established General investment, foreign
foreign companies securities, liquidity, convertible
securities, fixed income, and growth
investing risks
------------------------------------ ------------------------------------
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SUMMARY OF PRINCIPAL RISKS
Risk is the chance that you will lose money on your investment or that it will
not earn as much as you expect. In general, the greater the risk, the more
money your investment can earn for you - and the more you can lose. Like other
investment companies, the value of each Portfolio's shares may be affected by
the Portfolio's investment objective(s), principal investment strategies and
particular risk factors. Consequently, each Portfolio may be subject to
different principal risks. Some of the principal risks of investing in the
Portfolios are discussed below. However, other factors may also affect each
Portfolio's net asset value.
There is no guarantee that a Portfolio will achieve its investment objective(s)
or that it will not lose principal value.
GENERAL INVESTMENT RISKS: Each Portfolio is subject to the following risks:
ASSET CLASS RISK: There is the possibility that the returns from the
types of securities in which a Portfolio invests will underperform
returns from the various general securities markets or different asset
classes. Different types of securities tend to go through cycles of
outperformance and underperformance in comparison to the general
securities markets.
MARKET RISK: Each Portfolio's share price moves up and down over the
short term in reaction to stock or bond market movements. This means
that you could lose money over short periods, and perhaps over longer
periods during extended market downturns.
SECURITY SELECTION RISK: The Advisers for each Portfolio rely on the
insights of different specialists in making investment decisions based
on each Portfolio's particular investment objective(s) and investment
strategies. There is the possibility that the specific securities held
by a Portfolio will underperform other funds in the same asset class
or benchmarks that are representative of the general performance of
the asset class because of the Adviser's choice of portfolio
securities.
YEAR 2000 RISK: Like other mutual funds, financial and business
organizations and individuals around the world, the Trust and its
Portfolios could be adversely affected if the computer systems used by
the Advisers, other service providers, or persons with whom they deal,
do not properly process and calculate date-related information and
data dated on and after January 1, 2000. This possibility is commonly
known as the "Year 2000 Problem." Virtually all operations of the
Trust and its Portfolios are computer reliant. The Manager, Advisers,
administrator, transfer agent, distributors and custodian have
informed the Trust that they are actively taking steps to address the
Year 2000 Problem with regard to their respective computer systems and
the interfaces between their respective computer systems. The Trust is
also taking measures to obtain assurances from necessary persons that
comparable steps are being taken by the key service providers to the
Trust's Advisers, administrator, transfer agent, distributors, and
custodian. There can be no assurance that the Trust and the
Portfolios' key service providers will be Year 2000 compliant. If not
adequately addressed, the Year 2000 Problem could result in the
inability of the Trust to perform its mission critical functions,
including trading and settling trades of Portfolio securities, pricing
of portfolio securities and processing shareholder transactions, and
the net asset value of its Portfolios' shares may be materially
affected.
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In addition, because the Year 2000 Problem affects virtually all
issuers, the companies or entities in which the Portfolios may invest
also could be adversely impacted by the Year 2000 Problem. For
example, issuers may incur substantial costs to address the Year 2000
problem. The extent of such impact cannot be predicted and there can
be no assurances that the Year 2000 Problem will not have an adverse
effect on the issuers whose securities are held by the Portfolios. The
Advisers have assured the Trust that they consider such issues in
making investment decisions for the Portfolios. Furthermore, certain
of the Portfolios make international investments thereby exposing
these Portfolios to operations, custody and settlement processes
outside the United States. In many countries outside the United States
the Year 2000 Problem has not been adequately addressed and concerns
have been raised that capital flight, among other issues, may be
triggered by full disclosure of the Year 2000 Problem on countries
outside the United States. Additional information on the impact of the
Year 2000 Problem on emerging market countries is provided in this
section, under "FOREIGN SECURITIES RISKS--EMERGING MARKET RISK."
As indicated in "Summary Information Concerning EQ Advisors Trust" and "About
the Investment Portfolios," a particular Portfolio may also be subject to the
following risks:
CONVERTIBLE SECURITIES RISK: Convertible securities may include 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. Therefore, convertible securities enable you 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. Each Adviser will consider such event
in its determination of whether a Portfolio should continue to hold the
securities.
DERIVATIVES RISK: Derivatives are financial contracts whose value depends on,
or is derived from the value of an underlying asset, reference rate or index.
Derivatives include stock options, securities index options, currency options,
forward currency exchange contracts, futures contracts, swaps and options on
futures contracts. Certain Portfolios can use derivatives involving the U.S.
Government and foreign government securities and currencies. Investments in
derivatives can significantly increase your exposure to market risk, or credit
risk of the counterparty. Derivatives also involve the risk of mispricing or
improper valuation and the risk that changes in value of the derivative may not
correlate perfectly with the relevant assets, rates and indices.
FIXED INCOME RISKS: To the extent that any of the Portfolios invest a
substantial amount of its assets in fixed income securities, a Portfolio may be
subject to the following risks:
CREDIT RISK: Credit risk is the risk that the issuer or guarantor of a
debt security or counterparty to a Portfolio's transactions will be
unable or unwilling to make timely principal and/or interest payments,
or otherwise will be unable or unwilling to honor its financial
obligations. Each of the Portfolios may be subject to credit risk to
the extent that it invests in debt securities or engages in
transactions, such as securities loans, which involve a promise by a
third party to honor an obligation to the Portfolio. Credit risk is
particularly significant for the Portfolios that invest a portion of
their assets in "JUNK BONDS" or lower-rated securities.
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INTEREST RATE RISK: The price of a bond or a fixed income security is
dependent upon interest rates. Therefore, the share price and total
return of a Portfolio investing a significant portion of its assets in
bonds or fixed income securities will vary in response to changes in
interest rates. A rise in interest rates causes the value of a bond to
decrease, and vice versa. There is the possibility that the value of a
Portfolio's investment in bonds or fixed income securities may fall
because bonds or fixed income securities generally fall in value when
interest rates rise. The longer the term of a bond or fixed income
instrument, the more sensitive it will be to fluctuations in value
from interest rate changes. Changes in interest rates may have a
significant effect on Portfolios holding a significant portion of
their assets in fixed income securities with long term maturities.
In the case of mortgage-backed securities, rising interest rates tend
to extend the term to maturity of the securities, making them even
more susceptible to interest rate changes. When interest rates drop,
not only can the value of fixed income securities drop, but the yield
can drop, particularly where the yield on the fixed income securities
is tied to changes in interest rates, such as adjustable mortgages.
Also when interest rates drop, the holdings of mortgage-backed
securities by a Portfolio can reduce returns if the owners of the
underlying mortgages pay off their mortgages sooner than anticipated
since the funds prepaid will have to be reinvested at the then lower
prevailing rates. This is known as prepayment risk. When interest
rates rise, the holdings of mortgage-backed securities by a Portfolio
can reduce returns if the owners of the underlying mortgages pay off
their mortgages later than anticipated. This is known as extension
risk.
INVESTMENT-GRADE SECURITIES RISK: Debt securities are rated by
national bond ratings agencies. Securities rated BBB by Standard &
Poor's ("S&P") or Baa by Moody's Investors Services, Inc. ("Moody's")
are considered investment grade securities, but are somewhat riskier
than higher rated investment-grade obligations because they are
regarded as having only an adequate capacity to pay principal and
interest, and are considered to lack outstanding investment
characteristics and may be speculative.
JUNK BONDS OR LOWER RATED SECURITIES RISK: Bonds rated below
investment grade by S&P and Moody's are speculative in nature, may be
subject to certain risks with respect to the issuing entity and to
greater market fluctuations than higher rated fixed-income securities.
They are usually issued by companies without long track records of
sales and earnings, or by those companies with questionable credit
strength. These bonds are considered "below investment grade." The
retail secondary market for these "junk bonds" may be less liquid than
that of higher rated securities and adverse conditions could make it
difficult at times to sell certain securities or could result in lower
prices than those used in calculating the Portfolio's net asset value.
FOREIGN SECURITIES RISKS: Investing in foreign securities, including depositary
receipts, involves risks not associated with investing in U.S. securities and
can affect a Portfolio's performance. Foreign markets, particularly emerging
markets, may be less liquid, more volatile and subject to less government
supervision than domestic markets. There may be difficulties enforcing
contractual obligations, and it may take more time for trades to clear and
settle. The specific risks of investing in foreign securities, among others,
include:
CURRENCY RISK: The risk that changes in currency exchange rates will
negatively affect securities denominated in, and/or receiving revenues
in, foreign currencies. Adverse changes in currency exchange rates
(relative to the U.S. dollar) may erode or reverse any potential gains
from a Portfolio's investment in securities denominated in a foreign
currency or may widen existing losses.
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EMERGING MARKET RISK: There are greater risks involved in investing in
emerging markets countries and/or their securities markets. Generally,
economic structures in these countries are less diverse and mature
than those in developed countries, and their political systems are
less stable. Investments in emerging markets countries may be affected
by national policies that restrict foreign investment in certain
issuers or industries. The small size of their securities markets and
low trading volumes can make investments illiquid and more volatile
than investments in developed countries and such securities may be
subject to abrupt and severe price declines. As a result, a Portfolio
investing in emerging markets countries may be required to establish
special custody or other arrangements before investing.
The YEAR 2000 PROBLEM may also be especially acute in emerging market
countries. Many emerging market countries are currently lagging behind
more developed countries in their Year 2000 preparedness because they
lack the financial resources to undertake the necessary remedial
actions. A lack of Year 2000 preparedness may adversely affect the
health, security and economic well-being of emerging market countries
and could, obviously, adversely affect the value of a Portfolio's
investments in emerging market countries. More information on the Year
2000 Problem is provided in this section, under "GENERAL INVESTMENT
RISKS--YEAR 2000 RISK."
EURO RISK: Certain of the Portfolios invests in securities issued by
European issuers. On January 1, 1999, 11 of the 15 member states of
the European Monetary Union ("EMU") introduced the "Euro" as a common
currency. During a three-year transitional period, the Euro will
coexist with each participating state's currency and, on July 1, 2002,
the Euro is expected to become the sole currency of the participating
states. The introduction of the Euro will result in the redenomination
of European debt and equity securities over a period of time, which
may result in various legal and accounting differences and/or tax
treatments that otherwise would not likely occur. During this period,
the creation and implementation of suitable clearing and settlement
systems and other operational problems may cause market disruptions
that could adversely affect investments quoted in the Euro.
The consequences of the Euro conversion for foreign exchange rates,
interest rates and the value of European securities eligible for
purchase by the Portfolios are presently unclear and it is not
possible to predict the eventual impact of the Euro implementation
plan on the Portfolios. There are a number of significant risks
associated with EMU. Monetary and economic union on this scale has
never been attempted before. There is a significant degree of
uncertainty as to whether participating countries will remain
committed to EMU in the face of changing economic conditions. The
conversion may adversely affect a Portfolio if the Euro does not take
effect as planned or if a participating state withdraws from the EMU.
Such actions may adversely affect the value and/or increase the
volatility of securities held by the Portfolios.
POLITICAL/ECONOMIC RISK: Changes in economic and tax policies,
government instability, war or other political or economic actions or
factors may have an adverse effect on a Portfolio's foreign
investments.
REGULATORY RISK: Less information may be available about foreign
companies. In general, foreign companies are not subject to uniform
accounting, auditing and financial reporting standards or to other
regulatory practices and requirements as are U.S. companies.
TRANSACTION COSTS RISK: The costs of buying and selling foreign
securities, including tax, brokerage and custody costs, generally are
higher than those involving domestic transactions.
14
<PAGE>
GROWTH INVESTING RISK: Growth investing generally focuses on companies that,
due to their strong earnings and revenue potential, offer above-average
prospects for capital growth, with less emphasis on dividend income. Earnings
predictability and confidence in earnings forecasts are an important part of
the selection process. As a result, the price of growth stocks may be more
sensitive to changes in current or expected earnings than the prices of other
stocks. Advisers using this approach generally seek out companies experiencing
some or all of the following: high sales growth, high unit growth, high or
improving returns on assets and equity, and a strong balance sheet. Such
Advisers also prefer companies with a competitive advantage such as unique
management, marketing or research and development. Growth investing is also
subject to the risk that the stock price of one or more companies will fall or
will fail to appreciate as anticipated by the Advisers, regardless of movement
in the securities market.
INDEX-FUND RISK: The BT Equity 500 Index, BT Small Company Index and BT
International Equity Index Portfolios are not actively managed (which involves
buying and selling of securities based upon economic, financial and market
analysis and investment judgment). Rather, the Portfolios utilize a "passive"
or "indexing" investment approach and attempt to duplicate the investment
performance of the particular index the Portfolio is tracking (i.e., S&P 500
Index, Russell 2000 Index or MSCI EAFE Index) through statistical procedures.
Therefore, the Portfolios will invest in the securities included in the
relevant index or substantially identical securities regardless of market
trends. The Portfolios cannot modify their investment strategies to respond to
changes in the economy, which means they may be particularly susceptible to a
general decline in the U.S. or global stock market segment relating to the
relevant index.
LEVERAGING RISK: When a Portfolio is borrowing money or otherwise leveraging
its portfolio, the value of an investment in that Portfolio will be more
volatile and all other risks will tend to be compounded. All of the Portfolios
may take on leveraging risk by investing in collateral from securities loans
and by borrowing money to meet redemption requests.
LIQUIDITY RISK: Certain securities may be difficult (or impossible) to sell at
the time and price the seller would like. A Portfolio may have to hold these
securities longer than it would like and may forego other investment
opportunities. There is the possibility that a Portfolio may lose money or be
prevented from earning capital gains if it can not sell a security at the time
and price that is most beneficial to the Portfolio. Portfolios that invest in
privately-placed securities, high-yield bonds, mortgage-backed securities or
foreign or emerging markets securities, which have all experienced periods of
illiquidity, are subject to liquidity risks. A particular Portfolio may be more
susceptible to some of these risks than others, as noted in the description of
each Portfolio.
NON-DIVERSIFICATION RISK: The Lazard Small Cap Value, Morgan Stanley Emerging
Markets Equity and Merrill Lynch World Strategy Portfolios are classified as
"non-diversified" investment companies, which means that the proportion of each
Portfolio's assets that may be invested in the securities of a single issuer is
not limited by the 1940 Act. Since a relatively high percentage of each
non-diversified Portfolio's assets may be invested in the securities of a
limited number of issuers, some of which may be within the same industry, the
securities of each Portfolio may be more sensitive to changes in the market
value of a single issuer or industry. The use of such a focused investment
strategy may increase the volatility of a Portfolio's investment performance,
as the Portfolio may be more susceptible to risks associated with a single
economic, political or regulatory event than a diversified portfolio. If the
securities in which the Portfolio invests perform poorly, the Portfolio could
incur greater losses than it would have had it been invested in a greater
number of securities. However to qualify as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended (the "Code") and
receive pass through tax treatment, each Portfolio at the close of each fiscal
quarter, may not have more than 25% of its total assets invested in the
securities of any one issuer (excluding U.S. Government obligations) and with
respect to 50% of its assets, (i) may not have more than 5% of its total assets
invested in the securities of any one issuer and (ii) may not own more than 10%
of the outstanding voting securities of any one issuer. Each non-diversified
Portfolio intends to qualify as a RIC.
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<PAGE>
PORTFOLIO TURNOVER RISK: Consistent with their investment policies, the
Portfolios also will purchase and sell securities without regard to the effect
on portfolio turnover. Higher portfolio turnover (e.g., over 100% per year)
will cause a Portfolio to incur additional transaction costs and may result in
taxable gains being passed through to shareholders.
SMALL-CAP AND MID-CAP COMPANY RISK: Investments in small-cap and mid-cap
companies may involve greater risks than investments in larger, more
established issuers. Smaller companies may have narrower product lines, more
limited financial resources and more limited trading markets for their stock,
as compared with larger companies. Their securities may trade less frequently
and in more limited volume than the securities of larger, more established
companies. In addition, small-cap and mid-cap companies are typically subject
to greater changes in earnings and business prospects than are those of larger
companies. Consequently, the prices of small company stocks tend to rise and
fall in value more frequently than the stocks of larger companies. Although
investing in small-cap and mid-cap companies offers potential for above-average
returns, the companies may not succeed and the value of their stock could
decline significantly.
VALUE INVESTING RISK: Value investing attempts to identify strong companies
selling at a discount from their perceived true worth. Advisers using this
approach generally select stocks at prices, in their view, that are temporarily
low relative to the company's earnings, assets, cash flow and dividends. Value
investing is subject to the risk that the stocks' intrinsic value may never be
fully recognized or realized by the market, or their prices may go down. In
addition, there is the risk that a stock judged to be undervalued may actually
be appropriately priced. Value investing generally emphasizes companies that,
considering their assets and earnings history, are attractively priced and may
provide dividend income.
The Trust's Portfolios are not insured by the FDIC or any other government
agency. Each Portfolio is not a deposit or other obligation of any financial
institution or bank and is not guaranteed. Each Portfolio is subject to
investment risks and possible loss of principal invested.
16
<PAGE>
ABOUT THE INVESTMENT PORTFOLIOS
This section of the Prospectus provides a more complete description of the
principal investment objectives, strategies and risks of each of the
Portfolios. Of course, there can be no assurance that any Portfolio will
achieve its investment objective.
Please note that:
o The description of the principal risks for a Portfolio includes risks
more fully described in the "Summary of Principal Risks" in the preceding
section.
o Additional information concerning each Portfolio's strategies,
investments and risks can be found in the Trust's Statement of Additional
Information.
THE BENCHMARKS
Performance of each of the Trust's Portfolios as shown on the following pages
compares each Portfolio's performance to that of a broad-based securities
index. Each of the Portfolios' annualized rates of return are net of investment
management fees, and expenses of each of the Trust. These rates are not
representative of the actual return you would receive under your Equitable
Contract.
Broad-based securities indices are unmanaged and are not subject to fees and
expenses typically associated with managed investment company portfolios.
Investments cannot be made directly in a broad-based securities index.
Comparisons with these benchmarks, therefore, are of limited use. They are
included because they are widely known and may help you to understand the
universe of securities from which each Portfolio is likely to select its
holdings. "Blended" performance numbers (e.g., 60% S&P 500/40% Lehman
Gov't/Corp) assume a static mix of the two indices.
THE COMPOSITE MARKET BENCHMARK is made up of 36% S&P 500, 24% MSCI EAFE Index,
21% Salomon Brothers U.S. Treasury Bond 1 year and, 14% Salomon Brothers World
Government ex U.S., and 5% U.S. Treasury Bill.
THE STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX ("S&P 500") is an
unmanaged index containing common stock 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 dividends,
if any, but does not reflect fees, brokerage commissions or other expenses of
investing.
THE RUSSELL 2000 INDEX ("Russell 2000") is an unmanaged index (with no defined
investment objective) of 2000 small-cap stocks and it includes reinvestment of
dividends. It is compiled by the Frank Russell Company.
THE MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX ("MSCI EAFE") is a market
capitalization weighted equity index composed of a sample of companies
representative of the market structure of Europe, Australia and the Far East.
MSCI EAFE Index returns assume dividends reinvested net of withholding tax and
do not reflect any fees or expenses.
17
<PAGE>
THE MORGAN STANLEY CAPITAL INTERNATIONAL EMERGING MARKETS FREE PRICE RETURN
INDEX ("MSCI Emerging Markets Free") is a market capitalization weighted equity
index composed of companies that are representative of the market structure of
the following countries: Argentina, Brazil, Chile, China Free, Columbia, Czech
Republic, Greece, Hungary, India, Indonesia, Israel, Jordan, Korea (@ 50%),
Malaysia, Mexico Free, Pakistan, Peru, Philippines Free, Poland, Russia, South
Africa, Sri Lanka, Taiwan (@50%), Thailand, Turkey, Venezuela Free. The base
date for the index is December 31, 1987. "Free" MSCI indices exclude those
shares not purchasable by foreign investors. The average size of the emerging
market companies within this index is US $800 million.
LEHMAN GOVERNMENT/CORPORATE BOND INDEX ("Lehman Gov't/Corp") represents an
unmanaged group of securities widely regarded by investors as representative of
the bond market.
SALOMON BROTHERS BROAD INVESTMENT GRADE BOND INDEX is an unmanaged market
weighted index that contains approximately 4,700 individually priced investment
grade bonds.
18
<PAGE>
FIXED INCOME PORTFOLIOS
JPM CORE BOND PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to provide a high total return consistent with
moderate risk of capital and maintenance of liquidity.
THE INVESTMENT STRATEGY
This Portfolio's total return will consist of income plus realized and
unrealized capital gains and losses. The Portfolio currently invests all of its
assets in investment grade debt securities rated BBB or better by S&P or Baa or
better by Moody's or unrated securities of similar quality.
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 based on the
Adviser's view of the market and interest rates. The Adviser also actively
allocates the Portfolio's assets among the broad sectors of the fixed income
market. These securities principally include U.S. Government and agency
securities, corporate securities, private placements, asset-backed securities,
mortgage-related securities and direct mortgage obligations. The securities can
be of any duration but will generally mature within one year of the Salomon
Brothers Broad Investment Grade Bond Index (currently about 5 years). The
Portfolio may also use futures contracts to change the duration of the
Portfolio's bond holdings.
[SIDEBAR: Duration is a measure of the weighted average maturity of the bonds
held by the Portfolio and can be used by the Adviser as a measure of the
sensitivity of the market value of the Portfolio to changes in interest rates.
Generally, the longer the duration of the Portfolio, the more sensitive its
market value will be to changes in interest rates. ]
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 securities denominated in
currencies of developed foreign countries.
Under normal market conditions, the Portfolio will be primarily invested in
bonds. When market or financial conditions warrant, the Portfolio may invest up
to 100% of its assets in money market securities for temporary or defensive
purposes. Such investment strategies are inconsistent with the Portfolio's
investment objective and could result in the Portfolio not achieving its
investment objective.
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, FIXED INCOME RISKS,
including CREDIT, INTEREST RATE, and INVESTMENT-GRADE SECURITIES RISKS. Other
principal risks include LIQUIDITY RISK, PORTFOLIO TURNOVER RISK, and
DERIVATIVES RISK. Should the Portfolio invest in foreign securities, the
Portfolio will be subject to FOREIGN SECURITIES RISKS.
19
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's annual total return for 1998,
the Portfolio's first year of existence. The table below shows the Portfolio's
average annual total returns for one year and since inception. The table also
compares the Portfolio's performance to the returns of a broad-based index.
Both the bar chart and table assume reinvestment of dividends and
distributions. Past performance is not an indication of future performance. The
Portfolio's commenced operations on January 1, 1998.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
9.02%
======
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
4.72% (1998 3rd Quarter) 0.21% (1998 4th Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
JPM CORE BOND PORTFOLIO 9.02% 9.02%
SALOMON BROTHERS BROAD INVESTMENT
GRADE BOND INDEX* 8.72% 8.72%
- - ------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
J.P. MORGAN INVESTMENT MANAGEMENT INC. ("J.P. Morgan"), 522 Fifth Avenue, New
York, New York 10036. J.P. Morgan has been the Adviser to the Portfolio since
it commenced operations. J.P. Morgan is a registered investment adviser and is
a wholly owned subsidiary of J.P. Morgan & Co. Incorporated, a bank holding
company. J.P. Morgan manages portfolios for corporations, governments,
endowments, as well as many of the largest corporate retirements plans in the
nation.
The Portfolio Managers, responsible for the day to day management of the
Portfolio since it commenced operations, are PAUL L. ZEMSKY, a Managing
Director of J.P. Morgan and a portfolio manager specializing in quantitative
techniques, who joined J.P. Morgan in 1985; and ROBERT J. TEATOM, a Managing
Director of J.P. Morgan and co-head of its U.S. Fixed Income Group, who joined
J.P. Morgan in 1975.
20
<PAGE>
BALANCED PORTFOLIOS
EQ/EVERGREEN FOUNDATION PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to provide, in order of priority, reasonable
income, conservation of capital and capital appreciation.
[SIDEBAR: For purposes of this Portfolio, the words "reasonable income" mean
moderate income]
THE INVESTMENT STRATEGY
The Portfolio invests primarily in a combination of common stocks, preferred
stocks, securities that are convertible into or exchangeable for common stocks,
investment-grade corporate debt securities, securities of or guaranteed by the
U.S. Government, its agencies or instrumentalities, and short-term debt
instruments, such as high quality commercial paper, and obligations of
FDIC-member banks. Investments in common stocks focus on those that pay
dividends and have the potential for capital appreciation. Common stocks are
selected based on a combination of financial strength and estimated growth
potential. Bonds are selected based on the Adviser's projections of interest
rates, varying amounts and maturities in order to achieve capital protection
and, when possible, capital appreciation. The asset allocation of the Portfolio
will vary in accordance with changing economic and market conditions.
Under normal market conditions, at least 25% of the Portfolio's net assets will
be invested in fixed income securities. In selecting debt securities, the
Adviser will emphasize securities that the Adviser believes will not be subject
to significant fluctuations in value. The corporate debt obligations purchased
by the Portfolio will be rated A or higher by S&P and Moody's. The Fund is not
managed with a targeted maturity.
When market or financial conditions warrant, the Portfolio may invest 100% of
its assets in short-term obligations for temporary or defensive purposes. Such
investment strategies are inconsistent with the Portfolio's investment
objectives and could result in the Portfolio not achieving its investment
objective.
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, CONVERTIBLE SECURITIES
RISK and FIXED INCOME RISKS.
21
<PAGE>
PORTFOLIO PERFORMANCE
The inception date for this Portfolio is January 1, 1999. Therefore, no
performance information is available.
WHO MANAGES THE PORTFOLIO
EVERGREEN ASSET MANAGEMENT CORP. ("Evergreen"), 2500 Westchester Avenue,
Purchase, New York 10577. Evergreen has been the Adviser to the Portfolio since
it commenced operations. Evergreen is a registered investment adviser and a
wholly-owned subsidiary of First Union Corporation. Evergreen offers a broad
range of financial services to individuals and businesses throughout the United
States.
STEPHEN A. LIEBER is the Portfolio Manager and has been responsible for the
day-to-day management of the Portfolio since its inception. Mr. Lieber has been
the Chairman and Co-Chief Executive Officer of Evergreen since 1994 and has
been associated with Evergreen and its predecessor (as Chairman) since 1971.
22
<PAGE>
EQ/PUTNAM BALANCED PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to provide a balanced investment composed of a
well-diversified portfolio of stocks and bonds that will produce both capital
growth and current income.
THE INVESTMENT STRATEGY
The Portfolio may invest in almost any type of security or negotiable
instrument, including common stocks, corporate bonds, cash and money market
securities. Although the proportion invested in each type of security is not
fixed, generally, no more than 75% of the Portfolio's assets will be invested
in common stocks, securities that are convertible into common stocks and other
equity securities.
The Portfolio uses a value-oriented approach by investing in stocks the Adviser
believes are currently selling below their true worth.
[SIDEBAR: Value-investing attempts to identify strong companies selling at a
discount from their perceived true worth. The Adviser selects stocks for the
Portfolio at prices at which in its view are temporarily low relative to the
company's earnings, assets, cash flow and dividends.]
The Portfolio may also invest in debt securities, issued by the U.S. Government
or by private companies. Most of the Portfolio's debt securities will be
investment-grade (rated at least BBB) and are generally intermediate- to
long-term (with maturities of more than three (3) years). The Portfolio may
also invest in lower-rated debt securities (called "junk bonds").
The Portfolio may also invest up to 20% of its total assets in foreign
securities and may purchase Eurodollar certificates of deposit (i.e.,
short-term time deposits issued by European banks) without regard to this 20%
limit.
When market or financial conditions warrant, the Portfolio may invest up to
100% of its assets in short term obligations for temporary or defensive
purposes. Such investment strategies are inconsistent with the Portfolio's
investment objectives and could result in the Portfolio not achieving its
investment objective.
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks are GENERAL INVESTMENT RISKS, CONVERTIBLE SECURITIES
RISK, FIXED INCOME RISKS, DERIVATIVES RISK, and FOREIGN SECURITIES RISKS.
23
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
11.92%
=====
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
9.33% (1998 4th Quarter) (5.24)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
EQ/PUTNAM BALANCED PORTFOLIO 11.92% 15.93%
60% S&P 500/40% LEHMAN GOV'T/CORP. INDEX* 21.35% 23.48
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
PUTNAM INVESTMENT MANAGEMENT, INC. ("Putnam Management"), One Post Office
Square, Boston, MA 02109. Putnam Management has been the Adviser to the
Portfolio since it commenced operations. Putnam Management has been managing
mutual funds since 1937. Putnam Management is a subsidiary of Putnam
Investments, Inc., which is itself a subsidiary of Marsh & McLennan Companies,
Inc.
The Portfolio Managers, responsible for the day-to-day management of the
Portfolio, are: DAVID L. WALDMAN, Managing Director, who has been employed by
Putnam Management as an investment professional* since 1997 and prior to 1997,
Mr. Waldman was a senior Portfolio Manager at Lazard Freres since 1995, and
prior to 1995, he was a Vice President at Goldman Sachs; EDWARD P. BOUSA,
Senior Vice President, who has been employed by Putnam Management as an
investment professional* since October, 1992; JAMES M. PRUSKO, Vice President,
who has been employed by Putnam Management as an investment professional* since
1992; and KRISHNA K. MEMANI, MANAGING DIRECTOR, Senior Vice President, who has
been employed by Putnam Management as an investment professional* since 1993.
* Investment professional means that the manager was either a portfolio manager
or analyst.
24
<PAGE>
MERRILL LYNCH WORLD STRATEGY PORTFOLIO
INVESTMENT OBJECTIVE: 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.
[SIDEBAR: For purposes of this Portfolio, "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.]
THE INVESTMENT STRATEGY
The Portfolio is a non-diversified Portfolio that invests in both equity
securities and fixed-income securities. The Portfolio may invest entirely in
equity securities, entirely in fixed-income securities, or partly in equity
securities and partly in fixed-income securities.
[SIDEBAR: A Portfolio may be considered to be "non-diversified" for federal
securities law purposes because it invests in a limited number of securities.
In all cases, the Portfolio intends to be diversified for tax purposes so that
it can qualify as a regulated investment company.]
The Portfolio will normally invest a significant portion of its assets in
equity securities of companies throughout the world. The equity securities in
which the Portfolio invests will primarily be common stocks of large companies.
There are no limits on the Portfolio's ability to invest in any country or
geographic region. The Portfolio can invest primarily in U.S. securities,
primarily in foreign securities, or partly in both. It normally invests in at
least three countries at any given time. The Portfolio may invest in companies
in emerging markets, but the Adviser anticipates that a substantially greater
portion of the Portfolio's equity investments will be in companies in developed
countries. At the present time, the Portfolio focuses on investments in Canada,
Western Europe, the Far East, and Latin America, as well as in the United
States.
The Adviser will select the percentage of the Portfolio's assets that will be
invested in equity securities and fixed-income securities, as well as the
geographic allocation of the Portfolio's investments, based on its view of
general economic and financial trends in various countries and industries, such
as inflation, commodity prices, the direction of interest and currency
movements, estimates of growth in industry output and profits, and government
fiscal policies. For example, if the Adviser believes that falling commodity
prices and decreasing estimates of industrial output globally signal low growth
and limited returns from equity securities, the Portfolio may emphasize
fixed-income investments. Similarly, if the Adviser believes that low
inflation, new technologies and improvements in economic productivity in a
country or region signal a promising environment for equity securities in that
country or region the Portfolio may emphasize equity investments in that
country or region.
The Portfolio may invest in fixed-income securities of any maturity, including
United States and foreign government securities and corporate debt securities.
The Portfolio will only invest in debt securities that are rated investment
grade by S&P or Moody's or unrated securities that are of comparable quality.
The Portfolio may also invest in securities denominated in currencies other
than the U.S. dollar. The Portfolio may also engage in currency transactions to
hedge against the risk of loss from changes in currency exchange rates. In
addition, the Portfolio may also employ a variety of instruments and techniques
to enhance income and to hedge against market and currency risk.
25
<PAGE>
The Portfolio has no stated minimum holding period for investments, and will
buy or sell securities whenever the Adviser sees an appropriate opportunity.
When market or financial conditions warrant, the Portfolio may invest up to
100% of its assets in United States Government or Government agency securities,
money market securities, other fixed income securities, or cash for temporary
or defensive purposes. Such investment strategies are inconsistent with the
Portfolio's investment objective and could result in the Portfolio not
achieving its investment objective.
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, FOREIGN SECURITIES
RISKS, including CURRENCY, EURO, POLITICAL/ECONOMIC, REGULATORY AND TRANSACTION
COSTS RISKS. Other principal risks include FIXED INCOME RISKS, DERIVATIVES and
NON-DIVERSIFICATION RISK.
26
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
6.81%
====
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
10.56% (1998 4Tth Quarter) (11.15)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
Merrill Lynch World Strategy Portfolio 6.81% 6.91%
Composite Market Benchmark Index* (25.34)% (28.92)%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
MERRILL LYNCH ASSET MANAGEMENT, L.P. ("MLAM"), 800 Scudders Mill Road,
Plainsboro, New Jersey 08543. MLAM has been the Adviser to the Portfolio since
it commenced operations. MLAM is an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc., a financial services holding company. 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.
THOMAS R. ROBINSON is the Portfolio Manager primarily responsible for the
day-to-day management of the Portfolio since it commenced operations. Mr.
Robinson has served as a First Vice President of MLAM since 1997 and as a
Senior Portfolio Manager of MLAM since 1995. Prior to 1995, Mr. Robinson served
as Manager of International Strategy for Merrill Lynch & Co. Global Securities
Research and Economics Group.
27
<PAGE>
DOMESTIC EQUITY PORTFOLIOS
BT EQUITY 500 INDEX PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to replicate as closely as possible (before
deduction of Portfolio expenses) the total return of the S&P 500.
THE INVESTMENT STRATEGY
The Portfolio invests in equity securities of companies included in the S&P
500. The Adviser seeks to match the risk and return characteristics of the S&P
500 by investing in a statistically selected sample of the securities found in
the S&P 500, using a process known as "optimization". This process selects
stocks for the Portfolio so that industry weightings, market capitalizations
and fundamental characteristics (price to book ratios, price to earnings
ratios, debt to asset ratios and dividend yields) closely match those of the
securities included in the S&P 500. This approach helps to increase the
Portfolio's liquidity and reduce costs. The securities held by the Portfolio
are weighted to make the Portfolio's total investment characteristics similar
to those of the S&P 500 as a whole.
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.
[SIDEBAR: For more information on the S&P 500, see the preceding section "The
Benchmarks." 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. 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.]
Over time, the correlation between the performance of the Portfolio and the S&P
is expected to be 95% or higher before deduction of Portfolio expenses. The
Portfolio's ability to track the S&P 500 may be affected by, among others,
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. The Portfolio seeks securities to track the S&P 500,
therefore, the Adviser generally will not attempt to judge the merits of any
particular security as an investment.
28
<PAGE>
The Portfolio may also invest 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 a number of reasons, including: to simulate full investment in the
S&P 500 while retaining a cash balance for Portfolio management purposes; to
facilitate trading; to reduce transaction costs; or to seek higher investment
returns when a future contract, option, warrant or convertible security is
priced more attractively than the underlying equity security or S&P 500. These
instruments are considered to be derivatives.
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS and INDEX-FUND RISK.
Should the Portfolio invest in debt securities, you may also experience FIXED
INCOME RISKS.
29
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's annual total return for 1998,
the Portfolio's first year of existence. The table below shows the Portfolio's
average annual total returns for the Portfolio for one year and since
inception. The table also compares the Portfolio's performance to the returns
of a broad based index. Both the bar chart and table assume reinvestment of
dividends and distributions. Past performance is not an indication of future
performance. The Portfolio's inception date was January 1, 1998.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
25.14%
=====
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
21.26% (1998 4th Quarter) (10.03)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
BT Equity 500 Index Portfolio 25.14% 25.14%
S&P 500 Index* 28.58% 28.58%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
BANKERS TRUST COMPANY ("Bankers Trust"), 130 Liberty Street (One Bankers Trust
Plaza), New York, New York 10006. Bankers Trust has been the Adviser to the
Portfolio since it commenced operations. Bankers Trust is a wholly-owned
subsidiary of Bankers Trust Corporation. Bankers Trust conducts a variety of
general banking and trust activities and is a major wholesale supplier of
financial services, including investment management to the international and
domestic institutional markets.
30
<PAGE>
EQ/EVERGREEN PORTFOLIO
INVESTMENT OBJECTIVE: Seeks capital appreciation.
THE INVESTMENT STRATEGY
The Evergreen Portfolio invests primarily in common stocks and convertible
securities of companies that are relatively small, little-known or represent
special situations which the Adviser believes offer potential for capital
appreciation. In addition, the Portfolio may invest in relatively well-known,
large company securities that have the potential for capital appreciation.
Securities are selected based on a combination of comparative undervaluation
relative to growth potential and/or merger/acquisition price.
[SIDEBAR: For purposes of this Portfolio, a "little-known" company is one whose
business is limited to a regional market or whose securities are mainly
privately held. A " relatively small" company is one that has a small share of
the market for its products or services in comparison with other companies in
its field or that provides goods or services for a limited market. A "special
situation" company is one which offers potential for capital appreciation
because of a recent or anticipated change in structure, management, products or
services.
The Portfolio also may invest to a lesser extent in non-convertible debt
securities and preferred stocks that offer an opportunity for capital
appreciation.
When market or financial conditions warrant, the Portfolio may invest up to
100% of its assets in short-term obligations for temporary or defensive
purposes. Such investment strategies are inconsistent with the Portfolio's
investment objectives and could result in the Portfolio not achieving its
investment objective.
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, SMALL-CAP AND MID-CAP
COMPANY RISK and VALUE INVESTING RISK. Should the Portfolio invest in debt
securities, you may also experience FIXED INCOME RISKS.
31
<PAGE>
PORTFOLIO PERFORMANCE
- - -------------------------------------------------------------------------------
The inception date for this Portfolio is January 1, 1999. Therefore, no prior
performance information is available.
- - -------------------------------------------------------------------------------
WHO MANAGES THE PORTFOLIO
EVERGREEN ASSET MANAGEMENT CORP. ("Evergreen"), 2500 Westchester Avenue,
Purchase, New York 10577. Evergreen has been the Adviser to the Portfolio since
it commenced operations. Evergreen is a registered investment adviser and a
wholly-owned subsidiary of First Union Corporation. Evergreen offers a broad
range of financial services to individuals and businesses throughout the United
States.
The Portfolio Managers, responsible for the day-to-day management of the
Portfolio since its inception, are STEPHEN A. LIEBER, who has been Chairman and
Co-Chief Executive Officer of Evergreen since 1994 and has been associated with
Evergreen and its predecessor (as Chairman) since 1971; and NOLA MADDOX
FALCONE, C.F.A., who has been President and Co-Chief Executive Officer of
Evergreen since 1994. Ms. Falcone has been associated with Evergreen and its
predecessor (as portfolio manager) since 1974.
32
<PAGE>
EQ/PUTNAM GROWTH & INCOME VALUE PORTFOLIO
INVESTMENT OBJECTIVE: Seeks capital growth. Current income is a secondary
objective.
THE INVESTMENT STRATEGY
The Portfolio invests primarily in common stocks that offer potential for
capital growth and may invest in stocks that offer potential for current
income. In analyzing companies for investment, the Adviser tries to identify
common stocks of companies that are significantly undervalued compared with
their underlying assets or earnings potential and offer growth and current
income potential.
The Portfolio may also invest in corporate bonds, notes and debentures,
preferred stocks or convertible securities (both debt securities and preferred
stocks) or U.S. Government securities.
It may also invest a portion of its assets in debt securities rated below
investment grade ( commonly referred to as "junk bonds"), zero-coupon bonds and
payment-in-kind bonds, and high quality U.S. and foreign dollar-denominated
money market securities. The Portfolio may invest up to 20% of its total assets
in foreign securities, including transactions involving futures contracts,
forward contracts and options and foreign currency exchange transactions.
There may be times when the Adviser will use additional investment strategies
to achieve a Portfolio's investment objectives. For example, the portfolio may
engage in a variety of investment management practices such as buying and
selling derivatives, including stock index futures contracts and call and put
options.
When market or financial conditions warrant, the Portfolio may invest up to
100% of its assets in debt securities, preferred stocks or other securities for
temporary or defensive purposes. Such investment strategies are inconsistent
with the Portfolio's investment objectives and could result in the Portfolio
not achieving its investment objective.
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks are GENERAL INVESTMENT RISKS, DERIVATIVES RISK,
CONVERTIBLE SECURITIES RISK, FOREIGN SECURITIES RISKS, and VALUE INVESTING
RISK. Should the Portfolio invest in debt securities, you may also experience
FIXED INCOME RISKS including JUNK BOND RISK.
33
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
12.75
=====
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
16.49% (1998 4th Quarter) (10.58)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
EQ/Putnam Growth & Income Portfolio 12.75% 17.56%
S&P 500 Index* 28.58% 31.63%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
PUTNAM INVESTMENT MANAGEMENT, INC. ("Putnam Management"), One Post Office
Square, Boston, MA 02109. Putnam Management has been the Adviser to the
Portfolio since the Portfolio commenced operations. Putnam Management has been
managing mutual funds since 1937. Putnam Management is a subsidiary of Putnam
Investments, Inc., which is itself a subsidiary of Marsh & McLennan Companies,
Inc.
ANTHONY I. KREISEL is the Portfolio Manager responsible for the day to day
management of the Portfolio since it commenced operations. Mr. Kreisel has been
employed by Putnam Management as an investment professional* since 1986.
* Investment professional means that the manager was either a portfolio manager
or analyst.
34
<PAGE>
EQ/PUTNAM INVESTORS GROWTH PORTFOLIO
INVESTMENT OBJECTIVE: Seeks long-term growth of capital and any increased
income that results from this growth.
THE INVESTMENT STRATEGY
The Portfolio invests primarily in common stocks of companies with market
capitalizations of $2 billion or more. The Adviser gives consideration to
growth potential rather than to dividend income. The Portfolio may purchase
securities of medium-sized companies having a proprietary product or profitable
market niches and the potential to grow very rapidly.
The Adviser invests mostly in "growth" stocks whose earnings the Adviser
believes are likely to grow faster than the economy as a whole. The Adviser
evaluates a company's future earnings potential and dividends, financial
strength, working assets and competitive position in its industry.
Although the Portfolio invests primarily in U.S. stocks, the Portfolio may
invest without limit in securities of foreign issuers that are traded in U.S.
public markets. It may also, to a lesser extent, invest in securities of
foreign issuers that are not traded in U.S. public markets.
The Portfolio may also engage in a variety of transactions involving
derivatives, such as futures, options, warrants and swaps and may also invest
in convertible securities, preferred stocks and debt securities.
When market or financial conditions warrant, the Portfolio may invest without
limit in debt securities, preferred stocks, United States Government and agency
obligations, cash or money market instruments, or any other securities for
temporary or defensive purposes. Such investment strategies are inconsistent
with the Portfolio's investment objectives and could result in the Portfolio
not achieving its investment objective.
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks are GENERAL INVESTMENT RISKS, GROWTH INVESTING RISK,
MID-CAP and SMALL-CAP COMPANY RISK, CONVERTIBLE SECURITIES RISK, DERIVATIVES
RISK and FOREIGN SECURITIES RISKS. Should the Portfolio invest in debt
securities, you may also experience FIXED INCOME RISKS.
35
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
36.27%
=====
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
25.29% (1998 4th Quarter) (11.25)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
EQ/Putnam Investors Growth Portfolio 36.27% 37.34%
S&P 500 Index* 28.58% 31.63%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
PUTNAM INVESTMENT MANAGEMENT, INC. ("Putnam Management"), One Post Office
Square, Boston, MA 02109. Putnam Management has been the Adviser to the
Portfolio since the Portfolio commenced operations. Putnam Management has been
managing mutual funds since 1937. Putnam Management is a subsidiary of Putnam
Investments, Inc., which is itself a subsidiary of Marsh & McLennan Companies,
Inc.
The Portfolio Managers, responsible for the day to day management of the
Portfolio since its inception, are: C. BETH COTNER, who has been employed by
Putnam Management as an investment professional* since 1995, and prior to 1995,
was a Portfolio Manager and Executive Vice President of Kemper Financial
Services; RICHARD B. ENGLAND, who has been employed by Putnam Management as an
investment professional* since 1992; and MANUAL WEISS HERRERRO, who has been
employed by Putnam Management as investment professional* since 1987.
* Investment professional means that the manager was either a portfolio manager
or analyst.
36
<PAGE>
LAZARD LARGE CAP VALUE PORTFOLIO
INVESTMENT OBJECTIVE: Seeks capital appreciation by investing primarily in
equity securities of companies with relatively large capitalizations (i.e.,
companies having market capitalizations of at least ___ $ 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.
THE INVESTMENT STRATEGY
The Portfolio normally invests at least 80% of its total [net assets] assets
primarily in equity securities of large capitalization companies. Equity
securities include common stocks, preferred stocks and securities convertible
into or exchangeable for common stocks.
The Portfolio uses a value-oriented approach in searching for securities. The
Adviser uses a "bottom-up" approach (individual stock selection) to find
companies that have:
o low price to earnings ratios
o high yield o unrecognized assets
o the possibility of management change
o the prospect of improved profitability
The Portfolio may also invest up to 20% of its assets in U.S. Government
securities and investment grade debt securities of domestic corporations rated
BBB or better by S&P or Baa or better by Moody's.
The Portfolio may also invest up to 10% of its assets in foreign equity, debt
security, or depositary receipts.
The Portfolio may also invest without limitation in high-quality short-term
money market instruments. The Portfolio may engage in options transactions,
including writing covered call options or foreign currencies to offset costs of
hedging and writing and purchasing put and call options on securities. Although
the Portfolio will engage in options transactions primarily to hedge its
Portfolio, it may use options to increase returns and there is the risk that
these transactions sometimes may reduce returns or increase volatility.
When market or financial conditions warrant, the Portfolio may invest, without
limit, in money market securities for temporary or defensive purposes. Such
investment strategies could have the effect of reducing the benefit of any
upswing in the market. Such investment strategies are inconsistent with the
Portfolio's investment objectives and could result in the Portfolio not
achieving its investment objective.
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks of investing in the Portfolio are GENERAL INVESTMENT
RISKS, VALUE INVESTING RISK and DERIVATIVES RISK. Should the Portfolio invest
in debt securities, you may experience FIXED INCOME RISKS.
37
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's average annual total return for
1998, the Portfolio's first year of existence. The table below shows the
Portfolio's average annual total returns for the Portfolio for one year and
since inception. The table also compares the Portfolio's performance to the
returns of a broad based index. Both the bar chart and table assume
reinvestment of dividends and distributions. Past performance is not an
indication of future performance. The Portfolio's inception date was January 1,
1998.
- - --------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
20.01%
=====
- - --------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
23.34% (1998 4th Quarter) (13.43)% (1998 3rd Quarter)
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
Lazard Large Cap Value Portfolio 20.01% 20.01%
S&P 500 Index* 28.58% 28.58%
- - --------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
LAZARD ASSET MANAGEMENT ("LAM"), 30 Rockefeller Plaza, New York, New York
10112. LAM has been the Adviser to the Portfolio since it commenced operations.
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. Lazard Freres provides its clients with a wide variety of investment
banking, brokerage and related services, including investment management.
The Portfolio Managers, responsible for the day to day management since the
inception of the Portfolio are HERBERT W. GULLQUIST, a Vice-Chairman, Managing
Director and Chief Investment Officer of LAM, who has been with LAM since 1982;
and MICHAEL S. ROME, a Managing Director of LAM and a U.S./Global Equity
Portfolio Manager since 1991.
38
<PAGE>
MERRILL LYNCH BASIC VALUE EQUITY PORTFOLIO
INVESTMENT OBJECTIVE: Seeks 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 INVESTMENT STRATEGY
The Portfolio chooses securities for capital appreciation that are expected to
increase in value. In selecting securities the Adviser emphasizes stocks that
are undervalued, are selling at a discount, or seem capable of recovering from
being temporarily out of favor. The Adviser places particular emphasis on
securities with statistical characteristics associated with undervaluation.
The Adviser follows a contrary opinion/out-of-favor investment style. The
Adviser believes that favorable changes in market prices are more likely to
occur when:
o Stocks are out of favor.
o Company earnings are depressed.
o Price/earnings ratios are relatively low.
o Investment expectations are limited.
o There is no general interest in a security or industry.
On the other hand, the Adviser believes that negative developments are more
likely to occur when:
o Investment expectations are high.
o Stock prices are advancing or have advanced rapidly.
o Price/earnings ratios have been inflated.
o An industry or security continues to become popular among investors.
In other words, the Adviser believes that stocks with relatively high
price/earnings ratios are more vulnerable to price declines from unexpected
adverse developments. At the same time, stocks with relatively low
price/earnings ratios are more likely to benefit from favorable but generally
unanticipated events. Thus, the Portfolio may invest a large part of its net
assets in stocks that have weak research ratings.
The Portfolio invests primarily in common stocks of U.S. companies, but may buy
equity securities other than common stock and may also invest up to 10% of its
total assets in securities issued by foreign companies. The Portfolio may also
invest a substantial portion of its assets in companies with market
capitalizations below the largest companies. The Adviser believes that large
institutional investors may overlook these companies, making them undervalued.
The Portfolio has no minimum holding period for investments, and will buy or
sell securities whenever the Portfolio's management sees an appropriate
opportunity.
When market or financial conditions warrant, the Portfolio may invest in U.S.
Government and agency securities, money market securities and other
fixed-income securities for temporary or defensive purposes. Such investment
strategies are inconsistent with the Portfolio's investment objectives and
could result in the Portfolio not achieving its investment objective.
39
<PAGE>
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, SMALL-CAP AND MID-CAP
COMPANY RISK, and VALUE INVESTING RISK. Should the Portfolio invest in foreign
securities, you may experience FOREIGN SECURITIES RISKS.
40
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
11.59%
=====
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
11.20% (1997 3rd Quarter) (10.91)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
Merrill Lynch Basic Value
Equity Portfolio 11.59% 17.29%
S&P 500 Index* 28.58% 31.63%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
MERRILL LYNCH ASSET MANAGEMENT, L.P. ("MLAM"), 800 Scudders Mill Road,
Plainsboro, NJ 08543. MLAM has been the Adviser to the Portfolio since it
commenced operations. MLAM is an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc., a financial services holding company. 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.
KEVIN RENDINO, a First Vice President of MLAM since 1997, has been the
Portfolio Manager responsible for the day to day management of the Portfolio
since it commenced operations. Mr. Rendino was a Vice President of MLAM from
1993 to 1997.
41
<PAGE>
MFS GROWTH WITH INCOME PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to provide reasonable current income and long-term
growth of capital and income.
[SIDEBAR: For purposes of this Portfolio, the words "reasonable current income"
mean moderate income.]
THE INVESTMENT STRATEGY
The Portfolio invests, under normal market conditions, primarily (at least 65%
of its total assets) in equity securities, including common stocks, preferred
stocks, convertible securities, warrants and depositary receipts for those
securities. Equity securities may be listed on a securities exchange or traded
in the over-the-counter markets. While the Portfolio may invest in companies of
any size, the Portfolio generally focuses on companies with larger market
capitalizations that the Adviser believes have sustainable growth prospects and
attractive valuations based on current and expected earnings or cash flow.
The Adviser uses a "bottom-up" investment style in managing the Portfolio. This
means that securities are selected based upon fundamental analysis performed by
the Adviser's large group of equity research analysts.
The Portfolio may invest in foreign securities and may have exposure to foreign
currencies through its investment in these securities, its direct holdings of
foreign currencies or through its use of forward foreign currency exchange
contracts for the purchase or sale of a fixed quantity of foreign currency at a
future date.
When adverse market, financial or political conditions warrant, the Portfolio
may depart from its principal strategies for temporary or defensive purposes.
Such investment strategies are inconsistent with the Portfolio's investment
objective and could result in the Portfolio not achieving its investment
objective.
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, CONVERTIBLE SECURITIES
RISK, SMALL-CAP AND MID-CAP RISK, and GROWTH INVESTING RISK.. Should the
Portfolio invest in foreign securities, you may experience FOREIGN SECURITIES
RISKS.
42
<PAGE>
PORTFOLIO PERFORMANCE
- - -------------------------------------------------------------------------------
The inception date for this Portfolio is January 1, 1999. Therefore, no prior
performance information is available.
- - -------------------------------------------------------------------------------
WHO MANAGES THE PORTFOLIO
MASSACHUSETTS FINANCIAL SERVICES COMPANY ("MFS"), 500 Boylston Street, Boston,
MA 02116. MFS has been the Adviser to the Portfolio since it commenced
operations. MFS is America's oldest mutual fund organization. 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. 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 Managers are JOHN D. LAUPHEIMER, JR., Senior Vice President of
MFS, who has been employed as a portfolio manager by MFS since 1986; and
MITCHELL D. DYNAN, a Vice President of MFS, who has been employed as a
portfolio manager by MFS since 1981.
43
<PAGE>
MFS RESEARCH PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to provide long-term growth of capital and future
income.
THE INVESTMENT STRATEGY
The Portfolio invests primarily in equity securities, such as common stocks,
securities convertible into common stocks, preferred stocks and depositary
receipts of companies believed by the Adviser to have:
o favorable prospects for long-term growth;
o attractive valuations based on current and expected earnings or cash flow;
o dominant or growing market share; and
o superior management.
The Portfolio may invest in securities of companies of any size. The
Portfolio's investments may include securities traded on securities exchanges
or in the over-the-counter markets.
The Portfolio may invest in foreign equity securities, and may have exposure to
foreign currencies through its investment in these securities, its direct
holdings of foreign currencies or through its use of foreign currency exchange
contracts for the purchase or sale of a fixed quantity of foreign currency at a
future date.
When adverse market, financial or political conditions warrant, the Portfolio
may depart from its principal investment strategies for temporary or defensive
purposes. Such investment strategies are inconsistent with the Portfolio's
investment objectives and could result in the Portfolio not achieving its
investment objective.
The Portfolio may invest up to 10% of its assets in high yielding debt
securities rated below investment grade ("junk bonds").
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks of investing in the Portfolio are GENERAL INVESTMENT
RISKS, CONVERTIBLE SECURITIES RISK, GROWTH INVESTING RISK, and SMALL-CAP AND
MID-CAP COMPANY RISK. To the extent that the Portfolio invests in debt
securities it may be subject to FIXED INCOME RISKS. Should the Portfolio invest
in foreign securities, you may experience FOREIGN SECURITIES RISKS.
44
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
24.11%
=====
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
21.36% (1998 4th Quarter) (17.35)% (1997 4th Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
MFS Research Portfolio 24.11% 24.41%
S&P 500 Index* 28.58% 31.63%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
MASSACHUSETTS FINANCIAL SERVICES COMPANY ("MFS"), 500 Boylston Street, Boston,
MA 02116. MFS has been the Adviser to the Portfolio since it commenced
operations. MFS is America's oldest mutual fund organization. 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. 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.
A committee of investment research analysts selects portfolio securities for
the Portfolio. 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 committee allocates the Portfolio's assets among various industries.
Individual analysts then select what they view as the securities best suited to
achieve the Portfolio's investment objective within their assigned industry
responsibility.
45
<PAGE>
T. ROWE PRICE EQUITY INCOME PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to provide substantial dividend income and also
capital appreciation by investing primarily in dividend-paying common stocks of
established companies.
THE INVESTMENT STRATEGY
The Portfolio invests primarily in dividend-paying common stocks of established
companies that have favorable prospects for increasing dividend income and
capital appreciation. The Portfolio's yield as a result of that dividend income
is expected to be significantly above the average yield of the companies of the
S&P 500.
The Adviser bases its investment decisions on three premises: (1) over time,
dividend income can account for a significant portion of the Portfolio's
return; (2) dividends are a more stable and predictable source of return; and
(3) prices of stocks that pay a high current income level tend to be less
volatile than those paying below average dividends.
The Adviser uses a "value" approach in choosing securities. It looks for common
stocks of companies that have:
o established operating histories;
o above-average dividend yields relative to the S&P 500;
o low price to earnings ratios relative to the S&P 500;
o sound balance sheets; and
o low stock price relative to the company's asset value, earnings and
cash flow.
[SIDEBAR: Equity income investing involves finding common stocks that pay
dividend income. As an example, utility company stocks often provide dividend
income while a shareholder waits for the stock price to move. Dividends can
help reduce the Portfolio's volatility during turbulent markets and help offset
losses when stock prices are falling.]
The Portfolio may invest up to 25% of its total assets in foreign securities.
These securities include non-dollar-denominated securities traded outside the
United States and dollar-denominated securities such as American Depositary
Receipts. The Portfolio may also purchase preferred stocks, convertible
securities, warrants, U.S. Government securities, high-quality money market
securities, as well as investment grade debt securities and high yielding debt
securities ("junk bonds").
When market or financial conditions warrant, the Portfolio may invest without
limitation in high quality money market securities, and United States
Government debt securities for temporary or defensive purposes. Such investment
strategies are inconsistent with the Portfolio's investment objectives and
could result in the Portfolio not achieving its investment objective.
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks of investing in the Portfolio are GENERAL INVESTMENT
RISKS, VALUE INVESTING RISK, CONVERTIBLE SECURITIES RISK and FOREIGN SECURITIES
RISKS. Should the Portfolio invest in debt securities, you may also experience
FIXED INCOME RISKS.
46
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
9.11%
====
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
11.16% (1998 4th Quarter) (7.66)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
T. Rowe Price Equity Income
Portfolio 9.11% 18.73%
S&P 500 Index* 28.58% 31.63%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
T. ROWE PRICE ASSOCIATES, INC. ("T. Rowe Price"), 100 East Pratt Street,
Baltimore, MD 21202. T. Rowe Price has been the Adviser to the Portfolio since
the Portfolio commenced operations. T. Rowe Price serves as investment manager
to a variety of individual and institutional investor accounts, including
limited partnerships and other mutual funds.
Investment decisions with respect to the Portfolio are made by an Investment
Advisory Committee. BRIAN C. ROGERS has been the Committee Chairman since the
inception of the Portfolio and has day-to-day responsibility for managing the
Portfolio. Mr. Rogers joined T. Rowe Price in 1982 and has been managing
investments since 1983.
47
<PAGE>
AGGRESSIVE EQUITY PORTFOLIOS
BT SMALL COMPANY INDEX PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to replicate as closely as possible (before the
deduction of Portfolio expenses) the total return of the Russell 2000 Index
("Russell 2000").
THE INVESTMENT STRATEGY
The Portfolio invests primarily in equity securities of small-cap companies
included in the Russell 2000. The Adviser seeks to match the returns of the
Russell 2000. The Portfolio invests in a statistically selected sample of the
securities found in the Russell 2000, using a process known as "optimization."
This process selects stocks for the Portfolio so that industry weightings,
market capitalizations and fundamental characteristics (price to book ratios,
price to earnings ratios, debt to asset ratios and dividend yields) closely
match those of the securities included in the Russell 2000. This approach helps
to increase the Portfolio's liquidity and reduce costs. The securities held by
the Portfolio are weighted to make the Portfolio's total investment
characteristics similar to those of the Russell 2000 as a whole.
[SIDEBAR: For more information on The Russell 2000, see the preceding section
"The Benchmarks." 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.]
Over time, the correlation between the performance of the Portfolio and the
Russell 2000 is expected to be 95% or higher before the deduction of Portfolio
expenses. 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. The Portfolio seeks to track
the Russell 2000, therefore, the Adviser generally will not attempt to judge
the merits of any particular security as an investment.
Securities index futures contracts and related options, warrants and
convertible securities may be used for a number of reasons, including: to
simulate full investment in the Russell 2000 while retaining a cash balance for
fund management purposes; to facilitate trading; to reduce transaction costs;
or to seek higher investment returns when a future contract, option, warrant or
convertible security is priced more attractively than the underlying equity
security or Russell 2000. These instruments are considered to be derivatives.
The Portfolio may invest to a lesser extent in short-term debt securities and
money market securities to meet redemption requests or to facilitate investment
in the securities included in the Russell 2000.
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, INDEX-FUND RISK,
SMALL-CAP and MID-CAP COMPANY RISK, CONVERTIBLE SECURITIES RISK, LIQUIDITY RISK
and DERIVATIVES RISK. Should the Portfolio invest in debt securities, you may
experience FIXED INCOME RISKS.
48
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's annual total return for 1998,
the Portfolio's first year of existence. The table below shows the Portfolio's
average annual total returns for the Portfolio for one year and since
inception. The table also compares the Portfolio's performance to the returns
of a broad based index. Both the bar chart and table assume reinvestment of
dividends and distributions. Past performance is not an indication of future
performance. The Portfolio's inception date was January 1, 1998.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
(2.27)%
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
16.21% (1998 4th Quarter) (19.52) (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
BT Small Company Index
Portfolio (2.27)% (2.27)%
Russell 2000 Index* (2.54)% (2.54)%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
BANKERS TRUST COMPANY ("Bankers Trust"), 130 Liberty Street (One Bankers Trust
Plaza), New York, New York 10006. Bankers Trust has been the Adviser to the
Portfolio since it commenced operations. 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.
49
<PAGE>
LAZARD SMALL CAP VALUE PORTFOLIO
INVESTMENT OBJECTIVE: Seeks capital appreciation by investing 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 INVESTMENT STRATEGY
The Portfolio is a non-diversified Portfolio that invests primarily in equity
securities of U.S. companies with small market capitalizations that the Adviser
believes are undervalued based on their return on equity or capital. The
Portfolio will have characteristics similar to the Russell 2000 Index. The
equity securities that may be purchased by the Portfolio include common stocks,
preferred stocks, securities convertible into or exchangeable for common
stocks, rights and warrants.
[SIDEBAR: For more information on The Russell 2000, see the preceding section
"The Benchmarks"]
[SIDEBAR: A Portfolio may be considered to be "non-diversified" for federal
securities law purposes because it invests in a limited number of securities.
In all cases, the Portfolio intends to be diversified for tax purposes so that
it can qualify as a regulated investment company.]
In selecting investments for the Portfolio, the Adviser looks for equity
securities of companies that have one or more of the following characteristics:
(i) are undervalued relative to their earnings, cash flow or asset values; (ii)
have an attractive price/value relationship with expectations that some
catalyst will cause the perception of value to change within two years; (iii)
are out of favor due to circumstances which are unlikely to harm the company's
franchise or earnings power; (iv) have low projected price to earnings or
price-to-cash flow multiples; (v) have the potential to become a larger factor
in the company's business; (vi) have significant debt but have high levels of
free cash flow; and (vii) have a relatively short corporate history with the
expectation that the business may grow.
Although the Portfolio will principally invest at least 80% of its assets in
small capitalization securities, the Portfolio may also invest up to 20% of its
assets in larger capitalization equity securities or investment-grade debt
securities. The Portfolio may also engage in lending portfolio securities.
When market or financial conditions warrant the Portfolio may invest without
limitation in short-term money market instruments or hold its assets in cash
for temporary or defensive purposes. Such investment strategies could have the
effect of reducing the benefit of any upswing in the market. Such investment
strategies are inconsistent with the Portfolio's investment objectives and
could result in the Portfolio not achieving its investment objective.
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks of investing in the Portfolio are GENERAL INVESTMENT
RISKS, SMALL-CAP and MID-CAP COMPANY RISK, VALUE INVESTING risk, CONVERTIBLE
SECURITIES RISK, LIQUIDITY RISK and NON-DIVERSIFICATION RISK. Should the
Portfolio invest in debt securities, you may also experience FIXED INCOME
RISKS.
50
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's annual total return for 1998,
the Portfolio's first year of existence. The table below shows the Portfolio's
average annual total returns for the Portfolio for one year and since
inception. The table also compares the Portfolio's performance to the returns
of a broad based index. Both the bar chart and table assume reinvestment of
dividends and distributions. Past performance is not an indication of future
performance. The Portfolio's inception date was January 1, 1998.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
(7.03)%
======
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
15.78% (1998 4th Quarter) (20.10)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
Lazard Small Cap Value
Portfolio (7.03)% (7.03)%
Russell 2000 Index* (2.54)% (2.54)%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
LAZARD ASSET MANAGEMENT ("LAM"), 30 Rockefeller Plaza, New York, New York
10112. LAM has been the Adviser to the Portfolio since it commenced operations.
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. Lazard Freres provides its clients with a wide variety of investment
banking and related services, including investment management.
The Portfolio Managers, responsible for the day to day management since the
inception of the Portfolio, are: EILEEN D. ALEXANDERSON, a Managing Director of
LAM who has been with LAM since 1979 and HERBERT W. GULLQUIST, a Vice-Chairman,
Managing Director and Chief Investment Officer of LAM, who has been with LAM
since 1982.
51
<PAGE>
MFS EMERGING GROWTH COMPANIES PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to provide long-term capital growth.
THE INVESTMENT STRATEGY
The Portfolio invests, under normal market conditions, primarily (at least 65%
of its total assets) in common stocks and related securities, such as preferred
stock, convertible securities and depositary receipts of emerging growth
companies. Emerging growth companies that the Adviser believes are either:
o early in their life cycle but have the potential to become major
enterprises, or
o are major enterprises 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.
For purposes of this Portfolio, emerging growth companies may be of any size
and the Adviser would expect these companies to have products, technologies,
management, markets and opportunities that will facilitate earnings growth over
time that is well above the growth rate of the overall economy and rate of
inflation. The Portfolio's investments may include securities traded in the
over-the-counter markets.
The Adviser uses a "bottom-up" investment style in managing the Portfolio. This
means the securities are selected based upon fundamental analysis performed by
the Adviser.
In addition, up to 15% of the Portfolio's assets may be invested in foreign
securities, including those in emerging markets, or in cash and cash
equivalents.
When adverse market, financial or political conditions warrant, the Portfolio
may depart from its principal strategies for temporary or defensive purposes.
Such investment strategies are inconsistent with the Portfolio's investment
objectives and could result in the Portfolio not achieving its investment
objective.
The Portfolio may engage in active and frequent trading to achieve its
principal investment strategies. Frequent trading increases transaction costs,
which could detract from the Portfolio's performance.
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks of investing in the Portfolio are GENERAL INVESTMENT
RISKS, SMALL-CAP AND MID-CAP COMPANY RISK, CONVERTIBLE SECURITIES RISK,
LIQUIDITY RISK, FOREIGN SECURITIES RISKS, GROWTH INVESTING RISK, and PORTFOLIO
TURNOVER RISK.
52
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
34.57%
=====
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
26.70% (1998 04th Quarter) (12.69)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
MFS Emerging Growth
Companies Portfolio 34.57% 34.81%
Russell 2000 Index* (2.54)% (14.53)%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
MASSACHUSETTS FINANCIAL SERVICES COMPANY ("MFS"), 500 Boylston Street, Boston,
MA 02116. MFS has been the Adviser to the Portfolio since it commenced
operations. MFS is America's oldest mutual fund organization. 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. 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 Managers are JOHN W. BALLEN, President of MFS, who has been
employed by MFS as a portfolio manager of the Portfolio since 1984; TONI Y.
SHIMURA, a Vice President of MFS, who has been employed by MFS as a portfolio
manager for the Portfolio since 1995; and STEPHEN PESEK, a Vice President of
MFS, who has been employed as a portfolio manager by MFS since 1994. Prior to
1994, Mr. Pesek worked at Fidelity Investments as a research analyst.
53
<PAGE>
WARBURG PINCUS SMALL COMPANY VALUE PORTFOLIO
INVESTMENT OBJECTIVE: Seeks long-term capital appreciation.
THE INVESTMENT STRATEGY
The Portfolio invests primarily in equity securities of U.S. small-cap
companies with above-average growth potential that the Adviser believes to be
undervalued. Typically, such investments may include common stocks, preferred
stocks, convertible securities, warrants and rights of small-cap companies.
Once 65% of the Portfolio's assets are invested in small-cap companies, the
Portfolio may also invest in companies with a market capitalization of any
size.
[SIDE BAR: For purposes of this Portfolio, small-cap companies are companies
having market capitalizations within the range of capitalizations of companies
represented in the Russell 2000 Index .]
In determining whether a company's stock is undervalued, the Adviser considers
all relevant factors which may include a company's:
o price/earnings ratio;
o price to book value ratio;
o price to cash flow ratio; and
o debt to capital ratio
The Portfolio will invest primarily (at least 65% of its net assets) in the
securities of U.S. companies traded in the U.S. securities markets. The
Portfolio may invest to a lesser extent in foreign securities, investment grade
debt securities and high quality domestic and foreign short-term (one year or
less) and medium-term money-market securities.
When market or financial conditions warrant, the Portfolio may invest without
limitation in investment grade debt obligations and in domestic and foreign
obligations, including repurchase agreements for temporary or defensive
purposes. Such investment strategies are inconsistent with the Portfolio's
investment objectives and could result in the Portfolio not achieving its
investment objective.
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, SMALL-CAP and MID-CAP
COMPANY RISK, LIQUIDITY RISK and FOREIGN SECURITIES RISKS and VALUE INVESTING
RISK. Should the Portfolio invest in debt securities, you may also experience
FIXED INCOME RISKS.
54
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
(10.12)%
=======
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
15.49% (1997 3rd Quarter) (20.25)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
Warburg Pincus Small Company
Value Portfolio (10.02)% 4.25%
Russell 2000 Index* (2.54)% 14.53%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
WARBURG PINCUS ASSET MANAGEMENT, INC. ("WPAM"), 466 Lexington Avenue, New York,
New York 10017-3147. WPAM has been the Adviser to the Portfolio since it
commenced operations. 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. WPAM is
indirectly controlled by Warburg, Pincus & Co., a New York partnership which
has no business other than being a holding company of WPAM and its affiliates.
KYLE F. FREY is the Portfolio Manager responsible for the day-to-day management
of the Portfolio's securities portfolio since the Portfolio commenced
operations. Mr. Frey is a managing director, who has been with WPAM since 1989.
55
<PAGE>
INTERNATIONAL PORTFOLIOS
BT INTERNATIONAL EQUITY INDEX PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to replicate as closely as possible (before
deduction of Portfolio expenses) the total return of the MSCI ("MSCI EAFE
Index").
THE INVESTMENT STRATEGY
The Portfolio invests primarily in equity securities of companies included in
the MSCI EAFE Index. The Portfolio is constructed to have aggregate investment
characteristics similar to those of the MSCI EAFE Index. The Portfolio invests
in a statistically selected sample of the securities of companies included in
the MSCI EAFE Index, although not all companies within a country will be
represented in the Portfolio at the same time. Stocks are selected 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 securities should be purchased or sold in order
to replicate the MSCI EAFE index.
[SIDEBAR: For more information on the MSCI EAFE Index see the preceding section
"The Benchmarks." The MSCI 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 MSCI EAFE Index or any data included therein.]
Over time, the correlation between the performance of the Portfolio and the
MSCI EAFE Index is expected to be 95% or higher before deduction of Portfolio
expenses. The Portfolio's ability to track the MSCI EAFE Index may be affected
by, among others, transaction costs, administration and other expenses incurred
by the Portfolio, changes in either the composition of the MSCI EAFE Index or
the assets of the Portfolio, and the timing and amount of Portfolio investor
contributions and withdrawals, if any. The Portfolio seeks to track the MSCI
EAFE Index, therefore, the Adviser generally will not attempt to judge the
merits of any particular security as an investment.
The Portfolio may invest to a lesser extent in short-term debt securities and
money market instruments to meet redemption requests or to facilitate
investment in the securities of the MSCI EAFE Index. Securities index futures
contracts and related options, warrants and convertible securities may be used
for a number of reasons, including: to simulate full investment in the MSCI
EAFE Index while retaining a cash balance for Portfolio management purposes; to
facilitate trading; to reduce transaction costs; or to seek higher investment
returns when a future contract, option, warrant or convertible security is
priced more attractively than the underlying equity security or MSCI EAFE
Index. These instruments are considered to be derivatives.
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, INDEX-FUND RISK,
FOREIGN SECURITIES RISKS, including CURRENCY, EMERGING MARKET, EURO,
POLITICAL/ECONOMIC, REGULATORY and TRANSACTION COST RISKS. Other principal
risks include LIQUIDITY RISK and DERIVATIVES RISK.
56
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart and table below illustrate the Portfolio's average annual total
return. The information in the table also compares the Portfolio's performance
to the returns of a broad based index. Both the bar chart and table assume
reinvestment of dividends and distributions. Past performance is not an
indication of future performance. The Portfolio's inception date was January 1,
1998.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
20.07%
=====
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
20.43% (1998 4th Quarter) (13.90)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
BT International Equity Index
Portfolio 20.07% 20.07%
MSCI EAFE Index* 20.00% 20.00%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
BANKERS TRUST COMPANY ("Bankers Trust"), 130 Liberty Street (One Bankers Trust
Plaza), New York, New York 10006. Bankers Trust has been the Adviser to the
Portfolio since it commenced operations. 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, including investment management.
57
<PAGE>
EQ/PUTNAM INTERNATIONAL EQUITY PORTFOLIO
INVESTMENT OBJECTIVE: Seeks capital appreciation.
THE INVESTMENT STRATEGY
The Portfolio invests primarily in equity securities of companies organized
under the laws of a country other than the United States. Such equity
securities normally include common stocks, preferred stocks, securities
convertible into common or preferred stocks and warrants. Under normal market
circumstances, a majority of the Portfolio's assets will be invested in
companies located in at least three different countries outside the United
States. The countries in which the Portfolio may invest include emerging market
countries.
The Portfolio may engage in a variety of transactions using "derivatives," such
as futures, options, warrants, forward and swap contracts on both securities
and currencies.
The Portfolio will not limit its investments to any particular type of company.
The Portfolio may invest in companies of any size whose earnings the Adviser
believes to be in a relatively strong growth trend or whose securities the
Adviser considers to be undervalued.
The Adviser considers, among other things, a company's financial strength,
competitive position in its industry and projected future earnings and
dividends when deciding whether to buy or sell investments.
When market or financial conditions warrant, the Portfolio may invest, without
limitation, in securities of any kind, including securities traded primarily in
U.S. markets, cash and money market instruments for temporary or defensive
purposes. Such investment strategies are inconsistent with the Portfolio's
investment objectives and could result in the Portfolio not achieving its
investment objective.
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks are GENERAL INVESTMENT RISKS, FOREIGN SECURITIES
RISKS, including CURRENCY, EMERGING MARKET, EURO, POLITICAL/ECONOMIC,
REGULATORY and TRANSACTION COST RISKS. Other principal risks include SMALL-CAP
AND MID-CAP COMPANY RISK, CONVERTIBLE SECURITIES RISK, LIQUIDITY RISK and
DERIVATIVES RISK.
58
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
19.51%
=====
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
22.16% (1998 4th Quarter) (18.48)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
EQ/Putnam International Equity
Portfolio 19.51% 17.52%
S&P 500 Index* 20.00% 13.43%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
PUTNAM INVESTMENT MANAGEMENT, INC. ("Putnam Management"), One Post Office
Square, Boston, MA 02109. Putnam Management has been the Adviser to the
Portfolio since the Portfolio commenced operations. Putnam Management has been
managing mutual funds since 1937. Putnam Management is a subsidiary of Putnam
Investments, Inc.
The Portfolio Managers, responsible for the day to day management of the
Portfolio since the inception of the Portfolio, are JUSTIN SCOTT, a Managing
Director, who has been with Putnam Management as an investment professional*
since 1988 and OMID KAMSHAD, a Managing Director, who has been employed as an
investment professional* by Putnam Management since 1996. Prior to January
1996, he was a Director of Investments at Lombard Odier International Portfolio
Management Limited and prior to April 1995, he was Director at Baring Asset
Management Company.
* Investment professional means that the manager was either a portfolio manager
or analyst.
59
<PAGE>
MORGAN STANLEY EMERGING MARKETS EQUITY PORTFOLIO
INVESTMENT OBJECTIVE: Seeks long-term capital appreciation by investing
primarily in equity securities of emerging country issuers.
THE INVESTMENT STRATEGY
The Portfolio is a non-diversified Portfolio that invests primarily in equity
securities of companies located in emerging markets countries. Such equity
securities may include common stocks, preferred stocks, convertible securities,
depositary receipts, rights and warrants. The Adviser focuses on
growth-oriented companies in emerging market countries that it believes have
strong developing economies and increasingly sophisticated markets. The
Portfolio generally invests only in emerging markets countries whose currencies
are freely convertible into United States dollars.
[SIDEBAR: A Portfolio may be considered to be "non-diversified" for federal
securities law purposes because it invests in a limited number of securities.
In all cases, the Portfolio intends to be diversified for tax purposes so that
it can qualify as a regulated investment company.]
[SIDEBAR: For purposes of this Portfolio, an emerging market country security
is defined as a security of an issuer having one or more of the following
characteristics:
o its principal securities trading market is in an emerging market country;
o alone or on a consolidated basis, at least 50% of its revenues are
derived from goods produced, sales made or services performed in emerging
market countries; and
o it is organized under the laws of or has a principal office in an emerging
market country]
The Adviser's investment approach combines top-down country allocation with
bottom-up stock selection.
[SIDEBAR: In a "top-down" approach, country allocations are made based on
forecasts of stock market trends. In a "bottom-up" approach, securities are
reviewed and chosen individually.]
The Portfolio may invest to a lesser extent in corporate or government-issued
or guaranteed debt securities of emerging markets countries, including debt
securities that are rated or considered to be below investment grade ("junk
bonds"). The Portfolio also may, to a lesser extent, invest in equity or debt
securities (including "junk bonds") of corporate or governmental issuers
located in industrialized countries, foreign currency or investment funds and
supranational entities such as the World Bank. In addition, the Portfolio may
utilize forward foreign currency contracts, options and futures contracts and
swap transactions.
When market or financial conditions warrant the Portfolio may invest in certain
short- and medium-term fixed income securities of issuers other than emerging
market issuers and may invest without limitation in high quality money market
instruments for temporary or defensive purposes. Such investment strategies are
inconsistent with the Portfolio's investment objectives and could result in the
Portfolio not achieving its investment objective.
60
<PAGE>
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, FOREIGN SECURITIES
RISKS, including CURRENCY, EMERGING MARKET, EURO, POLITICAL/ECONOMIC,
REGULATORY and TRANSACTION COST RISKS. Other principal risks include
CONVERTIBLE SECURITIES RISK, LIQUIDITY RISK, DERIVATIVES RISK, and
NON-DIVERSIFICATION RISK. Should the Portfolio invest in debt securities, the
Portfolio would also be subject to FIXED INCOME RISKS.
61
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is August 20, 1977.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
(27.10)%
=======
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
14.56% (1998 4th Quarter) (22.14)% (1998 2nd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
Morgan Stanley Emerging Markets
Equity Portfolio (27.10)% (32.69)%
MSCI Emerging Markets
Free* (25.34)% (28.92)%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
MORGAN STANLEY ASSET MANAGEMENT ("MSAM"), 1221 Avenue of the Americas, New
York, NY 10020. MSAM has been the Adviser to the Portfolio since the Portfolio
commenced operations. 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. On December 1, 1998, Morgan
Stanley Asset Management Inc. changed its name to Morgan Stanley Dean Witter
Investment Management Inc. but continues to do business in certain instances
using the name Morgan Stanley Asset Management.
The Portfolio Managers, responsible for the day to day management of the
Portfolio since the Portfolio commenced operations, are: ROBERT MEYER, a
Managing Director of MSAM and Morgan Stanley & Co. Incorporated, who is head of
MSAM's Emerging Markets Equity Group and who joined MSAM in 1989; and ANDY
SKOV, a Principal of MSAM and Morgan Stanley & Co. Incorporated who joined MSAM
in 1994.
62
<PAGE>
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO
INVESTMENT OBJECTIVE: Seeks long-term growth of capital through investment
primarily in common stocks of established non-United States companies.
THE INVESTMENT STRATEGY
The Portfolio invests substantially all of its assets in common stocks of
established companies outside of the United States. The Portfolio intends to
diversify broadly among countries throughout the world by having securities
from at least five different countries represented in the Portfolio. No more
than 20% of its assets will be invested in securities of any one country,
except that up to 35% can be invested in stocks of companies in Australia,
Canada, France, Japan, United Kingdom or Germany. In determining the
appropriate distribution of investments among various countries and geographic
regions, the Adviser ordinarily considers the following factors:
o prospects for relative economic growth between foreign countries;
o expected levels of inflation;
o government policies influencing business conditions;
o the outlook for currency relationships; and
o 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
securities such as preferred stocks, warrants and convertible securities as
well as governmental debt securities and investment grade debt securities. The
Portfolio may also invest in certain foreign investment funds, hybrid
instruments and derivative instruments in keeping with the Portfolio objective.
In analyzing companies for investment, the Adviser uses a "bottom-up" approach
and looks for companies that have:
o prospects for achieving and sustaining above-average, long-term
earnings growth per share;
o a high return on invested capital;
o healthy balance sheet;
o sound financial and accounting policies and overall financial strength;
o strong competitive advantages;
o effective research, product development and marketing;
o pricing flexibility;
o strong management; and
o record of paying dividends.
This means that the securities are selected based upon fundamental analysis
performed by the Adviser, and are not selected based upon the type of
industries to which they belong.
When market or financial conditions warrant the Portfolio may invest without
limitation in high quality U.S. Government and corporate debt obligations for
temporary or defensive purposes. Such investment strategies are inconsistent
with the Portfolio's investment objectives and could result in the Portfolio
not achieving its investment objective.
63
<PAGE>
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks of investing in the Portfolio are GENERAL INVESTMENT
RISKS, FOREIGN SECURITIES RISK, including CURRENCY, EMERGING MARKET, EURO,
POLITICAL/ECONOMIC, REGULATORY AND TRANSACTION COST RISKS. Other Principal
risks include LIQUIDITY RISK, CONVERTIBLE SECURITIES RISK, FIXED INCOME RISKS,
and GROWTH INVESTING RISK.
64
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
13.68%
=====
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
16.86% (1998 4th Quarter) (13.63)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
T. Rowe Price International Stock
Portfolio (13.68)% 7.01%
MSCI EAFE Index* 20.00% 13.43%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
ROWE PRICE-FLEMING INTERNATIONAL, INC. ("Price-Fleming"), 100 East Pratt
Street, Baltimore, MD 21202. Price-Fleming has been the Adviser to the
Portfolio since it commenced its operations. Price-Fleming was incorporated in
Maryland in 1979 as a joint venture between T. Rowe Price and Robert Fleming
Holdings Limited ("Flemings"). Flemings is a diversified investment
organization that participates in a global network of regional investment
offices. The common stock of Price-Fleming is 50% owned by a wholly owned
subsidiary of T. Rowe Price, 25% owned by a subsidiary of Flemings and 25%
owned by Jardine Fleming Group Limited ("Jardine Fleming").
Investment decisions with respect to the Portfolio are made by an Investment
Advisory Committee Group. The Investment Advisory Group has day-to-day
responsibility for managing the Portfolio and developing and executing the
Portfolio's investment program.
65
<PAGE>
MANAGEMENT OF THE TRUST
This section gives you information on the Trust, the Manager and the Advisers
for the Portfolios. More detailed information concerning each of the Advisers
and portfolio managers is included in the description for each Portfolio in the
section "About The Investment Portfolios."
THE TRUST
The Trust is organized as a Delaware business trust and is registered with the
Securities and Exchange Commission ("SEC") as an open-end management investment
company. The Trust issues shares of beneficial interest that are currently
divided among twenty-one Portfolios, each of which has authorized Class IA and
Class IB shares. Each Portfolio has its own objectives, investment strategies
and risks, which have been previously described in this prospectus.
THE MANAGER
EQ Financial Consultants, Inc., 1290 Avenue of the Americas, New York, New York
10104, serves as the Manager of the Trust, subject to the supervision and
direction of the Board of Trustees. The Manager has overall responsibility for
the general management and administration of the Trust.
In the exercise of that responsibility, the Manager, without obtaining
shareholder approval but subject to the review and approval by the Board of
Trustees, may: (i) select the Advisers for the Portfolios; (ii) enter into and
materially modify existing investment advisory agreements; and (iii) terminate
and replace the Advisers. The Manager also monitors each Adviser's investment
program 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 also supervises the provision of services
by third parties such as the Trust's custodian and administrator.
The Manager is an investment adviser registered under the 1940 Act and a
broker-dealer registered under the Securities Exchange Act of 1934, as amended.
EQ Financial Consultants, Inc. is a wholly-owned subsidiary of Equitable.
The table below shows the annual rate of the management fees (as a percentage
of each Portfolio's average daily net assets) that the Manager received in 1998
for managing each of the Portfolios and the rate of the management fees waived
by the Manager in 1998 in accordance with the provisions of an expense
limitation agreement, as described directly below, between the Manager and the
Trust.
MANAGEMENT FEES PAID BY THE PORTFOLIOS TO EQ FINANCIAL CONSULTANTS
<TABLE>
<CAPTION>
- - ------------------------------------------------ ---------------------------------- -------------------------------
PORTFOLIOS ANNUAL RATE RECEIVED RATE OF FEES WAIVED
- - ------------------------------------------------ ---------------------------------- -------------------------------
<S> <C> <C>
T. Rowe Price Equity Income 0.55% 0.19%
- - ------------------------------------------------ ---------------------------------- -------------------------------
EQ/Putnam Growth & Income Value 0.55% 0.19%
- - ------------------------------------------------ ---------------------------------- -------------------------------
EQ/Putnam Investors Growth 0.55% 0.24%
- - ------------------------------------------------ ---------------------------------- -------------------------------
EQ/Putnam Balanced 0.55% 0.35%
- - ------------------------------------------------ ---------------------------------- -------------------------------
MFS Research 0.55% 0.20%
- - ------------------------------------------------ ---------------------------------- -------------------------------
MFS Emerging Growth Companies 0.55% 0.19%
- - ------------------------------------------------ ---------------------------------- -------------------------------
MFS Growth with Income 0.55% ---
- - ------------------------------------------------ ---------------------------------- -------------------------------
Merrill Lynch Basic Value Equity 0.55% 0.21%
- - ------------------------------------------------ ---------------------------------- -------------------------------
Lazard Large Cap Value 0.55% 0.34%
- - ------------------------------------------------ ---------------------------------- -------------------------------
T. Rowe Price International Stock 0.75% 0.21%
- - ------------------------------------------------ ---------------------------------- -------------------------------
EQ/Evergreen 0.75% ---
- - ------------------------------------------------ ---------------------------------- -------------------------------
EQ/Putnam International Equity 0.70% 0.26%
- - ------------------------------------------------ ---------------------------------- -------------------------------
Merrill Lynch World Strategy 0.70% 0.44%
- - ------------------------------------------------ ---------------------------------- -------------------------------
Morgan Stanley Emerging Markets Equity 1.15% 0.82%
- - ------------------------------------------------ ---------------------------------- -------------------------------
Warburg Pincus Small Company Value 0.65% 0.18%
- - ------------------------------------------------ ---------------------------------- -------------------------------
Lazard Small Cap Value 0.80% 0.40%
- - ------------------------------------------------ ---------------------------------- -------------------------------
JPM Core Bond 0.45%
- - ------------------------------------------------ ---------------------------------- -------------------------------
- - -
EQ/Evergreen Foundation 0.63% ---
- - ------------------------------------------------ ---------------------------------- -------------------------------
BT Small Company Index 0.25% 0.25%
- - ------------------------------------------------ ---------------------------------- -------------------------------
BT Equity 500 Index 0.25% 0.25%
- - ------------------------------------------------ ---------------------------------- -------------------------------
BT International Equity Index 0.35% 0.35%
- - ------------------------------------------------ ---------------------------------- -------------------------------
The EQ/Evergreen Portfolio, the EQ/Evergreen Foundation Portfolio and the MFS
Growth with Income Portfolio did not commence operations during 1998.
</TABLE>
66
<PAGE>
EXPENSE LIMITATION AGREEMENT
In the interest of limiting expenses of each Portfolio, the Manager has entered
into an expense limitation agreement with the Trust with respect to each
Portfolio ("Expense Limitation Agreement"). Pursuant to that Expense Limitation
Agreement, 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
extraordinary 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 the following fees:
MANAGEMENT EXPENSE LIMITATION FEES
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------- ---------------------------------------
PORTFOLIOS AMOUNT EXPENSES LIMITED TO
(% of daily net assets)
- - ---------------------------------------------------------------------------- ---------------------------------------
<S> <C>
T. Rowe Price Equity Income 0.60%
- - ---------------------------------------------------------------------------- ---------------------------------------
EQ/Putnam Growth & Income Value 0.60%
- - ---------------------------------------------------------------------------- ---------------------------------------
EQ/Putnam Investors Growth 0.60%
- - ---------------------------------------------------------------------------- ---------------------------------------
MFS Research 0.60%
- - ---------------------------------------------------------------------------- ---------------------------------------
MFS Emerging Growth Companies 0.60%
- - ---------------------------------------------------------------------------- ---------------------------------------
MFS Growth with Income 0.60%
- - ---------------------------------------------------------------------------- ---------------------------------------
Merrill Lynch Basic Value Equity 0.60%
- - ---------------------------------------------------------------------------- ---------------------------------------
EQ/Putnam Balanced 0.65%
- - ---------------------------------------------------------------------------- ---------------------------------------
Lazard Large Cap Value 0.65%
- - ---------------------------------------------------------------------------- ---------------------------------------
Warburg Pincus Small Company Value 0.75%
- - ---------------------------------------------------------------------------- ---------------------------------------
T. Rowe Price International Stock 0.95%
- - ---------------------------------------------------------------------------- ---------------------------------------
EQ/Putnam International Equity 0.95%
- - ---------------------------------------------------------------------------- ---------------------------------------
Merrill Lynch World Strategy 0.95%
- - ---------------------------------------------------------------------------- ---------------------------------------
Lazard Small Cap Value 0.95%
- - ---------------------------------------------------------------------------- ---------------------------------------
Morgan Stanley Emerging Markets Equity Portfolio 1.50%
- - ---------------------------------------------------------------------------- ---------------------------------------
JPM Core Bond 0.55%
- - ---------------------------------------------------------------------------- ---------------------------------------
BT International Equity Index 0.55%
- - ---------------------------------------------------------------------------- ---------------------------------------
BT Small Company Index 0.35%
- - ---------------------------------------------------------------------------- ---------------------------------------
BT Equity 500 Index 0.30%
- - ---------------------------------------------------------------------------- ---------------------------------------
EQ/Evergreen Foundation 0.70%
- - ---------------------------------------------------------------------------- ---------------------------------------
EQ/Evergreen Portfolio 0.80%
- - ---------------------------------------------------------------------------- ---------------------------------------
</TABLE>
67
<PAGE>
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.
THE ADVISERS
Each Portfolio has an Adviser that furnishes an investment program for the
Portfolio. 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. The Adviser
also makes decisions on behalf of the Portfolio and performs all administrative
tasks involved in maintaining the Portfolio.
The Manager has received an exemptive order from the SEC that permits the
Manager, subject to certain conditions, including board approval, 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.
The Manager pays each Adviser a fee based on the Portfolio's average daily net
assets. No portfolio is responsible for the fees paid to each of the Advisers.
THE ADMINISTRATOR
Pursuant to an agreement, Chase Global Funds Services Company ("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 commenced 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.
68
<PAGE>
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.
BROKERAGE TRANSACTIONS WITH AFFILIATES
To the extent permitted by law, the Trust may engage in securities and other
transactions with entities that may be affiliated with the Manager or the
Advisers. 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. For these purposes, however, the
Trust has considered this issue and believes that a broker-dealer affiliate of
an Adviser to one Portfolio should not be treated as an affiliate of the
Adviser to another Portfolio for which such Adviser does not provide investment
advice. The Trust has adopted procedures that 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. The Trust has also
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.
FUND DISTRIBUTION ARRANGEMENTS
The Trust offers two classes of shares on behalf of each Portfolio: Class IA
shares and Class IB shares. EQ Financial Consultants, Inc., 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. serves as the other distributor for the
Class IA shares of the Trust as well as the Class IB shares. Both classes of
shares are offered and redeemed at their net asset value without any sales
load.
PURCHASE AND REDEMPTION
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
or qualified retirement plan 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 and class related 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.
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.
69
<PAGE>
HOW ASSETS ARE VALUED
Values are determined according to accepted 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 in 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.
TAX INFORMATION
Each Portfolio of the Trust is a separate regulated investment company for
federal income tax purposes. Regulated investment companies are usually not
taxed at the entity (Portfolio) level. They pass through their income and gains
to their shareholders by paying dividends. Their shareholders include this
income on their respective tax returns. A Portfolio will be treated as a
regulated investment company if it meets specified federal income tax rules,
including types of investments, limits on investments, calculation of income,
and dividend payment requirements. Although the Trust intends that it and each
Portfolio will be operated to have no federal tax liability, if they have any
federal tax liability, that could hurt the investment performance of the
Portfolio in question. Also, any Portfolio investing in foreign securities or
holding foreign currencies could be subject to foreign taxes which could reduce
the investment performance of the Portfolio.
It is important for each Portfolio to maintain its federal income tax regulated
investment company status because the shareholders of the Portfolio that are
insurance company separate accounts will then be able to use a favorable
federal income tax investment diversification testing rule in figuring out
whether the Contracts indirectly funded by the Portfolio meet tax qualification
rules for variable insurance contracts. If a Portfolio fails to meet specified
investment diversification requirements, owners of non-pension plan Contracts
funded through the Trust could be taxed immediately on the accumulated
investment earnings under their Contracts and could lose any benefit of tax
deferral. The Administrator and the Manager therefore carefully monitor
compliance with all of the regulated investment company rules and variable
insurance contract investment diversification rules.
70
<PAGE>
PRIOR PERFORMANCE OF EACH ADVISER
The following table provides information concerning the historical performance
of another registered investment company (or series) or other institutional
private accounts 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. The performance
data, as shown below, for each Adviser's substantially similar investment
company or institutional accounts is not the performance data of any Portfolio
of the Trust, and should not be confused with performance data for each of the
Trust's Portfolios, which is shown under the caption "ABOUT THE INVESTMENT
PORTFOLIOS."
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 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. The investment results presented below are unaudited.
For more information on the specified market indices used below, see the
section "The Benchmarks."
71
<PAGE>
ANNUALIZED RATES OF RETURN AS OF 12/31/98*
<TABLE>
<CAPTION>
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
OTHER FUND OR ACCOUNT MANAGED BY ADVISER(1) 1 5 10 SINCE INCEPTION
(EQAT Portfolio)(2) YEAR YEARS YEARS INCEPTION DATE
- - ----------------------------------------------------
Benchmark
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
J.P. MORGAN ACTIVE FIXED INCOME COMPOSITE(3) 6.90% 7.20% 9.40% 5/31/77
(JPM Core Bond Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
Salomon Brothers Broad Investment Grade Bond 8.70% 7.30% 9.30%
Index(4)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
THE GEORGE PUTNAM FUND OF BOSTON5 10.60% 15.07% 13.77% 11/5/37
(EQ/Putnam Balanced Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index(6) 28.57% 24.06% 19.21%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
BT INSTITUTIONAL FUNDS - EQUITY 500 INDEX FUND - 28.75% 24.05% N/A 21.56% 12/31/92
INSTITUTIONAL CLASS
(BT Equity 500 Index Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index(6) 28.57% 24.06% N/A 21.61%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
BT ADVISORS FUNDS - SMALL CAP INDEX (2.60)% N/A N/A 11.58% 7/10/96
FUND-INSTITUTIONAL CLASS
(BT Small Company Index Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
Russell 2000 Index(7) (2.54)% N/A% N/A 11.85%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
PUTNAM GROWTH & INCOME FUND II(5) 12.46% N/A N/A 22.83% 1/5/95
(EQ/Putnam Growth & Income Value Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index(6) 28.57% N/A N/A 30.51%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
PUTNAM INVESTORS FUND(5) 35.52% 24.12% 20.16% 12/1/25
(EQ/Putnam Investors Growth Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index(6) 28.57% 24.06% 19.21%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
THE LAZARD FUNDS, INC. - LAZARD EQUITY PORTFOLIO 17.31% 20.36% 16.83% 6/87
(Lazard Large Cap Value Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index(6) 28.57% 24.06% 19.21%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
THE LAZARD FUNDS, INC. - LAZARD SMALL CAP
Portfolio(3,4) (12.62)% 11.45% N/A 16.10% 10/1/91
(Lazard Small Cap Value Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
Russell 2000 Index(7) (2.54)% 11.86% N/A 13.89%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC. - 8.88% 8.49% N/A 9.57% 2/28/92
MERRILL LYNCH GLOBAL STRATEGY FOCUS FUND
(Merrill Lynch World Strategy Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MSCI EAFE Index(8) 20.00% 9.19% N/A 9.98%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC. -MERRILL 9.44% 15.40% N/A 15.80% 7/1/93
LYNCH BASIC VALUE FOCUS FUND
(Merrill Lynch Basic Value Equity Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index(6) 28.57% 24.06% N/A 22.74%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MFS RESEARCH FUND(12) 22.92% 20.65% 18.44% 10/13/71
(MFS Research Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index(6) 28.57% 24.06% 19.21%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
T. ROWE PRICE EQUITY INCOME FUND(9) 9.23% 18.75% 15.18% 10/31/85
(T. Rowe Price Equity Income Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index(6) 28.57% 24.06% 19.21%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
WARBURG PINCUS SMALL COMPANY VALUE FUND(10) (14.88)% N/A N/A 16.51% 12/29/95
(Warburg Pincus Small Company Value Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
Russell 2000 Index(7) (2.54)% N/A N/A 11.58%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
BT ADVISORS FUNDS - EAFE EQUITY INDEX FUND - 19.81% N/A N/A 9.69% 1/24/96
INSTITUTIONAL CLASS
(BT International Equity Index Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MSCI EAFE Index(8) 20.00% N/A N/A 9.70%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
PUTNAM INTERNATIONAL GROWTH FUND(5) 18.95% 13.18% N/A 13.24% 2/28/91
(EQ/Putnam International Equity Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MSCI EAFE Index 20.00% 9.19% N/A 7.58%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MFS EMERGING GROWTH FUND(11) 23.56% 19.66% 22.94% 12/29/86
(MFS Emerging Growth Companies Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
Russell 2000 Index(7) (2.54)% 11.86% 12.94%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MASSACHUSETTS INVESTORS TRUST(12) 22.95% 22.97% 19.15% 7/15/24
(MFS Growth with Income Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index(6) 28.57% 24.06% 19.21%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MORGAN STANLEY INSTITUTIONAL FUND, INC. - EMERGING
MARKETS PORTFOLIO(13)
(Morgan Stanley Emerging Markets Equity Portfolio) (25.40)% (8.20)% N/A 3.50% 9/25/92
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
IFC Global Total Return Composite Index(20) (21.10)% (8.70)% N/A 1.90%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
T. ROWE PRICE INTERNATIONAL STOCK FUND 16.14% 8.87% 10.45% 5/9/80
(T. Rowe Price International Stock Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MSCI EAFE Index(8) 20.00% 9.19% 9.50%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
EVERGREEN FOUNDATION FUND(15) 12.21% 15.06% N/A 16.89% 1/2/90
(EQ/Evergreen Foundation Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index(6) 28.57% 24.06% N/A 18.82%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
EVERGREEN FUND(15) 7.23% 17.82% 14.07% 10/15/71
(EQ/Evergreen Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
Russell 2000 Index(7) (2.54)% 11.86% 12.94%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
</TABLE>
72
<PAGE>
*Average annual total return reflects changes in share prices and reinvestment
of dividends and distributions and is net of fund expenses.
(1) The registered investment company (or series) for which performance
results are presented will be subject to different expenses than the
Portfolio. In addition, holders of Contracts representing interests in
the Portfolio will be subject to charges and expenses relating to such
insurance contracts. The performance results presented above do not
reflect any insurance related expenses.
(2) The EQ Advisors Trust Portfolio will be subject to higher expenses
than the registered investment company for which performance results
are presented. In addition, holders of variable insurance contracts
representing interests in the Portfolio will be subject to charges and
expenses relating to such insurance contracts. The performance results
presented above do not reflect any insurance related expenses.
(3) The institutional private accounts that are included in the Adviser's
composite are not subject to the same types of expenses to which the
Portfolio is subject or to the diversification requirements, specific
tax restrictions and investment limitations imposed on the 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 Contracts representing
interests in the Portfolio will be subject to charges and expenses
relating to such Contracts. The performance results presented above do
not reflect any insurance related charges. Investors should also be
aware that the use of a methodology different from that used above to
calculate performance could result in different performance data.
(4) The Salomon Brothers Broad Investment Grade Bond Index is an
unmanaged, market-weighted index that 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.
(5) Annualized performance for the Class A shares. 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.
(6) 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.
(7) The Russell 2000 Index is an unmanaged index (with no defined
investment objective) 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.
(8) The Morgan Stanley Capital International EAFE Index ("EAFE Index") is
an unmanaged capitalization-weighted measure of stock markets in
Europe, Australia and the Far East. The returns of the EAFE Index
assume dividends are reinvested net of withholding tax and do not
reflect any fees or operating expenses. The index is not available for
actual investment.
(9) The investment advisory fee applicable to the T. Rowe Price Equity
Income Fund was capped at the maximum state-allowed fee in 1987.
(10) 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.
73
<PAGE>
(11) 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, or any charges that would be imposed at the
insurance company separate account level.
(12) Annualized performance for the Class A shares.
(13) Annualized performance for the Class A shares of the Morgan Stanley
Institutional Fund, Inc. - Emerging Markets Portfolio. The Class B
shares of the Morgan Stanley Institutional Fund, Inc. - Emerging
Markets Portfolio are subject to a Rule 12b-1 fee equal to 0.25% of
the Portfolio's assets. The expense ratio of Morgan Stanley
Institutional Fund, Inc. - Emerging Markets Portfolio has been capped
at 1.75% since inception.
(14) 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.
(15) Annualized performance for the Class Y shares.
74
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Trust's
financial performance since May 1, 1997. The financial information in the table
below for the period May 1, 1997 to December 31, 1998 relates only to the Class
IB shares and has been derived from the audited financial statements of the
Trust. These statements have been audited by PricewaterhouseCoopers LLP,
independent public accountants. PricewaterhouseCooper's report on the Trust's
financial statements as of December 31, 1998 appears in the Trust's Annual
Report. The information 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 (SAI) and
available upon request.
<TABLE>
<CAPTION>
NET REALIZED
AND UNREALIZED
GAIN (LOSS) ON
NET ASSET INVESTMENTS AND DIVIDENDS DIVIDENDS IN
VALUE, NET FOREIGN TOTAL FROM FROM NET EXCESS OF NET DISTRIBUTIONS
BEGINNING OF INVESTMENT CURRENCY INVESTMENT INVESTMENT INVESTMENT FROM REALIZED
PERIOD INCOME TRANSACTIONS OPERATIONS INCOME INCOME GAINS
------------- ----------- ----------------- ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
T. Rowe
Price
International
Stock
Portfolio
DEC 31,
1998
DEC. 31,
1997 $10.00 $0.02 $(0.17) $(0.15) -- --
T. Rowe
Price
Equity
Income
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $10.00 $0.10 $2.11 $2.21 ($0.09) -- $(0.04)
EQ/Putnam
Growth &
Income
Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $10.00 $0.06 $1.56 $1.62 $(0.06) -- $(0.01)
EQ/Putnam
Balanced
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $10.00 $0.14 $1.30 $1.44 $(0.13) $(0.01) $(0.09)
EQ/Putnam
International
Equity
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $10.00 $0.03 $0.93 $0.96 $(0.02) -- $(0.01)
EQ/Putnam
Investors
Growth
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $10.00 $0.02 $2.45 $2.47 $(0.03) -- $(0.04)
MFS
Research
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $10.00 $0.02 $1.58 $1.60 $(0.02) -- $(0.01)
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
NET REALIZED
AND UNREALIZED
GAIN (LOSS) ON
NET ASSET INVESTMENTS AND DIVIDENDS DIVIDENDS IN
VALUE, NET FOREIGN TOTAL FROM FROM NET EXCESS OF NET DISTRIBUTIONS
BEGINNING OF INVESTMENT CURRENCY INVESTMENT INVESTMENT INVESTMENT FROM REALIZED
PERIOD INCOME TRANSACTIONS OPERATIONS INCOME INCOME GAINS
------------- ----------- ----------------- ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
MFS
Emerging
Growth
Companies
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $10.00 $0.02 $2.21 $2.23 $(0.02) -- $(0.18)
Warburg
Pincus
Small
Company
Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $10.00 $0.01 $1.90 $1.91 $(0.01) -- --
Merrill
Lynch
World
Strategy
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $10.00 $0.08 $0.39 $0.47 $(0.05) -- --
Merrill
Lynch
Basic
Value
Equity
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $10.00 $0.06 $1.64 $1.70 $(0.06) -- $(0.05)
Morgan
Stanley
Emerging
Markets
Equity
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $10.00 $0.04 $(2.06) $(2.02) $(0.02) -- --
BT Equity
500 Index
Portfolio
DEC. 31,
1998
DEC. 31,
1997
BT
International
Equity
Index
Portfolio
DEC. 31,
1998
DEC. 31,
1997
BT Small
Company
Index
Portfolio
DEC. 31,
1998
DEC. 31,
1997
<PAGE>
JPM Core
Bond
Portfolio
DEC. 31,
1998
DEC. 31,
1997
Lazard
Large Cap
Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997
Lazard
Small Cap
Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
EXPENSES TO
DISTRIBUTIONS TOTAL NET ASSET NET ASSETS, AVERAGE NET
IN EXCESS OF DIVIDENDS AND VALUE, END OF TOTAL RETURN END OF PERIOD ASSETS AFTER
REALIZED GAINS DISTRIBUTIONS PERIOD (B) (000'S) WAIVERS (A)(C)
-------------- ------------- ------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
T. Rowe Price
International
Stock
Portfolio
DEC. 31,
1998
DEC. 31,
1997 -- -- $9.85 (1.49)% $69,572 1.20%
T. Rowe Price
Equity Income
Portfolio
DEC. 31,
1998
DEC. 31,
1997 -- $(0.13) $12.08 22.11% $99,947 0.85%
EQ/Putnam
Growth &
Income Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $(0.03) $(0.10) $11.52 16.23% $150,260 0.85%
EQ/Putnam
Balanced
Portfolio
DEC. 31,
1998
DEC. 31,
1997 -- $(0.23) $11.21 14.38% $25,854 0.90%
EQ/Putnam
International
Equity
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $(0.04) $(0.07) $10.89 9.58% $55,178 1.20%
EQ/Putnam
Investors
Growth
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $(0.07) $(0.14) $12.33 24.70% $39,695 0.85%
MFS Research
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $(0.09) $(0.12) $11.48 16.07% $114,754 0.85%
MFS Emerging
Growth
Companies
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $(0.11) $(0.31) $11.92 22.42% $99,317 0.85%
Warburg
Pincus Small
Company Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $(0.05) $(0.06) $11.85 19.15% $120,880 1.00%
Merrill Lynch
World
Strategy
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $(0.11) $(0.16) $10.31 4.70% $18,210 1.20%
Merrill Lynch
Basic Value
Equity
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $(0.01) $(0.12) $11.58 16.99% $49,495 0.85%
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
EXPENSES TO
DISTRIBUTIONS TOTAL NET ASSET NET ASSETS, AVERAGE NET
IN EXCESS OF DIVIDENDS AND VALUE, END OF TOTAL RETURN END OF PERIOD ASSETS AFTER
REALIZED GAINS DISTRIBUTIONS PERIOD (B) (000'S) WAIVERS (A)(C)
-------------- ------------- ------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Morgan Stanley
Emerging
Markets
Equity
Portfolio
DEC. 31,
1998
DEC. 31,
1997 -- $(0.02) $7.96 (20.16)% $21,433 1.75%
BT Equity 500
Index
Portfolio
DEC. 31,
1998
DEC. 31,
1997
BT
International
Equity Index
Portfolio
DEC. 31,
1998
DEC. 31,
1997
BT Small
Company Index
Portfolio
DEC. 31,
1998
DEC. 31,
1997
JPM Core Bond
Portfolio
DEC. 31,
1998
DEC. 31,
1997
Lazard Large
Cap Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997
Lazard Small
Cap Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
RATIO OF NET INVESTMENT RATIO OF NET
RATIO OF EXPENSES TO INCOME TO AVERAGE NET INVESTMENT INCOME TO
AVERAGE NET ASSETS ASSETS AFTER AVERAGE NET ASSETS PORTFOLIO
BEFORE WAIVERS (A)(C) WAIVERS(A)(C) BEFORE WAIVERS(A)(C) TURNOVER RATE
--------------------- ------------------------ -------------------- --------------
<S> <C> <C> <C> <C>
T. Rowe Price
International
Stock
Portfolio
DEC. 31,
1998
DEC. 31,
1997 2.56% 0.45% (0.91)% 17%
T. Rowe Price
Equity Income
Portfolio
DEC. 31,
1998
DEC. 31,
1997 1.74% 2.49% 1.60% 9%
EQ/Putnam
Growth &
Income Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997 1.75% 1.67% 0.77% 61%
EQ/Putnam
Balanced
Portfolio
DEC. 31,
1998
DEC. 31,
1997 2.55% 3.19% 1.54% 117%
EQ/Putnam
International
Equity
Portfolio
DEC. 31,
1998
DEC. 31,
1997 2.53% 0.74% (0.59)% 43%
EQ/Putnam
Investors
Growth
Portfolio
DEC. 31,
1998
DEC. 31,
1997 2.13% 0.58% (0.70)% 47%
MFS Research
Portfolio
DEC. 31,
1998
DEC. 31,
1997 1.78% 0.65% (0.28)% 51%
MFS Emerging
Growth
Companies
Portfolio
DEC. 31,
1998
DEC. 31,
1997 1.82% 0.61% (0.36)% 116%
Warburg
Pincus Small
Company Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997 1.70% 0.26% (0.44)% 44%
Merrill Lynch
World
Strategy
Portfolio
DEC. 31,
1998
DEC. 31,
1997 3.05% 1.89% 0.04% 58%
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
RATIO OF NET INVESTMENT RATIO OF NET
RATIO OF EXPENSES TO INCOME TO AVERAGE NET INVESTMENT INCOME TO
AVERAGE NET ASSETS ASSETS AFTER AVERAGE NET ASSETS PORTFOLIO
BEFORE WAIVERS (A)(C) WAIVERS(A)(C) BEFORE WAIVERS(A)(C) TURNOVER RATE
--------------------- ------------------------ -------------------- --------------
<S> <C> <C> <C> <C>
Merrill Lynch
Basic Value
Equity
Portfolio
DEC. 31,
1998
DEC. 31,
1997 1.89% 1.19% 0.87% 25%
*Morgan
Stanley
Emerging
Markets
Equity
Portfolio
DEC. 31,
1998
DEC. 31,
1997 2.61% 1.96% 1.10% 25%
**BT Equity
500 Index
Portfolio
DEC. 31,
1998
DEC. 31,
1997
**BT
International
Equity Index
Portfolio
DEC. 31,
1998
DEC. 31,
1997
**BT Small
Company Index
Portfolio
DEC. 31,
1998
DEC. 31,
1997
**JPM Core
Bond Portfolio
DEC. 31,
1998
DEC. 31,
1997
**Lazard
Large Cap
Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997
**Lazard
Small Cap
Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997
- - ------------------
*Commencement of Operations. The Morgan Stanley Emerging Markets Equity
Portfolio commenced operations on August 20, 1997.
**Commencement of Operations 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 was January 1, 1998. No financial highlights are presented for
EQ/Evergreen Foundation Portfolio, EQ/Evergreen Portfolio and MFS Growth with
Income Portfolio each of which received initial capital on December 31, 1998.
(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.
</TABLE>
80
<PAGE>
[The Trust began to offer Class IA shares for the T. Rowe Price Equity Income
Portfolio, MFS Emerging Growth Companies Portfolio, Warburg Pincus Small
Company Value Portfolio and BT International Equity Index Portfolio commencing
on November __, 1998. Per share information with respect to those Class IA
shares for the period November __, 1998 to December 31, 1998 will be provided
by Amendment.
81
<PAGE>
[BACK COVER]
If you wish to know more, you will find additional information about the Trust
and its Portfolios in the following documents:
ANNUAL REPORTS
The Annual Report includes more information about the Trust's performance and
is available upon request free of charge. The reports usually include
performance information, a discussion of market conditions and the investment
strategies that affected the Portfolios' performance during the last fiscal
year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI, dated May 1, 1999, is incorporated into this Prospectus by reference
and is available upon request free of charge.
You may visit the SEC's website at www.sec.gov to view the SAI and other
information about the Trust.
You can also review and copy information about the Trust, including the SAI, at
the SEC's Public Reference Room in Washington, D.C. You may have to pay a
duplicating fee. To find out more about the Public Reference Room, call the SEC
at 800-SEC-0330.
Investment Company Act File Number: 811-07953
<PAGE>
EQ ADVISORS TRUST
PROSPECTUS
May 1, 1999
This Prospectus describes the twenty-one (21) Portfolios offered by EQ Advisors
Trust. Each Portfolio has its own investment objective and strategies that are
designed to meet different investment goals. This Prospectus contains
information you should know before investing. Please read this Prospectus
carefully before investing and keep it for future reference.
FIXED INCOME PORTFOLIOS BALANCED PORTFOLIOS
JPM Core Bond EQ/Evergreen Foundation
EQ/Putnam Balanced
Merrill Lynch World Strategy
DOMESTIC EQUITY PORTFOLIOS AGGRESSIVE EQUITY PORTFOLIOS
BT Equity 500 Index BT Small Company Index
EQ/Evergreen Lazard Small Cap Value
EQ/Putnam Growth & Income Value MFS Emerging Growth Companies
EQ/Putnam Investors Growth Warburg Pincus Small Company Value
Lazard Large Cap Value
Merrill Lynch Basic Value Equity
MFS Growth with Income
MFS Research
T. Rowe Price Equity Income
INTERNATIONAL PORTFOLIOS
BT International Equity Index
EQ/Putnam International Equity
Morgan Stanley Emerging Markets Equity
T. Rowe Price International Stock
You should be aware that the Securities and Exchange Commission has not
approved or disapproved of the investment merit of these Portfolios or
determined if this Prospectus is accurate or complete. Any representation to
the contrary is a criminal offense.
-1-
<PAGE>
EQ ADVISORS TRUST
This Prospectus tells you about the twenty-one current Portfolios of the EQ
Advisors Trust ("Trust") and the Class IB shares offered by the Trust on behalf
of each Portfolio. The Trust is an open-end management investment company. Each
Portfolio is a separate series of the Trust with its own investment objective,
investment strategies and risks, which are described in this Prospectus. Each
of the current Portfolios of the Trust, 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 purposes of the
Investment Company Act of 1940, as amended ("1940 Act").
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 (the "Contract" or collectively, the
"Contracts") issued by The Equitable Life Assurance Society of the United
States ("Equitable") and Equitable of Colorado, Inc. ("EOC") and to
participants in The Equitable Investment Plan for Employees, Managers and
Agents ("Equitable Plan"). The prospectus is designed to help you make informed
decisions about the Portfolios that are available under your Contract or under
the Equitable Plan. You will find information about your Contract and how it
works in the accompanying prospectus for the Contracts if you are a
Contractholder or participant under a Contract.
Each Portfolio is managed by EQ Financial Consultants, Inc. ("Manager") which
directs the day to day operations of each Portfolio. Each of the Portfolios has
its own investment adviser ("Adviser"). Information about the Adviser for each
Portfolio is contained in the description concerning that Portfolio in the
section entitled "About the Investment Portfolios." The Manager has the
ultimate responsibility to oversee each of the Advisers and to recommend their
hiring, termination and replacement. Subject to approval by the Board of
Trustees, the Manager may without obtaining shareholder approval: (i) select
Advisers for each of the Trust's Portfolios; (ii) enter into and materially
modify existing investment advisory agreements; and (iii) terminate and replace
the Advisers.
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[2nd right hand page] TABLE OF CONTENTS
SUMMARY INFORMATION CONCERNING EQ ADVISORS TRUST.....................5
SUMMARY OF PRINCIPAL RISKS..........................................11
ABOUT THE INVESTMENT PORTFOLIOS.....................................17
FIXED INCOME PORTFOLIOS..........................................19
JPM CORE BOND PORTFOLIO.......................................19
BALANCED PORTFOLIOS..............................................21
EQ/EVERGREEN FOUNDATION PORTFOLIO.............................21
EQ/PUTNAM BALANCED PORTFOLIO..................................23
MERRILL LYNCH WORLD STRATEGY PORTFOLIO........................25
DOMESTIC EQUITY PORTFOLIOS.......................................28
BT EQUITY 500 INDEX PORTFOLIO.................................28
EQ/EVERGREEN PORTFOLIO........................................31
EQ/PUTNAM GROWTH & INCOME VALUE PORTFOLIO.....................33
EQ/PUTNAM INVESTORS GROWTH PORTFOLIO..........................35
LAZARD LARGE CAP VALUE PORTFOLIO..............................37
MERRILL LYNCH BASIC VALUE EQUITY PORTFOLIO....................39
MFS GROWTH WITH INCOME PORTFOLIO..............................42
MFS RESEARCH PORTFOLIO........................................44
T. ROWE PRICE EQUITY INCOME PORTFOLIO.........................46
AGGRESSIVE EQUITY PORTFOLIOS.....................................48
BT SMALL COMPANY INDEX PORTFOLIO..............................48
LAZARD SMALL CAP VALUE PORTFOLIO..............................50
MFS EMERGING GROWTH COMPANIES PORTFOLIO.......................52
WARBURG PINCUS SMALL COMPANY VALUE PORTFOLIO..................54
INTERNATIONAL PORTFOLIOS.........................................56
BT INTERNATIONAL EQUITY INDEX PORTFOLIO.......................56
EQ/PUTNAM INTERNATIONAL EQUITY PORTFOLIO......................58
MORGAN STANLEY EMERGING MARKETS EQUITY PORTFOLIO..............60
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO...................63
MANAGEMENT OF THE TRUST.............................................66
The Trust........................................................66
The Manager......................................................66
Expense Limitation Agreement.....................................67
The Advisers.....................................................68
The Administrator................................................68
The Transfer Agent...............................................68
Brokerage Practices..............................................69
Brokerage Transactions with Affiliates...........................69
FUND DISTRIBUTION ARRANGEMENTS......................................69
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PURCHASE AND REDEMPTION.............................................69
HOW ASSETS ARE VALUED...............................................70
TAX INFORMATION.....................................................70
PRIOR PERFORMANCE OF EACH ADVISER...................................71
FINANCIAL HIGHLIGHTS................................................75
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[TWO PAGE SPREAD]
SUMMARY INFORMATION CONCERNING EQ ADVISORS TRUST
The following chart highlights the twenty-one (21) Portfolios described in this
Prospectus that you can choose as investment alternatives under your Contracts
offered by Equitable or EOC. The chart and accompanying information identify
each Portfolio's investment objective(s), principal investment strategies and
principal risks. A "Summary of Principal Risks", which describes each of the
principal risks, follows the chart.
EQ ADVISORS TRUST
FIXED INCOME PORTFOLIO
Part A
- - ------------------------------------- -----------------------------------
PORTFOLIO INVESTMENT OBJECTIVE(S)
- - ------------------------------------- -----------------------------------
JPM CORE BOND Seeks to provide a high total
return consistent with moderate
risk of capital and maintenance
of liquidity
- - ------------------------------------- -----------------------------------
EQ ADVISORS TRUST
BALANCED PORTFOLIOS
Part A
- - ------------------------------------- -----------------------------------
PORTFOLIO INVESTMENT OBJECTIVE(S)
- - ------------------------------------- -----------------------------------
EQ/EVERGREEN FOUNDATION Seeks to provide, in order of
priority, reasonable income,
conservation of capital and capital
appreciation
- - ------------------------------------- -----------------------------------
EQ/PUTNAM BALANCED Seeks to provide a balanced
investment composed of a
well-diversified portfolio of
stocks and bonds that will
produce both capital growth and
current income
- - ------------------------------------- -----------------------------------
MERRILL LYNCH WORLD STRATEGY Seeks high total return by
investing primarily in a portfolio
of equity and fixed income
securities, including convertible
securities, of U.S. and foreign
issuers
- - ------------------------------------- -----------------------------------
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<PAGE>
EQ ADVISORS TRUST
FIXED INCOME PORTFOLIO
Part B
- - ------------------------------------- -----------------------------------
PRINCIPAL INVESTMENT STRATEGIES PRINCIPAL RISKS
- - ------------------------------------- -----------------------------------
Investment-grade securities rated General investment, fixed income,
BBB/Baa or better at the time of liquidity, portfolio turnover,
purchase (including foreign derivatives, and foreign securities
issuers) risks
- - ------------------------------------- -----------------------------------
EQ ADVISORS TRUST
BALANCED PORTFOLIOS
Part B
- - ------------------------------------- -------------------------------------
PRINCIPAL INVESTMENT STRATEGIES PRINCIPAL RISKS
- - ------------------------------------ -------------------------------------
Well-diversified portfolio of General investment, convertible
stocks and bonds, and negotiable securities, and fixed income risks
instruments
- - ------------------------------------ -------------------------------------
Common stocks, preferred stocks, General investment, convertible
securities convertible into or securities, fixed income,
exchangeable for common stocks, derivatives and foreign securities
corporate debt obligations, U.S. risks
Government securities and
short-term debt instruments
- - ------------------------------------ -------------------------------------
Equity and fixed income securities General investment, foreign
of U.S. and foreign companies securities, fixed income,
derivatives and non-diversification
risks
- - ------------------------------------ -------------------------------------
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EQ ADVISORS TRUST
DOMESTIC EQUITY PORTFOLIOS
Part A
- - -------------------------------- ------------------------------------------
PORTFOLIO INVESTMENT OBJECTIVE(S)
- - -------------------------------- ------------------------------------------
BT EQUITY 500 INDEX Seeks to replicate as closely as
possible (before deduction of
Portfolio expenses)
the total return of the S&P 500 Index
- - -------------------------------- ------------------------------------------
EQ/EVERGREEN Seeks capital appreciation
- - -------------------------------- ------------------------------------------
EQ/PUTNAM GROWTH & INCOME VALUE Seeks capital growth. Current income is a
secondary objective
- - -------------------------------- ------------------------------------------
EQ/PUTNAM INVESTORS GROWTH Seeks long-term growth of capital and any
increased income that results from this
growth
- - -------------------------------- ------------------------------------------
LAZARD LARGE CAP VALUE Seeks capital appreciation by investing
primarily in equity securities of
companies with relatively large
capitalizations (i.e., companies having
market capitalizations of at least $__
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
- - -------------------------------- ------------------------------------------
MERRILL LYNCH BASIC VALUE Seeks capital appreciation and secondarily,
EQUITY income by investing in securities,
primarily equities, that the Adviser
believes are undervalued and therefore
represent basic investment value
- - -------------------------------- ------------------------------------------
MFS GROWTH WITH INCOME Seeks to provide reasonable current
income and long-term growth of capital
and income
- - -------------------------------- ------------------------------------------
MFS RESEARCH Seeks to provide long-term growth of
capital and future income
- - -------------------------------- ------------------------------------------
T. ROWE PRICE EQUITY INCOME Seeks to provide substantial dividend
income and also capital appreciation by
investing primarily in dividend-paying
common stocks of established companies
- - ---------------------------------------------------------------------------
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EQ ADVISORS TRUST
DOMESTIC EQUITY PORTFOLIOS
Part B
- - ----------------------------------- -------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES PRINCIPAL RISKS
- - -------------------------------------------- --------------------------------
Common stocks of companies in the General investment, index-fund,
S&P 500 Index and fixed income risks
- - -------------------------------------------- --------------------------------
Common stocks offering potential for capital General investment, fixed
growth (plus common stocks offering income, small-cap and mid-cap
potential for current income, corporate company, and value investing
bonds, notes and debentures, preferred risks
stocks and convertible securities)
- - -------------------------------------------- --------------------------------
Common stocks (plus convertible bonds, General investment, derivatives,
convertible preferred stocks, preferred convertible securities, foreign
stocks and debt securities) securities, fixed income, and
value investing risks
- - -------------------------------------------- --------------------------------
Common stocks and convertible securities of General investment, growth
companies whose earnings are believed likely investing, small-cap and mid-cap
to grow faster than the economy as a whole company, convertible securities,
convertible securities, derivatives, derivatives, foreign securities,
and fixed income risks
- - -------------------------------------------- --------------------------------
Equity securities of companies with General investment, value
relatively large capitalizations that the investing, derivatives, fixed
Adviser believes are undervalued based on income, and foreign securities
their return on equity or capital risks
- - -------------------------------------------- --------------------------------
Equity securities that are undervalued General investment, small-cap
and mid-cap company, foreign
securities, and value investing
risks
- - -------------------------------------------- --------------------------------
Equity securities (common stock, preferred General investment, convertible
stock, preference stock, convertible securities, small-cap and
securities, warrants and depositary mid-cap company, foreign
receipts) securities, and growth investing
risks
- - -------------------------------------------- --------------------------------
Common stock or securities convertible into General investment, convertible
common stock of companies with better than securities, small-cap and
average prospects for long-term growth mid-cap company, foreign
company, securities, fixed income, and
growth investing risks
- - -------------------------------------------- --------------------------------
Dividend-paying common stocks of established General investment, value
companies investing, convertible
securities, and foreign
securities risks
- - -------------------------------------------- --------------------------------
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EQ ADVISORS TRUST
AGGRESSIVE EQUITY PORTFOLIOS
Part A
- - -------------------------------------------- --------------------------------
PORTFOLIO INVESTMENT OBJECTIVE(S)
- - ------------------------------------- ---------------------------------------
BT SMALL COMPANY INDEX
Seeks to replicate as
closely as possible
(before deduction of
Portfolio expenses)
the total return of
the Russell 2000 Index
- - ------------------------------------- --------------------------------------
LAZARD SMALL CAP VALUE Seeks capital appreciation by
investing in equity securities of U.S.
companies with small market
capitalizations (i.e., companies in
the range of companies represented by
the Russell 2000 Index) that the
Adviser considers inexpensively priced
relative to the return on total
capital or equity
- - ------------------------------------- --------------------------------------
MFS EMERGING GROWTH COMPANIES Seeks to provide long-term capital
growth
- - ------------------------------------- --------------------------------------
WARBURG PINCUS SMALL COMPANY VALUE Seeks long-term capital appreciation
- - ------------------------------------- --------------------------------------
EQ ADVISORS TRUST
INTERNATIONAL EQUITY PORTFOLIOS
Part A
- - ------------------------------------- --------------------------------------
PORTFOLIO INVESTMENT OBJECTIVE(S)
- - ------------------------------------- --------------------------------------
BT INTERNATIONAL EQUITY INDEX Seeks to replicate as closely as
possible (before deduction of
Portfolio expenses) the total return
of the MSCI EAFE Index
- - ------------------------------------- --------------------------------------
EQ/PUTNAM INTERNATIONAL EQUITY Seeks capital appreciation
- - ------------------------------------- --------------------------------------
MORGAN STANLEY EMERGING MARKETS Seeks long-term capital appreciation
by investing primarily in equity
securities of emerging country issuers
- - ------------------------------------- --------------------------------------
T. ROWE PRICE INTERNATIONAL STOCK Seeks long-term growth of capital
through investment primarily in common
stocks of established non-U.S.
companies
- - ------------------------------------- --------------------------------------
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EQ ADVISORS TRUST
AGGRESSIVE EQUITY PORTFOLIOS
Part B
- - ----------------------------------------- -----------------------------------
PRINCIPAL INVESTMENT STRATEGIES PRINCIPAL RISKS
- - ----------------------------------------- -----------------------------------
Common stocks of small-cap companies in General investment, index-fund,
the Russell 2000 Index small-cap and mid-cap company,
convertible securities, liquidity,
derivatives, and fixed income risks
- - ----------------------------------------- -----------------------------------
Equity securities of small-cap U.S. General investment, small-cap and
companies in the range of companies mid-cap company, value investing
included in the Russell 2000 Index that convertible securities, liquidity,
the Adviser believes are undervalued non-diversification, and fixed
based on their return on equity or income risks
capital
- - ----------------------------------------- -----------------------------------
Equity securities of emerging growth General investment, small-cap and
companies with the potential to become mid-cap company, convertible
major enterprises securities, liquidity, foreign
securities, growth investing, and
portfolio turnover risks
- - ----------------------------------------- ----------------------------------
Equity securities of small cap U.S. General investment, small-cap and
companies mid-cap company, liquidity,
foreign securities, fixed income,
and value investing risks
- - ----------------------------------------- ----------------------------------
EQ ADVISORS TRUST
INTERNATIONAL/EQUITY PORTFOLIOS
Part B
- - ----------------------------------------- ----------------------------------
PRINCIPAL INVESTMENT STRATEGIES PRINCIPAL RISKS
- - ----------------------------------------- ----------------------------------
Equity securities of companies in the General investment, index-fund,
MSCI EAFE Index foreign securities, liquidity, and
derivatives risks
- - ----------------------------------------- ----------------------------------
Equity securities of foreign companies General investment, foreign
securities, small-cap and mid-cap
company, convertible securities,
liquidity, and derivatives risks
- - ----------------------------------------- ----------------------------------
Equity securities of emerging market General investment, foreign
country companies securities, convertible
securities, liquidity,
derivatives, non-diversification,
and fixed income risks
- - ----------------------------------------- ----------------------------------
Common stocks of established foreign General investment, foreign
companies securities, liquidity, convertible
securities, fixed income, and
growth investing risks
- - ----------------------------------------- ----------------------------------
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<PAGE>
SUMMARY OF PRINCIPAL RISKS
Risk is the chance that you will lose money on your investment or that it will
not earn as much as you expect. In general, the greater the risk, the more
money your investment can earn for you - and the more you can lose. Like other
investment companies, the value of each Portfolio's shares may be affected by
the Portfolio's investment objective(s), principal investment strategies and
particular risk factors. Consequently, each Portfolio may be subject to
different principal risks. Some of the principal risks of investing in the
Portfolios are discussed below. However, other factors may also affect each
Portfolio's net asset value.
There is no guarantee that a Portfolio will achieve its investment objective(s)
or that it will not lose principal value.
GENERAL INVESTMENT RISKS: Each Portfolio is subject to the following risks:
ASSET CLASS RISK: There is the possibility that the returns from the
types of securities in which a Portfolio invests will underperform
returns from the various general securities markets or different asset
classes. Different types of securities tend to go through cycles of
outperformance and underperformance in comparison to the general
securities markets.
MARKET RISK: Each Portfolio's share price moves up and down over the
short term in reaction to stock or bond market movements. This means
that you could lose money over short periods, and perhaps over longer
periods during extended market downturns.
SECURITY SELECTION RISK: The Advisers for each Portfolio rely on the
insights of different specialists in making investment decisions based
on each Portfolio's particular investment objective(s) and investment
strategies. There is the possibility that the specific securities held
by a Portfolio will underperform other funds in the same asset class
or benchmarks that are representative of the general performance of
the asset class because of the Adviser's choice of portfolio
securities.
YEAR 2000 RISK: Like other mutual funds, financial and business
organizations and individuals around the world, the Trust and its
Portfolios could be adversely affected if the computer systems used by
the Advisers, other service providers, or persons with whom they deal,
do not properly process and calculate date-related information and
data dated on and after January 1, 2000. This possibility is commonly
known as the "Year 2000 Problem." Virtually all operations of the
Trust and its Portfolios are computer reliant. The Manager, Advisers,
administrator, transfer agent, distributors and custodian have
informed the Trust that they are actively taking steps to address the
Year 2000 Problem with regard to their respective computer systems and
the interfaces between their respective computer systems. The Trust is
also taking measures to obtain assurances from necessary persons that
comparable steps are being taken by the key service providers to the
Trust's Advisers, administrator, transfer agent, distributors, and
custodian. There can be no assurance that the Trust and the
Portfolios' key service providers will be Year 2000 compliant. If not
adequately addressed, the Year 2000 Problem could result in the
inability of the Trust to perform its mission critical functions,
including trading and settling trades of Portfolio securities, pricing
of portfolio securities and processing shareholder transactions, and
the net asset value of its Portfolios' shares may be materially
affected.
In addition, because the Year 2000 Problem affects virtually all
issuers, the companies or entities in which the Portfolios may invest
also could be adversely impacted by the Year 2000 Problem. For
example, issuers may incur substantial costs to address the Year 2000
problem. The extent of
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<PAGE>
such impact cannot be predicted and there can be no assurances that
the Year 2000 Problem will not have an adverse effect on the issuers
whose securities are held by the Portfolios. The Advisers have assured
the Trust that they consider such issues in making investment
decisions for the Portfolios. Furthermore, certain of the Portfolios
make international investments thereby exposing these Portfolios to
operations, custody and settlement processes outside the United
States. In many countries outside the United States the Year 2000
Problem has not been adequately addressed and concerns have been
raised that capital flight, among other issues, may be triggered
by full disclosure of the Year 2000 Problem on countries outside the
United States. Additional information on the impact of the Year 2000
Problem on emerging market countries is provided in this section,
under "FOREIGN SECURITIES RISKS--EMERGING MARKET RISK."
As indicated in "Summary Information Concerning EQ Advisors Trust" and "About
the Investment Portfolios," a particular Portfolio may also be subject to the
following risks:
CONVERTIBLE SECURITIES RISK: Convertible securities may include 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. Therefore, convertible securities enable you 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. Each Adviser will consider such event
in its determination of whether a Portfolio should continue to hold the
securities.
DERIVATIVES RISK: Derivatives are financial contracts whose value depends on,
or is derived from the value of an underlying asset, reference rate or index.
Derivatives include stock options, securities index options, currency options,
forward currency exchange contracts, futures contracts, swaps and options on
futures contracts. Certain Portfolios can use derivatives involving the U.S.
Government and foreign government securities and currencies. Investments in
derivatives can significantly increase your exposure to market risk, or credit
risk of the counterparty. Derivatives also involve the risk of mispricing or
improper valuation and the risk that changes in value of the derivative may not
correlate perfectly with the relevant assets, rates and indices.
FIXED INCOME RISKS: To the extent that any of the Portfolios invest a
substantial amount of its assets in fixed income securities, a Portfolio may be
subject to the following risks:
CREDIT RISK: Credit risk is the risk that the issuer or guarantor of a
debt security or counterparty to a Portfolio's transactions will be
unable or unwilling to make timely principal and/or interest payments,
or otherwise will be unable or unwilling to honor its financial
obligations. Each of the Portfolios may be subject to credit risk to
the extent that it invests in debt securities or engages in
transactions, such as securities loans, which involve a promise by a
third party to honor an obligation to the Portfolio. Credit risk is
particularly significant for the Portfolios that invest a portion of
their assets in "JUNK BONDS" or lower-rated securities.
INTEREST RATE RISK: The price of a bond or a fixed income security is
dependent upon interest rates. Therefore, the share price and total
return of a Portfolio investing a significant portion of its assets in
bonds or fixed income securities will vary in response to changes in
interest rates. A rise in interest rates causes the value of a bond to
decrease, and vice versa. There is the possibility that the value of a
Portfolio's investment in bonds or fixed income securities may fall
because bonds or fixed income securities generally fall in value when
interest rates rise. The
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longer the term of a bond or fixed income instrument, the more
sensitive it will be to fluctuations in value from interest rate
changes. Changes in interest rates may have a significant effect on
Portfolios holding a significant portion of their assets in fixed
income securities with long term maturities.
In the case of mortgage-backed securities, rising interest rates tend
to extend the term to maturity of the securities, making them even
more susceptible to interest rate changes. When interest rates drop,
not only can the value of fixed income securities drop, but the yield
can drop, particularly where the yield on the fixed income securities
is tied to changes in interest rates, such as adjustable mortgages.
Also when interest rates drop, the holdings of mortgage-backed
securities by a Portfolio can reduce returns if the owners of the
underlying mortgages pay off their mortgages sooner than anticipated
since the funds prepaid will have to be reinvested at the then lower
prevailing rates. This is known as prepayment risk. When interest
rates rise, the holdings of mortgage-backed securities by a Portfolio
can reduce returns if the owners of the underlying mortgages pay off
their mortgages later than anticipated. This is known as extension
risk.
INVESTMENT-GRADE SECURITIES RISK: Debt securities are rated by
national bond ratings agencies. Securities rated BBB by Standard &
Poor's ("S&P") or Baa by Moody's Investors Services, Inc. ("Moody's")
are considered investment grade securities, but are somewhat riskier
than higher rated investment-grade obligations because they are
regarded as having only an adequate capacity to pay principal and
interest, and are considered to lack outstanding investment
characteristics and may be speculative.
JUNK BONDS OR LOWER RATED SECURITIES RISK: Bonds rated below
investment grade by S&P and Moody's are speculative in nature, may be
subject to certain risks with respect to the issuing entity and to
greater market fluctuations than higher rated fixed-income securities.
They are usually issued by companies without long track records of
sales and earnings, or by those companies with questionable credit
strength. These bonds are considered "below investment grade." The
retail secondary market for these "junk bonds" may be less liquid than
that of higher rated securities and adverse conditions could make it
difficult at times to sell certain securities or could result in lower
prices than those used in calculating the Portfolio's net asset value.
FOREIGN SECURITIES RISKS: Investing in foreign securities, including depositary
receipts, involves risks not associated with investing in U.S. securities and
can affect a Portfolio's performance. Foreign markets, particularly emerging
markets, may be less liquid, more volatile and subject to less government
supervision than domestic markets. There may be difficulties enforcing
contractual obligations, and it may take more time for trades to clear and
settle. The specific risks of investing in foreign securities, among others,
include:
CURRENCY RISK: The risk that changes in currency exchange rates will
negatively affect securities denominated in, and/or receiving revenues
in, foreign currencies. Adverse changes in currency exchange rates
(relative to the U.S. dollar) may erode or reverse any potential gains
from a Portfolio's investment in securities denominated in a foreign
currency or may widen existing losses.
EMERGING MARKET RISK: There are greater risks involved in investing in
emerging markets countries and/or their securities markets. Generally,
economic structures in these countries are less diverse and mature
than those in developed countries, and their political systems are
less stable. Investments in emerging markets countries may be affected
by national policies that restrict foreign investment in certain
issuers or industries. The small size of their securities markets and
low trading volumes can make investments illiquid and more volatile
than
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<PAGE>
investments in developed countries and such securities may be
subject to abrupt and severe price declines. As a result, a Portfolio
investing in emerging markets countries may be required to establish
special custody or other arrangements before investing.
The YEAR 2000 PROBLEM may also be especially acute in emerging market
countries. Many emerging market countries are currently lagging behind
more developed countries in their Year 2000 preparedness because they
lack the financial resources to undertake the necessary remedial
actions. A lack of Year 2000 preparedness may adversely affect the
health, security and economic well-being of emerging market countries
and could, obviously, adversely affect the value of a Portfolio's
investments in emerging market countries. More information on the Year
2000 Problem is provided in this section, under "GENERAL INVESTMENT
RISKS--YEAR 2000 RISK."
EURO RISK: Certain of the Portfolios invests in securities issued by
European issuers. On January 1, 1999, 11 of the 15 member states of
the European Monetary Union ("EMU") introduced the "Euro" as a common
currency. During a three-year transitional period, the Euro will
coexist with each participating state's currency and, on July 1, 2002,
the Euro is expected to become the sole currency of the participating
states. The introduction of the Euro will result in the redenomination
of European debt and equity securities over a period of time, which
may result in various legal and accounting differences and/or tax
treatments that otherwise would not likely occur. During this period,
the creation and implementation of suitable clearing and settlement
systems and other operational problems may cause market disruptions
that could adversely affect investments quoted in the Euro.
The consequences of the Euro conversion for foreign exchange rates,
interest rates and the value of European securities eligible for
purchase by the Portfolios are presently unclear and it is not
possible to predict the eventual impact of the Euro implementation
plan on the Portfolios. There are a number of significant risks
associated with EMU. Monetary and economic union on this scale has
never been attempted before. There is a significant degree of
uncertainty as to whether participating countries will remain
committed to EMU in the face of changing economic conditions. The
conversion may adversely affect a Portfolio if the Euro does not take
effect as planned or if a participating state withdraws from the EMU.
Such actions may adversely affect the value and/or increase the
volatility of securities held by the Portfolios.
POLITICAL/ECONOMIC RISK: Changes in economic and tax policies,
government instability, war or other political or economic actions or
factors may have an adverse effect on a Portfolio's foreign
investments.
REGULATORY RISK: Less information may be available about
foreign companies. In general, foreign companies are not subject
to uniform accounting, auditing and financial reporting standards
or to other regulatory practices and requirements as are U.S.
companies.
TRANSACTION COSTS RISK: The costs of buying and selling foreign
securities, including tax, brokerage and custody costs, generally are
higher than those involving domestic transactions.
GROWTH INVESTING RISK: Growth investing generally focuses on companies that,
due to their strong earnings and revenue potential, offer above-average
prospects for capital growth, with less emphasis on dividend income. Earnings
predictability and confidence in earnings forecasts are an important part of
the selection process. As a result, the price of growth stocks may be more
sensitive to changes in current or expected earnings than the prices of other
stocks. Advisers using this approach generally seek out companies experiencing
some or all of the following: high sales growth, high unit growth, high or
improving returns on assets and equity, and a strong balance sheet. Such
Advisers also prefer companies
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<PAGE>
with a competitive advantage such as unique management, marketing or research
and development. Growth investing is also subject to the risk that the stock
price of one or more companies will fall or will fail to appreciate as
anticipated by the Advisers, regardless of movement in the securities market.
INDEX-FUND RISK: The BT Equity 500 Index, BT Small Company Index and BT
International Equity Index Portfolios are not actively managed (which involves
buying and selling of securities based upon economic, financial and market
analysis and investment judgment). Rather, the Portfolios utilize a "passive"
or "indexing" investment approach and attempt to duplicate the investment
performance of the particular index the Portfolio is tracking (i.e., S&P 500
Index, Russell 2000 Index or MSCI EAFE Index) through statistical procedures.
Therefore, the Portfolios will invest in the securities included in the
relevant index or substantially identical securities regardless of market
trends. The Portfolios cannot modify their investment strategies to respond to
changes in the economy, which means they may be particularly susceptible to a
general decline in the U.S. or global stock market segment relating to the
relevant index.
LEVERAGING RISK: When a Portfolio is borrowing money or otherwise leveraging
its portfolio, the value of an investment in that Portfolio will be more
volatile and all other risks will tend to be compounded. All of the Portfolios
may take on leveraging risk by investing in collateral from securities loans
and by borrowing money to meet redemption requests.
LIQUIDITY RISK: Certain securities may be difficult (or impossible) to sell at
the time and price the seller would like. A Portfolio may have to hold these
securities longer than it would like and may forego other investment
opportunities. There is the possibility that a Portfolio may lose money or be
prevented from earning capital gains if it can not sell a security at the time
and price that is most beneficial to the Portfolio. Portfolios that invest in
privately-placed securities, high-yield bonds, mortgage-backed securities or
foreign or emerging markets securities, which have all experienced periods of
illiquidity, are subject to liquidity risks. A particular Portfolio may be more
susceptible to some of these risks than others, as noted in the description of
each Portfolio.
NON-DIVERSIFICATION RISK: The Lazard Small Cap Value, Morgan Stanley Emerging
Markets Equity and Merrill Lynch World Strategy Portfolios are classified as
"non-diversified" investment companies, which means that the proportion of each
Portfolio's assets that may be invested in the securities of a single issuer is
not limited by the 1940 Act. Since a relatively high percentage of each
non-diversified Portfolio's assets may be invested in the securities of a
limited number of issuers, some of which may be within the same industry, the
securities of each Portfolio may be more sensitive to changes in the market
value of a single issuer or industry. The use of such a focused investment
strategy may increase the volatility of a Portfolio's investment performance,
as the Portfolio may be more susceptible to risks associated with a single
economic, political or regulatory event than a diversified portfolio. If the
securities in which the Portfolio invests perform poorly, the Portfolio could
incur greater losses than it would have had it been invested in a greater
number of securities. However to qualify as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended (the "Code") and
receive pass through tax treatment, each Portfolio at the close of each fiscal
quarter, may not have more than 25% of its total assets invested in the
securities of any one issuer (excluding U.S. Government obligations) and with
respect to 50% of its assets, (i) may not have more than 5% of its total assets
invested in the securities of any one issuer and (ii) may not own more than 10%
of the outstanding voting securities of any one issuer. Each non-diversified
Portfolio intends to qualify as a RIC.
PORTFOLIO TURNOVER RISK: Consistent with their investment policies, the
Portfolios also will purchase and sell securities without regard to the effect
on portfolio turnover. Higher portfolio turnover (e.g., over 100% per year)
will cause a Portfolio to incur additional transaction costs and may result in
taxable gains being passed through to shareholders.
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SMALL-CAP AND MID-CAP COMPANY RISK: Investments in small-cap and mid-cap
companies may involve greater risks than investments in larger, more
established issuers. Smaller companies may have narrower product lines, more
limited financial resources and more limited trading markets for their stock,
as compared with larger companies. Their securities may trade less frequently
and in more limited volume than the securities of larger, more established
companies. In addition, small-cap and mid-cap companies are typically subject
to greater changes in earnings and business prospects than are those of larger
companies. Consequently, the prices of small company stocks tend to rise and
fall in value more frequently than the stocks of larger companies. Although
investing in small-cap and mid-cap companies offers potential for above-average
returns, the companies may not succeed and the value of their stock could
decline significantly.
VALUE INVESTING RISK: Value investing attempts to identify strong companies
selling at a discount from their perceived true worth. Advisers using this
approach generally select stocks at prices, in their view, that are temporarily
low relative to the company's earnings, assets, cash flow and dividends. Value
investing is subject to the risk that the stocks' intrinsic value may never be
fully recognized or realized by the market, or their prices may go down. In
addition, there is the risk that a stock judged to be undervalued may actually
be appropriately priced. Value investing generally emphasizes companies that,
considering their assets and earnings history, are attractively priced and may
provide dividend income.
The Trust's Portfolios are not insured by the FDIC or any other government
agency. Each Portfolio is not a deposit or other obligation of any financial
institution or bank and is not guaranteed. Each Portfolio is subject to
investment risks and possible loss of principal invested.
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ABOUT THE INVESTMENT PORTFOLIOS
This section of the Prospectus provides a more complete description of the
principal investment objectives, strategies and risks of each of the
Portfolios. Of course, there can be no assurance that any Portfolio will
achieve its investment objective.
Please note that:
O The description of the principal risks for a Portfolio includes risks
more fully described in the "Summary of Principal Risks" in the preceding
section.
O Additional information concerning each Portfolio's strategies,
investments and risks can be found in the Trust's Statement of Additional
Information.
THE BENCHMARKS
Performance of each of the Trust's Portfolios as shown on the following pages
compares each Portfolio's performance to that of a broad-based securities
index. Each of the Portfolios' annualized rates of return are net of investment
management fees, and expenses of each of the Trust. These rates are not
representative of the actual return you would receive under your Equitable
Contract.
Broad-based securities indices are unmanaged and are not subject to fees and
expenses typically associated with managed investment company portfolios.
Investments cannot be made directly in a broad-based securities index.
Comparisons with these benchmarks, therefore, are of limited use. They are
included because they are widely known and may help you to understand the
universe of securities from which each Portfolio is likely to select its
holdings. "Blended" performance numbers (e.g., 60% S&P 500/40% Lehman
Gov't/Corp) assume a static mix of the two indices.
THE COMPOSITE MARKET BENCHMARK is made up of 36% S&P 500, 24% MSCI EAFE Index,
21% Salomon Brothers U.S. Treasury Bond 1 year and, 14% Salomon Brothers World
Government ex U.S., and 5% U.S. Treasury Bill.
THE STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX ("S&P 500") is an
unmanaged index containing common stock 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 dividends,
if any, but does not reflect fees, brokerage commissions or other expenses of
investing.
THE RUSSELL 2000 INDEX ("Russell 2000") is an unmanaged index (with no defined
investment objective) of 2000 small-cap stocks and it includes reinvestment of
dividends. It is compiled by the Frank Russell Company.
THE MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX ("MSCI EAFE") is a market
capitalization weighted equity index composed of a sample of companies
representative of the market structure of Europe, Australia and the Far East.
MSCI EAFE Index returns assume dividends reinvested net of withholding tax and
do not reflect any fees or expenses.
THE MORGAN STANLEY CAPITAL INTERNATIONAL EMERGING MARKETS FREE PRICE RETURN
INDEX ("MSCI Emerging Markets Free") is a market capitalization weighted equity
index composed of companies that are representative of the market structure of
the following countries: Argentina, Brazil, Chile, China Free, Columbia, Czech
Republic, Greece, Hungary, India, Indonesia, Israel, Jordan, Korea (@ 50%),
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Malaysia, Mexico Free, Pakistan, Peru, Philippines Free, Poland, Russia, South
Africa, Sri Lanka, Taiwan (@50%), Thailand, Turkey, Venezuela Free. The base
date for the index is December 31, 1987. "Free" MSCI indices exclude those
shares not purchasable by foreign investors. The average size of the emerging
market companies within this index is US $800 million.
LEHMAN GOVERNMENT/CORPORATE BOND INDEX ("Lehman Gov't/Corp") represents an
unmanaged group of securities widely regarded by investors as representative of
the bond market.
SALOMON BROTHERS BROAD INVESTMENT GRADE BOND INDEX is an unmanaged market
weighted index that contains approximately 4,700 individually priced investment
grade bonds.
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FIXED INCOME PORTFOLIOS
JPM CORE BOND PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to provide a high total return consistent with
moderate risk of capital and maintenance of liquidity.
THE INVESTMENT STRATEGY
This Portfolio's total return will consist of income plus realized and
unrealized capital gains and losses. The Portfolio currently invests all of its
assets in investment grade debt securities rated BBB or better by S&P or Baa or
better by Moody's or unrated securities of similar quality.
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 based on the
Adviser's view of the market and interest rates. The Adviser also actively
allocates the Portfolio's assets among the broad sectors of the fixed income
market. These securities principally include U.S. Government and agency
securities, corporate securities, private placements, asset-backed securities,
mortgage-related securities and direct mortgage obligations. The securities can
be of any duration but will generally mature within one year of the Salomon
Brothers Broad Investment Grade Bond Index (currently about 5 years). The
Portfolio may also use futures contracts to change the duration of the
Portfolio's bond holdings.
[SIDEBAR: Duration is a measure of the weighted average maturity of the bonds
held by the Portfolio and can be used by the Adviser as a measure of the
sensitivity of the market value of the Portfolio to changes in interest rates.
Generally, the longer the duration of the Portfolio, the more sensitive its
market value will be to changes in interest rates.]
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 securities denominated in
currencies of developed foreign countries.
Under normal market conditions, the Portfolio will be primarily invested in
bonds. When market or financial conditions warrant, the Portfolio may invest up
to 100% of its assets in money market securities for temporary or defensive
purposes. Such investment strategies are inconsistent with the Portfolio's
investment objective and could result in the Portfolio not achieving its
investment objective.
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, FIXED INCOME RISKS,
including CREDIT, INTEREST RATE, and INVESTMENT-GRADE SECURITIES RISKS. Other
principal risks include LIQUIDITY RISK, PORTFOLIO TURNOVER RISK, and
DERIVATIVES RISK. Should the Portfolio invest in foreign securities, the
Portfolio will be subject to FOREIGN SECURITIES RISKS.
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PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's annual total return for 1998,
the Portfolio's first year of existence. The table below shows the Portfolio's
average annual total returns for one year and since inception. The table also
compares the Portfolio's performance to the returns of a broad-based index.
Both the bar chart and table assume reinvestment of dividends and
distributions. Past performance is not an indication of future performance. The
Portfolio's commenced operations on January 1, 1998.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
9.02%
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
4.72% (1998 3rd Quarter) 0.21% (1998 4th Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
JPM CORE BOND PORTFOLIO 9.02% 9.02%
SALOMON BROTHERS BROAD
INVESTMENT GRADE BOND INDEX* 8.72% 8.72%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
J.P. MORGAN INVESTMENT MANAGEMENT INC. ("J.P. Morgan"), 522 Fifth Avenue, New
York, New York 10036. J.P. Morgan has been the Adviser to the Portfolio since
it commenced operations. J.P. Morgan is a registered investment adviser and is
a wholly owned subsidiary of J.P. Morgan & Co. Incorporated, a bank holding
company. J.P. Morgan manages portfolios for corporations, governments,
endowments, as well as many of the largest corporate retirements plans in the
nation.
The Portfolio Managers, responsible for the day to day management of the
Portfolio since it commenced operations, are PAUL L. ZEMSKY, a Managing
Director of J.P. Morgan and a portfolio manager specializing in quantitative
techniques, who joined J.P. Morgan in 1985; and ROBERT J. TEATOM, a Managing
Director of J.P. Morgan and co-head of its U.S. Fixed Income Group, who joined
J.P. Morgan in 1975.
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BALANCED PORTFOLIOS
EQ/EVERGREEN FOUNDATION PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to provide, in order of priority, reasonable
income, conservation of capital and capital appreciation. [SIDEBAR: For
purposes of this Portfolio, the words "reasonable income" mean moderate income]
THE INVESTMENT STRATEGY
The Portfolio invests primarily in a combination of common stocks, preferred
stocks, securities that are convertible into or exchangeable for common stocks,
investment-grade corporate debt securities, securities of or guaranteed by the
U.S. Government, its agencies or instrumentalities, and short-term debt
instruments, such as high quality commercial paper, and obligations of
FDIC-member banks. Investments in common stocks focus on those that pay
dividends and have the potential for capital appreciation. Common stocks are
selected based on a combination of financial strength and estimated growth
potential. Bonds are selected based on the Adviser's projections of interest
rates, varying amounts and maturities in order to achieve capital protection
and, when possible, capital appreciation. The asset allocation of the Portfolio
will vary in accordance with changing economic and market conditions.
Under normal market conditions, at least 25% of the Portfolio's net assets will
be invested in fixed income securities. In selecting debt securities, the
Adviser will emphasize securities that the Adviser believes will not be subject
to significant fluctuations in value. The corporate debt obligations purchased
by the Portfolio will be rated A or higher by S&P and Moody's. The Fund is not
managed with a targeted maturity.
When market or financial conditions warrant, the Portfolio may invest 100% of
its assets in short-term obligations for temporary or defensive purposes. Such
investment strategies are inconsistent with the Portfolio's investment
objectives and could result in the Portfolio not achieving its investment
objective.
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, CONVERTIBLE SECURITIES
RISK and FIXED INCOME RISKS.
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<PAGE>
PORTFOLIO PERFORMANCE
The inception date for this Portfolio is January 1, 1999. Therefore, no
performance information is available.
WHO MANAGES THE PORTFOLIO
EVERGREEN ASSET MANAGEMENT CORP. ("Evergreen"), 2500 Westchester Avenue,
Purchase, New York 10577. Evergreen has been the Adviser to the Portfolio since
it commenced operations. Evergreen is a registered investment adviser and a
wholly-owned subsidiary of First Union Corporation. Evergreen offers a broad
range of financial services to individuals and businesses throughout the United
States.
STEPHEN A. LIEBER is the Portfolio Manager and has been responsible for the
day-to-day management of the Portfolio since its inception. Mr. Lieber has been
the Chairman and Co-Chief Executive Officer of Evergreen since 1994 and has
been associated with Evergreen and its predecessor (as Chairman) since 1971.
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<PAGE>
EQ/PUTNAM BALANCED PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to provide a balanced investment composed of a
well-diversified portfolio of stocks and bonds that will produce both capital
growth and current income.
THE INVESTMENT STRATEGY
The Portfolio may invest in almost any type of security or negotiable
instrument, including common stocks, corporate bonds, cash and money market
securities. Although the proportion invested in each type of security is not
fixed, generally, no more than 75% of the Portfolio's assets will be invested
in common stocks, securities that are convertible into common stocks and other
equity securities.
The Portfolio uses a value-oriented approach by investing in stocks the Adviser
believes are currently selling below their true worth.
[SIDEBAR: Value-investing attempts to identify strong companies selling at a
discount from their perceived true worth. The Adviser selects stocks for the
Portfolio at prices at which in its view are temporarily low relative to the
company's earnings, assets, cash flow and dividends.]
The Portfolio may also invest in debt securities, issued by the U.S. Government
or by private companies. Most of the Portfolio's debt securities will be
investment-grade (rated at least BBB) and are generally intermediate- to
long-term (with maturities of more than three (3) years). The Portfolio may
also invest in lower-rated debt securities (called "junk bonds").
The Portfolio may also invest up to 20% of its total assets in foreign
securities and may purchase Eurodollar certificates of deposit (i.e.,
short-term time deposits issued by European banks) without regard to this 20%
limit.
When market or financial conditions warrant, the Portfolio may invest up to
100% of its assets in short term obligations for temporary or defensive
purposes. Such investment strategies are inconsistent with the Portfolio's
investment objectives and could result in the Portfolio not achieving its
investment objective.
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks are GENERAL INVESTMENT RISKS, CONVERTIBLE SECURITIES
RISK, FIXED INCOME RISKS, DERIVATIVES RISK, and FOREIGN SECURITIES RISKS.
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PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
11.92%
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
9.33% (1998 4th Quarter) (5.24)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
EQ/PUTNAM BALANCED PORTFOLIO 11.92% 15.93%
60% S&P 500/40% LEHMAN
GOV'T/CORP. INDEX* 21.35% 23.48
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
PUTNAM INVESTMENT MANAGEMENT, INC. ("Putnam Management"), One Post Office
Square, Boston, MA 02109. Putnam Management has been the Adviser to the
Portfolio since it commenced operations. Putnam Management has been managing
mutual funds since 1937. Putnam Management is a subsidiary of Putnam
Investments, Inc., which is itself a subsidiary of Marsh & McLennan Companies,
Inc.
The Portfolio Managers, responsible for the day-to-day management of the
Portfolio, are: DAVID L. WALDMAN, Managing Director, who has been employed by
Putnam Management as an investment professional* since 1997 and prior to 1997,
Mr. Waldman was a senior Portfolio Manager at Lazard Freres since 1995, and
prior to 1995, he was a Vice President at Goldman Sachs; EDWARD P. BOUSA,
Senior Vice President, who has been employed by Putnam Management as an
investment professional* since October, 1992; JAMES M. PRUSKO, Vice President,
who has been employed by Putnam Management as an investment professional* since
1992; and KRISHNA K. MEMANI, MANAGING DIRECTOR, Senior Vice President, who has
been employed by Putnam Management as an investment professional* since 1993.
* Investment professional means that the manager was either a portfolio manager
or analyst.
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<PAGE>
MERRILL LYNCH WORLD STRATEGY PORTFOLIO
INVESTMENT OBJECTIVE: 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.
[SIDEBAR: For purposes of this Portfolio, "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.]
THE INVESTMENT STRATEGY The Portfolio is a non-diversified Portfolio that
invests in both equity securities and fixed-income securities. The Portfolio
may invest entirely in equity securities, entirely in fixed-income securities,
or partly in equity securities and partly in fixed-income securities.
[SIDEBAR: A Portfolio may be considered to be "non-diversified" for federal
securities law purposes because it invests in a limited number of securities.
In all cases, the Portfolio intends to be diversified for tax purposes so that
it can qualify as a regulated investment company.]
The Portfolio will normally invest a significant portion of its assets in
equity securities of companies throughout the world. The equity securities in
which the Portfolio invests will primarily be common stocks of large companies.
There are no limits on the Portfolio's ability to invest in any country or
geographic region. The Portfolio can invest primarily in U.S. securities,
primarily in foreign securities, or partly in both. It normally invests in at
least three countries at any given time. The Portfolio may invest in companies
in emerging markets, but the Adviser anticipates that a substantially greater
portion of the Portfolio's equity investments will be in companies in developed
countries. At the present time, the Portfolio focuses on investments in Canada,
Western Europe, the Far East, and Latin America, as well as in the United
States.
The Adviser will select the percentage of the Portfolio's assets that will be
invested in equity securities and fixed-income securities, as well as the
geographic allocation of the Portfolio's investments, based on its view of
general economic and financial trends in various countries and industries, such
as inflation, commodity prices, the direction of interest and currency
movements, estimates of growth in industry output and profits, and government
fiscal policies. For example, if the Adviser believes that falling commodity
prices and decreasing estimates of industrial output globally signal low growth
and limited returns from equity securities, the Portfolio may emphasize
fixed-income investments. Similarly, if the Adviser believes that low
inflation, new technologies and improvements in economic productivity in a
country or region signal a promising environment for equity securities in that
country or region the Portfolio may emphasize equity investments in that
country or region.
The Portfolio may invest in fixed-income securities of any maturity, including
United States and foreign government securities and corporate debt securities.
The Portfolio will only invest in debt securities that are rated investment
grade by S&P or Moody's or unrated securities that are of comparable quality.
The Portfolio may also invest in securities denominated in currencies other
than the U.S. dollar. The Portfolio may also engage in currency transactions to
hedge against the risk of loss from changes in currency exchange rates. In
addition, the Portfolio may also employ a variety of instruments and techniques
to enhance income and to hedge against market and currency risk.
The Portfolio has no stated minimum holding period for investments, and will
buy or sell securities whenever the Adviser sees an appropriate opportunity.
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<PAGE>
When market or financial conditions warrant, the Portfolio may invest up to
100% of its assets in United States Government or Government agency securities,
money market securities, other fixed income securities, or cash for temporary
or defensive purposes. Such investment strategies are inconsistent with the
Portfolio's investment objective and could result in the Portfolio not
achieving its investment objective.
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, FOREIGN SECURITIES
RISKS, including CURRENCY, EURO, POLITICAL/ECONOMIC, REGULATORY AND TRANSACTION
COSTS RISKS. Other principal risks include FIXED INCOME RISKS, DERIVATIVES and
NON-DIVERSIFICATION RISK.
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PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
6.81%
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
10.56% (1998 4th Quarter) (11.15)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
Merrill Lynch World Strategy Portfolio 6.81% 6.91%
Composite Market Benchmark Index* (25.34)% (28.92)%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
MERRILL LYNCH ASSET MANAGEMENT, L.P. ("MLAM"), 800 Scudders Mill Road,
Plainsboro, New Jersey 08543. MLAM has been the Adviser to the Portfolio since
it commenced operations. MLAM is an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc., a financial services holding company. 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.
THOMAS R. ROBINSON is the Portfolio Manager primarily responsible for the
day-to-day management of the Portfolio since it commenced operations. Mr.
Robinson has served as a First Vice President of MLAM since 1997 and as a
Senior Portfolio Manager of MLAM since 1995. Prior to 1995, Mr. Robinson served
as Manager of International Strategy for Merrill Lynch & Co. Global Securities
Research and Economics Group.
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DOMESTIC EQUITY PORTFOLIOS
BT EQUITY 500 INDEX PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to replicate as closely as possible (before
deduction of Portfolio expenses) the total return of the S&P 500.
THE INVESTMENT STRATEGY
The Portfolio invests in equity securities of companies included in the S&P
500. The Adviser seeks to match the risk and return characteristics of the S&P
500 by investing in a statistically selected sample of the securities found in
the S&P 500, using a process known as "optimization". This process selects
stocks for the Portfolio so that industry weightings, market capitalizations
and fundamental characteristics (price to book ratios, price to earnings
ratios, debt to asset ratios and dividend yields) closely match those of the
securities included in the S&P 500. This approach helps to increase the
Portfolio's liquidity and reduce costs. The securities held by the Portfolio
are weighted to make the Portfolio's total investment characteristics similar
to those of the S&P 500 as a whole.
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.
[SIDEBAR: For more information on the S&P 500, see the preceding section "The
Benchmarks." 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. 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.]
Over time, the correlation between the performance of the Portfolio and the S&P
is expected to be 95% or higher before deduction of Portfolio expenses. The
Portfolio's ability to track the S&P 500 may be affected by, among others,
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. The Portfolio seeks securities to track the S&P 500,
therefore, the Adviser generally will not attempt to judge the merits of any
particular security as an investment.
The Portfolio may also invest 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 a number of reasons, including: to simulate full investment in the
S&P 500 while retaining a cash balance for Portfolio management purposes; to
facilitate trading; to reduce transaction costs; or to seek higher investment
returns when a future contract, option, warrant or convertible security is
priced more
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<PAGE>
attractively than the underlying equity security or S&P 500. These instruments
are considered to be derivatives.
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS and INDEX-FUND RISK.
Should the Portfolio invest in debt securities, you may also experience FIXED
INCOME RISKS.
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<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's annual total return for 1998,
the Portfolio's first year of existence. The table below shows the Portfolio's
average annual total returns for the Portfolio for one year and since
inception. The table also compares the Portfolio's performance to the returns
of a broad based index. Both the bar chart and table assume reinvestment of
dividends and distributions. Past performance is not an indication of future
performance. The Portfolio's inception date was January 1, 1998.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
25.14%
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
21.26% (1998 4th Quarter) (10.03)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
BT Equity 500 Index Portfolio 25.14% 25.14%
S&P 500 Index* 28.58% 28.58%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
BANKERS TRUST COMPANY ("Bankers Trust"), 130 Liberty Street (One Bankers Trust
Plaza), New York, New York 10006. Bankers Trust has been the Adviser to the
Portfolio since it commenced operations. Bankers Trust is a wholly-owned
subsidiary of Bankers Trust Corporation. Bankers Trust conducts a variety of
general banking and trust activities and is a major wholesale supplier of
financial services, including investment management to the international and
domestic institutional markets.
-30-
<PAGE>
EQ/EVERGREEN PORTFOLIO
INVESTMENT OBJECTIVE: Seeks capital appreciation.
THE INVESTMENT STRATEGY
The Evergreen Portfolio invests primarily in common stocks and convertible
securities of companies that are relatively small, little-known or represent
special situations which the Adviser believes offer potential for capital
appreciation. In addition, the Portfolio may invest in relatively well-known,
large company securities that have the potential for capital appreciation.
Securities are selected based on a combination of comparative undervaluation
relative to growth potential and/or merger/acquisition price.
[SIDEBAR: For purposes of this Portfolio, a "little-known" company is one whose
business is limited to a regional market or whose securities are mainly
privately held. A " relatively small" company is one that has a small share of
the market for its products or services in comparison with other companies in
its field or that provides goods or services for a limited market. A "special
situation" company is one which offers potential for capital appreciation
because of a recent or anticipated change in structure, management, products or
services.
The Portfolio also may invest to a lesser extent in non-convertible debt
securities and preferred stocks that offer an opportunity for capital
appreciation.
When market or financial conditions warrant, the Portfolio may invest up to
100% of its assets in short-term obligations for temporary or defensive
purposes. Such investment strategies are inconsistent with the Portfolio's
investment objectives and could result in the Portfolio not achieving its
investment objective.
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, SMALL-CAP AND MID-CAP
COMPANY RISK and VALUE INVESTING RISK. Should the Portfolio invest in debt
securities, you may also experience FIXED INCOME RISKS.
-31-
<PAGE>
PORTFOLIO PERFORMANCE
- - -------------------------------------------------------------------------------
The inception date for this Portfolio is January 1, 1999. Therefore, no prior
performance information is available.
- - -------------------------------------------------------------------------------
WHO MANAGES THE PORTFOLIO
EVERGREEN ASSET MANAGEMENT CORP. ("Evergreen"), 2500 Westchester Avenue,
Purchase, New York 10577. Evergreen has been the Adviser to the Portfolio since
it commenced operations. Evergreen is a registered investment adviser and a
wholly-owned subsidiary of First Union Corporation. Evergreen offers a broad
range of financial services to individuals and businesses throughout the United
States.
The Portfolio Managers, responsible for the day-to-day management of the
Portfolio since its inception, are STEPHEN A. LIEBER, who has been Chairman and
Co-Chief Executive Officer of Evergreen since 1994 and has been associated with
Evergreen and its predecessor (as Chairman) since 1971; and NOLA MADDOX
FALCONE, C.F.A., who has been President and Co-Chief Executive Officer of
Evergreen since 1994. Ms. Falcone has been associated with Evergreen and its
predecessor (as portfolio manager) since 1974.
-32-
<PAGE>
EQ/PUTNAM GROWTH & INCOME VALUE PORTFOLIO
INVESTMENT OBJECTIVE: Seeks capital growth. Current income is a secondary
objective.
THE INVESTMENT STRATEGY
The Portfolio invests primarily in common stocks that offer potential for
capital growth and may invest in stocks that offer potential for current
income. In analyzing companies for investment, the Adviser tries to identify
common stocks of companies that are significantly undervalued compared with
their underlying assets or earnings potential and offer growth and current
income potential.
The Portfolio may also invest in corporate bonds, notes and debentures,
preferred stocks or convertible securities (both debt securities and preferred
stocks) or U.S. Government securities.
It may also invest a portion of its assets in debt securities rated below
investment grade ( commonly referred to as "junk bonds"), zero-coupon bonds and
payment-in-kind bonds, and high quality U.S. and foreign dollar-denominated
money market securities. The Portfolio may invest up to 20% of its total assets
in foreign securities, including transactions involving futures contracts,
forward contracts and options and foreign currency exchange transactions.
There may be times when the Adviser will use additional investment strategies
to achieve a Portfolio's investment objectives. For example, the portfolio may
engage in a variety of investment management practices such as buying and
selling derivatives, including stock index futures contracts and call and put
options.
When market or financial conditions warrant, the Portfolio may invest up to
100% of its assets in debt securities, preferred stocks or other securities for
temporary or defensive purposes. Such investment strategies are inconsistent
with the Portfolio's investment objectives and could result in the Portfolio
not achieving its investment objective.
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks are GENERAL INVESTMENT RISKS, DERIVATIVES RISK,
CONVERTIBLE SECURITIES RISK, FOREIGN SECURITIES RISKS, and VALUE INVESTING
RISK. Should the Portfolio invest in debt securities, you may also experience
FIXED INCOME RISKS including JUNK BOND RISK.
-33-
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
12.75
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
16.49% (1998 4th Quarter) (10.58)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
EQ/Putnam Growth & Income Portfolio 12.75% 17.56%
S&P 500 Index* 28.58% 31.63%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
PUTNAM INVESTMENT MANAGEMENT, INC. ("Putnam Management"), One Post Office
Square, Boston, MA 02109. Putnam Management has been the Adviser to the
Portfolio since the Portfolio commenced operations. Putnam Management has been
managing mutual funds since 1937. Putnam Management is a subsidiary of Putnam
Investments, Inc., which is itself a subsidiary of Marsh & McLennan Companies,
Inc.
ANTHONY I. KREISEL is the Portfolio Manager responsible for the day to day
management of the Portfolio since it commenced operations. Mr. Kreisel has been
employed by Putnam Management as an investment professional* since 1986.
* Investment professional means that the manager was either a portfolio manager
or analyst.
-34-
<PAGE>
EQ/PUTNAM INVESTORS GROWTH PORTFOLIO
INVESTMENT OBJECTIVE: Seeks long-term growth of capital and any increased
income that results from this growth.
THE INVESTMENT STRATEGY
The Portfolio invests primarily in common stocks of companies with market
capitalizations of $2 billion or more. The Adviser gives consideration to
growth potential rather than to dividend income. The Portfolio may purchase
securities of medium-sized companies having a proprietary product or profitable
market niches and the potential to grow very rapidly.
The Adviser invests mostly in "growth" stocks whose earnings the Adviser
believes are likely to grow faster than the economy as a whole. The Adviser
evaluates a company's future earnings potential and dividends, financial
strength, working assets and competitive position in its industry.
Although the Portfolio invests primarily in U.S. stocks, the Portfolio may
invest without limit in securities of foreign issuers that are traded in U.S.
public markets. It may also, to a lesser extent, invest in securities of
foreign issuers that are not traded in U.S. public markets.
The Portfolio may also engage in a variety of transactions involving
derivatives, such as futures, options, warrants and swaps and may also invest
in convertible securities, preferred stocks and debt securities.
When market or financial conditions warrant, the Portfolio may invest without
limit in debt securities, preferred stocks, United States Government and agency
obligations, cash or money market instruments, or any other securities for
temporary or defensive purposes. Such investment strategies are inconsistent
with the Portfolio's investment objectives and could result in the Portfolio
not achieving its investment objective.
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks are GENERAL INVESTMENT RISKS, GROWTH INVESTING RISK,
MID-CAP and SMALL-CAP COMPANY RISK, CONVERTIBLE SECURITIES RISK, DERIVATIVES
RISK and FOREIGN SECURITIES RISKS. Should the Portfolio invest in debt
securities, you may also experience FIXED INCOME RISKS.
-35-
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
36.27%
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
25.29% (1998 4th Quarter) (11.25)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
EQ/Putnam Investors Growth Portfolio 36.27% 37.34%
S&P 500 Index* 28.58% 31.63%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
PUTNAM INVESTMENT MANAGEMENT, INC. ("Putnam Management"), One Post Office
Square, Boston, MA 02109. Putnam Management has been the Adviser to the
Portfolio since the Portfolio commenced operations. Putnam Management has been
managing mutual funds since 1937. Putnam Management is a subsidiary of Putnam
Investments, Inc., which is itself a subsidiary of Marsh & McLennan Companies,
Inc.
The Portfolio Managers, responsible for the day to day management of the
Portfolio since its inception, are: C. BETH COTNER, who has been employed by
Putnam Management as an investment professional* since 1995, and prior to 1995,
was a Portfolio Manager and Executive Vice President of Kemper Financial
Services; RICHARD B. ENGLAND, who has been employed by Putnam Management as an
investment professional* since 1992; and MANUAL WEISS HERRERRO, who has been
employed by Putnam Management as investment professional* since 1987.
* Investment professional means that the manager was either a portfolio manager
or analyst.
-36-
<PAGE>
LAZARD LARGE CAP VALUE PORTFOLIO
INVESTMENT OBJECTIVE: Seeks capital appreciation by investing primarily in
equity securities of companies with relatively large capitalizations (i.e.,
companies having market capitalizations of at least ___ $ 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.
THE INVESTMENT STRATEGY
The Portfolio normally invests at least 80% of its total [net assets] assets
primarily in equity securities of large capitalization companies. Equity
securities include common stocks, preferred stocks and securities convertible
into or exchangeable for common stocks.
The Portfolio uses a value-oriented approach in searching for securities. The
Adviser uses a "bottom-up" approach (individual stock selection) to find
companies that have:
o low price to earnings ratios
o high yield
o unrecognized assets
o the possibility of management change
o the prospect of improved profitability
The Portfolio may also invest up to 20% of its assets in U.S. Government
securities and investment grade debt securities of domestic corporations rated
BBB or better by S&P or Baa or better by Moody's.
The Portfolio may also invest up to 10% of its assets in foreign equity, debt
security, or depositary receipts.
The Portfolio may also invest without limitation in high-quality short-term
money market instruments. The Portfolio may engage in options transactions,
including writing covered call options or foreign currencies to offset costs of
hedging and writing and purchasing put and call options on securities. Although
the Portfolio will engage in options transactions primarily to hedge its
Portfolio, it may use options to increase returns and there is the risk that
these transactions sometimes may reduce returns or increase volatility.
When market or financial conditions warrant, the Portfolio may invest, without
limit, in money market securities for temporary or defensive purposes. Such
investment strategies could have the effect of reducing the benefit of any
upswing in the market. Such investment strategies are inconsistent with the
Portfolio's investment objectives and could result in the Portfolio not
achieving its investment objective.
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks of investing in the Portfolio are GENERAL INVESTMENT
RISKS, VALUE INVESTING RISK and DERIVATIVES RISK. Should the Portfolio invest
in debt securities, you may experience FIXED INCOME RISKS.
-37-
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's average annual total return for
1998, the Portfolio's first year of existence. The table below shows the
Portfolio's average annual total returns for the Portfolio for one year and
since inception. The table also compares the Portfolio's performance to the
returns of a broad based index. Both the bar chart and table assume
reinvestment of dividends and distributions. Past performance is not an
indication of future performance. The Portfolio's inception date was January 1,
1998.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
20.01%
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
23.34% (1998 4th Quarter) (13.43)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
Lazard Large Cap Value Portfolio 20.01% 20.01%
S&P 500 Index* 28.58% 28.58%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
LAZARD ASSET MANAGEMENT ("LAM"), 30 Rockefeller Plaza, New York, New York
10112. LAM has been the Adviser to the Portfolio since it commenced operations.
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. Lazard Freres provides its clients with a wide variety of investment
banking, brokerage and related services, including investment management.
The Portfolio Managers, responsible for the day to day management since the
inception of the Portfolio are HERBERT W. GULLQUIST, a Vice-Chairman, Managing
Director and Chief Investment Officer of LAM, who has been with LAM since 1982;
and MICHAEL S. ROME, a Managing Director of LAM and a U.S./Global Equity
Portfolio Manager since 1991.
-38-
<PAGE>
MERRILL LYNCH BASIC VALUE EQUITY PORTFOLIO
INVESTMENT OBJECTIVE: Seeks 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 INVESTMENT STRATEGY
The Portfolio chooses securities for capital appreciation that are expected to
increase in value. In selecting securities the Adviser emphasizes stocks that
are undervalued, are selling at a discount, or seem capable of recovering from
being temporarily out of favor. The Adviser places particular emphasis on
securities with statistical characteristics associated with undervaluation.
The Adviser follows a contrary opinion/out-of-favor investment style. The
Adviser believes that favorable changes in market prices are more likely to
occur when:
o Stocks are out of favor.
o Company earnings are depressed.
o Price/earnings ratios are relatively low.
o Investment expectations are limited.
o There is no general interest in a security or industry.
On the other hand, the Adviser believes that negative developments are more
likely to occur when:
o Investment expectations are high. Stock prices are advancing or have
o advanced rapidly. Price/earnings ratios have been inflated. An industry
o or security continues to become popular among investors.
In other words, the Adviser believes that stocks with relatively high
price/earnings ratios are more vulnerable to price declines from unexpected
adverse developments. At the same time, stocks with relatively low
price/earnings ratios are more likely to benefit from favorable but generally
unanticipated events. Thus, the Portfolio may invest a large part of its net
assets in stocks that have weak research ratings.
The Portfolio invests primarily in common stocks of U.S. companies, but may buy
equity securities other than common stock and may also invest up to 10% of its
total assets in securities issued by foreign companies. The Portfolio may also
invest a substantial portion of its assets in companies with market
capitalizations below the largest companies. The Adviser believes that large
institutional investors may overlook these companies, making them undervalued.
The Portfolio has no minimum holding period for investments, and will buy or
sell securities whenever the Portfolio's management sees an appropriate
opportunity.
When market or financial conditions warrant, the Portfolio may invest in U.S.
Government and agency securities, money market securities and other
fixed-income securities for temporary or defensive purposes. Such investment
strategies are inconsistent with the Portfolio's investment objectives and
could result in the Portfolio not achieving its investment objective.
-39-
<PAGE>
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, SMALL-CAP AND MID-CAP
COMPANY RISK, and VALUE INVESTING RISK. Should the Portfolio invest in foreign
securities, you may experience FOREIGN SECURITIES RISKS.
-40-
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
11.59%
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
11.20% (1997 3rd Quarter) (10.91)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
Merrill Lynch Basic Value Equity
Portfolio 11.59% 17.29%
S&P 500 Index* 28.58% 31.63%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
MERRILL LYNCH ASSET MANAGEMENT, L.P. ("MLAM"), 800 Scudders Mill Road,
Plainsboro, NJ 08543. MLAM has been the Adviser to the Portfolio since it
commenced operations. MLAM is an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc., a financial services holding company. 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.
KEVIN RENDINO, a First Vice President of MLAM since 1997, has been the
Portfolio Manager responsible for the day to day management of the Portfolio
since it commenced operations. Mr. Rendino was a Vice President of MLAM from
1993 to 1997.
-41-
<PAGE>
MFS GROWTH WITH INCOME PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to provide reasonable current income and long-term
growth of capital and income.
[SIDEBAR: For purposes of this Portfolio, the words "reasonable current income"
mean moderate income.]
THE INVESTMENT STRATEGY
The Portfolio invests, under normal market conditions, primarily (at least 65%
of its total assets) in equity securities, including common stocks, preferred
stocks, convertible securities, warrants and depositary receipts for those
securities. Equity securities may be listed on a securities exchange or traded
in the over-the-counter markets. While the Portfolio may invest in companies of
any size, the Portfolio generally focuses on companies with larger market
capitalizations that the Adviser believes have sustainable growth prospects and
attractive valuations based on current and expected earnings or cash flow.
The Adviser uses a "bottom-up" investment style in managing the Portfolio. This
means that securities are selected based upon fundamental analysis performed by
the Adviser's large group of equity research analysts.
The Portfolio may invest in foreign securities and may have exposure to foreign
currencies through its investment in these securities, its direct holdings of
foreign currencies or through its use of forward foreign currency exchange
contracts for the purchase or sale of a fixed quantity of foreign currency at a
future date.
When adverse market, financial or political conditions warrant, the Portfolio
may depart from its principal strategies for temporary or defensive purposes.
Such investment strategies are inconsistent with the Portfolio's investment
objective and could result in the Portfolio not achieving its investment
objective.
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, CONVERTIBLE SECURITIES
RISK, SMALL-CAP AND MID-CAP RISK, and GROWTH INVESTING RISK.. Should the
Portfolio invest in foreign securities, you may experience FOREIGN SECURITIES
RISKS.
-42-
<PAGE>
PORTFOLIO PERFORMANCE
- - -------------------------------------------------------------------------------
The inception date for this Portfolio is January 1, 1999. Therefore, no prior
performance information is available.
- - -------------------------------------------------------------------------------
WHO MANAGES THE PORTFOLIO
MASSACHUSETTS FINANCIAL SERVICES COMPANY ("MFS"), 500 Boylston Street, Boston,
MA 02116. MFS has been the Adviser to the Portfolio since it commenced
operations. MFS is America's oldest mutual fund organization. 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. 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 Managers are JOHN D. LAUPHEIMER, JR., Senior Vice President of
MFS, who has been employed as a portfolio manager by MFS since 1986; and
MITCHELL D. DYNAN, a Vice President of MFS, who has been employed as a
portfolio manager by MFS since 1981.
-43-
<PAGE>
MFS RESEARCH PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to provide long-term growth of capital and future
income.
THE INVESTMENT STRATEGY
The Portfolio invests primarily in equity securities, such as common stocks,
securities convertible into common stocks, preferred stocks and depositary
receipts of companies believed by the Adviser to have:
o favorable prospects for long-term growth;
o attractive valuations based on current and expected earnings or cash flow;
o dominant or growing market share; and
o superior management.
The Portfolio may invest in securities of companies of any size. The
Portfolio's investments may include securities traded on securities exchanges
or in the over-the-counter markets.
The Portfolio may invest in foreign equity securities, and may have exposure to
foreign currencies through its investment in these securities, its direct
holdings of foreign currencies or through its use of foreign currency exchange
contracts for the purchase or sale of a fixed quantity of foreign currency at a
future date.
When adverse market, financial or political conditions warrant, the Portfolio
may depart from its principal investment strategies for temporary or defensive
purposes. Such investment strategies are inconsistent with the Portfolio's
investment objectives and could result in the Portfolio not achieving its
investment objective.
The Portfolio may invest up to 10% of its assets in high yielding debt
securities rated below investment grade ("junk bonds").
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks of investing in the Portfolio are GENERAL INVESTMENT
RISKS, CONVERTIBLE SECURITIES RISK, GROWTH INVESTING RISK, and SMALL-CAP AND
MID-CAP COMPANY RISK. To the extent that the Portfolio invests in debt
securities it may be subject to FIXED INCOME RISKS. Should the Portfolio invest
in foreign securities, you may experience FOREIGN SECURITIES RISKS.
-44-
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
24.11%
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
21.36% (1998 4th Quarter) (17.35)% (1997 4th Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
MFS Research Portfolio 24.11% 24.41%
S&P 500 Index* 28.58% 31.63%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
MASSACHUSETTS FINANCIAL SERVICES COMPANY ("MFS"), 500 Boylston Street, Boston,
MA 02116. MFS has been the Adviser to the Portfolio since it commenced
operations. MFS is America's oldest mutual fund organization. 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. 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.
A committee of investment research analysts selects portfolio securities for
the Portfolio. 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 committee allocates the Portfolio's assets among various industries.
Individual analysts then select what they view as the securities best suited to
achieve the Portfolio's investment objective within their assigned industry
responsibility.
-45-
<PAGE>
T. ROWE PRICE EQUITY INCOME PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to provide substantial dividend income and also
capital appreciation by investing primarily in dividend-paying common stocks of
established companies.
THE INVESTMENT STRATEGY
The Portfolio invests primarily in dividend-paying common stocks of established
companies that have favorable prospects for increasing dividend income and
capital appreciation. The Portfolio's yield as a result of that dividend income
is expected to be significantly above the average yield of the companies of the
S&P 500.
The Adviser bases its investment decisions on three premises: (1) over time,
dividend income can account for a significant portion of the Portfolio's
return; (2) dividends are a more stable and predictable source of return; and
(3) prices of stocks that pay a high current income level tend to be less
volatile than those paying below average dividends.
The Adviser uses a "value" approach in choosing securities. It looks for common
stocks of companies that have:
o established operating histories;
o above-average dividend yields relative to the S&P 500;
o low price to earnings ratios relative to the S&P 500;
o sound balance sheets; and
o low stock price relative to the company's asset value, earnings and
cash flow.
[SIDEBAR: Equity income investing involves finding common stocks that pay
dividend income. As an example, utility company stocks often provide dividend
income while a shareholder waits for the stock price to move. Dividends can
help reduce the Portfolio's volatility during turbulent markets and help offset
losses when stock prices are falling.]
The Portfolio may invest up to 25% of its total assets in foreign securities.
These securities include non-dollar-denominated securities traded outside the
United States and dollar-denominated securities such as American Depositary
Receipts. The Portfolio may also purchase preferred stocks, convertible
securities, warrants, U.S. Government securities, high-quality money market
securities, as well as investment grade debt securities and high yielding debt
securities ("junk bonds").
When market or financial conditions warrant, the Portfolio may invest without
limitation in high quality money market securities, and United States
Government debt securities for temporary or defensive purposes. Such investment
strategies are inconsistent with the Portfolio's investment objectives and
could result in the Portfolio not achieving its investment objective.
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks of investing in the Portfolio are GENERAL INVESTMENT
RISKS, VALUE INVESTING RISK, CONVERTIBLE SECURITIES RISK and FOREIGN SECURITIES
RISKS. Should the Portfolio invest in debt securities, you may also experience
FIXED INCOME RISKS.
-46-
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
9.11%
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
11.16% (1998 4th Quarter) (7.66)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
T. Rowe Price Equity Income Portfolio 9.11% 18.73%
S&P 500 Index* 28.58% 31.63%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
T. ROWE PRICE ASSOCIATES, INC. ("T. Rowe Price"), 100 East Pratt Street,
Baltimore, MD 21202. T. Rowe Price has been the Adviser to the Portfolio since
the Portfolio commenced operations. T. Rowe Price serves as investment manager
to a variety of individual and institutional investor accounts, including
limited partnerships and other mutual funds.
Investment decisions with respect to the Portfolio are made by an Investment
Advisory Committee. BRIAN C. ROGERS has been the Committee Chairman since the
inception of the Portfolio and has day-to-day responsibility for managing the
Portfolio. Mr. Rogers joined T. Rowe Price in 1982 and has been managing
investments since 1983.
-47-
<PAGE>
AGGRESSIVE EQUITY PORTFOLIOS
BT SMALL COMPANY INDEX PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to replicate as closely as possible (before the
deduction of Portfolio expenses) the total return of the Russell 2000 Index
("Russell 2000").
THE INVESTMENT STRATEGY
The Portfolio invests primarily in equity securities of small-cap companies
included in the Russell 2000. The Adviser seeks to match the returns of the
Russell 2000. The Portfolio invests in a statistically selected sample of the
securities found in the Russell 2000, using a process known as "optimization."
This process selects stocks for the Portfolio so that industry weightings,
market capitalizations and fundamental characteristics (price to book ratios,
price to earnings ratios, debt to asset ratios and dividend yields) closely
match those of the securities included in the Russell 2000. This approach helps
to increase the Portfolio's liquidity and reduce costs. The securities held by
the Portfolio are weighted to make the Portfolio's total investment
characteristics similar to those of the Russell 2000 as a whole.
[SIDEBAR: For more information on The Russell 2000, see the preceding section
"The Benchmarks." 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.]
Over time, the correlation between the performance of the Portfolio and the
Russell 2000 is expected to be 95% or higher before the deduction of Portfolio
expenses. 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. The Portfolio seeks to track
the Russell 2000, therefore, the Adviser generally will not attempt to judge
the merits of any particular security as an investment.
Securities index futures contracts and related options, warrants and
convertible securities may be used for a number of reasons, including: to
simulate full investment in the Russell 2000 while retaining a cash balance for
fund management purposes; to facilitate trading; to reduce transaction costs;
or to seek higher investment returns when a future contract, option, warrant or
convertible security is priced more attractively than the underlying equity
security or Russell 2000. These instruments are considered to be derivatives.
The Portfolio may invest to a lesser extent in short-term debt securities and
money market securities to meet redemption requests or to facilitate investment
in the securities included in the Russell 2000.
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, INDEX-FUND RISK,
SMALL-CAP and MID-CAP COMPANY RISK, CONVERTIBLE SECURITIES RISK, LIQUIDITY RISK
and DERIVATIVES RISK. Should the Portfolio invest in debt securities, you may
experience FIXED INCOME RISKS.
-48-
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's annual total return for 1998,
the Portfolio's first year of existence. The table below shows the Portfolio's
average annual total returns for the Portfolio for one year and since
inception. The table also compares the Portfolio's performance to the returns
of a broad based index. Both the bar chart and table assume reinvestment of
dividends and distributions. Past performance is not an indication of future
performance. The Portfolio's inception date was January 1, 1998.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
(2.27)%
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
16.21% (1998 4th Quarter) (19.52) (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
BT Small Company Index Portfolio (2.27)% (2.27)%
Russell 2000 Index* (2.54)% (2.54)%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
BANKERS TRUST COMPANY ("Bankers Trust"), 130 Liberty Street (One Bankers Trust
Plaza), New York, New York 10006. Bankers Trust has been the Adviser to the
Portfolio since it commenced operations. 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.
-49-
<PAGE>
LAZARD SMALL CAP VALUE PORTFOLIO
INVESTMENT OBJECTIVE: Seeks capital appreciation by investing 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 INVESTMENT STRATEGY
The Portfolio is a non-diversified Portfolio that invests primarily in equity
securities of U.S. companies with small market capitalizations that the Adviser
believes are undervalued based on their return on equity or capital. The
Portfolio will have characteristics similar to the Russell 2000 Index. The
equity securities that may be purchased by the Portfolio include common stocks,
preferred stocks, securities convertible into or exchangeable for common
stocks, rights and warrants.
[SIDEBAR: For more information on The Russell 2000, see the preceding section
"The Benchmarks"]
[SIDEBAR: A Portfolio may be considered to be "non-diversified" for federal
securities law purposes because it invests in a limited number of securities.
In all cases, the Portfolio intends to be diversified for tax purposes so that
it can qualify as a regulated investment company.]
In selecting investments for the Portfolio, the Adviser looks for equity
securities of companies that have one or more of the following characteristics:
(i) are undervalued relative to their earnings, cash flow or asset values; (ii)
have an attractive price/value relationship with expectations that some
catalyst will cause the perception of value to change within two years; (iii)
are out of favor due to circumstances which are unlikely to harm the company's
franchise or earnings power; (iv) have low projected price to earnings or
price-to-cash flow multiples; (v) have the potential to become a larger factor
in the company's business; (vi) have significant debt but have high levels of
free cash flow; and (vii) have a relatively short corporate history with the
expectation that the business may grow.
Although the Portfolio will principally invest at least 80% of its assets in
small capitalization securities, the Portfolio may also invest up to 20% of its
assets in larger capitalization equity securities or investment-grade debt
securities. The Portfolio may also engage in lending portfolio securities.
When market or financial conditions warrant the Portfolio may invest without
limitation in short-term money market instruments or hold its assets in cash
for temporary or defensive purposes. Such investment strategies could have the
effect of reducing the benefit of any upswing in the market. Such investment
strategies are inconsistent with the Portfolio's investment objectives and
could result in the Portfolio not achieving its investment objective.
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks of investing in the Portfolio are GENERAL INVESTMENT
RISKS, SMALL-CAP and MID-CAP COMPANY RISK, VALUE INVESTING risk, CONVERTIBLE
SECURITIES RISK, LIQUIDITY RISK and NON-DIVERSIFICATION RISK. Should the
Portfolio invest in debt securities, you may also experience FIXED INCOME
RISKS.
-50-
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's annual total return for 1998,
the Portfolio's first year of existence. The table below shows the Portfolio's
average annual total returns for the Portfolio for one year and since
inception. The table also compares the Portfolio's performance to the returns
of a broad based index. Both the bar chart and table assume reinvestment of
dividends and distributions. Past performance is not an indication of future
performance. The Portfolio's inception date was January 1, 1998.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
(7.03)%
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
15.78% (1998 4th Quarter) (20.10)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
Lazard Small Cap Value Portfolio (7.03)% (7.03)%
Russell 2000 Index* (2.54)% (2.54)%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
LAZARD ASSET MANAGEMENT ("LAM"), 30 Rockefeller Plaza, New York, New York
10112. LAM has been the Adviser to the Portfolio since it commenced operations.
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. Lazard Freres provides its clients with a wide variety of investment
banking and related services, including investment management.
The Portfolio Managers, responsible for the day to day management since the
inception of the Portfolio, are: EILEEN D. ALEXANDERSON, a Managing Director of
LAM who has been with LAM since 1979 and HERBERT W. GULLQUIST, a Vice-Chairman,
Managing Director and Chief Investment Officer of LAM, who has been with LAM
since 1982.
-51-
<PAGE>
MFS EMERGING GROWTH COMPANIES PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to provide long-term capital growth.
THE INVESTMENT STRATEGY
The Portfolio invests, under normal market conditions, primarily (at least 65%
of its total assets) in common stocks and related securities, such as preferred
stock, convertible securities and depositary receipts of emerging growth
companies. Emerging growth companies that the Adviser believes are either:
o early in their life cycle but have the potential to become major
enterprises, or
o are major enterprises 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.
For purposes of this Portfolio, emerging growth companies may be of any size
and the Adviser would expect these companies to have products, technologies,
management, markets and opportunities that will facilitate earnings growth over
time that is well above the growth rate of the overall economy and rate of
inflation. The Portfolio's investments may include securities traded in the
over-the-counter markets.
The Adviser uses a "bottom-up" investment style in managing the Portfolio. This
means the securities are selected based upon fundamental analysis performed by
the Adviser.
In addition, up to 15% of the Portfolio's assets may be invested in foreign
securities, including those in emerging markets, or in cash and cash
equivalents.
When adverse market, financial or political conditions warrant, the Portfolio
may depart from its principal strategies for temporary or defensive purposes.
Such investment strategies are inconsistent with the Portfolio's investment
objectives and could result in the Portfolio not achieving its investment
objective.
The Portfolio may engage in active and frequent trading to achieve its
principal investment strategies. Frequent trading increases transaction costs,
which could detract from the Portfolio's performance.
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks of investing in the Portfolio are GENERAL INVESTMENT
RISKS, SMALL-CAP AND MID-CAP COMPANY RISK, CONVERTIBLE SECURITIES RISK,
LIQUIDITY RISK, FOREIGN SECURITIES RISKS, GROWTH INVESTING RISK, and PORTFOLIO
TURNOVER RISK.
-52-
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
34.57%
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
26.70% (1998 4th Quarter) (12.69)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
MFS Emerging Growth Companies
Portfolio 34.57% 34.81%
Russell 2000 Index* (2.54)% 14.53)%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
MASSACHUSETTS FINANCIAL SERVICES COMPANY ("MFS"), 500 Boylston Street, Boston,
MA 02116. MFS has been the Adviser to the Portfolio since it commenced
operations. MFS is America's oldest mutual fund organization. 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. 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 Managers are JOHN W. BALLEN, President of MFS, who has been
employed by MFS as a portfolio manager of the Portfolio since 1984; TONI Y.
SHIMURA, a Vice President of MFS, who has been employed by MFS as a portfolio
manager for the Portfolio since 1995; and STEPHEN PESEK, a Vice President of
MFS, who has been employed as a portfolio manager by MFS since 1994. Prior to
1994, Mr. Pesek worked at Fidelity Investments as a research analyst.
-53-
<PAGE>
WARBURG PINCUS SMALL COMPANY VALUE PORTFOLIO
INVESTMENT OBJECTIVE: Seeks long-term capital appreciation.
THE INVESTMENT STRATEGY
The Portfolio invests primarily in equity securities of U.S. small-cap
companies with above-average growth potential that the Adviser believes to be
undervalued. Typically, such investments may include common stocks, preferred
stocks, convertible securities, warrants and rights of small-cap companies.
Once 65% of the Portfolio's assets are invested in small-cap companies, the
Portfolio may also invest in companies with a market capitalization of any
size.
[SIDE BAR: For purposes of this Portfolio, small-cap companies are companies
having market capitalizations within the range of capitalizations of companies
represented in the Russell 2000 Index .]
In determining whether a company's stock is undervalued, the Adviser considers
all relevant factors which may include a company's:
O price/earnings ratio;
O price to book value ratio;
O price to cash flow ratio; and
O debt to capital ratio
The Portfolio will invest primarily (at least 65% of its net assets) in the
securities of U.S. companies traded in the U.S. securities markets. The
Portfolio may invest to a lesser extent in foreign securities, investment grade
debt securities and high quality domestic and foreign short-term (one year or
less) and medium-term money-market securities.
When market or financial conditions warrant, the Portfolio may invest without
limitation in investment grade debt obligations and in domestic and foreign
obligations, including repurchase agreements for temporary or defensive
purposes. Such investment strategies are inconsistent with the Portfolio's
investment objectives and could result in the Portfolio not achieving its
investment objective.
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, SMALL-CAP and MID-CAP
COMPANY RISK, LIQUIDITY RISK and FOREIGN SECURITIES RISKS and VALUE INVESTING
RISK. Should the Portfolio invest in debt securities, you may also experience
FIXED INCOME risks.
-54-
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
(10.12)%
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
15.49% (1997 3rd Quarter) (20.25)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
Warburg Pincus Small Company Value
Portfolio (10.02)% 4.25%
Russell 2000 Index* (2.54)% 14.53%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
WARBURG PINCUS ASSET MANAGEMENT, INC. ("WPAM"), 466 Lexington Avenue, New York,
New York 10017-3147. WPAM has been the Adviser to the Portfolio since it
commenced operations. 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. WPAM is
indirectly controlled by Warburg, Pincus & Co., a New York partnership which
has no business other than being a holding company of WPAM and its affiliates.
KYLE F. FREY is the Portfolio Manager responsible for the day-to-day management
of the Portfolio's securities portfolio since the Portfolio commenced
operations. Mr. Frey is a managing director, who has been with WPAM since 1989.
-55-
<PAGE>
INTERNATIONAL PORTFOLIOS
BT INTERNATIONAL EQUITY INDEX PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to replicate as closely as possible (before
deduction of Portfolio expenses) the total return of the MSCI ("MSCI EAFE
Index").
THE INVESTMENT STRATEGY
The Portfolio invests primarily in equity securities of companies included in
the MSCI EAFE Index. The Portfolio is constructed to have aggregate investment
characteristics similar to those of the MSCI EAFE Index. The Portfolio invests
in a statistically selected sample of the securities of companies included in
the MSCI EAFE Index, although not all companies within a country will be
represented in the Portfolio at the same time. Stocks are selected 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 securities should be purchased or sold in order
to replicate the MSCI EAFE index.
[SIDEBAR: For more information on the MSCI EAFE Index see the preceding section
"The Benchmarks." The MSCI 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 MSCI EAFE Index or any data included therein.]
Over time, the correlation between the performance of the Portfolio and the
MSCI EAFE Index is expected to be 95% or higher before deduction of Portfolio
expenses. The Portfolio's ability to track the MSCI EAFE Index may be affected
by, among others, transaction costs, administration and other expenses incurred
by the Portfolio, changes in either the composition of the MSCI EAFE Index or
the assets of the Portfolio, and the timing and amount of Portfolio investor
contributions and withdrawals, if any. The Portfolio seeks to track the MSCI
EAFE Index, therefore, the Adviser generally will not attempt to judge the
merits of any particular security as an investment.
The Portfolio may invest to a lesser extent in short-term debt securities and
money market instruments to meet redemption requests or to facilitate
investment in the securities of the MSCI EAFE Index. Securities index futures
contracts and related options, warrants and convertible securities may be used
for a number of reasons, including: to simulate full investment in the MSCI
EAFE Index while retaining a cash balance for Portfolio management purposes; to
facilitate trading; to reduce transaction costs; or to seek higher investment
returns when a future contract, option, warrant or convertible security is
priced more attractively than the underlying equity security or MSCI EAFE
Index. These instruments are considered to be derivatives.
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, INDEX-FUND RISK,
FOREIGN SECURITIES RISKS, including CURRENCY, EMERGING MARKET, EURO,
POLITICAL/ECONOMIC, REGULATORY and TRANSACTION COST RISKS. Other principal
risks include LIQUIDITY RISK and DERIVATIVES RISK.
-56-
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart and table below illustrate the Portfolio's average annual total
return. The information in the table also compares the Portfolio's performance
to the returns of a broad based index. Both the bar chart and table assume
reinvestment of dividends and distributions. Past performance is not an
indication of future performance. The Portfolio's inception date was January 1,
1998.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
20.07%
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
20.43% (1998 4th Quarter) (13.90)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
BT International Equity Index
Portfolio 20.07% 20.07%
MSCI EAFE Index* 20.00% 20.00%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
BANKERS TRUST COMPANY ("Bankers Trust"), 130 Liberty Street (One Bankers Trust
Plaza), New York, New York 10006. Bankers Trust has been the Adviser to the
Portfolio since it commenced operations. 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, including investment management.
-57-
<PAGE>
EQ/PUTNAM INTERNATIONAL EQUITY PORTFOLIO
INVESTMENT OBJECTIVE: Seeks capital appreciation.
THE INVESTMENT STRATEGY
The Portfolio invests primarily in equity securities of companies organized
under the laws of a country other than the United States. Such equity
securities normally include common stocks, preferred stocks, securities
convertible into common or preferred stocks and warrants. Under normal market
circumstances, a majority of the Portfolio's assets will be invested in
companies located in at least three different countries outside the United
States. The countries in which the Portfolio may invest include emerging market
countries.
The Portfolio may engage in a variety of transactions using "derivatives," such
as futures, options, warrants, forward and swap contracts on both securities
and currencies.
The Portfolio will not limit its investments to any particular type of company.
The Portfolio may invest in companies of any size whose earnings the Adviser
believes to be in a relatively strong growth trend or whose securities the
Adviser considers to be undervalued.
The Adviser considers, among other things, a company's financial strength,
competitive position in its industry and projected future earnings and
dividends when deciding whether to buy or sell investments.
When market or financial conditions warrant, the Portfolio may invest, without
limitation, in securities of any kind, including securities traded primarily in
U.S. markets, cash and money market instruments for temporary or defensive
purposes. Such investment strategies are inconsistent with the Portfolio's
investment objectives and could result in the Portfolio not achieving its
investment objective.
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks are GENERAL INVESTMENT RISKS, FOREIGN SECURITIES
RISKS, including CURRENCY, EMERGING MARKET, EURO, POLITICAL/ECONOMIC,
REGULATORY and TRANSACTION COST RISKS. Other principal risks include SMALL-CAP
AND MID-CAP COMPANY RISK, CONVERTIBLE SECURITIES RISK, LIQUIDITY RISK and
DERIVATIVES RISK.
-58-
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
19.51%
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
22.16% (1998 4th Quarter) (18.48)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
EQ/Putnam International Equity
Portfolio 19.51% 17.52%
S&P 500 Index* 20.00% 13.43%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
PUTNAM INVESTMENT MANAGEMENT, INC. ("Putnam Management"), One Post Office
Square, Boston, MA 02109. Putnam Management has been the Adviser to the
Portfolio since the Portfolio commenced operations. Putnam Management has been
managing mutual funds since 1937. Putnam Management is a subsidiary of Putnam
Investments, Inc.
The Portfolio Managers, responsible for the day to day management of the
Portfolio since the inception of the Portfolio, are JUSTIN SCOTT, a Managing
Director, who has been with Putnam Management as an investment professional*
since 1988 and OMID KAMSHAD, a Managing Director, who has been employed as an
investment professional* by Putnam Management since 1996. Prior to January
1996, he was a Director of Investments at Lombard Odier International Portfolio
Management Limited and prior to April 1995, he was Director at Baring Asset
Management Company.
* Investment professional means that the manager was either a portfolio manager
or analyst.
-59-
<PAGE>
MORGAN STANLEY EMERGING MARKETS EQUITY PORTFOLIO
INVESTMENT OBJECTIVE: Seeks long-term capital appreciation by investing
primarily in equity securities of emerging country issuers.
THE INVESTMENT STRATEGY
The Portfolio is a non-diversified Portfolio that invests primarily in equity
securities of companies located in emerging markets countries. Such equity
securities may include common stocks, preferred stocks, convertible securities,
depositary receipts, rights and warrants. The Adviser focuses on
growth-oriented companies in emerging market countries that it believes have
strong developing economies and increasingly sophisticated markets. The
Portfolio generally invests only in emerging markets countries whose currencies
are freely convertible into United States dollars.
[SIDEBAR: A Portfolio may be considered to be "non-diversified" for federal
securities law purposes because it invests in a limited number of securities.
In all cases, the Portfolio intends to be diversified for tax purposes so that
it can qualify as a regulated investment company.]
[SIDEBAR: For purposes of this Portfolio, an emerging market country security
is defined as a security of an issuer having one or more of the following
characteristics:
O its principal securities trading market is in an emerging market country;
O alone or on a consolidated basis, at least 50% of its revenues are
derived from goods produced, sales made or services performed in emerging
market countries; and
O it is organized under the laws of or has a principal office in an
emerging market country]
The Adviser's investment approach combines top-down country allocation with
bottom-up stock selection.
[SIDEBAR: In a "top-down" approach, country allocations are made based on
forecasts of stock market trends. In a "bottom-up" approach, securities are
reviewed and chosen individually.]
The Portfolio may invest to a lesser extent in corporate or government-issued
or guaranteed debt securities of emerging markets countries, including debt
securities that are rated or considered to be below investment grade ("junk
bonds"). The Portfolio also may, to a lesser extent, invest in equity or debt
securities (including "junk bonds") of corporate or governmental issuers
located in industrialized countries, foreign currency or investment funds and
supranational entities such as the World Bank. In addition, the Portfolio may
utilize forward foreign currency contracts, options and futures contracts and
swap transactions.
When market or financial conditions warrant the Portfolio may invest in certain
short- and medium-term fixed income securities of issuers other than emerging
market issuers and may invest without limitation in high quality money market
instruments for temporary or defensive purposes. Such investment strategies are
inconsistent with the Portfolio's investment objectives and could result in the
Portfolio not achieving its investment objective.
THE PRINCIPAL RISKS
As you consider an investment in this Portfolio, you should be aware of certain
risks. The principal risks are GENERAL INVESTMENT RISKS, FOREIGN SECURITIES
RISKS, including CURRENCY, EMERGING MARKET, EURO, POLITICAL/ECONOMIC,
REGULATORY and TRANSACTION COST RISKS. Other principal risks include
CONVERTIBLE
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<PAGE>
SECURITIES RISK, LIQUIDITY RISK, DERIVATIVES RISK, and NON-DIVERSIFICATION
RISK. Should the Portfolio invest in debt securities, the Portfolio would also
be subject to FIXED INCOME RISKS.
-61-
<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is August 20, 1977.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
(27.10)%
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
14.56% (1998 4th Quarter) (22.14)% (1998 2nd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
Morgan Stanley Emerging Markets
Equity Portfolio (27.10)% (32.69)%
MSCI Emerging Markets
Free* (25.34)% (28.92)%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
MORGAN STANLEY ASSET MANAGEMENT ("MSAM"), 1221 Avenue of the Americas, New
York, NY 10020. MSAM has been the Adviser to the Portfolio since the Portfolio
commenced operations. 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. On December 1, 1998, Morgan
Stanley Asset Management Inc. changed its name to Morgan Stanley Dean Witter
Investment Management Inc. but continues to do business in certain instances
using the name Morgan Stanley Asset Management.
The Portfolio Managers, responsible for the day to day management of the
Portfolio since the Portfolio commenced operations, are: ROBERT MEYER, a
Managing Director of MSAM and Morgan Stanley & Co. Incorporated, who is head of
MSAM's Emerging Markets Equity Group and who joined MSAM in 1989; and ANDY
SKOV, a Principal of MSAM and Morgan Stanley & Co. Incorporated who joined MSAM
in 1994.
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<PAGE>
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO
INVESTMENT OBJECTIVE: Seeks long-term growth of capital through investment
primarily in common stocks of established non-United States companies.
THE INVESTMENT STRATEGY
The Portfolio invests substantially all of its assets in common stocks of
established companies outside of the United States. The Portfolio intends to
diversify broadly among countries throughout the world by having securities
from at least five different countries represented in the Portfolio. No more
than 20% of its assets will be invested in securities of any one country,
except that up to 35% can be invested in stocks of companies in Australia,
Canada, France, Japan, United Kingdom or Germany. In determining the
appropriate distribution of investments among various countries and geographic
regions, the Adviser ordinarily considers the following factors:
O prospects for relative economic growth between foreign countries;
O expected levels of inflation;
O government policies influencing business conditions;
O the outlook for currency relationships;
O 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
securities such as preferred stocks, warrants and convertible securities as
well as governmental debt securities and investment grade debt securities. The
Portfolio may also invest in certain foreign investment funds, hybrid
instruments and derivative instruments in keeping with the Portfolio objective.
In analyzing companies for investment, the Adviser uses a "bottom-up" approach
and looks for companies that have:
o prospects for achieving and sustaining above-average, long -term
earnings growth per share;
o a high return on invested capital;
o healthy balance sheet;
o sound financial and accounting policies and overall financial strength;
o strong competitive advantages;
o effective research, product development and marketing;
o pricing flexibility;
o strong management; and
o record of paying dividends.
This means that the securities are selected based upon fundamental analysis
performed by the Adviser, and are not selected based upon the type of
industries to which they belong.
When market or financial conditions warrant the Portfolio may invest without
limitation in high quality U.S. Government and corporate debt obligations for
temporary or defensive purposes. Such investment strategies are inconsistent
with the Portfolio's investment objectives and could result in the Portfolio
not achieving its investment objective.
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<PAGE>
THE PRINCIPAL RISKS
As you consider an investment in the Portfolio, you should consider certain
risks. The principal risks of investing in the Portfolio are GENERAL INVESTMENT
RISKS, FOREIGN SECURITIES RISK, including CURRENCY, EMERGING MARKET, EURO,
POLITICAL/ECONOMIC, REGULATORY AND TRANSACTION COST RISKS. Other Principal
risks include LIQUIDITY RISK, CONVERTIBLE SECURITIES RISK, FIXED INCOME RISKS,
and GROWTH INVESTING RISK.
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<PAGE>
PORTFOLIO PERFORMANCE
The bar chart below illustrates the Portfolio's year to year annual total
returns. The table below shows the Portfolio's average annual total returns for
the Portfolio for one year and since inception. The table also compares the
Portfolio's performance to the returns of a broad-based index. Both the bar
chart and table assume reinvestment of dividends and distributions. Past
performance is not an indication of future performance. The inception date for
the Portfolio is May 1, 1997.
- - -------------------------------------------------------------------------------
CALENDAR YEAR ANNUAL TOTAL RETURN
1998
13.68%
- - -------------------------------------------------------------------------------
Best quarter (% and time period) Worst quarter (% and time period)
16.86% (1998 4th Quarter) (13.63)% (1998 3rd Quarter)
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR SINCE INCEPTION
T. Rowe Price International Stock
Portfolio (13.68)% 7.01%
MSCI EAFE Index* 20.00% 13.43%
- - -------------------------------------------------------------------------------
* For more information on this index, see the preceding section
"The Benchmarks."
WHO MANAGES THE PORTFOLIO
ROWE PRICE-FLEMING INTERNATIONAL, INC. ("Price-Fleming"), 100 East Pratt
Street, Baltimore, MD 21202. Price-Fleming has been the Adviser to the
Portfolio since it commenced its operations. Price-Fleming was incorporated in
Maryland in 1979 as a joint venture between T. Rowe Price and Robert Fleming
Holdings Limited ("Flemings"). Flemings is a diversified investment
organization that participates in a global network of regional investment
offices. The common stock of Price-Fleming is 50% owned by a wholly owned
subsidiary of T. Rowe Price, 25% owned by a subsidiary of Flemings and 25%
owned by Jardine Fleming Group Limited ("Jardine Fleming").
Investment decisions with respect to the Portfolio are made by an Investment
Advisory Committee Group. The Investment Advisory Group has day-to-day
responsibility for managing the Portfolio and developing and executing the
Portfolio's investment program.
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<PAGE>
MANAGEMENT OF THE TRUST
This section gives you information on the Trust, the Manager and the Advisers
for the Portfolios. More detailed information concerning each of the Advisers
and portfolio managers is included in the description for each Portfolio in the
section "About The Investment Portfolios."
THE TRUST
The Trust is organized as a Delaware business trust and is registered with the
Securities and Exchange Commission ("SEC") as an open-end management investment
company. The Trust issues shares of beneficial interest that are currently
divided among twenty-one Portfolios, each of which has authorized Class IA and
Class IB shares. Each Portfolio has its own objectives, investment strategies
and risks, which have been previously described in this prospectus.
THE MANAGER
EQ Financial Consultants, Inc., 1290 Avenue of the Americas, New York, New York
10104, serves as the Manager of the Trust, subject to the supervision and
direction of the Board of Trustees. The Manager has overall responsibility for
the general management and administration of the Trust.
In the exercise of that responsibility, the Manager, without obtaining
shareholder approval but subject to the review and approval by the Board of
Trustees, may: (i) select the Advisers for the Portfolios; (ii) enter into and
materially modify existing investment advisory agreements; and (iii) terminate
and replace the Advisers. The Manager also monitors each Adviser's investment
program 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 also supervises the provision of services
by third parties such as the Trust's custodian and administrator.
The Manager is an investment adviser registered under the 1940 Act and a
broker-dealer registered under the Securities Exchange Act of 1934, as amended.
EQ Financial Consultants, Inc. is a wholly-owned subsidiary of Equitable.
The table below shows the annual rate of the management fees (as a percentage
of each Portfolio's average daily net assets) that the Manager received in 1998
for managing each of the Portfolios and the rate of the management fees waived
by the Manager in 1998 in accordance with the provisions of an expense
limitation agreement, as described directly below, between the Manager and the
Trust.
MANAGEMENT FEES PAID BY THE PORTFOLIOS TO EQ FINANCIAL CONSULTANTS
- - -------------------------------------- -------------------- -------------------
PORTFOLIOS ANNUAL RATE RECEIVED RATE OF FEES WAIVED
- - -------------------------------------- -------------------- -------------------
T. Rowe Price Equity Income 0.55% 0.19%
- - -------------------------------------- -------------------- -------------------
EQ/Putnam Growth & Income Value 0.55% 0.19%
- - -------------------------------------- -------------------- -------------------
EQ/Putnam Investors Growth 0.55% 0.24%
- - -------------------------------------- -------------------- -------------------
EQ/Putnam Balanced 0.55% 0.35%
- - -------------------------------------- -------------------- -------------------
MFS Research 0.55% 0.20%
- - -------------------------------------- -------------------- -------------------
MFS Emerging Growth Companies 0.55% 0.19%
- - -------------------------------------- -------------------- -------------------
MFS Growth with Income 0.55% ---
- - -------------------------------------- -------------------- -------------------
Merrill Lynch Basic Value Equity 0.55% 0.21%
- - -------------------------------------- -------------------- -------------------
Lazard Large Cap Value 0.55% 0.34%
- - -------------------------------------- -------------------- -------------------
T. Rowe Price International Stock 0.75% 0.21%
- - -------------------------------------- -------------------- -------------------
EQ/Evergreen 0.75% ---
- - -------------------------------------- -------------------- -------------------
EQ/Putnam International Equity 0.70% 0.26%
- - -------------------------------------- -------------------- -------------------
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<PAGE>
- - -------------------------------------- -------------------- -------------------
Merrill Lynch World Strategy 0.70% 0.44%
- - -------------------------------------- -------------------- -------------------
Morgan Stanley Emerging Markets Equity 1.15% 0.82%
- - -------------------------------------- -------------------- -------------------
Warburg Pincus Small Company Value 0.65% 0.18%
- - -------------------------------------- -------------------- -------------------
Lazard Small Cap Value 0.80% 0.40%
- - -------------------------------------- -------------------- -------------------
JPM Core Bond 0.45%
- - -------------------------------------- -------------------- -------------------
EQ/Evergreen Foundation 0.63% ---
- - -------------------------------------- -------------------- -------------------
BT Small Company Index 0.25% 0.25%
- - -------------------------------------- -------------------- -------------------
BT Equity 500 Index 0.25% 0.25%
- - -------------------------------------- -------------------- -------------------
BT International Equity Index 0.35% 0.35%
- - -------------------------------------- -------------------- -------------------
The EQ/Evergreen Portfolio, the EQ/Evergreen Foundation Portfolio and the MFS
Growth with Income Portfolio did not commence operations during 1998.
EXPENSE LIMITATION AGREEMENT
In the interest of limiting expenses of each Portfolio, the Manager has entered
into an expense limitation agreement with the Trust with respect to each
Portfolio ("Expense Limitation Agreement"). Pursuant to that Expense Limitation
Agreement, 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
extraordinary 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 the following fees:
MANAGEMENT EXPENSE LIMITATION FEES
- - --------------------------------------------------- ---------------------------
PORTFOLIOS AMOUNT EXPENSES LIMITED TO
(% of daily net assets)
- - --------------------------------------------------- ---------------------------
T. Rowe Price Equity Income 0.60%
- - --------------------------------------------------- ---------------------------
EQ/Putnam Growth & Income Value 0.60%
- - --------------------------------------------------- ---------------------------
EQ/Putnam Investors Growth 0.60%
- - --------------------------------------------------- ---------------------------
MFS Research 0.60%
- - --------------------------------------------------- ---------------------------
MFS Emerging Growth Companies 0.60%
- - --------------------------------------------------- ---------------------------
MFS Growth with Income 0.60%
- - --------------------------------------------------- ---------------------------
Merrill Lynch Basic Value Equity 0.60%
- - --------------------------------------------------- ---------------------------
EQ/Putnam Balanced 0.65%
- - --------------------------------------------------- ---------------------------
Lazard Large Cap Value 0.65%
- - --------------------------------------------------- ---------------------------
Warburg Pincus Small Company Value 0.75%
- - --------------------------------------------------- ---------------------------
T. Rowe Price International Stock 0.95%
- - --------------------------------------------------- ---------------------------
EQ/Putnam International Equity 0.95%
- - --------------------------------------------------- ---------------------------
Merrill Lynch World Strategy 0.95%
- - --------------------------------------------------- ---------------------------
Lazard Small Cap Value 0.95%
- - --------------------------------------------------- ---------------------------
Morgan Stanley Emerging Markets Equity Portfolio 1.50%
- - -------------------------------------------------------------------------------
JPM Core Bond 0.55%
- - --------------------------------------------------- ---------------------------
BT International Equity Index 0.55%
- - --------------------------------------------------- ---------------------------
BT Small Company Index 0.35%
- - --------------------------------------------------- ---------------------------
BT Equity 500 Index 0.30%
- - --------------------------------------------------- ---------------------------
EQ/Evergreen Foundation 0.70%
- - --------------------------------------------------- ---------------------------
EQ/Evergreen Portfolio 0.80%
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<PAGE>
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.
THE ADVISERS
Each Portfolio has an Adviser that furnishes an investment program for the
Portfolio. 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. The Adviser
also makes decisions on behalf of the Portfolio and performs all administrative
tasks involved in maintaining the Portfolio.
The Manager has received an exemptive order from the SEC that permits the
Manager, subject to certain conditions, including board approval, 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.
The Manager pays each Adviser a fee based on the Portfolio's average daily net
assets. No portfolio is responsible for the fees paid to each of the Advisers.
THE ADMINISTRATOR
Pursuant to an agreement, Chase Global Funds Services Company ("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 commenced 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.
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<PAGE>
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.
BROKERAGE TRANSACTIONS WITH AFFILIATES
To the extent permitted by law, the Trust may engage in securities and other
transactions with entities that may be affiliated with the Manager or the
Advisers. 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. For these purposes, however, the
Trust has considered this issue and believes that a broker-dealer affiliate of
an Adviser to one Portfolio should not be treated as an affiliate of the
Adviser to another Portfolio for which such Adviser does not provide investment
advice. The Trust has adopted procedures that 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. The Trust has also
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.
FUND DISTRIBUTION ARRANGEMENTS
The Trust offers two classes of shares on behalf of each Portfolio: Class IA
shares and Class IB shares. EQ Financial Consultants, Inc., 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. serves as the other distributor for the
Class IB shares of the Trust as well as the Class IA shares. Both classes of
shares are offered and redeemed at their net asset value without any sales
load.
The Trust has adopted a Distribution Plan under Rule 12b-1 under the 1940 Act
for the Trust's Class IB shares. Under the Class IB Distribution Plan the Class
IB shares of the Trust pay each of the distributors an annual fee to compensate
them for promoting, selling and servicing shares of the Portfolios. The annual
fees equal 0.25% of each Portfolio's average daily net assets. Over time, the
fees will increase your cost of investing and may cost you more than other
types of charges.
PURCHASE AND REDEMPTION
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
or qualified retirement plan 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 and class related 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.
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.
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<PAGE>
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 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 in 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.
TAX INFORMATION
Each Portfolio of the Trust is a separate regulated investment company for
federal income tax purposes. Regulated investment companies are usually not
taxed at the entity (Portfolio) level. They pass through their income and gains
to their shareholders by paying dividends. Their shareholders include this
income on their respective tax returns. A Portfolio will be treated as a
regulated investment company if it meets specified federal income tax rules,
including types of investments, limits on investments, calculation of income,
and dividend payment requirements. Although the Trust intends that it and each
Portfolio will be operated to have no federal tax liability, if they have any
federal tax liability, that could hurt the investment performance of the
Portfolio in question. Also, any Portfolio investing in foreign securities or
holding foreign currencies could be subject to foreign taxes which could reduce
the investment performance of the Portfolio.
It is important for each Portfolio to maintain its federal income tax regulated
investment company status because the shareholders of the Portfolio that are
insurance company separate accounts will then be able to use a favorable
federal income tax investment diversification testing rule in figuring out
whether the Contracts indirectly funded by the Portfolio meet tax qualification
rules for variable insurance contracts. If a Portfolio fails to meet specified
investment diversification requirements, owners of non-pension plan Contracts
funded through the Trust could be taxed immediately on the accumulated
investment earnings under their Contracts and could lose any benefit of tax
deferral. The Administrator and the Manager therefore carefully monitor
compliance with all of the regulated investment company rules and variable
insurance contract investment diversification rules.
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<PAGE>
PRIOR PERFORMANCE OF EACH ADVISER
The following table provides information concerning the historical performance
of another registered investment company (or series) or other institutional
private accounts 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. The performance
data, as shown below, for each Adviser's substantially similar investment
company or institutional accounts is not the performance data of any Portfolio
of the Trust, and should not be confused with performance data for each of the
Trust's Portfolios, which is shown under the caption "ABOUT THE INVESTMENT
PORTFOLIOS."
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 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. The investment results presented below are unaudited.
For more information on the specified market indices used below, see the
section "The Benchmarks."
<TABLE>
ANNUALIZED RATES OF RETURN AS OF 12/31/98*
<S> <C> <C> <C> <C> <C>
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
OTHER FUND OR ACCOUNT MANAGED BY ADVISER1 1 5 10 SINCE INCEPTION
(EQAT Portfolio)2 YEAR YEARS YEARS INCEPTION DATE
- - ----------------------------------------------------
Benchmark
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
J.P. MORGAN ACTIVE FIXED INCOME COMPOSITE3 6.90% 7.20% 9.40% 5/31/77
(JPM Core Bond Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
Salomon Brothers Broad Investment Grade Bond 8.70% 7.30% 9.30%
Index4
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
THE GEORGE PUTNAM FUND OF BOSTON5 10.60% 15.07% 13.77% 11/5/37
(EQ/Putnam Balanced Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index6 28.57% 24.06% 19.21%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
BT INSTITUTIONAL FUNDS - EQUITY 500 INDEX FUND - 28.75% 24.05% N/A 21.56% 12/31/92
INSTITUTIONAL CLASS
(BT Equity 500 Index Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index6 28.57% 24.06% N/A 21.61%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
BT ADVISORS FUNDS - SMALL CAP INDEX (2.60)% N/A N/A 11.58% 7/10/96
FUND-INSTITUTIONAL CLASS
(BT Small Company Index Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
Russell 2000 Index7 (2.54)% N/A% N/A 11.85%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
PUTNAM GROWTH & INCOME FUND II5 12.46% N/A N/A 22.83% 1/5/95
(EQ/Putnam Growth & Income Value Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index6 28.57% N/A N/A 30.51%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
PUTNAM INVESTORS FUND5 35.52% 24.12% 20.16% 12/1/25
(EQ/Putnam Investors Growth Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index6 28.57% 24.06% 19.21%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
THE LAZARD FUNDS, INC. - LAZARD EQUITY PORTFOLIO 17.31% 20.36% 16.83% 6/87
(Lazard Large Cap Value Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index6 28.57% 24.06% 19.21%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
THE LAZARD FUNDS, INC. - LAZARD SMALL CAP
Portfolio3,4 (12.62)% 11.45% N/A 16.10% 10/1/91
(Lazard Small Cap Value Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
Russell 2000 Index7 (2.54)% 11.86% N/A 13.89%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC. - 8.88% 8.49% N/A 9.57% 2/28/92
MERRILL LYNCH GLOBAL STRATEGY FOCUS FUND
(Merrill Lynch World Strategy Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MSCI EAFE Index8 20.00% 9.19% N/A 9.98%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC. -MERRILL 9.44% 15.40% N/A 15.80% 7/1/93
LYNCH BASIC VALUE FOCUS FUND
(Merrill Lynch Basic Value Equity Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index6 28.57% 24.06% N/A 22.74%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MFS RESEARCH FUND12 22.92% 20.65% 18.44% 10/13/71
(MFS Research Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index6 28.57% 24.06% 19.21%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
T. ROWE PRICE EQUITY INCOME FUND9 9.23% 18.75% 15.18% 10/31/85
(T. Rowe Price Equity Income Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index6 28.57% 24.06% 19.21%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
WARBURG PINCUS SMALL COMPANY VALUE FUND10 (14.88)% N/A N/A 16.51% 12/29/95
(Warburg Pincus Small Company Value Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
Russell 2000 Index7 (2.54)% N/A N/A 11.58%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
BT ADVISORS FUNDS - EAFE EQUITY INDEX FUND - 19.81% N/A N/A 9.69% 1/24/96
INSTITUTIONAL CLASS
(BT International Equity Index Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MSCI EAFE Index8 20.00% N/A N/A 9.70%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
PUTNAM INTERNATIONAL GROWTH FUND5 18.95% 13.18% N/A 13.24% 2/28/91
(EQ/Putnam International Equity Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MSCI EAFE Index 20.00% 9.19% N/A 7.58%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MFS EMERGING GROWTH FUND11 23.56% 19.66% 22.94% 12/29/86
(MFS Emerging Growth Companies Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
Russell 2000 Index7 (2.54)% 11.86% 12.94%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MASSACHUSETTS INVESTORS TRUST12 22.95% 22.97% 19.15% 7/15/24
(MFS Growth with Income Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index6 28.57% 24.06% 19.21%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MORGAN STANLEY INSTITUTIONAL FUND, INC. - EMERGING
MARKETS PORTFOLIO13
(Morgan Stanley Emerging Markets Equity Portfolio) (25.40)% (8.20)% N/A 3.50% 9/25/92
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
IFC Global Total Return Composite Index20 (21.10)% (8.70)% N/A 1.90%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
</TABLE>
-72-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
T. ROWE PRICE INTERNATIONAL STOCK FUND 16.14% 8.87% 10.45% 5/9/80
(T. Rowe Price International Stock Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
MSCI EAFE Index8 20.00% 9.19% 9.50%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
EVERGREEN FOUNDATION FUND15 12.21% 15.06% N/A 16.89% 1/2/90
(EQ/Evergreen Foundation Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
S&P 500 Index6 28.57% 24.06% N/A 18.82%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
EVERGREEN FUND15 7.23% 17.82% 14.07% 10/15/71
(EQ/Evergreen Portfolio)
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
Russell 2000 Index7 (2.54)% 11.86% 12.94%
- - ---------------------------------------------------- ------------ ------------- -------------- ------------ ------------
</TABLE>
*Average annual total return reflects changes in share prices and reinvestment
of dividends and distributions and is net of fund expenses.
1 The registered investment company (or series) for which performance
results are presented will be subject to different expenses than the
Portfolio. In addition, holders of Contracts representing interests in
the Portfolio will be subject to charges and expenses relating to such
insurance contracts. The performance results presented above do not
reflect any insurance related expenses.
2 The EQ Advisors Trust Portfolio will be subject to higher expenses
than the registered investment company for which performance results
are presented. In addition, holders of variable insurance contracts
representing interests in the Portfolio will be subject to charges and
expenses relating to such insurance contracts. The performance results
presented above do not reflect any insurance related expenses.
3 The institutional private accounts that are included in the Adviser's
composite are not subject to the same types of expenses to which the
Portfolio is subject or to the diversification requirements, specific
tax restrictions and investment limitations imposed on the 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 Contracts representing
interests in the Portfolio will be subject to charges and expenses
relating to such Contracts. The performance results presented above do
not reflect any insurance related charges. Investors should also be
aware that the use of a methodology different from that used above to
calculate performance could result in different performance data.
4 The Salomon Brothers Broad Investment Grade Bond Index is an
unmanaged, market-weighted index that 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.
5 Annualized performance for the Class A shares. 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.
6 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.
7 The Russell 2000 Index is an unmanaged index (with no defined
investment objective) 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.
8 The Morgan Stanley Capital International EAFE Index ("EAFE Index") is
an unmanaged capitalization-weighted measure of stock markets in
Europe, Australia and the Far East. The returns of the EAFE Index
assume dividends are reinvested net of withholding tax and do not
reflect any fees or operating expenses. The index is not available for
actual investment.
9 The investment advisory fee applicable to the T. Rowe Price Equity
Income Fund was capped at the maximum state-
-73-
<PAGE>
allowed fee in 1987.
10 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.
11 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, or any charges that would be imposed at the
insurance company separate account level.
12 Annualized performance for the Class A shares.
13 Annualized performance for the Class A shares of the Morgan Stanley
Institutional Fund, Inc. - Emerging Markets Portfolio. The Class B
shares of the Morgan Stanley Institutional Fund, Inc. - Emerging
Markets Portfolio are subject to a Rule 12b-1 fee equal to 0.25% of
the Portfolio's assets. The expense ratio of Morgan Stanley
Institutional Fund, Inc. - Emerging Markets Portfolio has been capped
at 1.75% since inception.
14 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.
15 Annualized performance for the Class Y shares.
-74-
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Trust's
financial performance since May 1, 1997. The financial information in the table
below for the period May 1, 1997 to December 31, 1998 relates only to the Class
IB shares and has been derived from the audited financial statements of the
Trust. These statements have been audited by PricewaterhouseCoopers LLP,
independent public accountants. PricewaterhouseCooper's report on the Trust's
financial statements as of December 31, 1998 appears in the Trust's Annual
Report. The information 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 (SAI) and
available upon request.
<TABLE>
<CAPTION>
NET REALIZED
AND UNREALIZED ON
GAIN (LOSS) ON
NET ASSET INVESTMENTS AND DIVIDENDS DIVIDENDS IN
VALUE, NET FOREIGN TOTAL FROM FROM NET EXCESS OF NET DISTRIBUTIONS
BEGINNING OF INVESTMENT CURRENCY INVESTMENT INVESTMENT INVESTMENT FROM REALIZED
PERIOD INCOME TRANSACTIONS OPERATIONS INCOME INCOME GAINS
------------ ---------- ----------------- ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
T. Rowe
Price
International
Stock
Portfolio
DEC 31,
1998
DEC. 31,
1997 $10.00 $0.02 $(0.17) $(0.15) -- --
T. Rowe
Price
Equity
Income
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $10.00 $0.10 $2.11 $2.21 ($0.09) -- $(0.04)
EQ/Putnam
Growth &
Income
Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $10.00 $0.06 $1.56 $1.62 $(0.06) -- $(0.01)
EQ/Putnam
Balanced
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $10.00 $0.14 $1.30 $1.44 $(0.13) $(0.01) $(0.09)
EQ/Putnam
International
Equity
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $10.00 $0.03 $0.93 $0.96 $(0.02) -- $(0.01)
EQ/Putnam
Investors
Growth
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $10.00 $0.02 $2.45 $2.47 $(0.03) -- $(0.04)
MFS
Research
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $10.00 $0.02 $1.58 $1.60 $(0.02) -- $(0.01)
MFS
Emerging
Growth
Companies
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $10.00 $0.02 $2.21 $2.23 $(0.02) -- $(0.18)
Warburg
Pincus
Small
Company
Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $10.00 $0.01 $1.90 $1.91 $(0.01) -- --
</TABLE>
-75-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Merrill
Lynch
World
Strategy
Portfolio
DEC.
31, 1998
DEC.
31, 1997 $10.00 $0.08 $0.39 $0.47 $(0.05) -- --
Merrill
Lynch
Basic
Value
Equity
Portfolio
DEC.
31, 1998
DEC.
31, 1997 $10.00 $0.06 $1.64 $1.70 $(0.06) -- $(0.05)
Morgan
Stanley
Emerging
Markets
Equity
Portfolio
DEC.
31, 1998
DEC.
31, 1997 $10.00 $0.04 $(2.06) $(2.02) $(0.02) -- --
BT Equity
500 Index
Portfolio
DEC.
31, 1998
DEC.
31, 1997
BT
International
Equity
Index
Portfolio
DEC.
31, 1998
DEC.
31, 1997
BT Small
Company
Index
Portfolio
DEC.
31, 1998
DEC.
31, 1997
JPM Core
Bond
Portfolio
DEC.
31, 1998
DEC.
31, 1997
Lazard
Large Cap
Value
Portfolio
DEC.
31, 1998
DEC.
31, 1997
Lazard
Small Cap
Value
Portfolio
DEC.
31, 1998
DEC.
31, 1997
</TABLE>
-76-
<PAGE>
<TABLE>
RATIO OF
EXPENSES TO
DISTRIBUTIONS TOTAL NET ASSET NET ASSETS, AVERAGE NET
IN EXCESS OF DIVIDENDS AND VALUE, END OF TOTAL RETURN END OF PERIOD ASSETS AFTER
REALIZED GAINS DISTRIBUTIONS PERIOD (B) (000'S) WAIVERS (A)(C)
-------------- ------------- ------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
T. Rowe Price
International
Stock
Portfolio
DEC. 31,
1998
DEC. 31,
1997 -- -- $9.85 (1.49)% $69,572 1.20%
T. Rowe Price
Equity Income
Portfolio
DEC. 31,
1998
DEC. 31,
1997 -- $(0.13) $12.08 22.11% $99,947 0.85%
EQ/Putnam
Growth &
Income Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $(0.03) $(0.10) $11.52 16.23% $150,260 0.85%
EQ/Putnam
Balanced
Portfolio
DEC. 31,
1998
DEC. 31,
1997 -- $(0.23) $11.21 14.38% $25,854 0.90%
EQ/Putnam
International
Equity
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $(0.04) $(0.07) $10.89 9.58% $55,178 1.20%
EQ/Putnam
Investors
Growth
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $(0.07) $(0.14) $12.33 24.70% $39,695 0.85%
MFS Research
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $(0.09) $(0.12) $11.48 16.07% $114,754 0.85%
MFS Emerging
Growth
Companies
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $(0.11) $(0.31) $11.92 22.42% $99,317 0.85%
Warburg
Pincus Small
Company Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $(0.05) $(0.06) $11.85 19.15% $120,880 1.00%
Merrill Lynch
World
Strategy
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $(0.11) $(0.16) $10.31 4.70% $18,210 1.20%
Merrill Lynch
Basic Value
Equity
Portfolio
DEC. 31,
1998
DEC. 31,
1997 $(0.01) $(0.12) $11.58 16.99% $49,495 0.85%
</TABLE>
-77-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Morgan Stanley
Emerging
Markets
Equity
Portfolio
DEC. 31,
1998
DEC. 31,
1997 -- $(0.02) $7.96 (20.16)% $21,433 1.75%
BT Equity 500
Index
Portfolio
DEC. 31,
1998
DEC. 31,
1997
BT
International
Equity Index
Portfolio
DEC. 31,
1998
DEC. 31,
1997
BT Small
Company Index
Portfolio
DEC. 31,
1998
DEC. 31,
1997
JPM Core Bond
Portfolio
DEC. 31,
1998
DEC. 31,
1997
Lazard Large
Cap Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997
Lazard Small
Cap Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997
</TABLE>
-78-
<PAGE>
<TABLE>
RATIO OF NET INVESTMENT RATIO OF NET
RATIO OF EXPENSES TO INCOME TO AVERAGE NET INVESTMENT INCOME TO
AVERAGE NET ASSETS ASSETS AFTER AVERAGE NET ASSETS PORTFOLIO
BEFORE WAIVERS (A)(C) WAIVERS(A)(C) BEFORE WAIVERS(A)(C) TURNOVER RATE
--------------------- ----------------------- -------------------- -------------
<S> <C> <C> <C> <C>
T. Rowe Price
International
Stock
Portfolio
DEC. 31,
1998
DEC. 31,
1997 2.56% 0.45% (0.91)% 17%
T. Rowe Price
Equity Income
Portfolio
DEC. 31,
1998
DEC. 31,
1997 1.74% 2.49% 1.60% 9%
EQ/Putnam
Growth &
Income Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997 1.75% 1.67% 0.77% 61%
EQ/Putnam
Balanced
Portfolio
DEC. 31,
1998
DEC. 31,
1997 2.55% 3.19% 1.54% 117%
EQ/Putnam
International
Equity
Portfolio
DEC. 31,
1998
DEC. 31,
1997 2.53% 0.74% (0.59)% 43%
EQ/Putnam
Investors
Growth
Portfolio
DEC. 31,
1998
DEC. 31,
1997 2.13% 0.58% (0.70)% 47%
MFS Research
Portfolio
DEC. 31,
1998
DEC. 31,
1997 1.78% 0.65% (0.28)% 51%
MFS Emerging
Growth
Companies
Portfolio
DEC. 31,
1998
DEC. 31,
1997 1.82% 0.61% (0.36)% 116%
Warburg
Pincus Small
Company Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997 1.70% 0.26% (0.44)% 44%
<PAGE>
Merrill Lynch
World
Strategy
Portfolio
DEC. 31,
1998
DEC. 31,
1997 3.05% 1.89% 0.04% 58%
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Merrill Lynch
Basic Value
Equity
Portfolio
DEC. 31,
1998
DEC. 31,
1997 1.89% 1.19% 0.87% 25%
*Morgan
Stanley
Emerging
Markets
Equity
Portfolio
DEC. 31,
1998
DEC. 31,
1997 2.61% 1.96% 1.10% 25%
**BT Equity
500 Index
Portfolio
DEC. 31,
1998
DEC. 31,
1997
**BT
International
Equity Index
Portfolio
DEC. 31,
1998
DEC. 31,
1997
**BT Small
Company Index
Portfolio
DEC. 31,
1998
DEC. 31,
1997
**JPM Core
Bond Portfolio
DEC. 31,
1998
DEC. 31,
1997
**Lazard
Large Cap
Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997
**Lazard Small
Cap Value
Portfolio
DEC. 31,
1998
DEC. 31,
1997
</TABLE>
- - ------------------
*Commencement of Operations. The Morgan Stanley Emerging Markets Equity
Portfolio commenced operations on August 20, 1997.
**Commencement of Operations 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 was January 1, 1998. No financial highlights are presented for
EQ/Evergreen Foundation Portfolio, EQ/Evergreen Portfolio and MFS Growth with
Income Portfolio each of which received initial capital on December 31, 1998.
(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.
<PAGE>
[The Trust began to offer Class IA shares for the T. Rowe Price Equity Income
Portfolio, MFS Emerging Growth Companies Portfolio, Warburg Pincus Small
Company Value Portfolio and BT International Equity Index Portfolio commencing
on November __, 1998. Per share information with respect to those Class IA
shares for the period November __, 1998 to December 31, 1998 will be provided
by Amendment.
-80-
<PAGE>
[BACK COVER]
If you wish to know more, you will find additional information about the Trust
and its Portfolios in the following documents:
ANNUAL REPORTS
The Annual Report includes more information about the Trust's performance and
is available upon request free of charge. The reports usually include
performance information, a discussion of market conditions and the investment
strategies that affected the Portfolios' performance during the last fiscal
year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI, dated May 1, 1999, is incorporated into this Prospectus by reference
and is available upon request free of charge.
You may visit the SEC's website at www.sec.gov to view the SAI and other
information about the Trust.
You can also review and copy information about the Trust, including the SAI, at
the SEC's Public Reference Room in Washington, D.C. You may have to pay a
duplicating fee. To find out more about the Public Reference Room, call the SEC
at 800-SEC-0330.
Investment Company Act File Number: 811-07953
-81-
<PAGE>
EQ ADVISORS TRUST
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
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, 1999, 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
Trust History
Description of the Trust and its Investments and Risks
Trust Policies
Investment Strategies and Risks
Management of the Trust
Investment Management and Other Services
Brokerage Allocation and Other Strategies
Purchase and Pricing of Shares
Redemption of Shares
Taxation
Portfolio Performance
Other Services
Financial Statements
Appendix A: Investment Strategies Summary
Appendix B: Description of Bond Ratings
2
<PAGE>
TRUST HISTORY
EQ Advisors Trust (the "Trust") is an open-end management investment company
and is registered as such under the Investment Company Act of 1940, as amended
("1940 Act"). The Trust is organized as a Delaware business trust and was
formed on October 31, 1996 under the name "787 Trust." The Trust changed its
name to "EQ Advisors Trust" effective November 25, 1996.
DESCRIPTION OF THE TRUST AND ITS INVESTMENTS AND RISKS
The 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, MFS Growth with
Income 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, EQ/Evergreen Foundation Portfolio, and EQ/Evergreen 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 ("Class IB
Distribution Plan") adopted pursuant to Rule 12b-1 under the 1940 Act.
Both 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, 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 Class IB Distribution Plan
as adopted pursuant to Rule 12b-1 under the 1940 Act.
3
<PAGE>
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.
TRUST POLICIES
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.
4
<PAGE>
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, 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. In addition, 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
(including the amount borrowed) less liabilities (other than
borrowings);
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 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;
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;
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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;
g. EQ/Evergreen Portfolio and EQ/Evergreen Foundation Portfolio, each as
a matter of non-fundamental policy, may, in addition to the amount
specified above, also borrow up to an additional 5% of its total
assets from banks or other lenders; and
h. the MFS Growth with Income Portfolio, as a matter of non-fundamental
policy, may borrow up to 10% of its total assets (taken at cost), or
its net assets (taken at market value), whichever is less, but only
as a temporary measure for extraordinary or emergency purposes.
(2) Purchase or sell physical commodities, except that it may (i) enter into
futures contracts and options thereon in accordance with applicable law and
(ii) purchase or sell physical commodities if acquired as a result of ownership
of securities or other instruments. No Portfolio will consider stock index
futures contracts, 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. The
United States, state or local governments, or related agencies or
instrumentalities are not considered an industry. Industries are determined by
reference to the classifications of industries set forth in each Portfolio's
semi-annual and annual reports.
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(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);
f. MFS Growth with Income Portfolio, as a matter of non-fundamental
operating policy, may lend its portfolio securities provided
that no such loan may be made if, as a result, the aggregate of
such loans would exceed 25% of its net 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 directly or indirectly 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.
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;
- - ---------
* 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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(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, Merrill
Lynch Basic Value Equity Portfolio, MFS Investor Portfolio). Such mortgaging,
pledging or hypothecating may not exceed 15% of EQ/Putnam International Equity
Portfolio's total assets; 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); and 15% of MFS Investor
Portfolio's gross assets (taken at cost), 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, JPM Core Bond Portfolio,
EQ/Evergreen Foundation Portfolio, and EQ/Evergreen 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 Trust's Prospectus and Statement
of Additional Information, as may be amended from time to time; or
(7) Effect short sales of securities unless at all times when a short position
is open the Portfolio owns an equal amount of such securities or owns
securities which, without payment of any further consideration, are convertible
into or exchangeable for securities of the same issue as, and at least equal in
amount to, the securities sold short. Permissible futures contracts, options,
or currency transactions will not be deemed to constitute selling securities
short.
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INVESTMENT STRATEGIES AND RISKS
In addition to the Portfolios' principal investment strategies discussed in the
Prospectus, each Portfolio may engage in other types of investment strategies
as further described in the descriptions 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.
ASSET-BACKED SECURITIES. As indicated in Appendix A, certain portfolios may
invest in asset-backed securities. 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 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. In the case of
automobile loans, 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.
To lessen the effect of failures by obligors on underlying assets to make
payments, the securities may contain elements of credit support which fall into
two categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. A
Portfolio will not pay any additional or 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.
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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.
BRADY BONDS. As indicated in Appendix A, certain Portfolios may invest in Brady
Bonds. Brady Bonds 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 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.
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, which 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.
DEPOSITARY RECEIPTS. As indicated in Appendix A, certain portfolios may invest
in depositary receipts. Depositary receipts exist for many foreign securities
and 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 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 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.
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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.
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, floaters and inverse floaters,
hybrid instruments, mortgage-backed securities, options and future
transactions, 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.
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.
FLOATERS AND INVERSE FLOATERS. As indicated in Appendix A, certain portfolios
may invest in Floaters and Inverse Floaters. Floaters and Inverse Floaters 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 ".
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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 CURRENCY TRANSACTIONS. As indicated in Appendix A, certain portfolios
may purchase securities denominated in foreign currencies, including the
purchase of foreign currency on a spot (or cash) basis. 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 United States or foreign governments or central banks,
by currency controls or political developments in the United States or abroad.
For example, significant uncertainty surrounds the recent 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 United States dollar, resulting in a loss to the Portfolio. Certain
Portfolios may also invest in the following types of foreign currency
transactions:
FORWARD FOREIGN CURRENCY TRANSACTIONS. As indicated in Appendix A,
certain portfolios may engage in forward foreign currency exchange
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.
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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 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.
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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. As indicated in Appendix A, certain portfolios may also
purchase and sell foreign currency futures contracts and may purchase and write
exchange-traded call and put options on foreign currency futures contracts and
on foreign currencies. 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 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.
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OVER THE COUNTER OPTIONS ON FOREIGN CURRENCY TRANSACTIONS. The Merrill
Lynch World Strategy Portfolio will engage in over-the-counter 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
over-the-counter 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").
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.
Hedging transactions involve costs and may result in losses. As indicated in
Appendix A, certain of the Portfolios may also write covered call options on
foreign currencies to offset some of the costs of hedging those currencies. A
Portfolio will engage in over-the-counter options transactions on foreign
currencies only when appropriate exchange traded transactions are unavailable
and when, in the Adviser's opinion, the pricing mechanism and liquidity are
satisfactory and the participants are responsible parties likely to meet their
contractual obligations. A Portfolio's ability to engage in hedging and related
option transactions may be limited by tax considerations.
Transactions and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolios own or intend to
purchase or sell. They simply establish a rate of exchange which one can
achieve at some future point in time. Additionally, although these techniques
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, they tend to limit any potential gain which might result from the
increase in the value of such currency.
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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 additional information concerning the risks associated with utilizing
options, forward foreign currency exchange contracts, please see "Risks of
Transactions in Options, Futures Contracts and Forward Currency Contracts in
this sections.
FOREIGN SECURITIES. As indicated in Appendix A, certain Portfolios may also
invest in other types of types of foreign securities or engage in the certain
types of transactions related to foreign securities, such as Brady Bonds,
Depositary Receipts, Eurodollar and Yankee Dollar Obligations and Foreign
Currency Transactions, including forward foreign currency transactions, foreign
currency options and foreign currency futures contracts and options on futures.
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.
Foreign investments involve certain risks that are not present in domestic
securities. For example, foreign securities may be subject to currency risks or
to foreign government taxes which reduce their attractiveness. 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 uniform
accounting, auditing and financial reporting standards and practices comparable
to those in the United States. 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. 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.
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, banks and listed companies abroad 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,." which can result in losses to a 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.
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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.
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.
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.
In less liquid and well developed stock markets, such as those in some Eastern
European, Southeast Asian, and Latin American countries, volatility may be
heightened by actions of a few major investors. For example, substantial
increases or decreases in cash flows of mutual funds investing in these markets
could significantly affect stock prices and, therefore, share prices.
Additionally, investments in emerging market regions or the following
geographic regions are subject to more specific risks, as discussed below:
EMERGING MARKET SECURITIES. Investments in emerging market country
securities involve special risks. The economies, markets and political
structures of a number of the emerging market 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. Similarly, many of these countries,
particularly in Southeast Asia, Latin America, and Eastern Europe, are
grappling with severe inflation or recession, high levels of national debt,
currency exchange problems and government instability. 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.
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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.
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.
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. For example, 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 custodian containing certain
protective conditions, including, among other things, the 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.
PACIFIC BASIN REGION. 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.
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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.
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.
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Each Portfolio (except the Warburg Pincus Small Company Value Portfolio) may
make contracts to purchase 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.
A Portfolio will only enter into forward commitments and make commitments to
purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities. However, the Portfolio may sell
these securities before the settlement date if it is deemed advisable as a
matter of investment strategy. Forward commitments and when-issued and delayed
delivery transactions are generally expected to settle within three months from
the date the transactions are entered into, although the Portfolio may close
out its position prior to the settlement date by entering into a matching sales
transaction.
Although none of the Portfolios intends to make such purchases for speculative
purposes and each Portfolio intends to adhere to the policies of the Securities
and Exchange Commission ("SEC"), purchases of securities on such a basis may
involve more risk than other types of purchases. For example, by committing to
purchase securities in the future, a Portfolio subjects itself to a risk of
loss on such commitments as well as on its portfolio securities. Also, a
Portfolio may have to sell assets which have been set aside in order to meet
redemptions. In addition, if a Portfolio determines it is advisable as a matter
of investment strategy to sell the forward commitment or when-issued or delayed
delivery securities before delivery, that Portfolio may incur a gain or loss
because of market fluctuations since the time the commitment to purchase such
securities was made. Any such gain or loss would be treated as a capital gain
or loss and would be treated for tax purposes as such. When the time comes to
pay for the securities to be purchased under a forward commitment or on a
when-issued or delayed delivery basis, a 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 TRANSACTIONS. For information on "Futures Transactions," see the
discussion in this section under "Options and Futures Transactions."
HYBRID INSTRUMENTS. As indicated in Appendix A, certain Portfolios may invest
in hybrid instruments (a type of potentially high-risk derivative) Hybrid
instruments have recently been developed and combine the elements of futures
contracts or options with those of debt, preferred equity or a depositary
instrument. 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 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.
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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 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 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.
Although the risks of investing in hybrid instruments reflect a combination of
the risks of investing in securities, options, futures and currencies, hybrid
instruments are potentially more volatile and carry greater market risks than
traditional debt instruments. 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.
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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.
ILLIQUID SECURITIES OR NON-PUBLICLY TRADED SECURITIES. 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.
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).
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.
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. As indicated in
Appendix A, certain Portfolios may invest in or hold investment grade
securities, but not lower quality fixed income securities. Investment grade
securities are securities rated Baa by Moody's Investors Service Inc.
("Moody's") or BBB or higher by Standard & Poor's Rating Services, a division
of McGraw-Hill Companies, Inc. ("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 or higher by nationally recognized statistical rating
organizations ("NRSRO") (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 this 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.
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It is the policy of each Portfolio's Adviser to not rely exclusively on ratings
issued by credit rating agencies but to supplement such ratings with the
Adviser's own independent and ongoing review of credit quality. Junk bonds may
be issued as a consequence of corporate restructuring, such as leveraged
buyouts, mergers, acquisitions, debt recapitalizations, or similar events or by
smaller or highly leveraged companies. When economic conditions appear to be
deteriorating, junk bonds may decline in market value due to investors'
heightened concern over credit quality, regardless of prevailing interest
rates. Although the growth of the high yield securities market in the 1980s had
paralleled a long economic expansion, many issuers have been affected by
adverse economic and market conditions. It should be recognized that an
economic downturn or increase in interest rates is likely to have a negative
effect on: (i) the high yield bond market; (ii) the value of high yield
securities; and (iii) the ability of the securities' issuers to service their
principal and interest payment obligations, to meet their projected business
goals or to obtain additional financing. The market for junk bonds, especially
during periods of deteriorating economic conditions, may be less liquid than
the market for investment grade bonds. In periods of reduced market liquidity,
junk bond prices may become more volatile and may experience sudden and
substantial price declines. Also, there may be significant disparities in the
prices quoted for junk bonds by various dealers. Under such conditions, a
Portfolio may find it difficult to value its junk bonds accurately. Under such
conditions, a Portfolio may have to use subjective rather than objective
criteria to value its junk bond investments accurately and rely more heavily on
the judgment of the Trust's Board of Trustees. Prices for junk bonds also may
be affected by legislative and regulatory developments. For example, federal
rules require that savings and loans gradually reduce their holdings of
high-yield securities. Also, from time to time, Congress has considered
legislation to restrict or eliminate the corporate tax deduction for interest
payments or to regulate corporate restructuring such as takeovers, mergers or
leveraged buyouts. Such legislation, if enacted, could depress the prices of
outstanding junk bonds.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS. As indicated in Appendix A,
certain Portfolios may invest a portion of each of their assets in loan
participations and other direct indebtedness. These loans are made generally to
finance internal growth, mergers, acquisitions, stock repurchases, leveraged
buy-outs and other corporate activities. 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.
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. 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.
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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.
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.
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-BACKED OR MORTGAGE-RELATED SECURITIES. As indicated in Appendix A,
certain Portfolios 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. 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. 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.
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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.
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 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.
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. 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.
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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.
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 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 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
Portfolios may invest in both the IO class and the PO class. The prices of
stripped mortgage-backed securities may be particularly affected by changes in
interest rates. 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. 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.
Prepayments may also result in losses on stripped mortgage-backed securities. 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.
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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, it could end up acquiring a direct interest in the underlying real
property and the Portfolio would then 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. Investment in direct mortgages involve many
of the same risks as 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 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.
MUNICIPAL SECURITIES. As indicated in Appendix A, certain Portfolios 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.
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OPTIONS AND FUTURES TRANSACTIONS. 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 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.
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 over-the-counter
option and the resulting inability to close a futures position or
over-the-counter option prior to its maturity date.
Following is a description of specific Options and Futures Transactions,
followed by a discussion concerning the risks associated with utilizing
options, futures contracts, and forward foreign currency exchange contracts.
FUTURES TRANSACTIONS. As indicated in Appendix A, certain Portfolios
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. 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").
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No purchase price is paid or received when the contract is entered into.
Instead, a Portfolio upon entering into a futures contract (and to maintain the
Portfolio's open positions in futures contracts) would be required to deposit
with its custodian in a segregated account in the name of the futures broker an
amount of cash, United States government securities, suitable money market
instruments, or liquid, high-grade debt securities, known as "initial margin."
The margin required for a particular futures contract is set by the exchange on
which the contract is traded, and may be significantly modified from time to
time by the exchange during the term of the contract. Futures contracts are
customarily purchased and sold on margin that may range upward from less than
5% of the value of the contract being traded. By using futures contracts as a
risk management technique, given the greater liquidity in the futures market
than in the cash market, it may be possible to accomplish certain results more
quickly and with lower transaction costs.
If the price of an open futures contract changes (by increase in the case of a
sale or by decrease in the case of a purchase) so that the loss on the futures
contract reaches a point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin. However, if
the value of a position increases because of favorable price changes in the
futures contract so that the margin deposit exceeds the required margin, the
broker will pay the excess to the Portfolio. These subsequent payments called
"variation margin," to and from the futures broker, are made on a daily basis
as the price of the underlying assets fluctuate making the long and short
positions in the futures contract more or less valuable, a process known as
"marking to the market. The Portfolios expect to earn interest income on their
initial and variation margin deposits.
A Portfolio will incur brokerage fees when it purchases and sells futures
contracts. Positions taken in the futures markets are not normally held until
delivery or cash settlement is required, but are instead liquidated through
offsetting transactions which may result in a gain or a loss. While futures
positions taken by a Portfolio will usually be liquidated in this manner, the
Portfolio may instead make or take delivery of underlying securities whenever
it appears economically advantageous for the Portfolio to do so. A clearing
organization associated with the exchange on which futures are traded assumes
responsibility for closing out transactions and guarantees that as between the
clearing members of an exchange, the sale and purchase obligations will be
performed with regard to all positions that remain open at the termination of
the contract.
OPTIONS ON FUTURES CONTRACTS. As indicated in Appendix A, certain
Portfolios 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.
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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 Portfolios will write only options on futures contracts which are
"covered." A Portfolio will be considered "covered" with respect to a put
option it has written if, so long as it is obligated as a writer of the put,
the Portfolio segregates with its custodian cash, United States Government
securities or liquid securities at all times equal to or greater than the
aggregate exercise price of the puts it has written (less any related margin
deposited with the futures broker). A Portfolio will be considered "covered"
with respect to a call option it has written on a debt security future if, so
long as it is obligated as a writer of the call, the Portfolio owns a security
deliverable under the futures contract. A Portfolio will be considered
"covered" with respect to a call option it has written on a securities index
future if the Portfolio owns, so long as the Portfolio is obligated as the
writer of the call, a portfolio of securities the price changes of which are,
in the opinion of its Adviser, expected to replicate substantially the movement
of the index upon which the futures contract is based.
Upon the exercise of a call option, the writer of the option is obligated to
sell the futures contract (to deliver a "long" position to the option holder)
at the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a put, the
writer of the option is obligated to purchase the futures contract (deliver a
"short" position to the option holder) at the option exercise price which will
presumably be higher than the current market price of the contract in the
futures market. When the holder of an option exercises it and assumes a long
futures position, in the case of a call, or a short futures position, in the
case of a put, its gain will be credited to its futures margin account, while
the loss suffered by the writer of the option will be debited to its account
and must be immediately paid by the writer. However, as with the trading of
futures, most participants in the options markets do not seek to realize their
gains or losses by exercise of their option rights. Instead, the holder of an
option will usually realize a gain or loss by buying or selling an offsetting
option at a market price that will reflect an increase or a decrease from the
premium originally paid.
If a Portfolio writes options on futures contracts, the Portfolio will receive
a premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position If the option is not exercised, the Portfolio will realize a gain in
the amount of the premium, which may partially offset unfavorable changes in
the value of securities held in or to be acquired for the Portfolio. If the
option is exercised, the Portfolio will incur a loss in the option transaction,
which will be reduced by the amount of the premium it has received, but which
will offset any favorable changes in the value of its portfolio securities or,
in the case of a put, lower prices of securities it intends to acquire.
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LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS. The Portfolios will not engage in transactions in futures
contracts and related options for speculation. In addition, the Portfolios will
not purchase or sell futures contracts or related options unless either (1) the
futures contracts or options thereon are purchased for "bona fide hedging"
purposes (as that term is defined under the CFTC regulations) or (2) if
purchased for other purposes, the sum of the amounts of initial margin deposits
on a Portfolio's existing futures and premiums required to establish
non-hedging positions would not exceed 5% of the liquidation value of the
Portfolio's total assets. In instances involving the purchase of futures
contracts or the writing of put options thereon by a Portfolio, an amount of
cash and cash equivalents, equal to the cost of such futures contracts or
options written (less any related margin deposits), will be deposited in a
segregated account with its custodian, thereby insuring that the use of such
futures contracts and options is unleveraged. In instances involving the sale
of futures contracts or the writing of call options thereon by a Portfolio, the
securities underlying such futures contracts or options will at all times be
maintained by the Portfolio or, in the case of index futures and related
options, the Portfolio will own securities the price changes of which are, in
the opinion of its Adviser, expected to replicate substantially the movement of
the index upon which the futures contract or option is based.
For information concerning the risks associated with utilizing options, futures
contracts, and forward foreign currency exchange contracts, please see "Risks
of Transactions in Options, Futures Contracts and Forward Currency Contracts"
on page ____.
As indicated in Appendix A, certain Portfolios 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.
As indicated in Appendix A, certain Portfolios will not commit more than 5% of
its total assets to premiums when purchasing call or put options. In addition,
the total market value of securities against which a Portfolio has written call
or put options may not exceed 25% of its total assets. The 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.
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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.
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.
A Portfolio will write covered call options both to reduce the risks associated
with certain of its investments and to increase total investment return through
the receipt of premiums. In return for the premium income, the Portfolio will
give up the opportunity to profit from an increase in the market price of the
underlying security above the exercise price so long as its obligations under
the contract continue, except insofar as the premium represents a profit.
Moreover, in writing the call option, the Portfolio will retain the risk of
loss should the price of the security decline. The premium is intended to
offset that loss in whole or in part. Unlike the situation in which the
Portfolio owns securities not subject to a call option, the Portfolio, in
writing call options, must assume that the call may be exercised at any time
prior to the expiration of its obligation as a writer, and that in such
circumstances the net proceeds realized from the sale of the underlying
securities pursuant to the call may be substantially below the prevailing
market price.
A Portfolio may terminate its obligation under an option it has written by
buying an identical option. Such a transaction is called a "closing purchase
transaction." The Portfolio will realize a gain or loss from a closing purchase
transaction if the amount paid to purchase a call option is less or more than
the amount received from the sale of the corresponding call option. Also,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the exercise or closing out of a call option is likely to be offset in
whole or part by unrealized appreciation of the underlying security owned by
the Portfolio. When an underlying security is sold from the Portfolio's
securities portfolio, the Portfolio will effect a closing purchase transaction
so as to close out any existing covered call option on that underlying
security.
WRITING PUT OPTIONS. The writer of a put option becomes obligated to
purchase the underlying security at a specified price during the option period
if the buyer elects to exercise the option before its expiration date. A
Portfolio which writes a put option will be required to "cover" it, for
example, by depositing and maintaining in a segregated account with its
custodian cash, United States Government securities or other liquid securities
having a value equal to or greater than the exercise price of the option.
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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 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.
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SECURITIES INDEX OPTIONS. A Portfolio may write covered put and call
options and purchase call and put options on securities indexes for the purpose
of hedging against the risk of unfavorable price movements adversely affecting
the value of a Portfolio's securities or securities it intends to purchase.
Each Portfolio writes only "covered" options. A call option on a securities
index is considered covered, for example, if, so long as the Portfolio is
obligated as the writer of the call, it holds securities the price changes of
which are, in the opinion of a Portfolio's Adviser, expected to replicate
substantially the movement of the index or indexes upon which the options
written by the Portfolio are based. A put on a securities index written by a
Portfolio will be considered covered if, so long as it is obligated as the
writer of the put, the Portfolio segregates with its custodian cash, United
States Government securities or other liquid high-grade debt obligations having
a value equal to or greater than the exercise price of the option. Unlike a
stock option, which gives the holder the right to purchase or sell a specified
stock at a specified price, an option on a securities index gives the holder
the right to receive a cash "exercise settlement amount" equal to (i) the
difference between the exercise price of the option and the value of the
underlying stock index on the exercise date, multiplied by (ii) a fixed "index
multiplier."
A securities index fluctuates with changes in the market value of the
securities so included. For example, some securities index options are based on
a broad market index such as the S&P 500 or the NYSE Composite Index, or a
narrower market index such as the S&P 100. Indexes may also be based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index.
OVER-THE-COUNTER OPTIONS. As indicated in Appendix A, certain
Portfolios may engage in over-the-counter put and call option transactions. The
Warburg Pincus Small Company Value Portfolio may utilize up to 10% of its total
assets to purchase exchange-listed and over-the-counter put and call options on
stock indexes. 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 such options. Such over-the-counter options, and
the securities used as "cover" for such options, may be considered illiquid
securities. 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.
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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. 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.
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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.
PASSIVE FOREIGN INVESTMENT COMPANIES. As indicated in Appendix A, certain
Portfolios may purchase the securities of certain foreign investment funds or
trusts called passive foreign investment companies ("PFICs"). Such entities
have been the only or primary way to invest in certain countries because 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.
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 PFICS, to the limitation that no more
than 10% of the value of the Portfolio's total assets may be invested in such
securities. 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. As indicated in Appendix A, certain Portfolios 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.
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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.
Under a repurchase agreement, underlying debt instruments are acquired for a
relatively short period (usually not more than one week and never more than a
year) subject to an obligation of the seller to repurchase and the Portfolio to
resell the instrument at a fixed price and time, thereby determining the yield
during the Portfolio's holding period. This results in a fixed rate of return
insulated from market fluctuation during that holding period.
Repurchase agreements may have the characteristics of loans by a Portfolio.
During the term of the repurchase agreement, a Portfolio retains the security
subject to the repurchase agreement as collateral securing the seller's
repurchase obligation, continually monitors on a daily basis the market value
of the security subject to the agreement and requires the seller to deposit
with the Portfolio collateral equal to any amount by which the market value of
the security subject to the repurchase agreements falls below the resale amount
provided under the repurchase agreement. A Portfolio will enter into repurchase
agreements (with respect to 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.
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REAL ESTATE INVESTMENT TRUSTS. As indicated in Appendix A, certain Portfolios
may each invest up to 15% of its respective net assets in investments related
to real estate, including real estate investment trusts ("REITS"). Risks
associated with investments in securities of companies in the real estate
industry include: decline in the value of real estate; risks related to general
and local economic conditions; overbuilding and increased competition;
increases in property taxes and operating expenses; changes in zoning laws;
casualty or condemnation losses; variations in rental income; changes in
neighborhood values; the appeal of properties to tenants; and increases in
interest rates. In addition, equity REITS may be affected by changes in the
values of the underlying property owned by the trusts, while mortgage real
estate investment trusts may be affected by the quality of credit extended.
REITS are dependent upon management skills, may not be diversified and are
subject to the risks of financing projects. Such REITS are also subject to
heavy cash flow dependency, defaults by borrowers, self liquidation and the
possibility of failing to qualify for tax-free pass-through of income under the
Code and to maintain exemption from the 1940 Act. In the event an issuer of
debt securities collateralized by real estate defaults, it is conceivable that
the REITS could end up holding the underlying real estate.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. As indicated in Appendix A,
certain Portfolios 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 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. 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). If interest
rates rise during a reverse repurchase agreement, it may adversely affect the
Portfolio's net asset value. See "Fundamental Restrictions" for more
information concerning restrictions on borrowing by each Portfolio.
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 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.
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SECURITIES LOANS. All securities loans will be made pursuant to agreements
requiring the loans to be continuously secured by collateral in cash or high
grade debt obligations at least equal at all times to the market value of the
loaned securities. The borrower pays to the Portfolios an amount equal to any
dividends or interest received on loaned securities. The Portfolios retain all
or a portion of the interest received on investment of cash collateral or
receive a fee from the borrower. Lending portfolio securities involves risks of
delay in recovery of the loaned securities or in some cases loss of rights in
the collateral should the borrower fail financially.
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.
SHORT SALES AGAINST THE BOX. As indicated in Appendix A, certain Portfolios 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.
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SMALL COMPANY SECURITIES. As indicated in Appendix A, certain Portfolios 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 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. Structured notes are interests in entities organized and
operated solely for the purpose of restructuring the investment characteristics
of 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 Morgan Stanley
Emerging Markets Equity Portfolio may invest typically involve no credit
enhancement, their credit risk generally will be equivalent to that of the
underlying instruments. The Morgan Stanley Emerging Markets Equity 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 Morgan Stanley Emerging Markets Equity 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. As indicated in Appendix A, certain Portfolios 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 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.
44
<PAGE>
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 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.
The swaps in which a Portfolio may engage may include instruments under which
one party pays a single or periodic fixed amount(s) (or premium), and the other
party pays periodic amounts based on the movement of a specified index. Swaps
do not involve the delivery of securities, other underlying assets, or
principal. Accordingly, the risk of loss with respect to swaps is limited to
the net amount of payments the Portfolio is contractually obligated to make. If
the other party to a swap defaults, Portfolio's risk of loss consists of the
net amount of payments that the Portfolio contractually entitled to receive.
Currency swaps usually involve the delivery of the entire principal value of
one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. If there is a default by the counterparty, a Portfolio may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid. Certain swap transactions involve more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than traditional swap
transactions.
45
<PAGE>
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.
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 Federal Housing
Administration, Export-Import Bank of the United States, Small Business
Administration, and 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., Interamerican Development Bank, the International Bank for
Reconstruction and Development, and the Tennessee Valley Authority).
WARRANTS. Warrants are securities that give the holder the right, but not the
obligation to purchase equity issues of the company issuing the warrants, or a
related company, at a fixed price either on a date certain or during a set
period. At the time of issue, the cost of a warrant is substantially less than
the cost of the underlying security itself, and price movements in the
underlying security are generally magnified in the price movements of the
warrant. This effect enables the investor to gain exposure to the underlying
security with a relatively low capital investment but increases an investor's
risk in the event of a decline in the value of the underlying security and can
result in a complete loss of the amount invested in the warrant. In addition,
the price of a warrant tends to be more volatile than, and may not correlate
exactly to, the price of the underlying security. If the market price of the
underlying security is below the exercise price of the warrant on its
expiration date, the warrant will generally expire without value.
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.
46
<PAGE>
ZERO-COUPON BONDS. As indicated in Appendix A, certain Portfolios 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." 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" in the
Prospectus for the actual portfolio turnover rates of the Portfolios through
December 31, 1998 and June 30, 1999 and also see "Dividends, Distributions and
Taxes" below.
MANAGEMENT OF THE TRUST
The Board has the responsibility for the overall management of the Trust and
its Portfolios, including general supervision and review of the investment
activities and the conformity with Delaware Law and the stated policies of the
Trust's Portfolios. The Board elects the officers of the Trust who are
responsible for administering the Trust's day-to-day operations. Trustees and
officers of the Trust, together with information as to their principal business
occupations during the last five years, and other information are shown below.
As of March 31, 1999 the Trustees and officers of the Trust owned Contracts
entitling them to provide voting instructions in the aggregate with respect to
less than one percent of the Trust's shares of beneficial interest.
THE TRUSTEES
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- - --------------------- -------------------------------------------
<S> <C>
Peter D. Noris* (43) Executive Vice President and Chief Investment Officer, Equitable Life since May
Equitable Life 1995; prior thereto, Vice President, Salomon Brothers Inc., 1992 to 1995.
1290 Avenue of the Americas Principal, Equity Division, Morgan Stanley & Co., Inc., 1984 to 1992. Director,
New York, New York 10104 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 (52) Partner and Consultant, Syrus Associates since 1986. Trustee, Provident
Syrus Associates Investment Counsel Trust (investment company) since 1992. Director, The PBHG
880 Third Avenue Funds, Inc. (investment company) since 1995.
New York, NY 10022
William M. Kearns, Jr. (63) President, W.M. Kearns & Co., Inc., a private investment company, since 1994;
W.M. Kearns & Co., Inc. Director, Kuhlman Corporation, Malibu Entertainment Worldwide, Inc., Selective
310 South Street Insurance Group, Inc., as well as a number of private and venture-backed
Morristown, NJ 07960 companies; Managing Director, Lehman Brothers, Inc. and predecessor firms,
1969-1992; Advisory Director, Lehman Brothers, Inc. 1992-1994.
Christopher P.A. Komisarjevsky (54) President and Chief Executive Officer, Burson-Marsteller USA since 1996.
Burson-Marsteller President and Chief Executive Officer, Burson-Marsteller New York, 1995 to 1996.
230 Park Avenue South President and Chief Executive Officer, Gavin Anderson & Company New York, 1994 to
New York, NY 10003-1566 1995. Prior thereto, he held various positions with Hill and Knowlton, Inc. for
twenty years.
47
<PAGE>
Harvey Rosenthal (56) Independent Director and Investor, CVS Corporation (formerly Melville
60 State Street Corporation) since 1996. President and Chief Operating Officer, CVS Corporation
Suite 700 from 1994 to 1996. Prior thereto, he held various positions with CVS division of
Boston, MA 02109 Melville Corporation, for twenty-seven years.
William T. McCaffrey* (62) Director, Senior Executive Vice President and Chief Operating Officer, Equitable
89-25 63rd Avenue Life, to March 1998. Executive Vice President and Chief Administrative Officer,
Rego Park, NY 11374 The Equitable Companies Incorporated since 1994. Director, Equitable Foundation
and Equitable Distributors, Inc. since May 1996.
Michael Hegarty* (54) Director, President and Chief Operating Officer, Equitable Life since April 1,
Equitable Life 1998. Vice Chairman, Chase Manhattan Corporation from 1996 to 1998. Vice
1290 Avenue of the Americas Chairman, Chemical Bank, 1995 to 1996 (Chase Manhattan Corporation and Chemical
New York, New York 10104 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,
Norman Abrams, 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.
48
<PAGE>
TRUSTEE COMPENSATION TABLE*
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL
AGGREGATE BENEFITS ACCRUED COMPENSATION
COMPENSATION AS PART OF FROM TRUST PAID TO
TRUSTEE FROM THE TRUST TRUST EXPENSES TRUSTEES
- - -------- --------------- -------------- ----------------------
<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 year.
** Mr. Komisarjevsky has elected to participate in the Trust's deferred
compensation plan. As of December 31, 1998, Mr. Komisarjevsky had accrued
$32,424 (including interest).
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 or Chase Global Funds Services Company. The Trust's
principal officers are:
<TABLE>
<CAPTION>
<S> <C>
NAME, AGE AND POSITION WITH TRUST PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- - --------------------------------- -------------------------------------------
Peter D. Noris (43) (see above)
President
Norman Abrams (50) Vice President and Associate General Counsel, Equitable Life
Vice President and Secretary since January 1997. Vice President and Counsel, Equitable Life
from October 1991 to December 1996.
Harvey Blitz (52) Senior Vice President, Equitable Life since September 1987.
Vice President and Chief Financial Officer Deputy Chief Financial 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.
49
<PAGE>
Mary Breen (40) Vice President and Associate General Counsel, Equitable Life
Vice President since October 1996. 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 (42) Vice President and Treasurer, The Equitable Companies
Vice President and Treasurer Incorporated and Equitable Life. Treasurer, Frontier Trust
Company and EquiSource. Vice President and Treasurer, Equitable
Casualty Insurance Company.
Robin K. Murray (43) Vice President, Office of the Chief Investment Officer, and First
First Vice President 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.
Martin J. Telles (50) Executive Vice President and Chief Marketing Officer, Equico
Vice President Securities since 1993. Director, Royal Alliance.
Mary Joan Hoene (49) Vice President and Counsel, Insurance Division, Equitable Life
Vice President since 1998. Divisional Senior Vice President, Financial
Institution and Government Affairs, AIG Technical Services from
1994 to 1998. General Counsel, Mitchell Hutchins Asset
Management Inc., from 1988 to 1994.
Allen T. Zabusky (47) Vice President and Deputy Controller, Equitable Life since 1990.
Vice President and Controller Controller, The Equitable of Colorado, Inc. since 1996.
Mary E. Cantwell (37) Assistant Vice President, Office of the Chief Investment Officer,
Assistant Vice President 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 (34) Vice President, Fund Administration, Chase Global Funds Services
Assistant Treasurer Company since March 1997. Assistant Manager of Fund Accounting ,
Brown Brothers Harriman from July 1993 to March 1997.
Karl O. Hartmann (43) Senior Vice President and General Counsel, Chase Global Funds
Assistant Secretary Services Company.
Lloyd Lipsett (34) Vice President and Associate General Counsel, Chase Global Funds
Assistant Secretary Services Company since 1997. Associate, Hale and Dorr (law firm),
1995 to 1997. Associate, Choate, Hall & Stewart (law firm), 1993 to 1995.
</TABLE>
CONTROL PERSON AND PRINCIPAL HOLDERS OF SECURITIES
The Trust continuously offers its shares to separate accounts of insurance
companies in connection with variable life insurance contracts and variable
annuity certificates and contracts (the "Contracts") and to participants in
tax-qualified retirement plans. Class IB shares currently are sold only to
separate accounts of The Equitable Life Assurance Society of the United States
("Equitable"). Class IA shares currently are sold only to the Equitable
Investment Plan for Employees, Managers and Agents ("Equitable Plan").
Equitable may be deemed to be a control person with respect to the Trust by
virtue of its ownership of more than 100% of the Trust's shares as of November
15, 1998. Equitable 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.
50
<PAGE>
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 "Contract owners") and participants in the
Equitable Plan the opportunity to instruct them as to how shares allocable to
their Contracts or to the Equitable Plan 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 Contract owners owned Contracts entitling such persons to give voting
instructions regarding more than 5% of the outstanding shares of any Portfolio.
As of the date of this SAI, no participant in the Equitable Plan had interests
in the Equitable Plan entitling such person to give voting instructions
regarding more than 5% of the outstanding shares of any Portfolio.
The Trust may in the future offer its shares to separate accounts of insurance
companies unaffiliated with Equitable, as well as to tax-qualified retirement
plans in addition to the Equitable Plan. The Trust does not currently foresee
any disadvantages to Contract owners or participants in the Equitable Plan
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 in addition to the Equitable Plan. 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.
IINVESTMENT MANAGEMENT AND OTHER SERVICES
THE MANAGER
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"), Bankers Trust Company ("Bankers
Trust"), and Evergreen Asset Management Corp. ("Evergreen") (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.
The Manager 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.
51
<PAGE>
Equitable, which is a New York life insurance company and one of the largest
life insurance companies in the United States, is a wholly-owned subsidiary of
The Equitable Companies Incorporated ("The Equitable Companies"), a
publicly-owned holding company. The principal offices of The Equitable
Companies and Equitable are located at 1290 Avenue of the Americas, New York,
New York 10104.
AXA, a French insurance holding company, currently owns approximately 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 1998 of $____ billion. AXA is also the world's largest
insurer-based investment manager with $____ billion in assets under management
as of December 31, 1998. 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 below 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
"Management of the Trust -- Expense Limitation Agreement" section of the
Prospectus.
52
<PAGE>
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 table below shows the fees paid by each Portfolio to the Manager during the
year ended December 31, 1998. The first column shows the method of allocation
for calculating the fees, the second column shows each fee without fee waivers,
the third column shows the fees actually paid to the Manager after fee waivers
and the fourth 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.
<TABLE>
<CAPTION>
TOTAL AMOUNT OF
MANAGEMENT FEE FEES WAIVED AND
PAID TO MANAGER OTHER EXPENSES
PORTFOLIO MANAGEMENT FEE AFTER FEE WAIVER ASSUMED BY MANAGER
- - --------- -------------- ---------------- ------------------
<S> <C> <C> <C>
Merrill Lynch Basic Value Equity Portfolio $632,783 $396,615 $236,168
Merrill Lynch World Strategy Portfolio $179,486 $75,018 $104,468
MFS Emerging Growth Companies Portfolio $1,351,932 $881,342 $470,590
MFS Research Portfolio $1,319,969 $842,389 $477,580
EQ/Putnam Balanced Portfolio $269,939 $99,960 $169,979
EQ/Putnam Growth & Income Value Portfolio $1,654,313 $1,069,169 $585,144
EQ/Putnam International Equity Portfolio $673,315 $421,928 $251,387
EQ/Putnam Investors Growth Portfolio $497,899 $282,976 $214,923
T. Rowe Price Equity Income Portfolio $1,000,224 $661,278 $338,946
T. Rowe Price International Stock Portfolio $788,805 $573,446 $215,359
Warburg Pincus Small Company Value $1,012,129 $738,570 $273,559
Portfolio
Morgan Stanley Emerging Markets Equity $364,795 $105,117 $259,678
Portfolio
BT Equity 500 Index $210,001 $0 $232,207
BT International Equity Index $98,039 $0 $180,103
BT Small Company Index $45,728 $0 $220,614
JPM Core Bond $172,507 $86,266 $86,241
Lazard Large Cap Value $160,570 $73,011 $87,559
Lazard Small Cap Portfolios $194,797 $111,500 $83,297
</TABLE>
53
<PAGE>
EQ/Evergreen Foundation, EQ/Evergreen and MFS Growth with Income Portfolios
are not included in the above table because they had no operations during the
year ended December 31, 1998.
THE ADVISERS
On behalf of the T. Rowe Price Equity Income Portfolio and the T. Rowe Price
International Stock Portfolio, the Manager has entered into investment advisory
agreements ("Advisory Agreements") with T. Rowe Price and Price Fleming,
respectively. Additionally, the Manager has entered into an Advisory Agreement
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. The Manager has entered into an amendment to
the Advisory Agreement on behalf of MFS Research Portfolio, MFS Emerging Growth
Companies Portfolio and MFS Growth with Income Portfolio with MFS. 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 an Advisory
Agreement on behalf of Merrill Lynch World Strategy Portfolio and Merrill Lynch
Basic Value Equity Portfolio with MLAM. 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 entered into an Advisory
Agreement on behalf of the JPM Core Bond Portfolio with J.P. Morgan. 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. Finally, the Manager has entered into an
Advisory Agreement on behalf of EQ/Evergreen Foundation Portfolio and
EQ/Evergreen Portfolio with EQ/Evergreen. The Advisory Agreements obligate T.
Rowe Price, Price Fleming, Putnam Management, MFS, Warburg, MSAM, MLAM, LAM,
J.P. Morgan, Bankers Trust, and Evergreen 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 year ended December 31, 1998, the Manager paid the following fees to
each Adviser with respect to the Portfolios listed below pursuant to the
Investment Advisory Agreements:
PORTFOLIO ADVISORY FEE PAID
- - --------- -----------------
Merrill Lynch Basic Value Equity Portfolio $454,234
Merrill Lynch World Strategy Portfolio $128,253
MFS Emerging Growth Companies Portfolio $955,058
MFS Research Portfolio $935,189
EQ/Putnam Balanced Portfolio $245,492
EQ/Putnam Growth & Income Value Portfolio $1,395,817
EQ/Putnam International Equity Portfolio $625,984
EQ/Putnam Investors Growth Portfolio $453,137
T. Rowe Price Equity Income Portfolio $727,501
T. Rowe Price International Stock Portfolio $506,294
Warburg Pincus Small Company Value Portfolio $778,163
Morgan Stanley Emerging Markets Equity Portfolio $364,354
BT Equity 500 Index $42,047
BT International Equity Index, $42,067
BT Small Company Index $9,143
JPM Core Bond $15,022
Lazard Large Cap Value $123,634
Lazard Small Cap Value $158,214
54
<PAGE>
No advisory fees were paid to Evergreen or to MFS on behalf of MFS Growth with
Income Portfolio during the year ended December 31, 1998.
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 transactions for a Portfolio and
receive brokerage commissions in connection therewith as permitted by Section
17(e) of the 1940 Act.
THE ADMINISTRATOR
Pursuant to an administrative agreement ("Mutual Funds Services Agreement"),
Chase Global Funds Services Company ("Administrator") 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.
55
<PAGE>
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 year ended December 31, 1998, the Administrator was paid the
following fees, by the Administrator with respect to each Portfolio:
PORTFOLIO ADMINISTRATION FEE
- - --------- ------------------
Merrill Lynch Basic Value Equity Portfolio $ 92,138
Merrill Lynch World Strategy Portfolio $ 48,992
MFS Emerging Growth Companies Portfolio $166,093
MFS Research Portfolio $160,767
EQ/Putnam Balanced Portfolio $ 65,412
EQ/Putnam Growth & Income Value Portfolio $191,609
EQ/Putnam International Equity Portfolio $ 92,040
EQ/Putnam Investors Growth Portfolio $ 80,365
T. Rowe Price Equity Income Portfolio $131,283
T. Rowe Price International Stock Portfolio $120,081
Warburg Pincus Small Company Value Portfolio $113,472
Morgan Stanley Emerging Markets Equity Portfolio $ 58,490
BT Equity 500 Index $ 91,209
BT International Equity Index, $ 89,083
BT Small Company Index $ 97,220
JPM Core Bond $ 52,546
Lazard Large Cap Value $ 47,035
Lazard Small Cap Value $ 45,857
The EQ/Evergreen Foundation, EQ/Evergreen, and MFS Growth with Income
Portfolios did not pay a fee to the Administrator during the year ended
December 31, 1998.
THE DISTRIBUTORS
The Trust has distribution agreements with EQ Financial Consultants, Inc. and
EDI (each also referred to as a "Distributor," and together "Distributors"),
each an indirect wholly-owned subsidiary of Equitable. The address for EDI is
1290 Avenue of the Americas, New York, New York 10104, and that for EQ
Financial Consultants, Inc. is 1290 Avenue of the Americas, New York, New York
10104. EQ Financial Consultants, Inc. is one of the Distributors for the
Trust's Class IA shares and Class IB shares and also serves as the Manager of
the Trust. EDI also serves as one of the Distributors 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 ("Distribution Agreements"). were reapproved by the Board of
Trustees at a Board meeting held on April __, 1999. The Distribution Agreements
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 Class IB 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.
56
<PAGE>
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 Contract
owners and preparing, printing and mailing any other literature or advertising
in connection with the offering of the Class IA shares to prospective Contract
owners.
Pursuant to the Class IB 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, and 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 Class IB 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
TDistribution Agreements, payments to the Distributors for activities pursuant
to the Class IB 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 Class IB Distribution Plan and the
Distribution Agreements, each Portfolio is authorized to make payments monthly
to the Distributors that 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 Class IB 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 Class IB Distribution Plan and in connection
with their annual consideration of the Class IB Distribution 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.
57
<PAGE>
The Distributors for each class of shares will pay all fees and expenses in
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. EQ Financial Consultants, Inc. also serves as the
Distributor for shares of the Trust to the Equitable Plan. 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 Class IB 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 April __, 1999, the Board of
Trustees of the Trust, including the Independent Trustees, considered the
reapproval of the Class IB Distribution Plan. In connection with its
consideration of the Class IB Distribution Plan, the Board of Trustees was
furnished with a copy of the Class IB Distribution Plan and the related
materials, including information related to the advantages and disadvantages of
each Distribution Plan. Legal counsel for the Independent Trustees discussed
the legal and regulatory considerations in readopting the Class IB Distribution
Plan.
The Board of Trustees considered various factors in connection with its
decision as to whether to reapprove the Class IB Distribution Plan, including:
(i) the nature and causes of the circumstances which makes continuation of the
Class IB Distribution Plan, necessary and appropriate; (ii) the way in which
the Class IB 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 Class IB
Distribution Plan to any other person relative to those of the Trust; (v) the
effect of the Class IB Distribution Plan on existing owners of Contracts, (vi)
the merits of possible alternative plans or pricing structures; (vii)
competitive conditions in the variable products industry; and (viii) the
relationship of the Class IB 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 Independent Trustees, unanimously determined, in the
exercise of its business judgment, that the Class IB Distribution Plan is
reasonably likely to continue to benefit the Trust and the shareholders of its
Portfolios and approved its continuance.
The Class IB 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 Class IB 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 Class IB Distribution Plan or
any Rule 12b-1 related agreement, as applicable. In addition, the Class IB
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 Class IB Distribution Plan also
provides that it may not be amended to increase materially the amount (up to
.50% of average daily net assets annually) that may be spent for distribution
of Class IB shares of any Portfolio without the approval of Class IB
shareholders of that Portfolio.
58
<PAGE>
The table below shows the amount paid by each Portfolio to each of the
Distributors pursuant to the Distribution Plan for the year ended December 31,
1998:
<TABLE>
<CAPTION>
DISTRIBUTION FEE DISTRIBUTION FEE TOTAL
PORTFOLIO PAID TO EQF PAID TO EDI DISTRIBUTION FEES
- - --------- ---------------- ---------------- -----------------
<S> <C> <C> <C>
Merrill Lynch Basic Value Equity Portfolio $ $ $287,628
Merrill Lynch World Strategy Portfolio $ $ $ 64,102
MFS Emerging Growth Companies Portfolio $ $ $613,697
MFS Research Portfolio $ $ $599,986
EQ/Putnam Balanced Portfolio $ $ $122,699
EQ/Putnam Growth & Income Value Portfolio $ $ $751,961
EQ/Putnam International Equity Portfolio $ $ $240,470
EQ/Putnam Investors Growth Portfolio $ $ $226,318
T. Rowe Price Equity Income Portfolio $ $ $454,647
T. Rowe Price International Stock Portfolio $ $ $262,895
Warburg Pincus Small Company Value Portfolio $ $ $389,193
Morgan Stanley Emerging Markets Equity Portfolio $ $ $ 79,303
BT Equity 500 Index $ $ $210,001
BT International Equity Index, $ $ $ 69,922
BT Small Company Index $ $ $ 45,728
JPM Core Bond $ $ $ 95,837
Lazard Large Cap Value $ $ $ 72,986
Lazard Small Cap Value $ $ $ 60,874
</TABLE>
The EQ/Evergreen Foundation, EQ/Evergreen, and MFS Growth with Income did not
pay any distribution fees during the year ended December 31, 1998.
BROKERAGE ALLOCATION AND OTHER STRATEGIES
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.
59
<PAGE>
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, the Manager or Advisers. The
research services include economic, market, industry and company research
material. Based upon an assessment of the value of research and other brokerage
services provided, proposed allocations of brokerage for commission
transactions are periodically prepared internally. In addition, the Manager and
Advisers may allocate brokerage business to brokers and dealers that have made
or are expected to make significant efforts in facilitating the distribution of
the Trust's shares.
Commissions charged by brokers that provide research services may be somewhat
higher than commissions charged by brokers that do not provide research
services. As permitted by Section 28(e) of the 1934 Act and by policies adopted
by the Trustees, the Manager and Advisers may cause the Trust to pay a
broker-dealer that provides brokerage and research services to the Manager and
Advisers an amount of commission for effecting a securities transaction for the
Trust in excess of the commission another broker-dealer would have charged for
effecting that transaction.
The Manager and Advisers do not engage brokers and dealers whose commissions
are believed to be unreasonable in relation to brokerage and research services
provided. The overall reasonableness of commissions paid will be evaluated by
rating brokers on such general factors as execution capabilities, quality of
research (that is, quantity and quality of information provided, diversity of
sources utilized, nature and frequency of communication, professional
experience, analytical ability and professional stature of the broker) and
financial standing, as well as the net results of specific transactions, taking
into account such factors as price, promptness, size of order and difficulty of
execution. The research services obtained will, in general, be used by the
Manager and Advisers for the benefit of all accounts for which the responsible
party makes investment decisions. The receipt of research services from brokers
will tend to reduce the Manager's and Advisers' expenses in managing the
Portfolios.
During the year ended December 31, 1998, the Portfolios paid the amounts
indicated in brokerage commissions:
PORTFOLIO BROKERAGE COMMISSIONS PAID
- - --------- --------------------------
Merrill Lynch Basic Value Equity Portfolio $397,472
Merrill Lynch World Strategy Portfolio $ 89,702
MFS Emerging Growth Companies Portfolio $572,677
MFS Research Portfolio $602,002
EQ/Putnam Balanced Portfolio $ 62,166
EQ/Putnam Growth & Income Value Portfolio $529,088
EQ/Putnam International Equity Portfolio $502,896
EQ/Putnam Investors Growth Portfolio $141,031
T. Rowe Price Equity Income Portfolio $143,543
T. Rowe Price International Stock Portfolio $179,993
Warburg Pincus Small Company Value Portfolio $690,305
Morgan Stanley Emerging Markets Equity Portfolio $246,559
BT Equity 500 Index $ 87,608
BT International Equity Index $ 26,510
BT Small Company Index $ 38,914
JPM Core Bond $ 7,380
Lazard Large Cap Value $ 95,425
Lazard Small Cap Value $ 79,393
60
<PAGE>
The EQ/Evergreen Foundation, EQ/Evergreen, and MFS Growth with Income Portfolio
did not pay any brokerage commissions during the year ended December 31, 1998.
BROKERAGE TRANSACTIONS WITH AFFILIATES
In December 1984, Equitable acquired Donaldson, Lufkin & Jenrette, Inc.
("DLJ"). A DLJ subsidiary, Donaldson, Lufkin & Jenrette Securities Corporation,
is one of the nation's largest investment banking and securities firms. Another
DLJ subsidiary, Autranet, Inc., is a securities broker that markets
independently originated research to institutions. Through the Pershing
Division of Donaldson, Lufkin & Jenrette Securities Corporation, DLJ supplies
security execution and clearance services to financial intermediaries including
broker-dealers and banks. To the extent permitted by law, the Trust may engage
in securities and other transactions with those 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. Evergreen, the Adviser to the EQ/Evergreen Foundation Portfolio
and EQ/Evergreen Portfolio, may execute portfolio transactions through certain
affiliates of Evergreen and First Union, including Lieber & Company.
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.
61
<PAGE>
During the year ended December 31, 1998, the following Portfolios paid the
amounts indicated to the affiliated broker-dealers of the Manager or affiliates
of the Advisers to each Portfolio.
<TABLE>
<CAPTION>
PERCENTAGE OF
TRANSACTIONS
AFFILIATED AGGREGATE PERCENTAGE OF (BASED
AFFILIATED BROKERAGE TOTAL BROKERAGE ON DOLLAR
PORTFOLIO BROKER-DEALER COMMISSIONS PAID COMMISSIONS AMOUNTS)
- - --------- ------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Merrill Lynch Basic Value Equity Donaldson, Lufkin & Jenrette $14,104 3.55% 4.43%
Portfolio Securities Corporation
("DLJ")
Merrill Lynch, Pierce Fenner $13,238 3.33% 3.15%
& Smith Incorporated
("Merrill Lynch")
Merrill Lynch World Strategy Portfolio DLJ $ 2,260 2.52% 3.40%
Merrill Lynch $ 5,171 5.76% 7.31%
MFS Research Portfolio DLJ $ 408 .07% .07%
Pershing Trading Company, L.P. $ 48 .01% .01%
MFS Emerging Growth Companies Portfolio Pershing Trading Company, L.P. $ 600 .10% .12%
T. Rowe Price Equity Income Portfolio DLJ $ 4,060 2.83% 1.74%
T. Rowe Price International Stock Jardine Fleming Securities $ 1,978 1.10% .72%
Portfolio Ltd.
Robert Fleming Securities Ltd. $ 5,249 2.92% 3.41%
Ord Minnett - New Zealand Ltd. $ 326 .18% .13%
Ord Minnett, Inc. $ 155 .09% .06%
DLJ $ 165 .09% .14%
Morgan Stanley Emerging Markets Morgan Stanley & Co. $ 596 .24% .18%
Equity Portfolio
Lazard Small Cap Value Portfolio DLJ $ 150 .19% .15%
</TABLE>
62
<PAGE>
The EQ/Evergreen Foundation, EQ/Evergreen, and MFS Growth with Income Portfolio
did not pay any brokerage commissions during the year ended December 31, 1998.
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.
Values are determined according to accepted accounting practices and all laws
and regulations that apply. The assets of each Portfolio are valued as follows:
63
<PAGE>
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.
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.
64
<PAGE>
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.
TAXATION
Each Portfolio is treated for federal income tax purposes as a separate
taxpayer. The Trust intends that each Portfolio shall qualify each year and
elect to be treated as a regulated investment company under Subchapter M of the
Code. Such qualification does not involve supervision of management or
investment practices or policies by any governmental agency or bureau.
As a regulated investment company, each Portfolio will not be subject to
federal income or excise tax on any of its net investment income or net
realized capital gains which are timely distributed to shareholders under the
Code. A number of technical rules are prescribed for computing net investment
income and net capital gains. For example, dividends are generally treated as
received on the ex-dividend date. Also, certain foreign currency losses and
capital losses arising after October 31 of a given year may be treated as if
they arise on the first day of the next taxable year.
A Portfolio investing in foreign securities or currencies may be subject to
foreign taxes which could reduce the investment performance of such Portfolio.
However, if foreign securities comprise more than 50% of the year-end value of
a Portfolio, the Portfolio may elect to pass through such foreign taxes as a
deemed dividend to shareholders. In such a case the shareholder and not the
Portfolio would be entitled to claim a federal tax deduction or credit for
foreign taxes, as appropriate. The deduction or credit will not necessarily
result in a direct or immediate benefit to Contract owners.
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.
65
<PAGE>
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 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.
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
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.
66
<PAGE>
Each Portfolio's total return will vary from time to time depending upon market
conditions, the composition of each Portfolio's investment portfolio and
operating expenses of the Trust allocated to each Portfolio. Total return
should also be considered relative to changes in the value of a Portfolio's
shares and to the relative risks associated with the investment objectives and
policies of the Portfolios. These total return figures do not reflect insurance
company expenses and fees applicable to the Contracts. At any time in the
future, total return may be higher or lower than in the past and there can be
no assurance that any historical results will continue.
NON-STANDARD PERFORMANCE
In addition to the performance information described above, each Portfolio may
provide total return information with respect to the Portfolios for designated
periods, such as for the most recent six months or most recent twelve months.
This total return information is computed as described under "Computation of
Total Return" above except that no annualization is made.
OTHER SERVICES
INDEPENDENT ACCOUNTANT
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Trust's independent accountants. PricewaterhouseCoopers
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 serves as the transfer agent and dividend disbursing agent for the
Trust. Equitable 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.
67
<PAGE>
FINANCIAL STATEMENTS
The audited financial statements for the period ended December 31, 1998,
including the financial highlights, appearing in the Trust's Annual Report to
Shareholders are incorporated by reference and made a part of this document.
68
<PAGE>
EQ ADVISORS TRUST
INVESTMENT STRATEGIES SUMMARY
<TABLE>
<CAPTION>
BORROWINGS BORROWINGS
ASSET-BACKED (EMERGENCIES, LEVERAGING CONVERTIBLE INVERSE BRADY
PORTFOLIO SECURITIE (REDEMPTION SPURPOSES) SECURITIES FLOATERS(A) FLOATERS(A) BONDS(B)
--------- --------- ----------- ---------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
T. Rowe Price International Stock N Y - 33.3% N Y N N N
T. Rowe Price Equity Income N Y - 33.3% N Y N N N
EQ/Putnam Growth & Income Value N Y - 10.0% N Y N N N
EQ/Putnam International Equity N Y - 10.0% N Y N N N
EQ/Putnam Investors Growth N Y - 10.0% N Y N N N
EQ/Putnam Balanced Y Y - 10.0% N Y Y N Y
MFS Research N Y - 33.3% N Y N N N
MFS Emerging Growth Companies Y Y - 33.3% N Y N N Y
MFS Growth with Income N Y - 10.0% N Y N N N
Morgan Stanley Emerging Markets Y Y - 33.3% N Y Y Y Y
Equity
Warburg Pincus Small Company Value N Y - 30.0% N Y N N N
Merrill Lynch World Strategy N Y - 33.3% N Y N N N
Merrill Lynch Basic Value Equity N Y - 33.3% N Y N N N
Lazard Large Cap Value N Y - 10.0% Y - 33.3% Y Y N N
Lazard Small Cap Value N Y - N Y Y N N
15.0% (E)
JPM Core Bond Y Y - 33.3% N Y N N Y
BT Small Company Index Y Y - 33.3% N Y N N N
BT International Equity Index Y Y - 33.3% N Y N N N
BT Equity 500 Index Y Y - 33.3% N Y N N N
EQ/Evergreen Portfolio N Y - 33.3% N Y N N N
EQ/Evergreen Foundation Portfolio N Y - 33.3% N Y N N N
<CAPTION>
FOREIGN FOREIGN FOREIGN
DEPOSITORY CURRENCY CURRENCY CURRENCY OPTIONS
RECEIPTS(B) SPOT TRANS. FORWARD TRANS FUTURES TRANS(A) (EXCHANGE TRADED)
----------- ----------- ------------- ---------------- -----------------
<C> <C> <C> <C> <C>
Y Y Y Y Y
Y Y Y Y Y
Y Y Y Y Y
Y Y Y Y Y
Y Y Y Y Y
Y Y Y Y Y
Y Y N N N
Y Y Y Y Y
Y Y Y Y Y
Y Y Y Y Y
Y Y Y Y Y
Y Y Y Y Y
Y - 10% Y Y Y Y
Y - 10% Y N N N
N N N N N
Y Y Y Y Y
N N N N N
Y Y Y Y Y
N N N N N
N N N N N
Y Y Y Y Y
</TABLE>
--------------------------------------
(A) Considered a derivative security.
(B) Considered a foreign security.
(C) Written options must be "covered."
(D) Certain mortgages are considered derivatives.
(E) May not exceed 15% for temporary or emergency purposes, including to meet
redemptions (otherwise such borrowings may not exceed 5% of total assets).
69
<PAGE>
EQ ADVISORS TRUST
INVESTMENT STRATEGIES SUMMARY
<TABLE>
<CAPTION>
FOREIGN CURRENCY
--------------------
FOREIGN (WRITTEN,
CURRENCY COVERED INVESTMENT
OPTIONS CALL FOREIGN FORWARD HYBRID ILLIQUID COMPANY
PORTFOLIO (O-T-C) OPTIONS) SECURITIES COMMITMENTS INSTRUMENTS(A) SECURITIES SECURITIES
------------ ------- -------- ---------- ----------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
T. Rowe Price N Y Y Y - 10% Y - 15%
International Stock
T. Rowe Price Equity N Y Y Y - 10% Y - 15%
Income
EQ/Putnam Growth & Y Y Y N Y - 15%
Income Value
EQ/Putnam International Y Y Y N Y - 15%
Equity
EQ/Putnam Investors Y Y Y N Y - 15%
Growth
EQ/Putnam Balanced Y Y Y N Y - 15%
MFS Research N N Y N Y - 15%
MFS Emerging Growth Y Y Y N Y - 15%
Companies
MFS Growth with Income Y Y Y N Y - 15%
Morgan Stanley Emerging Y Y Y Y Y - 15%
Markets Equity
Warburg Pincus Small N Y N N Y - 10%
Company Value
Merrill Lynch World Y Y Y N Y - 15%
Strategy
Merrill Lynch Basic N Y Y N Y - 15%
Value Equity
Lazard Large Cap Value N Y Y N Y - 10%
Lazard Small Cap Value N N Y N Y - 10%
JPM Core Bond Y Y Y N Y - 15%
BT Small Company Index N N Y N Y - 15%
BT International Equity Y Y Y N Y - 15%
Index
BT Equity 500 Index N N Y N Y - 15%
EQ/Evergreen Portfolio Y Y Y N Y - 15%
EQ/Evergreen Foundation N Y Y N Y - 15%
Portfolio
<CAPTION>
INVESTMENT NON-INV.
GRADE GRADE SECURITY SECURITY
Fixed Fixed LOAN MORTGAGE DIRECT MUNICIPAL FUTURES OPTIONS
INCOME INCOME PARTICIPATION RELATED(D) MORTGAGES SECURITIES TRANS.(A) TRANS.(C)
- - ------ ------ ------------- ---------- --------- ---------- --------- ---------
<C> <C> <C> <C> <C> <C> <C> <C>
Y N N N N N Y Y
Y Y - 10% N N N N Y Y
Y Y N N N N Y Y
Y Y N N N N Y Y
Y Y N N N N Y Y
Y Y Y Y N N Y Y
Y Y - 10% N N N N N N
Y Y Y N N N Y Y
Y Y N N N N Y Y
Y Y Y Y N Y Y Y
Y Y N N N N Y Y
Y Y N N N N Y Y
Y N N N N N Y Y
Y N Y Y N N N N
Y N Y Y N N N N
Y N Y Y Y Y Y Y
Y N N Y N N Y Y
Y N N Y N N Y Y
Y N N Y N N Y Y
Y N N N N N Y Y
N Y N Y N N Y Y
</TABLE>
- - --------------------------------------
(A) Considered a derivative security.
(B) Considered a foreign security.
(C) Written options must be "covered."
(D) Certain mortgages are considered derivatives.
(E) May not exceed 15% for temporary or emergency purposes, including to meet
redemptions (otherwise such borrowings may not exceed 5% of total assets).
70
<PAGE>
EQ ADVISORS TRUST
INVESTMENT STRATEGIES SUMMARY
<TABLE>
<CAPTION>
PASSIVE PAYMENT REAL ESTATE REVERSE SHORT SALES
FOREIGN IN-KIND INVESTMENT REPURCHASE REPURCHASE SECURITIES AGAINST-
PORTFOLIO INV. COMP. BONDS TRUSTS AGREEMENTS AGREEMENTS LENDING THE-BOX
---------- ----- ------ ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
T. Rowe Price Y N Y N Y - 33.3% N
International
Stock
T. Rowe Price N N Y N Y - 33.3% N
Equity Income
EQ/Putnam Growth N Y Y N Y - 25.0% N
& Income Value
EQ/Putnam Y N Y N Y - 25.0% N
International
Equity
EQ/Putnam N N Y N Y - 25.0% N
Investors Growth
EQ/Putnam N Y Y N Y - 25.0% N
Balanced
MFS Research N N Y N Y - 33.3% N
MFS Emerging N N Y N Y - 30.0% N
Growth Companies
MFS Growth with N N Y N Y - 25.0% N
Income
Morgan Stanley Y Y Y Y Y - 33.3% Y
Emerging Markets
Equity
Warburg Pincus N N Y N Y - 20.0% Y
Small Company
Value
Merrill Lynch N N Y N Y - 20.0% N
World Strategy
Merrill Lynch N N Y N Y - 20.0% N
Basic Value
Equity
Lazard Large Cap N N Y Y Y - 10.0% N
Value
Lazard Small Cap N N Y N Y - 10.0% N
Value
JPM Core Bond N Y Y Y Y - 33.3% N
BT Small Company N N Y Y Y - 30.0% N
Index
BT International N N Y Y Y - 30.0% N
Equity Index
BT Equity 500 N N Y Y Y - 30.0% N
Index
EQ/Evergreen N N Y Y Y - 33.3% Y
Portfolio
EQ/Evergreen N N Y Y Y - 33.3% N
Foundation
Portfolio
<CAPTION>
SMALL ZERO
COMPANY STRUCTURED SWAP U.S. GOV'T COUPON
SECURITIES NOTES(A) TRANS.(A) SECURITIES WARRANTS BONDS
- - ---------- -------- --------- ---------- -------- -----
<C> <C> <C> <C> <C> <C>
N N N Y N
N N N Y N
N N N Y Y
Y N N Y N
N N N Y N
Y N N Y Y
N N N Y N
N N N Y N
N N N Y Y
Y Y Y Y Y
Y N N Y N
N N N Y N
N N N Y N
N N N Y N
Y N N Y N
N N Y Y Y
Y N N Y N
N N Y Y N
N N N Y N
Y N N Y N
N N N Y N
</TABLE>
- - --------------------------------------
(A) Considered a derivative security.
(B) Considered a foreign security.
(C) Written options must be "covered."
(D) Certain mortgages are considered derivatives.
(E) May not exceed 15% for temporary or emergency purposes, including to meet
redemptions (otherwise such borrowings may not exceed 5% of total assets).
71
<PAGE>
APPENDIX B
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:
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 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.
<PAGE>
PART C: OTHER INFORMATION
ITEM 23. EXHIBITS
(a)(1) Agreement and Declaration of Trust.(1)
(a)(2) Amended and Restated Agreement and Declaration of Trust.(2)
(a)(3) Certificate of Trust.(1)
(a)(4) Certificate of Amendment.(2)
(b)(1)(i) By-Laws of the Trust.(1)
(c)(1)(ii) None other than Exhibit (a)(2) and (b)(1)(i).
(d) Investment Advisory Contracts
(d)(1)(i) Investment Management Agreement between EQ Advisors Trust and
EQ Financial Consultants, Inc. dated April 14, 1997.(4)
(d)(1)(ii) Amendment No. 1, dated December 9, 1997 to Investment
Management Agreement between EQ Advisors Trust and EQ Financial
Consultants, Inc. dated April 14, 1997.(7)
(d)(1)(iii) Amendment No. 2, dated as of December 31, 1998 to Investment
Management Agreement between EQ Advisors Trust and EQ Financial
Consultants, Inc. dated April 14, 1997. (to be provided by
amendment)
(d)(1)(iv) Form of Amendment No. 3, dated as of April 30, 1999, to
Investment Management Agreement between EQ Advisors Trust and
EQ Financial Consultants, Inc. (to be provided by amendment)
(d)(2) Investment Advisory Agreement between EQ Financial Consultants,
Inc. and T. Rowe Price Associates, Inc. dated April 1997.(4)
(d)(3) Investment Advisory Agreement between EQ Financial Consultants,
Inc. and Rowe Price-Fleming International, Inc. dated April 1997.
(4)
(d)(4) Investment Advisory Agreement between EQ Financial Consultants,
Inc. and Putnam Investment Management, Inc. dated April 1997.(4)
(d)(5)(i) Investment Advisory Agreement between EQ Financial Consultants,
Inc. and Massachusetts Financial Services Company dated
April 1997.(4)
(d)(5)(ii) Amendment No. 1, dated as of December 31, 1998 to Investment
Advisory Agreement by and between EQ Financial Consultants, Inc.
and Massachusetts Financial Services Company dated April 1997.
(to be provided by amendment)
(d)(6) Investment Advisory Agreement between EQ Financial Consultants,
Inc. and Morgan Stanley Asset Management Inc. dated April 1997.
(4)
(d)(7) Investment Advisory Agreement between EQ Financial Consultants,
Inc. and Warburg, Pincus Counsellors, Inc. dated April 1997.(4)
(d)(8) Investment Advisory Agreement between EQ Financial Consultants,
Inc. and Merrill Lynch Asset Management, L.P. dated April 1997.(4)
(d)(9) Investment Advisory Agreement between EQ Financial Consultants,
Inc. and Lazard Freres & Co. LLC dated December 9, 1997.(7)
C-2
<PAGE>
(d)(10) Investment Advisory Agreement between EQ Financial Consultants,
Inc. and J.P. Morgan Investment Management, Inc. dated
December 9, 1997.(7)
(d)(11) 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)
(d)(12) Investment Advisory Agreement by and between EQ Financial
Consultants, Inc. and Evergreen Asset Management Corp., dated as
of December 31, 1998. (to be provided by amendment)
(d)(13) Form of Investment Advisory Agreement between EQ Financial
Consultants, Inc. and Alliance Capital Management L.P., dated as
of April 30, 1999. (to be provided by amendment)
(d)(14) Form of Investment Advisory Agreement between EQ Financial
Consultants, Inc. and Capital Guardian Trust Company, dated as of
April 30, 1999. (to be provided by amendment)
(e) Underwriting Contracts
(e)(1)(i) Distribution Agreement between EQ Advisors Trust and EQ Financial
Consultants, Inc. with respect to the Class IA shares dated April
14, 1997.(4)
(e)(1)(ii) 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(7)
(e)(1)(iii) Amendment No. 2 dated as of December 31, 1998 to the Distribution
Agreement between EQ Advisors Trust and EQ Financial Consultants
with respect to the Class 1A shares dated April 14, 1997. (to be
provided by amendment)
(e)(1)(iv) Form of Amendment No. 3 dated as of April 30, 1999 to the
Distribution Agreement between EQ Advisors Trust and EQ Financial
Consultants with respect to the Class IA shares dated April 14,
1997. (to be provided by amendment)
(e)(2)(i) Distribution Agreement between EQ Advisors Trust and EQ Financial
Consultants, Inc. with respect to the Class IB shares dated April
14, 1997.(4)
(e)(2)(ii) 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.(7)
(e)(2)(iii) Amendment No. 2 dated as of December 31, 1998 to the Distribution
Agreement between EQ Advisors Trust and EQ Financial Consultants,
Inc. with respect to the Class IB shares dated April 14, 1997.
(to be provided by amendment)
(e)(2)(iv) Form of Amendment No. 3 dated as of April 30, 1999 to the
Distribution Agreement between EQ Advisors Trust and EQ Financial
Consultants, Inc. with respect to the Class IB shares dated April
14, 1997. (to be provided by amendment)
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(e)(3)(i) Distribution Agreement between EQ Advisors Trust and Equitable
Distributors, Inc. with respect to the Class IA shares dated
April 14, 1997.(4)
(e)(3)(ii) 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.(7)
(e)(3)(iii) Amendment No. 2 dated as of December 31, 1998 to the Distribution
Agreement between EQ Advisors Trust and Equitable Distributors,
Inc. with respect to the Class IA shares dated April 14, 1997.
(to be provided by amendment)
(e)(3)(iv) Form of Amendment No. 3 dated as of April 30, 1999 to the
Distribution Agreement between EQ Advisors Trust and Equitable
Distributors, Inc. with respect to the Class IA shares dated
April 14, 1997. (to be provided by amendment)
(e)(4)(i) Distribution Agreement between EQ Advisors Trust and Equitable
Distributors, Inc. with respect to the Class IB shares dated
April 14, 1997.(4)
(e)(4)(ii) 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.(7)
(e)(4)(iii) Amendment No. 2 dated as of December 31, 1998 to the Distribution
Agreement between EQ Advisors Trust and Equitable Distributors,
Inc. with respect to the Class IB shares dated April 14, 1997.
(to be provided by amendment)
(e)(4)(iv) Form of Amendment No. 3 dated as of April 30, 1999 to the
Distribution Agreement between EQ Advisors Trust and Equitable
Distributors, Inc. with respect to the Class IB shares dated
April 14, 1997. (to be provided by amendment)
(f) Form of Deferred Compensation Plan.3 (to be provided by
amendment)
(g) Custodian Agreements
(g)(1)(i) Custodian Agreement between EQ Advisors Trust and The Chase
Manhattan Bank dated April 17, 1997 and Global Custody Rider.(4)
(g)(1)(ii) Amendment No. 1 dated December 9, 1997 to the Custodian Agreement
between EQ Advisors Trust and The Chase Manhattan Bank dated
April 17, 1997.(7)
(g)(1)(iii) Amendment No. 2 dated as of December 31, 1998 to the Custodian
Agreement between EQ Advisors Trust and The Chase Manhattan Bank
dated April 17, 1997. (to be provided by amendment)
(g)(1)(iv) Form of Amendment No. 3 dated as of April 30, 1999 to the
Custodian Agreement between EQ Advisors Trust and The Chase
Manhattan Bank dated April 17, 1997. (to be provided by
amendment)
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(g)(2)(i) Amended and Restated Global Custody Rider to the Domestic Custody
Agreement for Mutual Funds between The Chase Manhattan Bank and
EQ Advisors Trust dated August 31, 1998. (to be provided by
amendment)
(h) Other Material Contracts
(h)(1) Mutual Fund Services Agreement between EQ Advisors Trust and
Chase Global Funds Services Company dated April 25, 1997.(4)
(h)(2)(i) Amended and Restated Expense Limitation Agreement between EQ
Advisors Trust and EQ Financial Consultants, Inc. dated March 3,
1998.(8)
(h)(2)(ii) Amended and Restated Expense Limitation Agreement between EQ
Advisors Trust and EQ Advisers Trust and EQ Financial
Consultants, Inc. dated April, 1998.
(h)(2)(iii) Amended and Restated Expense Limitation Agreement by and between
EQ Financial Consultants, Inc. and EQ Advisors Trust dated as of
December 31, 1998. (to be provided by amendment)
(h)(2)(iv) Form of Amended and Restated Expense Limitation Agreement between
EQ Financial Consultants, Inc. and EQ Advisors Trust dated as of
April 30, 1999. (to be provided by amendment)
(h)(3)(i) Organizational Expense Reimbursement Agreement by and between EQ
Financial Consultants, Inc. and 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)
(h)(3)(ii) Organizational Expense Reimbursement Agreement by and between EQ
Financial Consultants, Inc. and EQ Advisors Trust, on behalf of
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 and EQ Financial Consultants, Inc. dated
December 9, 1997.(7)
(h)(3)(iii) Organizational Expense Reimbursement Agreement by and between EQ
Financial Consultants, Inc. and EQ Advisors Trust, on behalf of
the MFS Income with Growth Portfolio, EQ/Evergreen Foundation
Portfolio and EQ/Evergreen Portfolio dated December 31, 1998. (to
be provided by amendment)
(h)(4)(i) Participation Agreement dated April 14, 1997.(4)
(h)(4)(ii) Amendment No. 1 dated December 9, 1997 to the Participation
Agreement dated April 14, 1997.(7)
(h)(4)(iii) Amendment No. 2 dated as of December 31, 1998 to the
Participation Agreement dated April 14, 1997. (to be provided by
amendment)
(h)(4)(iv) Form of Amendment No. 3 dated as of April 30, 1999 to the
Participation Agreement dated April 14, 1997. (to be provided
by amendment)
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(h)(5) Participation Agreement dated December 1, 1998 with the Equitable
Investment Plan for Employees, Managers and Agents. (to be
provided by amendment)
(h)(6) License Agreement Relating to Use of Name between Merrill Lynch &
Co., Inc., and EQ Advisors Trust dated April 28, 1997.(4)
(i)(1) Opinion and Consent of Katten Muchin & Zavis regarding the
legality of the securities being registered.(1)
(i)(2) 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)
(i)(3) 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)
(i)(4) Opinion and Consent of Dechert Price & Rhoads regarding the
legality of the securities being registered with respect to the
EQ/Evergreen Foundation Portfolio, EQ/Evergreen Portfolio, and
MFS Growth with Income Portfolio.(9)
(i)(5) Opinion and Consent of Dechert Price & Rhoads regarding the
legality of the securities being registered with respect to the
EQ/Alliance Premier Growth Portfolio, EQ/Capital Research
Portfolio, EQ/Capital U.S. Equities Portfolio and EQ/Capital
International Equities Portfolio. (10)
(j) Consent of PricewaterhouseCoopers LLP, Independent Public
Accountants.
(k) Omitted Financial Statements: Annual Report of Shareholders for
the year ended December 31, 1998 for each of the Trust's twenty
one current Portfolios.
(l) Stock Subscription Agreement between the Trust, on behalf of the
T. Rowe Price Equity Income Portfolio, and Separate Account FP.(3)
(m) Distribution Plan Pursuant to Rule 12b-1 for the Trust's Class IB
shares.(4)
(n) Financial Data Schedule
(o) Plan Pursuant to Rule 18f-3 under the 1940 Act.(4)
Other Exhibits:
Power of Attorney.(3)
Power of Attorney for Michael Hegarty.(8)
- - ---------------
(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).
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(8) Incorporated herein by reference to Registrant's Registration
Statement on Form N-1A filed on March 5, 1998 (File No. 333-17217).
(9) Incorporated herein by reference to Registrant's Registration
Statement on Form N-1A filed on October 15, 1998 (File No. 333-17217).
10. Incorporated herein by reference in Registrant's Registration Statement
on Form N-1A filed on February 16, 1999 (File No. 333-`7217).
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE TRUST
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 November 15, 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.
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 1998 of $____ billion and is also the world's largest insurer-based
investment manager with $___ billion in assets under management. AXA is also
engaged in asset management, investment banking, securities trading and other
financial services activities principally in the United States, as well as in
Western Europe and the Asia Pacific area.
ITEM 25. 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."
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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 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.
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ITEM 26. 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.
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.
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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 J. P. Morgan Investment
Management Inc. is set forth in 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 Evergreen Asset Management
Corp. is set forth in Evergreen Asset Management Corp.'s Form ADV filed with
the Securities and Exchange Commission on March 31, 1998 (File No.
801-46522) and amended through the date hereof, is incorporated by reference.
The information as to the directors and officers of Alliance Capital Management
Corporation, the general partner of Alliance Capital Management L.P., is set
forth in Alliance Capital Management Corporation's Form ADV filed with the SEC
on April 21, 1998 (File No. 801-32361) and as 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. 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, Director of Bankers Trust Company. Private Investor. Former
Chairman and Chief Executive Officer, Telecredit, Inc. Also a director of
Equifax, Inc., Sunrise Medical Inc., Viking Office Products, Inc., Pacific
Crest Outward Bound School, Saltec International, Inc. and Chief Executives
Organization. President of Lee Ault & Company. General Partner of Badger Ridge
Farm.
Neil R. Austrian, Director of Bankers Trust Company. President and Chief
Operating Officer, National Football League. Also a director of Rafac
Technology and Viking Office Products, Inc., and trustee of Swarthmore College.
George B. Beitzel, Director of Bankers Trust Company. Director of Various
Corporations. Retired Senior Vice President and director, International
Business Machines Corporation. Also a director of Computer Task Group, Phillips
Petroleum Company, Rohm and Haas Company TIG Holdings, chairman emeritus of
Amherst College; and chairman of the Colonial Williamsburg Foundation and
Director of Caliber Systems, Inc.;
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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 of Bankers Trust Company. Director, Institute
for Advanced Study. 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 member of the Board of Trustees of
Woodward Academy. Former member of the board of director, Research Triangle
Institute. Chairman and member of Nominations Committee and Committee on
Science and Engineering Indicators, National Science Board.
William R. Howell, . Director of Bankers Trust Company. Chairman Emeritus, J.C.
Penney Company, Inc. Also a director of Exxon Corporation, Halliburton Company,
Warner-Lambert Company, Williams, Inc., Central & South West Corp.; and the
National Retail Federation, and National Organization on Disability. Member of
the American Society of Corporation Executives, Beta Gamma Sigma, Directors
Table, the Business Council, Delta Sigma Pi, University of Oklahoma, Dean's
Advisory Board, College of Business Administration. Chairman of Southern
Methodist University Board of Trustees.
Vernon E. Jordan, Jr., Director of Bankers Trust Company. Senior Partner, Akin,
Gump, Strauss, Hauer & Feld, LLP, Attorneys-at-law, Washington, D.C. and
Dallas, Texas. 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.
Director of National Academy Foundation and Governor for Joint Center for
Political and Economic Studies.
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, Director of Bankers Trust Company. Retired Chairman and Chief
Executive Officer, Philip Morris Companies Inc. Also a director of Sola
International Inc., and chairman of WPP Group plc. Director of AEA Investors
Inc., American Friends of Cambridge University, Cambridge University
Development Office in the United States and the Norton Gallery & School of Art,
and a trustee of Cambridge University Foundation, trustee emeritus of the
Institute for Advance Study, and honorary trustee of The New York Public
Library.
Frank N. Newman, Chairman of the Board, Chief Executive Officer and President
of the 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.; Alvin Alley Dance Theatre and Carnegie Hall; and
member, Board of Overseers of Cornell University Medical College and the
Graduate School of Medical Sciences.
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N.J. Nicholas Jr., Director of Bankers Trust Company. Investor. Former Co-chief
Executive Officer of Time Warner Inc. Also a director of Boston Scientific
Corporation, Vail Valley Institute, and Xerox Corporation; Chairman of the
Advisory Board of Columbia University Graduate School of Journalism.
Russell E. Palmer, Director of Bankers Trust Company. Chairman and Chief
Executive Officer, The Palmer Group. 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 Corporation, GTE Corporation, The May Department Stores
Company and Safeguard Scientifics, Inc.; and a trustee, the University of
Pennsylvania. Member of the Conference Board; public member of Hudson
Institute; member of Radnor Ventures Partner Advisory Board and member of
Advisory Board of the Comptroller General of the U.S.
Donald L. Staheli, Director of Bankers Trust Company. Retired Chairman of the
Board and Chief Executive Officer, Continental Grain 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 director and chairman of The Points of Light Foundation.
Chairman of National Advisory Council of Brigham Young University's Marriott
School of Management.
Patricia Carry Stewart, Director of Bankers Trust Company. Former Vice
President, The Edna McConnell Clark Foundation (a charitable foundation). 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, Director of Bankers Trust Company. President, Chief
Operating Officer and Director, Xerox Corporation. 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. Director of Chrysler Corporation.
George J. Vojta, Vice Chairman of the Board of the 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. and New York City Partnership's Housing
and Economic Development Committees.
Paul A. Volcker, Director of Bankers Trust Company. Director of Various
Corporations. 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.
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THE INFORMATION AS TO THE DIRECTORS AND OFFICERS OF CAPITAL GUARDIAN TRUST
COMPANY IS SET FORTH BELOW. TO THE KNOWLEDGE OF THE TRUST, NONE OF THE
DIRECTORS OR OFFICERS OF CAPITAL GUARDIAN 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 AS SET FORTH BELOW.
These persons may be contacted c/o Capital Guardian Trust Company, 333 South
Hope Street, Los Angeles, California 90071.
Donnalisa Barnum, Senior Vice President of Capital Guardian Trust Company. Vice
President, Capital International Limited.
Andrew F. Barth, Director of Capital Guardian Trust Company. Executive Vice
President and Research Manager, Capital Guardian Research Company.
Michael D. Beckman, Senior Vice President, Treasurer and Director of Capital
Guardian Trust Company. Director, Capital Guardian Trust Company of Nevada; and
Treasurer, Capital Guardian Research Company.
Elizabeth A. Burns, Senior Vice President of Capital Guardian Trust Company.
Lary P. Clemmensen, Director of Capital Guardian Trust Company and American
Funds Distributors, Inc. Chairman of the Board, American Funds Service Company;
Director and President, The Capital Group Companies, Inc.; Senior Vice
President and Director, Capital Research and Management Company; President and
Director, Capital Management Services, Inc.; Treasurer, Capital Strategy
Research, Inc.; and Senior Vice President, Capital Income Builder, Inc. and
Capital World Growth & Income Fund, Inc.
Roberta A. Conroy, Senior Vice President, Director and Counsel of Capital
Guardian Trust Company. Senior Vice President and Secretary, Capital
International, Inc. and Emerging Markets Growth Fund, Inc.; Assistant General
Counsel, The Capital Group Companies, Inc.; and Secretary. Capital Management
Services, Inc.
John B. Emerson, Senior Vice President of Capital Guardian Trust Company.
Deputy Assistant to the President for Intergovernmental Affairs and Deputy
Director of Presidential Personnel, The White House.
Michael E. Ericksen, Senior Vice President of Capital Guardian Trust Company.
Senior Vice President, Capital International, Limited.
David I. Fisher, Chairman and Director of The Capital Group Companies, Inc. and
Capital Guardian Trust Company. Vice Chairman and Director, Capital
International, Inc., Capital International K.K., Capital International Limited
and Emerging Markets Growth Fund, Inc.; President and Director, Capital Group
International, Inc. and Capital International Limited (Bermuda); Presidente du
Conseil, Capital International S.A.; and Director, Capital Group Research,
Inc., Capital Research International, EuroPacific Growth Fund and New
Perspective Fund.
William Flumenbaum, Senior Vice President of Capital Guardian Trust Company
Personal Investment Management Division. Vice President, Capital Guardian Trust
Company, a Nevada Corporation; Director, Principal Gifts - UCLA Development;
Executive Director, UCLA Jonsson Cancer Center Foundation; and Deputy Director,
UCLA Health Science Development.
C-14
<PAGE>
Richard N. Havas, Senior Vice President of Capital Guardian Trust Company,
Capital International Limited, Capital Research International and Capital
Guardian Canada, Inc.
Frederick M. Hughes, Jr., Senior Vice President of Capital Guardian Trust
Company.
William H. Hurt, Senior Vice President and Director of Capital Guardian Trust
Company. Chairman, Capital Guardian Trust Company of Nevada and Capital
Strategy Research, Inc.
Robert G. Kirby, Chairman Emeritus of Capital Guardian Trust Company. Senior
Partner, The Capital Group Partners L.P.
Nancy J. Kyle, Senior Vice President and Director of Capital Guardian Trust
Company. President, Capital Guardian Canada, Inc. and Vice President, Emerging
Markets Growth Fund, Inc.
Karin L. Larson, Director of Capital Guardian Trust Company and The Capital
Group Companies, Inc. President, Director and Director of Research, Capital
Guardian Research Company; Chairperson, President and Director, Capital Group
Research, Inc.; and President, Director and Director of International Research,
Capital Research International.
D. James Martin, Director of Capital Guardian Trust Company. Senior Vice
President and Director, Capital Guardian Research Company.
John R. McIlwraith, Senior Vice President and Director of Capital Guardian
Trust Company. Senior Vice President and Director, Capital International
Limited.
James R. Mulally, Senior Vice President and Director of Capital Guardian Trust
Company. Senior Vice President, Capital International Limited; Director,
Capital Guardian Research Company; and Vice President, Capital Research
Company.
Shelby Notkin, Senior Vice President of Capital Guardian Trust Company.
Director, Capital Guardian Trust Company of Nevada.
Mary M. O'Hern, Senior Vice President of Capital Guardian Trust Company and
Capital International Limited; Vice President, Capital International, Inc.
Jeffrey C. Paster, Senior Vice President of Capital Guardian Trust Company.
Robert V. Pennington, Senior Vice President of Capital Guardian Trust Company;
President, Capital Guardian Trust Company of Nevada.
Jason M. Pilalas, Director of Capital Guardian Trust Company. Senior Vice
President and Director, Capital Guardian Research Company.
Robert Ronus, President and Director of Capital Guardian Trust Company.
Chairman and Director, Capital Guardian Canada, Inc., Capital Guardian Research
Company and Capital Research International; Director, The Capital Group
Companies, Inc., Capital Group International, Inc. and Capital International
Fund S.A.; Directeur, Capital International S.A.; and Senior Vice President,
Capital International Limited.
C-15
<PAGE>
Theodore R. Samuels, Senior Vice President and Director of Capital Guardian
Trust Company. Director, Capital Guardian Research Company.
Lionel A. Sauvage, Senior Vice President of Capital Guardian Trust Company.
Director, Capital Guardian Research Company; and Vice President, Capital
International Research, Inc.
John H. Seiter, Executive Vice President of Client Relations & Marketing and
Director of Capital Guardian Trust Company. Senior Vice President, Capital
Group International, Inc.; and Vice President, The Capital Group Companies,
Inc.
Robert L. Spare, Senior Vice President of Capital Guardian Trust Company.
Eugene P. Stein, Executive Vice President and Director of Capital Guardian
Trust Company. Director, Capital Guardian Research Company.
Bente L. Strong, Senior Vice President of Capital Guardian Trust Company
Personal Investment Management Division. Publisher, Capital Publishing's The
American Benefactor Magazine.
Philip A. Swan, Senior Vice President of Capital Guardian Trust Company.
Shaw B. Wagener, Director of Capital Guardian Trust Company, Capital
International Asia Pacific Management Company, S.A., Capital International
Management Company, Capital International Emerging Countries Fund and Capital
International Latin American Fund. President and Director, Capital
International, Inc.; and Senior Vice President, Capital Group International,
Inc. and Emerging Markets Growth Fund, Inc.
Eugene M. Waldron, Senior Vice President of Capital Guardian Trust Company.
Vice President, Loomis, Sayles & Company.
N. Dexter Williams, Senior Vice President of Capital Guardian Trust Company
Personal Investment Management Division. Senior Vice President, American Funds
Distributors, Inc.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) EQ Financial Consultants, Inc. is a principal underwriter of the
Trust's Class IA shares and Class IB shares. 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 a principal underwriter
for the following entities: the Class IA and IB shares of The Hudson River
Trust; Separate Account Nos. 45, 66 and 301 of Equitable; and Separate Accounts
A, I and FP of Equitable. Equitable Distributors, Inc. serves as the principal
underwriter for the Class IB shares of The Hudson River Trust and Separate
Account FB and Separate Account No. 49 of Equitable.
(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-16
<PAGE>
===============================================================================
EQ FINANCIAL CONSULTANTS, INC.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES WITH EQ POSITIONS AND OFFICES WITH
BUSINESS ADDRESS FINANCIAL CONSULTANTS, INC. REGISTRANT (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
* Michael S. Martin Director Vice President
* 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
* Craig A. Junkins Executive Vice President
* Peter D. Noris Executive Vice President President
* Mark A. Silberman 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
* Donna M. Dazzo First Vice President
* Robin K. Murray First Vice President
* Michael Brzozowski Vice President and Compliance First Vice President
Director
* Raymond T. Barry Vice President
* Claire A. Comerford Vice President
* Amy Franceschini Vice President
* Linda Funigiello Vice President
* Mark Generales Vice President
Peter R. Kornweiss Vice President
* Frank Lupo Vice President
* Rosemary Magee Vice President
* Michael McBryan Vice President
* T.S. Narayanan Vice President
* Bill Nestel Vice President
* Laura A. Pellegrini Vice President
* Dan Roebuck Vice President
* Sid Smith Vice President
* Dan Wiley Vice President
* Mike Woodhead Vice President
* Mary E. Cantwell Assistant Vice President Assistant Vice President
* Tom C. Gosnell Assistant Vice President
* Ara Klidjian Assistant Vice President
* John T. McCabe Assistant Vice President
* Janet E. Hannon Secretary
* Linda J. Galasso Assistant Secretary
</TABLE>
C-17
<PAGE>
EQUITABLE DISTRIBUTORS, INC.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES WITH
NAME AND PRINCIPAL BUSINESS ADDRESS POSITIONS AND OFFICES WITH REGISTRANT (EQ
EQUITABLE DISTRIBUTORS, INC. 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 Vice President and Secretary
** Ken Jaffe Senior Vice President
** Michael McDaniel Senior Vice President
** Debora Buffington Chief Compliance Officer
* Mary P. Breen Vice President and Counsel
* Mark A. Silberman Vice President and Chief Financial
Officer
* Raymond T. Barry Vice President
** Mark Brandenberger Vice President
* Thomas D. Bullen 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) Inapplicable.
C-17
<PAGE>
ITEM 28. 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, NY 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, NJ 08543-9011
Warburg Pincus Asset Management, Inc. Morgan Stanley Asset Management Inc.
466 Lexington Avenue 1221 Avenue of the Americas
New York, NY 10017-3147 New York, NY 10020
Lazard Asset Management J.P Morgan Investment Management Inc.
30 Rockefeller Plaza 522 Fifth Avenue
New York, NY 10020 New York, NY 10036
Bankers Trust Company Evergreen Asset Management Corp.
130 Liberty Street 2500 Westchester Avenue
One Bankers Trust Plaza Purchase, NY 10577
New York, NY 10006
Alliance Capital Management L.P. Capital Guardian Trust Company
1345 Avenue of the Americas 11100 Santa Monica Boulevard
New York, NY 10105 17th Floor
Los Angeles, CA 90025
C-18
<PAGE>
ITEM 29. MANAGEMENT SERVICES: NONE.
ITEM 30. UNDERTAKINGS
Inapplicable.
C-19
<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 has
duly caused this Post-Effective Amendment No. 9 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 16th day of February,
1999.
EQ ADVISORS TRUST
By: /s/
---------------------------
Peter D. Noris
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment No. 9 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ President and Trustee February 16, 1999
- - ----------------------------
Peter D. Noris
* Trustee February 16, 1999
- - ----------------------------
William T. McCaffrey
* Trustee February 16, 1999
- - ----------------------------
Michael Hegarty
* Trustee February 16, 1999
- - ----------------------------
Jettie M. Edwards
* Trustee February 16, 1999
- - ----------------------------
William M. Kearns, Jr.
* Trustee February 16, 1999
- - ----------------------------
Christopher P.A. Komisarjevsky
* Trustee February 16, 1999
- - ----------------------------
Harvey Rosenthal
* Chief Financial Officer February 16, 1999
- - ----------------------------
Harvey Blitz
* By: /s/
-------------------
Peter D. Noris
(Attorney-in-Fact)
C-20
<PAGE>
EXHIBIT LIST
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------
(j) Consent of PricewaterhouseCoopers LLP, Independent Public
Accountants.
(n) Financial Data Schedule.
C-21
<PAGE>
EXHIBIT J
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the reference to us in the Prospectuses constituting parts
of this Post-Effective Amendment No. 9 to the registration statement on Form
N-1A (the "Registration Statement") under the heading "Financial Highlights" and
under the heading "Other Services--Independent Accountant" in the Statement of
Additional Information.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 12, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001027263
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<SERIES>
<NUMBER> 1
<NAME> T. ROWE PRICE EQUITY INCOME PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 190,671,176
<INVESTMENTS-AT-VALUE> 199,205,389
<RECEIVABLES> 2,535,693
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 34,662,625
<TOTAL-ASSETS> 236,403,707
<PAYABLE-FOR-SECURITIES> 1,595,578
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 35,129,685
<TOTAL-LIABILITIES> 36,725,263
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 186,803,782
<SHARES-COMMON-STOCK> 15,546,264
<SHARES-COMMON-PRIOR> 8,272,803
<ACCUMULATED-NII-CURRENT> 1,688,760
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,651,458
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,534,444
<NET-ASSETS> 199,678,444
<DIVIDEND-INCOME> 1,951,320
<INTEREST-INCOME> 369,212
<OTHER-INCOME> 17,435
<EXPENSES-NET> (651,208)
<NET-INVESTMENT-INCOME> 1,686,759
<REALIZED-GAINS-CURRENT> 2,560,333
<APPREC-INCREASE-CURRENT> 3,088,429
<NET-CHANGE-FROM-OPS> 7,335,521
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,463,906
<NUMBER-OF-SHARES-REDEEMED> (1,190,445)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 99,731,134
<ACCUMULATED-NII-PRIOR> 2,001
<ACCUMULATED-GAINS-PRIOR> 91,125
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 421,000
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 795,596
<AVERAGE-NET-ASSETS> 154,339,085
<PER-SHARE-NAV-BEGIN> 12.08
<PER-SHARE-NII> 0.11
<PER-SHARE-GAIN-APPREC> 0.65
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.84
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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<ARTICLE> 6
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<SERIES>
<NUMBER> 2
<NAME> T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 104,517,554
<INVESTMENTS-AT-VALUE> 111,253,099
<RECEIVABLES> 1,297,391
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 12,256,386
<TOTAL-ASSETS> 124,806,876
<PAYABLE-FOR-SECURITIES> 6,867,385
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,886,578
<TOTAL-LIABILITIES> 9,753,963
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 109,157,685
<SHARES-COMMON-STOCK> 10,366,644
<SHARES-COMMON-PRIOR> 7,571,312
<ACCUMULATED-NII-CURRENT> 641,355
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,448,982)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,702,855
<NET-ASSETS> 115,052,913
<DIVIDEND-INCOME> 1,059,252
<INTEREST-INCOME> 155,012
<OTHER-INCOME> 2,642
<EXPENSES-NET> (555,174)
<NET-INVESTMENT-INCOME> 661,732
<REALIZED-GAINS-CURRENT> (1,223,643)
<APPREC-INCREASE-CURRENT> 10,319,675
<NET-CHANGE-FROM-OPS> 9,757,764
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,726,254
<NUMBER-OF-SHARES-REDEEMED> (3,930,922)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 40,480,944
<ACCUMULATED-NII-PRIOR> (20,377)
<ACCUMULATED-GAINS-PRIOR> (225,339)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 346,500
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 652,971
<AVERAGE-NET-ASSETS> 93,233,155
<PER-SHARE-NAV-BEGIN> 9.85
<PER-SHARE-NII> 0.06
<PER-SHARE-GAIN-APPREC> 1.19
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.10
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001027263
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<SERIES>
<NUMBER> 3
<NAME> EQ/PUTNAM GROWTH & INCOME VALUE PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 309,656,871
<INVESTMENTS-AT-VALUE> 320,504,482
<RECEIVABLES> 9,555,504
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 42,179,229
<TOTAL-ASSETS> 372,239,215
<PAYABLE-FOR-SECURITIES> 7,866,346
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 42,887,782
<TOTAL-LIABILITIES> 50,754,128
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 305,105,103
<SHARES-COMMON-STOCK> 25,774,857
<SHARES-COMMON-PRIOR> 13,045,713
<ACCUMULATED-NII-CURRENT> 1,476,911
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,055,462
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,847,611
<NET-ASSETS> 321,485,087
<DIVIDEND-INCOME> 2,082,361
<INTEREST-INCOME> 363,787
<OTHER-INCOME> 22,984
<EXPENSES-NET> (992,179)
<NET-INVESTMENT-INCOME> 1,476,953
<REALIZED-GAINS-CURRENT> 4,468,625
<APPREC-INCREASE-CURRENT> 8,032,698
<NET-CHANGE-FROM-OPS> 13,978,276
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 13,200,793
<NUMBER-OF-SHARES-REDEEMED> (471,649)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 171,225,365
<ACCUMULATED-NII-PRIOR> (42)
<ACCUMULATED-GAINS-PRIOR> (413,163)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 641,629
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<GROSS-EXPENSE> 1,224,729
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<PER-SHARE-NII> 0.06
<PER-SHARE-GAIN-APPREC> 0.89
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.47
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
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<CIK> 0001027263
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<SERIES>
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<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 91,780,724
<INVESTMENTS-AT-VALUE> 103,502,691
<RECEIVABLES> 3,439,588
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 3,728,620
<TOTAL-ASSETS> 110,670,899
<PAYABLE-FOR-SECURITIES> 3,060,906
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,162,302
<TOTAL-LIABILITIES> 7,223,208
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 91,230,852
<SHARES-COMMON-STOCK> 7,916,516
<SHARES-COMMON-PRIOR> 5,296,019
<ACCUMULATED-NII-CURRENT> 716,102
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (63,476)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,564,213
<NET-ASSETS> 103,447,691
<DIVIDEND-INCOME> 939,533
<INTEREST-INCOME> 169,151
<OTHER-INCOME> 3,830
<EXPENSES-NET> (459,377)
<NET-INVESTMENT-INCOME> 653,137
<REALIZED-GAINS-CURRENT> 115,785
<APPREC-INCREASE-CURRENT> 11,786,283
<NET-CHANGE-FROM-OPS> 12,555,205
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,710,099
<NUMBER-OF-SHARES-REDEEMED> (89,602)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 45,769,545
<ACCUMULATED-NII-PRIOR> 62,965
<ACCUMULATED-GAINS-PRIOR> (179,261)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 267,637
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 546,045
<AVERAGE-NET-ASSETS> 77,204,675
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<NAME> BT EQUITY 500 INDEX PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001027263
<NAME> EQ ADVISORS TRUST
<SERIES>
<NUMBER> 14
<NAME> BT INTERNATIONAL EQUITY INDEX PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001027263
<NAME> EQ ADVISORS TRUST
<SERIES>
<NUMBER> 15
<NAME> BT SMALL COMPANY INDEX PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001027263
<NAME> EQ ADVISORS TRUST
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<NUMBER> 16
<NAME> JPM CORE BOND PORTFOLIO
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<S> <C>
<PERIOD-TYPE> 6-MOS
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001027263
<NAME> EQ ADVISORS TRUST
<SERIES>
<NUMBER> 17
<NAME> LAZARD LARGE CAP VALUE PORTFOLIO
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<S> <C>
<PERIOD-TYPE> 6-MOS
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<PAGE>
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<CIK> 0001027263
<NAME> EQ ADVISORS TRUST
<SERIES>
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<NAME> LAZARD SMALL CAP VALUE PORTFOLIO
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<S> <C>
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