<PAGE>
Filed Pursuant to Rule 497(C)
Registration File No.: 2-94996
THE HUDSON RIVER TRUST
Principal Office Located at
1345 Avenue of the Americas --New York, New York 10105
The Hudson River Trust (Trust) is a mutual fund, currently issuing separate
series of shares of beneficial interest, each representing a separate
investment portfolio (Portfolio). There are six Portfolios currently
available through the Income Manager (Service Mark) variable annuities to
which this prospectus relates. The Portfolios are Aggressive Stock, Common
Stock, Growth Investors, Global, High Yield and Money Market. An investment
in the Money Market Portfolio is neither insured nor guaranteed by the U.S.
Government. The Trust offers two classes of shares on behalf of each
Portfolio: Class IA shares, offered pursuant to another prospectus, and Class
IB shares offered hereby.
This prospectus sets forth concisely the investment objectives and policies
of these six Portfolios and the information about the Trust a prospective
investor should know before investing. It should be read and retained for
future reference.
A Statement of Additional Information (SAI) dated October 1, 1996 has been
filed with the Securities and Exchange Commission (SEC). This SAI is
incorporated by reference into this prospectus and is available at no charge
by writing the Trust at the above address.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Financial Highlights ........................ 2
The Trust ................................... 8
Investment Objectives and Policies .......... 8
Investment Techniques ....................... 14
Certain Investment Restrictions ............. 19
Management of the Trust ..................... 19
Description of the Trust's Shares ........... 21
Dividends, Distributions and Taxes .......... 23
Investment Performance ...................... 24
Appendix A --Description of Bond Ratings ... A-1
</TABLE>
An investment in the Trust is not a deposit or obligation of, or guaranteed
or endorsed by, any bank and is not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
PROSPECTUS DATED OCTOBER 1, 1996
- -----------------------------------------------------------------------------
HRT104 (9/96) Copyright 1996 The Hudson River Trust. All rights reserved.
<PAGE>
FINANCIAL HIGHLIGHTS
As of December 31, 1995, none of the Portfolios had begun issuing Class IB
shares (which are expected to be first offered on or about October 1, 1996).
Accordingly, the Financial Highlights set forth below relate solely to Class
IA shares and do not reflect the Class IB shares' distribution fees currently
payable at the rate of .25% per annum.
The following tables give information regarding income, expenses and capital
changes in the Common Stock and Money Market Portfolios attributable to a
Portfolio share of beneficial interest outstanding throughout the periods
indicated, based upon monthly average shares outstanding, and other
supplementary data. The information is presented under the continuing entity
basis of accounting as if the reorganization described in "General
Information and History" in the SAI had always been in effect.
The other tables also give equivalent information for a share of beneficial
interest in each of the other Portfolios outstanding throughout the periods
indicated.
Information regarding portfolio turnover rates, some of which exceeded 100%
during certain periods, is also included. Higher levels of portfolio activity
result in higher transaction costs, including higher brokerage expenses.
On December 16, 1992, the Trust's Board of Trustees declared a 10-for-1 stock
split of the outstanding shares of the Money Market, High Yield, Common
Stock, Global and Aggressive Stock Portfolios (Split Portfolios). The split
was effected on January 1, 1993 for shareholders of record on that date.
Consequently, the shares of beneficial interest outstanding and net asset
value per share presented in the Financial Highlights for a Split Portfolio
share outstanding throughout each period (other than the periods ended
December 31, 1993, December 31, 1994 and December 31, 1995), and the shares
outstanding at the end of such periods presented for the Split Portfolios,
have been restated.
The financial information in the tables below for the fiscal years ended
December 31, 1993, December 31, 1994 and December 31, 1995 has been audited
by Price Waterhouse LLP, the Trust's independent accountants. Financial
highlights for prior years have been audited by another independent
accounting firm. The audited financial statements for the Trust appear in the
SAI. The Trust's annual report, which contains additional performance
information, is available without charge upon request.
FINANCIAL HIGHLIGHTS
PER SHARE INCOME AND CAPITAL CHANGES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)(B)
GROWTH INVESTORS PORTFOLIO:
<TABLE>
<CAPTION>
OCTOBER 2,
YEAR ENDED DECEMBER 31, 1989 TO
------------------------------------------------------------------ DECEMBER 31,
1995 1994 1993* 1992 1991 1990 1989
--------- ---------- ---------- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period (a) $14.66 $15.61 $14.69 $ 15.17 $ 11.03 $ 10.33 $10.00
--------- ---------- ---------- ---------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .................. 0.57 0.50 0.43 0.44 0.41 0.44 0.11
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions .......................... 3.24 (0.98) 1.79 0.28 4.93 0.64 0.29
--------- ---------- ---------- ---------- --------- --------- --------
Total from investment operations ....... 3.81 (0.48) 2.22 0.72 5.34 1.08 0.40
--------- ---------- ---------- ---------- --------- --------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income ... (0.54) (0.46) (0.42) (0.41 ) (0.37 ) (0.38 ) (0.06)
Dividends in excess of net investment
income ................................ (0.01) (0.01) -- -- -- -- --
Distributions from realized gains ...... (0.24) -- (0.88) (0.79 ) (0.83 ) -- (0.01)
--------- ---------- ---------- ---------- --------- --------- --------
Total dividends and distributions ...... (0.79) (0.47) (1.30) (1.20 ) (1.20 ) (0.38 ) (0.07)
--------- ---------- ---------- ---------- --------- --------- --------
Net asset value, end of period ........... $17.68 $14.66 $15.61 $ 14.69 $ 15.17 $ 11.03 $10.33
========= ========== ========== ========== ========= ========= ========
Total return (c) ......................... 26.37% (3.15)% 15.26% 4.85 % 48.83 % 10.70 % 4.00%
========= ========== ========== ========== ========= ========= ========
RATIOS/SUPPLEMENTAL DATA:
Net asset, end of period (000's) ........ $896,134 $492,478 $278,467 $148,650 $84,338 $24,539 $6,018
Ratio of expenses to average net assets . 0.56% 0.59% 0.62% 0.60 % 0.66 % 0.78 % 0.29%
Ratio of net investment income to average
net assets ............................. 3.43% 3.32% 2.71% 3.00 % 3.03 % 4.11 % 1.01%
Portfolio turnover rate .................. 107% 131% 118% 129 % 139 % 92 % 6%
</TABLE>
- -----------
Footnotes appear on page 7.
2
<PAGE>
COMMON STOCK PORTFOLIO:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
1995 1994 1993* 1992 1991 1990 1989 1988 1987 1986
---------- ----------- ----------- ----------- ---------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of year (a) ....... $ 13.36 $ 14.65 $ 13.49 $ 14.18 $ 11.22 $ 12.87 $ 12.19 $ 10.15 $ 11.34 $ 11.28
---------- ----------- ----------- ----------- ---------- -------- --------- -------- -------- --------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income ................ 0.20 0.20 0.23 0.24 0.32 0.21 0.27 0.23 0.17 0.19
Net realized and
unrealized gain
(loss) on invest-
ments and
foreign currency
transactions .......... 4.12 (0.51) 3.10 0.20 3.91 (1.25) 2.84 2.04 0.72 1.77
---------- ----------- ----------- ----------- ---------- -------- --------- -------- -------- --------
Total from invest-
ment operations ....... 4.32 (0.31) 3.33 0.44 4.23 (1.04) 3.11 2.27 0.89 1.96
---------- ----------- ----------- ----------- ---------- -------- --------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net
investment
income ................ (0.20) (0.19) (0.23) (0.24) (0.29) (0.22) (0.26) (0.23) (0.17) (0.15)
Dividends in
excess of net
investment
income ................ (0.02) (0.01) (0.00) -- -- -- -- -- -- --
Distributions from
realized gains ........ (0.95) (0.77) (1.94) (0.89) (0.98) (0.39) (2.17) -- (1.91) (1.75)
Distributions in excess
of realized gains ..... (0.03) -- -- -- -- -- -- -- -- --
Tax return of capital
distributions ......... -- (0.01) -- -- -- -- -- -- -- --
---------- ----------- ----------- ----------- ---------- -------- --------- -------- -------- --------
Total dividends
and distributions ..... (1.20) (0.98) (2.17) (1.13) (1.27) (0.61) (2.43) (0.23) (2.08) (1.90)
---------- ----------- ----------- ----------- ---------- -------- --------- -------- -------- --------
Net asset value, end
of year ................ $ 16.48 $13.36 $14.65 $13.49 $ 14.18 $ 11.22 $ 12.87 $ 12.19 $ 10.15 $ 11.34
========== =========== =========== =========== ========== ======== ========= ======== ======== ========
Total return (c) ........ 32.45% (2.14)% 24.84% 3.22% 37.90% (8.11)% 25.59% 22.44% 7.49% 17.33%
========== =========== =========== =========== ========== ======== ========= ======== ======== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
year (000's) ........... $4,879,677 $3,466,245 $3,125,128 $2,307,292 $2,126,402 $673,476 $725,627 $537,827 $434,558 $351,580
Ratio of expenses to
average net assets ..... 0.38% 0.38% 0.38% 0.38% 0.40% 0.44% 0.43% 0.46% 0.46% 0.47%
Ratio of net invest-
ment income to
average net assets ..... 1.27% 1.40% 1.55% 1.73% 2.32% 1.72% 1.87% 2.02% 1.21% 1.43%
Portfolio turnover rate 61% 52% 82% 71% 90% 82% 90% 71% 86% 89%
</TABLE>
- ------------
Footnotes appear on page 7.
3
<PAGE>
GLOBAL PORTFOLIO:
<TABLE>
<CAPTION>
AUGUST 27,
YEAR ENDED DECEMBER 31, 1987 TO
------------------------------------------------------------------------------- DECEMBER 31,
1995 1994 1993* 1992 1991 1990 1989 1988 1987
--------- --------- --------- -------- ------- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period (a) ...................... $13.87 $13.62 $11.41 $11.64 $ 9.76 $ 10.74 $ 9.57 $ 8.67 $10.00
--------- --------- --------- -------- ------- -------- -------- ------ --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .......... 0.26 0.20 0.08 0.14 0.22 0.38 0.17 0.13 0.01
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions . 2.32 0.52 3.58 (0.20) 2.74 (1.03) 2.38 0.82 (1.34)
--------- --------- --------- -------- ------- -------- -------- ------ --------
Total from investment operations 2.58 0.72 3.66 (0.06) 2.96 (0.65) 2.55 0.95 (1.33)
--------- --------- --------- -------- ------- -------- -------- ------ --------
LESS DISTRIBUTIONS:
Dividends from net investment
income ........................ (0.25) (0.17) (0.15) (0.11) (0.23) (0.33) (0.14) (0.05) --
Distributions from realized
gains ......................... (0.42) (0.28) (1.30) (0.06) (0.85) -- (1.24) -- --
Distributions in excess of
realized gains ................ (0.03) (0.00) (0.00) -- -- -- -- -- --
Tax return of capital
distributions ................. (0.01) (0.02) -- -- -- -- -- -- --
--------- --------- --------- -------- ------- -------- -------- ------ --------
Total dividends and
distributions ................. (0.71) (0.47) (1.45) (0.17) (1.08) (0.33) (1.38) (0.05) --
--------- --------- --------- -------- ------- -------- -------- ------ --------
Net asset value, end of period .. $15.74 $13.87 $13.62 $11.41 $ 11.64 $ 9.76 $ 10.74 $ 9.57 $8.67
========= ========= ========= ======== ======= ======== ======== ====== ========
Total return (c) ................. 18.81% 5.23% 32.09% (0.50)% 30.54% (6.06)% 26.73% 10.88% (13.30)%
========= ========= ========= ======== ======= ======== ======== ====== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $686,140 $421,698 $141,257 $49,171 $39,487 $24,097 $15,409 $9,212 $6,030
Ratio of expenses to average net
assets ......................... 0.61% 0.69% 0.84% 0.70% 0.75% 0.75% 0.80% 1.06% 0.40%
Ratio of net investment income to
average net assets ............. 1.76% 1.41% 0.62% 1.20% 1.94% 3.67% 1.49% 1.30% 0.19%
Portfolio turnover rate .......... 67% 71% 150% 216% 267% 502% 399% 235% 11%
</TABLE>
- ------------
Footnotes appear on page 7.
4
<PAGE>
AGGRESSIVE STOCK PORTFOLIO:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1994 1993* 1992
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period (a) ...................... $ 30.63 $ 31.89 $ 29.81 $33.82
---------- ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .......... 0.10 0.04 0.09 0.17
Net realized and unrealized gain
(loss) on investments ......... 9.54 (1.26) 4.91 (1.25)
---------- ------------ ------------ ------------
Total from investment operations 9.64 (1.22) 5.00 (1.08)
---------- ------------ ------------ ------------
LESS DISTRIBUTIONS:
Dividends from net investment
income ........................ (0.10) (0.04) (0.09) (0.18)
Distributions from realized
gains ......................... (4.49) -- (2.75) (2.75)
Distributions in excess of
realized gains ................ -- -- (0.07) --
Tax return of capital
distribution .................. -- (0.00) (0.01) --
---------- ------------ ------------ ------------
Total dividends and
distributions ................. (4.59) (0.04) (2.92) (2.93)
---------- ------------ ------------ ------------
Net asset value, end of period .. $ 35.68 $30.63 $31.89 $29.81
========== ============ ============ ============
Total return (c) ................. 31.63% (3.81)% 16.77% (3.16)%
========== ============ ============ ============
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $2,700,515 $1,832,164 $1,557,332 $1,210,576
Ratio of expenses to average net
assets ......................... 0.49% 0.49% 0.49% 0.50%
Ratio of net investment income to
average net assets ............. 0.28% 0.12% 0.28% 0.57%
Portfolio turnover rate .......... 127% 92% 89% 68%
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
JANUARY 27,
YEAR ENDED DECEMBER 31, 1986 TO
------------------------------------------------- DECEMBER 31,
1991 1990 1989 1988 1987 1986
-------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period (a) ...................... $ 19.37 $ 19.90 $ 14.07 $ 14.09 $ 13.35 $10.00
-------- -------- ------- ------- ------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .......... 0.12 0.16 0.23 0.20 0.20 0.12
Net realized and unrealized gain
(loss) on investments ......... 16.68 1.46 5.87 (0.03) 0.79 3.46
-------- -------- ------- ------- ------- --------
Total from investment operations 16.80 1.62 6.10 0.17 0.99 3.58
-------- -------- ------- ------- ------- --------
LESS DISTRIBUTIONS:
Dividends from net investment
income ........................ (0.10) (0.16) (0.23) (0.19) (0.13) (0.05)
Distributions from realized
gains ......................... (2.25) (1.99) (0.04) -- (0.12) (0.18)
Distributions in excess of
realized gains ................ -- -- -- -- -- --
Tax return of capital
distribution .................. -- -- -- -- -- --
-------- -------- ------- ------- ------- --------
Total dividends and
distributions ................. (2.35) (2.15) (0.27) (0.19) (0.25) (0.23)
-------- -------- ------- ------- ------- --------
Net asset value, end of period .. $ 33.82 $ 19.37 $ 19.90 $ 14.07 $ 14.09 $13.35
======== ======== ======= ======= ======= ========
Total return (c) ................. 86.87% 8.16% 43.50% 1.13% 7.30% 35.90%
======== ======== ======= ======= ======= ========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $959,257 $120,960 $99,459 $62,116 $47,776 $8,414
Ratio of expenses to average net
assets ......................... 0.51% 0.55% 0.55% 0.65% 0.58% 0.78%
Ratio of net investment income to
average net assets ............. 0.40% 0.78% 1.29% 1.35% 1.19% 0.99%
Portfolio turnover rate .......... 117% 54% 89% 70% 134% 60%
</TABLE>
- ------------
Footnotes appear on page 7.
5
<PAGE>
HIGH YIELD PORTFOLIO:
<TABLE>
<CAPTION>
JANUARY 2,
YEAR ENDED DECEMBER 31, 1987 TO
--------------------------------------------------------------------------- DECEMBER 31,
1995 1994 1993* 1992 1991 1990 1989 1988 1987
---------- --------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period (a) $ 8.91 $ 10.08 $ 9.15 $ 8.96 $ 7.97 $ 9.14 $ 9.72 $ 9.67 $10.00
---------- --------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .................. 0.98 0.89 0.94 0.89 0.89 1.04 1.09 1.00 1.06
Net realized and unrealized gain (loss)
on investments ........................ 0.73 (1.17) 1.10 0.19 0.99 (1.14) (0.60) (0.08) (0.60)
---------- --------- ------- ------- ------- ------- ------- ------- -------
Total from investment operations ....... 1.71 (0.28) 2.04 1.08 1.88 (0.10) 0.49 0.92 0.46
---------- --------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income ... (0.94) (0.88) (0.92) (0.89) (0.89) (1.07) (1.07) (0.87) (0.79)
Dividends in excess of net investment
income ................................ (0.04) (0.01) -- -- -- -- -- -- --
Distributions from realized gains ...... -- -- (0.19) -- -- -- -- -- --
---------- --------- ------- ------- ------- ------- ------- ------- -------
Total dividends and distributions ...... (0.98) (0.89) (1.11) (0.89) (0.89) (1.07) (1.07) (0.87) (0.79)
---------- --------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of period ........... $ 9.64 $ 8.91 $10.08 $ 9.15 $ 8.96 $ 7.97 $ 9.14 $ 9.72 $ 9.67
========== ========= ======= ======= ======= ======= ======= ======= =======
Total return (c) ......................... 19.92% (2.79)% 23.15% 12.31% 24.46% (1.10) % 5.14% 9.73% 4.68%
========== ========= ======= ======= ======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) ....... $118,129 $73,895 $67,169 $47,687 $45,066 $36,569 $41,280 $34,810 $10,687
Ratio of expenses to average net assets . 0.60% 0.61% 0.63% 0.60% 0.61% 0.62% 0.62% 0.73% 0.98%
Ratio of net investment income to average
net assets ............................. 10.34% 9.23% 9.52% 9.58% 10.31% 12.04% 11.22% 10.05% 10.62%
Portfolio turnover rate .................. 350% 248% 280% 177% 187% 53% 116% 209% 235%
</TABLE>
MONEY MARKET PORTFOLIO:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1995 1994 1993* 1992 1991 1990 1989 1988 1987 1986
-------- --------- --------- --------- --------- -------- --------- --------- --------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning
of year(a) .................... $10.14 $10.12 $10.11 $10.13 $10.17 $10.14 $10.13 $10.09 $10.02 $10.00
-------- --------- --------- --------- --------- -------- --------- --------- --------- --------
INCOME FROM INVESTMENT
OPERATIONS: 0.61 0.81 0.89 0.73 0.64 0.67
Net investment income ......... 0.57 0.41 0.30 0.37
Net realized and
unrealized gain (loss) -- 0.01 0.01 (0.01) 0.01 (0.01)
on investments ............... -- -- -- (0.01) $10.17 $10.14 $10.13 $10.09 $10.02 $10.01
-------- --------- --------- --------- --------- -------- --------- --------- --------- --------
Total from investment
operations ................... 0.57 0.41 0.30 0.36 0.61 0.82 0.90 0.72 0.65 0.66
-------- --------- --------- --------- --------- -------- --------- --------- --------- --------
LESS DIVIDENDS:
Dividends from net
investment income ............ (0.55) (0.39) (0.29) (0.38) (0.65) (0.79) (0.89) (0.68) (0.58) (0.65)
-------- --------- --------- --------- --------- -------- --------- --------- --------- --------
Total dividends ............... (0.55) (0.39) (0.29) (0.38) (0.65) (0.79) (0.89) (0.68) (0.58) (0.65)
-------- --------- --------- --------- --------- -------- --------- --------- --------- --------
Net asset value, end of year $10.16 $10.14 $10.12 $10.11 $10.13 $10.17 $10.14 $10.13 $10.09 $10.02
======== ========= ========= ========= ========= ======== ========= ========= ========= ========
Total return (c) ............... 5.74% 4.02% 3.00% 3.57% 6.20% 8.22% 9.18% 7.32% 6.63% 6.60%
======== ========= ========= ========= ========= ======== ========= ========= ========= ========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000's) $386,691 $325,391 $248,460 $268,584 $302,395 $359,426 $289,338 $234,378 $154,606 $91,743
Ratio of expenses to average
net assets .................... 0.44% 0.42% 0.42% 0.43% 0.43% 0.44% 0.44% 0.48% 0.46% 0.46%
Ratio of net investment
income to average net
assets ........................ 5.53% 4.01% 2.91% 3.63% 5.96% 7.85% 8.70% 7.14% 6.29% 6.45%
</TABLE>
- ------------
Footnotes appear on page 7.
6
<PAGE>
- ------------
FOOTNOTES TO FINANCIAL HIGHLIGHTS
* Prior to July 22, 1993, Equitable Capital Management Corporation
(Equitable Capital) served as the investment adviser to the Trust. On
July 22, 1993, Alliance Capital Management L.P. acquired the business
and substantially all of the assets of Equitable Capital and became the
investment adviser to the Trust.
(a) Date as of which funds were first allocated to the Portfolios are as
follows:
Common Stock Portfolio --June 16, 1975
Money Market Portfolio --July 13, 1981
Aggressive Stock Portfolio --January 27, 1986
High Yield Portfolio --January 2, 1987
Global Portfolio --August 27, 1987
Growth Investors Portfolio --October 2, 1989
(b) Net investment income and capital changes per share are based upon
monthly average shares outstanding.
(c) Total return is calculated assuming an initial investment made at the
net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period. Total return calculated for a
period of less than one year is not annualized.
7
<PAGE>
THE TRUST
The Trust is an open-end management investment company under the Investment
Company Act of 1940 (Investment Company Act). As a "series" type of mutual
fund, the Trust issues shares of beneficial interest currently divided among
thirteen Portfolios, including the Aggressive Stock, Common Stock, Growth
Investors, Global, High Yield and Money Market Portfolios. Each Portfolio is
a separate diversified series of the Trust. The Trust's assets and
liabilities are divided among these Portfolios. Additional Portfolios may be
established. Originally organized as a Maryland corporation which commenced
operations on March 22, 1985, the Trust was formed as a Massachusetts
business trust on July 10, 1987.
The Trust's shares are sold only to separate accounts of insurance companies
in connection with variable life insurance contracts and variable annuity
certificates and contracts (collectively, the Contracts) issued by The
Equitable Life Assurance Society of the United States (Equitable), Equitable
Variable Life Insurance Company (Equitable Variable), an affiliate of
Equitable, and certain insurance companies unaffiliated with Equitable or
Equitable Variable. As of March 31, 1996, only Class IA shares were
outstanding and Equitable and Equitable Variable were the record owners of
approximately 99.6% of those shares. Consequently, Equitable and Equitable
Variable may be deemed to control the Trust.
The Trust offers two classes of shares on behalf of each Portfolio: Class IA
shares are offered pursuant to another prospectus at net asset value and are
not subject to fees imposed pursuant to a distribution plan. Class IA shares
of the Trust are sold to insurance company separate accounts of companies
that are not affiliated with each other. Class IB shares are offered pursuant
to this prospectus at net asset value and are subject to distribution fees
imposed under a distribution plan (the "Distribution Plan") adopted pursuant
to Rule 12b-1 under the Investment Company Act. Class IB shares of the Trust
are sold to an insurance company separate account of Equitable. Inquiries
regarding Class IA shares should be addressed to Equitable, Income Management
Group, at 200 Plaza Drive, Secaucus, NJ 07096 (tel. no. 1-800-789-7771).
The two classes of shares are offered under the Trust's multiple class
distribution system approved by the Trust's Board of Trustees on June 7,
1996, and are designed to allow promotion of insurance products investing in
the Trust through alternative distribution channels. Under the Trust's
multi-class system, shares of each class of a Portfolio represent an equal
pro rata interest in that Portfolio and, generally, shall have identical
voting, dividend, liquidation, and other rights, other than the payment of
distribution fees under the Distribution Plan.
The Trust does not currently foresee any disadvantages to policy owners
arising from offering the Trust's shares to separate accounts of insurance
companies that are unaffiliated with each other; however, it is theoretically
possible that the interests of owners of various policies participating in
the Trust through their separate accounts might at some time be in conflict.
In the case of a material irreconcilable conflict, one or more separate
accounts might withdraw their investments in the Trust, which would possibly
force the Trust to sell portfolio securities at disadvantageous prices.
INVESTMENT OBJECTIVES AND POLICIES
FUNDAMENTAL INVESTMENT OBJECTIVES
The following investment objectives of each Portfolio are fundamental and,
unless permitted by law, will not be changed without a vote of the holders of
the majority of the voting securities of that Portfolio. There can, of
course, be no assurance that a Portfolio will achieve its investment
objective.
o The Aggressive Stock Portfolio's fundamental investment objective
is to achieve long-term growth of capital. The Aggressive Stock
Portfolio will pursue this objective by investing primarily in
common stocks and other equity-type securities issued by quality
small and intermediate sized companies with strong growth prospects
and in covered options on those securities.
o The Common Stock Portfolio's fundamental investment objective is to
achieve long-term growth of its capital and increase income. It
will pursue this objective by investing primarily in common stock
and other equity-type instruments.
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o The Growth Investors Portfolio's fundamental investment objective
is to achieve the highest total return consistent with the
investment adviser's determination of reasonable risk. It will
pursue this objective by investing in a diversified mix of publicly
traded equity and fixed income securities, including at times
common stocks issued by intermediate and small-sized companies and
at times fixed income securities that are medium and lower quality
debt securities known as "junk bonds."
o The Global Portfolio's fundamental investment objective is to
achieve long-term growth of capital. The Global Portfolio will
pursue this objective by investing primarily in equity securities
of non-United States companies as well as United States issuers.
o The High Yield Portfolio's fundamental investment objective is to
achieve high return by maximizing current income and, to the extent
consistent with that objective, capital appreciation. The High
Yield Portfolio will pursue this objective by investing primarily
in a diversified mix of high yield, fixed income securities
involving greater volatility of price and risk of principal and
income than high quality fixed income securities. The medium and
lower quality debt securities in which the Portfolio may invest are
known as "junk bonds.'
o The Money Market Portfolio's fundamental investment objective is to
obtain a high level of current income, preserve its assets and
maintain liquidity. The Money Market Portfolio will pursue this
objective by investing in primarily high quality U.S. dollar
denominated money market instruments.
INVESTMENT POLICIES
The following investment policies and restrictions, unless otherwise noted,
are not fundamental policies of the Portfolios. They may be changed by the
Board of Trustees without a shareholder vote, except as otherwise stated in
this Prospectus or in the Trust's SAI.
AGGRESSIVE STOCK PORTFOLIO
The Aggressive Stock Portfolio attempts to achieve its objective by investing
primarily in common stocks and other equity-type securities issued by
intermediate and small-sized companies with favorable growth prospects.
The Aggressive Stock Portfolio may also invest a portion of its assets in
securities of companies in cyclical industries, companies whose securities
are temporarily undervalued, companies in special situations and less widely
known companies.
If, in light of economic conditions, it appears that the Aggressive Stock
Portfolio's objective will not be achieved primarily through investments in
common stocks, the Portfolio may also invest in other equity-type securities
(such as preferred stocks and convertible debt instruments) and protective
options. Under certain market conditions, the Aggressive Stock Portfolio may
also invest in corporate fixed income securities, which will generally be
investment grade, or invest part of its assets in cash or cash equivalents
for liquidity or defensive purposes, including money market instruments rated
at least Prime-1 by Moody's or A-1 by S&P. The Aggressive Stock Portfolio may
invest no more than 20% of its total assets in foreign securities. See
"Investment Techniques--Foreign Securities and Currencies," below. The
Portfolio may make secured loans of up to 50% of its total portfolio
securities. See "Investment Techniques--Securities Lending," below. The
Aggressive Stock Portfolio may write covered call options and may purchase
call and put options on individual equity securities, securities indexes and
foreign currencies. The Aggressive Stock Portfolio may also purchase and sell
stock index and foreign currency futures contracts and options thereon. See
"Investment Techniques--Options," "Investment Techniques--Futures" and "Risk
Factors in Options and Futures," below.
Risk Factors. More risk is associated with investment in intermediate and
small-sized companies, because they are often dependent on only one or two
products. They are more vulnerable to competition from larger companies with
greater resources and to economic conditions affecting their market sector.
Intermediate and small-sized companies may be new, without long business or
management histories, and
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perceived by the market as unproven. Their securities may be held primarily
by insiders or institutional investors, which may affect marketability. The
prices of these stocks often fluctuate more than the overall stock market.
COMMON STOCK PORTFOLIO
The Common Stock Portfolio attempts to achieve its investment objective by
investing primarily in common stocks and other equity-type securities that
the Trust's investment adviser believes will share in the growth of the
nation's economy over a long period.
Most of the time, the Common Stock Portfolio will invest primarily in common
stocks that are listed on national securities exchanges. Smaller amounts will
be invested in stocks that are traded over-the-counter and in other
equity-type securities (such as preferred stocks or convertible debt
instruments). Current income is an incidental consideration. The Common Stock
Portfolio generally will not invest more than 20% of its total assets in
foreign securities. See "Investment Techniques--Foreign Securities and
Currencies," below.
If, in light of economic conditions and the general level of common stock
prices, it appears that the Portfolio's investment objective will not be met
by using all its assets to buy equities, the Common Stock Portfolio may also
use part of its assets to make nonequity investments. These could include
buying securities such as nonparticipating and nonconvertible preferred
stocks and certain fixed income securities. Fixed income securities will
include investment grade bonds and debentures and money market instruments,
as well as securities that have a high current yield because they are either
rated in the lower categories by NRSROs (i.e., Baa or lower by Moody's or BBB
or lower by S&P) or are unrated. For a discussion of the risks associated
with investment in these higher yielding securities, see "Investment
Techniques--Fixed Income Securities" and "Investment Techniques--Risk Factors
of Lower Rated Fixed Income Securities," below. For the fiscal year ended
December 31, 1995, less than 1% of the average assets of the Portfolio were
invested in higher yielding securities.
The Common Stock Portfolio may make temporary investments in money market
instruments of the same type and credit quality in which the Money Market
Portfolio may invest. The Portfolio may make secured loans of up to 50% of
its total portfolio securities. See "Investment Techniques--Securities
Lending," below. The Common Stock Portfolio may write covered call and put
options and may buy call and put options on individual common stocks and
other equity-type securities, securities indexes, and foreign currencies. The
Portfolio may also purchase and sell stock index and foreign currency futures
contracts and options thereon. See "Investment Techniques--Options,"
"Investment Techniques--Futures," and "Investment Techniques--Risk Factors in
Options and Futures," below.
GROWTH INVESTORS PORTFOLIO
The Growth Investors Portfolio attempts to achieve its investment objective
by allocating varying portions of its assets to a number of different asset
classes. The Portfolio pursues an asset allocation strategy designed to meet
the "investor profile" of the "growth investor." The "growth investor" has a
longer-term investment horizon and is therefore willing to take more risks in
an attempt to achieve long-term growth of principal. This investor wishes, in
effect, to be risk conscious without being risk averse. The asset mix for the
Growth Investors Portfolio attempts to provide for upside potential without
excessive volatility.
The Trust's investment adviser has established an asset allocation committee
(the Committee), all the members of which are employees of the investment
adviser, which is responsible for setting and continually reviewing the asset
mix ranges of the Portfolio. The Committee meets at least twice each month.
Under normal market conditions, the Committee is expected to change
allocation ranges approximately three to five times per year. However, the
Committee has broad latitude to establish the frequency, as well as the
magnitude, of allocation changes within the guidelines established for the
Portfolio. During periods of severe market disruption, allocation ranges may
change frequently. It is also possible that in periods of stable and
consistent outlook no change will be made. The Committee's decisions are
based on a variety of factors, including liquidity, portfolio size, tax
consequences and general market conditions, always within the context of the
"growth investor" profile.
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When the Committee establishes a new allocation range for the Portfolio, it
also prescribes the length of time during which the Portfolio should achieve
an asset mix within the new range. To achieve a new asset mix, the Portfolio
looks first to available cash flow. If cash flow proves insufficient to
achieve the desired asset mix, the Portfolio will sell securities and
reinvest the proceeds in the appropriate asset class.
Equity investments will include common stocks that are listed on national
securities exchanges as well as those that are traded over-the-counter and
also equity-type securities, which may include preferred stock and
convertible securities, and include securities issued by intermediate and
small-sized companies with favorable growth prospects. More risk is
associated with investment in intermediate and small-sized companies because
they are often dependent on only one or two products. They are more
vulnerable to competition from larger companies with greater resources and to
economic conditions affecting their market sector. Intermediate and
small-sized companies may be new, without long business or management
histories, and perceived by the market as unproven. Their securities may be
held primarily by insiders or institutional investors, which may affect
marketability. The prices of these stocks often fluctuate more than the
overall stock market.
Fixed income investments will include investment grade fixed income
securities (including cash and money market instruments) as well as
securities that have a high current yield and that are either rated in the
lower categories by nationally recognized statistical rating organizations
NRSROs (i.e., Baa or lower by Moody's or BBB or lower by S&P) or are unrated.
For a discussion of the risks associated with investment in these higher
yielding securities, see "Investment Techniques--Fixed Income Securities";
and "Investment Techniques--Risk Factors of Lower Rated Fixed Income
Securities," below. For the fiscal year ended December 31, 1995,
approximately 31.18% of the Portfolio was invested in fixed income
securities, all rated AAA or its equivalent.
The Portfolio will at all times hold at least 40% of its assets in publicly
traded common stocks and other equity securities of the type purchased by the
Common Stock Portfolio (the Equity Core). The Portfolio is generally expected
to hold approximately 70% of its assets in equity securities (including the
Equity Core) and 30% in fixed income securities. Actual asset mixes will be
adjusted in response to economic and credit market cycles. The fixed income
asset class will always comprise at least 10%, but never more than 60%, of
the Portfolio's total assets. The equity class will always comprise at least
40%, but never more than 90%, of the Portfolio's total assets. No more than
30% of the Portfolio's assets will be invested in securities of non-United
States issuers. See "Investment Techniques--Foreign Securities and
Currencies," below.
The Portfolio is permitted to use a variety of hedging techniques to attempt
to control stock market, interest rate and currency risks. The Portfolio may
write covered call and put options and may purchase call and put options on
all the types of securities in which it may invest, as well as securities
indexes and foreign currencies. The Portfolio may also purchase and sell
stock index, interest rate and foreign currency futures contracts and options
thereon, as well as forward foreign currency exchange contracts. See
"Investment Techniques--Forward Foreign Currency Exchange Contracts," below.
The Portfolio may make loans of up to 50% of its total portfolio securities.
See "Investment Techniques--Securities Lending," below.
Risk Factors. In addition to the risk factors associated with certain types
of securities in which the Portfolio may invest, and in addition to the risk
of loss inherent in any securities ownership, there is associated with this
Portfolio the risk that the investment adviser will not accurately assess and
respond to changing market conditions. While the investment adviser has
established the Committee to help it anticipate and respond positively to
changes in market conditions, there can be no assurance that this goal will
be achieved. Furthermore, there may be additional operating expenses for this
Portfolio during periods of frequently changing asset mix ranges.
GLOBAL PORTFOLIO
The Global Portfolio attempts to achieve its objective by investing primarily
in a diversified portfolio of equity securities selected principally to
permit participation in established non-United States companies with
prospects for growth, as well as in securities issued by United States
companies. These non-United States companies may have operations in the
United States, in their country of incorporation or in other
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countries. The Global Portfolio intends to diversify investments among
several countries and to have represented in the Portfolio business
activities in not less than three different countries (including the United
States). For temporary or defensive purposes, the Global Portfolio may at
times invest substantially all of its assets in securities issued by United
States companies or in cash or cash equivalents, including money market
instruments issued by foreign entities.
The Global Portfolio may invest in any type of security including, but not
limited to, shares, preferred or common (including shares of mutual funds
which invest in foreign securities), bonds and other evidences of
indebtedness, and other securities of issuers wherever organized and
governments and their political subdivisions. Although no particular
proportion of stocks, bonds or other securities is required to be maintained,
the Global Portfolio, in view of its investment objective, intends under
normal conditions to maintain a portfolio consisting primarily of a
diversified list of equity securities. The Portfolio may make secured loans
of up to 50% of its total portfolio securities. See "Investment
Techniques--Securities Lending," below. The Global Portfolio may write
covered call and put options and may purchase call and put options on
individual equity securities, securities indexes, and foreign currencies. The
Global Portfolio may also purchase and sell stock index, foreign currency and
interest rate futures contracts and options on such contracts, as well as
forward foreign currency exchange contracts. See "Investment
Techniques--Options," "Investment Techniques--Forward Foreign Currency
Exchange Contracts," "Investment Techniques--Futures," and "Investment
Techniques--Risk Factors in Options and Futures," below.
Risk Factors. For a discussion of the risks associated with investments in
foreign securities, see "Investment Techniques--Foreign Securities and
Currencies," below.
HIGH YIELD PORTFOLIO
The High Yield Portfolio attempts to achieve its objective by investing
primarily in a diversified mix of high yield, fixed income securities
potentially involving greater volatility of price and risk of principal and
income than high quality fixed income securities.
Ordinarily, the Portfolio will invest a portion of its funds in fixed income
securities which have a high current yield and that are either rated in the
lower categories of NRSROs (i.e., rated Baa or lower by Moody's or BBB or
lower by S&P) or are unrated. The Portfolio may also make temporary
investments in money market instruments of the same type as the Money Market
Portfolio. The Portfolio will not invest more than 10% of its total assets in
(i) fixed income securities which are rated lower than B3 or B-or their
equivalents by one NRSRO or if unrated are of equivalent quality as
determined by the investment adviser, and (ii) money market instruments of
any entity which has an outstanding issue of unsecured debt that is rated
lower than B3 or B-or their equivalents by an NRSRO or if unrated is of
equivalent quality as determined by the investment adviser; however, this
restriction will not apply to (i) fixed income securities which, in the
opinion of the investment adviser, have similar characteristics to securities
which are rated B3 or higher by Moody's or B-or higher by S&P, or (ii) money
market instruments of any entity that has an unsecured issue of outstanding
debt which, in the opinion of the investment adviser, has similar
characteristics to securities which are so rated. See Appendix A,
"Description of Bond Ratings," for a description of each rating category. In
the event that any securities held by the High Yield Portfolio fall below
those ratings, the Portfolio will not be obligated to dispose of such
securities and may continue to hold such securities if, in the opinion of the
investment adviser, such investment is considered appropriate under the
circumstances.
For the fiscal year ended December 31, 1995, the approximate percentages of
the Portfolio's average assets invested in securities of each rating
category, determined on a dollar weighted basis, were as follows: 6.2% in
securities rated AAA or its equivalent, 25.2% in securities rated BB or its
equivalent and 65.5% in securities rated B or its equivalent. Of these
securities, 98.4% were rated by an NRSRO and 1.6% were unrated. All of the
unrated securities were considered by the investment adviser to be of
comparable quality to the Portfolio's investments rated by an NRSRO.
The Portfolio may also invest in fixed income securities which are providing
high current yields because of risks other than credit, such as prepayment
risks, in the case of mortgage-backed securities, or currency
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risks, in the case of non-U.S. dollar denominated foreign securities. Smaller
amounts may also be invested in common stocks and other equity-type
securities (such as convertible debt securities). See "Investment
Techniques--Fixed Income Securities" and "Investment Techniques--Risk Factors
of Lower Rated Fixed Income Securities," below.
The High Yield Portfolio will be managed to maximize current income by taking
advantage of market developments, yield disparities and variations in the
creditworthiness of issuers. Substantially all of the Portfolio's investments
will be income producing. The Portfolio will use various strategies in
attempting to achieve its objective. The Portfolio may make secured loans of
its portfolio securities without limitation. See "Investment
Techniques--Securities Lending," below. In order to enhance its current
return and to reduce fluctuations in net asset value, the Portfolio may write
covered call and put options and may purchase call and put options on
individual fixed income securities, securities indexes and foreign
currencies. The Portfolio may also purchase and sell stock index, interest
rate and foreign currency futures contracts and options thereon. See
"Investment Techniques--Options," "Investment Techniques--Futures," and "Risk
Factors in Options and Futures," below.
MONEY MARKET PORTFOLIO
The Money Market Portfolio attempts to achieve its objective by investing
primarily in a diversified portfolio of high-quality U.S. dollar-denominated
money market instruments. The instruments in which the Portfolio invests
include: (1) marketable obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities (collectively, the U.S.
Government); (2) certificates of deposit, bankers' acceptances, bank notes,
time deposits and interest bearing savings deposits issued or guaranteed by
(a) domestic banks (including their foreign branches) or savings and loan
associations having total assets of more than $1 billion and which are
members of the Federal Deposit Insurance Corporation (FDIC) in the case of
banks, or insured by the FDIC, in the case of savings and loan associations
or (b) foreign banks (either by their foreign or U.S. branches) having total
assets of at least $5 billion and having an issue of either commercial paper
rated at least A-1 by S&P or Prime-1 by Moody's or long term debt rated at
least AA by S&P or Aa by Moody's; (3) commercial paper (rated at least A-1 by
S&P or Prime-1 by Moody's or, if not rated, issued by domestic or foreign
companies having outstanding debt securities rated at least AA by S&P or Aa
by Moody's) and participation interests in loans extended by banks to such
companies; (4) mortgage-backed securities and asset-backed securities; (5)
corporate debt obligations with remaining maturities of less than one year,
rated at least AA by S&P or Aa by Moody's, as well as corporate debt
obligations rated at least A by S&P or Moody's, provided the corporation also
has outstanding an issue of commercial paper rated at least A-1 by S&P or
Prime-1 by Moody's; (6) floating rate or master demand notes; and (7)
repurchase agreements covering securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities (see "Investment
Techniques--Repurchase Agreements," below). Time deposits with maturities
greater than seven days are considered to be illiquid securities.
Investments by the Money Market Portfolio are limited to those which present
minimal credit risk. If a security held by the Money Market Portfolio is no
longer deemed to present minimal credit risk, the Money Market Portfolio will
dispose of the security as soon as practicable unless the Trustees determine
that such action would not be in the best interest of the Portfolio.
Purchases of securities that are unrated must be ratified by the Trustees of
the Trust. Because the market value of debt obligations fluctuates as an
inverse function of changing interest rates, the Portfolio seeks to minimize
the effect of such fluctuations by investing only in instruments with a
remaining maturity of 397 calendar days or less at the time of investment,
except for obligations of the U.S. Government, its agencies, and
instrumentalities which may have a remaining maturity of 762 calendar days or
less. The Portfolio will maintain a dollar-weighted average portfolio
maturity of 90 days or less. The Money Market Portfolio may invest up to 20%
of its total assets in U.S. dollar-denominated foreign money market
instruments. See "Investment Techniques--Foreign Securities and Currencies,"
below. The Portfolio may make secured loans of up to 50% of its total
portfolio securities. See "Investment Techniques--Securities Lending," below.
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INVESTMENT TECHNIQUES
The Portfolios have the flexibility to invest, within limits, in a variety of
instruments designed to enhance their investment capabilities. All of the
Portfolios may make investments in repurchase agreements, and all of the
Portfolios may purchase or sell securities on a when-issued, delayed delivery
or forward commitment basis. The Portfolios, other than the Money Market
Portfolio, may write (i.e., sell) covered put and call options and buy put
and call options on securities and securities indexes. The Portfolios, other
than the Money Market Portfolio, may also write covered put and call options
and buy put and call options on foreign currencies. The Aggressive Stock,
Common Stock, Growth Investors, Global and High Yield Portfolios may use
exchange-traded financial futures contracts, and options thereon. A brief
description of certain of these investment instruments and their risks
appears below. More detailed information is to be found in the SAI.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
The Portfolios may invest in mortgage-backed securities, which are mortgage
loans made by banks, savings and loan institutions and other lenders that are
assembled into pools, that are (i) issued by an agency of the U.S. Government
(such as GNMA) whose securities are guaranteed by the U.S. Treasury, (ii)
issued by an instrumentality of the U.S. Government (such as FNMA) whose
securities are supported by the instrumentality's right to borrow from the
U.S. Treasury, at the discretion of the U.S. Treasury, though not backed by
the full faith and credit of the U.S. Government itself, or (iii)
collateralized by U.S. Treasury obligations or U.S. Government agency
securities. Interests in such pools are described in this prospectus as
mortgage-backed securities. The Portfolios may invest in (i) mortgage-backed
securities, including GNMA, FNMA and FHLMC certificates, (ii) CMOs that are
issued by non-governmental entities and collateralized by U.S. Treasury
obligations or by U.S. Government agency or instrumentality securities, (iii)
REMICs and (iv) other asset-backed securities. Other asset-backed securities
(unrelated to mortgage loans) may include securities such as certificates for
automobile receivables (CARS) and credit card receivable securities (CARDS)
as well as other asset-backed securities that may be developed in the future.
The rate of return on mortgage-backed securities, such as GNMA, FNMA and
FHLMC certificates and CMOs, and, to a lesser extent, asset-backed securities
may be affected by early prepayment of principal on the underlying loans or
receivables. Prepayment rates vary widely and may be affected by changes in
market interest rates. It is not possible to accurately predict the average
life of a particular mortgage pool or pool of loans or receivables.
Reinvestment of principal may occur at higher or lower rates than the
original yield. Therefore, the actual maturity and realized yield on
mortgage-backed securities and, to a lesser extent, asset-backed securities
will vary based upon the prepayment experience of the underlying pool of
mortgages or pool of loans or receivables.
The fixed rate mortgage-backed and asset-backed securities in which the Money
Market Portfolio invests will have remaining maturities of less than one
year. The Portfolios may also invest in floating or variable rate
mortgage-backed and asset-backed securities on the same terms as they may
invest in floating or variable rate notes, described below under "Certain
Money Market Instruments."
CERTAIN MONEY MARKET INSTRUMENTS
All of the Portfolios may utilize money market instruments, including
certificates of deposit, time deposits, bankers' acceptances, bank notes and
other short-term debt obligations issued by commercial banks and certificates
of deposit, time deposits, and other short-term obligations issued by savings
and loan associations (S&Ls). Certificates of deposit are receipts from a
bank or an S&L for funds deposited for a specified period of time at a
specified rate of return. Time deposits in banks or S&Ls are generally
similar to certificates of deposit, but are uncertificated. Bankers'
acceptances are time drafts drawn on commercial banks by borrowers, usually
in connection with international commercial transactions.
The Portfolios may also use commercial paper, meaning short-term, unsecured
promissory notes issued by corporations to finance their short-term credit
needs. In addition, the Portfolios may invest in variable or floating rate
notes. Variable and floating rate notes provide for automatic establishment
of a new interest
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rate at fixed periodic intervals (e.g., daily, monthly) or whenever some
specified interest rate changes. The interest rate on variable or floating
rate securities is ordinarily determined by reference to some other objective
measure such as the U.S. Treasury bill rate. Many floating rate notes have
put or demand features which allow the holder to put the note back to the
issuer or the broker who sold it at certain specified times and upon notice.
Floating rate notes without such a put or demand feature, or in which the
notice period is greater than seven days, may be considered illiquid
securities.
FIXED INCOME SECURITIES
Fixed income securities include preferred and preference stocks and all types
of debt obligations of both domestic and foreign issuers (such as bonds,
debentures, notes, equipment lease certificates, equipment trust
certificates, conditional sales contracts, commercial paper, mortgage-backed
securities and obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities).
Corporate debt securities may bear fixed, contingent or variable rates of
interest and may involve equity features, such as conversion or exchange
rights or warrants for the acquisition of stock of the same or a different
issuer or participation based on revenues, sales or profits or the purchase
of common stock in a unit transaction (where corporate debt securities and
common stock are offered as a unit).
RISK FACTORS OF LOWER RATED FIXED INCOME SECURITIES
Fixed income investments that have a high current yield and that are either
rated in the lower categories by NRSROs (i.e., Baa or lower by Moody's or BBB
or lower by S&P) or are unrated 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. Because investment in medium and lower
quality bonds involves greater investment risk, achievement of a Portfolio's
investment objective will be more dependent on the investment adviser's
analysis than would be the case if that Portfolio were investing in higher
quality bonds. Medium and lower quality bonds may be more susceptible to real
or perceived adverse economic and individual corporate developments than
would investment grade bonds. For example, a projected economic downturn or
the possibility of an increase in interest rates could cause a decline in
high yield bond prices because such an event might lessen the ability of
highly leveraged high yield issuers to meet their principal and interest
payment obligations, meet projected business goals or obtain additional
financing. In addition, the secondary trading market for medium and lower
quality bonds may be less liquid than the market for investment grade bonds.
This potential lack of liquidity may make it more difficult for the
investment adviser to value accurately certain portfolio securities. Further,
as with many corporate bonds (including investment grade issues), there is
the risk that certain high yield bonds containing redemption or call
provisions may be called by the issuers of such bonds in a declining interest
rate market, and the relevant Portfolio would then have to replace such
called bonds with lower yielding bonds, thereby decreasing the net investment
income to the Portfolio. Prepayment of mortgages underlying mortgage-backed
securities, even though these securities will generally be rated in the
higher categories of NRSROs, may reduce their current yield and total return.
However, the Trust's investment adviser intends to invest in these securities
only when the potential benefits to a Portfolio are deemed to outweigh the
risks.
REPURCHASE AGREEMENTS
In repurchase agreements, a Portfolio buys securities from a seller, usually
a bank or brokerage firm, with the understanding that the seller will
repurchase the securities at a higher price at a future date. During the term
of the repurchase agreement, the Portfolio's custodian retains the securities
subject to the repurchase agreement as collateral securing the seller's
repurchase obligation, continually monitors on a daily basis the market value
of the securities subject to the agreement and requires the seller to deposit
with the Portfolio's custodian collateral equal to any amount by which the
market value of the securities subject to the repurchase agreement falls
below the resale amount provided under the repurchase agreement. The
creditworthiness of sellers is determined by the investment adviser, subject
to direction of and review by the Board of Trustees. Such transactions afford
an opportunity for the Portfolio to earn a fixed rate of return on available
cash at minimal market risk, although the Portfolio may be subject to
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various delays and risks of loss if the seller is unable to meet its
obligation to repurchase. The staff of the SEC currently takes the position
that repurchase agreements maturing in more than seven days are illiquid
securities. No Portfolio will enter into a repurchase agreement if as a
result more than 15% of the Portfolio's net assets would be invested in
"illiquid securities" (except that the limitation is 10% for the Money Market
Portfolio).
FORWARD COMMITMENTS AND WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Portfolios may enter into forward commitments for the purchase or sale of
securities and may purchase and sell securities on a when-issued or delayed
delivery basis. Forward commitments and when-issued or delayed delivery
transactions arise when securities are purchased or sold 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 market value of such
securities may be more or less than the purchase price payable at settlement.
No payment or delivery is made by the Portfolio until it receives delivery or
payment from the other party to the transaction. When a Portfolio engages in
forward commitments or when-issued or delayed delivery transactions, the
Portfolio relies on the other party to consummate the transaction. Failure to
consummate the transaction may result in the Portfolio missing the
opportunity of obtaining a price or yield considered to be advantageous.
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. The Portfolio's custodian will
maintain, in a segregated account of the Portfolio, cash, U.S. Government
securities or other liquid high-grade debt obligations having a value equal
to or greater than the Portfolio's purchase commitments; the custodian will
likewise segregate securities sold under a forward commitment or on a delayed
delivery basis. A Portfolio will sell on a forward settlement basis only
securities it owns or has the right to acquire.
OPTIONS
The Portfolios, other than the Money Market Portfolio, may write (sell)
covered put and call options and buy put and call options, including options
relating to individual securities and securities indexes. The Portfolios,
other than the Money Market Portfolio, may also write covered put and call
options and buy put and call options on foreign currencies.
A call option is a contract that gives to the holder the right to buy a
specified amount of the underlying security at a fixed or determinable price
(called the exercise or strike price) upon exercise of the option. A put
option is a contract that gives the holder the right to sell a specified
amount of the underlying security at a fixed or determinable price upon
exercise of the option. In the case of index options, exercises are settled
through the payment of cash rather than the delivery of property. A call
option on a security will be considered covered, for example, if the
Portfolio holds the security upon which the option is written. The Portfolios
may write call options on securities or securities indexes for the purpose of
increasing their return or to provide a partial hedge against a decline in
the value of their portfolio securities or both. The Portfolios may write put
options on securities or securities indexes in order to earn additional
income or (in the case of put options written on individual securities) to
purchase the underlying security at a price below the current market price.
If a Portfolio writes an option which expires unexercised or is closed out by
the Portfolio at a profit, it will retain all or part of the premium received
for the option, which will increase its gross income. If the option is
exercised, the Portfolio will be required to sell or purchase the underlying
security at a disadvantageous price, or, in the case of index options,
deliver an amount of cash, which loss may only be partially offset by the
amount of premium received. Each of the Portfolios noted above may also
purchase put or call options on securities and securities indexes in order to
hedge against changes in interest rates or stock prices which may adversely
affect the prices of securities that the Portfolio wants to purchase at a
later date, to hedge its existing investments against a decline in value, or
to attempt to reduce the risk of missing a market or industry segment
advance. In the event that the expected changes in interest rates or stock
prices occur, the Portfolio may be able to offset the resulting adverse
effect on the Portfolio by exercising or selling the options
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purchased. The premium paid for a put or call option plus any transaction
costs will reduce the benefit, if any, realized by the Portfolio upon
exercise or liquidation of the option. Unless the price of the underlying
security or level of the securities index changes by an amount in excess of
the premium paid, the option may expire without value to the Portfolio. See
"Risk Factors in Options and Futures," below.
Options purchased or written by the Portfolios may be traded on the national
securities exchanges or negotiated with a dealer. 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 options, and the securities used as "cover" for such options,
may be considered illiquid securities.
In instances in which a Portfolio has entered into agreements with primary
dealers 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 securities only the amount equal 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.
The Portfolios, except the Money Market Portfolio, may purchase put and call
options and write covered put and call options on foreign currencies for the
purpose of protecting against declines in the dollar value of portfolio
securities and against increases in the dollar cost of securities to be
acquired. Such investment strategies will be used as a hedge and not for
speculation. As in the case of other types of options, however, the writing
of an option on foreign currency will constitute only a partial hedge, up to
the amount of the premium received, and the 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 the Portfolio's position,
it may forfeit the entire amount of the premium plus related transaction
costs. Options on foreign currencies may be traded on the national securities
exchanges or in the over-the-counter market. As described above, 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.
FUTURES
The Growth Investors, Global and High Yield Portfolios may each purchase and
sell futures contracts and related options on debt securities and on indexes
of debt securities to hedge against anticipated changes in interest rates
that might otherwise have an adverse effect on the value of their assets or
assets they intend to acquire. In addition, each Portfolio listed above as
well as the Common Stock and Aggressive Stock Portfolios may purchase and
sell stock index futures contracts and related options to hedge the equity
portion of its assets or equity assets it intends to acquire with regard to
market risk as distinguished from stock-specific risk. As described below
under "Foreign Securities and Currencies," the Global, Growth Investors,
Common Stock, Aggressive Stock and High Yield Portfolios may each enter into
futures contracts and related options on foreign currencies in order to limit
its exchange rate risk. All futures contracts and related options will be
traded on exchanges that are licensed and regulated by the Commodity Futures
Trading Commission (CFTC). All of the Portfolios, except the Money Market
Portfolio, may enter into futures contracts and buy and sell related options
without limitation, except as noted below. Pursuant to regulations of the
CFTC which provide an exemption from registration as a commodity pool
operator, a Portfolio will not purchase or sell futures contracts or options
on futures contracts unless either (i) the futures contracts or options
thereon are for "bona fide hedging" purposes (as that term is defined under
the CFTC regulations) or (ii) if for other purposes, the sum of amounts of
initial margin deposits and premiums required to establish non-hedging
positions would not exceed 5% of the Portfolio's liquidation value. When a
Portfolio purchases or sells a futures contract or writes a put or call
option on a futures contract, the Portfolio will segregate with its custodian
cash or cash equivalents (less any related margin deposits) equal to the cost
of the futures contract it intends to sell or purchase to insure that such
futures positions are not leveraged, or may otherwise cover such positions.
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FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
All the Portfolios, except the Money Market Portfolio, may enter into
contracts for the purchase or sale of a specific currency at a future date at
a price set at the time of the contract.
Generally, such forward contracts will be for a period of less than three
months. The Portfolios will enter into forward contracts for hedging purposes
only. These transactions will include forward purchases or sales of foreign
currencies for the purpose of protecting the dollar value of securities
denominated in a foreign currency or protecting the dollar equivalent of
interest or dividends to be paid on such securities. Forward contracts are
traded in the inter-bank market, and not on organized commodities or
securities exchanges.
RISK FACTORS IN OPTIONS AND FUTURES
To the extent a hedging transaction is effective, it will protect the value
of the securities or currencies which are hedged but may reduce or eliminate
the potential for gain. The effectiveness of a hedge depends, among other
things, on the correlation between the price movements of the hedging vehicle
and the hedged items, but these correlations generally are imperfect. A
hedging transaction may produce a loss as a result of such imperfect
correlations or for other reasons. The risks of trading futures contracts
also include the risks of inability to effect closing transactions or to do
so at favorable prices; consequently, losses from investing in futures
contracts are potentially unlimited. The risks of option trading include
possible loss of the entire premium on purchased options and inability to
effect closing transactions at favorable prices. The extent to which a
Portfolio can benefit from investments involving options and futures
contracts may also be limited by various tax rules. Favorable results from
options and futures transactions may depend on the investment adviser's
ability to predict correctly the direction of securities prices, interest
rates and other economic factors.
FOREIGN SECURITIES AND CURRENCIES
All of the Portfolios may invest in foreign securities. Investments in
foreign securities may involve a higher degree of risk because of limited
publicly available information, non-uniform accounting, auditing and
financial standards, reduced levels of government regulation of foreign
securities markets, difficulties and delays in transaction settlements, lower
liquidity and greater volatility, withholding or confiscatory taxes, changes
in currency exchange rates, currency exchange control regulations and
restrictions on and the costs associated with the exchange of currencies and
expropriation, nationalization or other adverse political or economic
developments. It may also be more difficult to obtain and enforce a judgment
against a foreign issuer or enterprise and there may be difficulties in
effecting the repatriation of capital invested abroad. In addition, banking,
securities and other business operations abroad may not be subject to
regulation as rigorous as that applicable to similar activities in the United
States. Further, there may be restrictions on foreign investment in some
countries. Special tax considerations apply to foreign securities, and
foreign brokerage commissions and other fees are generally higher than in the
United States.
The Portfolios may buy and sell foreign currencies principally for the
purpose of preserving the value of foreign securities or in anticipation of
purchasing foreign securities.
SECURITIES LENDING
For purposes of realizing additional income, each Portfolio may lend
securities with a value of up to 50% of its total assets to broker-dealers
approved by the Board of Trustees. In addition, the High Yield Portfolio may
make secured loans of its portfolio securities without restriction. Any such
loan of portfolio securities will be continuously secured by collateral at
least equal to the value of the security loaned. Such collateral will be in
the form of cash, marketable securities issued or guaranteed by the U.S.
Government or its agencies, or a standby letter of credit issued by qualified
banks. 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 the investment adviser to be of good standing and will not be
made unless, in the judgment of the investment adviser, the consideration to
be earned from such loans would justify the risk.
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CERTAIN INVESTMENT RESTRICTIONS
The following restrictions apply to all of the Portfolios, unless otherwise
stated, and are fundamental. Unless permitted by law, they will not be
changed for any Portfolio without a vote of that Portfolio's shareholders.
Additional investment restrictions appear in the SAI.
None of the Portfolios will make loans, except that this restriction shall
not apply to secured loans of portfolio securities by each of the Portfolios.
Each Portfolio, other than the High Yield Portfolio, may make loans of
portfolio securities not exceeding 50% of the value of that Portfolio's total
assets. This restriction does not prevent a Portfolio from purchasing debt
obligations in which a Portfolio may invest consistent with its investment
policies, or from buying government obligations, short-term commercial paper
or publicly traded debt, including bonds, notes, debentures, certificates of
deposit, and equipment trust certificates, nor does this restriction apply to
loans made under insurance policies or through entry into repurchase
agreements to the extent they may be viewed as loans. The High Yield
Portfolio may make secured loans of portfolio securities or cash without
limitation.
Each Portfolio, except as noted below, elects not to "concentrate"
investments in an industry, as that concept is defined under applicable
federal securities laws. In general, this means that no Portfolio will make
an investment in an industry if that investment would make the Portfolio's
holding in that industry exceed 25% of the Portfolio's total assets. However,
this restriction does not apply to investments by the Money Market Portfolio
in certificates of deposit or securities issued and guaranteed by domestic
banks. Furthermore, the United States Government, its agencies and
instrumentalities are not considered members of any industry for purposes of
this restriction.
Each Portfolio intends to be "diversified," as that term is defined under
applicable Federal securities laws. In general, this means that no Portfolio
will make an investment unless, when considering all its other investments,
75% of the value of the Portfolio's assets would consist of cash, cash items,
U.S. Government securities, securities of other investment companies and
other securities. For the purposes of this restriction, "other securities"
are limited for any one issuer to not more than 5% of the value of the
Portfolio's total assets and to not more than 10% of the issuer's outstanding
voting securities.
As a matter of operating policy, except as noted below, the Money Market
Portfolio will invest no more than 5% of the value of its total assets, at
the time of acquisition, in the securities of any one issuer, other than
obligations of the U.S. Government, its agencies and instrumentalities.
However, the Money Market Portfolio may invest up to 25% of the value of its
total assets in First Tier Securities (as defined in Rule 2a-7 under the
Investment Company Act of 1940) of a single issuer for a period of up to
three business days after the purchase of such securities. The Money Market
Portfolio will also not (i) invest more than 5% of the value of its total
assets, at time of acquisition, in Second Tier Securities (as defined in Rule
2a-7 under the Investment Company Act of 1940) or (ii) invest more than the
greater of 1% of the value of the Portfolio's total assets or $1,000,000, at
the time of acquisition, in Second Tier Securities of a single issuer.
MANAGEMENT OF THE TRUST
THE BOARD OF TRUSTEES
The Board of Trustees is responsible for the management of the business and
affairs of the Trust as provided in the laws of the Commonwealth of
Massachusetts and the Trust's Declaration of Trust and By-laws.
THE INVESTMENT ADVISER
Alliance Capital Management L.P. (Alliance), the main office of which is
located at 1345 Avenue of the Americas, New York, New York 10105, serves as
investment adviser to the Trust pursuant to an investment advisory agreement,
relating to each of the Portfolios, between the Trust and Alliance. Alliance,
a publicly traded limited partnership, is indirectly majority-owned by
Equitable.
Alliance is an investment adviser registered under the Investment Advisers
Act of 1940 (Advisers Act). Alliance, a leading international investment
adviser, acts as an investment adviser to various separate accounts and
general accounts of Equitable and other affiliated insurance companies.
Alliance also provides investment advisory and management services to other
investment companies and to endow-
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ment funds, insurance companies, foreign entities, qualified and non-tax
qualified corporate funds, public and private pension and profit-sharing
plans, foundations and tax-exempt organizations.
Alliance manages the day-to-day investment operations of the Trust and
exercises responsibility for the investment and reinvestment of the Trust's
assets. Alliance provides, without charge, personnel to the Trust to render
such clerical, accounting, administrative and other services, other than
investor services, as the Trust may request.
The advisory fee payable by the Trust is at the following annual percentages
of the value of each Portfolio's daily average net assets:
<TABLE>
<CAPTION>
DAILY AVERAGE NET ASSETS
----------------------------------------------
FIRST $350 NEXT $400 OVER $750
MILLION MILLION MILLION
-------------- -------------- --------------
<S> <C> <C> <C>
Aggressive Stock .500% .475% .450%
Common Stock ..... .400% .375% .350%
Growth Investors .550% .525% .500%
Global ........... .550% .525% .500%
High Yield ....... .550% .525% .500%
Money Market ..... .400% .375% .350%
</TABLE>
THE PORTFOLIO MANAGERS
AGGRESSIVE STOCK PORTFOLIO
Alden M. Stewart and Randall E. Haase have been the persons principally
responsible for the Aggressive Stock Portfolio's investment program since
1993. Mr. Stewart, an Executive Vice President of Alliance, has been
associated with Alliance since 1970.* Mr. Haase, a Vice President of
Alliance, has been associated with Alliance since 1988.*
COMMON STOCK PORTFOLIO
Tyler J. Smith has been the person principally responsible for the Common
Stock Portfolio's investment program since 1977. Mr. Smith, a Senior Vice
President of Alliance, has been associated with Alliance since 1970.*
GROWTH INVESTORS PORTFOLIO
Robert G. Heisterberg is the person principally responsible for the Growth
Investors Portfolio's investment program as of February 12, 1996. Mr.
Heisterberg, a Senior Vice President of Alliance and Global Economic Policy
Analysis, has been associated with Alliance since 1977.
GLOBAL PORTFOLIO
Ronald Simcoe has been the person principally responsible for the Global
Portfolio's investment program since 1988. Mr. Simcoe, a Vice President of
Alliance, has been associated with Alliance since 1977.*
HIGH YIELD PORTFOLIO
Wayne C. Tappe has been the person principally responsible for the High Yield
Portfolio's investment program since 1995. Mr. Tappe, a Vice President of
Alliance, has been associated with Alliance since 1987.*
- ----------
* Prior to July 22, 1993, with Equitable Capital Management Corporation
(Equitable Capital). On that date Alliance acquired the business and
substantially all of the assets of Equitable Capital and became the
investment adviser to the Trust.
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MONEY MARKET PORTFOLIO
Raymond J. Papera has been the person principally responsible for the Money
Market Portfolio's investment program since 1990. Mr. Papera, a Vice
President of Alliance, has been associated with Alliance since 1990.*
THE TRUST'S EXPENSES
The Trust's investment adviser pays all of the Trust's operating expenses not
specifically assumed by the Trust. In addition to the investment advisory fee
and brokers' commissions, transfer taxes and other fees relating to
purchases, loans and sales of investments, a number of expenses are paid
directly by the Trust. The Trust pays Trustees' fees and expenses; the fees
and expenses of its independent auditors and of its legal counsel; the costs
of printing and mailing of annual and semi-annual reports to shareholders,
proxy statements, prospectuses, prospectus supplements and SAIs, all to the
extent they are sent to existing Contract owners; the costs of printing of
registration statements; bank transaction charges and custodian's fees; any
proxy solicitors' fees and expenses; SEC 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.
TRANSACTIONS WITH AFFILIATES
In December 1984, Equitable acquired Donaldson, Lufkin & Jenrette, Inc.
(DLJ). A DLJ subsidiary, Donaldson, Lufkin & Jenrette Securities Corporation,
is one of the nation's largest investment banking and securities firms.
Another DLJ subsidiary, Autranet, Inc., is a securities broker that markets
independently originated research to institutions. Through the Pershing
Division of Donaldson, Lufkin & Jenrette Securities Corporation, DLJ supplies
security execution and clearance services to financial intermediaries
including broker-dealers and banks. To the extent permitted by law, the Trust
may engage in securities and other transactions with the above entities or
may invest in shares of the investment companies with which those entities
have affiliations. The Investment Company Act generally prohibits the Trust
from engaging in securities transactions with DLJ or its affiliates, as
principal, unless pursuant to an exemptive order from the SEC. The Trust may
apply for such exemptive relief. The Trust has adopted procedures, prescribed
by Section 17(e)(2)(A) of the Investment Company Act and Rule 17e-1
thereunder, which are reasonably designed to provide that any commissions it
pays to DLJ or its affiliates do not exceed the usual and customary broker's
commission. In addition, the Trust will adhere to Section 11(a) of the
Securities Exchange Act of 1934 and any applicable rules thereunder governing
floor trading. The Trust has adopted procedures permitting it to purchase
securities, under certain restrictions prescribed by an SEC rule, in a public
offering in which DLJ or an affiliate is an underwriter.
DESCRIPTION OF THE TRUST'S SHARES
CHARACTERISTICS
The Board of Trustees has authority to issue an unlimited number of shares of
beneficial interest, without par value. The Trust is divided into thirteen
portfolios, each of which has Class IA and Class IB shares. The Board of
Trustees may establish additional Portfolios and additional classes of
shares. Each share of each class of a Portfolio shall be entitled to one vote
(or fraction thereof in respect of a fractional share) on matters that such
shares (or class of shares) shall be entitled to vote. Shareholders of each
Portfolio shall vote together on any matter, except to the extent otherwise
required by the Investment Company Act, or when the Board of Trustees of the
Trust have determined that the matter affects only the interest of
shareholders of one or more classes, in which case only the shareholders of
such class or classes shall
- ---------
* Prior to July 22, 1993, with Equitable Capital Management Corporation
(Equitable Capital). On that date Alliance acquired the business and
substantially all of the assets of Equitable Capital and became the
investment adviser to the Trust.
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be entitled to vote thereon. Any matter shall be deemed to have been
effectively acted upon with respect to each Portfolio if acted upon as
provided in Rule 18f-2 under the the Investment Company Act, or any successor
rule, and in the Declaration of Trust. The Trust is not required to hold
annual shareholder meetings, but special meetings may be called for purposes
such as electing or removing trustees, changing fundamental policies or
approving an investment advisory agreement.
Under the Trust's multi-class system, shares of each class of a Portfolio
represent an equal pro rata interest in that Portfolio and, generally, shall
have identical voting, dividend, liquidation, and other rights, preferences,
powers, restrictions, limitations, qualifications and terms and conditions,
except that: (1) each class shall have a different designation; (2) each
class of shares shall bear its "Class Expenses;" (3) each class shall have
exclusive voting rights on any matter submitted to shareholders that relates
solely to its distribution arrangements; (4) 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; (5) each class may
have separate exchange privileges, although exchange privileges are not
currently contemplated; and (6) 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 to the Distributor pursuant to the Distribution Plan for Class IB
shares.
PURCHASE AND REDEMPTION
Class IB shares are offered at net asset value and are subject to
distribution fees under the Distribution Plan. The price at which a purchase
is effected is based on the next calculation of net asset value after an
order is placed by an insurance company investing in the Trust. Net asset
value per share is calculated for purchases and redemption of shares of each
Portfolio by dividing the value of total Portfolio assets, less liabilities
(including Trust expenses, which are accrued daily), by the total number of
shares of that Portfolio outstanding. The net asset value per share of each
Portfolio is determined each business day at 4:00 p.m. Eastern time. Values
are not calculated on national business holidays.
The Trust has a distribution agreement for its Class IB shares with Equitable
Distributors, Inc. (the "Distributor"), a Delaware corporation and an
indirect, wholly-owned subsidiary of The Equitable Life Assurance Society of
the United States located at 787 Seventh Avenue, New York, New York 10019.
The Trust has adopted the Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act for the Class IB shares of the Trust. Pursuant to the
Distribution Plan, the Trust compensates the Distributor 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 Distributor will be used to defray various costs incurred or
paid by the Distributor in connection with the printing and mailing of Trust
prospectuses, statements of additional information, any supplements thereto
and shareholder reports and holding seminars and sales meetings with
wholesale and retail sales personnel designed to promote the distribution of
Class IB shares. The Distributor may also use a portion of the amounts
received to provide compensation to financial intermediaries and third-party
broker-dealers for their services in connection with the distribution of
Class IB shares.
The Distribution Plan provides that the Trust, on behalf of each Portfolio,
may pay annually up to 0.50% of the average daily net assets of a Portfolio
attributable to its Class IB shares in respect of activities primarily
intended to result in the sale of Class IB shares. However, under the
distribution agreement payments to the Distributor for activities pursuant to
the Distribution Plan are limited to payments at an annual rate equal to
0.25% of average daily net assets of a Portfolio attributable to its Class IB
shares. Under the terms of the Distribution Plan and the distribution
agreement, each Portfolio is authorized to make payments monthly to the
Distributor which may be used to pay or reimburse entities providing
distribution and shareholder servicing with respect to the Class IB shares
for such entities' fees or expenses incurred or paid in that regard.
The Distribution Plan is of a type known as a "compensation" plan because
payments are made for services rendered to the Trust with respect to Class IB
shares regardless of the level of expenditures by
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the Distributor. The Trustees will, however, take into account such
expenditures for purposes of reviewing operations under the Distribution Plan
and in connection with their annual consideration of the Plan's renewal. The
Distributor has indicated that it expects its 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 Distributor determines is primarily intended to
result in the sale of Class IB shares.
All shares may be redeemed in accordance with the Trust's Declaration of
Trust and By-Laws. Class IB shares will be redeemed at their net asset value.
Sales and redemptions of shares of the same class by the same shareholder on
the same day will be netted. All redemption requests will be processed and
payment with respect thereto will be made within seven days after tenders.
The Trust may also suspend redemption, if permitted by the Investment Company
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.
HOW ASSETS ARE VALUED
Values are determined according to accepted accounting practices and all laws
and regulations that apply. The assets of each Portfolio are generally valued
as follows, as further described in the SAI:
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, or in American Depositary
Receipt or similar form in the United States, are valued at
representative quoted prices in the currency of the country of origin.
Foreign currency amounts are translated into U.S. dollars at the bid
price last quoted by a composite list of major U.S. banks.
o Short-term debt securities in the Portfolios other than the Money Market
Portfolio which mature in 60 days or less are valued at amortized cost,
which approximates market value. Securities held in the Money Market
Portfolio are valued at prices based on equivalent yields or yield
spreads.
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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Under current federal income tax law, the Trust believes that each Portfolio
is entitled, and the Trust intends that each Portfolio shall qualify each
year and elect, to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (Internal
Revenue Code). As a regulated investment company, a Portfolio will not be
subject to federal tax on its net investment income and net realized capital
gains to the extent such income and gains are timely distributed to its
insurance company shareholders. Accordingly, each Portfolio intends to
distribute all of its net investment income and net realized capital gains to
its shareholders. An insurance company which is a shareholder of a Portfolio
will generally not be taxed on distributions from that Portfolio. All
dividend distributions will be reinvested in full and fractional shares of
the Portfolio to which they relate.
Although the Trust intends that it and the Portfolios will be operated so
that they will have no federal income or excise tax liability, if any such
liability is nevertheless incurred, the investment performance of
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the Portfolio or Portfolios incurring such liability will be adversely
affected. In addition, Portfolios investing in foreign securities and
currencies may be subject to foreign taxes which could reduce the investment
performance of such Portfolio.
In addition to meeting investment diversification rules applicable to
regulated investment companies under Subchapter M of the Internal Revenue
Code, because the Trust funds certain types of Contracts, each Portfolio is
also subject to the investment diversification requirements of Subchapter L
of the Internal Revenue Code. Were any Portfolio to fail to comply with those
requirements, owners of Contracts (other than "pension plan contracts")
funded through the Trust would be taxed immediately on the accumulated
investment earnings under their Contracts and would thereby lose any benefit
of tax deferral. Compliance is therefore carefully monitored by the
investment adviser.
Certain additional tax information appears in the SAI.
For more information regarding the tax implications for owners of Contracts
investing in the Trust, refer to the prospectuses for those products.
INVESTMENT PERFORMANCE
Each Portfolio may illustrate in advertisements or sales materials its
average annual total return, which is the rate of growth of the Portfolio
that would be necessary to achieve the ending value of an investment kept in
the Portfolio for the period specified and is based on the following
assumptions: (1) all dividends and distributions by the Portfolio are
reinvested in shares of the Portfolio at net asset value, and (2) all
recurring fees are included for applicable periods.
Each Portfolio may also illustrate in advertisements or sales materials its
cumulative total return for several time periods throughout the Portfolio's
life based on an assumed initial investment of $1,000. Any such cumulative
total return for each Portfolio will assume the reinvestment of all income
dividends and capital gains distributions for the indicated periods and will
include all recurring fees.
The Money Market Portfolio may illustrate in advertisements or sales
materials its yield and effective yield. The Portfolio's yield refers to
income generated by an investment in the Portfolio over a 7-day period,
expressed as an annual percentage rate. The Money Market Portfolio's
effective yield is calculated similarly but assumes that income earned from
the investment is reinvested. The Portfolio's effective yield will be
slightly higher than its yield because of the compounding effect of this
assumed reinvestment.
The High Yield Portfolio may illustrate in advertisements or sales materials
its yield based on a recent 30-day period, which reflects the income per
share earned by that Portfolio's investments. The yield is calculated by
dividing that Portfolio's net investment income per share during that period
by the net asset value on the last day of that period and annualizing the
result.
These performance figures are based on historical earnings and are not
intended to indicate future performance. Nor do they reflect fees and charges
imposed under the Contracts, which fees and charges will reduce such
performance figures; therefore, these figures may be of limited use for
comparative purposes. No Portfolio will use information concerning its
investment performance in advertisements or sales materials unless
appropriate information concerning the relevant separate account is also
included.
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<PAGE>
APPENDIX A
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 and differ from the higher rated issues only in small degree.
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 favorable 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.
A-1
<PAGE>
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.
A-2
<PAGE>
THE HUDSON RIVER TRUST
1345 Avenue of the Americas --New York, New York 10105
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1996
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with The Hudson River Trust (Trust) Prospectus dated
October 1, 1996 relating to Class IB shares and retained for future reference.
This Statement of Additional Information relates to the Trust's Class IB shares.
A separate Statement of Additional Information relates to the Trust's Class IA
shares.
A copy of the Prospectus to which this Statement of Additional Information
relates is available at no charge by writing the Trust at the above address.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
General Information and History ........................................ 2
Investment Restrictions of the Portfolios .............................. 4
Description of Certain Securities in Which the Portfolios May Invest .. 6
Management of the Trust ................................................ 21
Investment Advisory and Other Services ................................. 26
Brokerage Allocation ................................................... 28
Trust Expenses and Other Charges ....................................... 30
Purchase and Pricing of Securities ..................................... 30
Certain Tax Considerations ............................................. 32
Portfolio Performance .................................................. 33
Other Services ......................................................... 36
Financial Statements ................................................... 37
Appendix A--Description of Commercial Paper Ratings .................... A-1
</TABLE>
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HRT-SAI (9/96) Copyright 1996. The Hudson River Trust. All rights
reserved. Catalog No.126491
<PAGE>
GENERAL INFORMATION AND HISTORY
THE TRUST
The Hudson River Trust is an open-end management investment company--a type
of company commonly known as a "mutual fund." It is registered as such under
the Investment Company Act of 1940, as amended (Investment Company Act).
Originally organized as a Maryland corporation, the Trust's operations
commenced on March 22, 1985. On July 10, 1987, the Trust was formed as a
Massachusetts business trust. The Trust offers two classes of shares on
behalf of each Portfolio: Class IA shares are offered pursuant to another
prospectus at net asset value and are not subject to fees imposed pursuant to
a distribution plan. Class IA shares are sold to insurance company separate
accounts of companies that are not affiliated with each other. Class IB
shares are offered pursuant to this prospectus at net asset value and are
subject to distribution fees imposed under a distribution plan (the
"Distribution Plan") adopted pursuant to Rule 12b-1 under the Investment
Company Act. Prior to October 1, 1996, the Trust offered only those shares that
are now designated as Class IA shares.
The two classes of shares are offered under the Trust's multiple class
distribution system approved by the Trust's Board of Trustees on June 7, 1996
and are designed to allow promotion of insurance products investing in the
Trust through alternative distribution channels. Under the Trust's
multi-class system, shares of each class of a Portfolio represent an equal
pro rata interest in that Portfolio and, generally, shall have identical
voting, dividend, liquidation, and other rights, other than the payment of
distribution fees under the Distribution Plan.
The Trust continuously offers its shares exclusively to separate accounts of
insurance companies in connection with variable life insurance contracts and
variable annuity certificates and contracts (collectively, Contracts). Class
IB shares are sold only to an insurance company separate account of The
Equitable Life Assurance Society of the United States (Equitable). Currently,
the Trust's shareholders of Class IA shares are separate accounts of
Equitable, separate accounts of Equitable Variable Life Insurance Company
(Equitable Variable), a wholly-owned subsidiary of Equitable, a separate
account of Integrity Life Insurance Company, a separate account of American
Franklin Life Insurance Company, a separate account of Transamerica
Occidental Life Insurance Company and a separate account of SAFECO Life
Insurance Company, all of which are insurance companies unaffiliated with
Equitable. The Trust may offer its shares to separate accounts of other
insurance companies, both affiliated and not affiliated with Equitable. As of
March 31, 1996, Equitable and Equitable Variable owned approximately 99.6% of
the Trust's outstanding Class IA shares and, as a result, may be deemed to be
control persons with respect to the Trust.
As a "series" type of mutual fund, the Trust issues separate series of shares
of beneficial interest, each of which represents a separate portfolio
(Portfolio) of investments. Each Portfolio resembles a separate fund issuing
a separate class of stock. The Common Stock and Money Market Portfolios are
the successors to Separate Accounts I and II of Equitable Variable. (See
"Description of Reorganization and Other Matters"). The Balanced and
Aggressive Stock Portfolios received their initial funding on January 27,
1986 from Equitable Variable. The High Yield Portfolio received its initial
funding on January 2, 1987. The Global Portfolio received its initial funding
on August 27, 1987. The Conservative Investors and Growth Investors
Portfolios received their initial funding on October 2, 1989. The
Intermediate Government Securities Portfolio (Government Portfolio) received
its initial funding on April 1, 1991. The Quality Bond and Growth and Income
Portfolios received their initial funding on October 1, 1993. The Equity
Index Portfolio received its initial funding on March 1, 1994. The
International Portfolio received its initial funding on April 3, 1995.
Because of current Federal securities law requirements, the Trust expects
that its shareholders will offer to owners of the Contracts (Contractowners)
the opportunity to instruct them as to how shares allocable to their
Contracts will be voted with respect to certain matters, such as approval of
investment advisory agreements. As of March 31, 1996, to the Trust's
knowledge, no Contractowners other than those set forth below owned Contracts
entitling such persons to give voting instructions regarding more than 5% of
the outstanding shares of a Portfolio.
2
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL QUALITY BOND EQUITY INDEX GLOBAL
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------- -------------------------- ------------------------ ------------------------
UNITS % OF % OF % OF % OF
OWNED PORTFOLIO UNITS OWNED PORTFOLIO UNITS OWNED PORTFOLIO UNITS OWNED PORTFOLIO
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Boatmen's Trust Co.* 10,860,007 61.79
Equitable ........... 501,445 8.59 3,410,647 7.19
Wachovia Bank** .... 2,682,954 15.27 2,801,789 16.37
</TABLE>
- ------------
* Boatmen's Trust Co., Trustee under Master Trust Agreement for SBC
Communications, Inc. Deferred Compensation Plans and other Executive
Benefit Plans.
** Wachovia Bank of Georgia, N.A., Trustee for the Mars, Inc.
Non-Qualified Retirement Benefits Trust.
The principal addresses of Boatmen's Trust Co., Equitable and Wachovia Bank
are 175 East Houston Street, San Antonio, Texas; 787 Seventh Avenue, New
York, New York; and 301 North Main Street, Winston-Salem, North Carolina,
respectively.
Were such a Contractowner's funds withdrawn from the Trust or transferred to
a different Portfolio at the Contractowner's request, the Trust could be
forced to sell portfolio securities at disadvantageous prices.
LEGAL CONSIDERATIONS
Under Massachusetts 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 Investment Company Act, shareholders of record of not less than
two-thirds of the outstanding shares of the Trust (including both Class IA
and Class IB shares) 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 shall 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. Amendments to the Declaration of Trust of the Trust generally
require 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.
Under Massachusetts law, in certain circumstances shareholders may be held
personally liable as partners for the obligations of a business trust such as
the Trust. The shareholders of the Trust are the insurance companies whose
separate accounts invest in it. The Trust's Declaration of Trust contains
provisions designed to protect shareholders from such liability to the extent
of the Trust's assets. As a result, the risk of personal liability for the
insurance company shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he or
she would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct
of his or her office. The Declaration of Trust permits the Trust to purchase
and maintain on behalf of the Trustees insurance against certain liabilities.
DESCRIPTION OF REORGANIZATION AND OTHER MATTERS
The following transactions, referred to as the Reorganization, were effected
simultaneously on March 22, 1985, pursuant to an Agreement and Plan of
Reorganization dated November 20, 1984, entered into by Equitable Variable,
Separate Accounts I and II, and The Hudson River Fund, Inc. (the Fund), the
predecessor of the Trust.
Equitable Variable divided Separate Account I into two divisions, a Common
Stock Division and a Money Market Division. Separate Account II was combined
with Separate Account I (the Continuing
3
<PAGE>
Separate Account). Rather than investing directly, the Common Stock Division
and the Money Market Division of the Continuing Separate Account invested in
shares of the Fund, which, in turn, invested in diversified portfolios of
common stock or money market investments.
In order for the Fund to commence operations, all the investment assets of
Separate Accounts I and II (together with any related liabilities) were
transferred to the Common Stock and Money Market Portfolios of the Fund,
respectively, in exchange for shares in those Portfolios having an equivalent
aggregate net asset value.
On September 30, 1987, all of the Fund's assets and liabilities were
transferred to the Trust, pursuant to an Agreement and Plan of Reorganization
(the Plan) between the Fund and the Trust. The Plan was proposed to
shareholders in order to permit greater operating flexibility and
efficiencies. The Plan provided for changes of domicile (from Maryland to
Massachusetts) and of form of organization (from a corporation to a business
trust). However, in all other material respects the Trust was identical to
the Fund immediately prior to the execution of the Plan.
INVESTMENT RESTRICTIONS OF THE PORTFOLIOS
FUNDAMENTAL RESTRICTIONS
The following restrictions apply to all of the Portfolios and are
fundamental. Unless permitted by law, they will not be changed for any
Portfolio without a vote of that Portfolio's shareholders.
None of the Portfolios will:
o underwrite securities issued by other persons except to the extent that,
in connection with the disposition of its portfolio investments, it may
be deemed to be an underwriter under certain Federal securities laws;
o make short sales of securities, except when it has, by reason of
ownership of other securities, the right to obtain securities of
equivalent kind and amount that will be held so long as it is in a short
position;
o issue senior securities;
o purchase real estate or mortgages; however, the Portfolios may, as
appropriate and consistent with their investment policies and other
investment restrictions, buy securities of issuers which engage in real
estate operations and securities which are secured by interests in real
estate (including partnership interests and shares of real estate
investment trusts), and may hold and sell real estate acquired as a
result of ownership of such securities;
o purchase any security on margin or borrow money, except that this
restriction shall not apply to borrowing from banks for temporary
purposes, to the pledging of assets to banks in order to transfer funds
for various purposes as required without interfering with the orderly
liquidation of securities in a Portfolio (but not for leveraging
purposes), to margin payments or pledges in connection with options,
futures contracts, options on futures contracts, forward contracts or
options on foreign currencies or, with respect to the Quality Bond
Portfolio, to transactions in interest rate swaps, caps and floors; or
o make loans (including lending cash or securities), except that this
restriction shall not apply to the High Yield and Government Portfolio.
Additionally, each of the other Portfolios may make loans of portfolio
securities not exceeding 50% of the value of that Portfolio's total
assets. This restriction does not prevent a Portfolio from purchasing
debt obligations in which a Portfolio may invest consistent with its
investment policies, or from buying government obligations, short-term
commercial paper, or publicly traded debt, including bonds, notes,
debentures, certificates of deposit, and equipment trust certificates,
nor does this restriction apply to loans made under insurance policies
or through entry into repurchase agreements to the extent they may be
viewed as loans.
4
<PAGE>
Each Portfolio, except as noted below, elects not to "concentrate"
investments in an industry, as that concept is defined under applicable
Federal securities laws. In general, this means that no Portfolio will make
an investment in an industry if that investment would make the Portfolio's
holding in that industry exceed 25% of the Portfolio's assets. However, this
restriction does not apply to investments by the Money Market Portfolio in
certificates of deposit or securities issued and guaranteed by domestic
banks. Furthermore, the U.S. Government, its agencies and instrumentalities
are not considered members of any industry. Each Portfolio intends to be
"diversified," as that term is defined under applicable Federal securities
laws. In general, this means that no Portfolio will make an investment
unless, when considering all its other investments, 75% of the value of the
Portfolio's assets would consist of cash, cash items, U. S. Government
securities, securities of other investment companies and other securities.
For the purposes of this restriction, "other securities" are limited for any
one issuer to not more than 5% of the value of the Portfolio's total assets
and to not more than 10% of the issuer's outstanding voting securities. As a
matter of operating policy, each Portfolio will not consider repurchase
agreements to be subject to the above-stated 5% limitation if all the
collateral underlying the repurchase agreements are U.S. Government
securities and such repurchase agreements are fully collateralized.
Further, as a matter of operating policy, the Money Market Portfolio will
invest no more than 5% of the value of its total assets in securities of any
one issuer, other than U.S. Government securities, except that the Money
Market Portfolio may invest up to 25% of its total assets in First Tier
Securities (as defined in Rule 2a-7 under the Investment Company Act) of a
single issuer for a period of up to three business days after the purchase of
such security. Further, as a matter of operating policy, the Money Market
Portfolio will not invest more than (i) the greater of 1% of its total assets
or $1,000,000 in Second Tier Securities (as defined in Rule 2a-7 under the
Investment Company Act) of a single issuer and (ii) 5% of the Money Market
Portfolio's total assets, when acquired, in Second Tier Securities.
These policies of the Portfolios with respect to concentration and
diversification will not be changed for any Portfolio without a vote of that
Portfolio's shareholders, unless permitted by law.
NON-FUNDAMENTAL RESTRICTIONS
The following investment restrictions apply to all of the Portfolios, but are
not fundamental. They may be changed for any Portfolio without a vote of that
Portfolio's shareholders.
None of the Portfolios will:
o invest more than 15% of its assets in securities restricted as to
disposition under Federal securities laws, or securities otherwise
considered illiquid or not readily marketable, including repurchase
agreements having a maturity of more than seven days; however, this
restriction will not apply to securities sold pursuant to Rule 144A
under the Securities Act of 1933, so long as such securities meet
liquidity guidelines to be established by the Trust's Board of Trustees;
o trade in foreign exchange (except transactions incidental to the
settlement of purchases or sales of securities for a Portfolio);
however, the Global and International Portfolios may trade in foreign
exchange without limitation in connection with their foreign currency
hedging strategies; and the High Yield, Quality Bond, Growth and Income,
Conservative Investors, Balanced, Common Stock, Aggressive Stock and
Growth Investors Portfolios may trade in foreign exchange in connection
with their foreign currency hedging strategies, provided the amount of
foreign exchange underlying such a Portfolio's currency hedging
transactions does not exceed 10% of such Portfolio's assets;
o acquire securities of any company that is a securities broker or dealer,
a securities underwriter, an investment adviser of an investment
company, or an investment adviser registered under the Investment
Advisers Act of 1940 (other than any such company that derives no more
than 15% of its gross revenues from securities related activities),
except the Portfolios (other than the Money Market Portfolio) may
purchase bank, trust company, and bank holding company stock, and except
that each of the Portfolios may invest, in accordance with Rule 12d3-1
under the Investment Company Act, up to 5% of its total assets in any
such company provided that it owns no more than 5% of the outstanding
equity securities of any class plus 10% of the outstanding debt
securities of such company; or
o make an investment in order to exercise control or management over a
company.
5
<PAGE>
In addition, none of the Portfolios will invest more than 5% of its assets in
the securities of any one investment company, own more than 3% of any one
investment company's outstanding voting securities, or have total holdings of
investment company securities in excess of 10% of the value of the
Portfolio's assets.
ADDITIONAL INVESTMENT RESTRICTION THAT APPLIES TO THE COMMON STOCK, BALANCED,
AGGRESSIVE STOCK AND CONSERVATIVE INVESTORS PORTFOLIOS
The Common Stock, Balanced, Aggressive Stock and Conservative Investors
Portfolios will operate under the general investment restrictions described
above. In addition, they will not:
o acquire securities of investment companies not registered under the
Investment Company Act.
ADDITIONAL INVESTMENT RESTRICTIONS THAT APPLY TO THE MONEY MARKET PORTFOLIO
The Money Market Portfolio will operate under the general investment
restrictions described above. In addition, it will not:
o invest more than 10% of its assets in securities restricted as to
disposition under Federal securities laws, or securities otherwise
considered illiquid or not readily marketable, including repurchase
agreements having a maturity of more than seven days; however, this
restriction will not apply to securities sold pursuant to Rule 144A
under the Securities Act of 1933, so long as such securities meet
liquidity guidelines to be established by the Trust's Board of Trustees;
o purchase oil and gas interests;
o purchase or write puts or calls (options); or
o purchase equity securities, voting securities other than securities of
registered investment companies with investment policies not
substantially broader than those of the Portfolio (subject to the above
percentage limitations) or local or state government securities.
The Money Market Portfolio will invest only in funds whose investment
policies are similar to or narrower than those of the Portfolio. It is
expected that such investments would be made in funds designed for
institutional investors such as the Portfolio and would be used for amounts
which might otherwise be left uninvested because they do not meet the
minimums necessary for other permitted investments or to take advantage of
higher yields available at that time in such funds.
ADDITIONAL INVESTMENT RESTRICTION THAT APPLIES TO THE HIGH YIELD AND GROWTH
INVESTORS PORTFOLIOS
The High Yield and Growth Investors Portfolios will operate under the general
investment restrictions described above. In addition, each will not:
o invest more than 10% of its total assets in (i) fixed income securities
which are rated lower than B3 by Moody's Investors Service, Inc.
(Moody's) or B-by Standard & Poor's Corporation (S&P) or are unrated,
and (ii) money market instruments of any entity which has an outstanding
issue of unsecured debt that is rated lower than B3 by Moody's or B-by
S&P, or is unrated; however this restriction will not apply to (i) fixed
income securities which, in the opinion of the Trust's investment
adviser, have similar characteristics to securities which are rated B3
or higher by Moody's or B-or higher by S&P, or (ii) money market
instruments of any entity that has an unsecured issue of outstanding
debt which, in the opinion of the Trust's investment adviser, has
similar characteristics to securities which are so rated.
DESCRIPTION OF CERTAIN SECURITIES IN WHICH THE PORTFOLIOS MAY INVEST
REPURCHASE AGREEMENTS
All of the Portfolios, except the Equity Index Portfolio, may enter into
repurchase agreements. Under a repurchase agreement, underlying debt
instruments are acquired for a relatively short period (usually not
6
<PAGE>
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 the Portfolio.
During the term of the repurchase agreement, the 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 agreement falls below
the resale amount provided under the repurchase agreement. A Portfolio enters
into repurchase agreements with respect to United States Government
obligations, certificates of deposit, or bankers' acceptances with registered
broker-dealers, United States Government securities dealers or domestic banks
whose creditworthiness is determined to be satisfactory by the Trust's
investment adviser, Alliance Capital Management L.P. (Alliance), 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 Securities and Exchange Commission (SEC) currently takes the position
that repurchase agreements maturing in more than seven days are illiquid
securities. No Portfolio will enter into a repurchase agreement maturing in
more than seven days if as a result more than 15% of the Portfolio's net
assets (10% for the Money Market Portfolio) would be invested in "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 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 on the
collateral may be delayed or limited and a loss may be incurred.
FORWARD COMMITMENTS AND WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Portfolios may enter into forward commitments for the purchase or sale of
securities and may purchase or sell securities on a "when-issued" or "delayed
delivery" basis. Forward commitments and when-issued or 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, U.S. Government
securities or other liquid high-grade debt obligations in an amount equal to
or greater than, on a daily basis, the amount of the Portfolio's forward
commitments, when-issued or delayed delivery commitments.
A Portfolio will only enter into forward commitments and make commitments to
purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities. However, the Portfolio may
sell these securities before the settlement date if it is deemed advisable as
a matter of investment strategy. Forward commitments and when-issued and
delayed delivery transactions are generally expected to settle within three
months from the date the transactions are entered into, although the
Portfolio may close out its position prior to the settlement date by entering
into a matching sale 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 SEC, purchases of securities on such bases may involve
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<PAGE>
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).
WARRANTS
All the Portfolios, except the Money Market Portfolio, may purchase warrants
and similar rights, which are rights to purchase securities at specific
prices valid for a specific period of time. Their prices do not necessarily
move parallel to the prices of the underlying securities, and warrantholders
receive no dividends and have no voting rights or rights with respect to the
assets of an issuer. Warrants cease to have value if not exercised prior to
the expiration date.
FOREIGN SECURITIES
Each Portfolio, except the Government and Equity Index Portfolios, may invest
in foreign securities. Each of the Common Stock, Balanced, Quality Bond and
Aggressive Stock Portfolios has the discretion to invest a portion of its
assets in foreign securities. Generally, this amount will not exceed 20% of
each Portfolio's total assets. The Money Market Portfolio may invest up to
20% of its assets in foreign money market instruments denominated in U.S.
dollars. The Conservative Investors Portfolio may invest up to 15% of its
assets in foreign securities, the Growth Investors Portfolio may invest up to
30% of its assets in foreign securities, and the Growth and Income Portfolio
may invest up to 25% of its assets in foreign securities. The High Yield
Portfolio may purchase foreign securities, provided the value of issues
denominated in foreign currency shall not exceed 20% of the Portfolio's total
assets and the value of issues denominated in United States currency shall
not exceed 25% of the Portfolio's total assets.
No percentage limitation applies to investments in foreign securities by the
Global Portfolio or the International Portfolio.
Foreign securities involve currency risks. The value of a foreign security
denominated in foreign currency changes with variations in the exchange
rates. Fluctuations in exchange rates may also affect the earning power and
asset value of the foreign entity issuing a security, even one denominated in
U.S. dollars. Dividend and interest payments will be repatriated based on the
exchange rate at the time of disbursement, and restrictions on capital flows
may be imposed.
Foreign securities may be subject to foreign government taxes which reduce
their attractiveness. Other risks of investing in such securities include
political or economic instability in the country involved, the difficulty of
predicting international trade patterns and the possibility of imposition of
exchange controls. The prices of such securities may be more volatile than
those of domestic securities. In addition, there may be less publicly
available information about a foreign issuer than about a domestic issuer.
Foreign issuers generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
issuers. There is generally less regulation of stock exchanges, brokers,
banks and listed companies abroad than in the United States, and settlements
may be slower and may be subject to failure. With respect to certain foreign
countries, there is a possibility of expropriation of assets or
nationalization, imposition of withholding taxes on dividend or interest
payments, difficulty in obtaining and enforcing judgments against foreign
entities or diplomatic developments which could affect investment in these
countries. Losses and other expenses may be incurred in converting between
various currencies in connection with purchases and sales of foreign
securities.
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For many foreign securities, there are U.S. dollar-denominated American
Depository Receipts (ADRs) which are traded in the United States on exchanges
or over-the-counter, are issued by domestic banks or trust companies and for
which market quotations are readily available. ADRs do not lessen the foreign
exchange risk inherent in investing in the securities of foreign issuers.
However, by investing in ADRs rather than directly in stock of foreign
issuers, the Portfolios will avoid currency risks which might occur during
the settlement period for either purchases or sales. A Portfolio may purchase
foreign securities directly, as well as through ADRs.
MORTGAGE-BACKED SECURITIES
Government National Mortgage Association (GNMA) certificates are
mortgage-backed securities representing part ownership of a pool of mortgage
loans. These loans, issued by lenders such as mortgage bankers, commercial
banks and savings and loan associations, are either insured by the Federal
Housing Administration or the Farmer's Home Administration or guaranteed by
the Veterans Administration. A "pool" or group of such mortgages is assembled
and after being approved by GNMA, is offered to investors through securities
dealers. Once approved by GNMA, the timely payment of interest and principal
on each mortgage is guaranteed by GNMA and backed by the full faith and
credit of the U.S. Treasury. GNMA certificates differ from bonds in that
principal is paid back monthly by the borrower over the term of the loan
rather than returned in a lump sum at maturity. GNMA certificates are called
"pass-through" securities because both interest and principal payments
(including prepayments) are passed through to the holder of the certificate.
In addition to GNMA certificates, a Portfolio (other than the Equity Index
Portfolio) may invest in mortgage-backed securities issued by the Federal
National Mortgage Association (FNMA) and by the Federal Home Loan Mortgage
Corporation (FHLMC). FNMA, a federally chartered and privately-owned
corporation, issues mortgage-backed pass-through securities which are
guaranteed as to timely payment of principal and interest by FNMA. FHLMC, a
corporate instrumentality of the United States whose stock is owned by the
Federal Home Loan Banks, issues participation certificates which represent an
interest in mortgages from FHLMC's portfolio. FHLMC guarantees the timely
payment of interest and the ultimate collection of principal. Securities
guaranteed by FNMA and FHLMC are not backed by the full faith and credit of
the United States. If other fixed or variable rate pass-through securities
issued by the United States Government or its agencies or instrumentalities
are developed in the future, the Portfolios reserve the right to invest in
them.
The Portfolios (other than the Equity Index Portfolio) may also invest in
other types of mortgage-backed securities issued by governmental or
non-governmental entities, such as banks and other mortgage lenders. These
other instruments include collateralized mortgage obligations (CMOs),
mortgage pass-through bonds and mortgage-backed bonds. Non-governmental
securities may offer a higher yield but may also be subject to greater price
fluctuation and risk than governmental securities.
CMOs are obligations fully collateralized directly or indirectly by a pool of
mortgages on which payments of principal and interest are passed through to
the holders of the CMOs on the same schedule as they are received, although
not necessarily on a pro rata basis. In reliance on an SEC interpretation,
investments in certain qualifying CMOs, including CMOs that have elected to
be treated as Real Estate Mortgage Investment Conduits (REMICs), are not
subject to the Investment Company Act's limitation on acquiring interests in
other investment companies. In order to be able to rely on the SEC's
interpretation, the CMOs and REMICs must be unmanaged, fixed-asset issuers
that (i) invest primarily in mortgage-backed securities, (ii) do not issue
redeemable securities, (iii) operate under general exemptive orders exempting
them from all provisions of the Investment Company Act, and (iv) are not
registered or regulated under the Investment Company Act as investment
companies. To the extent that a Portfolio selects CMOs or REMICs that do not
meet the above requirements, the Portfolio may not invest more than 10% of
its assets in all such entities and may not acquire more than 3% of the
voting securities of any single such entity. Mortgage-backed bonds are
general obligations of the issuer fully collateralized directly or indirectly
by a pool of mortgages. The mortgages serve as collateral for the issuer's
payment obligations on the mortgage-backed bonds but interest and principal
payments on the mortgages are not passed through directly (as with GNMA, FNMA
and FHLMC pass-through securities) or on a modified basis (as
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with CMOs). Accordingly, a change in the rate of prepayments on the pool of
mortgages could change the effective maturity of a CMO but not the effective
maturity of a mortgage-backed bond (although, like many bonds,
mortgage-backed bonds may be callable by the issuer prior to maturity). It is
expected that governmental, government-related, or private entities may
create mortgage loan pools and other mortgage-backed securities offering
mortgage pass-through and mortgage-collateralized investments in addition to
those described above.
Commercial banks, savings and loans, private mortgage insurance companies,
mortgage bankers, and other secondary market issuers also create pass-through
pools of conventional residential mortgage loans. In addition, such issuers
may be the originators and/or servicers of the underlying mortgage loans as
well as the guarantors of the mortgage-backed securities. Pools created by
non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because of the absence of direct or
indirect government or agency guarantors. Timely payment of interest and
principal with respect to these pools may be supported by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance, and letters of credit. The insurance, guarantees, and
creditworthiness of the issuers thereof will be considered in determining
whether a mortgage-backed security meets a Portfolio's investment quality
standards. There is no assurance that the private insurers or guarantors can
meet their obligations under the insurance policies or guarantee
arrangements.
Each Portfolio (other than the Equity Index Portfolio) may buy
mortgage-backed securities without insurance or guarantees, if the investment
adviser determines that the securities meet the Portfolio's quality
standards. The investment adviser will, consistent with each Portfolio's
investment objectives, policies, and quality standards, consider making
investments in new types of mortgage-backed securities as such securities are
developed and offered to investors.
Prepayment of mortgages underlying mortgage-backed securities may reduce
their current yield and total return. During periods of declining interest
rates, such prepayments can be expected to accelerate and the Portfolios
would be required to reinvest the proceeds at the lower interest rates then
available. In addition, prepayments of mortgages which underlie securities
purchased at a premium could result in capital losses because the premium may
not have been fully amortized at the time the obligation is repaid. The
Portfolios do not intend to invest in these securities unless the Trust's
adviser believes that the potential benefits outweigh the risks.
ASSET-BACKED SECURITIES
The Portfolios (other than the Equity Index Portfolio) may purchase
asset-backed securities (unrelated to first mortgage loans) that represent
fractional interests in pools of retail installment loans, both secured (such
as Certificates for Automobile Receivables) and unsecured, leases or
revolving credit receivables both secured and unsecured (such as Credit Card
Receivable Securities). These assets are generally held by a special purpose
trust and payments of principal and interest or interest only are passed
through or paid through monthly or quarterly to certificate holders and may
be guaranteed up to certain amounts by letters of credit issued by a
financial institution affiliated or unaffiliated with the trustee or
originator of the trust.
Underlying automobile sales contracts, leases or credit card receivables are
subject to prepayment, which may reduce the overall return to certificate
holders. Nevertheless, for asset-backed securities, principal repayment rates
tend not to vary much with interest rates and the short-term nature of the
underlying car loans, leases or receivables tends to dampen the impact of any
change in the prepayment level. Certificate holders may also experience
delays in payment on the certificates if the full amounts due on underlying
sales contracts, leases or receivables are not realized by the Trust because
of unanticipated legal or administrative costs of enforcing the contracts or
because of depreciation or damage to the collateral (usually automobiles)
securing certain contracts, or other factors. If consistent with its
investment objective and policies, a Portfolio may invest in other
asset-backed securities that may be developed in the future.
SECURITIES ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT OR ITS AGENCIES OR
INSTRUMENTALITIES
These securities include issues of the United States Treasury, such as bills,
certificates of indebtedness, notes and bonds, and issues of agencies and
instrumentalities established under the authority of an act of Congress.
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Such agencies and instrumentalities include, but are not limited to, the
National Bank for Cooperatives, each of the Federal Financing Banks, FHLMC,
the Farm Credit Banks, Federal Land Banks, FNMA, Tennessee Valley Authority,
Farm Credit System, Farm Credit System Financial Assistance Corporation,
Inter-American Development Bank, Maritime Administration, Resolution Trust
Corporation, Federal Agricultural Mortgage Corporation, Small Business
Administration, U.S. Postal Service and Washington Metropolitan Transit
Authority.
Issues of the U.S. Treasury are direct obligations of the U.S. Government and
are backed by the full faith and credit of the United States. Issues of
agencies, such as GNMA, are guaranteed by the U.S. Treasury, and issues of
other agencies and instrumentalities, such as FNMA, are supported by the
issuing agency's or instrumentality's right to borrow from the U.S. Treasury,
at the discretion of the U.S. Treasury, or are supported by the issuing
agency's or instrumentality's own credit.
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND BANK TIME DEPOSITS
Certificates of deposit are receipts issued by a bank in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest
to the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for
specific merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be
as long as 270 days, most maturities are six months or less.
Bank time deposits are funds kept on deposit with a bank for a stated period
of time in an interest bearing account. At present, bank time deposits
maturing in more than seven days are not considered by management of the
Trust to be readily marketable and therefore are subject to the 15% limit on
illiquid securities.
COMMERCIAL PAPER, MASTER DEMAND NOTES AND FLOATING RATE NOTES
Commercial paper consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to finance their
current operations.
Variable amount master demand notes are obligations that permit the
investment of fluctuating amounts by a Portfolio, at varying rates of
interest pursuant to direct arrangements between the Portfolio, as lender,
and the borrower. These notes permit daily changes in the amounts borrowed.
The Portfolio has the right to increase the amount under the note at any time
up to the full amount provided by the note agreement, or to decrease the
amount, and the borrower may repay up to the full amount of the note without
penalty. Because variable amount master notes are direct lending arrangements
between the lender and borrower, and not generally backed by bank letters of
credit, it is not generally contemplated that such instruments will be
traded, and there is no secondary market for these notes, although they are
redeemable (and thus immediately repayable by the borrower) at face value,
plus accrued interest, at any time. Therefore, the Portfolio's right to
redeem depends on the ability of the borrower to pay principal and interest
on demand. Variable amount master demand notes are valued at their face
amount (par) because of their one-day demand feature. In connection with
master demand note arrangements, the Portfolio considers earning power, cash
flow, and other liquidity ratios of the issuer. Master demand notes, as such,
are not typically rated by credit rating agencies.
Floating or variable rate notes are generally medium to long-term debt
securities, but may include short-term debt securities, issued by entities
such as commercial banks, corporations or sovereign borrowers. They are
interest bearing securities on which the coupon is adjusted periodically to
reflect money market conditions. The period at the end of which the
adjustment occurs is often called the interest reset period. The Portfolios
will buy only notes with an interest reset period of six months or less.
There is an active secondary market for floating or variable rate notes.
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EURODOLLAR SECURITIES
Negotiable certificates of deposit and time deposits of foreign branches of
American or foreign banks payable in United States dollars are known as
Eurodollar deposits. Eurodollar securities also include bonds underwritten by
an international syndicate and sold "at issue" to non-U.S. investors. Such
securities are not registered with the SEC or issued domestically and are
primarily traded in foreign markets. Certain risks applicable to foreign
securities apply to Eurodollar instruments. Investment risks from these
securities include future political and economic developments, possible
foreign withholding taxes on interest, possible seizure of foreign deposits,
or the possible establishment of exchange controls affecting payment on these
securities. See "Foreign Securities," above, for additional information about
foreign securities. In addition to those risks, foreign branches of American
and foreign banks have extensive government regulation which may limit both
the amount and type of loans and interest rates. In addition, the banking
industry's profitability is closely linked to prevailing money market
conditions for financing lending operations. Both general economic conditions
and credit risks play an important part in the operations of the industry.
American banks are required to maintain reserves, are limited in how much
they can loan a single borrower and are subject to other regulations to
promote financial soundness. Not all of these laws and regulations apply to
foreign branches of American and foreign banks. In addition, foreign
countries have accounting and reporting principles that differ from those in
the United States.
HIGH YIELD DEBT SECURITIES
The High Yield Portfolio, as described in the Prospectus, intends to invest
primarily in debt securities offering high current income. The Growth
Investors Portfolio may invest up to 15% of its total assets in such high
yield debt securities, and the Growth and Income Portfolio may invest up to
30% of its total assets in high yield convertible securities. High yield
securities may be medium and lower quality securities rated, for example, BB
or B by one of the nationally recognized statistical rating organizations
(NRSROs) or may be unrated but of similar investment quality as determined by
the Portfolio's investment adviser. These securities are also known as "junk
bonds." The market values of such high yield securities tend to reflect
individual corporate developments to a greater extent than higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Such medium and lower rated securities also tend to be more
sensitive to real or perceived adverse economic conditions than higher rated
securities.
Companies that issue high yield securities are often highly leveraged and may
not have available to them more traditional methods of financing. Therefore,
the risk associated with acquiring the securities of such issuers generally
is greater than is the case with higher rated securities. For example, during
an economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of high yield securities may experience "financial stress"
and may not have sufficient revenues to meet their payment obligations. Such
an issuer's ability to service its obligations may also be adversely affected
by specific corporate developments, or the issuer's inability to meet
specific projected business forecasts, or the unavailability of additional
financing. Risk of loss due to default by the issuer is also significantly
greater for the holders of high yield securities because such securities are
generally unsecured and are generally subordinated to the debts of other
creditors of the issuer.
The High Yield, Growth and Income and Growth Investors Portfolios may have
difficulty disposing of certain high yield securities, particularly those
perceived to have a high credit risk, because there may be a thin trading
market for such securities. Because not all dealers maintain markets in all
high yield securities, there is no established retail secondary market for
certain of these securities, and the Portfolios anticipate that such
securities could be sold only to a limited number of dealers or institutional
investors. Moreover, to the extent a secondary trading market for high yield
securities does exist, it is generally less liquid than the secondary market
for higher rated securities. The lack of a highly liquid secondary market for
certain high yield securities may have an adverse impact on the market price
for such securities and each Portfolio's ability to dispose of particular
issues when necessary to meet the Portfolio's liquidity needs or in response
to a specific economic event such as a deterioration in the creditworthiness
of the issuer. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of high
yield securities, especially in a thinly traded market. The lack of
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a liquid secondary market for certain securities may also make it more
difficult for the Portfolios to obtain accurate market quotations for
purposes of valuing certain of its high yield portfolio securities. Market
quotations are generally available on many high yield issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
In addition, the market for high yield securities, at its current size, has
not weathered a major economic recession, and one cannot be certain what
effect such a recession might have on such securities. It is possible,
however, that a recession could severely disrupt the market for such medium
and lower quality securities and may have an adverse impact on the value of
such securities. In addition, it is possible that an economic downturn could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest on such securities.
From time to time, proposals have been discussed regarding new legislation
designed to limit the use of certain high yield securities by issuers in
connection with leveraged buy-outs, mergers and acquisitions, or to limit the
deductibility of interest payments on such securities. Such proposals if
enacted into law could: (i) reduce the market for such securities generally;
(ii) negatively affect the financial condition of issuers of high yield
securities by removing or reducing a source of future financing; and (iii)
negatively affect the value of specific high yield issues and the high yield
market in general.
Factors adversely impacting the market value of high yield securities may
adversely impact each Portfolio's net asset value. In addition, each
Portfolio may incur additional expenses to the extent it is required to seek
recovery upon a default in the payment of principal or interest on its
portfolio securities. The Portfolios will not rely primarily on ratings of
NRSROs, but rather will rely on the investment adviser's judgment, analysis
and experience in evaluating the creditworthiness of an issuer. In evaluating
such securities, Alliance will take into consideration, among other things,
the issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters.
TRANSACTIONS IN OPTIONS, FUTURES AND FORWARD CONTRACTS
To the extent provided below, the Portfolios may enter into transactions in
options, futures and forward contracts on a variety of instruments and
indexes, in order to protect against declines in the value of portfolio
securities and increases in the cost of securities to be acquired and, in the
case of options written on securities or indexes of securities, to increase a
Portfolio's return. All the Portfolios, except the Money Market Portfolio,
are authorized to engage in futures transactions. In general, the Portfolios
will limit their use of futures contracts and options on futures contracts so
that either (i) the contracts or options thereon are for "bona fide hedging"
purposes as defined under regulations of the Commodity Futures Trading
Commission (CFTC) or (2) if for other purposes, no more than 5% of the
liquidation value of each Portfolio's total assets will be used for initial
margin or option premiums required to establish non-hedging positions. These
instruments will be used for hedging purposes and not for speculation or to
leverage the Portfolios.
OPTIONS ON SECURITIES
Writing Call Options. Every Portfolio, except the Money Market and Equity
Index Portfolios, may write (sell) covered call options on its portfolio
securities in an attempt to enhance investment performance. 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 covered call option
is, for example, a call option written on a security that is owned by the
writer (or on a security convertible into such a security without additional
consideration) throughout the option period.
A Portfolio will write covered call options both to reduce the risks
associated with certain of its investments and to increase total investment
return through the receipt of premiums. In return for the premium income, the
Portfolio will give up the opportunity to profit from an increase in the
market price of the underlying security above the exercise price so long as
its obligations under the contract continue,
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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. 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
the 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.
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 high-grade debt
obligations having a value equal to or greater than the exercise price of the
option.
The Portfolios, except the Money Market and Equity Index 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. If a Portfolio is able to enter into a closing purchase
transaction, the Portfolio will realize a profit (or loss) from that
transaction if the cost of the transaction is less (or more) than the premium
received from the writing of the option. After writing a put option, a
Portfolio may incur a loss equal to the difference between the exercise price
of the option and the sum of the market value of the underlying security plus
the premiums received from the sale of the option.
Purchasing Options. The Portfolios, except the Money Market and Equity Index
Portfolios, may purchase put options and call options. The Portfolios 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 the Portfolios intend to purchase pending their ability to
invest
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in an orderly manner in those securities. The Portfolios may sell put or call
options they have previously purchased, which could result in a net gain or
loss depending on whether the amount received on the sale is more or less
than the premium and other transaction costs paid on the put or call option
which was bought.
SECURITIES INDEX OPTIONS
The Portfolios, except for the Money Market and Equity Index Portfolios, 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
Alliance, 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 values 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. Options on stock indexes are currently traded
on the following exchanges among others: The Chicago Board Options Exchange;
New York Stock Exchange; and American Stock Exchange.
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.
In writing securities index options, the principal risk is that price changes
in the hedged securities will not correlate with price changes in the
options, and thus the Portfolio could bear a loss on the options that would
be only partially offset (or not offset at all) by the increased value or
reduced cost of the hedged securities. Moreover, in the event the Portfolio
were unable to close an option it had written, it might be unable to sell the
securities used as cover.
OVER-THE-COUNTER OPTIONS
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 Portfolios may enter into contracts (or amend existing contracts) with
primary dealer(s) 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
15
<PAGE>
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.
FUTURES TRANSACTIONS
All the Portfolios, except the Money Market Portfolio, may trade in certain
futures contracts. 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. No purchase
price is paid or received when the contract is entered into. Instead, a good
faith deposit known as initial margin is made with the broker and subsequent
daily payments known as variation margin are made to and by the broker
reflecting changes in the value of the security or level of the index.
Futures contracts are designated by boards of trade which have been
designated "contracts markets" by the CFTC. By using futures contracts as a
risk management technique, given the greater liquidity in the futures market
than in the cash market, it might be possible to accomplish certain results
more quickly and with lower transaction costs.
Purchases or sales of securities index futures contracts may be used to
attempt to protect a Portfolio's current or intended investments from broad
fluctuations in securities prices, and interest rate and foreign currency
futures contracts are purchased or sold to attempt to hedge against the
effects of interest or exchange rate changes on a Portfolio's current or
intended investments in fixed income or foreign securities. All the
Portfolios, except the Money Market, Equity Index and Government Portfolios,
may trade in foreign currency futures contracts. In the event that an
anticipated decrease in the value of portfolio securities occurs as a result
of a general stock market decline, a general increase in interest rates or a
decline in the dollar value of foreign currencies in which portfolio
securities are denominated, the adverse effects of such changes may be
offset, in whole or part, by gains on the sale of futures contracts. In
addition, the increased cost of portfolio securities to be acquired, caused
by a general rise in the dollar value of foreign currencies or by a rise in
stock prices or a decline in interest rates, may be offset, in whole or part,
by gains on futures contracts purchased by a Portfolio. In order to achieve
desired asset mix parameters, the Conservative Investors and Growth Investors
Portfolios may use futures contracts and related options transactions to
establish a position in an asset class as a temporary substitute for
purchasing individual securities, which may be subsequently purchased in
orderly fashion. Similarly, these transactions may enable the Conservative
Investors and Growth Investors Portfolios to reduce a position in an asset
class as a temporary substitute for selling individual securities, in order
to effect an orderly sale program. In the case of the Equity Index Portfolio,
futures contracts and related options on the S&P 500 Index may be purchased
in order to reduce brokerage costs, maintain liquidity to meet shareholder
redemptions or minimize tracking error. A Portfolio will incur brokerage fees
when it purchases and sells futures contracts, and it will be required to
maintain margin deposits. (See "Risks of Transactions in Options, Futures
Contracts and Forward Currency Contracts," below.) 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 to the Portfolio to do so. A clearing organization associated
with the exchange on which futures are traded assumes responsibility for
closing
16
<PAGE>
out transactions and guarantees that as between the clearing members of an
exchange, the sale and purchase obligations will be performed with regard to
all positions that remain open at the termination of the contract.
SECURITIES INDEX FUTURES CONTRACTS
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 seek to protect the value of its portfolio against an overall decline in
the market for such securities. Alternatively, in anticipation of a generally
rising market, a Portfolio can seek to avoid losing the benefit of apparently
low current prices by establishing a "long" position in securities index
futures and later liquidating that position as particular securities are in
fact acquired. To the extent that these hedging strategies are successful,
the Portfolio will be affected to a lesser degree by adverse overall market
price movements than would otherwise be the case.
OPTIONS ON FUTURES CONTRACTS
Each of the Portfolios, other than the Money Market Portfolio, may also
purchase and write exchange-traded call and put options on futures contracts
of the type which the particular Portfolio is authorized to enter into. These
options are traded on exchanges that are licensed and regulated by the CFTC
for the purpose of options trading. A call option on a futures contract gives
the purchaser the right, in return for the premium paid, to purchase a
futures contract (assume a "long" position) at a specified exercise price at
any time before the option expires. A put option gives the purchaser the
right, in return for the premium paid, to sell a futures contract (assume a
"short" position), for a specified exercise price, at any time before the
option expires. The Portfolios will write only options on futures contracts
which are "covered." A Portfolio will be considered "covered" with respect to
a put option it has written if, so long as it is obligated as a writer of the
put, the Portfolio segregates with its custodian cash, United States
Government securities or liquid high-grade debt obligations 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 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 Alliance,
expected to replicate substantially the movement of the index upon which the
futures contract is based.
Upon the exercise of a call, 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.
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
17
<PAGE>
option on a futures contract, it may obtain benefits similar to those that
would result if it held the futures position itself. Purchases of options on
futures contracts may present less risk in hedging than the purchase and sale
of the underlying futures contracts since the potential loss is limited to
the amount of the premium plus related transaction costs.
The purchase of put options on futures contracts is a means of hedging a
portfolio of securities against a general decline in market prices. The
purchase of a call option on a futures contract represents a means of hedging
against a market advance when a Portfolio is not fully invested.
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.
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.
While the holder or writer of an option on a futures contract may normally
terminate its position by selling or purchasing an offsetting option of the
same series, a Portfolio's ability to establish and close out options
positions at fairly established prices will be subject to the existence of a
liquid market. The Portfolios will not purchase or write options on futures
contracts unless, in Alliance's opinion, the market for such options has
sufficient liquidity that the risks associated with such options transactions
are not at unacceptable levels.
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. All the Portfolios, other than the Money
Market Portfolio, may enter into futures contracts and buy and sell related
options as described above. 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 Alliance, expected to replicate substantially the movement of the index
upon which the futures contract or option is based.
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 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
18
<PAGE>
movements, a Portfolio would continue to be required to make daily cash
payments of maintenance 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 CURRENCY OPTIONS, FOREIGN CURRENCY FUTURES CONTRACTS AND OPTIONS ON
FUTURES
The Portfolios, other than the Money Market, Government and Equity Index
Portfolios, may purchase or sell exchange-traded or over-the-counter foreign
currency options, foreign currency futures contracts and related options on
foreign currency futures contracts as a hedge against possible variations in
foreign exchange rates. The Portfolios will write options on foreign currency
or on foreign currency futures contracts only if they are "covered." A put on
a foreign currency or on a foreign currency futures contract written by a
Portfolio will be considered "covered" if, so long as the Portfolio is
obligated as the writer of the put, it segregates with the Portfolio's
custodian cash, U.S. Government securities or other liquid high-grade debt
securities equal at all times to the aggregate exercise price of the put. A
call on a foreign currency or on a foreign currency future contract written
by the Portfolio will be considered "covered" only if the Portfolio owns
short term debt securities with a value equal to the face amount of the
option contract and denominated in the currency upon which the call is
written. Option transactions may be effected to hedge the currency risk on
non-U.S. dollar-denominated securities owned by a Portfolio, sold by a
Portfolio but not yet delivered or anticipated to be purchased by a
Portfolio. As an illustration, a Portfolio may use such techniques to hedge
the stated value in U.S. dollars of an investment in a Japanese
yen-denominated security. In these circumstances, a Portfolio may purchase a
foreign currency put option enabling it to sell a specified amount of yen for
dollars at a specified price by a future date. To the extent the hedge is
successful, a loss in the value of the dollar relative to the yen will tend
to be offset by an increase in the value of the put option. As in the case of
other types of options, however, the writing of an option on foreign currency
will constitute only a partial hedge, up to the amount of the premium
received, and the 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 the Portfolio's position, it may forfeit the entire
amount of the premium plus related transaction costs.
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. See "Over-the-Counter Options," above. 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.
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.
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 Alliance's
ability to predict future currency exchange rates.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
When a Portfolio invests in foreign securities, the securities are usually
denominated in foreign currency, and the Portfolio may temporarily hold
foreign currency in connection with such investments. As a result,
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<PAGE>
the value of the Portfolio's assets will be subject to fluctuations based on
changes in the relative value of the foreign currency and the United States
dollar. To control the effects of this exchange risk, all the Portfolios,
except the Money Market, Equity Index and Government Portfolios, may enter
into forward foreign currency exchange contracts (forward currency
contracts), which are agreements to purchase or sell foreign currencies at a
specified future date and price. Forward currency contracts are usually used
to fix the United States dollar value of securities a Portfolio has agreed to
buy or sell (transaction hedging). The Portfolios may also use forward
currency contracts to hedge the United States dollar value of securities it
already owns (position hedging). The Portfolios will not speculate in forward
currency contracts.
In general, forward currency contracts are not regulated by any governmental
authority, or guaranteed by a third party or traded on an exchange.
Accordingly, each party to a forward currency contract is dependent upon the
creditworthiness and good faith of the other. Creditworthiness is evaluated
by Alliance.
RISKS OF TRANSACTIONS IN OPTIONS, FUTURES CONTRACTS AND FORWARD CURRENCY
CONTRACTS
Although the Portfolios will enter into transactions in futures contracts,
options on securities and securities indexes, options on futures contracts,
forward currency contracts and certain currency options as described above
for hedging purposes, and transactions in options on securities and
securities indexes to generate option premium income, their use does involve
the following risks. A lack of correlation between the index or instrument
underlying an option or futures contract and the assets being hedged, or
unexpected adverse price movements, could render a Portfolio's hedging
strategy unsuccessful and could result in losses. Moreover, when an option
has been written, in the event of a decline, the underlying position is only
hedged to the extent of the amount of premium received. Over-the-counter
transactions in options on foreign currencies and options on securities and
securities indexes also involve a lack of an organized exchange trading
environment, making them less liquid, and making it more difficult to value
them than if they were exchange traded.
In addition, there can be no assurance that a liquid secondary market will
exist for any futures contract or option purchased or sold, and a Portfolio
may be required to maintain a position until exercise or expiration, which
could result in losses. If a futures market were to become unavailable, in
the event of an adverse movement, the Portfolio would be required to continue
to make daily cash payments of variation margin if it could not close a
futures position. If an options market were to become unavailable and a
closing transaction could not be entered into, an option holder would be able
to realize profits or limit losses only by exercising an option, and an
option writer would remain obligated until exercise or expiration. Finally,
if a broker or clearing member of an options or futures clearing corporation
were to become insolvent, the Portfolios could experience delays and might
not be able to trade or exercise options or futures purchased through that
broker. In addition, the Portfolios could have some or all of their positions
closed out without their consent. If substantial and widespread, these
insolvencies could ultimately impair the ability of the clearing corporations
themselves. While the principal purpose of hedging is to limit the effects of
adverse market movements, the attendant expense may cause the Portfolios'
returns to be less than if hedging had not taken place. The overall
effectiveness of hedging therefore depends on Alliance's accuracy in
predicting future changes in interest rate levels or securities price
movements, as well as on the expense of hedging.
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<PAGE>
MANAGEMENT OF THE TRUST
As of March 31, 1996, 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>
*John D. Carifa (51)...................President, Chief Operating Officer and a Director of Alliance
Alliance Capital Management L.P. Capital Management Corporation, the general partner of Alliance
1345 Avenue of the Americas ("ACMC"); Chairman and Chief Executive Officer of Alliance's
New York, NY 10105 Mutual Fund Division. Mr. Carifa also serves as a director or
trustee of all other registered investment companies sponsored
by Alliance, and a director of Frontier Trust Company, a
subsidiary of Equitable.
Richard W. Couper (73)................President Emeritus and Trustee of Woodrow Wilson
The Burke Library National Fellowship Foundation and President Emeritus of the New
Hamilton College York Public Library.
P.O. Box 345
Clinton, NY 13323-0345
Brenton W. Harries (68)...............Director of Enhance Reinsurance Co. since December 1986. Mr.
14 Point Road Harries was also President and Chief Executive Officer, Global
Wilton Point, Electronic Markets Company from August 1985 to October 1986
South Norwalk, CT 06854
Howard E. Hassler (Chairman) (66).... Currently a consultant specializing in retailing, finance and
200 East 57th Street real estate. Former Chairman and Chief Executive Officer of
Penthouse D Brooks Fashion Stores, Inc. (specialty clothing stores); Former
New York, NY 10022 Chairman, President and Chief Operating Officer of Allied Stores
Corporation (department and specialty stores), 1987; Executive
Vice President and Director, Allied Stores Corporation from June
1984 to June 1987.
William L. Mannion (65)............... Retired. Former Group Senior Vice President of Operations of
45 Bonnie Way American Ultramar Limited until December 31, 1986.
Allendale, NJ 07401
Alton G. Marshall (75)................Senior Fellow, Nelson A. Rockefeller Institute of Government
136 E. 79th Street since January 1991. Mr. Marshall is also President of Alton G.
New York, NY 10021 Marshall Associates, Inc., New York, New York, a real estate
investment corporation, since 1981; Director of EQK Partners,
Atlanta, Georgia, since 1984; Director, New York State Electric
& Gas Corp., since 1971; Director and Chairman of the Executive
Committee of Lincoln Savings Bank since January 1991, and
Chairman and Chief Executive Officer of such bank from March
1984 through December 1990.
21
<PAGE>
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------------- ----------------------------------------------------------------
*Peter D. Noris (40)...................Executive Vice President and Chief Investment Officer of
Equitable Equitable since May 1995; prior thereto, Vice President of
787 Seventh Avenue Salomon Brothers Inc., from 1992 to 1995. Principal of
New York, NY 10019 Equity Division, Morgan Stanley & Co. Inc., from 1984 to 1992.
Director of Equitable Variable and Equitable Real Estate
Investment Management, Inc. since September 1995 and of ACMC
since July 1995.
Donald J. Robinson (62)...............Partner and Member of the Executive Committee of the law firm of
599 Lexington Avenue Orrick, Herrington & Sutcliffe from July 1987 to December 1994.
New York, NY 10022 Of Counsel since January 1995.
</TABLE>
*Trustees Carifa and Noris are "interested persons" (as defined in the
Investment Company Act) of the Trust. Mr. Carifa is deemed an "interested
person" of the Trust by virtue of his position as a director and officer of
ACMC. Mr. Noris is deemed an "interested person" of the Trust by virtue of
his position as an officer of Equitable and a director of ACMC.
Trustees Couper, Harries and Robinson are Trustees (but not "interested
persons") of The Alliance Portfolios, a mutual fund. Trustee Robinson is also
a director or trustee (but not an "interested person") of three other mutual
funds advised by Alliance. Trustee Marshall is an independent general partner
(but not an "interested person") of Equitable Capital Partners, L.P. and
Equitable Capital Partners (Retirement Fund), L.P., both of which are
business development companies registered under the Investment Company Act.
COMMITTEES OF THE BOARD
The Trust has a standing audit committee consisting of Trustees Mannion,
Couper, Harries, Hassler, Marshall and Robinson. The audit committee's
function is to recommend to the Board of Trustees a firm of independent
auditors to conduct the annual audit of the Trust's financial statements;
review with such firm the outline, scope and results of this annual audit;
and review the performance and fees charged by the independent auditors for
professional services. In addition, the committee meets with the independent
auditors and representatives of management to review accounting activities
and areas of financial reporting and control. The Trust has no standing
executive committee.
The Trust has a nominating committee consisting of Trustees Hassler, Couper
and Robinson. This committee considers individuals for nomination as Trustees
of the Trust.
The Trust has a valuation committee consisting of Trustees Harries, Mannion
and Noris. 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 Trustees Robinson,
Hassler and Mannion. The compensation committee's function is to review the
Trustees' compensation arrangements.
The Trust has a conflicts committee consisting of Trustees Hassler and Robinson.
The conflicts committee's function is to take any action necessary to resolve
conflicts among shareholders.
22
<PAGE>
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION FROM
RETIREMENT THE ALLIANCE FUND
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL COMPLEX,
COMPENSATION AS PART OF TRUST BENEFITS UPON INCLUDING THE
TRUSTEE FROM THE TRUST EXPENSES RETIREMENT TRUST1
- ------------------ -------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
John D. Carifa $ -0- $-0- $-0- $ -0-
- ------------------ -------------- ---------------- ---------------- -----------------
Richard W. Couper $42,500 $-0- $-0- $ 66,500
- ------------------ -------------- ---------------- ---------------- -----------------
Brenton W. Harries $42,500 $-0- $-0- $ 66,500
- ------------------ -------------- ---------------- ---------------- -----------------
Howard E. Hassler $55,750 $-0- $-0- $ 55,750
- ------------------ -------------- ---------------- ---------------- -----------------
William L. Mannion $44,500(3) $-0- $-0- $ 44,500
- ------------------ -------------- ---------------- ---------------- -----------------
Alton G. Marshall $42,500 $-0- $-0- $112,000
- ------------------ -------------- ---------------- ---------------- -----------------
Peter D. Noris $ -0- $-0- $-0- $ -0-
- ------------------ -------------- ---------------- ---------------- -----------------
Donald J. Robinson $42,500(2) $-0- $-0- $ 60,500
- ------------------ -------------- ---------------- ---------------- -----------------
<FN>
- ------------
(1)There are 107 investment companies in the Alliance Fund Complex.
(2)Including amounts deferred.
(3)Completely deferred.
</TABLE>
COMPENSATION OF TRUSTEES
Each Trustee, other than those who are "interested persons" of the Trust (as
defined in the Investment Company Act), receives from the Trust an annual fee
of $29,000, plus an additional fee of $4,000 per board meeting and $2,000 per
committee meeting attended. The meeting fee paid to the Trustee acting as
chairman of the meeting is increased by 50%. The Chairman of the Board
receives an additional annual retainer of $7,000. Trustees receive $1,000 for
each day spent performing special services requested by the Chairman or the
President of the Trust, and reimbursement for expenses in connection with the
performance of regular and special services.
During the year ended December 31, 1995 the Trust paid total retainer and
meeting fees of $310,750 (including deferrals of $69,000).
A deferred compensation plan for the benefit of the Trustees has been adopted
by the Trust. Under the plan each Trustee may defer payment of all or part of
the fees payable for such Trustee's services. Each Trustee may defer payment
of such fees until his retirement as a Trustee or until the earlier
attainment of a specified age. Fees deferred under the 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.
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<PAGE>
THE TRUST'S OFFICERS
No officer of the Trust receives any compensation paid by the Trust. Each
officer of the Trust is an employee of Alliance or Equitable. The Trust's
principal executive officers are:
<TABLE>
<CAPTION>
NAME AND AGE POSITION WITH TRUST PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------ --------------------------------- -----------------------------------------------
<S> <C> <C>
James M. Benson (49) President and Chief Executive President, Equitable (February 1994 to present);
Officer Chief Executive Officer, Equitable (February
1996 to present); Chief Operating Officer,
Equitable (February 1994 to February 1996);
Senior Executive Vice President, Equitable
(April 1993 to February 1994); Director,
Association for Advanced Life Underwriting,
Health Plans, Inc. (August 1988 to present)
and Hospital for Special Surgery (April 1996
to present).
Mark D. Gersten (45) Treasurer and Chief Financial Senior Vice President, Alliance Fund Services,
Officer Inc. (AFS) with which he has been associated
since prior to 1991.
Laura Mah (40) Controller and Chief Accounting Vice President, Alliance Capital Management
Officer Corporation (ACMC) (July 1993 to present);
Equitable Capital Management Corporation (ECMC)
(April 1989 to July 1993).
Bruce Calvert (49) Vice President Vice Chairman and Chief Investment Officer of
ACMC with which he has been associated since
prior to 1991.
Kathleen A. Corbet (36) Vice President Senior Vice President, ACMC (July 1993 to
present); Executive Vice President, ECMC (June
1992 to July 1993); Senior Vice President, ECMC
(May 1991 to June 1992); Managing Director,
ECMC (September 1988 to May 1991).
24
<PAGE>
NAME AND AGE POSITION WITH TRUST PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------ --------------------------------- -----------------------------------------------
Nelson R. Jantzen (51) Vice President Senior Vice President, ACMC (July 1993 to
present); Executive Vice President, ECMC (June
1992 to July 1993); Senior Vice President, ECMC
(February 1990 to June 1992); Managing
Director, ECMC (January 1987 to February 1990).
Director, Equitable Capital DHO Ltd. (November
1990 to July 1993); Secretary and Treasurer,
Equitable Capital Diversified Holdings L.P. II
(February 1990 to July 1993); Secretary and
Treasurer, Equitable Capital Diverisifed
Holdings L.P. I (May 1989 to July 1993);
Investment Officer, Equitable Variable
(February 1977 to July 1993); Investment
Officer, Equitable (February 1977 to July
1993).
Barbara J. Krumsiek (44) Vice President Senior Vice President, Alliance Fund
Distributors Inc. (AFD) (July 1993 to present);
Executive Vice President, ECMC (June 1992 to
July 1993); Senior Vice President, ECMC (March
1987 to June 1992).
Wayne D. Lyski (55) Vice President Executive Vice President, ACMC with which he
has been associated since prior to 1991.
Michael S. Martin (50) Vice President Chairman, (May 1992 to present), EQ Financial
Consultants, Inc.; Director (March 1992 to
present) EQ Financial Consultants Inc.;
Chief Executive Officer (February 1994 to
present), EQ Financial Consultants Inc.; Senior
Vice President, Equitable (June 1989 to present).
Samuel B. Shlesinger (49) Vice President Senior Vice President, Equitable Variable
(February 1988 to present); Senior Vice
President, Equitable (November 1986 to
present); President and Chief Executive
Officer, Equitable of Colorado (October 1985 to
present).
Alden M. Stewart (50) Vice President Executive Vice President, ACMC (July 1993 to
present); ECMC since prior to 1991.
Edmund P. Bergan, Jr. (46) Secretary Senior Vice President and General Counsel, AFD
with which he has been associated since prior
to 1991.
</TABLE>
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<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
GENERAL INFORMATION
Alliance, an investment adviser registered with the SEC under the Investment
Advisers Act of 1940, has served as the investment adviser to the Trust since
July 22, 1993. Alliance is a major international investment adviser that
serves its clients, who primarily are major corporate employee benefit funds,
public employee retirement systems, investment companies, foundations and
endowment funds, with a staff of more than 1,400 employees operating out of
domestic offices and the overseas offices of subsidiaries in London, England;
Tokyo, Japan; Vancouver and Toronto, Canada; Melbourne, Australia; and
Dusseldorf, Germany. The principal offices of Alliance are located at 1345
Avenue of the Americas, New York, New York 10105.
Alliance is a publicly-traded Delaware limited partnership whose limited
partnership interests, represented by units, are listed on the New York Stock
Exchange. As of March 1, 1996, ACMC, Inc. and Equitable Capital Management
Corporation, each a wholly-owned direct or indirect subsidiary of Equitable,
owned in the aggregate approximately 57.6% of the issued and outstanding
units representing assignments of beneficial ownership of limited partnership
interests in the Adviser ("Units"), and approximately 32.4% and 10.0% of the
Units were owned by the public and employees of the Adviser and its
subsidiaries, respectively, calculated. ACMC, the sole general partner of,
and the owner of a 1% general partnership interest in, Alliance, is a
wholly-owned subsidiary of Equitable Investment Corporation (EIC), which in
turn is wholly-owned by Equitable Holding Corporation (EHC), a wholly-owned
subsidiary of Equitable.
Equitable, which is a New York life insurance company and one of the largest
life insurance companies in the United States, is a wholly-owned subsidiary
of The Equitable Companies Incorporated (The Equitable Companies), a
publicly-owned holding company. The principal offices of The Equitable
Companies and Equitable are located at 787 Seventh Avenue, New York, New York
10019.
AXA, a French insurance holding company, currently owns approximately 63.9%
of the outstanding voting shares of common stock of The Equitable Companies.
Under its investment arrangements with Equitable and 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 principal holding company for most of the companies in one of the
largest insurance groups in Europe. The majority of AXA's stock is owned by a
group of five French mutual insurance companies, the AXA Group, which is the
third largest insurance group in France and one of the largest insurance
groups in Europe. Principally engaged in property and casualty insurance and
life insurance in Europe and elsewhere in the world, the AXA Group is also
involved in real estate operations and certain other financial services,
including mutual fund management, lease financing services and brokerage
services.
ADVISORY AGREEMENT
The Investment Advisory Agreement terminates automatically in the event of
its assignment or, with respect to any Portfolio, upon 60 days' notice given
by the Trust's Board of Trustees, by Alliance or by majority vote (as defined
in the Investment Company Act and the rules thereunder) of the Portfolio's
shares. Otherwise, the term of the Investment Advisory Agreement on behalf of
each Portfolio is two years, but the Agreement will remain in effect from
year to year with respect to any Portfolio so long as its continuance is
approved at least annually by a majority of the non-interested members of the
Board of Trustees, and by (i) a majority vote (as defined in the Investment
Company Act and the rules thereunder) of the Portfolio's shareholders or (ii)
the Board of Trustees.
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<PAGE>
The advisory fee payable by the Trust is at the following annual percentages
of the value of each Portfolio's daily average net assets:
<TABLE>
<CAPTION>
DAILY AVERAGE NET ASSETS
----------------------------------------------------
FIRST $350 NEXT $400 OVER $750
MILLION MILLION MILLION
---------------- ---------------- ----------------
<S> <C> <C> <C>
Conservative Investors .... .550% .525% .500%
Balanced ................... .400% .375% .350%
Growth Investors ........... .550% .525% .500%
Common Stock ............... .400% .375% .350%
Global ..................... .550% .525% .500%
Aggressive Stock ........... .500% .475% .450%
Money Market ............... .400% .375% .350%
Intermediate Goverment
Securities ................ .500% .475% .450%
High Yield ................. .550% .525% .500%
FIRST $500 NEXT $500
MILLION MILLION OVER $1 BILLION
---------------- ---------------- ----------------
Growth and Income .......... .550% .525% .500%
Quality Bond ............... .550% .525% .500%
FIRST $750 NEXT $750 OVER $1.5
MILLION MILLION BILLION
---------------- ---------------- ----------------
Equity Index ............... .350% .300% .250%
FIRST $500 OVER $1.5
MILLION NEXT $1 BILLION BILLION
---------------- ---------------- ----------------
International .............. .900% .850% .800%
</TABLE>
Because of undertakings made by Equitable Variable in connection with the
Reorganization, Equitable Variable reimburses the Common Stock and Money
Market Divisions of its Continuing Separate Account to offset completely the
effect on such divisions of the portion of the Trust's advisory fees
applicable to such divisions which exceed a .25% effective annual rate. In
addition, Equitable Variable reimburses the High Yield, Aggressive Stock and
Balanced Divisions of its Separate Account I for the portion of the Trust's
advisory fees applicable to those divisions which exceeds a .25% effective
annual rate. Because of expense limits in the variable annuity contracts
funded by its Separate Account A, Equitable reimburses the Common Stock,
Money Market and Balanced Division of that separate account for the portion
of the Trust's advisory fees applicable to those divisions which exceeds a
.26% effective rate, and the Aggressive Stock Division for the portion that
exceeds a .41% effective rate. Policies sold by insurers other than Equitable
and Equitable Variable and newer policy designs of Equitable Variable bear
the advisory fees without adjustment. For a discussion of the Reorganization,
see "General Information," above.
In 1995, the Trust paid advisory fees of $40,636,168 to Alliance. In 1994,
the Trust paid advisory fees of $31,614,475 to Alliance. In 1993, the Trust
paid advisory fees of $15,066,885 to Equitable Capital Management Corporation
(Equitable Capital), the Trust's prior investment adviser, for the period
January 1, 1993 to July 22, 1993 and advisory fees of $9,858,491 to Alliance
for the period July 23, 1993 to December 31, 1993.
27
<PAGE>
SPECIFIC SERVICES PERFORMED
Alliance performs the following services for or on behalf of the Trust
pursuant to the Investment Advisory Agreement.
Subject to the approval and supervision of the Board of Trustees, Alliance
exercises overall responsibility for the investment and reinvestment of the
Trust's assets. Alliance manages each Portfolio and is responsible for the
investment operations of the Trust and the composition of each Portfolio,
including the purchase, retention and disposition of the investments,
securities and cash contained therein, in accordance with each Portfolio's
investment objectives and policies as stated in the Trust's Declaration of
Trust, By-laws, Prospectus and SAI as from time to time in effect. In
connection therewith, Alliance provides investment research and supervision
of the Trust's investments and conducts a continuous program of investment
evaluation and, if appropriate, sales and reinvestment of the Trust's assets.
Alliance furnishes to the Trust such statistical information, with respect to
the investments which the Trust may hold or contemplate purchasing, as the
Trust may reasonably request. On Alliance's own initiative, it apprises the
Trust of important developments materially affecting each Portfolio and
furnishes the Trust from time to time such information as it may believe
appropriate for this purpose. In addition, Alliance furnishes to the Board of
Trustees such periodic and special reports as the Board may reasonably
request. Alliance also implements all purchases and sales of investments for
each Portfolio in a manner consistent with such investment policies, as from
time to time amended.
Alliance, on behalf of the Trust, arranges for the placement of orders and
other execution of transactions for each Portfolio. Alliance furnishes to the
Trust, at least once every three months, a schedule of the investments and
other assets held in each Portfolio and a statement of all purchases and
sales for each Portfolio made during the period since the last preceding
report. Alliance prepares the financial statements for the Trust's
Prospectuses, SAIs and annual and semi-annual reports to shareholders and
furnishes such other investment accounting services as the Trust may from
time to time reasonably request. Alliance computes the Trust's net asset
value per share for each Portfolio on a daily basis.
At the Trust's request, Alliance provides, without charge, personnel, who may
be the Trust's officers, to render such clerical, accounting, administrative
and other services, other than investor services, to the Trust as it may from
time to time request. Also, Alliance furnishes to the Trust, without charge,
such office facilities, which may be Alliance's own offices, as Alliance may
believe appropriate or as the Trust may reasonably request, subject to the
requirements of any regulatory authority to which Alliance may be subject.
However, the Trust may also hire its own employees and contract for services
to be performed by third parties.
Pursuant to the terms of the Investment Advisory Agreement, Alliance has
contracted with Equitable for the provision of certain administrative
services to the Trust.
Alliance also performs investment advisory services for certain of
Equitable's separate and advisory accounts and for other clients, including
mutual funds registered as investment companies under the Investment Company
Act, some of which fund Contracts issued by Equitable, Equitable Variable and
certain other unaffiliated insurance companies. There are occasions on which
transactions for the Trust may be executed as part of concurrent
authorizations to purchase or sell the same security for Equitable's general
account or for other accounts or investment companies managed by Equitable or
Alliance. These concurrent authorizations potentially can be either
advantageous or disadvantageous to the Trust. When these concurrent
authorizations occur, the objective is to allocate the executions and related
brokerage charges among the accounts or mutual funds in an equitable manner.
BROKERAGE ALLOCATION
SELECTION OF BROKERS
Pursuant to the Investment Advisory Agreement, Alliance, on behalf of the
Trust, arranges for the placement of orders and other transactions for each
Portfolio.
28
<PAGE>
BROKERAGE COMMISSIONS
The Portfolios are charged for securities brokers' commissions, transfer
taxes and similar fees relating to securities transactions. Alliance seeks to
obtain the best price and execution on all orders placed for the Portfolios,
considering all the circumstances except to the extent it may be permitted to
pay higher commissions as described below.
It is expected that securities will ordinarily be purchased in the primary
markets, whether over-the-counter or listed, and that listed securities may
be purchased in the over-the-counter market if that market is deemed the
primary market.
Transactions on stock exchanges involve the payment of brokerage commissions.
In transactions on stock exchanges in the United States, these commissions
are negotiated, whereas on many foreign stock exchanges these commissions are
fixed. However, brokerage commission rates in certain countries in which the
Portfolios may invest may be discounted for certain large domestic and
foreign investors such as the Portfolios. A number of foreign banks and
brokers will be used for execution of each Portfolio's portfolio
transactions. In the case of securities traded in the foreign and domestic
over-the-counter markets, there is generally no stated commission, but the
price usually includes an undisclosed com mission or mark-up. In underwritten
offerings, the price generally includes a disclosed fixed commission or
discount.
Alliance may, in the allocation of brokerage business, take into
consideration research and other brokerage services provided by brokers and
dealers to Equitable or Alliance. 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 limited cases, certain brokers have been advised informally that, although
the Trust is under no legal obligation, an attempt will be made to meet the
internally proposed level of allocated brokerage business to the broker for
brokerage and research services over a period of time. Equitable Variable and
its affiliates, in their insurance and investment operations, and Alliance,
in its investment advisory operations, engage in transactions in the normal
course of business with brokers and dealers which execute orders of the
Portfolios. The allocation of the Trust's portfolio brokerage business is not
affected by such transactions.
Commissions charged by brokers which provide research services may be
somewhat higher than commissions charged by brokers which do not provide
them. As permitted by Section 28(e) of the Securities Exchange Act of 1934
and by policies adopted by the Trustees, Alliance may cause the Trust to pay
a broker-dealer which provides brokerage and research services to Alliance 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.
Alliance does not engage brokers whose commissions it believes to be
unreasonable in relation to 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 Alliance for the benefit of
all accounts for which it makes investment decisions. The receipt of research
services from brokers will tend to reduce Alliance's expenses in managing the
Portfolios other than the Money Market Portfolio. This has been taken into
account when setting the amount paid for managing those Portfolios. Although
orders may be given by the Money Market Portfolio to brokers or dealers which
provide research services to Alliance, the fact that the investment adviser
may benefit from such research has not been considered when setting the
amount paid for managing that Portfolio. This is because Money Market
Portfolio transactions will generally be with issuers or market makers where
no commissions are charged. In 1993 the Trust paid an aggregate of
$14,267,261 in brokerage commissions of which $2,154,951 was paid to
29
<PAGE>
brokers relating to transactions aggregating $1,230,357,454 which were
directed to them in part for research services provided by them. In 1994 the
Trust paid an aggregate of $15,624,978 in brokerage commissions of which
$3,918,833 was paid to brokers relating to transactions aggregating
$1,594,352,806 which were directed to them in part for research services
provided by them. In 1995 the Trust paid an aggregate of $21,329,056 in
brokerage commissions of which $18,468,344 was paid to brokers relating to
transactions aggregating $8,928,306,482 which were directed to them in part
for research services provided by them.
BROKERAGE TRANSACTIONS WITH AFFILIATES
To the extent permitted by law, the Trust may engage in brokerage
transactions with its affiliate, Donaldson, Lufkin & Jenrette, Inc. (DLJ),
with brokers who are DLJ affiliates, or with unaffiliated brokers who trade
or clear through DLJ. The Investment Company Act generally prohibits the
Trust from engaging in securities transactions with DLJ or its affiliates, as
principal, 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 Investment Company Act, which are reasonably designed to provide that
any commissions or other remuneration it pays to DLJ or its affiliates do not
exceed the usual and customary broker's commission. In addition, the Trust
will adhere to the requirements under the Securities Exchange Act of 1934
governing floor trading. Also, due to securities law limitations, the Trust
will limit purchases of securities in a public offering, if such securities
are underwritten by DLJ or its affiliates. During the years ended December
31, 1993, December 31, 1994, and December 31, 1995, the Trust paid no
brokerage commissions to DLJ.
TRUST EXPENSES AND OTHER CHARGES
Pursuant to the Trust's Investment Advisory Agreement, Alliance is obligated
to pay all of the Trust's operating expenses not specifically assumed by the
Trust. Although the Trust does specifically assume certain of its operating
expenses (in addition to the investment advisory fee), a daily adjustment
will be made in the values under certain Contracts outstanding and offered by
Equitable and Equitable Variable when their management separate accounts were
reorganized into unit investment trust form to offset completely the impact
of any such expense on values under such Contracts. Contracts sold by
insurers other than Equitable and Equitable Variable and new policy designs
of Equitable and Equitable Variable bear such expenses without adjustment.
Although Equitable and Equitable Variable do not expect the Trust to incur
any federal income or excise tax liability (see "Dividends, Distributions and
Taxes" in the Prospectus), Equitable and Equitable Variable reserve the right
to exclude any such taxes from such adjustments.
The expenses which the Trust will pay directly are set forth in the
Prospectus.
PURCHASE AND PRICING OF SECURITIES
As stated in the Prospectus, the Trust will offer and sell its shares at each
Portfolio's per share net asset value, which will be determined in the manner
set forth below.
The net asset value of the shares of each 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 Portfolio will be computed by dividing the sum of the
investments held by that Portfolio, plus any cash or other assets, minus all
liabilities, by the total number of outstanding shares of that Portfolio at
such time. All expenses borne by the Trust, including the investment advisory
fee payable to Alliance, will be accrued daily.
The net asset value per share of any series (i.e., Portfolio) will be
determined and computed as follows, in accordance with generally accepted
accounting principles, and consistent with the Investment Company Act:
o The assets belonging to each series will include (a) all consideration
received by the Trust for the issue or sale of shares of that
particular series, together with all assets in which such consideration
30
<PAGE>
is invested or reinvested, (b) all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale,
exchange or liquidation of such assets, (c) any funds or payments
derived from any reinvestment of such proceeds in whatever form the
same may be and (d) General Items, if any, allocated to that series.
General Items includes any assets, income, earnings, profits, and
proceeds thereof, funds, or payments which are not readily identifiable
as belonging to any particular series. General Items will be allocated
as the Trust's Board of Trustees considers fair and equitable.
o The liabilities belonging to each series will include (a) the
liabilities of the Trust in respect of that series, (b) all expenses,
costs, charges and reserves attributable to that series, and (c) any
general liabilities, expenses, costs, charges or reserves of the Trust
which are not readily identifiable as belonging to any particular
series which have been allocated as the Trust's Board of Trustees
considers fair and equitable.
The value of each Portfolio will be determined at the close of business on
each "business day," i.e., each day in which the degree of trading in the
Portfolio might materially affect the net asset value of such Portfolio.
Normally, this would be each day that the New York Stock Exchange is open and
would include some Federal holidays. For stocks and options, the close of
trading is the 4:00 p.m. and 4:15 p.m. close respectively of the New York
Stock Exchange and the Options Price Reporting Authority; for bonds it is the
close of business in New York City, and for foreign securities it is the
close of business in the applicable foreign country with exchange rates
determined at 2:00 p.m. New York City time.
Values are determined according to accepted accounting practices and all laws
and regulations that apply. The assets of each Portfolio are valued as
follows:
o Stocks listed on national securities exchanges and certain
over-the-counter issues traded on the NASDAQ national market system are
valued at the last sale price, or, if there is no sale, at the 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 American Depositary
Receipt 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 its U.S. dollar equivalent at
current exchange rates.
o U.S. Treasury securities and other obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, are valued at
representative quoted prices.
o Long-term corporate bonds are valued at prices obtained from a bond
pricing service of a major dealer in bonds when such prices are
available; however, when such prices are not available, such bonds are
valued at a bid price estimated by a broker.
o Short-term debt securities in the Portfolios other than the Money
Market Portfolio 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. Securities held by the Money
Market Portfolio are valued at prices based on equivalent yields or
yield spreads.
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.
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<PAGE>
o Purchased options, including options on futures, are valued at their
last bid price. Written options are valued at their last asked price.
o Futures contracts are valued as of their last sale price or, if there
is no sale, at the latest available bid price.
o Other securities and assets for which market quotations are not readily
available or for which valuation cannot be provided are valued in good
faith by the valuation committee of the Board of Trustees using its
best judgment.
The market value of a put or call option will usually reflect, among other
factors, the market price of the underlying security.
When the Trust writes a call option, an amount equal to the premium received
by the Trust is included in the Trust's financial statements as an asset and
an equivalent liability. The amount of the liability is subsequently
marked-to-market to reflect the current market value of the option written.
When an option expires on its stipulated expiration date or the Trust enters
into a closing purchase or sale transaction, the Trust realizes a gain (or
loss) without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is extinguished. When an
option is exercised, the Trust realizes a gain or loss from the sale of the
underlying security, and the proceeds of sale are increased by the premium
originally received, or reduced by the price paid for the option.
Alliance 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. Alliance will
continuously monitor the performance of these services.
CERTAIN TAX CONSIDERATIONS
Each Portfolio is treated for Federal income tax purposes as a separate
taxpayer. The Trust intends that each Portfolio shall qualify each year and
elect to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986 (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. Under present law, as a Massachusetts business trust doing business in
New York, a Portfolio will also not be subject to any excise or income taxes
in Massachusetts or New York on such amounts. 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.
Portfolios investing in foreign securities or currencies may be subject to
foreign taxes which could reduce the investment performance of such
Portfolios. However, if foreign securities comprise more than 50% of the
year-end value of any 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. As of December 31,
1994 only the Global Portfolio qualified to pass through foreign tax paid to
its shareholders.
To qualify for treatment as a regulated investment company, a Portfolio must,
among other things, derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stock or securities or foreign
currencies, or other income derived with respect to its business of
investing. A Portfolio must also derive less than 30% of its gross income in
each taxable year from gains from the sale or other disposition of stock or
securities held for less than three months. Other investments subject to this
three-month limit are options, futures or forward contracts (other than those
relating to foreign currency), or in certain circumstances, foreign
currencies and related options, futures and forward contracts the gains on
which are not directly related
32
<PAGE>
to the Portfolio's business of investing in stock or securities. This 30%
rule may be inapplicable in the context of certain abnormal redemptions of
Portfolio shares. For purposes of these tests, gross income is determined
without regard to losses from the sale or other disposition of stock or
securities.
In addition, the Secretary of the Treasury has regulatory authority to
exclude from qualifying income described above foreign currency gains which
are not "directly related" to a regulated investment company's "principal
business of investing" in stock, securities or related options or futures.
The Secretary of the Treasury has not to date exercised this authority.
Generally, in order to avoid a 4% nondeductible excise tax, each Portfolio of
the Trust must distribute to its shareholders during the calendar year the
following amounts:
o 98% of the Portfolio's ordinary income for the calendar year;
o 98% of the Portfolio's capital gain net income (all capital gains, both
long-term and short-term, minus all such capital losses), all computed
as if the Portfolio were on a taxable year ending October 31 of the
year in question and beginning the previous November 1; and
o any undistributed ordinary income or capital gain net income for the
prior year.
The excise tax is inapplicable to any regulated investment company whose sole
shareholders are either tax-exempt pension trusts or separate accounts of
life insurance companies funding variable contracts. 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 policies
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 U.S. Government agency or
instrumentality is treated as a separate issuer. Compliance with the
regulations is tested on the last day of each calendar year quarter. There is
a 30 day period after the end of each calendar year quarter in which to cure
any non-compliance.
PORTFOLIO PERFORMANCE
MONEY MARKET PORTFOLIO YIELD
The Money Market Portfolio calculates yield information for seven-day
periods. The seven-day current yield calculation is based on a hypothetical
shareholder account with one share at the beginning of the period. To
determine the seven-day rate of return, the net change in the share value is
computed by subtracting the share value at the beginning of the period from
the share value (exclusive of capital changes) at the end of the period. The
net change is divided by the share value at the beginning of the period to
obtain the base period rate of return. This seven-day base period return is
then multiplied by 365/7 to produce an annualized current yield figure
carried to the nearest one-hundredth of one percent.
Realized capital gains or losses and unrealized appreciation or depreciation
of the Portfolio are excluded from this calculation. The net change in share
values also reflects all accrued expenses of the Money Market Portfolio as
well as the value of additional shares purchased with dividends from the
original shares and any additional shares.
The effective yield is obtained by adjusting the current yield to give effect
to the compounding nature of the Money Market Portfolio's investments, as
follows: The unannualized base period return is compounded by adding one to
the base period return, raising the sum to a power equal to 365 divided by 7,
and subtracting one from the result--i.e., effective yield = [(base period
return +1)365/7] -1.
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Money Market Portfolio yields will fluctuate daily. Accordingly, yields for
any given period are not necessarily representative of future results. Yield
is a function of the type and quality of the instruments in the Money Market
Portfolio, maturities and rates of return on investments, among other
factors. In addition, the value of shares of the Money Market Portfolio will
fluctuate and not remain constant.
The Money Market Portfolio yield may be compared with yields of other
investments. However, it should not be compared to the return on fixed rate
investments which guarantee rates of interest for specified periods. The
yield also should not be compared to the yield of money market funds made
available to the general public because their yields usually are calculated
on the basis of a constant $1 price per share and they pay out earnings in
dividends which accrue on a daily basis. Investment income of the Money
Market Portfolio, including any realized gains as well as accrued interest,
is not paid out in dividends but is reflected in the share value. The Money
Market Portfolio yield also does not reflect insurance company charges and
fees applicable to Contracts.
The seven-day current yield for the Money Market Portfolio was 5.44% for the
period ended December 31, 1995. The effective yield for that period was
5.44%.
QUALITY BOND, GOVERNMENT AND HIGH YIELD PORTFOLIO YIELDS
Yields of the Quality Bond, Government and High Yield Portfolios will be
computed by annualizing net investment income, as determined by the SEC's
formula, calculated on a per share basis for a recent 30-day period and
dividing that amount by a Portfolio share's net asset value (reduced by any
undeclared earned income expected to be paid shortly as a dividend) on the
last trading day of that period. Net investment income will reflect
amortization of any market value premium or discount of fixed income
securities (except for obligations backed by mortgages or other assets) over
such period and may include recognition of a pro rata portion of the stated
dividend rate of dividend paying portfolio securities. The Portfolios' yields
will vary from time to time depending upon market conditions, the
compostition of each Portfolio's portfolio and operating expenses of the
Trust allocated to each Portfolio. Yield 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 yields do not reflect insurance company charges and fees applicable to
the Contracts.
At any time in the future, yields and total return may be higher or lower
than past yields and there can be no assurance that any historical results
will continue.
The 30 day yields for the Quality Bond, Government and High Yield Portfolios
for the period ended December 31, 1995 were 5.31%, 6.28% and 10.57%,
respectively.
TOTAL RETURN CALCULATIONS
Each Portfolio may provide average annual total return information calculated
according to a formula prescribed by the SEC. According to that formula,
average annual total return figures represent the average annual compounded
rate of return for the stated period. Average annual total return quotations
reflect the percentage change between the beginning value of a static account
in the Portfolio and the ending value of that account measured by the then
current net asset value of that Portfolio assuming that all dividends and
capital gains distributions during the stated period were invested in shares
of the Portfolio when paid. Total return is calculated by finding the average
annual compounded rates of return of a hypothetical investment that would
equate the initial amount invested to the ending redeemable value of such
investment, according to the following formula:
T = (ERV/P)1/n -1
where T equals average annual total return; where ERV, the ending redeemable
value, is the value at the end of the applicable period of a hypothetical
$1,000 investment made at the beginning of the applicable period; where P
equals a hypothetical initial investment of $1,000; and where n equals the
number of years.
The average annual total returns through December 31, 1995 for the Common
Stock Portfolio for one year, five years, and 10 years were 32.45%, 18.16%,
and 15.16%, respectively.
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The average annual total returns through December 31, 1995 for the
Intermediate Government Securities Portfolio for one year and since inception
(on April 1, 1991) were 13.33%, and 7.63%, respectively.
The average annual total returns through December 31, 1995 for the High Yield
Portfolio for one year, five years, and since inception (on January 2, 1987)
were 19.92%, 14.95%, and 10.20%, respectively.
The average annual total returns through December 31, 1995 for the Balanced
Portfolio for one year, five years, and since inception (on January 27, 1986)
were 19.75%, 11.17%, and 12.08%, respectively.
The average annual total returns through December 31, 1995 for the Global
Portfolio for one year, five years, and since inception (on August 27, 1987)
were 18.81%, 16.49%, and 11.36%, respectively.
The average annual total returns through December 31, 1995 for the Aggressive
Stock Portfolio for one year, five years, and since inception (on January 27,
1986) were 31.63%, 21.75%, and 20.02%, respectively.
The average annual total returns through December 31, 1995 for the
Conservative Investors Portfolio for one year, five years, and since
inception (on October 2, 1989) were 20.40%, 10.15%, and 9.65%, respectively.
The average annual total returns through December 31, 1995 for the Growth
Investors Portfolio for one year, five years, and since inception (on October
2, 1989) were 26.37%, 17.13%, and 16.05%, respectively.
The average annual total returns through December 31, 1995 for the Quality
Bond Portfolio for one year and since inception (on October 1, 1993) were
17.02% and 4.54%, respectively.
The average annual total returns through December 31, 1995 for the Growth and
Income Portfolio for one year and since inception (on October 1, 1993) were
24.07% and 9.66%, respectively.
The average annual total return through December 31, 1995 for the Equity
Index Portfolio for one year and since inception (on March 1, 1994) was
36.48% and 19.11%, respectively.
The aggregate annual total return through December 31, 1995 for the
International Portfolio since inception (April 3, 1995) was 11.29%.
Each Portfolio, from time to time, also may advertise its cumulative total
return figures. Cumulative total return is the compound rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect changes in the price of a Portfolio's shares
and assume that all dividends and capital gains distributions during the
period were reinvested in shares of that Portfolio. Cumulative total return
is calculated by finding the compound rates of return of a hypothetical
investment over such period, according to the following formula (cumulative
total return is then expressed as a percentage):
C = (ERV/P) -1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value; ERV is the value, at the end of the applicable
period, of a hypothetical $1,000 investment made at the beginning of
the applicable period.
The cumulative total return, since the inception of each Portfolio through
December 31, 1995, for the Common Stock, Intermediate Government Securities,
High Yield, Balanced, Global, Aggressive Stock, Conservative Investors,
Growth Investors, Quality Bond, Growth and Income, Equity Index and
International Portfolios were 1,468.54%, 41.83%, 139.75%, 210.41%, 145.55%,
512.26%, 77.86%, 153.57%, 10.50%, 23.05%, 37.96% and 11.29%, respectively.
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OTHER SERVICES
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036,
serves as the Trust's independent accountant. The financial statements of the
Common Stock, Money Market, Balanced, Aggressive Stock, High Yield, Global,
Conservative Investors, Growth Investors, Intermediate Government Securities,
Quality Bond, Growth and Income and Equity Index Portfolios for the year
ended December 31, 1995 and the International Portfolio for the period April
3, 1995 (commencement of operations) through December 31, 1995, which are
included in this SAI, have been audited by Price Waterhouse LLP, the Trust's
independent accountant for such periods, as stated in their report appearing
herein, and have been so included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
CUSTODIAN
The Chase Manhattan Bank, N.A., whose principal address is One Chase
Manhattan Plaza, New York, New York 10081, has been designated the Custodian
of the Trust's portfolio securities and other assets.
TRANSFER AGENT
Equitable serves as the transfer agent and dividend disbursing agent for the
Trust. For the year ended December 31, 1995, Equitable received no
compensation for providing such services for the Trust.
UNDERWRITER
The Trust has a distribution agreement with Equitable Distributors, Inc. (the
"Class IB Distributor"), an indirect wholly-owned subsidiary of Equitable and
an affiliate of the Adviser, in respect of the Class IB shares. The address
for the Class IB Distributor is 787 Seventh Avenue, New York, New York 10019.
The Trust's distribution agreement in respect of Class IB shares dated July
8, 1996 (the "Class IB Underwriting Agreement"), will remain in effect until
July 8, 1997, and from year to year thereafter only if its continuance is
approved annually by (1) a majority of the Trustees who are not parties to
such agreement or "interested persons" (as defined in the Investment Company
Act) of the Trust or a Portfolio and who have no direct or indirect financial
interest in the operation of the distribution plan adopted under Rule 12b-1
of the Investment Company Act (the "Distribution Plan") or any such related
agreement (the "Independent Trustees") and (2) either by vote of a majority
of the Trustees or a majority of the outstanding voting securities of the
Trust.
The Class IB Distributor will pay for printing and distributing prospectuses
or reports prepared for its use in connection with the offering of the Class
IB shares to prospective investors and preparing, printing and mailing any
other literature or advertising in connection with the offering of the Class
IB shares to prospective investors. The Class IB Distributor will pay all
fees and expenses in connection with its qualification and registration as a
broker or dealer under Federal and state laws and of any activity which is
primarily intended to result in the sale of Class IB shares issued by the
Trust, unless the Distribution Plan in effect for Class IB shares provides
that the Trust or another entity shall bear some or all of such expenses.
As agent, the Class IB 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. The
Class IB Underwriting Agreement provides that the Class IB Distributor
accepts orders for shares at net asset value without sales commission or load
being charged. The Class IB Distributor has made no firm commitment to
acquire shares of any Portfolio.
A description of the Distribution Plan and related services and fees
thereunder is provided in the prospectus. On June 7, 1996, the Board of
Trustees of the Trust unanimously approved the Distribution Plan. In
connection with its consideration of the Distribution Plan, the Board of
Trustees was furnished
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with drafts of the Distribution Plan and the related materials, including
information related to the advantages and disadvantages of Rule 12b-1 plans
currently being used in the mutual fund industry generally and with other
competing funding vehicles for variable annuity and variable life contracts.
Legal counsel for the Independent Trustees provided additional information,
summarized the provisions of the proposed Distribution Plan and discussed the
legal and regulatory considerations in adopting such Distribution Plan.
The Board considered various factors in connection with its decision as to
whether to approve the Distribution Plan, including (a) the nature and causes
of the circumstances which make implementation of the Distribution Plan
necessary and appropriate; (b) the way in which the Distribution Plan would
address those circumstances, including the nature and potential amount of
expenditures; (c) the nature of the anticipated benefits; (d) the possible
benefits of the Distribution Plan to any other person relative to those of
the Trust; (e) the effect of the Distribution Plan on existing owners of
variable annuity contracts and variable life insurance policies; (f) the
merits of possible alternative plans or pricing structures; (g) competitive
conditions in the variable products industry; and (h) the relationship of the
Distribution Plan to other distribution efforts of the Trust.
Based upon its review of the foregoing factors and the materials presented to
it, and in light of its fiduciary duties under relevant state law and the
Investment Company Act, the Board determined, in the exercise of its business
judgment, that the Distribution Plan is reasonably likely to benefit the
Trust and the shareholders of its Portfolios.
The Board realizes that there is no assurance that the expenditure of Trust
assets to finance distribution of Class IB shares of the Trust will have the
anticipated results. However, the Board believes there is a reasonable
likelihood that one or more of such benefits will result, and since the Board
will be in a position to monitor the distribution expenses of the Class IB
shares of the Trust, it will be able to evaluate the benefit of such
expenditures in deciding whether to continue the Distribution Plan.
The Distribution Plan and any Rule 12b-1 related agreement that is entered
into by the Trust or the Class IB Distributor in connection with the
Distribution Plan will continue in effect for a period of more than one year
only so long as continuance is specifically approved at least annually by a
vote of a majority of the Trust's Board of Trustees, and of a majority of the
Independent Trustees, cast in person at a meeting called for the purpose of
voting on the Distribution Plan, or the Rule 12b-1 related agreement, as
applicable. In addition, the Distribution Plan and any Rule 12b-1 related
agreement may be terminated as to Class IB shares of a Portfolio at any time,
and in the case of any Rule 12b-1 related agreement, upon 60 days' written
notice, without penalty, by vote of a majority of the outstanding Class IB
shares of that Portfolio or by vote of a majority of the Independent
Trustees. The Distribution Plan also provides that it may not be amended to
increase materially the amount (to more than .50% of average daily net assets
annually) that may be spent for distribution of Class IB shares of a
Portfolio without the approval of Class IB shareholders of that Portfolio.
FINANCIAL STATEMENTS
The Trust's financial statements for the fiscal year ended December 31,
1995 are incorporated by reference to the Trust's post-effective amendment
no. 26, filed with the Securities and Exchange Commission pursuant to Rule
485(b) on May 1, 1996.
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APPENDIX A
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 AND PRIME-1 COMMERCIAL PAPER RATINGS
The rating A-1 (including A-1+) is the highest commercial paper rating
assigned by S&P. Commercial paper rated A-1 by S&P has the following
characteristics:
o liquidity ratios are adequate to meet cash requirements;
o long-term senior debt is rated "A" or better;
o the issuer has access to at least two additional channels of borrowing;
o basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances;
o typically, the issuer's industry is well established and the issuer has
a strong position within the industry; and
o the reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determines whether the
issuer's commercial paper is rated A-1, A-2 or A-3. Issues rated A-1 that are
determined by S&P to have overwhelming safety characteristics are designated
A-1+.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following:
o evaluation of the management of the issuer;
o economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain
areas;
o evaluation of the issuer's products in relation to competition and
customer acceptance;
o liquidity;
o amount and quality of long-term debt;
o trend of earnings over a period of ten years;
o financial strength of parent company and the relationships which exist
with the issuer; and
o recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet
such obligations.
A-1
