<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14, 1997
REGISTRATION NO. 2-94996
REGISTRATION NO. 811-4185
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
[ ]
PRE-EFFECTIVE AMENDMENT NO.
[ ]
POST-EFFECTIVE AMENDMENT NO. 28
[X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
[ ]
AMENDMENT NO. 29
[X]
THE HUDSON RIVER TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
1345 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10105
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
JAMES M. BENSON, PRESIDENT
787 SEVENTH AVENUE
47TH FLOOR
NEW YORK, NEW YORK 10019
(NAME AND ADDRESS OF AGENT FOR SERVICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 852-6860
PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
EDMUND P. BERGAN, JR.
ALLIANCE CAPITAL MANAGEMENT L.P.
1345 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10105
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: CONTINUOUS.
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[X] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
PURSUANT TO RULE 24F-2(A)(1) OF THE INVESTMENT COMPANY ACT OF 1940, THE
REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OR AMOUNT OF SECURITIES UNDER
THE SECURITIES ACT OF 1933.
THE REGISTRANT'S 24F-2 NOTICE FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
WAS FILED ON FEBRUARY 29, 1996.
<PAGE>
THE HUDSON RIVER TRUST
CROSS-REFERENCE SHEET
ITEMS REQUIRED BY FORM N-1A
<TABLE>
<CAPTION>
ITEM NUMBER IN PART A PROSPECTUS CAPTION
----------------------------------------------- ---------------------------
<S> <C> <C>
1. Cover Page ..................................... COVER PAGE
2. Synopsis ....................................... NOT APPLICABLE
3. Condensed Financial Information ................ FINANCIAL HIGHLIGHTS
THE TRUST; INVESTMENT
4. General Description of Registrant .............. OBJECTIVES AND POLICIES
5. Management of the Trust ........................ MANAGEMENT OF THE TRUST
5A. Management's Discussion of Fund Performance ... NOT APPLICABLE
6. Capital Stock and Other Securities ............. THE TRUST; DESCRIPTION OF
THE TRUST'S SHARES;
DIVIDENDS, DISTRIBUTIONS
AND TAXES
7. Purchase of Securities Being Offered ........... DESCRIPTION OF THE TRUST'S
SHARES
8. Redemption or Repurchase ....................... DESCRIPTION OF THE TRUST'S
SHARES
9. Legal Proceedings .............................. NOT APPLICABLE
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ADDITIONAL
ITEM NUMBER IN PART B INFORMATION CAPTION
-------------------------------------------------------- ----------------------------
<S> <C> <C>
10. Cover Page .............................................. COVER PAGE
11. Table of Contents ....................................... TABLE OF CONTENTS
12. General Information and History ......................... GENERAL INFORMATION AND
HISTORY
13. Investment Objectives and Policies ...................... INVESTMENT RESTRICTIONS OF
THE PORTFOLIOS; DESCRIPTION
OF CERTAIN SECURITIES IN
WHICH THE PORTFOLIOS MAY
INVEST
14. Management of the Fund .................................. MANAGEMENT OF THE TRUST;
INVESTMENT ADVISORY AND
OTHER SERVICES
15. Control Persons and Principal Holders of Securities .... GENERAL INFORMATION AND
HISTORY; DESCRIPTION OF THE
TRUST'S SHARES*
16. Investment Advisory and Other Services .................. INVESTMENT ADVISORY AND
OTHER SERVICES; FINANCIAL
STATEMENTS
<PAGE>
STATEMENT OF ADDITIONAL
ITEM NUMBER IN PART B INFORMATION CAPTION
-------------------------------------------------------- ----------------------------
17. Brokerage Allocation and Other Practices ................ INVESTMENT ADVISORY AND
OTHER SERVICES
18. Capital Stock and Other Securities ...................... GENERAL INFORMATION AND
HISTORY; DESCRIPTION OF THE
TRUST'S SHARES*
19. Purchase, Redemption and Pricing of Securities Being
Offered ................................................. PURCHASE AND PRICING OF
SECURITIES; DESCRIPTION OF
THE TRUST'S SHARES*
20. Tax Status .............................................. CERTAIN TAX CONSIDERATIONS
21. Underwriters ............................................ OTHER SERVICES
22. Calculation of Performance Data ......................... PORTFOLIO PERFORMANCE
23. Financial Statements .................................... FINANCIAL STATEMENTS
</TABLE>
- ------------------
* Prospectus Caption
<PAGE>
THE HUDSON RIVER TRUST
Principal Office Located at
1345 Avenue of the Americas -- New York, New York 10105
The Hudson River Trust (the "Trust") is a mutual fund, currently issuing
fourteen series of shares of beneficial interest, each representing a
separate investment portfolio (each a "Portfolio"). The Portfolios are The
Asset Allocation Series: Conservative Investors, Balanced and Growth
Investors; The Equity Series: Growth and Income, Equity Index, Common Stock,
Global, International, Aggressive Stock and Small Cap Growth; and The Fixed
Income Series: Money Market, Intermediate Government Securities, Quality Bond
and High Yield. An investment in the Money Market Portfolio is neither
insured nor guaranteed by the U.S. Government. Shares of each Portfolio are
currently divided into two classes: Class IA shares, offered hereby, and
Class IB shares, offered pursuant to another prospectus.
This prospectus sets forth concisely the investment objectives and policies
of the fourteen 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 relating to Class IA shares ("SAI")
dated May 1, 1997 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 ................................... 11
Investment Objectives and Policies .......... 11
Investment Techniques ....................... 26
Certain Investment Restrictions ............. 31
Management of the Trust ..................... 32
Description of the Trust's Shares ........... 35
Dividends, Distributions and Taxes .......... 37
Investment Performance ...................... 37
Appendix A -- Performance Information ...... A-1
Appendix B -- Description of Bond Ratings .. B-1
</TABLE>
An investment in the Trust is not a deposit or obligation of, or guaranteed
or endorsed by, any bank and is not federally 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
PROSPECTUS DATED MAY 1, 1997
- ------------------------------------------------------------------------------
HRT103 (5/97) Copyright 1996 The Hudson River Trust. All rights reserved.
<PAGE>
FINANCIAL HIGHLIGHTS
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 following
tables also give equivalent information for a share of beneficial interest in
each of the other Portfolios (other than the Small Cap Growth Portfolio)
outstanding throughout the periods indicated. No shares of the Small Cap
Portfolio were outstanding as of December 31, 1996.
Information regarding portfolio turnover rates, some of which exceeded 100%
during 1994 and 1993, is also included. Higher levels of portfolio activity
result in higher transaction costs, including higher brokerage expenses. The
equity component of the Balanced Portfolio's portfolio turnover rates in 1996
and 1995 was % and 152%, respectively, and the fixed income component was
% and 233%, respectively, in 1996 and 1995.
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, Balanced,
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 on or after December 31, 1993), 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 on
of after December 31, 1993 has been audited by , 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)(C)
ASSET ALLOCATION SERIES
CONSERVATIVE INVESTORS PORTFOLIO:
<TABLE>
<CAPTION>
OCTOBER 2,
YEAR ENDED DECEMBER 31, 1989 TO
------------------------------------------------------------------- DECEMBER 31,
1996 1995 1994 1993* 1992 1991 1990 1989
-------- -------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period (a) .... $10.15 $11.12 $10.94 $11.29 $10.23 $10.26 $10.00
-------- -------- -------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ...................... 0.60 0.55 0.52 0.64 0.69 0.72 0.15
Net realized and unrealized gain (loss) on
investments ............................... 1.43 (1.00) 0.65 (0.01) 1.28 (0.09) 0.16
-------- -------- -------- ------- ------- ------- -------
Total from investment operations ........... 2.03 (0.45) 1.17 0.63 1.97 0.63 0.31
-------- -------- -------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income ....... (0.59) (0.52) (0.50) (0.62) (0.66) (0.66) (0.05)
Dividends in excess of net investment income -- -- (0.00) -- -- -- --
Distributions from realized gains .......... (0.07) -- (0.49) (0.36) (0.25) -- --
-------- -------- -------- ------- ------- ------- -------
Total dividends and distributions .......... (0.66) (0.52) (0.99) (0.98) (0.91) (0.66) (0.05)
-------- -------- -------- ------- ------- ------- -------
Net asset value, end of period ............... $11.52 $10.15 $11.12 $10.94 $11.29 $10.23 $10.26
======== ======== ======== ======= ======= ======= =======
Total return (d) ............................. 20.40% (4.10)% 10.76% 5.64% 19.80% 6.30% 3.10%
======== ======== ======== ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) ............ $252,101 $173,691 $114,418 $70,675 $50,279 $29,971 $13,984
Ratio of expenses to average net assets ..... 0.59% 0.59% 0.60% 0.61% 0.64% 0.73% 0.26%
Ratio of net investment income to average net
assets ..................................... 5.48% 5.22% 4.49% 5.77% 6.45% 7.06% 1.54%
Portfolio turnover rate ...................... 287% 228% 178% 136% 171% 88% 0%
</TABLE>
- ------------
Footnotes appear on page 10.
2
<PAGE>
BALANCED PORTFOLIO:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1996 1995 1994 1993* 1992 1991 1990
------- ------------ ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period (a) ................... $ 14.87 $ 16.67 $ 16.19 $ 18.48 $ 14.40 $ 15.16
------------ ------------ ------------ ------------ ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ........ 0.54 0.45 0.50 0.56 0.60 0.78
Net realized and unrealized
gain (loss) on investments . 2.36 (1.78) 1.46 (1.11) 5.23 (0.76)
------------ ------------ ------------ ------------ ---------- ----------
Total from investment
operations .................. 2.90 (1.33) 1.96 (0.55) 5.83 0.02
------------ ------------ ------------ ------------ ---------- ----------
LESS DISTRIBUTIONS:
Dividends from net
investment income ........... (0.54) (0.44) (0.50) (0.55) (0.55) (0.78)
Dividends in excess of net
investment income ........... -- (0.03) -- -- -- --
Distributions from realized
gains ....................... (0.47) -- (0.95) (1.19) (1.20) --
Distributions in excess of
realized gains .............. -- -- (0.03) -- -- --
Tax return of capital
distributions ............... -- (0.00) -- -- -- --
------------ ------------ ------------ ------------ ---------- ----------
Total dividends and
distributions ............... (1.01) (0.47) (1.48) (1.74) (1.75) (0.78)
------------ ------------ ------------ ------------ ---------- ----------
Net asset value, end of period $ 16.76 $ 14.87 $ 16.67 $ 16.19 $ 18.48 $ 14.40
============ ============ ============ ============ ========== ==========
Total return (d) .............. 19.75% (8.02)% 12.28% (2.85)% 41.25% 0.25%
============ ============ ============ ============ ========== ==========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's) ...................... $1,523,142 $1,329,820 $1,364,640 $1,076,670 $964,262 $286,432
Ratio of expenses to average
net assets ................... 0.40% 0.39% 0.39% 0.40% 0.41% 0.45%
Ratio of net investment income
to average net assets ........ 3.33% 2.87% 2.99% 3.30% 3.60% 5.35%
Portfolio turnover rate ...... 186% 115% 99% 91% 159% 119%
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1989 1988 1987
---------- ---------- ----------
<S> <C> <C> <C>
Net asset value, beginning of
period (a) ................... $ 13.38 $ 12.39 $ 12.79
---------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ........ 0.85 0.67 0.41
Net realized and unrealized
gain (loss) on investments . 2.53 0.95 (0.47)
---------- ---------- ----------
Total from investment
operations .................. 3.38 1.62 (0.06)
---------- ---------- ----------
LESS DISTRIBUTIONS:
Dividends from net
investment income ........... (0.85) (0.63) (0.34)
Dividends in excess of net
investment income ........... -- -- --
Distributions from realized
gains ....................... (0.75) -- --
Distributions in excess of
realized gains .............. -- -- --
Tax return of capital
distributions ............... -- -- --
---------- ---------- ----------
Total dividends and
distributions ............... (1.60) (0.63) (0.34)
---------- ---------- ----------
Net asset value, end of period $ 15.16 $ 13.38 $ 12.39
========== ========== ==========
Total return (d) .............. 25.84% 13.27% (0.86)
========== ========== ==========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's) ...................... $241,910 $161,819 $108,913
Ratio of expenses to average
net assets ................... 0.45% 0.51% 0.47%
Ratio of net investment income
to average net assets ........ 5.71% 5.15% 2.88%
Portfolio turnover rate ...... 132% 204% 197%
</TABLE>
- ------------
Footnotes appear on page 10.
3
<PAGE>
GROWTH INVESTORS PORTFOLIO:
<TABLE>
<CAPTION>
OCTOBER 2,
YEAR ENDED DECEMBER 31, 1989 TO
---------------------------------------------------------------------------DECEMBER 31,
1996 1995 1994 1993* 1992 1991 1990 1989
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <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 (d) ......................... 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>
EQUITY SERIES
GROWTH AND INCOME PORTFOLIO:
<TABLE>
<CAPTION>
OCTOBER 1, 1993
YEAR ENDED TO
DECEMBER 31, DECEMBER 31, 1993
------------------------------ -----------------
1996 1995 1994
-------- --------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of period (a) .............. $ 9.70 $ 9.95 $10.00
--------- --------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................................ 0.33 0.31 0.03
Net realized and unrealized gain (loss) on
investments .......................................... 1.97 (0.36) (0.06)
--------- --------- -------
Total from investment operations ..................... 2.30 (0.05) (0.03)
--------- --------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income ................. (0.30) (0.20) (0.02)
Dividends in excess of net investment income ........ -- -- (0.00)
Tax return of capital distribution ................... -- -- (0.00)
--------- --------- -------
Total dividends and distributions .................... (0.30) (0.20) (0.02)
--------- --------- -------
Net asset value, end of period ........................ $ 11.70 $ 9.70 $ 9.95
========= ========= =======
Total return (d) ...................................... 24.07% (0.58)% (0.25)%
========= ========= =======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) ..................... $98,053 $31,522 $1,456
Ratio of expenses to average net assets ............... 0.60% 0.78% 2.70%(b)
Ratio of net investment income to average net assets . 3.11% 3.13% 1.12%(b)
Portfolio turnover rate ............................... 65% 52% 48%
</TABLE>
- ------------
Footnotes appear on page 10.
4
<PAGE>
EQUITY INDEX PORTFOLIO:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 1, 1994
DECEMBER 31, TO DECEMBER 31, 1994
------------------ --------------------
1996 1995
-------- --------
<S> <C> <C> <C>
Net asset value, beginning of period (a) ............... $ 9.87 $10.00
---------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................................. 0.26 0.20
Net realized and unrealized gain (loss) on investments 3.32 (0.09)
---------- --------
Total from investment operations ...................... 3.58 0.11
---------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income .................. (0.22) (0.20)
Distributions of realized gains ....................... (0.09) (0.03)
Distributions in excess of realized gains ............. (0.01) (0.01)
---------- --------
Total dividends and distributions ..................... (0.32) (0.24)
---------- --------
Net asset value, end of period ......................... $ 13.13 $ 9.87
========== ========
Total return (d) ....................................... 36.48% 1.08%
========== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) ...................... $165,785 $36,748
Ratio of expenses to average net assets ................ 0.48% 0.49%(b)
Ratio of net investment income to average net assets .. 2.16% 2.42%(b)
Portfolio turnover rate ................................ 9% 7%
</TABLE>
COMMON STOCK PORTFOLIO:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994 1993* 1992
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of year (a) ....... $ 13.36 $14.65 $13.49 $14.18
------------ ---------- ------------ ------------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income ................ 0.20 0.20 0.23 0.24
Net realized and
unrealized gain
(loss) on invest-
ments and
foreign currency
transactions .......... 4.12 (0.51) 3.10 0.20
------------ ---------- ------------ ------------
Total from invest-
ment operations ....... 4.32 (0.31) 3.33 0.44
------------ ---------- ------------ ------------
LESS DISTRIBUTIONS:
Dividends from net
investment
income ................ (0.20) (0.19) (0.23) (0.24)
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)
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)
------------ ---------- ------------ ------------
Net asset value, end
of year ................ $ 16.48 $13.36 $14.65 $13.49
============ ========== =========== ==========
Total return (d) ........ 32.45% (2.14)% 24.84% 3.22%
============ ========== =========== ==========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
year (000's) ........... $4,879,677 $3,466,245 $3,125,128 $2,307,292
Ratio of expenses to
average net assets ..... 0.38% 0.38% 0.38% 0.38%
Ratio of net invest-
ment income to
average net assets ..... 1.27% 1.40% 1.55% 1.73%
Portfolio turnover rate 61% 52% 82% 71%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1991 1990 1989 1988 1987
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of year (a) ....... $11.22 $12.87 $12.19 $10.15 $11.34
---------- --------- --------- --------- ---------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income ................ 0.32 0.21 0.27 0.23 0.17
Net realized and
unrealized gain
(loss) on invest-
ments and
foreign currency
transactions .......... 3.91 (1.25) 2.84 2.04 0.72
---------- --------- --------- --------- ---------
Total from invest-
ment operations ....... 4.23 (1.04) 3.11 2.27 0.89
---------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net
investment
income ................ (0.29) (0.22) (0.26) (0.23) (0.17)
Dividends in
excess of net
investment
income ................ -- -- -- -- --
Distributions from
realized gains ........ (0.98) (0.39) (2.17) -- (1.91)
Distributions in excess
of realized gains ..... -- -- -- -- --
Tax return of capital
distributions ......... -- -- -- -- --
---------- --------- --------- --------- ---------
Total dividends
and distributions ..... (1.27) (0.61) (2.43) (0.23) (2.08)
---------- --------- --------- --------- ---------
Net asset value, end
of year ................ $ 14.18 $ 11.22 $ 12.87 $ 12.19 $ 10.15
========== ========= ========= ========= =========
Total return(d) ........ 37.90% (8.11)% 25.59% 22.44% 7.49%
========== ========= ========= ========= =========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
year (000's) ........... $2,126,402 $673,476 $725,627 $537,827 $434,558
Ratio of expenses to
average net assets ..... 0.40% 0.44% 0.43% 0.46% 0.46%
Ratio of net invest-
ment income to
average net assets ..... 2.32% 1.72% 1.87% 2.02% 1.21%
Portfolio turnover rate 90% 82% 90% 71% 86%
</TABLE>
- ------------
Footnotes appear on page 10.
5
<PAGE>
GLOBAL PORTFOLIO:
<TABLE>
<CAPTION>
AUGUST 27,
YEAR ENDED DECEMBER 31, 1987 TO
--------------------------------------------------------------------------------------- DECEMBER 31,
1996 1995 1994 1993* 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- -------- ------- --------
<S> <C> <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 (d) ................ 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>
INTERNATIONAL PORTFOLIO:
<TABLE>
<CAPTION>
APRIL 3,
YEAR ENDED 1995 TO
DECEMBER 31, DECEMBER 31,
1996 1995
-------------- -----------
<S> <C> <C>
Net asset value, beginning of period (a) ............ $ 10.00
-----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .............................. 0.14
Net realized and unrealized gain on investments ... 0.98
-----------
Total from investment operations ................... 1.12
-----------
LESS DISTRIBUTIONS:
Dividends from net investment income ............... (0.07)
Dividends in excess of net investment income ...... (0.13)
Distributions of realized gains .................... (0.05)
-----------
Total dividends and distributions .................. (0.25)
-----------
Net asset value, end of period ...................... $ 10.87
===========
Total return (d) .................................... 11.29%
===========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) ................... $28,684
Ratio of expenses to average net assets ............. 1.03%(b)
Ratio of net investment income to average net assets 1.71%(b)
Portfolio turnover rate ............................. 56%
</TABLE>
- ------------
Footnotes appear on page 10.
6
<PAGE>
AGGRESSIVE STOCK PORTFOLIO:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993* 1992
-------- ----------- ----------- ----------- ------------
<S> <C> <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 (d) ................. 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>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1991 1990 1989 1988 1987
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period (a) ...................... $ 19.37 $ 19.90 $ 14.07 $ 14.09 $ 13.35
---------- ---------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .......... 0.12 0.16 0.23 0.20 0.20
Net realized and unrealized gain
(loss) on investments ......... 16.68 1.46 5.87 (0.03) 0.79
---------- ---------- --------- --------- ---------
Total from investment operations 16.80 1.62 6.10 0.17 0.99
---------- ---------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment
income ........................ (0.10) (0.16) (0.23) (0.19) (0.13)
Distributions from realized
gains ......................... (2.25) (1.99) (0.04) -- (0.12)
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)
---------- ---------- --------- --------- ---------
Net asset value, end of period .. $ 33.82 $ 19.37 $ 19.90 $ 14.07 $ 14.09
========== ========== ========= ========= =========
Total return (d) ................. 86.87% 8.16% 43.50% 1.13% 7.30%
========== ========== ========= ========= =========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $959,257 $120,960 $99,459 $62,116 $47,776
Ratio of expenses to average net
assets ......................... 0.51% 0.55% 0.55% 0.65% 0.58%
Ratio of net investment income to
average net assets ............. 0.40% 0.78% 1.29% 1.35% 1.19%
Portfolio turnover rate .......... 117% 54% 89% 70% 134%
</TABLE>
- ------------
Footnotes appear on page 10.
7
<PAGE>
FIXED INCOME SERIES
MONEY MARKET PORTFOLIO:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993* 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning
of year(a) .................... $ 10.14 $10.12 $10.11 $10.13
-------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ......... 0.57 0.41 0.30 0.37
Net realized and
unrealized gain (loss)
on investments ............... -- -- -- (0.01)
-------- -------- -------- --------
Total from investment
operations ................... 0.57 0.41 0.30 0.36
-------- -------- -------- --------
LESS DIVIDENDS:
Dividends from net
investment income ............ (0.55) (0.39) (0.29) (0.38)
-------- -------- -------- --------
Total dividends ............... (0.55) (0.39) (0.29) (0.38)
-------- -------- -------- --------
Net asset value, end of year $ 10.16 $10.14 $10.12 $10.11
======== ======== ======== ========
Total return (d) ............... 5.74% 4.02% 3.00% 3.57%
======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000's) $386,691 $325,391 $248,460 $268,584
Ratio of expenses to average
net assets .................... 0.44% 0.42% 0.42% 0.43%
Ratio of net investment
income to average net
assets ........................ 5.53% 4.01% 2.91% 3.63%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1991 1990 1989 1988 1987
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year(a) .................... $10.17 $10.14 $10.13 $10.09 $10.02
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ......... 0.61 0.81 0.89 0.73 0.64
Net realized and
unrealized gain (loss)
on investments ............... -- 0.01 0.01 (0.01) 0.01
-------- -------- -------- -------- --------
Total from investment
operations ................... 0.61 0.82 0.90 0.72 0.65
-------- -------- -------- -------- --------
LESS DIVIDENDS:
Dividends from net
investment income ............ (0.65) (0.79) (0.89) (0.68) (0.58)
-------- -------- -------- -------- --------
Total dividends ............... (0.65) (0.79) (0.89) (0.68) (0.58)
-------- -------- -------- -------- --------
Net asset value, end of year $ 10.13 $ 10.17 $ 10.14 $ 10.13 $ 10.09
======== ======== ======== ======== ========
Total return (d) ............... 6.20% 8.22% 9.18% 7.32% 6.63%
======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000's) $302,395 $359,426 $289,338 $234,378 $154,606
Ratio of expenses to average
net assets .................... 0.43% 0.44% 0.44% 0.48% 0.46%
Ratio of net investment
income to average net
assets ........................ 5.96% 7.85% 8.70% 7.14% 6.29%
</TABLE>
<PAGE>
INTERMEDIATE GOVERNMENT SECURITIES PORTFOLIO (E):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------------------------- APRIL 1, 1991 TO
1996 1995 1994 1993* 1992 DECEMBER 31, 1991
------- --------- --------- ---------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period (a) .... $ 8.87 $ 10.08 $10.53 $10.73 $10.00
--------- --------- --------- --------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ....................... 0.58 0.65 0.59 0.60 0.52
Net realized and unrealized gain (loss) on
investments ................................. 0.57 (1.08) 0.51 (0.02) 0.66
--------- --------- --------- --------- ------
Total from investment operations ............ 1.15 (0.43) 1.10 0.58 1.18
--------- --------- --------- --------- ------
LESS DISTRIBUTIONS:
Dividends from net investment income ....... (0.55) (0.78) (0.68) (0.60) (0.34)
Distributions from realized gains ........... -- -- (0.87) (0.18) (0.11)
--------- --------- --------- --------- ------
Total dividends and distributions ........... (0.55) (0.78) (1.55) (0.78) (0.45)
--------- --------- --------- --------- ------
Net asset value, end of period ............... $ 9.47 $ 8.87 $10.08 $10.53 $10.73
========= ========= ========= ========= ======
Total return (d) ............................. 13.33% (4.37)% 10.58% 5.53% 12.10%
========= ========= ========= ========= ======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) ............ $71,780 $48,518 $158,511 $293,587 $241,290
Ratio of expenses to average net assets ..... 0.57% 0.56% 0.53% 0.52% 0.43%
Ratio of net investment income to average net
assets ...................................... 6.15% 6.75% 5.43% 5.63% 4.88%
Portfolio turnover rate ...................... 255% 133% 254% 316% 174%
</TABLE>
- ------------
Footnotes appear on page 10.
8
<PAGE>
QUALITY BOND PORTFOLIO:
<TABLE>
<CAPTION>
OCTOBER 1, 1993
YEAR ENDED TO
DECEMBER 31, DECEMBER 31, 1993
------------------------------ -----------------
1996 1995 1994
-------- ---------- ----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period (a) ................................... $ 8.72 $ 9.82 $ 10.00
---------- ---------- -------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ..................................................... 0.57 0.66 0.11
Net realized and unrealized gain (loss) on investments and foreign
currency transactions .................................................... 0.88 (1.16) (0.16)
---------- ---------- ---------
Total from investment operations .......................................... 1.45 (0.50) (0.05)
---------- ---------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income ...................................... (0.56) (0.55) (0.12)
Distributions in excess of realized gains ................................. -- -- (0.01)
Tax return of capital distributions ....................................... -- (0.05) --
---------- ---------- ---------
Total dividends and distributions ......................................... (0.56) (0.60) (0.13)
---------- ---------- ---------
Net asset value, end of period ............................................. $ 9.61 $ 8.72 $ 9.82
========== ========== =========
Total return (d) ........................................................... 17.02% (5.10)% (0.51)%
========== ========== =========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) .......................................... $157,443 $127,575 $104,832
Ratio of expenses to average net assets .................................... 0.59% 0.59% 0.69%(b)
Ratio of net investment income to average net assets ....................... 6.13% 7.17% 4.62%(b)
Portfolio turnover rate .................................................... 411% 222% 77%
</TABLE>
HIGH YIELD PORTFOLIO:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993* 1992
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period (a) $ 8.91 $10.08 $ 9.15 $ 8.96
-------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................. 0.98 0.89 0.94 0.89
Net realized and unrealized gain (loss)
on investments ....................... 0.73 (1.17) 1.10 0.19
-------- ------- ------- -------
Total from investment operations ...... 1.71 (0.28) 2.04 1.08
-------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income .. (0.94) (0.88) (0.92) (0.89)
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)
-------- ------- ------- -------
Net asset value, end of period .......... $ 9.64 $ 8.91 $10.08 $ 9.15
======== ======= ======= =======
Total return (d) ........................ 19.92% (2.79)% 23.15% 12.31%
======== ======= ======= =======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) ...... $118,129 $73,895 $67,169 $47,687
Ratio of expenses to average net assets 0.60% 0.61% 0.63% 0.60%
Ratio of net investment income to
average net assets .................... 10.34% 9.23% 9.52% 9.58%
Portfolio turnover rate ................. 350% 248% 280% 177%
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
JANUARY 2,
YEAR ENDED DECEMBER 31, 1987 TO
---------------------------------- DECEMBER 31,
1991 1990 1989 1988 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period (a) $ 7.97 $ 9.14 $ 9.72 $ 9.67 $10.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................. 0.89 1.04 1.09 1.00 1.06
Net realized and unrealized gain (loss)
on investments ....................... 0.99 (1.14) (0.60) (0.08) (0.60)
------- ------- ------- ------- -------
Total from investment operations ...... 1.88 (0.10) 0.49 0.92 0.46
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income .. (0.89) (1.07) (1.07) (0.87) (0.79)
Dividends in excess of net investment
income ............................... -- -- -- -- --
Distributions from realized gains ..... -- -- -- -- --
------- ------- ------- ------- -------
Total dividends and distributions ..... (0.89) (1.07) (1.07) (0.87) (0.79)
------- ------- ------- ------- -------
Net asset value, end of period .......... $ 8.96 $ 7.97 $ 9.14 $ 9.72 $ 9.67
======= ======= ======= ======= =======
Total return (d) ........................ 24.46% (1.10)% 5.14% 9.73% 4.68%
======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) ...... $45,066 $36,569 $41,280 $34,810 $10,687
Ratio of expenses to average net assets 0.61% 0.62% 0.62% 0.73% 0.98%
Ratio of net investment income to
average net assets .................... 10.31% 12.04% 11.22% 10.05% 10.62%
Portfolio turnover rate ................. 187% 53% 116% 209% 235%
</TABLE>
- ------------
Footnotes appear on page 10.
9
<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. ("Alliance") 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
Balanced Portfolio -- January 27, 1986
Aggressive Stock Portfolio -- January 27, 1986
High Yield Portfolio -- January 2, 1987
Global Portfolio -- August 27, 1987
Conservative Investors Portfolio -- October 2, 1989
Growth Investors Portfolio -- October 2, 1989
Intermediate Government Securities Portfolio -- April 1, 1991
Quality Bond Portfolio -- October 1, 1993
Growth and Income Portfolio -- October 1, 1993
Equity Index Portfolio -- March 1, 1994
International Portfolio -- April 3, 1995
(b) Annualized.
(c) Net investment income and capital changes per share are based upon
monthly average shares outstanding.
(d) Total return is calculated assuming an initial investment made at 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.
(e) On February 22, 1994 shares of the Intermediate Government Securities
Portfolio of the Trust were substituted for shares of the Trust's
Short-Term World Income Portfolio.
10
<PAGE>
THE TRUST
The Trust is an open-end management investment company under the Investment
Company Act of 1940 (the "Investment Company Act"). As a "series" investment
company, the Trust issues shares of beneficial interest currently divided
into fourteen Portfolios, although additional Portfolios may be established.
Each Portfolio is a separate diversified series of the Trust, and the Trust's
assets and liabilities are divided among the Portfolios. Originally organized
as a Maryland corporation which commenced operations on March 22, 1985, the
Trust was reorganized 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") and
certain insurance companies unaffiliated with Equitable. Equitable was the
record owner of approximately % and % of the Trust's Class IA and
Class IB shares, respectively as of March 31, 1997, and consequently may be
deemed to control the Trust.
Shares of each Portfolio are currently divided into two classes: Class IA
shares are offered pursuant to this prospectus at net asset value and are not
subject to fees imposed pursuant to a distribution plan. Class IB shares are
offered pursuant to another prospectus at net asset value and are subject to
distribution fees imposed pursuant to a distribution plan adopted under Rule
12b-1 under the Investment Company Act. Class IB shares are sold to an
insurance company separate account of Equitable. Inquiries regarding Class IB
shares should be addressed to Equitable, Income Management Group, at 200
Plaza Drive, Secaucus, NJ 07096 (toll-free: 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 the assets of that Portfolio and, generally, have
identical voting, dividend, liquidation, and other rights, other than with
respect to 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 could 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.
THE ASSET ALLOCATION SERIES
o The Conservative Investors Portfolio's fundamental investment
objective is to achieve a high total return without, in the
investment adviser's opinion, undue risk to principal. It will
pursue this objective by investing in a diversified mix of publicly
traded equity and debt securities.
o The Balanced Portfolio's fundamental investment objective is to
achieve a high return through both appreciation of capital and
current income. The Balanced Portfolio will pursue this objective
by investing in a diversified portfolio of publicly traded equity
and debt securities and short-term money market instruments.
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
11
<PAGE>
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."
THE EQUITY SERIES
o The Growth and Income Portfolio's fundamental investment objective
is to provide a high total return through a combination of current
income and capital appreciation by investing primarily in
income-producing common stocks and securities convertible into
common stocks.
o The Equity Index Portfolio's fundamental investment objective is to
seek a total return before expenses that approximates the total
return performance of the Standard & Poor's Corporation (S&P) 500
Index, including reinvestment of dividends, at a risk level
consistent with that of the Index.
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.
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 International Portfolio's fundamental investment objective is
to achieve long-term growth of capital by investing primarily in a
diversified portfolio of equity securities selected principally to
permit participation in non-United States companies with prospects
for growth.
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 Small Cap Growth Portfolio's fundamental investment objective
is to achieve long-term growth of capital. The Small Cap Growth
Portfolio will pursue this objective by investing primarily in U.S.
common stocks and other equity-type securities issued by smaller
companies with favorable growth prospects.
THE FIXED INCOME SERIES
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.
o The Intermediate Government Securities Portfolio's fundamental
investment objective is to achieve high current income consistent
with relative stability of principal through investment primarily
in debt securities issued or guaranteed as to principal and
interest by the U.S. Government or any of its agencies or
instrumentalities. The Portfolio's investments will each have a
final maturity of not more than ten years or a duration not
exceeding that of a 10-year Treasury note.
o The Quality Bond Portfolio's fundamental investment objective is to
achieve high current income consistent with preservation of capital
by investing primarily in investment grade fixed income securities.
The Quality Bond Portfolio reserves the right to invest in
convertible debt securities, preferred stocks and dividend-paying
common stocks.
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
12
<PAGE>
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."
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.
THE ASSET ALLOCATION SERIES
The Conservative Investors Portfolio, the Balanced Portfolio and the Growth
Investors Portfolio together are called the Asset Allocation Series. These
Portfolios invest in a variety of fixed income and equity securities, each
pursuant to a different asset allocation strategy, as described below. The
term "asset allocation" is used to describe the process of shifting assets
among discrete categories of investments in an effort to reduce risk while
producing desired return objectives. Portfolio management, therefore, will
consist not only of specific securities selection but also of setting,
monitoring and changing, when necessary, the asset mix.
Each Portfolio has been designed with a view toward a different "investor
profile." The "conservative investor" has a relatively short-term investment
bias, either because of a limited tolerance for market volatility or a short
investment horizon. This investor is averse to taking risks that may result
in principal loss, even though such aversion may reduce the potential for
higher long-term gains and result in lower performance during periods of
equities market strength. Consequently, the asset mix for the Conservative
Investors Portfolio attempts to reduce volatility while providing modest
upside potential. 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 "balanced investor" is somewhat less aggressive than the growth investor
and seeks a medium to long-term investment posture. This investor is
sensitive to risk, but is willing to take on some risk in seeking high total
return. Consequently, the asset mix for the Balanced Portfolio attempts to
capture a sizable portion of the market's upside while diversifying risk
among asset classes.
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 each 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 each
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
appropriate investor profile for each Portfolio. Consequently, asset mix
decisions for the Conservative Investors Portfolio particularly emphasize
risk assessment of each asset class viewed over the shorter term, while
decisions for the Growth Investors Portfolio are principally based on the
longer term total return potential for each asset class.
When the Committee establishes a new allocation range for a Portfolio, it
also prescribes the length of time during which that Portfolio should achieve
an asset mix within the new range. To achieve a new asset mix, the Portfolios
look first to available cash flow. If cash flow proves insufficient to
achieve the desired asset mix, the Portfolios will sell securities and
reinvest the proceeds in the appropriate asset class.
The Asset Allocation Series Portfolios are permitted to use a variety of
hedging techniques to attempt to control stock market, interest rate and
currency risks. Each of the Portfolios in the Asset Allocation Series may
make loans of up to 50% of its total portfolio securities. Each of the
Portfolios in the Asset Allocation
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Series 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. Each 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.
Risk Factors. In addition to the risk factors associated with certain types
of securities in which the Portfolios in the Asset Allocation Series may
invest, and in addition to the risk of loss inherent in any securities
ownership, there is associated with these Portfolios 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 these Portfolios during periods of
frequently changing asset mix ranges.
CONSERVATIVE INVESTORS PORTFOLIO--INVESTMENT POLICIES
The Conservative Investors Portfolio attempts to achieve its investment
objective by allocating varying portions of its assets to high quality,
publicly traded fixed income securities (including money market instruments
and cash) and publicly traded common stocks and other equity securities of
United States and non-United States issuers. All fixed income securities held
by the Portfolio will be of investment grade. This means that they will be in
one of the top four rating categories assigned by S&P or Moody's Investors
Service, Inc. (Moody's). Equity securities invested in by the Portfolio will
consist of the types of securities in which the Common Stock Portfolio may
invest and may include convertible securities. No more than 15% 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 will at all times hold at least 40% of its assets in investment
grade fixed income securities, each having a duration of less than that of a
10-year Treasury bond (the Fixed Income Core). Duration is a measure that
relates the price volatility of a bond to changes in interest rates. The
duration of a bond is the weighted average term to maturity, expressed in
years, of the present value of all future cash flows, including coupon
payments and principal repayments. Thus, by definition, duration is always
less than or equal to full maturity. As of December 31, 1995, the duration of
a 10-year Treasury bond was considered to be 5.61 years.
The Portfolio is generally expected to hold approximately 70% of its assets
in fixed income securities (including the Fixed Income Core) and 30% in
equity 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 50%, but never more than 90%, of the Portfolio's total
assets. The equity class will always comprise at least 10%, but never more
than 50%, of the Portfolio's total assets.
BALANCED PORTFOLIO--INVESTMENT POLICIES
The Balanced Portfolio attempts to achieve its objective by investing varying
portions of its assets in publicly-traded equity and debt securities and
money market instruments. The Balanced Portfolio attempts to achieve
long-term growth of capital by investing in common stock and other
equity-type instruments. It will try to achieve a competitive level of
current income and capital appreciation through investments in publicly
traded debt securities and a high level of current income through investments
in money market instruments.
The portion of the Balanced Portfolio's assets invested in each type of
security will vary in accordance with economic conditions, the general level
of common stock prices, interest rates and other relevant considerations,
including the risks associated with each investment medium. Although the
Balanced Portfolio will seek to reduce the risks associated with any one
investment medium by utilizing a variety of investments, performance will
depend upon the investment adviser's ability to assess accurately and react
to changing market conditions.
The Balanced Portfolio will at all times hold at least 25% of its assets in
fixed income securities (including, for these purposes, that portion of the
value of securities convertible into common stock which is
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attributable to the fixed income characteristics of those securities). The
Portfolio's equity securities will always comprise at least 25%, but never
more than 75%, of the Portfolio's total assets. Consequently, the Portfolio
will have "Core Holdings" of at least 25% fixed income securities and 25%
equity securities. Over time, holdings by the Portfolio are currently
expected to average approximately 50% in fixed income securities and
approximately 50% in equity securities. Actual asset mixes will be adjusted
in response to economic and credit market cycles.
The equity securities invested in by the Balanced Portfolio will consist of
the types of securities in which the Common Stock Portfolio may invest. The
money market securities will consist of the types of securities and credit
quality in which the Money Market Portfolio may invest. The debt securities
will consist principally of bonds, notes, debentures and equipment trust
certificates. The Portfolio may also buy debt securities with equity features
such as conversion or exchange rights or warrants for the acquisition of
stock or participations based on revenues, rates or profits. These debt
securities will principally be investment grade securities rated at least Baa
by Moody's or BBB by S&P, or will be issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. If such Baa or BBB debt
securities held by the Portfolio fall below those ratings, the Portfolio will
not be obligated to dispose of them and may continue to hold them if the
investment adviser considers them appropriate investments under the
circumstances. In addition, the Balanced Portfolio may at times hold some of
its assets in cash. The 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 Balanced 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 Balanced 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 "Investment
Techniques--Risk Factors in Options and Futures," below.
GROWTH INVESTORS PORTFOLIO--INVESTMENT POLICIES
The Growth Investors Portfolio attempts to achieve its investment objective
by allocating varying portions of its assets to a number of asset classes.
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. 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 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.
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THE EQUITY SERIES
GROWTH AND INCOME PORTFOLIO--INVESTMENT POLICIES
The Growth and Income Portfolio seeks to maintain a portfolio yield above
that of issuers comprising the S&P 500 Index and to achieve (in the long run)
a rate of growth in portfolio income that exceeds the rate of inflation. The
Growth and Income Portfolio will generally invest in common stocks of "blue
chip" issuers, i.e., those (1) which have a total market capitalization of at
least $1 billion, (2) which pay periodic dividends and (3) whose common stock
is in the highest four issuer ratings for S&P (i.e., A+, A, A-or B+) or
Moody's (i.e., High Grade, Investment Grade, Upper Medium Grade or Medium
Grade) or, if unrated, is determined to be of comparable quality by the
Trust's investment adviser. It is expected that on average the dividend rate
of these issuers will exceed the average rate of issuers constituting the S&P
500 Index.
The Growth and Income Portfolio may invest without limit in securities
convertible into common stocks which include convertible bonds, convertible
preferred stocks and warrants convertible into common stocks. The Growth and
Income Portfolio may invest up to 30% of its total assets in high yield, high
risk convertible securities rated at the time of purchase below investment
grade (i.e., rated Ba or lower by Moody's or BB or lower by S&P or determined
by the Trust's investment adviser to be of comparable quality). Convertible
securities normally provide a higher yield than the underlying stock but
lower than a fixed income security without the convertible feature. Also, the
price of a convertible security will normally vary to some degree with
changes in the price of the underlying common stock although in some market
conditions the higher yield tends to make the convertible security less
volatile than the underlying common stock. In addition, the price of a
convertible security will also vary to some degree inversely with interest
rates. For additional discussion of the risks associated with investment in
lower-rated securities, see "Investment Techniques--Fixed Income Securities"
and "Investment Techniques--Risk Factors of Lower Rated Fixed Income
Securities," below. For more information concerning the bond ratings assigned
by Moody's and S&P, see Appendix B.
The Growth and Income Portfolio does not expect to invest more than 25% of
its total assets in foreign securities, although it may do so without limit.
It may enter into foreign currency futures contracts (and related options),
forward foreign currency exchange contracts and options on currencies for
hedging purposes. See "Investment Techniques--Forward Foreign Currency
Exchange Contracts," below.
The Growth and Income Portfolio may write covered call and put options on
securities and securities indexes for hedging purposes or to enhance its
return and may purchase call and put options on securities and securities
indexes for hedging purposes. The Growth and Income Portfolio may also
purchase and sell securities index futures contracts and may write and
purchase options thereon for hedging purposes. See "Investment
Techniques--Options," "Investment Techniques--Futures," and "Investment
Techniques--Risk Factors in Options and Futures," below.
For temporary defensive purposes, the Growth and Income Portfolio may invest
in certain money market instruments. See "Investment Techniques--Certain
Money Market Instruments," below.
EQUITY INDEX PORTFOLIO--INVESTMENT POLICIES
The Equity Index Portfolio's investment objective is to seek a total return
before expenses that approximates the total return performance of the S&P 500
Index (Index), including reinvestment of dividends, at a risk level
consistent with that of the Index. The Index is a widely publicized index
that tracks 500 companies traded on the New York and American Stock Exchanges
and in the over-the-counter market. It is weighted by market value so that
each company's stock influences the Index in proportion to its market
importance. While most issuers are among the 500 largest U.S. companies in
terms of aggregate market value, some other stocks are included by S&P for
purposes of diversification. The value of the Index may change over time due
to a variety of factors, including economic factors and events affecting
issuers included in the Index.
In managing the Equity Index Portfolio, the Trust's investment adviser will
not utilize customary economic, financial or market analyses or other
traditional investment techniques. Rather, the investment
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adviser will use proprietary modeling techniques to construct a portfolio
which it believes will, in the aggregate, approximate the performance results
of the Index. The investment adviser will first select from the largest
capitalization securities in the Index on a capitalization-weighted basis.
Generally, the largest capitalization securities reasonably track the Index
because the Index is significantly influenced by a small number of
securities. However, selecting securities on the basis of their
capitalization alone would distort the Equity Index Portfolio's industry
diversification, and therefore economic events could potentially have a
dramatically different impact on the performance of the Equity Index
Portfolio from that of the Index. Recognizing this fact, the modeling
techniques also consider industry diversification when selecting investments
for the Equity Index Portfolio. The investment adviser also seeks to
diversify the Equity Index Portfolio's assets with respect to market
capitalization. As a result, the Equity Index Portfolio will include
securities of smaller and medium-sized capitalization companies in the Index.
Although the modeling techniques are intended to produce a portfolio whose
performance approximates that of the Index (before expenses), there can be no
assurance that these techniques will reduce "tracking error" (i.e., the
difference between the Equity Index Portfolio's investment results (before
expenses) and the Index's). Tracking error may arise as a result of brokerage
costs, fees and operating expenses and a lack of correlation between the
Equity Index Portfolio's investments and the Index.
Cash may be accumulated in the Equity Index Portfolio until it reaches
approximately 1% of the value of the Equity Index Portfolio at which time
such cash will be invested in common stocks as described above. Accumulation
of cash increases tracking error. The Equity Index Portfolio will, however,
remain substantially fully invested in common stocks even when common stock
prices are generally falling. Also, adverse performance of a stock will
ordinarily not result in its elimination from the Equity Index Portfolio.
In order to reduce brokerage costs, maintain liquidity to meet shareholder
redemptions or minimize tracking error when the Equity Index Portfolio holds
cash, the Equity Index Portfolio may from time to time buy and hold futures
contracts on the Index and options on such futures contracts. See "Investment
Techniques--Futures" and "Investment Techniques--Risk Factors in Options and
Futures," below. The contract value of futures contracts purchased by the
Equity Index Portfolio plus the contract value of futures contracts
underlying call options purchased by the Equity Index Portfolio will not
exceed 20% of the Equity Index Portfolio's total assets.
The Equity Index Portfolio may seek to increase income by lending securities
with a value of up to 50% of its total assets to brokers-dealers. See
"Investment Techniques--Securities Lending," below.
COMMON STOCK PORTFOLIO--INVESTMENT POLICIES
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
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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.
GLOBAL PORTFOLIO--INVESTMENT POLICIES
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 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, as well as 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.
INTERNATIONAL PORTFOLIO--INVESTMENT POLICIES
The International Portfolio attempts to achieve its objective by investing
primarily in a diversified portfolio of equity securities selected
principally to permit participation in non-United States companies or foreign
governmental enterprises with prospects for growth. These non-United States
companies may have operations in the United States, in their country of
incorporation and/or in other countries. The International Portfolio intends
to have represented in the Portfolio business activities in not less than
three different countries and may invest anywhere in the world, including
Europe, Canada, Australia, Asia, Latin America and Africa. The International
Portfolio may purchase securities of developing countries, which include,
among others, Mexico, Brazil, Hong Kong, India, Poland, Turkey and South
Africa. The International Portfolio intends to diversify investments among
several countries, although for temporary defensive purposes, the
International Portfolio may at times invest substantially all of its assets
in securities issued by a single major developed country (e.g., the United
States) or in cash or cash equivalents, including money market instruments
issued by that country.
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The International Portfolio may invest in any type of investment grade, fixed
income security including, but not limited to, preferred stock, convertible
securities, bonds, notes and other evidences of indebtedness of foreign
issuers, including obligations of foreign governments. The International
Portfolio may also establish and maintain temporary cash balances in U.S. and
foreign short-term high-grade money market instruments for defensive purposes
or to take advantage of buying opportunities. Although no particular
proportion of stocks, bonds or other securities is required to be maintained,
the International Portfolio, in view of its investment objective, intends
under normal market conditions to maintain a portfolio consisting primarily
of a diversified list of equity securities. The International Portfolio may
make loans of up to 50% of its portfolio securities. See "Investment
Techniques--Securities Lending," below. The International Portfolio may write
covered call and put options and may purchase call and put options on
individual equity securities, securities indexes, and foreign currencies. See
"Investment Techniques--Options," below. The International 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--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.
AGGRESSIVE STOCK PORTFOLIO--INVESTMENT POLICIES
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 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.
SMALL CAP GROWTH PORTFOLIO--INVESTMENT POLICIES
The Small Cap Growth Portfolio will pursue its objective by investing
primarily in U.S. common stocks and other equity-type securities issued by
smaller companies with favorable growth prospects. The Small Cap Growth
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.
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The Small Cap Growth Portfolio may also invest in equity-type securities
other than common stocks (such as preferred stocks and convertible debt
instruments) and in protective options if it is Alliance's judgment that, in
light of economic conditions, such investments offer the Small Cap Growth
Portfolio better prospects for achieving its objective. Under certain market
conditions, the Small Cap Growth 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 Small Cap Growth Portfolio will not invest more
than 20% of its net asset value, measured at the time of investment, in
securities principally traded on foreign securities markets (other than
commercial paper). See "Investment Techniques--Foreign Securities and
Currencies," below. The Small Cap Growth Portfolio may make secured loans of
up to 50% of its total portfolio securities. See "Investment
Techniques--Securities Lending," below. The Small Cap Growth Portfolio may
write covered call options and may purchase call and put options on
individual equity securities, securities indexes and foreign currencies. The
Small Cap Growth Portfolio may also purchase and sell stock index and foreign
currency futures contracts and options thereon. See "Investment
Techniques--Forward Commitments and When-Issued and Delayed Delivery
Securities," "Investment Techniques--Options," "Investment
Techniques--Futures," and "Investment Techniques--Risk Factors in Options and
Futures," below.
The investment objective of the Small Cap Growth Portfolio is fundamental
and, unless permitted by law, will not be changed without a vote of the
holders of the majority of the voting securities of the Small Cap Growth
Portfolio. There can, of course, be no assurance that the Small Cap Growth
Portfolio will achieve its investment objective. Under current SEC
guidelines, for so long as the Portfolio has the words "Small Cap" in its
name, it is required, under normal market conditions, to invest at least 65%
of its total assets in securities of smaller capitalization companies
(currently considered by Alliance to mean companies with market
capitalization at or below $2 billion).
Risk Factors. More risk is associated with investment in small-sized
companies, because they tend to be often dependent on only one or two
products. They tend to be more vulnerable to competition from larger
companies with greater resources and to economic conditions affecting their
market sector. 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.
THE FIXED INCOME SERIES
MONEY MARKET PORTFOLIO--INVESTMENT POLICIES
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.
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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.
INTERMEDIATE GOVERNMENT SECURITIES PORTFOLIO--INVESTMENT POLICIES
The Intermediate Government Securities Portfolio (Government Portfolio)
attempts to achieve its investment objective by investing primarily in debt
securities issued or guaranteed as to the timely payment of principal and
interest by the U.S. Government or any of its agencies or instrumentalities
(U.S. Government Securities). The Government Portfolio may also invest in
repurchase agreements and forward commitments related to U.S. Government
Securities. The Portfolio may seek to enhance its current return and may seek
to hedge against changes in interest rates by engaging in transactions
involving related options, futures and options on futures.
The Government Portfolio expects that under normal market conditions it will
invest at least 80% of its total assets in U.S. Government Securities and
repurchase agreements and forward commitments relating to U.S. Government
Securities. U.S. Government Securities include, without limitation, the
following:
o U.S. Treasury Bills--Direct obligations of the U.S. Treasury which
are issued in maturities of one year or less. No interest is paid
on Treasury Bills; instead, they are issued at a discount and
repaid at full face value when they mature. They are backed by the
full faith and credit of the U.S. Government.
o U.S. Treasury Notes--Direct obligations of the U.S. Treasury issued
in maturities which vary between one and ten years, with interest
payable every six months. They are backed by the full faith and
credit of the U.S. Government.
o U.S. Treasury Bonds--These direct obligations of the U.S. Treasury
are issued in maturities more than ten years from the date of
issue, with interest payable every six months. They are backed by
the full faith and credit of the U.S. Government.
o "Ginnie Maes"--Ginnie Maes are debt securities issued by a mortgage
banker or other mortgagee and represent an interest in a pool of
mortgages insured by the Federal Housing Administration or the
Farmer's Home Administration or guaranteed by the Veteran's
Administration. The Government National Mortgage Association (GNMA)
guarantees the timely payment of principal and interest. Ginnie
Maes, although not direct obligations of the U.S. Government, are
guaranteed by the U.S. Treasury.
o "Fannie Maes"--The Federal National Mortgage Association (FNMA) is
a government-sponsored corporation owned entirely by private
stockholders that purchases residential mortgages from a list of
approved seller/servicers. Pass-through securities issued by FNMA
are guaranteed as to timely payment of principal and interest by
FNMA and supported by FNMA's right to borrow from the U.S.
Treasury, at the discretion of the U.S. Treasury. Fannie Maes are
not backed by the full faith and credit of the U.S. Government.
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o "Freddie Macs"--The Federal Home Loan Mortgage Corporation (FHLMC),
a corporate instrumentality of the U.S. Government, issues
participation certificates (PCs) which represent an interest in
residential mortgages from FHLMC's National Portfolio. FHLMC
guarantees the timely payment of interest and ultimate collection
of principal, but PCs are not backed by the full faith and credit
of the U.S. Government.
o Governmental Collateralized Mortgage Obligations--These are
securities issued by a U.S. Government instrumentality or agency
which are backed by a portfolio of mortgages or mortgage-backed
securities held under an indenture. See "Other Investments," below.
o "Sallie Maes"--The Student Loan Marketing Association (SLMA) is a
government-sponsored corporation owned entirely by private
stockholders that provides liquidity for banks and other
institutions engaged in the Guaranteed Student Loan Program. These
loans are either directly guaranteed by the U.S. Treasury or
guaranteed by state agencies and reinsured by the U.S. Government.
SLMA issues both short term notes and longer term public bonds to
finance its activities.
The Portfolio may also invest in "zero coupon" U.S. Government Securities
which have been stripped of their unmatured interest coupons and receipts or
in certificates representing undivided interests in such stripped U.S.
Government Securities and coupons. These securities tend to be more volatile
than other types of U.S. Government Securities.
Guarantees of the Portfolio's securities by the U.S. Government or its
agencies or instrumentalities guarantee only the payment of principal at
maturity and interest when due on the guaranteed securities, and do not
guarantee the securities' yield or value or the yield or value of the
Government Portfolio's shares.
The Portfolio buys and sells securities with a view to maximizing current
return without, in the view of the investment adviser, undue risk to
principal. Potential capital gains resulting from possible changes in
interest rates will not be a major consideration. The Portfolio may take full
advantage of a wide range of maturities of U.S. Government Securities and may
adjust the dollar-weighted average maturity of its portfolio from time to
time, depending on its assessment of relative yields on securities of
different maturities and the expected effect of future changes in interest
rates on the market value of the Portfolio's portfolio. However, at all
times, each instrument in the Portfolio will have either a final maturity of
not more than ten years or a duration not exceeding that of a 10-year
Treasury note. Duration is a measure that relates the price volatility of a
security to changes in interest rates. The duration of a security is the
weighted average term to maturity, expressed in years, of the present value
of all future cash flows, including coupon payments and principal repayments.
Thus, by definition, duration is always less than or equal to full maturity.
As of December 31, 1995, the duration of a 10-year Treasury bond was
considered to be 5.61 years. The Portfolio may also invest a substantial
portion of its assets in money market instruments. See "Investment
Techniques--Certain Money Market Instruments," below.
It is a fundamental policy of the Government Portfolio that under normal
market conditions it will invest at least 65% of its total assets in U.S.
Government Securities and repurchase agreements and forward commitments
relating to U.S. Government Securities.
Other Investments. The Government Portfolio may also purchase collateralized
mortgage obligations (CMOs) issued by non-governmental issuers and securities
issued by a real estate mortgage investment conduit (REMIC). See "Investment
Techniques--Mortgage-Backed and Asset-Backed Securities," below. The
Government Portfolio will purchase only CMOs collateralized by U.S.
Government Securities. However, CMOs issued by entities other than U.S.
Government agencies or instrumentalities and securities issued by REMICs are
not considered U.S. Government Securities for purposes of the investment
policies of the Government Portfolio even though the CMOs may be
collateralized by U.S. Government Securities. Such securities will generally
be investment grade. In the event such securities fall below investment
grade, 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.
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In order to enhance its current return and to reduce fluctuations in net
asset value, the Portfolio may write call and put options on U.S. Government
Securities which are "covered" as described herein and may purchase call and
put options on U.S. Government Securities. The Portfolio may also enter into
interest rate futures contracts with respect to U.S. Government Securities,
and may write and purchase options thereon. See "Investment
Techniques--Options" and "Investment Techniques--Futures," below.
The Portfolio may also enter into forward commitments for the purchase of
U.S. Government Securities, purchase such securities on a when-issued or
delayed delivery basis, make secured loans of its portfolio securities
without limitation and enter into repurchase agreements with respect to U.S.
Government Securities with commercial banks and registered broker-dealers.
See "Investment Techniques--Forward Commitments and When-Issued and Delayed
Delivery Securities," below.
The Portfolio may make short sales involving either securities retained in
the Portfolio's portfolio or securities which the Portfolio has the absolute
right to acquire without additional consideration.
Special Considerations. U.S. Government Securities are considered among the
safest of fixed income investments. As a result, however, their yields are
generally lower than the yields available from corporate debt securities. As
with other mutual funds, the value of the Portfolio's shares will fluctuate
with the value of its investments. The value of the Portfolio's investments
will change as the general level of interest rates fluctuates. During periods
of falling interest rates, the values of U.S. Government Securities generally
rise. Conversely, during periods of rising interest rates, the values of U.S.
Government Securities generally decline. In an effort to preserve the capital
of the Portfolio when interest rates are generally rising, the investment
adviser may shorten the average maturity of the U.S. Government Securities in
the Portfolio's portfolio. Because the principal values of U.S. Government
Securities with shorter maturities are less affected by rising interest
rates, a portfolio with a shorter average maturity will generally diminish
less in value during such periods than a portfolio of longer average
maturity. Since U.S. Government Securities with shorter maturities, however,
generally have a lower yield to maturity, the Portfolio's current return
based on its net asset value will generally be lower as a result of such
action than it would have been had such action not been taken. Ginnie Maes
and other mortgage-backed or mortgage related securities in which the
Portfolio invests may not be an effective means of "locking in" favorable
long-term interest rates since the Portfolio must reinvest scheduled and
unscheduled principal payments relating to such securities. At the time
principal payments or prepayments are received by the Portfolio and
reinvested, prevailing interest rates may be higher or lower than the
Portfolio's current yield.
At times when the Portfolio has written call options, its ability to profit
from declining interest rates will be limited. Any resulting appreciation in
the value of the Portfolio would likely be partially or wholly offset by the
losses on call options written by the Portfolio. The termination of option
positions under such conditions would result in the realization of capital
losses, which would reduce the amounts available for distribution to
shareholders.
QUALITY BOND PORTFOLIO--INVESTMENT POLICIES
The Quality Bond Portfolio expects to invest in readily marketable securities
with relatively attractive yields, but which do not, in the opinion of the
Trust's investment adviser, involve undue risk of loss of capital. The
Quality Bond Portfolio will follow a policy of investing at least 65% of its
total assets in securities which at the time of purchase are rated at least
Baa by Moody's or BBB by S&P, or in unrated fixed income securities
determined by the investment adviser to be of comparable quality. In the
event that the credit rating of a security held by the Quality Bond Portfolio
falls below investment grade (or, in the case of unrated securities, the
investment adviser determines that the quality of such security has
deteriorated below investment grade), the Quality Bond Portfolio will not be
obligated to dispose of such security and may continue to hold the obligation
if, in the opinion of the investment adviser, such investment is considered
appropriate in the circumstances. The Quality Bond Portfolio will also seek
to maintain an average aggregate quality rating of its portfolio securities
of at least A (Moody's and S&P). For more information concerning the bond
ratings assigned by Moody's and S&P, see Appendix B.
The Quality Bond Portfolio has complete flexibility as to the types of
securities in which it will invest and the relative proportions thereof, and
the Quality Bond Portfolio plans to vary the proportions of its
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holdings of long-and short-term fixed income securities (including debt
securities, convertible debt securities and U.S. Government obligations) and
preferred stocks in order to reflect its assessment of prospective cyclical
changes even if such action may adversely affect current income. The Quality
Bond Portfolio will not, however, invest more than 5% of its total assets in
the securities of any one issuer, excepting U.S. Government obligations,
although up to 25% of the total assets of the Portfolio may be invested
without regard to this restriction. Further, the Quality Bond Portfolio will
not own more than 10% of the outstanding voting securities of any issuer.
The Quality Bond Portfolio may invest in foreign securities. The Quality Bond
Portfolio will not invest more than 20% of its total assets in securities
denominated in currencies other than the U.S. dollar. See "Investment
Techniques--Foreign Securities and Currencies," below. The Quality Bond
Portfolio may enter into foreign currency futures contracts (and related
options), forward foreign currency exchange contracts and options on foreign
currencies for hedging purposes. See "Investment Techniques--Forward Foreign
Currency Exchange Contracts," below.
For temporary defensive purposes, the Quality Bond Portfolio may invest in
certain money market instruments. See "Investment Techniques--Certain Money
Market Instruments," below.
The Quality Bond Portfolio may purchase put and call options written by
others and write covered put and call options overlying the types of
securities in which the Quality Bond Portfolio may invest. The Quality Bond
Portfolio also intends to write covered call options for cross-hedging
purposes. A call option is for cross-hedging purposes if it is designed to
provide a hedge against a decline in value of another security which the
Portfolio owns or has the right to acquire. See "Investment
Techniques--Options," below.
Interest Rate Transactions. The Quality Bond Portfolio may seek to protect
the value of its investments from interest rate fluctuations by entering into
various hedging transactions, such as interest rate swaps and the purchase or
sale of interest rate caps and floors. The Portfolio expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio. The Quality Bond Portfolio may also
enter into these transactions to protect against an increase in the price of
securities the Portfolio anticipates purchasing at a later date. The Quality
Bond Portfolio intends to use these transactions as a hedge and not as a
speculative investment. Interest rate swaps involve the exchange by the
Quality Bond Portfolio with another party of their respective commitments to
pay or receive interest, e.g., an exchange of floating rate payments for
fixed rate payments. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payments on a notional principal amount from the
party selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate floor.
The Quality Bond Portfolio may enter into interest rate swaps, caps and
floors on either an asset-based or liability-based basis depending on whether
it is hedging its assets or its liabilities, and will only enter into such
swaps, caps and floors on a net basis, i.e., the two payment streams are
netted out, with the Quality Bond Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. The net amount of the
excess, if any, of the Quality Bond Portfolio's obligations over its
entitlements with respect to each interest rate swap, cap or floor will be
accrued on a daily basis and an amount of cash or liquid securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the custodian. The Quality Bond
Portfolio will not enter into any interest rate swap, cap or floor
transaction unless the unsecured senior debt or the claims-paying ability of
the other party thereto is rated in the highest rating category of at least
one NRSRO at the time of entering into such transaction. If there is a
default by the other party to such a transaction, the Quality Bond Portfolio
will have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals
and agents. As a result, the swap market has become well established and
provides a degree of liquidity. Caps and floors are more recent innovations
which tend to be less liquid than swaps.
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Zero Coupon Securities. To the extent consistent with its investment
objective, the Quality Bond Portfolio may invest in "zero coupon" securities,
which are debt securities that have been stripped of their unmatured interest
coupons, and receipts or certificates representing interests in such stripped
debt obligations and coupons. A zero coupon security pays no interest to its
holder during its life. Its value to an investor consists of the difference
between its face value at the time of maturity and the price for which it was
acquired, which is generally an amount significantly less than its face
value. Accordingly, such securities usually trade at a deep discount from
their face or par value and will be subject to greater fluctuations of market
value in response to changing interest rates than debt obligations of
comparable maturities that make current distributions of interest. The
Quality Bond Portfolio may also invest in "pay-in-kind" debentures (i.e.,
debt obligations the interest on which may be paid in the form of additional
obligations of the same type rather than cash) which have characteristics
similar to zero coupon securities.
The Quality Bond Portfolio may invest in collateralized mortgage obligations
or CMOs. See "Investment Techniques--Mortgage-Backed and Asset-Backed
Securities," below. The Portfolio may purchase and sell interest rate futures
contracts and options thereon and may make loans of securities with a value
of up to 50% of its total assets. See "Investment Techniques--Futures,"
"Investment Techniques--Risk Factors in Options and Futures" and "Investment
Techniques--Securities Lending," below.
HIGH YIELD PORTFOLIO--INVESTMENT POLICIES
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 B,
"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 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.
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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.
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, other than the Equity Index Portfolio, 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 and the Equity Index Portfolios,
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, Equity Index and Government Portfolios, may also write covered
put and call options and buy put and call options on foreign currencies. The
Balanced, Common Stock, Aggressive Stock, Small Cap Growth, High Yield,
Global, International, Conservative Investors, Growth Investors, Government,
Quality Bond, Growth and Income and Equity Index 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, other than the Equity Index Portfolio, 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, other than the Equity Index Portfolio, 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."
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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, other than the Equity Index Portfolio, may also use
commercial paper, meaning short-term, unsecured promissory notes issued by
corporations to finance their short-term credit needs. In addition, these
Portfolios may invest in variable or floating rate notes. Variable and
floating rate notes provide for automatic establishment of a new interest
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.
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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 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).
LOAN ASSIGNMENTS AND PARTICIPATIONS
The High Yield Portfolio may invest in participations and assignments of
loans to corporate, governmental, or other borrowers originally made by
institutional lenders or lending syndicates. These investments are subject to
the same risks associated with fixed income securities generally. For
example, loans to foreign governments will involve a risk that the
governmental entities responsible for the repayment of the loan may be
unable, or unwilling, to pay interest and repay principal when due. In
addition, loan participations and assignments may have a lower yield because
they are often not rated and may also be less liquid than other debt
interests.
Even if the loans are secured, there is no assurance that the liquidation of
collateral from a secured loan would satisfy the borrower's obligation, or
that the collateral can be liquidated. Also, if a loan is foreclosed, the
Portfolio could become part owner of any collateral, and would bear the costs
and liabilities associated with owning and disposing of the collateral. In
addition, it is conceivable that under emerging legal theories of lender
liability, the Portfolio could be held liable as a co-lender.
A loan is often administered by a bank or other financial institution that
acts as agent for all holders. The agent administers the terms of the loan,
as specified in the loan agreement. Unless, under the terms of the loan or
other indebtedness, the Portfolio has direct recourse against the borrower
(usually not the case with loan participations), it may have to rely on the
agent to apply appropriate credit remedies against a borrower. Consequently,
loan participations may also be adversely affected by the insolvency of the
lending bank or other intermediary.
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
28
<PAGE>
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 and the Equity Index Portfolios,
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, Government and Equity Index
Portfolios, 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 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, Government and Equity Index
Portfolios, 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
29
<PAGE>
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 High Yield, Global, International, Conservative Investors, Growth
Investors, Government, Balanced and Quality Bond 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 (except the Government and Quality Bond Portfolios) as well as the
Common Stock, Aggressive Stock, Small Cap Growth and Growth and Income
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. 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. As described below under "Foreign Securities and
Currencies," the High Yield, Global, International, Conservative Investors,
Growth Investors, Balanced, Common Stock, Aggressive Stock, Small Cap Growth,
Quality Bond and Growth and Income 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. In addition, the
contract value of futures contracts purchased by the Equity Index Portfolio
plus the contract value of futures contracts underlying call options
purchased by the Equity Index Portfolio will not exceed 20% of the Equity
Index Portfolio's total assets. 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.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
All the Portfolios, except the Money Market, Government and Equity Index
Portfolios, 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.
30
<PAGE>
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, except the Government and Equity Index 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 and Government
Portfolios may each 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.
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 and Government Portfolios, may make
loans of portfolio securities not exceeding 50% of the value of that
Portfolio's total
31
<PAGE>
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 and
Government Portfolios 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 endowment 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.
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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>
FIRST NEXT NEXT NEXT
$750 MILLION $750 MILLION $1 BILLION $2.5 BILLION THEREAFTER
-------------- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
International ..................... 0.900% 0.825% 0.800% 0.780% 0.770%
Global ............................ 0.675% 0.600% 0.550% 0.530% 0.520%
Aggressive Stock .................. 0.625% 0.575% 0.525% 0.500% 0.475%
Common Stock ...................... 0.475% 0.425% 0.375% 0.355% 0.345%*
Growth and Income ................. 0.550% 0.525% 0.500% 0.480% 0.470%
Small Cap Growth .................. -- -- -- -- --
Growth Investors .................. 0.550% 0.500% 0.450% 0.425% 0.400%
Balanced .......................... 0.450% 0.400% 0.350% 0.325% 0.300%
Conservative Investors ............ 0.475% 0.425% 0.375% 0.350% 0.325%
High Yield ........................ 0.600% 0.575% 0.550% 0.530% 0.520%
Quality Bond ...................... 0.525% 0.500% 0.475% 0.455% 0.445%
Intermediate Government Securities 0.500% 0.475% 0.450% 0.430% 0.420%
Equity Index ...................... 0.325% 0.300% 0.275% 0.255% 0.245%
Money Market ...................... 0.350% 0.325% 0.300% 0.280% 0.270%
</TABLE>
* On assets in excess of $10 billion, the management fee for the Common Stock
Portfolio is reduced to 0.335% of average daily net assets.
THE PORTFOLIO MANAGERS
THE ASSET ALLOCATION SERIES
CONSERVATIVE INVESTORS, BALANCED AND GROWTH INVESTORS PORTFOLIOS
Robert G. Heisterberg is the person principally responsible for the
Conservative Investors, Balanced and Growth Investors Portfolios' investment
programs 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.
THE EQUITY SERIES
GROWTH AND INCOME PORTFOLIO
Paul Rissman and W. Theodore Kuck are the persons principally responsible for
the Growth and Income Portfolio's investment program, Mr. Rissman since
February 12, 1996 and Mr. Kuck since its the Portfolio's inception. Mr.
Rissman, a Vice President of Alliance, has been associated with Alliance
since 1989. Mr. Kuck, a Vice President of Alliance, has been associated with
Alliance since 1971.*
EQUITY INDEX PORTFOLIO
Judith A. Maglio has been the person principally responsible for the Equity
Index Portfolio's investment program since inception. Ms. Maglio, a Vice
President of Alliance, has been associated with Alliance since 1970.
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.*
33
<PAGE>
GLOBAL AND INTERNATIONAL PORTFOLIOS
Ronald Simcoe has been the person principally responsible for the Global
Portfolio's investment program since 1988 and the International Portfolio's
investment program since its inception. Mr. Simcoe, a Vice President of
Alliance, has been associated with Alliance since 1977.*
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.*
SMALL CAP GROWTH PORTFOLIO
The employee of Alliance principally responsible for the Small Cap Growth
Portfolio's investment program is Michael F. Gaffney, a Senior Vice President
of Alliance, with which he has been associated since 1987.*
THE FIXED INCOME SERIES
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.*
INTERMEDIATE GOVERNMENT SECURITIES PORTFOLIO
Patricia J. Young and Paul A. Ullman have been the persons principally
responsible for the Intermediate Government Securities Portfolio's investment
program since 1995. Ms. Young, Senior Vice President of Alliance, with which
she has been associated since 1992, previously was employed by Hyperion
Capital (beginning in 1991) and Fischer, Francis, Trees & Watts prior
thereto. Mr. Ullman, Vice President of Alliance, with which he has been
associated since 1992, previously was employed by Hyperion Capital since
1990.
QUALITY BOND PORTFOLIO
Matthew Bloom has been the person principally responsible for the Quality
Bond Portfolio's investment program since 1995. Mr. Bloom, a Vice President
of Alliance, has been associated with Alliance since 1989.
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.
THE TRUST'S EXPENSES
The Trust pays all of its operating expenses not specifically assumed by
Alliance. The expenses borne by the Trust include or could include taxes;
brokerage commissions; interest charges; securities lending fees; fees and
expenses of the registration or qualification of a Portfolio's securities
under federal or state securities laws; fees of the Portfolio's custodian,
transfer agent, independent accountants and legal counsel; all expenses of
shareholders' and trustees' meetings; all expenses of the preparation,
typesetting, printing and mailing to existing shareholders of prospectuses,
prospectus supplements, statements of additional information, proxy
statements, and annual and semi-annual reports; any proxy solicitor's fees
and expenses; costs of fidelity bonds and Trustees' liability insurance
premiums as well as extraordinary expenses such as indemnification payments
or damages awarded in litigation or settlements made; any
34
<PAGE>
membership fees of the Investment Company Institute and similar
organizations; costs of maintaining the Trust's corporate existence and the
compensation of Trustees who are not directors, officers, or employees of
Alliance or its affiliates. The following table, reflecting the Trust's
expenses, is based on information for the year ended December 31, 1996 and
has been restated to reflect (i) the fees that would have been paid to
Alliance if the present advisory agreement had been in effect as of January
1, 1996 and (ii) estimated accounting expenses for the year ended December
31, 1997. [To be updated]
<TABLE>
<CAPTION>
GROWTH
CONSERVATIVE GROWTH AND EQUITY COMMON
INVESTORS BALANCED INVESTORS INCOME INDEX STOCK
TYPE OF EXPENSE PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------- -------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investment Advisory Fees 0.55% 0.37% 0.52% 0.55% 0.35% 0.35%
Other Expenses ........... 0.04% 0.03% 0.04% 0.05% 0.13% 0.03%
-------------- ----------- ----------- ----------- ----------- -----------
Total Expenses ........... 0.59% 0.40% 0.56% 0.60% 0.48% 0.38%
============== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE
AGGRESSIVE SMALL MONEY GOVERNMENT QUALITY HIGH
GLOBAL STOCK CAP GROWTH MARKET SECURITIES BOND YIELD INTERNATIONAL
TYPE OF EXPENSE PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO*
- ------------------- ----------- ------------ ----------- ----------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Advisory
Fees .............. 0.53% 0.46% 0.40% 0.50% 0.55% 0.55% 0.90%
Other Expenses ..... 0.08% 0.03% 0.04% 0.07% 0.04% 0.05% 0.13%
----------- ------------ ----------- -------------- ----------- ----------- -----------
Total Expenses ..... 0.61% 0.49% 0.44% 0.57% 0.59% 0.60% 1.03%
=========== ============ =========== ============== =========== =========== ===========
===============
</TABLE>
- ------------
* Annualized.
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 fourteen
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 on which
such shares (or class of shares) shall be entitled to vote. Shareholders of
each Portfolio 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 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 Investment Company Act,
35
<PAGE>
or any successor rule, and in the Trust's Agreement and 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 the assets of 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
EQ Financial Consultants, Inc., formerly Equico Securities, Inc. ("EQ
Financial"), a wholly-owned subsidiary of Equitable, is the principal
underwriter of the Class IA shares of the Trust. EQ Financial's address is
1755 Broadway, New York, New York 10019. The Trust will offer and sell its
shares without a sales charge, at each Portfolio's net asset value per share.
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.
All shares may be redeemed in accordance with the Trust's Agreement and
Declaration of Trust and By-Laws. 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.
36
<PAGE>
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 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 Government, Quality Bond and High Yield Portfolios each 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.
37
<PAGE>
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.
Performance of Similarly Managed Portfolios. In addition to managing the
assets of the Small Cap Growth Portfolio, Alliance manages 6 portfolios of
discretionary tax-exempt accounts of institutional clients managed as
described below without significant client-imposed restrictions ("Historical
Portfolios"). These accounts Alliance manages have substantially the same
investment objectives and policies and are managed in accordance with
essentially the same investment strategies and techniques as those of the
Small Cap Growth Portfolio. The Historical Portfolios are not subject to
certain limitations, diversification requirements and other restrictions to
which the Small Cap Growth Portfolio, as a registered investment company, is
subject and which if applicable to the Historical Portfolios, may have
adversely affected the performance results of the Historical Portfolios.
Set forth below is performance data provided by Alliance relating to the
Historical Portfolios for each of the seventeen full calendar years during
which Alliance has managed the Historical Portfolios. As of December 31,
1996, the assets in the Historical Portfolios totaled approximately $397
million and the average size of an institutional account in the Historical
Portfolio was $66 million. Each Historical Portfolio has a nearly identical
composition of individual investment holdings and related percentage
weightings.
The performance data is net of an imputed advisory fee deemed paid quarterly
at the same level as the advisory fee payable by the Small Cap Growth
Portfolio, although the actual advisory fees payable by the Historical
Portfolios varied. The performance data includes the cost of brokerage
commissions, but excludes custodial fees, transfer agency costs and other
administrative expenses that will be payable by the Small Cap Growth
Portfolio and will result in a higher expense ratio for the Small Cap Growth
Portfolio. Expenses associated with the distribution of Class IB shares of
the Small Cap Growth Portfolio in accordance with the plan adopted by the
Trust's Board of Trustees pursuant to Rule 12b-1 under the 1940 Act
("distribution fees") are also excluded. The performance data has also not
been adjusted for corporate or individual taxes, if any, payable by the
account owners.
Alliance has calculated the investment performance of the Historical
Portfolios on a trade-date basis. Dividends have been accrued at the end of
the month and cash flows weighted daily. Due to the similarity of investment
composition and the performance of each of the Historical Portfolios,
composite investment performance for all portfolios has been determined on a
simple average, rather than a dollar-weighted, basis. New accounts are
included in the composite investment performance computations at the
beginning of the month following the initial contribution. The composite
total returns set forth below are calculated using a method that links the
monthly return amounts for the disclosed periods, resulting in a
time-weighted rate of return.
As reflected below, the Historical Portfolios have over time performed
favorably when compared with the performance of recognized performance
indices. The Russell 2000 universe of securities is compiled by Frank Russell
Company and [consists of the 2000 smallest of the 3000 largest capitalization
U.S. equity securities.] The Russell 2000 Index reflects changes in market
prices, but excludes investment income.
To the extent the Small Cap Growth Portfolio does not invest in U.S. common
stocks or utilizes investment techniques such as futures or options, the
Russell 2000 Index may not be substantially comparable to the Small Cap
Growth Portfolio. The Russell 2000 Index are included to illustrate material
economic and market factors that existed during the time period shown. The
Russell 2000 Index does not reflect the deduction of any fees. If the Small
Cap Growth Portfolio were to purchase a portfolio of securities substantially
identical to the securities comprising the Russell 2000 Index, the Small Cap
Growth Portfolio's performance relative to the index would be reduced by the
Small Cap Growth Portfolio's expenses, including brokerage commissions,
advisory fees, distribution fees, custodial fees, transfer agency costs and
other administrative expenses as well as by the impact on the Small Cap
Growth Portfolio's shareholders of sales charges and income taxes.
38
<PAGE>
The Lipper Growth Fund Index is prepared by Lipper Analytical Services, Inc.
and represents a composite index of the investment performance for the 30
largest growth mutual funds. The composite investment performance of the
Lipper Growth Fund Index reflects investment management and administrative
fees and other operating expenses paid by these mutual funds and reinvested
income dividends and capital gain distributions, but excludes the impact of
any income taxes and sales charges.
The following performance data is provided solely to illustrate Alliance's
performance in managing the Historical Portfolios as measured against certain
broad based market indices and against the composite performance of other
open-end growth mutual funds. Investors should not rely on the following
performance data of the Historical Portfolios as an indication of future
performance of the Small Cap Growth Portfolio. The composite investment
performance for the periods presented may not be indicative of future rates
of return. Other methods of computing investment performance may produce
different results, and the results for different periods may vary.
<TABLE>
<CAPTION>
SCHEDULE OF COMPOSITE INVESTMENT PERFORMANCE--HISTORICAL PORTFOLIOS
FOR THE SEVENTEEN YEARS ENDED DECEMBER 31, 1996*
HISTORICAL RUSSELL LIPPER GROWTH
PORTFOLIOS 2000 INDEX FUND INDEX
TOTAL RETURN TOTAL RETURN TOTAL RETURN
---------------- ---------------- -----------------
<S> <C> <C> <C>
Year ended:
December 31, 1996 ....................................
December 31, 1995 ....................................
December 31, 1994 ....................................
December 31, 1993 ....................................
December 31, 1992 ....................................
December 31, 1991 ....................................
December 31, 1990 ....................................
December 31, 1989 ....................................
December 31, 1988 ....................................
December 31, 1987 ....................................
December 31, 1986 ....................................
December 31, 1985 ....................................
December 31, 1984 ....................................
December 31, 1983 ....................................
Cumulative total return for the period January 1, 1983
to December 31, 1996 ....................................
</TABLE>
- ------------
* Total return is a measure of investment performance that is based upon
the change in value of an investment from the beginning to the end of a
specified period and assumes reinvestment of all dividends and other
distributions. The basis of preparation of this data is described in
the preceding discussion.
The average annual total returns presented below are based upon the
cumulative total return as of December 31, 1996, and for more than one year
assume a steady compounded rate of return and are not year-by-year results,
which fluctuated over the periods as shown.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
-------------------------------------------------
HISTORICAL RUSSELL LIPPER GROWTH
PORTFOLIOS 2000 INDEX FUND INDEX
-------------- -------------- -----------------
<S> <C> <C> <C>
Three years .............
Five years ..............
Ten years ...............
Since January 1, 1983 ..
</TABLE>
39
<PAGE>
APPENDIX A
PERFORMANCE INFORMATION
The following tables provide performance results for The Hudson River Trust
Portfolios, net of investment management fees and direct operating expenses
of the Trust, together with comparative benchmarks, including both unmanaged
market indexes and universes of managed portfolios. The unmanaged market
indexes do not reflect any asset-based charges for investment management or
other expenses, which are inapplicable to these benchmarks. The rates of
return shown for the Portfolios are not an estimate or guarantee of future
investment performance and do not take into account charges applicable to the
Contracts or imposed at the separate account level. The ultimate change in
Contract values will depend not only on the performance of the Portfolios at
the underlying Trust level, but also on the insurance and administrative
charges, applicable sales charges, and the mortality and expense risk charge
applicable under such Contracts. These Contract charges effectively reduce
the dollar amount of any net gains and increase the dollar amount of any net
losses.
The Lipper averages are contained in Lipper's survey of the performance of a
large number of mutual funds. This survey is published by Lipper Analytical
Services, Inc., a firm recognized for its reporting of performance of
actively managed funds. According to Lipper, performance data are presented
net of investment management fees, direct operating expenses and, for funds
with Rule 12b-1 plans, asset-based sales charges. Performance data for funds
which assess sales charges in other ways do not reflect deductions for sales
charges. Performance data shown for the Portfolios does not reflect deduction
for sales charges (which are assessed at the policy level). This means that
to the extent that asset-based sales charges deducted by some funds have
lowered the Lipper averages, the performance data shown for the Portfolios
appears relatively more favorable than the performance data for the Lipper
averages.
The performance results presented below are based on Portfolio percent
changes in net asset values with dividends and capital gains reinvested.
Similarly, the market indexes have been adjusted, where necessary, to reflect
the benefit of total reinvestment of income, dividends and capital gains.
Cumulative rates of return reflect performance over a stated period of time.
Annualized rates of return represent the rate of growth that would have
produced the corresponding cumulative return had performance been constant
over the entire period.
From time to time the Trust and/or its shareholders may include in reports or
in advertising material descriptions of general economic and market
conditions affecting the Trust and/or its shareholders and may compare the
performance of the Trust's Portfolios with (1) that of other insurance
company separate accounts, if appropriate, or mutual funds included in the
rankings prepared by Lipper or similar investment services that monitor the
performance of insurance company separate accounts or mutual funds, (2) other
appropriate indices of investment securities and averages for peer universes
of funds which are described in this prospectus, or (3) data developed by the
Trust and/or its shareholders derived from such indices or averages.
Each Portfolio's performance may also be compared to the performance of other
mutual funds by Morningstar, Inc. which ranks mutual funds on the basis of
historical risk and total return. Morningstar rankings are calculated using
the mutual fund's average annual return for certain periods and a risk factor
that reflects the mutual fund's performance relative to three-month Treasury
bill monthly returns. Morningstar's rankings range from five stars (highest)
to one star (lowest) and represent Morningstar's assessment of the historical
risk level and total return of a mutual fund as a weighted average for 3, 5,
and 10-year periods. In each category, Morningstar limits its five star
rankings to 10% of the funds it follows and its four star rankings to 22.5%
of the funds it follows. Rankings are not absolute or necessarily predictive
of future performance.
The Lehman Treasury Bond Index (Lehman Treasury) represents an unmanaged
group of securities consisting of all currently offered public obligations of
the United States Treasury intended for distribution in the domestic market.
A-1
<PAGE>
The Standard and Poor's 500 Stock Index (S&P 500) represents an unmanaged
weighted index of 500 industrial, transportation, utility, and financial
companies, widely regarded by investors as representative of the stock
market.
The Lehman Government/Corporate Bond Index (Lehman Gov't Corp.) represents an
unmanaged group of securities widely regarded by investors as representative
of the bond market.
The Value Line Convertible Index is comprised of 585 of the most actively
traded convertible bonds and preferred stocks on an unweighted basis.
The Morgan Stanley Capital International World Index (MSCI World Index) is an
arithmetic, market value-weighted average of the performance of over 1,300
securities listed on the stock exchanges of twenty foreign countries and the
United States.
The Morgan Stanley Capital International EAFE Index (MSCI EAFE) is a market
capitalization weighted equity index composed of a sample of companies
representative of the market structure of Europe, Australia and the Far East.
The Standard & Poor's MidCap 400 Index (S&P 400) represents an unmanaged
weighted index of 400 domestic stocks chosen for market size (median market
capitalization of about $610 million), liquidity, and industry group
representation.
The Russell 2000 Index consists of the smallest 2,000 securities in the
Russell 3000 Index. (The Russell 3000 Index represents approximately 98% of
the investable U.S. equity market.) The Russell 2000 Index, widely regarded
in the industry as the premier measure of small capitalization stocks,
represents approximately 11% of the Russell 3000 Index total market
capitalization.
The Lehman Intermediate Government Bond Index represents an unmanaged group
of securities consisting of all United States Treasury and agency securities
with remaining maturities of from one to ten years and issue amounts of at
least $100 million outstanding.
The Lehman Aggregate Bond Index is an index comprised of investment grade
fixed income securities, including U.S. Treasury, mortgage-backed, corporate
and "Yankee" bonds (U.S. dollar denominated bonds issued outside the United
States).
The Merrill Lynch High Yield Master Index (ML Master) represents an unmanaged
group of securities widely regarded by investors as representative of the
high yield bond market.
The "blended" performance numbers (e.g., 50% S&P 400/50% Russell 2000) in all
cases assume a static mix of the two indices.
The dates as of which funds were first allocated to the Portfolios are as
follows: the Common Stock Portfolio on June 16, 1975; the Money Market
Portfolio on July 13, 1981; the Balanced and Aggressive Stock Portfolios on
January 27, 1986; the High Yield Portfolio on January 2, 1987; the Global
Portfolio on August 27, 1987; the Conservative Investors and Growth Investors
Portfolios on October 2, 1989; the Intermediate Government Securities
Portfolio on April 1, 1991; the Quality Bond and Growth and Income Portfolios
on October 1, 1993; the Equity Index Portfolio on March 1, 1994; and the
International Portfolio on April 3, 1995. In the "Since Inception" columns of
Table I and Table II below, the performance of each Portfolio and its
comparative indices is measured from the date funds were first allocated to
the Portfolios, except as follows: for the Common Stock Portfolio and its
comparative indices, from January 13, 1976, the date on which the unit value
was established and Contract owner contributions were first accepted by the
Common Stock Portfolio's separate account predecessor; for the Lipper Money
Market Funds Average, from June 1, 1981; for the Lipper Balanced Funds and
Small Company Growth Funds Averages, from January 1, 1986; and for the Lipper
Global Funds Average, from August 28, 1987.
The Trust's Portfolios serve as the underlying investment vehicles for
Contracts. Shares of these Portfolios cannot be purchased directly. Shares of
the Portfolios of the Trust are purchased by corresponding investment
divisions of insurance company separate accounts. Refer to the attached
Contract prospectus for further information about your Contract including a
description of all charges and expenses.
A-2
<PAGE>
TABLE I
ANNUALIZED RATES OF RETURN
PERIODS ENDING DECEMBER 31, 1996
[TO BE UPDATED]
<TABLE>
<CAPTION>
Since
PORTFOLIO/Benchmarks 1 Year 3 Years 5 Years 10 Years 15 Years Inception
-------- --------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
THE ASSET ALLOCATION SERIES
CONSERVATIVE INVESTORS ...................... 20.40% 8.55% 10.15% -- -- 9.65%
Lipper Flexible Portfolio Average ........... 25.08 10.80 12.85 -- -- 10.28
70% Lehman Treasury/30% S&P 500 ............. 24.11 10.41 11.73 -- -- 10.55
- -----------------------------------------------------------------------------------------------------------------
BALANCED .................................... 19.75 7.34 11.17 -- -- 12.08
Lipper Balanced Mutual Funds Average ....... 25.16 10.73 13.04 -- -- 11.34
50% S&P 500/50% Lehman Gov't Corp. .......... 28.39 12.01 13.39 -- -- 12.74
- -----------------------------------------------------------------------------------------------------------------
GROWTH INVESTORS ............................ 26.37 12.15 17.13 -- -- 16.05
Lipper Flexible Portfolio Average ........... 25.08 10.80 12.85 -- -- 10.28
70% S&P 500/30% Lehman Gov't Corp. .......... 32.05 13.35 14.70 -- -- 11.97
- -----------------------------------------------------------------------------------------------------------------
THE EQUITY SERIES
GROWTH AND INCOME ........................... 24.07 -- -- -- -- 9.66
Lipper Growth & Income Funds Average ....... 30.82 -- -- -- -- 13.47
75% S&P 500/25% Value Line Convertible ..... 34.93 -- -- -- -- 15.45
- -----------------------------------------------------------------------------------------------------------------
EQUITY INDEX ................................ 36.48 -- -- -- -- 19.11
Lipper S&P 500 Index Funds Average .......... 36.84 -- -- -- -- 18.92
S&P 500 ..................................... 37.54 -- -- -- -- 19.89
- -----------------------------------------------------------------------------------------------------------------
COMMON STOCK ................................ 32.45 17.40 18.16 15.16% 14.37% 14.78
Lipper Growth Equity Mutual Funds Average .. 30.79 12.45 16.01 12.95 12.81 14.79
S&P 500 ..................................... 37.54 15.30 16.57 14.87 14.79 14.24
- -----------------------------------------------------------------------------------------------------------------
GLOBAL ...................................... 18.81 18.20 16.49 -- -- 11.36
Lipper Global Mutual Funds Average .......... 16.05 13.96 12.28 -- -- 7.87
MSCI World .................................. 20.72 15.83 11.74 -- -- 6.75
- -----------------------------------------------------------------------------------------------------------------
INTERNATIONAL ............................... -- -- -- -- -- 11.29*
Lipper International Mutual Funds Average .. -- -- -- -- -- 10.32*
MSCI EAFE ................................... -- -- -- -- -- 9.17*
- -----------------------------------------------------------------------------------------------------------------
AGGRESSIVE STOCK ............................ 31.63 13.92 21.75 -- -- 20.02
Lipper Small Company Growth Funds
Average .................................... 31.55 14.77 20.78 -- -- 13.42
50% S&P 400/50% Russell 2000 ................ 29.69 13.67 20.16 -- -- 13.58
- -----------------------------------------------------------------------------------------------------------------
THE FIXED INCOME SERIES
MONEY MARKET ................................ 5.74 4.24 4.48 6.02 -- 7.42
Lipper Money Market Mutual Funds
Average .................................... 5.37 3.89 4.12 5.64 -- 7.15
3 Month T-Bill .............................. 5.74 4.34 4.47 5.77 -- 7.09
- -----------------------------------------------------------------------------------------------------------------
INTERMEDIATE GOVERNMENT SECURITIES .......... 13.33 6.22 -- -- -- 7.63
Lipper Intermediate Government Funds Average 15.75 6.56 -- -- -- 8.03
Lehman Intermediate Government Bond ........ 14.41 6.74 -- -- -- 8.17
- -----------------------------------------------------------------------------------------------------------------
QUALITY BOND ................................ 17.02 -- -- -- -- 4.54
Lipper Corporate Debt Funds A Rated
Average .................................... 18.45 -- -- -- -- 5.38
Lehman Aggregate Bond ....................... 18.47 -- -- -- -- 6.46
- -----------------------------------------------------------------------------------------------------------------
HIGH YIELD .................................. 19.92 12.81 14.95 -- -- 10.20
Lipper High Current Yield Mutual
Funds Average .............................. 16.44 10.18 16.58 -- -- 8.98
ML Master ................................... 19.91 11.57 17.17 -- -- 11.28
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
*Unannualized
A-3
<PAGE>
TABLE II
CUMULATIVE RATES OF RETURN
PERIODS ENDING DECEMBER 31, 1996
[TO BE UPDATED]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Since
PORTFOLIO/Benchmarks 1 Year 3 Years 5 Years 10 Years 15 Years Inception
- ----------------------------------------- -------- --------- --------- ---------- ---------- -----------
THE ASSET ALLOCATION SERIES
CONSERVATIVE INVESTORS ................... 20.40% 27.91% 62.13% -- -- 77.86
Lipper Flexible Portfolio Average ....... 25.08 36.25 84.60 -- -- 85.64
70% Lehman Treasury/30% S&P 500 .......... 24.11 34.58 74.09 -- -- 87.24
- --------------------------------------------------------------------------------------------------------------
BALANCED ................................. 19.75 23.67 69.79 -- -- 210.41
Lipper Balanced Mutual Funds Average .... 25.16 35.96 85.17 -- -- 191.88
50% S&P 500/50% Lehman Gov't Corp. ...... 28.39 40.53 87.43 -- -- 229.15
- --------------------------------------------------------------------------------------------------------------
GROWTH INVESTORS ......................... 26.37 41.08 120.45 -- -- 153.57
Lipper Flexible Portfolio Average. ...... 25.08 36.25 84.60 -- -- 85.64
70% S&P 500/30% Lehman Gov't Corp. ...... 32.05 45.64 98.56 -- -- 102.72
- --------------------------------------------------------------------------------------------------------------
THE EQUITY SERIES
GROWTH AND INCOME ........................ 24.07 -- -- -- -- 23.05
Lipper Growth & Income Funds Average .... 30.82 -- -- -- -- 33.24
75% S&P 500/25% Value Line Convertible .. 34.93 -- -- -- -- 38.14
- --------------------------------------------------------------------------------------------------------------
EQUITY INDEX ............................. 36.48 -- -- -- -- 37.96
Lipper S&P 500 Index Funds Average ...... 36.84 -- -- -- -- 37.40
S&P 500 .................................. 37.54 -- -- -- -- 39.30
- --------------------------------------------------------------------------------------------------------------
COMMON STOCK ............................. 32.45 61.81 130.29 310.38% 649.17% 1,468.54
Lipper Growth Equity Mutual Funds Average 30.79 42.98 113.39 251.64 564.19 1,534.57
S&P 500 .................................. 37.54 53.30 115.25 300.11 692.18 1,327.94
- --------------------------------------------------------------------------------------------------------------
GLOBAL ................................... 18.81 65.16 114.48 -- -- 145.55
Lipper Global Mutual Funds Average ...... 16.05 48.34 79.41 -- -- 90.34
MSCI World ............................... 20.72 55.39 74.20 -- -- 72.35
- --------------------------------------------------------------------------------------------------------------
INTERNATIONAL ............................ -- -- -- -- -- 11.29*
Lipper International Mutual Funds Average -- -- -- -- -- 10.32*
MSCI EAFE ................................ -- -- -- -- -- 9.17*
- --------------------------------------------------------------------------------------------------------------
AGGRESSIVE STOCK ......................... 31.63 47.84 167.51 -- -- 512.26
Lipper Small Company Growth Funds Average 31.55 52.74 161.35 -- -- 248.87
50% S&P 400/50% Russell 2000 ............. 29.69 46.89 150.49 -- -- 254.09
- --------------------------------------------------------------------------------------------------------------
THE FIXED INCOME SERIES
MONEY MARKET ............................. 5.74 13.26 24.51 79.50 -- 181.66
Lipper Money Market Mutual Funds Average 5.37 12.13 22.34 73.21 -- 172.66
3 Month T-Bill ........................... 5.74 13.58 24.45 75.23 -- 170.07
- --------------------------------------------------------------------------------------------------------------
INTERMEDIATE GOVERNMENT SECURITIES ...... 13.33 19.84 -- -- -- 41.83
Lipper Intermediate Government Funds
Average ................................. 15.75 21.09 -- -- -- 44.66
Lehman Intermediate Government Bond ..... 14.41 21.60 -- -- -- 45.17
- --------------------------------------------------------------------------------------------------------------
QUALITY BOND ............................. 17.02 -- -- -- -- 10.50
Lipper Corporate Debt Funds A Rated
Average ................................. 18.45 -- -- -- -- 12.58
Lehman Aggregate Bond .................... 18.47 -- -- -- -- 15.09
- --------------------------------------------------------------------------------------------------------------
HIGH YIELD ............................... 19.92 43.58 100.72 -- -- 139.75
Lipper High Current Yield Bond Funds
Average ................................. 16.44 33.90 116.45 -- -- 118.26
ML Master ................................ 19.91 38.89 120.85 -- -- 161.50
- --------------------------------------------------------------------------------------------------------------
</TABLE>
*Unannualized
A-4
<PAGE>
TABLE III
ANNUAL RATES OF RETURN
<TABLE>
<CAPTION>
GROWTH
YEAR ENDING COMMON MONEY AGGRESSIVE HIGH CONSERV. GROWTH INTERMEDIATE QUALITY AND
DECEMBER 31 STOCK MARKET STOCK BALANCED YIELD GLOBAL INVESTORS INVESTORS GOVT. SECURITIES BOND INCOME
- ----------- ----- ------ ----- -------- ----- ------ --------- --------- ---------------- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1976 ....... 9.2%*
1977 ....... -9.2
1978 ....... 8.2
1979 ....... 29.8
1980 ....... 50.1
1981 ....... -5.8 7.1%*
1982 ....... 17.6 13.0
1983 ....... 26.1 8.9
1984 ....... -2.0 10.9
1985 ....... 33.4 8.2
1986 ....... 17.3 6.6 35.9%* 29.1%*
1987 ....... 7.5 6.6 7.3 -0.9 4.7%* -13.3%*
1988 ....... 22.4 7.3 1.1 13.3 9.7 10.9
1989 ....... 25.6 9.2 43.5 25.8 5.1 26.7 3.1%* 4.0%*
1990 ....... -8.1 8.2 8.2 0.3 -1.1 -6.1 6.3 10.7
1991 ....... 37.9 6.2 86.9 41.3 24.5 30.5 19.8 48.8 12.1%*
1992 ....... 3.2 3.6 -3.2 -2.8 12.3 -0.5 5.6 4.9 5.5
1993 ....... 24.8 3.0 16.8 12.3 23.2 32.1 10.8 15.3 10.6 -0.5%* -0.3%*
1994 ....... -2.1 4.0 -3.8 -8.0 -2.8 5.2 -4.1 -3.2 -4.4 -5.1 -0.6
1995 ....... 32.5 5.7 31.6 19.8 19.9 18.8 20.4 26.4 13.3 17.0 24.0
1996 ....... -- -- -- -- -- -- --
- ----------- ------- ------ ---------- -------- ----- ------- --------- --------- ---------------- ------- ------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDING EQUITY
DECEMBER 31 INDEX INTERNATIONAL
- ----------- ----- -------------
<S> <C> <C>
1976 .......
1977 .......
1978 .......
1979 .......
1980 .......
1981 .......
1982 .......
1983 .......
1984 .......
1985 .......
1986 .......
1987 .......
1988 .......
1989 .......
1990 .......
1991 .......
1992 .......
1993 .......
1994 ....... 1.1*
1995 ....... 36.5 11.3%*
1996 .......
- ----------- ------ ------
</TABLE>
- ------------
*Unannualized from the inception date described in the Prospectus through
the end of the calendar year indicated.
A-5
<PAGE>
APPENDIX B
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.
B-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.
B-2
<PAGE>
THE HUDSON RIVER TRUST
Principal Office Located at
1345 Avenue of the Americas -- New York, New York 10105
The Hudson River Trust (the "Trust") is a mutual fund, currently issuing
fourteen series of shares of beneficial interest, each representing a
separate investment portfolio (each a "Portfolio"). The Portfolios are The
Asset Allocation Series: Conservative Investors, Balanced and Growth
Investors; The Equity Series: Growth and Income, Equity Index, Common Stock,
Global, International, Aggressive Stock and Small Cap Growth; and The Fixed
Income Series: Money Market, Intermediate Government Securities, Quality Bond
and High Yield. An investment in the Money Market Portfolio is neither
insured nor guaranteed by the U.S. Government. Shares of each Portfolio are
currently divided into two classes: 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 the fourteen 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 relating to Class IB shares ("SAI")
dated May 1, 1997 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 .................................. 4
Investment Objectives and Policies ........ 4
Investment Techniques ...................... 19
Certain Investment Restrictions ............ 25
Management of the Trust .................... 25
Description of the Trust's Shares .......... 28
Dividends, Distributions and Taxes ........ 30
Investment Performance ..................... 31
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 federally 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
PROSPECTUS DATED MAY 1, 1997
- -----------------------------------------------------------------------------
HRT103 (5/97) Copyright 1996 The Hudson River Trust. All rights reserved.
<PAGE>
FINANCIAL HIGHLIGHTS
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 following
tables also give equivalent information for a share of beneficial interest in
each of the other Portfolios (other than the Small Cap Growth Portfolio)
outstanding throughout the periods indicated. No shares of the Small Cap
Portfolio were outstanding as of December 31, 1996.
Information regarding portfolio turnover rates, some of which exceeded 100%
during 1994 and 1993, is also included. Higher levels of portfolio activity
result in higher transaction costs, including higher brokerage expenses. The
equity component of the Balanced Portfolio's portfolio turnover rates in 1996
and 1995 was % and 152%, respectively, and the fixed income component was
% and 233%, respectively, in 1996 and 1995.
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, Balanced,
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 on or after December 31, 1993), 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 on
of after December 31, 1993 has been audited by , 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)
<TABLE>
<CAPTION>
OCTOBER 2, 1996 TO DECEMBER 31, 1993
-----------------------------------------------------------------------------
AGGRESSIVE COMMON GROWTH MONEY
STOCK STOCK INVESTORS GLOBAL HIGH YIELD MARKET
-------------- ---------- ----------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period (a) ........
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ..........................
Net realized and unrealized gain (loss) on
investments ...................................
Total from investment operations ...............
LESS DISTRIBUTIONS:
Dividends from net investment income ...........
Dividends in excess of net investment income ... [FINANCIAL HIGHLIGHTS TO COME]
Distributions from realized gains ..............
Total dividends and distributions ..............
Net asset value, end of period ...................
Total return (d) .................................
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) ................
Ratio of expenses to average net assets .........
Ratio of net investment income to average net
assets .........................................
Portfolio turnover rate ..........................
</TABLE>
2
<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. ("Alliance") acquired
the business and substantially all of the assets of Equitable Capital
and became the investment adviser to the Trust.
3
<PAGE>
THE TRUST
The Trust is an open-end management investment company under the Investment
Company Act of 1940 (the "Investment Company Act"). As a "series" investment
company, the Trust issues shares of beneficial interest currently divided
into fourteen Portfolios, although additional Portfolios may be established.
Each Portfolio is a separate diversified series of the Trust, and the Trust's
assets and liabilities are divided among the Portfolios. Originally organized
as a Maryland corporation which commenced operations on March 22, 1985, the
Trust was reorganized 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") and
certain insurance companies unaffiliated with Equitable. Equitable was the
record owner of approximately % and % of the Trust's Class IA and
Class IB shares, respectively as of March 31, 1997, and consequently may be
deemed to control the Trust.
Shares of each Portfolio are currently divided into two classes: 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 (toll-free 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 the assets of that Portfolio and, generally, have
identical voting, dividend, liquidation, and other rights, other than with
respect to 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 could 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.
THE ASSET ALLOCATION SERIES
o The Conservative Investors Portfolio's fundamental investment
objective is to achieve a high total return without, in the
investment adviser's opinion, undue risk to principal. It will
pursue this objective by investing in a diversified mix of publicly
traded equity and debt securities.
o The Balanced Portfolio's fundamental investment objective is to
achieve a high return through both appreciation of capital and
current income. The Balanced Portfolio will pursue this objective
by investing in a diversified portfolio of publicly traded equity
and debt securities and short-term money market instruments.
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
4
<PAGE>
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."
THE EQUITY SERIES
o The Growth and Income Portfolio's fundamental investment objective
is to provide a high total return through a combination of current
income and capital appreciation by investing primarily in
income-producing common stocks and securities convertible into
common stocks.
o The Equity Index Portfolio's fundamental investment objective is to
seek a total return before expenses that approximates the total
return performance of the Standard & Poor's Corporation (S&P) 500
Index, including reinvestment of dividends, at a risk level
consistent with that of the Index.
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.
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 International Portfolio's fundamental investment objective is
to achieve long-term growth of capital by investing primarily in a
diversified portfolio of equity securities selected principally to
permit participation in non-United States companies with prospects
for growth.
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 Small Cap Growth Portfolio's fundamental investment objective
is to achieve long-term growth of capital. The Small Cap Growth
Portfolio will pursue this objective by investing primarily in U.S.
common stocks and other equity-type securities issued by smaller
companies with favorable growth prospects.
THE FIXED INCOME SERIES
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.
o The Intermediate Government Securities Portfolio's fundamental
investment objective is to achieve high current income consistent
with relative stability of principal through investment primarily
in debt securities issued or guaranteed as to principal and
interest by the U.S. Government or any of its agencies or
instrumentalities. The Portfolio's investments will each have a
final maturity of not more than ten years or a duration not
exceeding that of a 10-year Treasury note.
o The Quality Bond Portfolio's fundamental investment objective is to
achieve high current income consistent with preservation of capital
by investing primarily in investment grade fixed income securities.
The Quality Bond Portfolio reserves the right to invest in
convertible debt securities, preferred stocks and dividend-paying
common stocks.
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.
5
<PAGE>
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."
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.
THE ASSET ALLOCATION SERIES
The Conservative Investors Portfolio, the Balanced Portfolio and the Growth
Investors Portfolio together are called the Asset Allocation Series. These
Portfolios invest in a variety of fixed income and equity securities, each
pursuant to a different asset allocation strategy, as described below. The
term "asset allocation" is used to describe the process of shifting assets
among discrete categories of investments in an effort to reduce risk while
producing desired return objectives. Portfolio management, therefore, will
consist not only of specific securities selection but also of setting,
monitoring and changing, when necessary, the asset mix.
Each Portfolio has been designed with a view toward a different "investor
profile." The "conservative investor" has a relatively short-term investment
bias, either because of a limited tolerance for market volatility or a short
investment horizon. This investor is averse to taking risks that may result
in principal loss, even though such aversion may reduce the potential for
higher long-term gains and result in lower performance during periods of
equities market strength. Consequently, the asset mix for the Conservative
Investors Portfolio attempts to reduce volatility while providing modest
upside potential. 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 "balanced investor" is somewhat less aggressive than the growth investor
and seeks a medium to long-term investment posture. This investor is
sensitive to risk, but is willing to take on some risk in seeking high total
return. Consequently, the asset mix for the Balanced Portfolio attempts to
capture a sizable portion of the market's upside while diversifying risk
among asset classes.
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 each 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 each
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
appropriate investor profile for each Portfolio. Consequently, asset mix
decisions for the Conservative Investors Portfolio particularly emphasize
risk assessment of each asset class viewed over the shorter term, while
decisions for the Growth Investors Portfolio are principally based on the
longer term total return potential for each asset class.
When the Committee establishes a new allocation range for a Portfolio, it
also prescribes the length of time during which that Portfolio should achieve
an asset mix within the new range. To achieve a new asset mix, the Portfolios
look first to available cash flow. If cash flow proves insufficient to
achieve the desired asset mix, the Portfolios will sell securities and
reinvest the proceeds in the appropriate asset class.
The Asset Allocation Series Portfolios are permitted to use a variety of
hedging techniques to attempt to control stock market, interest rate and
currency risks. Each of the Portfolios in the Asset Allocation Series
6
<PAGE>
may make loans of up to 50% of its total portfolio securities. Each of the
Portfolios in the Asset Allocation Series 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.
Each 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.
Risk Factors. In addition to the risk factors associated with certain types
of securities in which the Portfolios in the Asset Allocation Series may
invest, and in addition to the risk of loss inherent in any securities
ownership, there is associated with these Portfolios 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 these Portfolios during periods of
frequently changing asset mix ranges.
CONSERVATIVE INVESTORS PORTFOLIO--INVESTMENT POLICIES
The Conservative Investors Portfolio attempts to achieve its investment
objective by allocating varying portions of its assets to high quality,
publicly traded fixed income securities (including money market instruments
and cash) and publicly traded common stocks and other equity securities of
United States and non-United States issuers. All fixed income securities held
by the Portfolio will be of investment grade. This means that they will be in
one of the top four rating categories assigned by S&P or Moody's Investors
Service, Inc. (Moody's). Equity securities invested in by the Portfolio will
consist of the types of securities in which the Common Stock Portfolio may
invest and may include convertible securities. No more than 15% 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 will at all times hold at least 40% of its assets in investment
grade fixed income securities, each having a duration of less than that of a
10-year Treasury bond (the Fixed Income Core). Duration is a measure that
relates the price volatility of a bond to changes in interest rates. The
duration of a bond is the weighted average term to maturity, expressed in
years, of the present value of all future cash flows, including coupon
payments and principal repayments. Thus, by definition, duration is always
less than or equal to full maturity. As of December 31, 1995, the duration of
a 10-year Treasury bond was considered to be 5.61 years.
The Portfolio is generally expected to hold approximately 70% of its assets
in fixed income securities (including the Fixed Income Core) and 30% in
equity 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 50%, but never more than 90%, of the Portfolio's total
assets. The equity class will always comprise at least 10%, but never more
than 50%, of the Portfolio's total assets.
BALANCED PORTFOLIO--INVESTMENT POLICIES
The Balanced Portfolio attempts to achieve its objective by investing varying
portions of its assets in publicly-traded equity and debt securities and
money market instruments. The Balanced Portfolio attempts to achieve
long-term growth of capital by investing in common stock and other
equity-type instruments. It will try to achieve a competitive level of
current income and capital appreciation through investments in publicly
traded debt securities and a high level of current income through investments
in money market instruments.
The portion of the Balanced Portfolio's assets invested in each type of
security will vary in accordance with economic conditions, the general level
of common stock prices, interest rates and other relevant considerations,
including the risks associated with each investment medium. Although the
Balanced Portfolio will seek to reduce the risks associated with any one
investment medium by utilizing a variety of investments, performance will
depend upon the investment adviser's ability to assess accurately and react
to changing market conditions.
7
<PAGE>
The Balanced Portfolio will at all times hold at least 25% of its assets in
fixed income securities (including, for these purposes, that portion of the
value of securities convertible into common stock which is attributable to
the fixed income characteristics of those securities). The Portfolio's equity
securities will always comprise at least 25%, but never more than 75%, of the
Portfolio's total assets. Consequently, the Portfolio will have "Core
Holdings" of at least 25% fixed income securities and 25% equity securities.
Over time, holdings by the Portfolio are currently expected to average
approximately 50% in fixed income securities and approximately 50% in equity
securities. Actual asset mix will be adjusted in response to economic and
credit market cycles.
The equity securities invested in by the Balanced Portfolio will consist of
the types of securities in which the Common Stock Portfolio may invest. The
money market securities will consist of the types of securities and credit
quality in which the Money Market Portfolio may invest. The debt securities
will consist principally of bonds, notes, debentures and equipment trust
certificates. The Portfolio may also buy debt securities with equity features
such as conversion or exchange rights or warrants for the acquisition of
stock or participations based on revenues, rates or profits. These debt
securities will principally be investment grade securities rated at least Baa
by Moody's or BBB by S&P, or will be issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. If such Baa or BBB debt
securities held by the Portfolio fall below those ratings, the Portfolio will
not be obligated to dispose of them and may continue to hold them if the
investment adviser considers them appropriate investments under the
circumstances. In addition, the Balanced Portfolio may at times hold some of
its assets in cash. The 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 Balanced 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 Balanced 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 "Investment
Techniques--Risk Factors in Options and Futures," below.
GROWTH INVESTORS PORTFOLIO--INVESTMENT POLICIES
The Growth Investors Portfolio attempts to achieve its investment objective
by allocating varying portions of its assets to a number of asset classes.
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. 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 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
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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.
THE EQUITY SERIES
GROWTH AND INCOME PORTFOLIO--INVESTMENT POLICIES
The Growth and Income Portfolio seeks to maintain a portfolio yield above
that of issuers comprising the S&P 500 Index and to achieve (in the long run)
a rate of growth in portfolio income that exceeds the rate of inflation. The
Growth and Income Portfolio will generally invest in common stocks of "blue
chip" issuers, i.e., those (1) which have a total market capitalization of at
least $1 billion, (2) which pay periodic dividends and (3) whose common stock
is in the highest four issuer ratings for S&P (i.e., A+, A, A-or B+) or
Moody's (i.e., High Grade, Investment Grade, Upper Medium Grade or Medium
Grade) or, if unrated, is determined to be of comparable quality by the
Trust's investment adviser. It is expected that on average the dividend rate
of these issuers will exceed the average rate of issuers constituting the S&P
500 Index.
The Growth and Income Portfolio may invest without limit in securities
convertible into common stocks which include convertible bonds, convertible
preferred stocks and warrants convertible into common stocks. The Growth and
Income Portfolio may invest up to 30% of its total assets in high yield, high
risk convertible securities rated at the time of purchase below investment
grade (i.e., rated Ba or lower by Moody's or BB or lower by S&P or determined
by the Trust's investment adviser to be of comparable quality). Convertible
securities normally provide a higher yield than the underlying stock but
lower than a fixed income security without the convertible feature. Also, the
price of a convertible security will normally vary to some degree with
changes in the price of the underlying common stock although in some market
conditions the higher yield tends to make the convertible security less
volatile than the underlying common stock. In addition, the price of a
convertible security will also vary to some degree inversely with interest
rates. For additional discussion of the risks associated with investment in
lower-rated securities, see "Investment Techniques--Fixed Income Securities"
and "Investment Techniques--Risk Factors of Lower Rated Fixed Income
Securities," below. For more information concerning the bond ratings assigned
by Moody's and S&P, see Appendix B.
The Growth and Income Portfolio does not expect to invest more than 25% of
its total assets in foreign securities, although it may do so without limit.
It may enter into foreign currency futures contracts (and related options),
forward foreign currency exchange contracts and options on currencies for
hedging purposes. See "Investment Techniques--Forward Foreign Currency
Exchange Contracts," below.
The Growth and Income Portfolio may write covered call and put options on
securities and securities indexes for hedging purposes or to enhance its
return and may purchase call and put options on securities and securities
indexes for hedging purposes. The Growth and Income Portfolio may also
purchase and sell securities index futures contracts and may write and
purchase options thereon for hedging purposes. See "Investment
Techniques--Options," "Investment Techniques--Futures," and "Investment
Techniques--Risk Factors in Options and Futures," below.
For temporary defensive purposes, the Growth and Income Portfolio may invest
in certain money market instruments. See "Investment Techniques--Certain
Money Market Instruments," below.
EQUITY INDEX PORTFOLIO--INVESTMENT POLICIES
The Equity Index Portfolio's investment objective is to seek a total return
before expenses that approximates the total return performance of the S&P 500
Index (Index), including reinvestment of dividends, at a risk level
consistent with that of the Index. The Index is a widely publicized index
that tracks 500 companies traded on the New York and American Stock Exchanges
and in the over-the-counter market. It is weighted by market value so that
each company's stock influences the Index in proportion to its market
importance. While most issuers are among the 500 largest U.S. companies in
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terms of aggregate market value, some other stocks are included by S&P for
purposes of diversification. The value of the Index may change over time due
to a variety of factors, including economic factors and events affecting
issuers included in the Index.
In managing the Equity Index Portfolio, the Trust's investment adviser will
not utilize customary economic, financial or market analyses or other
traditional investment techniques. Rather, the investment adviser will use
proprietary modeling techniques to construct a portfolio which it believes
will, in the aggregate, approximate the performance results of the Index. The
investment adviser will first select from the largest capitalization
securities in the Index on a capitalization-weighted basis. Generally, the
largest capitalization securities reasonably track the Index because the
Index is significantly influenced by a small number of securities. However,
selecting securities on the basis of their capitalization alone would distort
the Equity Index Portfolio's industry diversification, and therefore economic
events could potentially have a dramatically different impact on the
performance of the Equity Index Portfolio from that of the Index. Recognizing
this fact, the modeling techniques also consider industry diversification
when selecting investments for the Equity Index Portfolio. The investment
adviser also seeks to diversify the Equity Index Portfolio's assets with
respect to market capitalization. As a result, the Equity Index Portfolio
will include securities of smaller and medium-sized capitalization companies
in the Index.
Although the modeling techniques are intended to produce a portfolio whose
performance approximates that of the Index (before expenses), there can be no
assurance that these techniques will reduce "tracking error" (i.e., the
difference between the Equity Index Portfolio's investment results (before
expenses) and the Index's). Tracking error may arise as a result of brokerage
costs, fees and operating expenses and a lack of correlation between the
Equity Index Portfolio's investments and the Index.
Cash may be accumulated in the Equity Index Portfolio until it reaches
approximately 1% of the value of the Equity Index Portfolio at which time
such cash will be invested in common stocks as described above. Accumulation
of cash increases tracking error. The Equity Index Portfolio will, however,
remain substantially fully invested in common stocks even when common stock
prices are generally falling. Also, adverse performance of a stock will
ordinarily not result in its elimination from the Equity Index Portfolio.
In order to reduce brokerage costs, maintain liquidity to meet shareholder
redemptions or minimize tracking error when the Equity Index Portfolio holds
cash, the Equity Index Portfolio may from time to time buy and hold futures
contracts on the Index and options on such futures contracts. See "Investment
Techniques--Futures" and "Investment Techniques--Risk Factors in Options and
Futures," below. The contract value of futures contracts purchased by the
Equity Index Portfolio plus the contract value of futures contracts
underlying call options purchased by the Equity Index Portfolio will not
exceed 20% of the Equity Index Portfolio's total assets.
The Equity Index Portfolio may seek to increase income by lending securities
with a value of up to 50% of its total assets to brokers-dealers. See
"Investment Techniques--Securities Lending," below.
COMMON STOCK PORTFOLIO--INVESTMENT POLICIES
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
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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.
GLOBAL PORTFOLIO--INVESTMENT POLICIES
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 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, as well as 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.
INTERNATIONAL PORTFOLIO--INVESTMENT POLICIES
The International Portfolio attempts to achieve its objective by investing
primarily in a diversified portfolio of equity securities selected
principally to permit participation in non-United States companies or foreign
governmental enterprises with prospects for growth. These non-United States
companies may have operations in the United States, in their country of
incorporation and/or in other countries. The International Portfolio intends
to have represented in the Portfolio business activities in not less than
three different countries and may invest anywhere in the world, including
Europe, Canada, Australia,
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Asia, Latin America and Africa. The International Portfolio may purchase
securities of developing countries, which include, among others, Mexico,
Brazil, Hong Kong, India, Poland, Turkey and South Africa. The International
Portfolio intends to diversify investments among several countries, although
for temporary defensive purposes, the International Portfolio may at times
invest substantially all of its assets in securities issued by a single major
developed country (e.g., the United States) or in cash or cash equivalents,
including money market instruments issued by that country.
The International Portfolio may invest in any type of investment grade, fixed
income security including, but not limited to, preferred stock, convertible
securities, bonds, notes and other evidences of indebtedness of foreign
issuers, including obligations of foreign governments. The International
Portfolio may also establish and maintain temporary cash balances in U.S. and
foreign short-term high-grade money market instruments for defensive purposes
or to take advantage of buying opportunities. Although no particular
proportion of stocks, bonds or other securities is required to be maintained,
the International Portfolio, in view of its investment objective, intends
under normal market conditions to maintain a portfolio consisting primarily
of a diversified list of equity securities. The International Portfolio may
make loans of up to 50% of its portfolio securities. See "Investment
Techniques--Securities Lending," below. The International Portfolio may write
covered call and put options and may purchase call and put options on
individual equity securities, securities indexes, and foreign currencies. See
"Investment Techniques--Options," below. The International 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--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.
AGGRESSIVE STOCK PORTFOLIO--INVESTMENT POLICIES
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 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.
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SMALL CAP GROWTH PORTFOLIO--INVESTMENT POLICIES
The Small Cap Growth Portfolio will pursue its objective by investing
primarily in U.S. common stocks and other equity-type securities issued by
smaller companies with favorable growth prospects. The Small Cap 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.
The Small Cap Growth Portfolio may also invest in equity-type securities
other than common stocks (such as preferred stocks and convertible debt
instruments) and in protective options if it is Alliance's judgment that, in
light of economic conditions, such investments offer the Small Cap Growth
Portfolio better prospects for achieving its objective. Under certain market
conditions, the Small Cap Growth 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 Small Cap Growth Portfolio will not invest more
than 20% of its net asset value, measured at the time of investment, in
securities principally traded on foreign securities markets (other than
commercial paper). See "Investment Techniques--Foreign Securities and
Currencies," below. The Small Cap Growth Portfolio may make secured loans of
up to 50% of its total portfolio securities. See "Investment
Techniques--Securities Lending," below. The Small Cap Growth Portfolio may
write covered call options and may purchase call and put options on
individual equity securities, securities indexes and foreign currencies. The
Small Cap Growth Portfolio may also purchase and sell stock index and foreign
currency futures contracts and options thereon. See "Investment
Techniques--Forward Commitments and When-Issued and Delayed Delivery
Securities," "Investment Techniques--Options," "Investment
Techniques--Futures," and "Investment Techniques--Risk Factors in Options and
Futures," below.
The investment objective of the Small Cap Growth Portfolio is fundamental
and, unless permitted by law, will not be changed without a vote of the
holders of the majority of the voting securities of the Small Cap Growth
Portfolio. There can, of course, be no assurance that the Small Cap Growth
Portfolio will achieve its investment objective. Under current SEC
guidelines, for so long as the Portfolio has the words "Small Cap" in its
name, it is required, under normal market conditions, to invest at least 65%
of its total assets in securities of smaller capitalization companies
(currently considered by Alliance to mean companies with market
capitalization at or below $2 billion).
Risk Factors. More risk is associated with investment in small-sized
companies, because they tend to be often dependent on only one or two
products. They tend to be more vulnerable to competition from larger
companies with greater resources and to economic conditions affecting their
market sector. 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.
THE FIXED INCOME SERIES
MONEY MARKET PORTFOLIO--INVESTMENT POLICIES
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
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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.
INTERMEDIATE GOVERNMENT SECURITIES PORTFOLIO--INVESTMENT POLICIES
The Intermediate Government Securities Portfolio (Government Portfolio)
attempts to achieve its investment objective by investing primarily in debt
securities issued or guaranteed as to the timely payment of principal and
interest by the U.S. Government or any of its agencies or instrumentalities
(U.S. Government Securities). The Government Portfolio may also invest in
repurchase agreements and forward commitments related to U.S. Government
Securities. The Portfolio may seek to enhance its current return and may seek
to hedge against changes in interest rates by engaging in transactions
involving related options, futures and options on futures.
The Government Portfolio expects that under normal market conditions it will
invest at least 80% of its total assets in U.S. Government Securities and
repurchase agreements and forward commitments relating to U.S. Government
Securities. U.S. Government Securities include, without limitation, the
following:
o U.S. Treasury Bills--Direct obligations of the U.S. Treasury which
are issued in maturities of one year or less. No interest is paid
on Treasury Bills; instead, they are issued at a discount and
repaid at full face value when they mature. They are backed by the
full faith and credit of the U.S. Government.
o U.S. Treasury Notes--Direct obligations of the U.S. Treasury issued
in maturities which vary between one and ten years, with interest
payable every six months. They are backed by the full faith and
credit of the U.S. Government.
o U.S. Treasury Bonds--These direct obligations of the U.S. Treasury
are issued in maturities more than ten years from the date of
issue, with interest payable every six months. They are backed by
the full faith and credit of the U.S. Government.
o "Ginnie Maes"--Ginnie Maes are debt securities issued by a mortgage
banker or other mortgagee and represent an interest in a pool of
mortgages insured by the Federal Housing Administration or the
Farmer's Home Administration or guaranteed by the Veteran's
Administration. The Government National Mortgage Association (GNMA)
guarantees the timely payment of principal and interest. Ginnie
Maes, although not direct obligations of the U.S. Government, are
guaranteed by the U.S. Treasury.
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o "Fannie Maes"--The Federal National Mortgage Association (FNMA) is
a government-sponsored corporation owned entirely by private
stockholders that purchases residential mortgages from a list of
approved seller/servicers. Pass-through securities issued by FNMA
are guaranteed as to timely payment of principal and interest by
FNMA and supported by FNMA's right to borrow from the U.S.
Treasury, at the discretion of the U.S. Treasury. Fannie Maes are
not backed by the full faith and credit of the U.S. Government.
o "Freddie Macs"--The Federal Home Loan Mortgage Corporation (FHLMC),
a corporate instrumentality of the U.S. Government, issues
participation certificates (PCs) which represent an interest in
residential mortgages from FHLMC's National Portfolio. FHLMC
guarantees the timely payment of interest and ultimate collection
of principal, but PCs are not backed by the full faith and credit
of the U.S. Government.
o Governmental Collateralized Mortgage Obligations--These are
securities issued by a U.S. Government instrumentality or agency
which are backed by a portfolio of mortgages or mortgage-backed
securities held under an indenture. See "Other Investments," below.
o "Sallie Maes"--The Student Loan Marketing Association (SLMA) is a
government-sponsored corporation owned entirely by private
stockholders that provides liquidity for banks and other
institutions engaged in the Guaranteed Student Loan Program. These
loans are either directly guaranteed by the U.S. Treasury or
guaranteed by state agencies and reinsured by the U.S. Government.
SLMA issues both short term notes and longer term public bonds to
finance its activities.
The Portfolio may also invest in "zero coupon" U.S. Government Securities
which have been stripped of their unmatured interest coupons and receipts or
in certificates representing undivided interests in such stripped U.S.
Government Securities and coupons. These securities tend to be more volatile
than other types of U.S. Government Securities.
Guarantees of the Portfolio's securities by the U.S. Government or its
agencies or instrumentalities guarantee only the payment of principal at
maturity and interest when due on the guaranteed securities, and do not
guarantee the securities' yield or value or the yield or value of the
Government Portfolio's shares.
The Portfolio buys and sells securities with a view to maximizing current
return without, in the view of the investment adviser, undue risk to
principal. Potential capital gains resulting from possible changes in
interest rates will not be a major consideration. The Portfolio may take full
advantage of a wide range of maturities of U.S. Government Securities and may
adjust the dollar-weighted average maturity of its portfolio from time to
time, depending on its assessment of relative yields on securities of
different maturities and the expected effect of future changes in interest
rates on the market value of the Portfolio's portfolio. However, at all
times, each instrument in the Portfolio will have either a final maturity of
not more than ten years or a duration not exceeding that of a 10-year
Treasury note. Duration is a measure that relates the price volatility of a
security to changes in interest rates. The duration of a security is the
weighted average term to maturity, expressed in years, of the present value
of all future cash flows, including coupon payments and principal repayments.
Thus, by definition, duration is always less than or equal to full maturity.
As of December 31, 1995, the duration of a 10-year Treasury bond was
considered to be 5.61 years. The Portfolio may also invest a substantial
portion of its assets in money market instruments. See "Investment
Techniques--Certain Money Market Instruments," below.
It is a fundamental policy of the Government Portfolio that under normal
market conditions it will invest at least 65% of its total assets in U.S.
Government Securities and repurchase agreements and forward commitments
relating to U.S. Government Securities.
Other Investments. The Government Portfolio may also purchase collateralized
mortgage obligations (CMOs) issued by non-governmental issuers and securities
issued by a real estate mortgage investment conduit (REMIC). See "Investment
Techniques--Mortgage-Backed and Asset-Backed Securities," below. The
Government Portfolio will purchase only CMOs collateralized by U.S.
Government Securities. However, CMOs issued by entities other than U.S.
Government agencies or instrumentalities
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and securities issued by REMICs are not considered U.S. Government Securities
for purposes of the investment policies of the Government Portfolio even
though the CMOs may be collateralized by U.S. Government Securities. Such
securities will generally be investment grade. In the event such securities
fall below investment grade, 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.
In order to enhance its current return and to reduce fluctuations in net
asset value, the Portfolio may write call and put options on U.S. Government
Securities which are "covered" as described herein and may purchase call and
put options on U.S. Government Securities. The Portfolio may also enter into
interest rate futures contracts with respect to U.S. Government Securities,
and may write and purchase options thereon. See "Investment
Techniques--Options" and "Investment Techniques--Futures," below.
The Portfolio may also enter into forward commitments for the purchase of
U.S. Government Securities, purchase such securities on a when-issued or
delayed delivery basis, make secured loans of its portfolio securities
without limitation and enter into repurchase agreements with respect to U.S.
Government Securities with commercial banks and registered broker-dealers.
See "Investment Techniques--Forward Commitments and When-Issued and Delayed
Delivery Securities," below.
The Portfolio may make short sales involving either securities retained in
the Portfolio's portfolio or securities which the Portfolio has the absolute
right to acquire without additional consideration.
Special Considerations. U.S. Government Securities are considered among the
safest of fixed income investments. As a result, however, their yields are
generally lower than the yields available from corporate debt securities. As
with other mutual funds, the value of the Portfolio's shares will fluctuate
with the value of its investments. The value of the Portfolio's investments
will change as the general level of interest rates fluctuates. During periods
of falling interest rates, the values of U.S. Government Securities generally
rise. Conversely, during periods of rising interest rates, the values of U.S.
Government Securities generally decline. In an effort to preserve the capital
of the Portfolio when interest rates are generally rising, the investment
adviser may shorten the average maturity of the U.S. Government Securities in
the Portfolio's portfolio. Because the principal values of U.S. Government
Securities with shorter maturities are less affected by rising interest
rates, a portfolio with a shorter average maturity will generally diminish
less in value during such periods than a portfolio of longer average
maturity. Since U.S. Government Securities with shorter maturities, however,
generally have a lower yield to maturity, the Portfolio's current return
based on its net asset value will generally be lower as a result of such
action than it would have been had such action not been taken. Ginnie Maes
and other mortgage-backed or mortgage related securities in which the
Portfolio invests may not be an effective means of "locking in" favorable
long-term interest rates since the Portfolio must reinvest scheduled and
unscheduled principal payments relating to such securities. At the time
principal payments or prepayments are received by the Portfolio and
reinvested, prevailing interest rates may be higher or lower than the
Portfolio's current yield.
At times when the Portfolio has written call options, its ability to profit
from declining interest rates will be limited. Any resulting appreciation in
the value of the Portfolio would likely be partially or wholly offset by the
losses on call options written by the Portfolio. The termination of option
positions under such conditions would result in the realization of capital
losses, which would reduce the amounts available for distribution to
shareholders.
QUALITY BOND PORTFOLIO--INVESTMENT POLICIES
The Quality Bond Portfolio expects to invest in readily marketable securities
with relatively attractive yields, but which do not, in the opinion of the
Trust's investment adviser, involve undue risk of loss of capital. The
Quality Bond Portfolio will follow a policy of investing at least 65% of its
total assets in securities which at the time of purchase are rated at least
Baa by Moody's or BBB by S&P, or in unrated fixed income securities
determined by the investment adviser to be of comparable quality. In the
event that the credit rating of a security held by the Quality Bond Portfolio
falls below investment grade (or, in the case of unrated securities, the
investment adviser determines that the quality of such security has
deteriorated below investment grade), the Quality Bond Portfolio will not be
obligated to dispose of such
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security and may continue to hold the obligation if, in the opinion of the
investment adviser, such investment is considered appropriate in the
circumstances. The Quality Bond Portfolio will also seek to maintain an
average aggregate quality rating of its portfolio securities of at least A
(Moody's and S&P). For more information concerning the bond ratings assigned
by Moody's and S&P, see Appendix B.
The Quality Bond Portfolio has complete flexibility as to the types of
securities in which it will invest and the relative proportions thereof, and
the Quality Bond Portfolio plans to vary the proportions of its holdings of
long-and short-term fixed income securities (including debt securities,
convertible debt securities and U.S. Government obligations) and preferred
stocks in order to reflect its assessment of prospective cyclical changes
even if such action may adversely affect current income. The Quality Bond
Portfolio will not, however, invest more than 5% of its total assets in the
securities of any one issuer, excepting U.S. Government obligations, although
up to 25% of the total assets of the Portfolio may be invested without regard
to this restriction. Further, the Quality Bond Portfolio will not own more
than 10% of the outstanding voting securities of any issuer.
The Quality Bond Portfolio may invest in foreign securities. The Quality Bond
Portfolio will not invest more than 20% of its total assets in securities
denominated in currencies other than the U.S. dollar. See "Investment
Techniques--Foreign Securities and Currencies," below. The Quality Bond
Portfolio may enter into foreign currency futures contracts (and related
options), forward foreign currency exchange contracts and options on foreign
currencies for hedging purposes. See "Investment Techniques--Forward Foreign
Currency Exchange Contracts," below.
For temporary defensive purposes, the Quality Bond Portfolio may invest in
certain money market instruments. See "Investment Techniques--Certain Money
Market Instruments," below.
The Quality Bond Portfolio may purchase put and call options written by
others and write covered put and call options overlying the types of
securities in which the Quality Bond Portfolio may invest. The Quality Bond
Portfolio also intends to write covered call options for cross-hedging
purposes. A call option is for cross-hedging purposes if it is designed to
provide a hedge against a decline in value of another security which the
Portfolio owns or has the right to acquire. See "Investment
Techniques--Options," below.
Interest Rate Transactions. The Quality Bond Portfolio may seek to protect
the value of its investments from interest rate fluctuations by entering into
various hedging transactions, such as interest rate swaps and the purchase or
sale of interest rate caps and floors. The Portfolio expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio. The Quality Bond Portfolio may also
enter into these transactions to protect against an increase in the price of
securities the Portfolio anticipates purchasing at a later date. The Quality
Bond Portfolio intends to use these transactions as a hedge and not as a
speculative investment. Interest rate swaps involve the exchange by the
Quality Bond Portfolio with another party of their respective commitments to
pay or receive interest, e.g., an exchange of floating rate payments for
fixed rate payments. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payments on a notional principal amount from the
party selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate floor.
The Quality Bond Portfolio may enter into interest rate swaps, caps and
floors on either an asset-based or liability-based basis depending on whether
it is hedging its assets or its liabilities, and will only enter into such
swaps, caps and floors on a net basis, i.e., the two payment streams are
netted out, with the Quality Bond Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. The net amount of the
excess, if any, of the Quality Bond Portfolio's obligations over its
entitlements with respect to each interest rate swap, cap or floor will be
accrued on a daily basis and an amount of cash or liquid securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the custodian. The Quality Bond
Portfolio will not enter into any interest rate swap, cap or floor
transaction unless the unsecured senior debt or the claims-paying ability of
the other party thereto is rated in the highest rating category of at least
one NRSRO at the time of entering into
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such transaction. If there is a default by the other party to such a
transaction, the Quality Bond Portfolio will have contractual remedies
pursuant to the agreements related to the transaction. The swap market has
grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and agents. As a result,
the swap market has become well established and provides a degree of
liquidity. Caps and floors are more recent innovations which tend to be less
liquid than swaps.
Zero Coupon Securities. To the extent consistent with its investment
objective, the Quality Bond Portfolio may invest in "zero coupon" securities,
which are debt securities that have been stripped of their unmatured interest
coupons, and receipts or certificates representing interests in such stripped
debt obligations and coupons. A zero coupon security pays no interest to its
holder during its life. Its value to an investor consists of the difference
between its face value at the time of maturity and the price for which it was
acquired, which is generally an amount significantly less than its face
value. Accordingly, such securities usually trade at a deep discount from
their face or par value and will be subject to greater fluctuations of market
value in response to changing interest rates than debt obligations of
comparable maturities that make current distributions of interest. The
Quality Bond Portfolio may also invest in "pay-in-kind" debentures (i.e.,
debt obligations the interest on which may be paid in the form of additional
obligations of the same type rather than cash) which have characteristics
similar to zero coupon securities.
The Quality Bond Portfolio may invest in collateralized mortgage obligations
or CMOs. See "Investment Techniques--Mortgage-Backed and Asset-Backed
Securities," below. The Portfolio may purchase and sell interest rate futures
contracts and options thereon and may make loans of securities with a value
of up to 50% of its total assets. See "Investment Techniques--Futures,"
"Investment Techniques--Risk Factors in Options and Futures" and "Investment
Techniques--Securities Lending," below.
HIGH YIELD PORTFOLIO--INVESTMENT POLICIES
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 B,
"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.
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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 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.
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, other than the Equity Index Portfolio, 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 and the Equity Index Portfolios,
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, Equity Index and Government Portfolios, may also write covered
put and call options and buy put and call options on foreign currencies. The
Balanced, Common Stock, Aggressive Stock, Small Cap Growth, High Yield,
Global, International, Conservative Investors, Growth Investors, Government,
Quality Bond, Growth and Income and Equity Index 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, other than the Equity Index Portfolio, 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, other than the Equity Index Portfolio, 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
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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, other than the Equity Index Portfolio, may also use
commercial paper, meaning short-term, unsecured promissory notes issued by
corporations to finance their short-term credit needs. In addition, these
Portfolios may invest in variable or floating rate notes. Variable and
floating rate notes provide for automatic establishment of a new interest
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
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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 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).
LOAN ASSIGNMENTS AND PARTICIPATIONS
The High Yield Portfolio may invest in participations and assignments of
loans to corporate, governmental, or other borrowers originally made by
institutional lenders or lending syndicates. These investments are subject to
the same risks associated with fixed income securities generally. For
example, loans to foreign governments will involve a risk that the
governmental entities responsible for the repayment of the loan may be
unable, or unwilling, to pay interest and repay principal when due. In
addition, loan participations and assignments may have a lower yield because
they are often not rated and may also be less liquid than other debt
interests.
Even if the loans are secured, there is no assurance that the liquidation of
collateral from a secured loan would satisfy the borrower's obligation, or
that the collateral can be liquidated. Also, if a loan is foreclosed, the
Portfolio could become part owner of any collateral, and would bear the costs
and liabilities associated with owning and disposing of the collateral. In
addition, it is conceivable that under emerging legal theories of lender
liability, the Portfolio could be held liable as a co-lender.
A loan is often administered by a bank or other financial institution that
acts as agent for all holders. The agent administers the terms of the loan,
as specified in the loan agreement. Unless, under the terms of the loan or
other indebtedness, the Portfolio has direct recourse against the borrower
(usually not the case with loan participations), it may have to rely on the
agent to apply appropriate credit remedies against a borrower. Consequently,
loan participations may also be adversely affected by the insolvency of the
lending bank or other intermediary.
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
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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 and the Equity Index Portfolios,
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, Government and Equity Index
Portfolios, 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 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.
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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, Government and Equity Index
Portfolios, 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 High Yield, Global, International, Conservative Investors, Growth
Investors, Government, Balanced and Quality Bond 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 (except the Government and Quality Bond Portfolios) as well as the
Common Stock, Aggressive Stock, Small Cap Growth and Growth and Income
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. 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. As described below under "Foreign Securities and
Currencies," the High Yield, Global, International, Conservative Investors,
Growth Investors, Balanced, Common Stock, Aggressive Stock, Small Cap Growth,
Quality Bond and Growth and Income 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. In addition, the
contract value of futures contracts purchased by the Equity Index Portfolio
plus the contract value of futures contracts underlying call options
purchased by the Equity Index Portfolio will not exceed 20% of the Equity
Index Portfolio's total assets. 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.
23
<PAGE>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
All the Portfolios, except the Money Market, Government and Equity Index
Portfolios, 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, except the Government and Equity Index 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 and Government
Portfolios may each 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
24
<PAGE>
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.
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 and Government 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. The
High Yield and Government Portfolios 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
25
<PAGE>
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 endowment 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>
FIRST NEXT NEXT NEXT
$750 MILLION $750 MILLION $1 BILLION $2.5 BILLION THEREAFTER
-------------- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
International ..................... 0.900% 0.825% 0.800% 0.780% 0.770%
Global ............................ 0.675% 0.600% 0.550% 0.530% 0.520%
Aggressive Stock .................. 0.625% 0.575% 0.525% 0.500% 0.475%
Common Stock ...................... 0.475% 0.425% 0.375% 0.355% 0.345%*
Growth and Income ................. 0.550% 0.525% 0.500% 0.480% 0.470%
Small Cap Growth .................. -- -- -- -- --
Growth Investors .................. 0.550% 0.500% 0.450% 0.425% 0.400%
Balanced .......................... 0.450% 0.400% 0.350% 0.325% 0.300%
Conservative Investors ............ 0.475% 0.425% 0.375% 0.350% 0.325%
High Yield ........................ 0.600% 0.575% 0.550% 0.530% 0.520%
Quality Bond ...................... 0.525% 0.500% 0.475% 0.455% 0.445%
Intermediate Government Securities 0.500% 0.475% 0.450% 0.430% 0.420%
Equity Index ...................... 0.325% 0.300% 0.275% 0.255% 0.245%
Money Market ...................... 0.350% 0.325% 0.300% 0.280% 0.270%
</TABLE>
* On assets in excess of $10 billion, the management fee for the Common Stock
Portfolio is reduced to 0.335% of average daily net assets.
THE PORTFOLIO MANAGERS
THE ASSET ALLOCATION SERIES
CONSERVATIVE INVESTORS, BALANCED AND GROWTH INVESTORS PORTFOLIOS
Robert G. Heisterberg is the person principally responsible for the
Conservative Investors, Balanced and Growth Investors Portfolios' investment
programs 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.
THE EQUITY SERIES
GROWTH AND INCOME PORTFOLIO
Paul Rissman and W. Theodore Kuck are the persons principally responsible for
the Growth and Income Portfolio's investment program, Mr. Rissman since
February 12, 1996 and Mr. Kuck since its the Portfolio's inception. Mr.
Rissman, a Vice President of Alliance, has been associated with Alliance
since 1989. Mr. Kuck, a Vice President of Alliance, has been associated with
Alliance since 1971.*
EQUITY INDEX PORTFOLIO
Judith A. Maglio has been the person principally responsible for the Equity
Index Portfolio's investment program since inception. Ms. Maglio, a Vice
President of Alliance, has been associated with Alliance since 1970.
26
<PAGE>
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.*
GLOBAL AND INTERNATIONAL PORTFOLIOS
Ronald Simcoe has been the person principally responsible for the Global
Portfolio's investment program since 1988 and the International Portfolio's
investment program since its inception. Mr. Simcoe, a Vice President of
Alliance, has been associated with Alliance since 1977.*
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.*
SMALL CAP GROWTH PORTFOLIO
The employee of Alliance principally responsible for the Small Cap Growth
Portfolio's investment program is Michael F. Gaffney, a Senior Vice President
of Alliance, with which he has been associated since 1987.*
THE FIXED INCOME SERIES
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.*
INTERMEDIATE GOVERNMENT SECURITIES PORTFOLIO
Patricia J. Young and Paul A. Ullman have been the persons principally
responsible for the Intermediate Government Securities Portfolio's investment
program since 1995. Ms. Young, Senior Vice President of Alliance, with which
she has been associated since 1992, previously was employed by Hyperion
Capital (beginning in 1991) and Fischer, Francis, Trees & Watts prior
thereto. Mr. Ullman, Vice President of Alliance, with which he has been
associated since 1992, previously was employed by Hyperion Capital since
1990.
QUALITY BOND PORTFOLIO
Matthew Bloom has been the person principally responsible for the Quality
Bond Portfolio's investment program since 1995. Mr. Bloom, a Vice President
of Alliance, has been associated with Alliance since 1989.
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.
THE TRUST'S EXPENSES
The Trust pays all of its operating expenses not specifically assumed by
Alliance. The expenses borne by the Trust include or could include taxes;
brokerage commissions; interest charges; securities lending fees;
27
<PAGE>
fees and expenses of the registration or qualification of a Portfolio's
securities under federal or state securities laws; fees of the Portfolio's
custodian, transfer agent, independent accountants and legal counsel; all
expenses of shareholders' and trustees' meetings; all expenses of the
preparation, typesetting, printing and mailing to existing shareholders of
prospectuses, prospectus supplements, statements of additional information,
proxy statements, and annual and semi-annual reports; any proxy solicitor's
fees and expenses; costs of fidelity bonds and Trustees' liability insurance
premiums as well as extraordinary expenses such as indemnification payments
or damages awarded in litigation or settlements made; any membership fees of
the Investment Company Institute and similar organizations; costs of
maintaining the Trust's corporate existence and the compensation of Trustees
who are not directors, offices, or employees of Alliance or its affiliates.
The following table, reflecting the Trust's expenses, is based on information
for the year ended December 31, 1996 and has been restated to reflect (i) the
fees that would have been paid to Alliance if the present advisory agreement
had been in effect as of January 1, 1996 and (ii) estimated accounting
expenses for the year ended December 31, 1997. [To be updated]
<TABLE>
<CAPTION>
GROWTH
CONSERVATIVE GROWTH AND EQUITY COMMON
INVESTORS BALANCED INVESTORS INCOME INDEX STOCK
TYPE OF EXPENSE PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------- -------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investment Advisory Fees 0.55% 0.37% 0.52% 0.55% 0.35% 0.35%
12b-1 fees ...............
Other Expenses ........... 0.04% 0.03% 0.04% 0.05% 0.13% 0.03%
-------------- ----------- ----------- ----------- ----------- -----------
Total Expenses ........... 0.59% 0.40% 0.56% 0.60% 0.48% 0.38%
============== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
SMALL INTERMEDIATE
AGGRESSIVE CAP MONEY GOVERNMENT QUALITY HIGH
GLOBAL STOCK GROWTH MARKET SECURITIES BOND YIELD INTERNATIONAL
TYPE OF EXPENSE PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO*
- ------------------- ----------- ------------ ----------- ----------- -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Advisory
Fees .............. 0.53% 0.46% 0.40% 0.50% 0.55% 0.55% 0.90%
12b-1 fees .........
Other Expenses ..... 0.08% 0.03% 0.04% 0.07% 0.04% 0.05% 0.13%
----------- ------------ ----------- -------------- ----------- ----------- -------------
Total Expenses ..... 0.61% 0.49% 0.44% 0.57% 0.59% 0.60% 1.03%
=========== ============ =========== ============== =========== =========== =============
</TABLE>
- ------------
* Annualized.
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 fourteen
portfolios, each of which has Class IA and Class IB shares.
28
<PAGE>
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
on which such shares (or class of shares) shall be entitled to vote.
Shareholders of each Portfolio 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 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 Investment
Company Act, or any successor rule, and in the Trust's Agreement and
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 the assets of that Portfolio and,
generally, 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 purchase 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
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
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<PAGE>
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 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 the 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 redeemed in accordance with the Trust's Agreement and
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
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<PAGE>
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 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 Government, Quality Bond and High Yield Portfolios each 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.
Performance of Similarly Managed Portfolios. In addition to managing the
assets of the Small Cap Growth Portfolio, Alliance manages 6 portfolios of
discretionary tax-exempt accounts of institutional clients managed as
described below without significant client-imposed restrictions ("Historical
Portfolios"). These accounts have substantially the same investment
objectives and policies and are managed in accordance with essentially the
same investment strategies and techniques as those of the Small Cap
31
<PAGE>
Growth Portfolio. The Historical Portfolios are not subject to certain
limitations, diversification requirements and other restrictions to which the
Small Cap Growth Portfolio, as a registered investment company, is subject
and which if applicable to the Historical Portfolios, may have adversely
affected the performance results of the Historical Portfolios.
Set forth below is performance data provided by Alliance relating to the
Historical Portfolios for each of the seventeen full calendar years during
which Alliance has managed the Historical Portfolios. As of December 31,
1996, the assets in the Historical Portfolios totaled approximately $397
million and the average size of an institutional account in the Historical
Portfolios was $66 million. Each Historical Portfolio has a nearly identical
composition of individual investment holdings and related percentage
weightings.
The performance data is net of an imputed advisory fee deemed paid quarterly
at the same level as the advisory fee payable by the Small Cap Growth
Portfolio, although the actual advisory fees payable by the Historical
Portfolios varied. The performance data includes the cost of brokerage
commissions, but excludes custodial fees, transfer agency costs and other
administrative expenses that will be payable by the Small Cap Growth
Portfolio and will result in a higher expense ratio for the Small Cap Growth
Portfolio. Expenses associated with the distribution of Class IB shares of
the Small Cap Growth Portfolio in accordance with the plan adopted by the
Trust's Board of Trustees pursuant to Rule 12b-1 under the 1940 Act
("distribution fees") are also excluded. The performance data has also not
been adjusted for corporate or individual taxes, if any, payable by the
account owners.
Alliance has calculated the investment performance of the Historical
Portfolios on a trade-date basis. Dividends have been accrued at the end of
the month and cash flows weighted daily. Due to the similarity of investment
composition and the performance of each of the Historical Portfolios,
composite investment performance for all portfolios has been determined on a
simple average, rather than a dollar-weighted, basis. New accounts are
included in the composite investment performance computations at the
beginning of the month following the initial contribution. The composite
total returns set forth below are calculated using a method that links the
monthly return amounts for the disclosed periods, resulting in a
time-weighted rate of return.
As reflected below, the Historical Portfolios have over time performed
favorably when compared with the performance of recognized performance
indices. The Russell 2000 universe of securities is compiled by Frank Russell
Company and [consists of the 2000 smallest of the 3000 largest capitalization
U.S. equity securities.] The Russell 2000 Index reflects changes in market
prices, but excludes investment income.
To the extent the Small Cap Growth Portfolio does not invest in U.S. common
stocks or utilizes investment techniques such as futures or options, the
Russell 2000 Index may not be substantially comparable to the Small Cap
Growth Portfolio. The Russell 2000 Index is included to illustrate material
economic and market factors that existed during the time period shown. The
Russell 2000 Index does not reflect the deduction of any fees. If the Small
Cap Growth Portfolio were to purchase a portfolio of securities substantially
identical to the securities comprising the Russell 2000 Index, the Small Cap
Growth Portfolio's performance relative to the index would be reduced by the
Small Cap Growth Portfolio's expenses, including brokerage commissions,
advisory fees, distribution fees, custodial fees, transfer agency costs and
other administrative expenses as well as by the impact on the Small Cap
Growth Portfolio's shareholders of sales charges and income taxes.
The Lipper Growth Fund Index is prepared by Lipper Analytical Services, Inc.
and represents a composite index of the investment performance for the 30
largest growth mutual funds. The composite investment performance of the
Lipper Growth Fund Index reflects investment management and administrative
fees and other operating expenses paid by these mutual funds and reinvested
income dividends and capital gain distributions, but excludes the impact of
any income taxes and sales charges.
The following performance data is provided solely to illustrate Alliance's
performance in managing the Historical Portfolios as measured against certain
broad based market indices and against the composite performance of other
open-end growth mutual funds. Investors should not rely on the following
performance data of the Historical Portfolios as an indication of future
performance of the Small Cap
32
<PAGE>
Growth Portfolio. The composite investment performance for the periods
presented may not be indicative of future rates of return. Other methods of
computing investment performance may produce different results, and the
results for different periods may vary.
SCHEDULE OF COMPOSITE INVESTMENT PERFORMANCE--HISTORICAL PORTFOLIOS
FOR THE SEVENTEEN YEARS ENDED DECEMBER 31, 1996*
<TABLE>
<CAPTION>
HISTORICAL RUSSELL LIPPER GROWTH
PORTFOLIOS 2000 INDEX FUND INDEX
TOTAL RETURN TOTAL RETURN TOTAL RETURN
<S> <C> <C> <C>
Year ended:
December 31, 1996 ................................
December 31, 1995 ................................
December 31, 1994 ................................
December 31, 1993 ................................
December 31, 1992 ................................
December 31, 1991 ................................
December 31, 1990 ................................
December 31, 1989 ................................
December 31, 1988 ................................
December 31, 1987 ................................
December 31, 1986 ................................
December 31, 1985 ................................
December 31, 1984 ................................
December 31, 1983 ................................
Cumulative total return for the period January 1,
1983 to December 31, 1996 ...........................
</TABLE>
- ------------
* Total return is a measure of investment performance that is based upon
the change in value of an investment from the beginning to the end of a
specified period and assumes reinvestment of all dividends and other
distributions. The basis of preparation of this data is described in
the preceding discussion.
The average annual total returns presented below are based upon the
cumulative total return as of December 31, 1996, and assume a steady
compounded rate of return and are not year-by-year results, which fluctuated
over the periods as shown.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
-------------------------------------------------
HISTORICAL RUSSELL LIPPER GROWTH
PORTFOLIOS 2000 INDEX FUND INDEX
-------------- -------------- -----------------
<S> <C> <C> <C>
Three years .............
Five years ..............
Ten years ...............
Since January 1, 1983 ..
</TABLE>
33
<PAGE>
THE HUDSON RIVER TRUST
1345 Avenue of the Americas -- New York, New York 10105
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with The Hudson River Trust (Trust) Prospectus dated May
1, 1997 relating to Class IA shares and retained for future reference. This
Statement of Additional Information relates to the Trust's Class IA shares. A
separate Statement of Additional Information relates to the Trust's Class IB
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 .. 7
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 ......................................................... 35
Financial Statements ................................................... 37
Appendix A--Description of Commercial Paper Ratings .................... A-1
</TABLE>
- -------------------------------------------------------------------------------
HRT-SAI (5/97) Copyright 1997. 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 (the "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 reorganized as a
Massachusetts business trust. Shares of each Portfolio are divided into two
classes: Class IA shares and Class IB shares. Class IA shares are offered at
net asset value pursuant to this Statement of Additional Information and a
related prospectus and are not subject to fees imposed under any distribution
plan. Class IB shares are offered at net asset value pursuant to a separate
Statement of Additional Information and related prospectus 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 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 that invest 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 the assets of that Portfolio and, generally, have
identical voting, dividend, liquidation, and other rights, other than with
respect to 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").
Currently, the Trust's shareholders of Class IA shares are separate accounts
of The Equitable Life Assurance Society of the United States ("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 regardless of whether they are affiliated with Equitable.
As of January 31, 1997, Equitable owned approximately 99.7% of the Trust's
outstanding Class IA shares and all of the Trust's outstanding Class IB shares
and, as a result, may be deemed to be control persons with respect to the
Trust. Class IB shares are sold only to an insurance company separate account
of Equitable.
As a "series" investment company, 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 Life Insurance Company, formerly a wholly owned subsidiary of
Equitable that was merged into Equitable as of January 1, 1997 ("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. The
Small Cap Growth Portfolio received its initial funding on [May 1, 1997].
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 January 31, 1997,
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>
QUALITY BOND GLOBAL
PORTFOLIO PORTFOLIO
------------------------ ------------------------
UNITS % OF UNITS % OF
OWNED PORTFOLIO OWNED PORTFOLIO
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Boatmen's Trust Co.* ......... 11,194,047 69.0
Equitable Realty Assets Corp. 3,548,559 5.9
</TABLE>
- ------------
* Boatmen's Trust Co., Trustee under Master Trust Agreement for SBC
Communications, Inc. Deferred Compensation Plans and other Executive
Benefit Plans.
The principal addresses of Boatmen's Trust Co., and Equitable Realty Asset
Corp. are 175 East Houston Street, San Antonio, Texas and 9000 Central Park
Avenue, Atlanta, Georgia, respectively.
Were such a substantial 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. The Trust has agreed to be bound by the procedures
set forth in Section 16(c) of the Investment Company Act, and accordingly,
shareholders of record of not less than two-thirds of the outstanding shares
of the Trust may remove a Trustee by a vote cast in person or by proxy at a
meeting called for that purpose.
Except as set forth above, the Trustees 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 by the Trust 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.
[At a meeting held on March 17, 1997, the shareholders of the Trust approved
the amendment and restatement of the Trust's Agreement and Declaration of
Trust. On March , 1997 the Agreement and Declaration of Trust was amended
and restated, and filed with the office of the Secretary of the Commonwealth
of Massachusetts].
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
4
<PAGE>
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.
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
holdings 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 the collateral
underlying the repurchase agreements consists exclusively of 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 its total assets,
at the time a Second Tier Security is 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 net 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, Growth
Investors and Small Cap Growth 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 that the Portfolios (other than the Money Market Portfolio) may
purchase bank, trust company, and bank holding company stock, and
5
<PAGE>
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.
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 APPLICABLE 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 APPLICABLE 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 APPLICABLE 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 ("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 (A) 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 (B) 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.
6
<PAGE>
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 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 debt instruments 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 the Portfolio's holding period.
Repurchase agreements may exhibit 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 U.S. Government obligations,
certificates of deposit, or bankers' acceptances with registered
broker-dealers, U.S. 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
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generally expected to settle within three months from the date the
transactions are entered into, although a 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, purchases of securities on such bases may involve more
risk than other types of purchases. For example, by committing to purchase
securities in the future, a Portfolio subjects itself to a risk of loss on
such commitments as well as on its portfolio securities. Also, a Portfolio
may have to sell assets that 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 in parallel with 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,
Aggressive Stock and Small Cap Growth 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 currencies shall not exceed 20% of the
Portfolio's total assets and the value of issues denominated in U.S. 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 a foreign currency changes with fluctuations in 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
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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.
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
mortgage-backed securities issued by the U.S. 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
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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 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 loan institutions, 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. Alliance 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 retail installment loans, leases or revolving credit 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 retail installment loans, leases or revolving credit 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 retail installment loans, leases or revolving
credit receivables are not realized by the Trust because of unanticipated
legal or administrative costs of enforcing the contracts, retail installment
loans, leases or revolving credit receivables, or because of depreciation or
damage to the collateral (usually automobiles) securing certain contracts,
retail
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installment loans, leases or revolving credit receivables, 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 U.S. 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.
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.
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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.
EURODOLLAR SECURITIES
Negotiable certificates of deposit and time deposits of foreign branches of
U.S. or foreign banks payable in U.S. 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 U.S. and
foreign banks are subject to 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.
U.S. 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 U.S. 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 Alliance. 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 risks associated with acquiring the securities of such issuers generally
are 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, 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 exists, it may be less liquid
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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 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 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 securities 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 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 and quality of management, its sensitivity to economic
conditions and trends, its operating history 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. Each Portfolio, other than 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.
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A Portfolio will write covered call options both to reduce the risks
associated with certain of its investments and to increase total investment
return through the receipt of premiums. In return for the premium income, the
Portfolio will give up the opportunity to profit from an increase in the
market price of the underlying security above the exercise price so long as
its obligations under the contract continue, except insofar as the premium
represents a profit. Moreover, in writing the call option, the Portfolio will
retain the risk of loss should the price of the security decline. The premium
is intended to offset that loss in whole or in part. Unlike the situation in
which the Portfolio owns securities not subject to a call option, the
Portfolio, in writing call options, must assume that the call may be
exercised at any time prior to the expiration of its obligation as a writer,
and that in such circumstances the net proceeds realized from the sale of the
underlying securities pursuant to the call may be substantially below the
prevailing market price.
A Portfolio may terminate its obligation under an option it has written by
buying an identical option. Such a transaction is called a "closing purchase
transaction." The Portfolio will realize a gain or loss from a closing
purchase transaction if the amount paid to purchase a call option is less or
more than the amount received from the sale of the corresponding call option.
Also, because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the exercise or closing out of a call option is likely to be
offset in whole or part by unrealized appreciation of the underlying security
owned by the Portfolio. When an underlying security is sold from the
Portfolio's securities portfolio, the Portfolio will effect a closing
purchase transaction so as to close out any existing covered call option on
that underlying security. 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 liquid
securities 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
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<PAGE>
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 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 purchased.
SECURITIES INDEX OPTIONS
The Portfolios, except 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 liquid securities 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 included in the index. For example, some securities index options
are based on a broad market index such as the S&P 500 or the New York Stock
Exchange ("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; NYSE; 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. The
principal risk of purchasing securities index options 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.
The principal risk of writing securities index options 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 traded 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, in the
opinion of Alliance, 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
15
<PAGE>
to repurchase an option it writes at any time at a repurchase price which
represents the fair market value, as determined in good faith through
negotiation between the parties, but which in no event will exceed a price
determined pursuant to a formula contained in the contract. Although the
specific details of the formula may vary between contracts with different
primary dealers, the formula will generally be based on a multiple of the
premium received by each Portfolio for writing the option, plus the amount,
if any, of the option's intrinsic value (i.e., the amount the option is
"in-the-money"). The formula will also include a factor to account for the
difference between the price of the security and the strike price of the
option if the option is written "out-of-the-money." Although the Portfolios
have established standards of creditworthiness for these primary dealers, the
Portfolios may still be subject to the risk that firms participating in such
transactions will fail to meet their obligations. With respect to agreements
concerning the over-the-counter options a Portfolio has written, the
Portfolio will 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 Commodity Futures Trading Commission
("CFTC").
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 may be 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 in 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 in
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. 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 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.
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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 futures contract 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
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
it 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 liquid securities at all times equal to or
greater than the aggregate exercise price of the puts it has written (less
any related margin deposited with the futures broker). A Portfolio will be
considered "covered" with respect to a call option it has written on a debt
security future if, so long as it is obligated as a writer of the call, the
Portfolio owns the 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 so long as the Portfolio is obligated as the
writer of the call, the Portfolio owns 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 futures margin 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
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.
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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, except 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 liquid assets 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
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.
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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
currencies or on foreign currency futures contracts only if they are
"covered." A put option 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 liquid assets equal at all times to the
aggregate exercise price of the put. A call option on a foreign currency or
on a foreign currency futures 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. Although the purchase of an option on foreign
currency may constitute an effective hedge against fluctuations in exchange
rates in the event of exchange 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, thus 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 foreign currency exchange rates.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
When a Portfolio invests in foreign securities, the securities are usually
denominated in a foreign currency, and the Portfolio may temporarily hold
foreign currency in connection with such investments. As a result, 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 U.S. dollar. To control
the effects of this exchange risk, all of 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
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foreign currencies at a specified future date and price. Forward currency
contracts are usually used to fix the U.S. 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 U.S. 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 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. The Portfolios will only enter
forward currency contracts with counter parties that, in the opinion of
Alliance, do not present undue risk.
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 involves
certain risks. A lack of correlation between the index or instrument
underlying an option or futures contract and the assets or liabilities 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 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. Accordingly a
Portfolio may be required to maintain a position until exercise or
expiration, which could result in losses. If in the event of an adverse
movement the Portfolio could not close a futures position, it would be
required to continue to make daily cash payments of variation margin. If a
Portfolio could not close an option position, an option holder would be able
to realize profits or limit losses only by exercising the 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 or offset 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 and/or securities price
movements, as well as on the expense of hedging.
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MANAGEMENT OF THE TRUST
As of January 31, 1997, the Trustees and officers of the Trust owned
Contracts entitling them to provide voting instructions in the aggregate with
respect to less than one percent of the Trust's shares of beneficial
interest.
THE TRUSTEES
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ---------------------- -------------------------------------------
<S> <C>
*John D. Carifa (52).................. 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 (74)............... 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 (69).............. 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) (67)... 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 (66).............. 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.
Clifford L. Michel (57).............. Member of the law firm of Cahill Gordon & Reindel since prior to
St. Bernard's Road 1992. He is President and Chief Executive Officer of Wenonah
Gladstone, NJ 07934 Development Company (investments) and a Director of Placer Dome,
Inc. (mining).
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*Peter D. Noris (41).................. Executive Vice President (since May 1995); and Chief Investment
The Equitable Life Assurance Society Officer (since July 1995) of Equitable prior thereto, Vice
of the United States President of Salomon Brothers Inc., from 1992 to 1995. Principal
787 Seventh Avenue of Equity Division, Morgan Stanley & Co. Inc., from 1984 to
New York, NY 10019 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).............. Senior Partner of the law firm of Orrick, Herrington & Sutcliffe
599 Lexington Avenue from July 1987 to December 1994; Member of the Executive
New York, NY 10022 Committee of the firm from January to December 1994; Senior
Counsel of the firm 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 and
director of ACMC and Alliance. 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 36 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.
Trustee Michel is a director or trustee (but not an "interested person") of
37 other mutual funds advised by Alliance. Trustee Hassler is a director (but
not an "interested person" of Alliance Real Estate Investment Fund, Inc.
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 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
AGGREGATE RETIREMENT THE ALLIANCE FUND
COMPENSATION BENEFITS ACCRUED ESTIMATED ANNUAL COMPLEX,
FROM THE AS PART OF TRUST BENEFITS UPON INCLUDING THE
TRUSTEE TRUST EXPENSES RETIREMENT TRUST(1)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John D. Carifa $ -0- $-0- $-0- $ -0-
- -----------------------------------------------------------------------------------------
Richard W. Couper $59,000(2) $-0- $-0- $ 85,000
- -----------------------------------------------------------------------------------------
Brenton W. Harries $59,000 $-0- $-0- $ 86,000
- -----------------------------------------------------------------------------------------
Howard E. Hassler $85,000 $-0- $-0- $ 86,750
- -----------------------------------------------------------------------------------------
William L. Mannion $66,000(2) $-0- $-0- $ 66,000
- -----------------------------------------------------------------------------------------
Alton G. Marshall $61,000 $-0- $-0- $133,500
- -----------------------------------------------------------------------------------------
Clifford L. Michel $20,068(3) $-0- $-0- $146,068
- -----------------------------------------------------------------------------------------
Peter D. Noris $ -0- $-0- $-0- $ -0-
- -----------------------------------------------------------------------------------------
Donald J. Robinson $63,000(2) $-0- $-0- $137,250
- -----------------------------------------------------------------------------------------
</TABLE>
- ------------
(1)As of December 31, 1996 there were 110 investment companies in the
Alliance Fund Complex.
(2)Completely deferred.
(3)Appointed as Trustee on October 16, 1996.
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, 1996, the Trust paid total retainer and
meeting fees of $413,068 (including deferrals of $188,000).
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.
23
<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 (50) President and Chief Executive Director and President, Equitable (February
Officer 1994 to present); Chief Executive Officer,
Equitable (February 1996 to present); Director
and Senior Executive Vice President, Equitable
Companies (February 1994 to present); Chief
Operating Officer, Equitable Companies
(February 1996 to present); President, Chief
Executive Officer and Director, Equitable
Variable (until December 1996); Chief Operating
Officer, Equitable (February 1994 to February
1996); Senior Executive Vice President,
Equitable (April 1993 to February 1994);
President, Management Compensation Group (1983
to February 1993); Director, Association for
Advanced Life Underwriting, Health Plans, Inc.
(August 1988 to present) and Hospital for
Special Surgery (April 1996 to present);
Director, ACMC (October 1993 to present),
Equitable Distributors, Inc. (May 1996 to
present), and AXA Re Life Insurance Company
(January 1995 to present).
Mark D. Gersten (46) 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 (41) Controller and Chief Vice President, ACMC (July 1993 to present);
Accounting Officer Equitable Capital Management Corporation
("ECMC") (April 1989 to July 1993).
Bruce Calvert (50) Vice President Vice Chairman and Chief Investment Officer,
ACMC, with which he has been associated since
prior to 1991.
Kathleen A. Corbet (37) 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>
Nelson R. Jantzen (52) 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), EQF; Director
(March 1992 to present), EQF.; Chief Executive
Officer (January 1994 to present), EQF; Vice
President, Equitable Variable (May 1996 to
December 1996); Director, The Equitable of
Colorado, Inc. ("Colorado") (January 1995 to
present) and Equitable Underwriting and Sales
Agency (Bahamas) Limited (January 1995 to
present); formerly, Chairman and Chief
Executive Officer, Equisource of New York
(January 1992 to October 1994) and Frontier
(April 1992 to October 1994); Director, Vice
President and Treasurer, Equitable
Distributors, Inc. (August 1993 to February
1995).
25
<PAGE>
Samuel B. Shlesinger (50) Vice President Senior Vice President, Equitable Variable
(February 1988 to December 1996); Senior Vice
President, Equitable (November 1986 to
present); President and Chief Executive
Officer, Equitable of Colorado (October 1985 to
present).
Alden M. Stewart (51) 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>
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. Alliance's principal executive officer is Dave H.
Williams, its Chairman and Chief Executive Officer.
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 December 31, 1996, ACMC, Inc. and Equitable Capital
Management Corporation, each a wholly-owned direct or indirect subsidiary of
Equitable, owned in the aggregate approximately 57% of the issued and
outstanding units representing assignments of beneficial ownership of limited
partnership interests in the Adviser ("Units"), and approximately 33% and 10%
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. The principal offices of Alliance and ACMC are
located at 1345 Avenue of the Americas, New York, New York 10105.
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 and 1290 Avenue of the Americas, New York, New York 10019,
respectively.
AXA, a French insurance holding company, currently owns approximately 63.9%
of the outstanding voting shares of common stock of The Equitable Companies.
As a majority shareholder of The Equitable Companies, AXA is able to exercise
significant influence over the operations and capital structure of The
Equitable Companies, Equitable and their subsidiaries. AXA is the holding
company for an international group of insurance and related financial
services companies. AXA is the eleventh largest insurance group in the world
based on the worldwide revenues in 1994 and the second largest French
insurance group based on worldwide gross premiums in 1994. AXA is also
engaged in asset management, investment banking, securities trading and
financial services activities principally in the United States, as well as in
Western Europe and the Asia Pacific area.
26
<PAGE>
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.
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 NEXT NEXT NEXT
$750 MILLION $750 MILLION $1 BILLION $2.5 BILLION THEREAFTER
--------------- --------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Conservative Investors .... .475% .425% .375% .350% .325%
Balanced ................... .450% .400% .350% .325% .300%
Growth Investors ........... .550% .500% .450% .425% .400%
Common Stock ............... .475% .425% .375% .355% .345%*
Global ..................... .675% .600% .550% .530% .520%
Aggressive Stock ........... .625% .575% .525% .500% .475%
[Small Cap Growth] ......... % % % % %
Money Market ............... .350% .325% .300% .280% .270%
Intermediate Government
Securities ................ .500% .475% .450% .430% .420%
High Yield ................. .600% .575% .550% .530% .520%
Growth and Income .......... .550% .525% .500% .480% .470%
Quality Bond ............... .525% .500% .475% .455% .445%
Equity Index ............... .325% .300% .275% .255% .245%
International .............. .900% .825% .800% .780% .770%
</TABLE>
- ------------
* On assets in excess of $10 billion, the management fee for the Common
Stock Portfolio is reduced to 0.335% of average daily net assets.
Because of undertakings made by Equitable Variable in connection with the
Reorganization, Equitable 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 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 newer
policy designs of Equitable bear the advisory fees without adjustment. For a
discussion of the Reorganization, see "General Information," above.
In 1996, the Trust paid advisory fees of $ to Alliance. 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.
SPECIFIC SERVICES PERFORMED
Alliance performs the following services for or on behalf of the Trust
pursuant to the Investment Advisory Agreement.
27
<PAGE>
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 Agreement and
Declaration of Trust, By-laws, Prospectus and Statement of Additional
Information 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.
At the Trust's request, Alliance provides, without charge, personnel, who may
be the Trust's officers, to render such clerical, administrative and other
services, other than investor services or accounting services, to the Trust
and also furnishes to the Trust, without charge, such office facilities,
which may be Alliance's own offices, as may be required to perform its
investment advisory and portfolio management services. 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 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.
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.
28
<PAGE>
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.
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 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. In 1996
the Trust paid an aggregate of $ in brokerage commissions of which
$ was paid to brokers relating to transactions aggregating $
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
29
<PAGE>
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, 1994 and December 31, 1995, the Trust
paid no brokerage commissions to DLJ, and during the fiscal year ended
December 31, 1996, the Trust paid $2,500 to Autranet, Inc., an affiliate of
DLJ, in accordance with the procedures described above.
TRUST EXPENSES AND OTHER CHARGES
Pursuant to the Trust's Investment Advisory Agreement, the Trust is obligated
to pay all of its operating expenses not specifically assumed by Alliance. In
addition, as principal underwriter of the Trust's Class IA shares, EQ
Financial Consultants, Inc. will bear the Trust's marketing expenses. A daily
adjustment will be made in the values under certain Contracts outstanding and
offered by Equitable and Equitable Variable when the management separate
accounts of Equitable and Equitable Variable 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 bear such expenses
without adjustment. Although Equitable does not expect the Trust to incur any
federal income or excise tax liability (see "Dividends, Distributions and
Taxes" in the Prospectus), Equitable reserves the right to exclude any such
taxes from such adjustments.
The expenses borne by the Trust include or could include taxes; brokerage
commissions; interest charges; securities lending fees; fees and expenses of
the registration or qualification of a Portfolio's securities under federal
or state securities laws; fees of the Portfolio's custodian, transfer agent,
independent accountants, and legal counsel; all expenses of shareholders' and
trustees' meetings; all expenses of the preparation, typesetting, printing
and mailing to existing shareholders of prospectuses, prospectus supplements,
statements of additional information, proxy statements, and annual and
semi-annual reports; any proxy solicitor's fees and expenses; costs of
fidelity bonds and Trustees; liability insurance premiums as well as
extraordinary expenses such as indemnification payments or damages awarded in
litigation or settlements made; any membership fees of the Investment Company
Institute and similar organizations; costs of maintaining the Trust's
corporate existence and the compensation of Trustees who are not directors,
officers, or employees of Alliance or its affiliates.
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
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
30
<PAGE>
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 NYSE 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. (Eastern time) close respectively of the NYSE and the
Options Price Reporting Authority; for bonds the close of trading 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 generally 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 held by 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 held by 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.
o Purchased options, including options on futures, are valued at their
last bid price. Written options are valued at their last asked price.
31
<PAGE>
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 for assistance in valuing the assets of the Trust. Alliance
will continuously monitor the performance of such pricing 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,
1996 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 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.
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<PAGE>
In addition, the Secretary of the Treasury has regulatory authority to
exclude from qualifying income described above foreign currency gains which
are not "directly related" to a regulated investment company's "principal
business of investing" in stock, securities or related options or futures.
The Secretary of the Treasury has not to date exercised this authority.
Generally, in order to avoid a 4% nondeductible excise tax, each Portfolio 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 U.S. 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.
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.
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<PAGE>
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 % for the
period ended December 31, 1996. The effective yield for that period was
%.
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, 1996 were %, % and %,
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. These total returns do not reflect insurance company charges
and fees applicable to the Contracts.
The average annual total returns through December 31, 1996 for the Common
Stock Portfolio for one year, five years, and 10 years were %, %,
and %, respectively.
The average annual total returns through December 31, 1996 for the
Intermediate Government Securities Portfolio for one year, five years, and
since inception (on April 1, 1991) were %, %, and %,
respectively.
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<PAGE>
The average annual total returns through December 31, 1996 for the High Yield
Portfolio for one year, five years, and since inception (on January 2, 1987)
were %, %, and %, respectively.
The average annual total returns through December 31, 1996 for the Balanced
Portfolio for one year, five years, and ten years were %, %, and
%, respectively.
The average annual total returns through December 31, 1996 for the Global
Portfolio for one year, five years, and since inception (on August 27, 1987)
were %, %, and %, respectively.
The average annual total returns through December 31, 1996 for the Aggressive
Stock Portfolio for one year, five years, and ten years were %, %,
and %, respectively.
The average annual total returns through December 31, 1996 for the
Conservative Investors Portfolio for one year, five years, and since
inception (on October 2, 1989) were %, %, and %, respectively.
The average annual total returns through December 31, 1996 for the Growth
Investors Portfolio for one year, five years, and since inception (on October
2, 1989) were %, %, and %, respectively.
The average annual total returns through December 31, 1996 for the Quality
Bond Portfolio for one year and since inception (on October 1, 1993) were
% and %, respectively.
The average annual total returns through December 31, 1996 for the Growth and
Income Portfolio for one year and since inception (on October 1, 1993) were
% and %, respectively.
The average annual total return through December 31, 1996 for the Equity
Index Portfolio for one year and since inception (on March 1, 1994) was %
and %, respectively.
The aggregate annual total return through December 31, 1996 for the
International Portfolio since inception (April 3, 1995) was %.
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 %, %, %, %, %, %,
%, %, %, %, % and %, respectively. These total
returns do not reflect insurance company charges and fees applicable to the
Contracts.
OTHER SERVICES
INDEPENDENT ACCOUNTANTS
, 1177 Avenue of the Americas, New York, New York 10036, serves as
the Trust's independent accountants. The financial statements of the Common
Stock, Money Market, Balanced,
35
<PAGE>
Aggressive Stock, High Yield, Global, Conservative Investors, Growth
Investors, Intermediate Government Securities, Quality Bond, Growth and
Income, Equity Index and International Portfolios for the year ended December
31, 1996, which are included in this SAI, have been audited by , the
Trust's independent accountants 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, 1996, Equitable received no
compensation for providing such services for the Trust.
UNDERWRITER
EQF, a wholly-owned subsidiary of Equitable, serves, without compensation from
the Trust, as the principal underwriter of the Class IA shares of the Trust,
pursuant to an agreement with the Trust. Under the terms of the agreement,
EQF is not obligated to sell any specific number of shares. It has authority,
pursuant to the agreement, to enter into similar contracts with other
insurance companies and with other entities registered as broker-dealers
under the Securities Exchange Act of 1934.
As principal underwriter, EQF bears the Trust's marketing expenses. However,
EQF expects to be reimbursed for the portion of expenses attributable to the
marketing of other insurance companies' products by such insurance companies.
EQF has entered into sales agreements with Equitable and each unaffiliated
insurer under which shares of the Trust are made available for the investment
of net considerations which are received under variable insurance contracts
and are allocated to their respective separate accounts.
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<PAGE>
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
<PAGE>
THE HUDSON RIVER TRUST
1345 Avenue of the Americas -- New York, New York 10105
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with The Hudson River Trust (Trust) Prospectus dated May
1, 1997 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 .. 7
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 ......................................................... 35
Financial Statements ................................................... 37
Appendix A--Description of Commercial Paper Ratings .................... A-1
</TABLE>
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HRT-SAI (5/97) Copyright 1997. 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 (the "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 reorganized as a
Massachusetts business trust. Shares of each Portfolio are divided into two
classes Class IA shares and Class IB shares. Class IA shares are offered at
net asset value pursuant to a separate Statement of Additional Information
and a related prospectus and are not subject to fees imposed under any
distribution plan. Class IB shares are offered at net asset pursuant to this
Statement of Additional Information and a related prospectus 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 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 that invest 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 the assets of that Portfolio and, generally, have
identical voting, dividend, liquidation, and other rights, other than with
respect to 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 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,
regardless of whether they are affiliated with Equitable. As of January 31,
1997, Equitable owned approximately 99.7% of the Trust's outstanding Class IA
shares and all of the Trust's outstanding class IB shares and, as a result,
may be deemed to control the Trust.
As a "series" investment company, 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 Life Insurance Company, formerly a wholly owned subsidiary of
Equitable that [was merged into Equitable as of January 1, 1997 ("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. The
Small Cap Growth Portfolio received its initial funding on [May 1, 1997]
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 January 31, 1997,
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
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<TABLE>
<CAPTION>
QUALITY BOND GLOBAL
PORTFOLIO PORTFOLIO
------------------------ -----------------------
UNITS % OF UNITS % OF
OWNED PORTFOLIO OWNED PORTFOLIO
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Boatmen's Trust Co.* ........ 11,194,047 69.0
Equitable Realty Assets
Corp. ...................... 3,548,559 5.9
</TABLE>
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* Boatmen's Trust Co., Trustee under Master Trust Agreement for SBC
Communications, Inc. Deferred Compensation Plans and other Executive
Benefit Plans.
The principal addresses of Boatmen's Trust Co., and Equitable Realty Asset
Corp. are 175 East Houston Street, San Antonio, Texas and 9000 Central Park
Avenue, Atlanta, Georgia, respectively.
Were such a substantial 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. The Trust has agreed to be bound by the
procedures set forth in Section 16(c) of the Investment Company Act, and
accordingly, 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 by the Trust 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.
3
<PAGE>
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 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.
[At a meeting held on March 17, 1997, the shareholders of the Trust approved
the amendment and restatement of the Trust's Agreement and Declaration of
Trust. On March , 1997 the Agreement and Declaration of Trust was amended
and restated, and filed with the office of the Secretary of the Commonwealth
of Massachusetts.]
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
4
<PAGE>
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.
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
holdings 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 the collateral
underlying the repurchase agreements consists exclusively of 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 its total assets,
at the time a Second Tier Security is 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 net 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, Growth
Investors and Small Cap Growth 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 that the Portfolios (other than the
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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.
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 APPLICABLE 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 APPLICABLE 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 APPLICABLE 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 ("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 (A) 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 (B) 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.
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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 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 debt instruments 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 the Portfolio's holding period.
Repurchase agreements may exhibit 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 U.S. Government obligations,
certificates of deposit, or bankers' acceptances with registered
broker-dealers, U.S. 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
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generally expected to settle within three months from the date the
transactions are entered into, although a 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, purchases of securities on such bases may involve more
risk than other types of purchases. For example, by committing to purchase
securities in the future, a Portfolio subjects itself to a risk of loss on
such commitments as well as on its portfolio securities. Also, a Portfolio
may have to sell assets 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 in parallel with 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,
Aggressive Stock and Small Cap Growth 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 currencies shall not exceed 20% of the
Portfolio's total assets and the value of issues denominated in U.S. 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 a foreign currency changes with fluctuations in 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
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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.
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
mortgage-backed securities issued by the U.S. 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
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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 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 loan institutions, 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. Alliance 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 retail installment loans, leases or revolving credit receivables
are subject to prepayment, which may reduce the overall return to certificate
holders. Certificate holders may also experience delays in payment on the
certificates if the full amounts due on underlying retail installment loans,
leases or revolving credit receivables are not realized by the Trust because
of unanticipated legal or administrative costs of enforcing the contracts,
retail installment loans, leases or revolving credit receivables or because of
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depreciation or damage to the collateral (usually automobiles) securing
certain contracts, retail installment loans, leases or revolving credit
receivables 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 U.S. 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.
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
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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 mediumto 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.
EURODOLLAR SECURITIES
Negotiable certificates of deposit and time deposits of foreign branches of
U.S. or foreign banks payable in U.S. 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 U.S. and
foreign banks are subject to 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.
U.S. 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 U.S. 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 Alliance 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 risks associated with acquiring the securities of such issuers generally
are 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, 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.
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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 exists, it may be 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 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 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 securities 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 Alliance'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 and quality of management, its sensitivity to
economic conditions and trends, its operating history 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. Each Portfolio, other than the Money Market and Equity
Index Portfolios, may write (sell) covered call options on its portfolio
securities in an attempt to enhance investment
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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, 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 liquid
securities 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
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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 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 purchased.
SECURITIES INDEX OPTIONS
The Portfolios, except 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 liquid securities 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 included. For example, some securities index options are based on
a broad market index such as the S&P 500 in the index or the New York Stock
Exchange ("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; NYSE; 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. The
principal risk of purchasing securities index options 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 options index do not exceed the cost of the option.
The principal risk of writing securities index options 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.
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OVER-THE-COUNTER OPTIONS
Options traded in the over-the-counter market may not be as actively traded
as those traded 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, in the
opinion of Alliance, 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 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 Portfolios
have established standards of creditworthiness for these primary dealers, the
Portfolios may still be subject to the risk that firms participating in such
transactions will fail to meet their obligations. With respect to agreements
concerning the over-the-counter options a Portfolio has written, the
Portfolio will 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 Commodity Futures Trading Commission
("CFTC").
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 may be 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 in 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 in
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. 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
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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 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 futures contract 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
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
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
liquid securities at all times equal to or greater than the aggregate
exercise price of the puts it has written (less any related margin deposited
with the futures broker). A Portfolio will be considered "covered" with
respect to a call option it has written on a debt security future if, so long
as it is obligated as a writer of the call, the Portfolio owns the 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 so long as the Portfolio is obligated as the writer of the call, the
Portfolio owns 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 futures margin account
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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
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, except 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 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.
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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
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
currencies or on foreign currency futures contracts only if they are
"covered." A put option 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 liquid assets equal at all times to the
aggregate exercise price of the put. A call option on a foreign currency or
on a foreign currency futures 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. Although the purchase of an option on foreign
currency may constitute an effective hedge against fluctuations in exchange
rates in the event of exchange 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, thus 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 foreign currency exchange rates.
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FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
When a Portfolio invests in foreign securities, the securities are usually
denominated in a foreign currency, and the Portfolio may temporarily hold
foreign currency in connection with such investments. As a result, 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 U.S. dollar. To control
the effects of this exchange risk, all of 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 U.S. 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
U.S. 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 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. The Portfolios will only enter
forward currency contracts with counter parties that, in the opinion of
Alliance do not present undue credit risk.
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 involves
certain risks. A lack of correlation between the index or instrument
underlying an option or futures contract and the assets or liabilities 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 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. Accordingly, a
Portfolio may be required to maintain a position until exercise or
expiration, which could result in losses. If, in the event of an adverse
movement, the Portfolio could not close a futures position, it would be
required to continue to make daily cash payments of variation margin. If a
Portfolio could not close an option position, an option holder would be able
to realize profits or limit losses only by exercising the 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 or offset 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 and/or securities price
movements, as well as on the expense of hedging.
20
<PAGE>
MANAGEMENT OF THE TRUST
As of January 31, 1997, the Trustees and officers of the Trust owned
Contracts entitling them to provide voting instructions in the aggregate with
respect to less than one percent of the Trust's shares of beneficial
interest.
THE TRUSTEES
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ---------------------- -------------------------------------------
<S> <C>
*John D. Carifa (52).................. 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 (74)............... 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 (69).............. 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) (67)... 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 (66).............. 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>
Clifford L. Michel (57).............. Member of the law firm of Cahill Gordon & Reindel since prior to
St. Bernard's Road 1992. He is President and Chief Executive Officer of Wenonah
Gladstone, NJ 07934 Development Company (investments) and a Director of Placer Dome,
Inc. (mining).
*Peter D. Noris (41).................. Executive Vice President (since May 1995) and Chief
The Equitable Life Assurance Society Investment Officer since July 1995 of Equitable; prior thereto,
of the United States Vice President of Salomon Brothers Inc., from 1992 to 1995.
787 Seventh Avenue Principal of Equity Division, Morgan Stanley & Co. Inc., from
New York, NY 10019 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).............. Senior Partner of the law firm of Orrick, Herrington & Sutcliffe
599 Lexington Avenue from July 1987 to December 1994; Member of the Executive
New York, NY 10022 Committee of the firm from January to December 1994. Senior
Counsel of the firm 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 and
director of ACMC and Alliance. 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 36 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.
Trustee Michel is a director or trustee (but not an "interested person") of
37 other mutual funds advised by Alliance. Trustee Hassler is a director (but
not an "interested person" of Alliance Real Estate Investment Fund, Inc.
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 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
AGGREGATE RETIREMENT THE ALLIANCE FUND
COMPENSATION BENEFITS ACCRUED ESTIMATED ANNUAL COMPLEX,
FROM THE AS PART OF TRUST BENEFITS UPON INCLUDING THE
TRUSTEE TRUST EXPENSES RETIREMENT TRUST (1)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John D. Carifa $ -0- $-0- $-0- $ -0-
- -----------------------------------------------------------------------------------------
Richard W. Couper $59,000(2) $-0- $-0- $ 85,000
- -----------------------------------------------------------------------------------------
Brenton W. Harries $59,000 $-0- $-0- $ 86,000
- -----------------------------------------------------------------------------------------
Howard E. Hassler $85,000 $-0- $-0- $ 86,750
- -----------------------------------------------------------------------------------------
William L. Mannion $66,000(2) $-0- $-0- $ 66,000
- -----------------------------------------------------------------------------------------
Alton G. Marshall $61,000 $-0- $-0- $133,500
- -----------------------------------------------------------------------------------------
Clifford L. Michel(3) $20,068 $-0- $-0- $146,068
- -----------------------------------------------------------------------------------------
Peter D. Noris $ -0- $-0- $-0- $ -0-
- -----------------------------------------------------------------------------------------
Donald J. Robinson $63,000(2) $-0- $-0- $137,250
- -----------------------------------------------------------------------------------------
</TABLE>
- ------------
(1) As of December 31, 1996, there were 110 investment companies in the
Alliance Fund Complex.
(2) Completely deferred.
(3) Appointed as Trustee on October 16, 1996.
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, 1996 the Trust paid total retainer and
meeting fees of $413,068 (including deferrals of $188,000).
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.
23
<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 (50) President and Chief Executive Director and President, Equitable (February 1994
Officer to present); Chief Executive Officer, Equitable
(February 1996 to present); Director and Senior
Executive Vice President, Equitable Companies
(February 1994 to present); Chief Operating Officer,
Equitable Companies (February 1996 to present);
President, Chief Executive Officer and Director,
Equitable Variable (until December 1996); Chief
Operating Officer, Equitable (February 1994 to
February 1996); Senior Executive Vice President,
Equitable (April 1993 to February 1994); President,
Management Compensation Group (1983 to February
1993); Director, Association for Advanced Life
Underwriting, Health Plans, Inc. (August 1988 to
present) and Hospital for Special Surgery (April
1996 to present); Director, ACMC (October 1993 to
present), Equitable Distributors, Inc. (May 1996
to present), and AXA Re Life Insurance Company (January
1995 to present).
Mark D. Gersten (46) Treasurer and Chief Financial Senior Vice President, Alliance Fund Services, Inc.
Officer ("AFS") with which he has been associated since prior
to 1991.
Laura Mah (41) Controller and Chief Vice President, ("ACMC") (July 1993 to present);
Accounting Officer Equitable Capital Management Corporation ECMC (April
1989 to July 1993).
Bruce Calvert (50) Vice President Vice Chairman and Chief Investment Officer, ACMC,
with which he has been associated since prior to
1991.
Kathleen A. Corbet (37) 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).
Nelson R. Jantzen (52) Vice President Senior Vice President, ACMC (July 1993 to present);
Executive Vice President, ECMC (June 1992 to July
1993); Senior Vice President, ECMC (Febru-
24
<PAGE>
ary 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), EQF; Director (March
1992 to present, EQF; Chief Executive Officer (January
1994 to present), EQF; Vice President, Equitable
Variable (May 1996 to December 1996); Director, The
Equitable of Colorado, Inc. ("Colorado") (January
1995 to present) and Equitable Underwriting and Sales
Agency (Bahamas) Limited (January 1995 to present);
formerly, Chairman and Chief Executive Officer,
Equisource of New York (January 1992 to October 1994)
and Frontier (April 1992 to October 1994); Director,
Vice President and Treasurer, Equitable
Distributors, Inc. (August 1993 to February 1995).
Samuel B. Shlesinger (49) Vice President Senior Vice President, Equitable Variable (February
1986 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 (51) 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>
25
<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. Alliance's principal executive officer is Dave H.
Williams, its Chairman and Chief Executive Officer.
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 December 31, 1996, ACMC, Inc. and Equitable Capital
Management Corporation, each a wholly-owned direct or indirect subsidiary of
Equitable, owned in the aggregate approximately 57% of the issued and
outstanding units representing assignments of beneficial ownership of limited
partnership interests in the Adviser ("Units"), and approximately 33% and 10%
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. The principal offices of Alliance are located at
1345 Avenue of the Americas, New York, New York 10105.
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 and 1290 Avenue of the Americas, New York, New York 10019,
respectively.
AXA, a French insurance holding company, currently owns approximately 63.9%
of the outstanding voting shares of common stock of The Equitable Companies.
As a majority shareholder of The Equitable Companies, AXA is able to exercise
significant influence over the operations and capital structure of The
Equitable Companies, Equitable and their subsidiaries. AXA is the holding
company for an international group of insurance and related financial
services companies. AXA is the eleventh largest insurance group in the world
based on worldwide revenues in 1994 and the second largest French insurance
group based on worldwide gross premiums in 1994. AXA is also engaged in asset
management, investment banking, securities trading and financial services
activities principally in the United States, as well as in Western Europe and
the Asia Pacific area.
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.
26
<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 NEXT NEXT NEXT
$750 MILLION $750 MILLION $1 BILLION $2.5 BILLION THEREAFTER
---------------- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Conservative Investors .... .475% .425% .375% .350% .325%
Balanced ................... .450% .400% .350% .325% .300%
Growth Investors ........... .550% .500% .450% .425% .400%
Common Stock ............... .475% .425% .375% .355% .345%
Global ..................... .675% .600% .550% .530% .520%
Aggressive Stock ........... .625% .575% .525% .500% .475%
[Small Cap Growth] ......... % % % % %
Money Market ............... .350% .325% .300% .280% .270%
Intermediate Government
Securities ................ .500% .475% .450% .430% .420%
High Yield ................. .600% .575% .550% .530% .520%
Growth and Income .......... .550% .525% .500% .480% .470%
Quality Bond ............... .525% .500% .475% .455% .445%
Equity Index ............... .325% .300% .275% .255% .245%
International .............. .900% .825% .800% .780% .770%
</TABLE>
- ------------
* On assets in excess of $10 billion, the management fee for the Common
Stock Portfolio is reduced to 0.335% of average daily net assets.
Because of undertakings made by Equitable Variable in connection with the
Reorganization, Equitable 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 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 newer
policy designs of Equitable bear the advisory fees without adjustment. For a
discussion of the Reorganization, see "General Information," above.
In 1996, the Trust paid advisory fees of $ to Alliance. 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.
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 Agreement
Declaration of Trust, By-laws, Prospectus and Statement of Additional
Information 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
27
<PAGE>
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.
At the Trust's request, Alliance provides, without charge, personnel, who may
be the Trust's officers, to render such clerical, administrative and other
services, other than investor services or accounting services, to the Trust
and also furnishes to the Trust, without charge, such office facilities,
which may be Alliance's own offices, as may be required to perform its
investment advisory and portfolio management services. 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 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.
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
28
<PAGE>
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.
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 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. In 1996
the Trust paid an aggregate of $ in brokerage commissions of which $
was paid to brokers relating to transactions aggregating $ 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, 1994 and December 31, 1995, the Trust paid no brokerage commissions to
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DLJ, and during the fiscal year ended December 31, 1996, the Trust paid
$2,500 to Autranet, Inc., an affiliate of DLJ, in accordance with the
procedures described above.
TRUST EXPENSES AND OTHER CHARGES
Pursuant to the Trust's Investment Advisory Agreement, the Trust is obligated
to pay all of the its operating expenses not specifically assumed by
Alliance. A daily adjustment will be made in the values under certain
Contracts outstanding and offered by Equitable and Equitable Variable when the
management separate accounts of Equitable and Equitable Variable 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
bear such expenses without adjustment. Although Equitable do not expect the
Trust to incur any federal income or excise tax liability (see "Dividends,
Distributions and Taxes" in the Prospectus), Equitable reserves the right to
exclude any such taxes from such adjustments.
The expenses borne by the Trust include or could include taxes; brokerage
commissions; interest charges; securities lending fees; fees and expenses of
the registration or qualification of a Portfolio's securities under federal
or state securities laws; fees of the Portfolio's custodian, transfer agent,
independent accountants, and legal counsel; all expenses of shareholders' and
trustees' meetings; all expenses of the preparation, typesetting, printing
and mailing to existing shareholders of prospectuses, prospectus supplements,
statements of additional information, proxy statements, and annual and
semi-annual reports; any proxy solicitor's fees and expenses; costs of
fidelity bonds and Trustees' liability insurance premiums as well as
extraordinary expenses such as indemnification payments or damages awarded in
litigation or settlements made; any membership fees of the Investment Company
Institute and similar organizations; costs of maintaining the Trust's
corporate existence and the compensation of Trustees who are not directors,
officers, or employees of Alliance or its affiliates.
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
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.
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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 NYSE 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. (Eastern time) close respectively of the NYSE and the
Options Price Reporting Authority; for bonds the close of trading 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 generally 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 held by the Money Market Portfolio which
mature in 60 days or less are valued at amortized cost, which
approximates market value. Short-term debt securities held by 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.
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
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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 for assistance in valuing the assets of the Trust. Alliance
will continuously monitor the performance of such pricing 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,
1996 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 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
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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 U.S. 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.
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 % for the
period ended December 31, 1996. The effective yield for that period was
%.
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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, 1996 were %, % and %,
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. These total returns do not reflect insurance company charges
and fees applicable to the Contracts.
The average annual total returns through December 31, 1996 for the Common
Stock Portfolio for one year, five years, and 10 years were %, %,
and %, respectively.
The average annual total returns through December 31, 1996 for the
Intermediate Government Securities Portfolio for one year, five years, and
since inception (on April 1, 1991) were %, %, and %,
respectively.
The average annual total returns through December 31, 1996 for the High Yield
Portfolio for one year, five years, and since inception (on January 2, 1987)
were %, %, and %, respectively.
The average annual total returns through December 31, 1996 for the Balanced
Portfolio for one year, five years, and ten years were %, %, and
%, respectively.
The average annual total returns through December 31, 1996 for the Global
Portfolio for one year, five years, and since inception (on August 27, 1987)
were %, %, and %, respectively.
The average annual total returns through December 31, 1996 for the Aggressive
Stock Portfolio for one year, five years, and ten years were %, %,
and %, respectively.
The average annual total returns through December 31, 1996 for the
Conservative Investors Portfolio for one year, five years, and since
inception (on October 2, 1989) were %, %, and %, respectively.
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The average annual total returns through December 31, 1996 for the Growth
Investors Portfolio for one year, five years, and since inception (on October
2, 1989) were %, %, and %, respectively.
The average annual total returns through December 31, 1996 for the Quality
Bond Portfolio for one year and since inception (on October 1, 1993) were
% and %, respectively.
The average annual total returns through December 31, 1996 for the Growth and
Income Portfolio for one year and since inception (on October 1, 1993) were
% and %, respectively.
The average annual total return through December 31, 1996 for the Equity
Index Portfolio for one year and since inception (on March 1, 1994) was
% and %, respectively.
The aggregate annual total return through December 31, 1996 for the
International Portfolio since inception (April 3, 1995) was %.
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 %, %, %, %, %,
%, %, %, %, %, % and %, respectively.
These total returns do not reflect insurance company charges and fees
applicable to the Contracts.
OTHER SERVICES
INDEPENDENT ACCOUNTANTS
[ ], 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 [ ], 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, 1996, Equitable received no
compensation for providing such services for the Trust.
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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 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
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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
To be filed by amendment
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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.
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PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
(a) Financial Statements:
The following financial statements are filed as part of this amended Registration Statement.
Included in Part A -- Prospectus of the Registration Statement: Financial Highlights.
Included in Part B -- Statement of Additional Information of the Registration Statement:
* Audited Statements of Assets and Liabilities as of December 31, 1996.
* Audited Statements of Operations for the year ended December 31, 1996.
* Audited Statements of Changes in Net Assets of the Common Stock, Money Market, Balanced, Aggressive
Stock, High Yield, Global, Conservative Investors, Growth Investors, Quality Bond, Growth and Income,
Equity Index and Intermediate Government Securities Portfolios for the years ended December 31, 1996
and 1995 and of the International Portfolio for the year ended December 31, 1996 and for the period
from April 3, 1995 (date of commencement of operations) through December 31, 1995.
* Money Market Portfolio Audited Portfolio of Investments as of December 31, 1996.
* Intermediate Government Securities Portfolio Audited Portfolio of Investments as of December 31,
1996.
* Quality Bond Portfolio Audited Portfolio of Investments as of December 31, 1996.
* High Yield Portfolio Audited Portfolio of Investments as of December 31, 1996.
* Balanced Portfolio Audited Portfolio of Investments as of December 31, 1996.
* Growth and Income Portfolio Audited Portfolio of Investments as of December 31, 1996.
* Equity Index Portfolio Audited Portfolio of Investments as of December 31, 1996.
* Common Stock Portfolio Audited Portfolio of Investments as of December 31, 1996.
* Global Portfolio Audited Portfolio of Investments as of December 31, 1996.
* Aggressive Stock Portfolio Audited Portfolio of Investments as of December 31, 1996.
* Conservative Investors Portfolio Audited Portfolio of Investments as of December 31, 1996.
* Growth Investors Portfolio Audited Portfolio of Investments as of December 31, 1996.
* International Portfolio Audited Portfolio of Investments as of December 31, 1996.
* Notes to Financial Statements.
* Financial Highlights.
* Report of Independent Accountants.
</TABLE>
- ------------
* Incorporated by reference to the Registrant's Annual Report expected to be
filed no later than March 1, 1997.
1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
(b) Exhibits:
The following exhibits are filed herewith:
(1) Form of Amended and Restated Agreement and Declaration of Trust of the Trust.
(2) Form of By-Laws of the Trust.
(3) Not applicable.
(4)(a) Portions of Amended and Restated Agreement and Declaration of Trust relating to shareholders' rights.
(4)(b) Portions of By-Laws of the Trust relating to shareholders' rights.
(5) Form of Investment Advisory Agreement between the Trust and Alliance dated [ ].
(6)(a) Form of Distribution Agreement among the Trust, Equitable Variable Life Insurance Company ("Equitable
Variable" or "EVLICO") and Integrity (previously filed with Post-Effective Amendment No. 9 on August
17, 1987).
(6)(b) Form of Sales Agreement between Integrity and other Insurance Companies (previously filed with
Post-Effective Amendment No. 4 on January 10, 1986).
(6)(c) Distribution Agreement between the Trust and Equitable Variable (previously filed with Post-Effective
Amendment No. 12 on April 28, 1989).
(6)(d) Distribution Agreement between the Trust and Integrity (previously filed with Post-Effective Amendment
No. 12 on April 28, 1989).
(6)(e) Distribution Agreement between the Trust and Integrity, dated September 30, 1991 (previously filed
with Post-Effective Amendment No. 15 on December 21, 1990).
(6)(f) Distribution Agreement between the Trust and Equitable Variable dated September 30, 1991 (previously
filed with Post-Effective Amendment No. 15 on December 20, 1990).
(6)(g) Distribution Agreement between the Trust and Equitable Variable dated July 22, 1992 (previously filed
with Post-Effective Amendment No. 19 on March 2, 1993).
(6)(h) Distribution Agreement between the Trust and Equico Securities, Inc. ("Equico") dated May 1, 1994
(previously filed with Post-Effective Amendment No. 23 on August 24, 1994).
(6)(i) Distribution Agreement between the Trust and Equico dated January 1, 1995 (previously filed with
Post-Effective Amendment No. 25 on May 1, 1995).
(6)(j) Form of Class IA Distribution Agreement between the Trust and EQ Financial Consultants, Inc. (previously
filed with Post-Effective Amendment No. 27 on May 9, 1996).
(6)(k) Form of Class IB Distribution Agreement between the Trust and Equitable Distributors, Inc. (previously
filed with Post-Effective Amendment No. 27 on May 9, 1996).
(7) Not applicable.
(8) Custodian Agreement between the Trust and Chase, dated August 25, 1988 (previously filed with Post-Effective
Amendment No. 12 on April 28, 1989).
(9)(a)(1) Agreement and Plan of Reorganization among Equitable Variable, Separate Account I of Equitable Variable,
Separate Account II of Equitable Variable and the Fund (previously filed with the original Registration
Statement on December 20, 1984).
2
<PAGE>
(9)(a)(2) Agreement relating to effective date of reorganization among Separate Account I of Equitable Variable,
Separate Account II of Equitable Variable and the Fund (previously filed with Pre-Effective Amendment
No. 1 on March 14, 1985).
(9)(b) Agreement pursuant to Rule 11a2-2(T) under the Securities Exchange Act of 1934 among the Fund, Integrity,
EIMC, Donaldson, Lufkin & Jenrette Securities Corporation and Autranet, Inc. (previously filed with
Post-Effective Amendment No. 1 on August 14, 1985).
(9)(c)(1) Code of Ethics of the Fund (previously filed with Pre-Effective Amendment No. 1 on March 14, 1985).
(9)(c)(2) Amendment of Code of Ethics of the Fund (previously filed with Post-Effective Amendment No. 1 on
August 14, 1985).
(9)(d) Fidelity Bond between the Fund and National Union Fire Insurance Company of Pittsburgh, Pa.
(9)(e) Form of Agreement and Plan of Reorganization between the Fund and the Trust (previously filed with
Post-Effective Amendment No. 9 on August 17, 1987).
(10) Inapplicable.
*(11)(a) Consent of Price Waterhouse LLP.
(11)(b)(1) Powers of Attorney (previously filed with Post-Effective Amendment No. 12 on April 28, 1989).
(11)(b)(2) Powers of Attorney (previously filed with Post-Effective Amendment No. 14 on April 30, 1991).
(11)(b)(3) Powers of Attorney (previously filed with Post-Effective Amendment No. 17 on February 26, 1992).
(11)(b)(4) Powers of Attorney (previously filed with Post-Effective Amendment No. 19 on March 2, 1993).
(11)(b)(5) Powers of Attorney (previously filed with Post-Effective Amendment No. 20 on June 28, 1993).
(11)(b)(6) Powers of Attorney (previously filed with Post-Effective Amendment No. 24 on December 1, 1994).
(12) Inapplicable.
(13) See Exhibit number 9(a)(1) above.
(14) Inapplicable.
(15) Rule 12b-1 Plan (previously filed with Post-Effective Amendment No. 27 on May 9, 1996).
*(16) Schedule for computation of Portfolio yield quotations and total return.
*(17) Financial Data Schedule.
(18) Rule 18f-3 Plan (previously filed with Post-Effective Amendment No. 27 on May 9, 1996).
</TABLE>
- ------------
* To be filed by Amendment.
3
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Equitable controls the Trust by virtue of their ownership of % of the
Trust's shares as of January 31, 1997. All Trust shareholders are required to
solicit instructions from their policyowners as to certain matters. The Trust
also offers its shares to insurance companies unaffiliated with Equitable.
On July 22, 1992, Equitable converted from a New York mutual life
insurance company to a publicly-owned New York stock life insurance company.
At that time Equitable became a wholly-owned subsidiary of The Equitable
Companies Incorporated ("Holding Company" or "EQ") and currently Equitable
constitutes the Holding Company's only operating business.
The largest stockholder of the Holding Company is AXA, a French insurance
holding company. AXA currently owns approximately [60]% of the outstanding
shares of common stock of the Holding Company plus convertible preferred
stock. AXA, a public company with shares traded on the Paris Bourse (the
French stock exchange), 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 response to Item 26 included in Post-Effective Amendment No. 5 to the
Registration Statement on Form N-4 for Separate Account A of Equitable (File
Nos. 33-47949 and 811-1705) is incorporated herein by reference.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS AS OF JANUARY 31, 1997
- ---------------------------- -----------------------------------------------
<S> <C>
Class IA shares of
beneficial interest 17
Class IB 1
</TABLE>
ITEM 27. INDEMNIFICATION
DECLARATION OF TRUST
The Declaration of Trust provides in substance that no Trustee or officer
and no investment adviser or other third party shall be liable to the Trust,
its shareholders, or to any shareholder, Trustee, officer, employee or agent
for any action or failure to act, except upon a showing of bad faith, willful
misfeasance, gross negligence or reckless disregard of duties. The
Declaration of Trust further provides in substance that, with the exceptions
stated above, a Trustee or officer of the Trust is entitled to be indemnified
against all liability incurred in connection with the affairs of the Trust.
In addition, the Declaration of Trust authorizes the Trust to purchase and
pay for liability insurance to indemnify the Trustees and officers against
certain claims and liabilities.
MASSACHUSETTS LAW
Under Massachusetts law, shareholders of a Massachusetts business trust
such as the Trust may, under certain circumstances, be held personally liable
as partners for the obligations of the Trust. The Trust's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given
in each agreement, obligation or instrument entered into or executed by the
Trust or the Trustees.
INSURANCE
To the extent permitted by New York law and subject to all applicable
requirements thereof, Equitable has undertaken to indemnify each Trustee and
officer of the Trust, so long as Equitable indirectly controls the Trust, who
is made or threatened to be made a party to any action or proceeding, whether
civil or criminal, by reason of the fact that he or she, his or her testator
or intestate, is or was a Trustee or officer of the Trust.
4
<PAGE>
The Trustees and officers are insured under a policy issued by Lloyd's of
London to Equitable and certain affiliates:
Annual Limit: $25,000,000
Deductible: $5,000,000 each loss and aggregate for company
retention, nil per trustee and officer individually.
The Trustees and officers are also insured under a policy issued by X.L.
Insurance Company of $25,000,000 coverage and a policy issued by A.C.E.
Insurance Company of $50,000,000 coverage excess of the Lloyd's policy.
UNDERTAKING
Insofar as indemnification for liability arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The descriptions of Alliance Capital Management L.P. under the caption
"Management of the Trust" in the Prospectus and under the caption "Investment
Advisory and Other Services" in the Statement of Additional Information
constituting Parts A and B, respectively, of this Registration Statement are
incorporated by reference herein.
The information as to the directors and executive officers of Alliance
Capital Management Corporation, the general partner of Alliance Capital
Management L.P., set forth in Alliance Capital Management L.P.'s Form ADV
filed with the Securities and Exchange Commission on April 21, 1988 (File No.
801-32361) and amended through the date hereof, is incorporated by reference.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) EQ Financial Consultants, Inc. is the principal underwriter of the
Trust's Class IA shares, and Equitable Distributors, Inc. is the principal
underwriter of the Trust's Class IB shares.
(b) Set forth below is certain information regarding the directors and
officers of EQ Financial Consultants, Inc., the principal underwriter of the
Trust's Class IA shares, and of Equitable Distributors, Inc., the principal
underwriter of the Trust's Class IB shares. The business address of the
persons whose names are preceded by a single asterisk is 787 Seventh Avenue,
New York, New York 10019. The business address of the persons whose names are
preceded by a double asterisk is 1755 Broadway, 3rd Floor, New York, New York
10019. The business address of the persons whose names are preceded by a
triple asterisk is 1290 Avenue of the Americas, New York, New York 10104. Ms.
Krumsiek's business address is 1345 Avenue of the Americas, 33rd Floor, New
York, New York 10105. Mr. Higgins' business address is 6301 Morrison
Boulevard, Charlotte, North Carolina 28211. Mr. Witte's business address is
135 West Fiftieth Street, 4th Floor, New York, New York 10020. Mr.
Kornweiss's business address is 4251 Crums Mill Road, Harrisburg, PA 17112.
Mr. Bullen's business address is 200 Plaza Drive, 4th Floor, Secaucus, New
Jersey 07096. Mr. Meserve's business address is 660 Newport Center Drive,
Suite 1200, Newport Beach, California 92660.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
NAME AND PRINCIPAL OFFICES WITH OFFICES WITH
BUSINESS ADDRESS EQ FINANCIAL CONSULTANTS, INC. REGISTRANT
- ------------------------------ ----------------------------------------------------- ------------------
<S> <C> <C>
DIRECTORS
*Derry E. Bishop Director None
***Harvey Blitz Director None
5
<PAGE>
Barbara J. Krumsiek Director Vice President
*Michael S. Martin Director Vice President
**Michael F. McNelis Director None
***Richard V. Silver Director None
*Mark R. Wutt Director None
OFFICERS
*Michael S. Martin Chairman of the Board and Chief Executive Officer Vice President
**Michael F. McNelis President and Chief Operating Officer None
*Derry E. Bishop Executive Vice President None
***Gordon G. Dinsmore Executive Vice President None
*Donald D. Higgins Executive Vice President None
**Martin J. Telles Executive Vice President and Chief Marketing Officer None
*Fred A. Folco Executive Vice President None
*Thomas J. Duddy, Jr. Executive Vice President None
*William J. Green Executive Vice President None
***A. Frank Beaz Executive Vice President None
*Dennis D. Witte Executive Vice President None
**Robert McKenna Senior Vice President and Chief Financial Officer None
**Theresa A. Nurge-Alws Senior Vice President None
***Naomi Friedland-Wechsler General Counsel None
**Ronald Boswell First Vice President None
**Donna M. Dazzo First Vice President None
**Nancy Yurinan First Vice President None
**Michael Brzozowski Vice President and Compliance Director None
**Amy Franceschini Vice President None
**Linda Funigiello Vice President None
**James Furlong Vice President None
**Richard Koll Vice President None
Peter R. Kornweiss Vice President None
**Frank Lupo Vice President None
**T.S. Narayanan Vice President None
***Janet E. Hannon Secretary None
***Linda J. Galasso Assistant Secretary None
***Harvey Blitz Executive Vice President None
*Peter D. Noris Executive Vice President Trustee
**James R. Anderson Vice President None
***Raymond T. Barry Vice President None
**Rosemary Magee Vice President None
**Laura A. Pellegrini Vice President None
</TABLE>
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
NAME AND PRINCIPAL OFFICES WITH OFFICES WITH
BUSINESS ADDRESS EQUITABLE DISTRIBUTORS, INC. REGISTRANT
- ------------------------------ ------------------------------------ -----------------------
<S> <C> <C>
DIRECTORS
*James M. Benson Director President and Chief
Executive Officer
*Greg Brakovich Director None
*Jerome S. Golden Director None
*William T. McCaffrey Director None
*James A. Shepherdson, III Director None
OFFICERS
*Jerome S. Golden Chairman of the Board None
*Greg Brakovich Co-President, Co-Chief Executive None
Officer and Managing Director
*James A. Shepherdson, III Co-President, Co-Chief Executive None
Officer and Managing Director
Dennis D. Witte Senior Vice President None
6
<PAGE>
Phillipe D. Meserve Managing Director None
*Thomas D. Bullen Chief Financial Officer None
**Michael Brzozowski Chief Compliance Officer None
***Naomi Friedland-Wechsler Chief Legal Officer None
***Ronald R. Quist Treasurer None
***Janet Hannon Secretary None
***Linda J. Galasso Assistant Secretary None
</TABLE>
(c) Inapplicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The Trust's accounts and records required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules thereunder are in
the physical possession of the following:
The Trust
Rule 31a-1(b)(4)
Rule 31a-2(a)(1)
Alliance Capital Management Corporation
135 West 50th Street
New York, New York 10019
Rule 31a-1(b)(1)-(3),(5)-(12)
Rule 31a-2(a)(1)-(2)
The Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, New York 10081
Rule 31a-1(b)(2)-(3)
Rule 31a-2(a)(2)
ITEM 31. MANAGEMENT SERVICES
Inapplicable.
ITEM 32. UNDERTAKINGS
The Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
***************
NOTICE
A copy of the Declaration of Trust of The Hudson River Trust (the "Trust")
is on file with the Secretary of State of The Commonwealth of Massachusetts
and notice is hereby given that this Registration Statement has been executed
on behalf of the Trust by an officer of the Trust as an officer and by its
Trustees as trustees and not individually and the obligations of or arising
out of this Registration Statement are not binding upon any of the Trustees,
officers or shareholders individually but are binding only upon the assets
and property of the Trust.
7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York and the State of New York
on the 14 day of February 1997.
THE HUDSON RIVER TRUST
By: /s/ Kathleen A. Corbet
-------------------------------
Title: Vice President
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
PRINCIPAL EXECUTIVE OFFICER:
James M. Benson,
President and Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER:
Mark D. Gersten,
Treasurer and Chief Financial Officer
PRINCIPAL ACCOUNTING OFFICER:
Laura Mah,
Controller and Chief Accounting Officer
TRUSTEES:
John D. Carifa
Richard W. Couper
Brenton W. Harries
Howard E. Hassler
William L. Mannion
Alton G. Marshall
Donald J. Robinson
By: /s/ Edmund P. Bergan, Jr.
-------------------------------
Edmund P. Bergan, Jr.
As Attorney-in-Fact
February 14, 1997
8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
(1) Form of Amended and Restated Agreement and Declaration of Trust of the Trust.
(2) Form of By-Laws of the Trust.
(4)(a) Portions of Amendment and Restated Agreement and Declaration of Trust relating to
shareholders' rights.
(4)(b) Portions of By-Laws of the Trust relating to shareholders' rights.
(5) Form of Investment Advisory Agreement between the Trust and Alliance.
</TABLE>
<PAGE>
THE HUDSON RIVER TRUST
-----------------
AMENDED AND RESTATED
AGREEMENT AND DECLARATION OF TRUST
-----------------
AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST
made in this ____ day of January, 1997 (as so amended and restated, the
"Declaration of Trust"), by the Trustees hereunder, and by the holders of
shares of beneficial interest to be issued hereunder as hereinafter provided.
WHEREAS, pursuant to Section 10.3 of Article X of the Declaration of
Trust the Trustees of the Trust have determined that the Declaration of Trust
should be amended and restated; and
WHEREAS, the shareholders have duly approved this Declaration of
Trust;
NOW, THEREFORE, the Trustees of this Trust direct that this
Declaration of Trust be filed with the Secretary of State of The Commonwealth
of Massachusetts and that this Declaration of Trust shall take effect as of
the date of filing.
WITNESSETH that
WHEREAS, this Trust was established on July 10, 1987 by an Agreement
and Declaration and Trust of the same date executed and delivered in Boston,
Massachusetts; and
WHEREAS, this Trust was formed to establish a trust fund for the
purpose of investing and reinvesting the assets of insurance company separate
accounts and such other assets as may be held by it; and
WHEREAS, the Trustees have agreed to manage all property coming into
their hands as trustees of a Massachusetts voluntary association with
transferable shares in accordance with the provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby declare that they will hold all
cash, securities and other assets, which they may from time to time acquire in
any manner as Trustees hereunder IN TRUST to manage and dispose of the same
upon the following terms and conditions for the pro rata benefit of the
holders from time to time of Shares in this Trust as hereinafter set forth.
<PAGE>
ARTICLE I
NAME AND DEFINITIONS
1.1 Name. This Trust shall be known as "The Hudson River Trust,"
and the Trustees shall conduct the business of the Trust under that name or any
other name as they may from time to time determine.
1.2 Definitions. Whenever used herein, unless otherwise
required by the context or specifically provided:
(a) The "Trust" refers to the Massachusetts business trust
established by Agreement and Declaration of Trust dated July 10, 1987, as
amended from time to time, and as amended and restated herein;
(b) "Trustees" refers to the Trustees of the Trust named herein
or elected in accordance with Article IV;
(c) "Shares" means the equal proportionate transferable units of
interest into which the beneficial interest in the Trust shall be divided from
time to time or, if more than one series or class of Shares is authorized by
the Trustees, the equal proportionate transferable units into which each
series or class of Shares shall be divided from time to time;
(d) "Shareholder" means a record owner of Shares;
(e) The "1940 Act" refers to the Investment Company Act of 1940
and the Rules and Regulations thereunder, all as amended from time to time;
(f) The terms "Affiliated Person", "Assignment", "Commission",
"Interested Person", "Principal Underwriter" and "Majority Shareholder Vote"
(the 67% or 50% requirement of the third sentence of Section 2(a)(42) of the
1940 Act, whichever may be applicable) shall have the meanings given them in
the 1940 Act;
(g) "Declaration of Trust" shall mean this Amended and
Restated Agreement and Declaration of Trust as amended or restated from time
to time; and
(h) "Bylaws" shall mean the Bylaws of the Trust as amended from
time to time.
-2-
<PAGE>
ARTICLE II
PURPOSE OF TRUST
The purpose of the Trust is to provide investors a managed investment
primarily in securities, commodities and other investment media and to carry
on such other business as the Trustees may from time to time determine
pursuant to their authority under this Declaration of Trust.
ARTICLE III
SHARES
3.1 Division of Beneficial Interest. The Shares of the Trust
shall be issued with or without par value and shall be issued in one or
more series as the Trustees may, without shareholder approval, authorize. Each
series shall be preferred over all other series in respect of the assets
allocated to that series. The Shares of any series may be issued in two or
more classes, as the Trustees may, without Shareholder approval, authorize.
Unless the Trustees have authorized the issuance of Shares of a series in two
or more classes, each Share of a series shall represent an equal proportionate
interest in the assets and liabilities of the series with each other Share of
the same series, none having priority or preference over another. If the
Trustees have authorized the issuance of Shares of a series in two or more
classes, then the classes may have such variations as to dividend, redemption,
and voting rights, net asset values, expenses borne by the classes, and other
matters as the Trustees have authorized. The number of Shares authorized shall
be unlimited. The Trustees may from time to time divide or combine the Shares
of any series or of any class of a series into a greater or lesser number
without thereby changing the proportionate beneficial interests in the series
or class.
3.2 Ownership of Shares. The ownership of Shares shall be
recorded on the books of the Trust or a transfer or similar agent. No
certificates certifying the ownership of Shares shall be issued except as the
Trustees may otherwise determine from time to time. The Trustees may make such
rules as they consider appropriate for the issuance of Share certificates, the
transfer of Shares and similar matters. The record books of the Trust as kept
by the Trust or any transfer or similar agent, as the case may be, shall be
conclusive as to who are the Shareholders of each series or class and as to
the number of Shares of each series or class held from time to time by each
Shareholder.
3.3 Investment in the Trust. The Trustees shall accept
investments in the Trust from such persons and on such terms and for such
consideration, which may consist of cash or tangible or intangible property or
a combination thereof, as they from time to time authorize.
All consideration received by the Trust for the issue or sale of
Shares of each series, together with all income, earnings, profits, and
proceeds thereof, including any proceeds
-3-
<PAGE>
derived from the sale, exchange or liquidation thereof, and any funds or
payments derived from any reinvestment of such proceeds in whatever form the
same may be shall irrevocably belong to the series of Shares with respect to
which the same were received by the Trust for all purposes, subject only to
the rights of creditors, and shall be so handled upon the books of account of
the Trust and are herein referred to as "assets of" such series.
3.4 No Preemptive Rights. Shareholders shall have no preemptive
or other right to subscribe to any additional Shares or other securities
issued by the Trust.
3.5 Status of Shares and Limitation of Personal Liability. Shares
shall be deemed to be personal property giving only the rights provided in
this instrument. Every shareholder by virtue of having become a Shareholder
shall be held to have expressly assented and agreed to the terms hereof and to
have become a party hereto. The death of a Shareholder during the continuance
of the Trust shall not operate to terminate the same nor entitle the
representative of any deceased Shareholder to an accounting or to take any
action in court or elsewhere against the Trust or the Trustees, but only to
the rights of said decedent under this Trust. Ownership of Shares shall not
entitle the Shareholder to any title in or to the whole or any part of the
Trust property or right to call for a partition or division of the same or for
an accounting, nor shall the ownership of Shares constitute the Shareholders
partners. Neither the Trust nor the Trustees, nor any officer, employee or
agent of the Trust shall have any power to bind personally any Shareholder,
nor except as specifically provided herein to call upon any Shareholder for
the payment of any sum of money or assessment whatsoever other than such as
the Shareholder may at any time personally agree to pay.
ARTICLE IV
THE TRUSTEES
4.1 Election. The number of Trustees shall be as provided in the
Bylaws or as fixed from time to time by the Trustees. The Shareholders may
elect Trustees at any meeting of Shareholders called by the Trustees for that
purpose. Each Trustee shall serve during the continued lifetime of the Trust
until he dies, resigns or is removed, or, if sooner, until the next meeting of
Shareholders called for the purpose of electing Trustees and the election and
qualification of his successor. Any Trustee may resign at any time by written
instrument signed by him and delivered to any officer of the Trust, to each
other Trustee or to a meeting of the Trustees. Such resignation shall be
effective upon receipt unless specified to be effective at some other time.
Except to the extent expressly provided in a written agreement with the Trust,
no Trustee resigning and no Trustee removed shall have any right to any
compensation for any period following his resignation or removal, or any right
to damages on account of such removal.
4.2 Effect of Death, Resignation, etc. of a Trustee. The death,
declination, resignation, retirement, removal or incapacity of the Trustees,
or any one of them, shall not
-4-
<PAGE>
operate to annul the Trust or to revoke any existing agency created pursuant
to the terms of this Declaration of Trust.
4.3 Powers. Subject to the provisions of this Declaration of
Trust, the business of the Trust shall be managed by the Trustees, and
they shall have all powers necessary or convenient to carry out that
responsibility. Without limiting the foregoing, the Trustees may adopt Bylaws
not inconsistent with this Declaration of Trust providing for the conduct of
the business of the Trust and may amend and repeal them to the extent that
such Bylaws do not reserve that right to the Shareholders; they may enlarge or
reduce their number, may fill vacancies in their number, including vacancies
caused by enlargement of their number, and may remove Trustees with or without
cause; they may elect and remove, with or without cause, such officers and
appoint and terminate such agents as they consider appropriate; they may
appoint from their own number, and terminate, any one or more committees,
consisting of two or more Trustees, including an executive committee which
may, when the Trustees are not in session, exercise some or all of the power
and authority of the Trustees as the Trustees may determine; they may employ
one or more custodians of the assets of the Trust and may authorize such
custodians to employ subcustodians and to deposit all or any part of such
assets in a system or systems for the central handling of securities, retain a
transfer agent or a Shareholder servicing agent, or both, provide for the
distribution of Shares by the Trust, through one or more principal
underwriters or otherwise, set record dates for the determination of
Shareholders with respect to various matters, and in general delegate such
authority as they consider desirable to any officer of the Trust, to any
committee of the Trustees and to any agent or employee of the Trust or to any
such custodian or underwriter.
Without limiting the foregoing, the Trustees shall have power and authority:
(a) To invest and reinvest cash, and to hold cash uninvested;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate,
write options on and lease any or all of the assets of the Trust;
(c) To act as a distributor of shares and as underwriter of, or
broker or dealer in, securities or other property;
(d) To vote or give assent, or exercise any rights of ownership,
with respect to stock or other securities or property; and to execute and
deliver proxies or powers of attorney to such person or persons as the
Trustees shall deem proper, granting to such person or persons such power and
discretion with relation to securities or property as the Trustees shall deem
proper;
(e) To exercise powers and rights of subscription or otherwise
which in any manner arise out of ownership of securities;
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(f) To hold any security or property in a form not indicating any
trust, whether in bearer, unregistered or other negotiable form, or in the
name of the Trustees or of the Trust or in the name of a custodian,
subcustodian or other depository or a nominee or nominees or otherwise;
(g) To allocate assets, liabilities and expenses of the Trust to
a particular series or class of Shares or to apportion the same among two
or more series of classes of Shares, provided that any liabilities or expenses
incurred by a particular series or class of Shares shall be payable solely out
of the assets of that series or class;
(h) To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or issuer, any
security of which is or was held in the Trust; to consent to any contract,
lease, mortgage, purchase or sale of property by such corporation or issuer;
and to pay calls or subscriptions with respect to any security held in the
Trust;
(i) To join with other security holders in acting through a
committee depositary, voting trustee or otherwise, and in that connection
to deposit any security with, or transfer any security to, any such committee,
depositary or trustee, and to delegate to them such power and authority with
relation to any security (whether or not so deposited or transferred) as the
Trustees shall deem proper, and to agree to pay, and to pay, such portion of
the expenses and compensation of such committee, depositary or trustee as the
Trustees shall deem proper;
(j) To compromise, arbitrate or otherwise adjust claims in
favor of or against the Trust or any matter in controversy, including but
not limited to claims for taxes;
(k) To enter into joint ventures, general or limited
partnerships and any other combinations or associations;
(l) To borrow funds;
(m) To endorse or guarantee the payment of any notes or other
obligations of any person; to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof; and to mortgage and pledge the
Trust property or any part thereof to secure any of or all such obligations;
(n) To purchase and pay for entirely out of Trust property such
insurance as they may deem necessary or appropriate for the conduct of the
business, including without limitation, insurance policies insuring the assets
of the Trust and payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, investment advisers or managers, principal
underwriters, or independent contractors of the Trust individually against all
claims and liabilities of every nature arising by reason of holding, being or
having held any such office or position, or by reason of any action alleged to
have been taken or omitted by any such person
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as Shareholder, Trustee, officer, employee, agent, investment adviser or
manager, principal underwriter, or independent contractor, including any
action taken or omitted that may be determined to constitute negligence,
whether or not the Trust would have the power to indemnify such person against
such liability;
(o) To pay pensions for faithful service, as deemed appropriate
by the Trustees, and to adopt, establish and carry out pension, profit-sharing,
share bonus, share purchase, savings, thrift and other retirement, incentive
and benefit plans, trusts and provisions, including the purchasing of life
insurance and annuity contracts as a means of providing such retirement and
other benefits, for any or all of the Trustees, officers, employees and agents
of the Trust; and
(p) To engage in any other lawful act or activity in which
corporations organized under the Massachusetts Business Corporation Law may
engage.
The Trustees shall not in any way be bound or limited by present or
future law or custom in regard to investments by trustees. Except as otherwise
provided herein or from time to time in the Bylaws, any action to be taken by
the Trustees may be taken by a majority of the Trustees present at a meeting
of Trustees (a quorum being present), within or without Massachusetts,
including any meeting held by means of a conference telephone or other
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time and participation by such means
shall constitute presence in person at a meeting, or by written consents of a
majority of the Trustees then in office.
4.4 Payment of Expenses by Trust. The Trustees are authorized to
pay or to cause to be paid out of the principal or income of the Trust,
or partly out of principal and partly out of income, as they deem fair, all
expenses, fees, charges, taxes and liabilities incurred or arising in
connection with the Trust, in connection with the management thereof, or in
connection with the financing of the sale of Shares, including, but not
limited to, the Trustees' compensation and such expenses and charges for the
services of the Trust's officers, employees, any investment adviser, manager,
or sub-adviser, principal underwriter, auditor, counsel, custodian, transfer
agent, shareholder servicing agent, and such other agents or independent
contractors and such other expenses and charges as the Trustees may deem
necessary or proper to incur; provided, however, that all expenses, fees,
charges, taxes and liabilities incurred or arising in connection with a
particular series or class of Shares as determined by the Trustees, shall be
payable solely out of the assets of that series or class.
4.5 Ownership of Assets of the Trust. Title to all of the assets
of each series of Shares and of the Trust shall at all times be considered as
vested in the Trustees.
4.6 Advisory, Management and Distribution. The Trustees may, at
any time and from time to time, contract for exclusive or nonexclusive
advisory and/or management services with any corporation, trust, association
or other organization (the "Manager"), including, without limitation, Alliance
Capital Management, L.P., every such contract to comply with such
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requirements and restrictions as may be set forth in the Bylaws; and any such
contract may provide for one or more Sub-advisers who shall perform all or
part of the obligations of the Manager under such contract and may contain
such other terms interpretive of or in addition to said requirements and
restrictions as the Trustees may determine, including, without limitation,
authority to determine from time to time what investments shall be purchased,
held, sold or exchanged and what portion, if any, of the assets of the Trust
shall be held uninvested and to make changes in the Trust's investments. The
Trustees may also, at any time and from time to time, contract with the
Manager or any other corporation, trust, association or other organization,
appointing it exclusive or nonexclusive distributor or principal underwriter
for the Shares, every such contract to comply with such requirements and
restrictions as may be set forth in the Bylaws; and any such contract may
contain such other terms interpretive of or in addition to said requirements
and restrictions as the Trustees may determine.
The fact that:
(i) any of the Shareholders, Trustees or officers of the
Trust is a shareholder, director, officer, partner, trustee, employee,
manager, adviser, principal underwriter or distributor or agent of or for any
corporation, trust, association, or other organization, or of or for any
parent or affiliate of any organization, with which an advisory or management
contract, or principal underwriter's or distributor's contract, or transfer,
shareholder servicing or other agency contract may have been or may hereafter
be made, or that any such organization, or any parent or affiliate thereof, is
a Shareholder or has an interest in the Trust, or that
(ii) any corporation, trust, association or other
organization with which an advisory or management contract or principal
underwriter's or distributor's contract, or transfer, shareholder servicing or
other agency contract may have been or may hereafter be made also has an
advisory or management contract, or principal underwriter's or distributors
contract, or transfer, Shareholder servicing or other agency contract with one
or more other corporations, trusts, associations, or other organizations, or
has other business or interests shall not affect the validity of any such
contract or disqualify any Shareholder, Trustee or officer of the Trust from
voting upon or executing the same or create any liability or accountability to
the Trust on its Shareholders.
ARTICLE V
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Shareholders shall have such power to vote as is provided for in, and
may hold meetings and take actions pursuant to, the provisions of the Bylaws.
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ARTICLE VI
DISTRIBUTIONS, REDEMPTIONS AND REPURCHASES
6.1 Distributions. The Trustees may each year, or more frequently
if they so determine, distribute to the Shareholders of each series or
class of Shares such income and capital gains, accrued or realized, as the
Trustees may determine, after providing for actual and accrued expenses and
liabilities (including such reserves as the Trustees may establish) determined
in accordance with good accounting practices. The Trustees shall have full
discretion to determine which items shall be treated as income and which items
as capital and their determination shall be binding upon the Shareholders.
Distributions of each year's income of each series or class of Shares shall be
distributed pro rata to Shareholders in proportion to the number of Shares of
each series or class held by each of them. Such distributions shall be made in
cash or Shares or a combination thereof as determined by the Trustees. Any
such distribution paid in Shares will be paid at the net asset value thereof
as determined in accordance with the Bylaws.
6.2 Redemptions and Repurchases. The Trust shall purchase such
Shares as are offered by any Shareholder for redemption, upon the
presentation of any certificate for the Shares to be purchased, a proper
instrument of transfer and a request directed to the Trust or a person
designated by the Trust that the Trust purchase such Shares, or in accordance
with such other procedures for redemption as the Trustees may from time to
time authorize, and the Trust will pay therefor the net asset value thereof,
as next determined in accordance with the Bylaws, less such redemption charge
or fee as the Trustees may determine from time to time. Except as otherwise
determined by the Trustees, payment for said Shares shall be made by the Trust
to the Shareholder within seven days after the date on which the request is
made. The obligation set forth in this Section 2 is subject to the provision
that in the event that any time the New York Stock Exchange is closed for
other than customary weekends or holidays, or, if permitted by rules of the
Commission. During periods when trading on the Exchange is restricted or
during any emergency which makes it impractical for the Trust to dispose of
its investments or to determine fairly the value of its net assets, or during
any other period permitted by order of the Commission for the protection of
investors, such obligation may be suspended or postponed by the Trustees. The
Trust may also purchase or repurchase Shares at a price not exceeding the net
asset value of such Shares in effect when the purchase or repurchase or any
contract to purchase or repurchase is made.
6.3 Redemptions at the Option of the Trust. The Trust shall
have the right at its option and at any time to redeem Shares of any
Shareholder at the net asset value thereof as determined in accordance with
the Bylaws: (i) if at such time such Shareholder owns fewer Shares than, or
Shares having an aggregate net asset value of less than, an amount determined
from time to time by the Trustees; or (ii) to the extent that such Shareholder
owns Shares of a particular series or class of Shares equal to or in excess of
a percentage of the outstanding Shares of that series or class determined from
time to time by the Trustees; or (iii) to the
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extent that such Shareholder owns Shares of the Trust representing a
percentage equal to or in excess of such percentage of the aggregate number of
outstanding Shares of the Trust or the aggregate net asset value of the Trust
determined from time to time by the Trustees.
6.4 Dividends, Distributions, Redemptions and Repurchases. No
dividend or distribution (including, without limitation, any distribution paid
upon termination of the Trust or of any series) with respect to, nor any
redemption or repurchase of, the Shares of any series shall be effected by the
Trust other than from the assets of such series.
ARTICLE VII
COMPENSATION AND LIMITATION OF LIABILITY OF TRUSTEES
7.1 Compensation. The Trustees as such shall be entitled to
reasonable compensation from the Trust; they may fix the amount of their
compensation. Nothing herein shall in any way prevent the employment of any
Trustee for advisory, management, legal, accounting, investment banking,
underwriting, brokerage, or investment dealer or other services and payment
for the same by the Trust.
7.2 Limitation of Liability. The Trustees shall not be
responsible or liable in any event for any neglect or wrongdoing of any
officer, agent, employee, manager or principal underwriter of the Trust, nor
shall any Trustee be responsible for the act or omission of any other Trustee,
but nothing herein contained shall protect any Trustees against any liability
to which he or she would otherwise be subject by reason of wilful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in
the conduct of his or her office.
Every note, bond, contract, instrument, certificate, Share or
undertaking and every other act or thing whatsoever executed or done by or on
behalf of the Trust or the Trustees or any of them in connection with the
Trust shall be conclusively deemed to have been executed or done only in or
with respect to their or his or her capacity as Trustees or Trustee, and such
Trustees or Trustee shall not be personally liable thereon.
ARTICLE VIII
INDEMNIFICATION
8.1 Trustees, Officers, etc. The Trust shall indemnify each of
its Trustees and officers (including persons who serve at the Trust's
request as directors, officers or trustees of another organization in which
the Trust has any interest as a shareholder, creditor or otherwise)
(hereinafter referred to as a "Covered Person") against all liabilities and
expenses, including but not limited to amounts paid in satisfaction of
judgments, in compromise or as fines and penalties, and counsel fees
reasonably incurred by any Covered Person in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or
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criminal, before any court or administrative or legislative body, in which
such Covered Person may be or may have been involved as a party or otherwise
or with which such Covered Person may be or may have been threatened, while in
office or thereafter, by reason of being or having been such a Covered Person
except with respect to any matter as to which such Covered Person shall have
been finally adjudicated in any such action, suit or other proceeding (a) not
to have acted in good faith in the reasonable belief that such Covered
Person's action was in or not opposed to the best interests of the Trust or
(b) to be liable to the Trust or its Shareholders by reason of wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such Covered Person's office. Expenses, including
counsel fees so incurred by any such Covered Person (but excluding amounts
paid in satisfaction of judgments, in compromise or as fines or penalties),
shall be paid from time to time by the Trust in advance of the final
disposition of any such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such Covered Person to repay amounts so paid to
the Trust if it is ultimately determined that indemnification of such expenses
is not authorized under this Article; provided, however, that either (a) such
Covered Person shall have provided appropriate security for such undertaking,
(b) the Trust shall be insured against losses arising from any such advance
payments or (c) either a majority of the disinterested Trustees acting on the
matter (provided that a majority of the disinterested Trustees then in office
act on the matter), or independent legal counsel in a written opinion, shall
have determined, based upon a review of readily available facts (as opposed to
a full trial type inquiry) that there is reason to believe that such Covered
Person will be found entitled to indemnification under this Article.
8.2 Compromise Payment. As to any matter disposed of (whether
by a compromise payment, pursuant to a consent decree or otherwise)
without an adjudication in a decision on the merits by a court, or by any
other body before which the proceeding was brought, that such Covered Person
either (a) did not act in good faith in the reasonable belief that his action
was in or not opposed to the best interests of the Trust or (b) is liable to
the Trust or its Shareholders by reason of wilful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct
of his or her office, indemnification shall be provided if (a) approved as in
the best interests of the Trust, after notice that it involves such
indemnification, by at least a majority of the disinterested Trustees acting
on the matter (provided that a majority of the disinterested Trustees then in
office act on the matter) upon a determination, based upon a review of readily
available facts (as opposed to a full trial type inquiry) that such Covered
Person acted in good faith in the reasonable belief that his action was in or
not opposed to the best interests of the Trust and is not liable to the Trust
or its Shareholders by reasons of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
or her office, or (b) there has been obtained an opinion in writing of
independent legal counsel, based upon a review of readily available facts (as
opposed to a full trial type inquiry) to the effect that such Covered Person
appears to have acted in good faith in the reasonable belief that his action
was in or not opposed to the best interests of the Trust and that such
indemnification would not protect such Person against any liability to the
Trust to which he would otherwise be subject by reason of
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wilful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. Any approval pursuant to this
Section shall not prevent the recovery from any Covered Person of any amount
paid to such Covered Person in accordance with this Section as indemnification
if such Covered Person is subsequently adjudicated by a court of competent
jurisdiction not to have acted in good faith in the reasonable belief that
such Covered Person's action was in or not opposed to the best interests of
the Trust or to have been liable to the Trust or its Shareholders by reason of
wilful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office.
8.3 Indemnification Not Exclusive. The right of indemnification
hereby provided shall not be exclusive of or affect any other rights to which
such Covered Person may be entitled. As used in this Article VIII, the term
"Covered Person" shall include such person's heirs, executors and
administrators and a "disinterested Trustee" is a Trustee who is not an
"interested person" of the Trust as defined in Section 2(a)(19) of the
Investment Company Act of 1940, as amended, (or who has been exempted from
being an "interested person" by any rule, regulation or order of the
Commission) and against whom none of such actions, suits or other proceedings
or another action, suit or other proceeding on the same or similar grounds is
then or has been pending. Nothing contained in this Article shall affect any
rights to indemnification to which personnel of the Trust, other than Trustees
or officers, and other persons may be entitled by contract or otherwise under
law, nor the power of the Trust to purchase and maintain liability insurance
on behalf of any such person.
8.4 Shareholders. In case any Shareholder or former Shareholder
shall be held to be personally liable solely by reason of his or her being or
having been a Shareholder and not because of his or her acts or omissions
or for some other reason, the Shareholder or former Shareholder (or his or her
heirs, executors, administrators or other legal representatives or in the case
of a corporation or other entity, its corporate or other general successor)
shall be entitled to be held harmless from and indemnified against all loss
and expense arising from such liability, but only out of the assets of the
particular series of Shares of which he or she is or was a Shareholder.
ARTICLE IX
MISCELLANEOUS
9.1 Trustees, Shareholders, etc. Not Personally Liable, Notice.
All persons extending credit to, contracting with or having any claim
against the Trust or a particular series of Shares shall look only to the
assets of the Trust or the assets of that particular series of Shares for
payment under such credit, contract or claim; and neither the Shareholders nor
the Trustees, nor any of the Trust's officers, employees or agents, whether
past, present or future, shall be personally liable therefor. Nothing in this
Declaration of Trust shall protect any Trustee against any liability to which
such Trustees would otherwise be subject by reason of
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wilful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the office of Trustee.
Every note, bond, contract, instrument, certificate or undertaking
made or issued by the Trustees or by any officer or officers shall give notice
that this Declaration of Trust is on file with the Secretary of The
Commonwealth of Massachusetts and shall recite that the same was executed or
made by or on behalf of the Trust or by them as Trustee or Trustees or as
officers or officer and not individually and that the obligations of such
instrument are not binding upon any of them or the Shareholders individually
but are binding only upon the assets and property of the Trust, and may
contain such further recitals as he or she or they may deem appropriate, but
the omission thereof shall not operate to bind any Trustee or Trustees or
officer of officers or Shareholder or Shareholders individually.
9.2 Trustee's Good Faith Action, Expert Advice, No Bond or
Surety. The exercise by the Trustees of their powers and discretion
hereunder shall be binding upon everyone interested. A Trustee shall be liable
for his or her own wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustee, and
for nothing else, and shall not be liable for errors of judgment or mistakes
of fact or law. The Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Declaration of Trust, and shall
be under no liability for any act or omission in accordance with such advice
or for failing to follow such advice. The Trustees shall not be required to
give any bond as such, nor any surety if a bond is required.
9.3 Liability of Third Persons Dealing with Trustees. No person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to
the application of any payments made or property transferred to the Trust or
upon its order.
9.4 Duration and Termination of Trust. Unless terminated as
provided herein, the Trust shall continue without limitation of time. The
Trust may be terminated at any time by the vote of Shareholders holding at
least a majority of the Shares of each series entitled to vote or by the
Trustees by written notice to the Shareholders. Any series of Shares may be
terminated at any time by vote of Shareholders holding at least a majority of
the Shares of such series entitled to vote or by the Trustees by written
notice to the Shareholders of such series.
Upon termination of the Trust or of any one or more series of Shares,
after paying or otherwise providing for all charges, taxes, expenses and
liabilities, whether due or accrued or anticipated, of the Trust or of the
particular series as may be determined by the Trustees, the Trust shall, in
accordance with such procedures as the Trustees consider appropriate, reduce
the remaining assets to distributable form in cash or shares or other
securities, or any combination thereof, and distribute the proceeds to the
Shareholders of the series involved, ratably according to the aggregate net
asset value of Shares of such series or class of Shares held by the several
Shareholders of such series or class of Shares on the date of termination.
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9.5 Filing of Copies, References, Headings. The original or a
copy of this instrument and of each amendment hereto shall be kept at the
office of the Trust where it may be inspected by any Shareholder. A copy of
this instrument and of each amendment hereto shall be filed by the Trust with
the Secretary of The Commonwealth of Massachusetts and with the Boston City
Clerk, as well as any other governmental office where such filing may from
time to time be required. Anyone dealing with the Trust may rely on a
certificate by an officer of the Trust as to whether or not any such
amendments have been made and as to any matters in connection with the Trust
hereunder, and, with the same effect as if it were the original, may rely on a
copy certified by an officer of the Trust to be a copy of this instrument or
of any such amendments. In this instrument and in any such amendment,
references to this instrument, and all expressions like "herein", "hereof" and
"hereunder" shall be deemed to refer to this instrument as amended or affected
by any such amendments. Headings are placed herein for convenience of
reference only and shall not be taken as a part hereof or control or affect
the meaning, construction or effect of this instrument. This instrument may be
executed in any number of counterparts each of which shall be deemed an
original.
9.6 Applicable Law. The original Declaration of Trust was
executed and delivered in The Commonwealth of Massachusetts, and the Trust was
created under and is to be governed by and construed and administered
according to the laws of said Commonwealth. The Trust shall be of the type
commonly called a Massachusetts business trust, and without limiting the
provisions hereof, the Trust may exercise all powers which are ordinarily
exercised by such a trust.
9.7 Amendments. This Declaration of Trust may be amended at any
time by an instrument in writing signed by a majority of the then Trustees
when authorized to do so by vote of Shareholders holding a majority of the
Shares of each series entitled to vote, except that an amendment which shall
affect the holders of one or more series of Shares but not the holders of
all outstanding series shall be authorized by vote of the Shareholders holding
a majority of the Shares entitled to vote of each series affected and no vote
of Shareholders of a series not affected shall be required. Any amendment
which shall affect the holders of Shares of one or more classes of a series
but not the holders of all Shares of a series shall be authorized by vote of
the Shareholders holding a majority of the Shares of such classes affected by
the amendment voting together as a single class, and no vote of Shareholders
of the classes not affected shall be required. Amendments having the purpose
of changing the name of the Trust, of establishing, changing, or eliminating
the par value of the shares or of supplying any omission, curing any ambiguity
or curing, correcting or supplementing any defective or inconsistent provision
contained herein shall not require authorization by Shareholder vote. In
addition to the foregoing, the provisions of this Declaration of Trust may be
amended for any other reason at any time without the vote or consent of
Shareholders, so long as such amendment does not materially adversely affect
the rights of any Shareholder with respect to which such amendment is or
purports to be applicable and so long as such amendment is not in
contravention of applicable law, including the 1940 Act, by an instrument
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signed in writing by a majority of the Trustees (or by an officer of the Trust
pursuant to a vote of a majority of Trustees).
IN WITNESS WHEREOF, the undersigned have executed this Amended and
Restated Declaration of Trust this ____ day of January, 1997.
-------------------------
John D. Carifa
-------------------------
Peter D. Noris
-------------------------
Clifford L. Michel
-------------------------
Donald J. Robinson
-------------------------
Alton G. Marshall
-------------------------
Brenton W. Harries
-------------------------
Richard D. Couper
-------------------------
William L. Mannion
-------------------------
Howard E. Hassler
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AMENDED AND RESTATED
BYLAWS
OF
THE HUDSON RIVER TRUST
ARTICLE 1
Agreement and Declaration of Trust and Principal Office
1.1 Agreement and Declaration of Trust. These Bylaws shall be subject
to the Agreement and Declaration of Trust, as from time to time in effect (the
"Declaration of Trust"), of The Hudson River Trust, the Massachusetts business
trust established by the Declaration of Trust (the "Trust").
1.2 Principal Office of the Trust. A principal office of the Trust
shall be located in Boston, Massachusetts. The Trust may have such other
offices within or without Massachusetts as the Trustees may determine or as
they may authorize.
ARTICLE 2
Meetings of Trustees
2.1 Regular Meetings. Regular meetings of the Trustees may be held
without call or notice at such places and at such times as the Trustees may
from time to time determine, provided that notice of the first regular meeting
following any such determination shall be given to absent Trustees.
2.2 Special Meetings. Special of the Trustees may be held at any time
and at any place designated in the call of the meeting when called by the
Chairman of the Trustees, the President or the Treasurer or by two or more
Trustees, sufficient notice thereof being given to each Trustee by the Clerk
or an Assistant Clerk or by the officer or the Trustees calling the meeting.
2.3 Notice. It shall be sufficient notice to a Trustee of a special
meeting to send notice by mail at least forty-eight hours or by telegram,
telex or telecopy or other electronic facsimile transmission method at least
twenty-four hours before the meeting addressed to the Trustee at his or her
usual or last known business or residence address or to give notice to him or
her in person or by telephone at least twenty-four hours before the meeting.
Notice of a meeting need not be given to any Trustee if a written waiver of
notice, executed by him or her before the meeting, is filed with the records
of the meeting, or to any Trustee who attends the meeting without protesting
prior thereto or at its commencement the lack of notice to him or her. Neither
notice of a meeting nor a waiver of a notice need specify the purposes of the
meeting.
<PAGE>
2.4 Quorum. At any meeting of the Trustees a majority of the Trustees
then in office shall constitute a quorum. Any meeting may be adjourned from
time to time by a majority of the votes cast upon the question, whether or not
a quorum is present, and the meeting may be held as adjourned without further
notice.
ARTICLE 3
Officers
3.1 Enumeration; Qualification. The officers of the Trust shall be a
President, a Treasurer, a Clerk, and such other officers, including a Chairman
of the Trustees and a Controller, if any, as the Trustees from time to time
may in their discretion elect. The Trust may also have such agents as the
Trustees from time to time may in their discretion appoint. The Chairman of
the Trustees, if one is elected, shall be a Trustee and may but need not be a
shareholder; and any other officer may but not need be a Trustee or a
shareholder. Any two or more offices may be held by the same person.
3.2 Election. The President, the Treasurer, and the Clerk shall be
elected annually by the Trustees. Other officers, if any, may be elected or
appointed by the Trustees at such or any other time. Vacancies in any office
may be filled at any time.
3.3 Tenure. The Chairman of the Trustees, if one is elected, the
President, the Treasurer and the Clerk shall hold office until their
respective successors are chosen and qualified, or in each case until he or
she sooner dies, resigns, is removed or becomes disqualified. Each other
officer shall hold office and each agent shall retain authority at the
pleasure of the Trustees.
3.4 Powers. Subject to the other provisions of these Bylaws, each
officer shall have, in addition to the duties and powers herein and in the
Declaration of Trust set forth, such duties and powers as are commonly
incident to the office occupied by him or her as if the Trust were organized
as a Massachusetts business corporation and such other duties and powers as
the Trustees may from time to time designate.
3.5 Chairman; President. Unless the Trustees otherwise provide, the
Chairman of the Trustees or, if there is none or in the absence of the
Chairman, the President shall preside at all meetings of the shareholders and
of the Trustees. The President shall be the chief executive officer.
3.6 Treasurer and Controller. The Treasurer shall be the chief
financial officer and, if no Controller is elected, chief accounting officer
of the Trust, and shall, subject to the provisions of the Declaration of Trust
and to any arrangement made by the Trustees with a custodian, investment
adviser or manager, or transfer, shareholder servicing or similar agent, be in
charge of the valuable papers and, if no Controller is elected, the books of
account and
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accounting records of the Trust, and shall have such other duties and powers
as may be designated from time to time by the Trustees or by the President.
The Controller, if any, shall be the chief accounting officer of the
Trust and shall be in charge of its books of account and accounting records.
The Controller shall be responsible for preparation of financial statements of
the Trust and shall have such other duties and powers as may be designated
from time to time by the Trustees or the President.
3.7 Clerk. The Clerk shall record all proceedings of the shareholders
and the Trustees in books to be kept therefor, which books or a copy thereof
shall be kept at the principal office of the Trust. In the absence of the
Clerk from any meeting of the shareholders or Trustees, an assistant clerk or
if there be none or if he or she is absent, a temporary clerk chosen at such
meeting shall record the proceedings thereof in the aforesaid books.
3.8 Resignations. Any officer may resign at any time by written
instrument signed by him or her and delivered to the Chairman, the President
or the Clerk or to a meeting of the Trustees. Such resignation shall be
effective upon receipt unless specified to be effective at some other time.
Except to the extent expressly provided in a written agreement with the Trust,
no officer resigning and no officer removed shall have any right to any
compensation for any period following his or her resignation or removal, or
any right to damages on account of such removal.
ARTICLE 4
Committees
4.1 Quorum; Voting. A majority of the members of any Committee of the
Trustees shall constitute a quorum for the transaction of business, and any
action of such a Committee may be taken at a meeting by a vote of a majority
of the members present (a quorum being present) or evidenced by one or more
writings signed by such a majority. Members of a Committee may participate in
a meeting of such Committee by means of a conference telephone or other
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time and participation by such means
shall constitute presence in person at a meeting.
ARTICLE 5
Reports
5.1 General. The Trustees and officers shall render reports at the
time and in the manner required by the Declaration of Trust or any applicable
law. Officers and Committees shall render such additional reports as they may
deem desirable or as may from time to time be required by the Trustees.
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ARTICLE 6
Fiscal Year
6.1 General. Except as from time to time otherwise provided by the
Trustees, the initial fiscal year of the Trust shall end on such date as is
determined in advance or in arrears by the Treasurer, and subsequent fiscal
years shall end on such date in subsequent years.
ARTICLE 7
Seal
7.1 General. The seal of the Trust shall consist of a flat-faced die
with the word "Massachusetts", together with the name of the Trust and the
year of its organization cut or engraved thereon but, unless otherwise
required by the Trustees, the seal shall not be necessary to be placed on, and
its absence shall not impair the validity of, any document, instrument or
other paper executed and delivered by or on behalf of the Trust.
ARTICLE 8
Execution of Papers
8.1 General. Except as the Trustees may generally or in particular
cases authorize the execution thereof in some other manner, all deeds, leases,
contracts, notes and other obligations made by the Trustees shall be signed by
the President or by the Treasurer and need not bear the seal of the Trust.
ARTICLE 9
Share Certificate
9.1 Share Certificates. No certificates certifying the ownership of
shares shall be issued except as the Trustee may otherwise authorize. In the
event that the Trustees authorize the issuance of share certificates, subject
to the provisions of Section 9.3, each shareholder shall be entitled to a
certificate stating the number of shares and the series or class owned by him
or her, in such form as shall be prescribed from time to time by the Trustees.
Such certificates shall be signed by the President or any Vice-President and
by the Treasurer or any Assistant Treasurer. Such signatures may be facsimiles
if the certificate is signed by a transfer agent, or by a registrar, other
than a Trustee, officer or employee of the Trust. In case any officer who has
signed or whose facsimile signature has been placed on such certificate shall
cease to be such officer before such certificate is issued, it may be issued
by the Trust with the same effect as if he or she were such officer at the
time of its issue.
In lieu of issuing certificates for shares, the Trustees or the
transfer agent may either issue receipts therefor or may keep accounts upon
the books of the Trust for the record holders of such shares, who shall in
either case be deemed, for all purposes hereunder, to be the
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holders of certificates for such shares as if they had accepted such
certificates and shall be held to have expressly assented and agreed to the
terms hereof.
9.2 Loss of Certificates. In case of the alleged loss or destruction
or the mutilation of a share certificate, a duplicate certificate may be
issued in place thereof, upon such terms as the Trustees may prescribe.
9.3 Discontinuance of Issuance of Certificates. The Trustees may at
any time discontinue the issuance of share certificates and may, by written
notice to each shareholder, require the surrender of share certificates to the
Trust for cancellation. Such surrender and cancellation shall not effect the
ownership of shares in the Trust.
ARTICLE 10
Provisions Relating to the Conduct of Trust's Business
10.1 Certain Definitions. When used herein the following words shall
have the following meanings: "Distributor" shall mean any one or more
corporations, firms or associations which have distributor's or principal
underwriter's contracts in effect with the Trust providing that redeemable
shares issued by the Trust shall be offered and sold by such Distributor.
"Manager" shall mean any corporation, firm or association which may at the
time have an advisory or management contract with the Trust and any
corporation, firm or association which may at any time have a sub-advisory
contract relating to the Trust with any such Manager.
10.2 Limitation on Holdings by the Trust of Certain Securities and on
Dealings with Officers or Trustees. The Trust may not purchase or retain
shares or securities issued by an issuer if one or more of the holders of the
shares or securities issued by an issuer or one or more of the officers or
directors of such issuer is an officer or Trustee of the Trust or officer or
director of the Manager and if one or more of such officers, Trustees or
directors owns beneficially more than 1/2 of 1% of the shares or securities,
or both, of such issuer and such officers, Trustees and directors owning more
than 1/2 of 1% of such shares or securities. Each officer and Trustee of the
Trust shall keep the Treasurer of the Trust informed of the names of all
issuers shares or securities of which are held in the portfolio of the Trust
and in which such officer or Trustee owns as much as 1/2 of 1% of the
outstanding shares or securities.
The Trust will not lend any of its assets to the Distributor or
Manager or to any officer or director of the Distributor or Manager or any
officer or Trustee of the Trust, and shall not permit any officer or Trustee
or any officer or director of the Distributor or Manager to deal for or on
behalf of the Trust with himself or herself as principal or agent, or with any
partnership, association or corporation in which he or she has a financial
interest; provided that the foregoing provisions shall not prevent (a)
officers and Trustees of the Trust or officers and directors of the
Distributor or Manager from buying, holding or selling shares in the Trust
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or from being partners, officers or directors of or otherwise financially
interested in the Distributor or the Manager; (b) purchases or sales of
securities or other property if such transaction is permitted by or is exempt
or exempted from the provisions of the Investment Company Act of 1940 or any
Rule or Regulation thereunder (together, the "1940 Act"); (c) Employment of
legal counsel, registrar, transfer agent, shareholder servicing agent,
dividend disbursing agent or custodian who is, or has a partner, shareholder,
officer or director who is, an officer or Trustee of the Trust or an officer
or director of the Distributor or Manager; (d) sharing statistical, research,
legal and management expenses and office hire and expenses with any other
investment company in which an officer or Trustee of Trust or an officer or
director of the Distributor or Manager is an officer or director or otherwise
financially interested.
10.3 Limitation on Dealing in Securities of the Trust by Certain
Officers, Trustees, Distributor or Manager. Neither the Distributor nor
Manager, nor any officer or Trustee of the Trust or officer or director of the
Distributor or Manager shall take long or short positions in securities issued
by the Trust; provided, however, that:
(a) the Distributor may purchase from the Trust and otherwise
deal in shares issued by the Trust pursuant to the terms of
its contract with the Trust;
(b) any officer or Trustee of the Trust or officer or director
of the Distributor or Manager or any trustee or fiduciary
for the benefit of any of them may at any time, or from time
to time, purchase from the Trust or from the Distributor
shares issued by the Trust at the price available to the
public or to such officer, Trustee, director, trustee or
fiduciary, no such purchase to be in contravention of any
applicable state or federal requirement; and
(c) the Distributor or the Manager may at any time, or from time
to time, purchase for investment shares issued by the Trust.
10.4 Securities and Cash of the Trust to be held by Custodian subject
to certain Terms and Conditions.
(a) All securities and cash owned by this Trust shall be held by
or deposited with one or more banks or trust companies
having (according to its last published report) not less
than $5,000,000 aggregate capital, surplus and undivided
profits (any such bank or trust company being hereby
designated as "Custodian"), provided such a Custodian can be
found ready and willing to act; subject to such rules,
regulations and orders, if any, as the Securities and
Exchange Commission may adopt, this Trust may, or may permit
any Custodian to, deposit all or any part of the securities
owned by this Trust in a system for the central handling of
securities pursuant to which all securities of any
particular class or series of any issue deposited within the
system may be transferred or
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pledged by bookkeeping entry, without physical delivery. The
Custodian may appoint, subject to the approval of the
Trustees, one or more subcustodians.
(b) The Trust shall enter into a written contract with each
Custodian regarding the powers, duties and compensation of
such Custodian with respect to the cash and securities of
the Trust held by such Custodian. Said contract and all
amendments thereto shall be approved by the Trustees.
(c) The Trust shall upon the resignation or inability to serve
of any Custodian or upon change of any Custodian:
(i) in case of such resignation or inability to serve,
use its best efforts to obtain a successor
Custodian;
(ii) require that the cash and securities owned by the
Trust be delivered directly to the successor
Custodian; and
(iii) in the event that no successor Custodian can be
found, submit to the shareholders, before
permitting delivery of the cash and securities
owned by the Trust otherwise than to a successor
Custodian, the question whether the Trust shall be
liquidated or shall function without a Custodian.
10.5 Requirements and Restrictions Regarding the Management Contract.
Every advisory or management contract entered into by the Trust shall provide
that in the event that the total expenses of any series of shares of the Trust
for any fiscal year should exceed the limits imposed on investment company
expenses imposed by any statute or regulatory authority of any jurisdiction in
which shares of the Trust are offered for sale, the compensation due the
Manager for such fiscal year shall be reduced by the amount of such excess by
a reduction or refund thereof.
10.6 Reports to Shareholders: Distributions from Realized Gains. The
Trust shall send to each shareholder of record at least semi-annually a
statement of the condition of the Trust and of the results of its operations,
containing all information required by applicable laws or regulations.
10.7 Determination of Net Asset Value Per Share. Net asset value per
share of each series or class of shares of the Trust shall mean: (i) the value
of all the assets of such series or class of shares; (ii) less total
liabilities of such series or class of shares; (iii) divided by the number of
shares of such series or class of shares outstanding, in each case at the time
of each determination. The net asset value per share of each series or class
of shares shall be determined as of the normal close of trading on the New
York Stock Exchange on each day on which such Exchange is open. As of any time
other than the normal close of trading on such
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Exchange, the Trustees may cause the net asset value per share last determined
to be determined again in a similar manner or adjusted to reflect changes in
market values of securities in the portfolio, such adjustment to be made on
the basis of changes in selected security prices determined by the Trustees to
be relevant to the portfolio of such series or class of shares or in averages
or in other standard and readily ascertainable market data, and the Trustees
may fix the time when such redetermined or adjusted net asset value per share
of each series or class of shares shall become effective.
In valuing the portfolio investments of any series or class of shares
for determination of net asset value per shares of such series, securities for
which market quotations are readily available shall be valued at prices which,
in the opinion of the Trustees or the person designated by the Trustees to
make the determination, most nearly represent the market value of such
securities, and other securities and assets shall be valued at their fair
value as determined by or pursuant to the direction of the Trustees, which in
the case of short-term debt obligations, commercial paper and repurchase
agreements may, but need not, be on the basis of quoted yields for securities
of comparable maturity, quality and type, or on the basis of amortized cost.
Expenses and liabilities of the Trust shall be accrued each day. Liabilities
may include such reserves for taxes, estimated accrued expenses and
contingencies as the Trustees or their designates may in their sole discretion
deem fair and reasonable under the circumstances. No accruals shall be made in
respect of taxes on unrealized appreciation of securities owned unless the
Trustees shall otherwise determine. Dividends payable by the Trust shall be
deducted as at the time of but immediately prior to the determination of net
asset value per share on the record date therefor.
ARTICLE 11
Shareholders' Voting Powers and Meetings
11.1 Voting Powers. The Shareholders shall have power to vote only
(i) for the election of Trustees as provided in Article IV, Section 1 of the
Declaration of Trust, provided, however, that no meeting of Shareholders is
required to be called for the purpose of electing Trustees unless and until
such time as less than a majority of the Trustees have been elected by the
Shareholders, (ii) with respect to any Manager or Sub-Adviser as provided in
Article IV, Section 6 of the Declaration of Trust to the extent required by
the 1940 Act, (iii) with respect to any termination of this Trust to the
extent and as provided in Article IX, Section 4 of the Declaration of Trust,
(iv) with respect to any amendment of the Declaration of Trust to the extent
and as provided in Article IX, Section 7 of the Declaration of Trust, (v) to
the same extent as the stockholders of a Massachusetts business corporation as
to whether or not a court action, proceeding or claim should or should not be
brought or maintained derivatively or as a class action on behalf of the Trust
or the Shareholders, and (vi) with respect to such additional matters relating
to the Trust as may be required by law, the Declaration of Trust, these Bylaws
or any registration of the Trust with the Commission (or any successor agency)
or any state, or as the Trustees may consider necessary or desirable. Each
whole Share shall be entitled to one vote as to any matter on which it is
entitled to vote and each fractional Share shall be
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entitled to a proportionate fractional vote. The Shareholders of any
particular series or class shall not be entitled to vote on any matters as to
which such series or class is not affected. Except with respect to matters as
to which the Trustees have determined that only the interests of one or more
particular series or classes are affected or as required by law, all of the
Shares of each series or class shall, on matters as to which such series or
class is entitled to vote, vote with other series or classes so entitled as a
single class. Notwithstanding the foregoing, with respect to matters which
would otherwise be voted on by two or more series or classes as a single
class, the Trustees may, in their sole discretion, submit such matters to the
Shareholders of any or all such series or classes, separately. There shall be
no cumulative voting in the election of Trustees. Shares may be voted in
person or by proxy. A proxy with respect to Shares held in the name of two or
more persons shall be valid if executed by any one of them unless at or prior
to exercise of the proxy the Trust receives a specific written notice to the
contrary from any one of them. A proxy purporting to be executed by or on
behalf of a Shareholder shall be deemed valid unless challenged at or prior to
its exercise and the burden of proving invalidity shall rest on the
challenger. Until Shares are issued, the Trustees may exercise all rights of
Shareholders and may take any action required by law, the Declaration of Trust
or these Bylaws to be taken by shareholders.
11.2 Voting Power and Meetings. Meetings of the Shareholders of the
Trust or of one or more series or class of shares may be called by the
Trustees for the purpose of electing Trustees as provided in Article IV,
Section 1 of the Declaration of Trust and for such other purposes as may be
prescribed by law, by the Declaration of Trust or by these Bylaws. Meetings of
the Shareholders of the Trust or of one or more series or classes of shares
may also be called by the Trustees from time to time for the purpose of taking
action upon any other matter deemed by the Trustees to be necessary or
desirable. A meeting of Shareholders may be held at any place designated by
the Trustees. Written notice of any meeting of Shareholders shall be given or
caused to be given by the Trustees by mailing such notice at least seven days
before such meeting, postage prepaid, stating the time and place of the
meeting, to each Shareholder at the Shareholder's address as it appears on the
records of the Trust. Whenever notice of a meeting is required to be given to
a Shareholder under the Declaration of Trust or these Bylaws, a written waiver
thereof, executed before or after the meeting by such Shareholder or his
attorney thereunto authorized and filed with the records of the meeting, shall
be deemed equivalent to such notice.
11.3 Quorum and Required Vote. One-quarter (25%) of Shares entitled
to vote shall be a quorum for the transaction of business at a Shareholders'
meeting, except that where any provision of law or of the Declaration of Trust
or these Bylaws permits or requires that holders of any series or class of
shares shall vote as a series or class, as the case may be, then one-quarter
(25%) of the aggregate number of Shares of that series or that class entitled
to vote shall be necessary to constitute a quorum for the transaction of
business by that series or class. Any lesser number shall be sufficient for
adjournments. Any adjourned session or sessions may be held, within a
reasonable time after the date set for the original meeting, without the
necessity of further notice. Except when a larger vote is required by any
provision
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of law or the Declaration of Trust or these Bylaws, a majority of the Shares
voted shall decide any questions and a plurality shall elect a Trustee,
provided that where any provision of law or of the Declaration of Trust or
these Bylaws permits or requires that the holders of any series or class shall
vote as a series or class, as the case may be, then a majority of the Shares
of that series or that class voted on the matter (or a plurality with respect
to the election of a Trustee) shall decide that matter insofar as that series
or class is concerned.
11.4 Action by Written Consent. Any action taken by Shareholders may
be taken without a meeting if a majority of Shareholders entitled to vote on
the matter (or such larger proportion thereof as shall be required by any
express provision of law or the Declaration of Trust or these Bylaws) consent
to the action in writing and such written consents are filed with the records
of the meetings of Shareholders. Such consent shall be treated for all
purposes as a vote taken at a meting of Shareholders.
11.5 Record Dates. For the purpose of determining the shareholders
who are entitled to vote or act at any meeting or any adjournment thereof, or
who are entitled to receive payment of any dividend or of any other
distribution, the Trustees may from time to time fix a time, which shall be
not more than 60 days before the date of any meeting of shareholders or the
date for the payment of any dividend or of any other distribution, as the
record date for determining the shareholders having the right to notice of and
to vote at such meeting and any adjournment thereof or the right to receive
such dividend or distribution, and in such case only shareholders of record on
such record date shall have such right notwithstanding any transfer of shares
on the books of the Trust after the record date; or without fixing such record
date the Trustees may for any of such purposes close the register or transfer
books for all or any part of such period.
ARTICLE 12
Amendments to the Bylaws
12.1 General. These Bylaws may be amended or repealed, in whole or in
part, by a majority of the Trustees then in office at any meeting of the
Trustees, or by one or more writings signed by such a majority.
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Exhibit 4(a)
-----------------------------
PORTIONS OF THE AMENDED AND RESTATED
AGREEMENT AND DECLARATION OF TRUST OF
THE HUDSON RIVER TRUST
RELATING TO SHAREHOLDERS' RIGHTS
-----------------------------
ARTICLE 3.
SHARES
3.1. Division of Beneficial Interest. The Shares of the Trust shall
be issued with or without par value and shall be issued in one or more series
as the Trustees may, without shareholder approval, authorize. Each series
shall be preferred over all other series in respect of the assets allocated to
that series. The Shares of any series may be issued in two or more classes, as
the Trustees may, without Shareholder approval, authorize. Unless the Trustees
have authorized the issuance of Shares of a series in two or more classes,
each Share of a series shall represent an equal proportionate interest in the
assets and liabilities of the series with each other Share of the same series,
none having priority or preference over another. If the Trustees have
authorized the issuance of Shares of a series in two or more classes, then the
classes may have such variations as to dividend, redemption, and voting
rights, net asset values, expenses borne by the classes, and other matters as
the Trustees have authorized. The number of Shares authorized shall be
unlimited. The Trustees may from time to time divide or combine the Shares of
any series or of any class of a series into a greater or lesser number without
thereby changing the proportionate beneficial interests in the series or
class.
3.2. Ownership of Shares. The ownership of Shares shall be recorded
on the books of the Trust or a transfer or similar agent. No certificates
certifying the ownership of Shares shall be issued except as the Trustees may
otherwise determine from time to time. The Trustees may make such rules as
they consider appropriate for the issuance of Share certificates, the transfer
of Shares and similar matters. The record books of the Trust as kept by the
Trust or any transfer or similar agent, as the case may be, shall be
conclusive as to who are the Shareholders of each series or class and as to
the number of Shares of each series or class held from time to time by each
Shareholder.
3.3. Investment in the Trust. The Trustees shall accept investments
in the Trust from such persons and on such terms and for such consideration,
which may consist of cash or tangible or intangible property or a combination
thereof, as they from time to time authorize.
<PAGE>
All consideration received by the Trust for the issue or sale of
Shares of each series, together with all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation thereof, and any funds or payments derived from any reinvestment
of such proceeds in whatever form the same may be shall irrevocably belong to
the series of Shares with respect to which the same were received by the Trust
for all purposes, subject only to the rights of creditors, and shall be so
handled upon the books of account of the Trust and are herein referred to as
"assets of" such series.
3.4. No Preemptive Rights. Shareholders shall have no preemptive or
other right to subscribe to any additional Shares or other securities issued
by the Trust.
3.5. Status of Shares and Limitation of Personal Liability. Shares
shall be deemed to be personal property giving only the rights provided in
this instrument. Every shareholder by virtue of having become a Shareholder
shall be held to have expressly assented and agreed to the terms hereof and to
have become a party hereto. The death of a Shareholder during the continuance
of the Trust shall not operate to terminate the same nor entitle the
representative of any deceased Shareholder to an accounting or to take any
action in court or elsewhere against the Trust or the Trustees, but only to
the rights of said decedent under this Trust. Ownership of Shares shall not
entitle the Shareholder to any title in or to the whole or any part of the
Trust property or right to call for a partition or division of the same or for
an accounting, nor shall the ownership of Shares constitute the Shareholders
partners. Neither the Trust nor the Trustees, nor any officer, employee or
agent of the Trust shall have any power to bind personally any Shareholder,
nor except as specifically provided herein to call upon any Shareholder for
the payment of any sum of money or assessment whatsoever other than such as
the Shareholder may at any time personally agree to pay.
ARTICLE 5.
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Shareholders shall have such power to vote as is provided for in, and
may hold meetings and take actions pursuant to, the provisions of the Bylaws.
ARTICLE 6.
DISTRIBUTIONS, REDEMPTIONS AND REPURCHASES
6.1. Distributions. The Trustees may each year, or more frequently if
they so determine, distribute to the Shareholders of each series or class of
Shares such income and capital gains, accrued or realized, as the Trustees may
determine, after providing for actual and accrued expenses and liabilities
(including such reserves as the Trustees may establish) determined in
accordance with good accounting practices. The Trustees shall have full
discretion to determine which items shall be treated as income and which items
as capital and
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their determination shall be binding upon the Shareholders. Distributions of
each year's income of each series or class of Shares shall be distributed pro
rata to Shareholders in proportion to the number of Shares of each series or
class held by each of them. Such distributions shall be made in cash or Shares
or a combination thereof as determined by the Trustees. Any such distribution
paid in Shares will be paid at the net asset value thereof as determined in
accordance with the Bylaws.
6.2. Redemptions and Repurchases. The Trust shall purchase such
Shares as are offered by any Shareholder for redemption, upon the presentation
of any certificate for the Shares to be purchased, a proper instrument of
transfer and a request directed to the Trust or a person designated by the
Trust that the Trust purchase such Shares, or in accordance with such other
procedures for redemption as the Trustees may from time to time authorize, and
the Trust will pay therefor the net asset value thereof, as next determined in
accordance with the Bylaws, less such redemption charge or fee as the Trustees
may determine from time to time. Except as otherwise determined by the
Trustees, payment for said Shares shall be made by the Trust to the
Shareholder within seven days after the date on which the request is made. The
obligation set forth in this Section 2 is subject to the provision that in the
event that any time the New York Stock Exchange is closed for other than
customary weekends or holidays, or, if permitted by rules of the Commission.
During periods when trading on the Exchange is restricted or during any
emergency which makes it impractical for the Trust to dispose of its
investments or to determine fairly the value of its net assets, or during any
other period permitted by order of the Commission for the protection of
investors, such obligation may be suspended or postponed by the Trustees. The
Trust may also purchase or repurchase Shares at a price not exceeding the net
asset value of such Shares in effect when the purchase or repurchase or any
contract to purchase or repurchase is made.
6.3. Redemptions at the Option of the Trust. The Trust shall have the
right at its option and at any time to redeem Shares of any Shareholder at the
net asset value thereof as determined in accordance with the Bylaws: (i) if at
such time such Shareholder owns fewer Shares than, or Shares having an
aggregate net asset value of less than, an amount determined from time to time
by the Trustees; or (ii) to the extent that such Shareholder owns Shares of a
particular series or class of Shares equal to or in excess of a percentage of
the outstanding Shares of that series or class determined from time to time by
the Trustees; or (iii) to the extent that such Shareholder owns Shares of the
Trust representing a percentage equal to or in excess of such percentage of
the aggregate number of outstanding Shares of the Trust or the aggregate net
asset value of the Trust determined from time to time by the Trustees.
6.4. Dividends, Distributions, Redemptions and Repurchases. No
dividend or distribution (including, without limitation, any distribution paid
upon termination of the Trust or of any series) with respect to, nor any
redemption or repurchase of, the Shares of any series shall be effected by the
Trust other than from the assets of such series.
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ARTICLE 8.
INDEMNIFICATION
8.4. Shareholders. In case any Shareholder or former Shareholder
shall be held to be personally liable solely by reason of his or her being or
having been a Shareholder and not because of his or her acts or omissions or
for some other reason, the Shareholder or former Shareholder (or his or her
heirs, executors, administrators or other legal representatives or in the case
of a corporation or other entity, its corporate or other general successor)
shall be entitled to be held harmless from and indemnified against all loss
and expense arising from such liability, but only out of the assets of the
particular series of Shares of which he or she is or was a Shareholder.
ARTICLE 9.
MISCELLANEOUS
9.1. Trustees, Shareholders, etc. Not Personally Liable, Notice. All
persons extending credit to, contracting with or having any claim against the
Trust or a particular series of Shares shall look only to the assets of the
Trust or the assets of that particular series of Shares for payment under such
credit, contract or claim; and neither the Shareholders nor the Trustees, nor
any of the Trust's officers, employees or agents, whether past, present or
future, shall be personally liable therefor. Nothing in this Declaration of
Trust shall protect any Trustee against any liability to which such Trustees
would otherwise be subject by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of the
office of Trustee.
Every note, bond, contract, instrument, certificate or undertaking
made or issued by the Trustees or by any officer or officers shall give notice
that this Declaration of Trust is on file with the Secretary of The
Commonwealth of Massachusetts and shall recite that the same was executed or
made by or on behalf of the Trust or by them as Trustee or Trustees or as
officers or officer and not individually and that the obligations of such
instrument are not binding upon any of them or the Shareholders individually
but are binding only upon the assets and property of the Trust, and may
contain such further recitals as he or she or they may deem appropriate, but
the omission thereof shall not operate to bind any Trustee or Trustees or
officer of officers or Shareholder or Shareholders individually.
9.7. Amendments. This Declaration of Trust may be amended at any time
by an instrument in writing signed by a majority of the then Trustees when
authorized to do so by vote of Shareholders holding a majority of the Shares
of each series entitled to vote, except that an amendment which shall affect
the holders of one or more series of Shares but not the holders of all
outstanding series shall be authorized by vote of the Shareholders holding a
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<PAGE>
majority of the Shares entitled to vote of each series affected and no vote of
Shareholders of a series not affected shall be required. Any amendment which
shall affect the holders of Shares of one or more classes of a series but not
the holders of all Shares of a series shall be authorized by vote of the
Shareholders holding a majority of the Shares of such classes affected by the
amendment voting together as a single class, and no vote of Shareholders of
the classes not affected shall be required. Amendments having the purpose of
changing the name of the Trust, of establishing, changing, or eliminating the
par value of the shares or of supplying any omission, curing any ambiguity or
curing, correcting or supplementing any defective or inconsistent provision
contained herein shall not require authorization by Shareholder vote. In
addition to the foregoing, the provisions of this Declaration of Trust may be
amended for any other reason at any time without the vote or consent of
Shareholders, so long as such amendment does not materially adversely affect
the rights of any Shareholder with respect to which such amendment is or
purports to be applicable and so long as such amendment is not in
contravention of applicable law, including the 1940 Act, by an instrument
signed in writing by a majority of the Trustees (or by an officer of the Trust
pursuant to a vote of a majority of Trustees).
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<PAGE>
Exhibit 4(b)
PORTIONS OF AMENDED AND RESTATED
BYLAWS
OF
THE HUDSON RIVER TRUST
RELATING TO SHAREHOLDERS' RIGHTS
ARTICLE 5
Reports
5.1 General. The Trustees and officers shall render reports at the
time and in the manner required by the Declaration of Trust or any applicable
law. Officers and Committees shall render such additional reports as they may
deem desirable or as may from time to time be required by the Trustees.
ARTICLE 10
Provisions Relating to the Conduct of Trust's Business
10.6 Reports to Shareholders: Distributions from Realized Gains. The
Trust shall send to each shareholder of record at least semi-annually a
statement of the condition of the Trust and of the results of its operations,
containing all information required by applicable laws or regulations.
ARTICLE 11
Shareholders' Voting Powers and Meetings
11.1 Voting Powers. The Shareholders shall have power to vote only
(i) for the election of Trustees as provided in Article IV, Section 1 of the
Declaration of Trust, provided, however, that no meeting of Shareholders is
required to be called for the purpose of electing Trustees unless and until
such time as less than a majority of the Trustees have been elected by the
Shareholders, (ii) with respect to any Manager or Sub-Adviser as provided in
Article IV, Section 6 of the Declaration of Trust to the extent required by
the 1940 Act, (iii) with respect to any termination of this Trust to the
extent and as provided in Article IX, Section 4 of the Declaration of Trust,
(iv) with respect to any amendment of the Declaration of Trust to the extent
and as provided in Article IX, Section 7 of the Declaration of Trust, (v) to
the same extent as the stockholders of a Massachusetts business corporation as
to whether or not a court action, proceeding or claim should or should not be
brought or maintained derivatively or as a class action on behalf of the Trust
or the Shareholders, and (vi) with respect to such additional matters relating
to the Trust as may be required by law, the Declaration of Trust, these Bylaws
or any registration of the Trust with the Commission (or any successor agency)
or any state, or as the Trustees may consider necessary or desirable. Each
whole Share shall be entitled to one vote as to any matter on which it is
entitled to vote and each fractional Share shall be
<PAGE>
entitled to a proportionate fractional vote. The Shareholders of any
particular series or class shall not be entitled to vote on any matters as to
which such series or class is not affected. Except with respect to matters as
to which the Trustees have determined that only the interests of one or more
particular series or classes are affected or as required by law, all of the
Shares of each series or class shall, on matters as to which such series or
class is entitled to vote, vote with other series or classes so entitled as a
single class. Notwithstanding the foregoing, with respect to matters which
would otherwise be voted on by two or more series or classes as a single
class, the Trustees may, in their sole discretion, submit such matters to the
Shareholders of any or all such series or classes, separately. There shall be
no cumulative voting in the election of Trustees. Shares may be voted in
person or by proxy. A proxy with respect to Shares held in the name of two or
more persons shall be valid if executed by any one of them unless at or prior
to exercise of the proxy the Trust receives a specific written notice to the
contrary from any one of them. A proxy purporting to be executed by or on
behalf of a Shareholder shall be deemed valid unless challenged at or prior to
its exercise and the burden of proving invalidity shall rest on the
challenger. Until Shares are issued, the Trustees may exercise all rights of
Shareholders and may take any action required by law, the Declaration of Trust
or these Bylaws to be taken by shareholders.
11.2 Voting Power and Meetings. Meetings of the Shareholders of the
Trust or of one or more series or class of shares may be called by the
Trustees for the purpose of electing Trustees as provided in Article IV,
Section 1 of the Declaration of Trust and for such other purposes as may be
prescribed by law, by the Declaration of Trust or by these Bylaws. Meetings of
the Shareholders of the Trust or of one or more series or classes of shares
may also be called by the Trustees from time to time for the purpose of taking
action upon any other matter deemed by the Trustees to be necessary or
desirable. A meeting of Shareholders may be held at any place designated by
the Trustees. Written notice of any meeting of Shareholders shall be given or
caused to be given by the Trustees by mailing such notice at least seven days
before such meeting, postage prepaid, stating the time and place of the
meeting, to each Shareholder at the Shareholder's address as it appears on the
records of the Trust. Whenever notice of a meeting is required to be given to
a Shareholder under the Declaration of Trust or these Bylaws, a written waiver
thereof, executed before or after the meeting by such Shareholder or his
attorney thereunto authorized and filed with the records of the meeting, shall
be deemed equivalent to such notice.
11.3 Quorum and Required Vote. One-quarter (25%) of Shares entitled
to vote shall be a quorum for the transaction of business at a Shareholders'
meeting, except that where any provision of law or of the Declaration of Trust
or these Bylaws permits or requires that holders of any series or class of
shares shall vote as a series or class, as the case may be, then one-quarter
(25%) of the aggregate number of Shares of that series or that class entitled
to vote shall be necessary to constitute a quorum for the transaction of
business by that series or class. Any lesser number shall be sufficient for
adjournments. Any adjourned session or sessions may be held, within a
reasonable time after the date set for the original meeting, without the
necessity of further notice. Except when a larger vote is required by any
provision
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<PAGE>
of law or the Declaration of Trust or these Bylaws, a majority of the Shares
voted shall decide any questions and a plurality shall elect a Trustee,
provided that where any provision of law or of the Declaration of Trust or
these Bylaws permits or requires that the holders of any series or class shall
vote as a series or class, as the case may be, then a majority of the Shares
of that series or that class voted on the matter (or a plurality with respect
to the election of a Trustee) shall decide that matter insofar as that series
or class is concerned.
11.4 Action by Written Consent. Any action taken by Shareholders may
be taken without a meeting if a majority of Shareholders entitled to vote on
the matter (or such larger proportion thereof as shall be required by any
express provision of law or the Declaration of Trust or these Bylaws) consent
to the action in writing and such written consents are filed with the records
of the meetings of Shareholders. Such consent shall be treated for all
purposes as a vote taken at a meting of Shareholders.
11.5 Record Dates. For the purpose of determining the shareholders
who are entitled to vote or act at any meeting or any adjournment thereof, or
who are entitled to receive payment of any dividend or of any other
distribution, the Trustees may from time to time fix a time, which shall be
not more than 60 days before the date of any meeting of shareholders or the
date for the payment of any dividend or of any other distribution, as the
record date for determining the shareholders having the right to notice of and
to vote at such meeting and any adjournment thereof or the right to receive
such dividend or distribution, and in such case only shareholders of record on
such record date shall have such right notwithstanding any transfer of shares
on the books of the Trust after the record date; or without fixing such record
date the Trustees may for any of such purposes close the register or transfer
books for all or any part of such period.
ARTICLE 12
Amendments to the Bylaws
12.1 General. These Bylaws may be amended or repealed, in whole or in
part, by a majority of the Trustees then in office at any meeting of the
Trustees, or by one or more writings signed by such a majority.
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<PAGE>
INVESTMENT ADVISORY AGREEMENT
AGREEMENT executed as of _______________, 1997, between THE HUDSON
RIVER TRUST, a Massachusetts business trust (the "Trust"), on behalf of its
portfolio series listed on Schedule 1 hereto (each, a "Portfolio" and
collectively, the "Portfolios"), and ALLIANCE CAPITAL MANAGEMENT L.P. (the
"Adviser").
Witnesseth:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY ADVISER TO THE TRUST
(a) Subject always to the control of the Trustees of the Trust, the
Adviser will, at its expense, furnish continuously an investment program for
each Portfolio, will make investment decisions on behalf of each Portfolio and
will, subject to the provisions of paragraph (c), place all orders for the
purchase and sale of each Portfolio's portfolio securities. Subject always to
the control of the Trustees of the Trust, the Adviser will also manage,
supervise and conduct the other affairs and business of the Trust and the
Portfolios and matters incidental thereto. In the performance of its duties,
the Adviser will comply with the provisions of the Agreement and Declaration
of Trust and By-laws of the Trust and each Portfolio's stated investment
objectives, policies and restrictions and will use its best efforts to
safeguard and promote the welfare of the Trust and the Portfolios and to
comply with other policies which the Trustees may from time to time determine.
(b) The Adviser, at its expense, will furnish all necessary office
space and equipment, bookkeeping and clerical services (but not accounting
services) required for it to perform its duties hereunder and will pay all
salaries, fees and expenses of officers and Trustees of the Trust who are
affiliated with the Adviser.
(c) In the selection of brokers, dealers, or futures commissions
merchants (collectively, "brokers") and the placing of orders for the purchase
and sale of portfolio investments for each Portfolio, the Adviser shall seek
to obtain the most favorable price and execution available, except to the
extent it may be permitted to pay higher brokerage commissions for brokerage
and research services as described below. In using its best efforts to obtain
for each Portfolio the most favorable price and execution available, the
Adviser, bearing in mind each Portfolio's best interest at all times, shall
consider all factors it deems relevant, including, by way of illustration,
price, the size of the transaction, the nature of the market for the security,
the amount of the commission, the timing of the transaction taking
<PAGE>
into account market prices and trends, the reputation, experience and
financial stability of the broker involved and the quality of service rendered
by the broker in other transactions. Subject to such policies as the Trustees
may determine, the Adviser shall not be deemed to have acted unlawfully or to
have breached any duty created by this Agreement or otherwise solely by reason
of its having caused any Portfolio to pay a broker that provides brokerage and
research services to the Adviser an amount of commission for effecting a
portfolio investment transaction in excess of the amount of commission another
broker would have charged for effecting that transaction, if the Adviser
determines in good faith that such amount of commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker, viewed in terms of either that particular transaction or the Adviser's
overall responsibilities with respect to such Portfolio and to other clients
of the Adviser as to which the Adviser exercises investment discretion.
(d) Subject to the provisions of the Agreement and Declaration of
Trust of the Trust and the Investment Company Act of 1940, the Adviser, at its
expense, may select and Agreement with one or more investment advisers (the
"Sub-Adviser") for any Portfolio to perform some or all of the services for
which it is responsible pursuant to paragraph (a) of this Section 1 (and any
related facilities or services for which it is responsible under paragraph (b)
of this Section 1). The Adviser will compensate any Sub-Adviser of such
Portfolio for its services to such Portfolio. The Adviser may terminate the
services of any Sub-Adviser at any time in its sole discretion, and shall at
such time assume the responsibilities of such Sub- Adviser unless and until a
successor Sub-Adviser is selected.
(e) The Adviser shall not be obligated to pay any expenses of or for
the Trust or any Portfolio not expressly assumed by the Adviser pursuant to
this Section 1 other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers and
employees of the Trust may be a shareholder, director, officer or employee of,
or be otherwise interested in, the Adviser, and in any person controlling,
controlled by or under common control with the Adviser, and that the Adviser
and any person controlling, controlled by or under common control with the
Adviser may have an interest in the Trust or in any Portfolio. It is also
understood that the Adviser and persons controlling, controlled by or under
common control with the Adviser have and may have advisory, management
service, distribution or other contracts with other organizations and persons,
and may have other interests and businesses.
3. COMPENSATION TO BE PAID BY THE TRUST TO THE ADVISER
The Trust, on behalf of the Portfolios, will pay to the Adviser as
compensation for the Adviser's services rendered, for the facilities furnished
and for the expenses borne by the Adviser pursuant to Section 1, a fee
computed and paid monthly at the annual rates applicable
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<PAGE>
to the average daily net asset value of each Portfolio set forth on Schedule 1
hereto. Such fee computed with respect to the net asset value of a Portfolio
shall be paid from the assets of such Portfolio. Such average daily net asset
value of each Portfolio shall be determined by taking an average of all of the
determinations of such net asset value during such month at the close of
business on each business day during such month while this Agreement is in
effect. Such fee shall be payable for each month within five (5) business days
after the end of such month.
In the event that expenses of any Portfolio for any fiscal year (not
including any distribution expenses paid by such Portfolio pursuant to any
distribution plan) should exceed the expense limitation on investment company
expenses enforced by any statute or regulatory authority of any jurisdiction
in which shares of such Portfolio are qualified for offer and sale, the
compensation due the Adviser for such fiscal year shall be reduced by the
amount of such excess by a reduction or refund thereof. In the event that the
expenses of any Portfolio exceed any expense limitation which the Adviser may,
by written notice to the Trust, voluntarily declare to be effective with
respect to such Portfolio, subject to such terms and conditions as the Adviser
may prescribe in such notice, the compensation due the Adviser shall be
reduced, and, if necessary, the Adviser shall bear the expenses of such
Portfolio to the extent required by such expense limitation.
If the Adviser shall serve for less than the whole of a month, the
foregoing compensation shall be prorated.
4. ASSIGNMENT TERMINATES THIS AGREEMENT; AMENDMENTS OF THIS
AGREEMENT
This Agreement shall automatically terminate, without the payment of
any penalty, in the event of its assignment; and this Agreement shall not be
amended as to any Portfolio unless such amendment is approved at a meeting by
the affirmative vote of a majority of the outstanding shares of such
Portfolio, and by the vote, cast in person at a meeting called for the purpose
of voting on such approval, of a majority of the Trustees of the Trust who are
not interested persons of the Trust or of the Adviser or of any Sub-Adviser of
the Trust. Shareholders of a Portfolio not affected by any such amendment
shall have no right to vote with respect to such amendment.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS AGREEMENT
This Agreement shall become effective upon its execution, and shall
remain in full force and effect as to a particular Portfolio continuously
thereafter (unless terminated automatically as set forth in Section 4) until
terminated as follows:
(a) Either party hereto may at any time terminate this Agreement as
to any Portfolio on not more than sixty days' written notice delivered or
mailed by registered mail, postage prepaid, to the other party, or
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<PAGE>
(b) If (i) the Trustees of the Trust or the shareholders by the
affirmative vote of a majority of the outstanding shares of such Portfolio,
and (ii) a majority of the Trustees of the Trust who are not interested
persons of the Trust or of the Adviser, by vote cast in person at a meeting
called for the purpose of voting on such approval, do not specifically approve
at least annually the continuance of this Agreement, then this Agreement shall
automatically terminate with respect to such Portfolio at the close of
business on the second anniversary of its execution, or upon the expiration of
one year from the effective date of the last such continuance, whichever is
later; provided, however, that if the continuance of this Agreement is
submitted to the shareholders of such Portfolio for their approval and such
shareholders fail to approve such continuance of this Agreement as provided
herein, the Adviser may continue to serve hereunder in a manner consistent
with the Investment Company Act of 1940 and the rules and regulations
thereunder.
Action by the Trust under (a) above may be taken either (i) by vote
of a majority of its Trustees or (ii) by the affirmative vote of a majority of
the outstanding shares of the relevant Portfolio affected.
Termination of this Agreement pursuant to this Section 5 shall be
without the payment of any penalty.
6. CERTAIN INFORMATION
The Adviser shall promptly notify the Trust in writing of the
occurrence of any of the following events: (a) the Adviser shall fail to be
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended from time to time, and under the laws of any jurisdiction in which
the Adviser is required to be registered as an investment adviser in order to
perform its obligations under this Agreement, (b) the Adviser shall have been
served or otherwise have notice of any action, suit, proceeding, inquiry or
investigation at law or in equity, before or by any court, public board or
body, involving the affairs of the Trust and (c) there shall be any change in
the "control" (as defined in the Investment Company Act of 1940) of the
Adviser.
7. CERTAIN DEFINITIONS
For the purposes of this Agreement, the "affirmative vote of a
majority of the outstanding shares" of the Portfolio means the affirmative
vote, at a duly called and held meeting of shareholders of such Portfolio, (a)
of the holders of 67% or more of the shares of such Portfolio present (in
person or by proxy) and entitled to vote at such meeting, if the holders of
more than 50% of the outstanding securities of the Portfolio entitled to vote
at such meeting are present in person or by proxy, or (b) of the holders of
more than 50% of the outstanding shares of the Portfolio entitled to vote at
such meeting, whichever is less.
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<PAGE>
For the purposes of this Agreement, the terms "affiliated person,"
"control," "interested person" and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940 and the rules and
regulations thereunder, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under said Act; the term
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940 and the rules and
regulations thereunder; and the term "brokerage and research services" shall
have the meaning given in the Securities Exchange Act of 1934 and the rules
and regulations thereunder.
8. NONLIABILITY OF ADVISER
In the absence of willful misfeasance, bad faith or gross negligence
on the part of the Adviser, or reckless disregard of its obligations and
duties hereunder, the Adviser shall not be subject to any liability to the
Trust, to any Portfolio, or to any shareholder of any Portfolio, for any act
or omission in the course of, or connected with, rendering services hereunder.
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust as Trustees and not individually and that the
obligations of this instrument are not binding upon any of the Trustees or
shareholders individually but are binding only upon the assets and property of
each of the respective Portfolios.
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<PAGE>
IN WITNESS WHEREOF, THE HUDSON RIVER TRUST and ALLIANCE CAPITAL
MANAGEMENT L.P. have each caused this instrument to be signed in duplicate on
its behalf by its duly authorized representative, all as of the day and year
first above written.
THE HUDSON RIVER TRUST
By _______________________________
Name:
Title:
ALLIANCE CAPITAL MANAGEMENT L.P.
By _______________________________
Name:
Title:
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<PAGE>
SCHEDULE 1
TO
INVESTMENT ADVISORY AGREEMENT
THE HUDSON RIVER TRUST
FEE SCHEDULE
(AS A PERCENTAGE OF AVERAGE
DAILY NET ASSETS)
<TABLE>
<CAPTION>
FIRST NEXT NEXT NEXT
$750 MILLION $750 MILLION $1 BILLION $2.5 BILLION THEREAFTER
------------ ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
INTERNATIONAL PORTFOLIOS
International 0.900% 0.825% 0.800% 0.780% 0.770%
Global 0.675% 0.600% 0.550% 0.530% 0.520%
EQUITY PORTFOLIOS
Aggressive Stock 0.625% 0.575% 0.525% 0.500% 0.475%
Common Stock 0.475% 0.425% 0.375% 0.355% 0.345%*
Growth & Income 0.550% 0.525% 0.500% 0.480% 0.470%
Small Cap Growth % % % % %
ASSET ALLOCATION PORTFOLIOS
Growth Investors 0.550% 0.500% 0.450% 0.425% 0.400%
Balanced 0.450% 0.400% 0.350% 0.325% 0.300%
Conservative Investors 0.475% 0.425% 0.375% 0.350% 0.325%
FIXED INCOME PORTFOLIOS
High Yield 0.600% 0.575% 0.550% 0.530% 0.520%
Quality Bond 0.525% 0.500% 0.475% 0.455% 0.445%
Intermediate Government 0.500% 0.475% 0.450% 0.430% 0.420%
Securities
OTHER PORTFOLIOS
Equity Index 0.325% 0.300% 0.275% 0.255% 0.245%
Money Market 0.350% 0.325% 0.300% 0.280% 0.270%
</TABLE>
*On assets in excess of $10 billion, the management fee for the Common Stock
Portfolio is reduced to 0.335% of average daily net assets.
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