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Filed Pursuant to Rule 497(e)
Registration File No.: 002-94996
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
separate series of shares of beneficial interest, each representing a
separate investment portfolio (each a "Portfolio"). There are eleven
Portfolios currently available through the Income Manager (Service Mark). The
Portfolios are The Asset Allocation Series: Alliance Conservative Investors
and Alliance Growth Investors; The Equity Series: Alliance Growth and Income,
Alliance Common Stock, Alliance Global, Alliance International, Alliance
Aggressive Stock and Alliance Small Cap Growth; and The Fixed Income Series:
Alliance Money Market, Alliance Intermediate Government Securities and
Alliance High Yield. An investment in the Alliance 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 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. California
residents may obtain the SAI at no charge by calling 1-800-999-3527.
TABLE OF CONTENTS
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PAGE
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Financial Highlights......................... 2
The Trust.................................... 3
Investment Objectives and Policies........... 3
Investment Techniques........................ 14
Certain Investment Restrictions.............. 20
Management of the Trust...................... 21
Description of the Trust's Shares............ 24
Dividends, Distributions and Taxes........... 26
Investment Performance....................... 26
Appendix A--Description of Bond Ratings ..... A-1
Appendix B--Performance Information.......... B-1
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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
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HRT103 (5/97)--#6 Copyright 1997 The Hudson River Trust. All rights reserved.
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FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited by Price
Waterhouse LLP, the Trust's independent accountants. The December 31, 1996
audited financial statements of the Trust and the "Report of Independent
Accountants" appear in the SAI. The Trust's annual report, which contains
additional performance information, is available without charge upon request.
No Class IB shares of the Alliance Conservative Investors, Alliance Growth
and Income, Alliance International, Alliance Small Cap Growth and Alliance
Intermediate Government Securities Portfolios were outstanding as of December
31, 1996.
FINANCIAL HIGHLIGHTS
PER SHARE INCOME AND CAPITAL CHANGES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)(B)
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OCTOBER 2, 1996 TO DECEMBER 31,
1996
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ALLIANCE ALLIANCE ALLIANCE
AGGRESSIVE COMMON GROWTH
STOCK STOCK INVESTORS
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Net asset value, beginning of period ..... $ 37.28 $ 17.90 $ 16.78
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INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ............ (0.01) 0.02 0.07
Net realized and unrealized gain on
investments and foreign currency
transactions ........................... 0.85 1.52 0.71
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Total from investment operations ........ 0.84 1.54 0.78
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LESS DISTRIBUTIONS:
Dividends from net investment income .... -- (0.00) (0.02)
Dividends in excess of net investment
income ................................. (0.02) (0.03) (0.09)
Distributions from realized gains ....... (0.23) (0.16) (0.02)
Distributions in excess of realized gains (2.04) (1.03) (0.24)
Tax return of capital distributions ..... -- -- --
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Total dividends and distributions ....... (2.29) (1.22) (0.37)
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Net asset value, end of period ............ $ 35.83 $ 18.22 $ 17.19
============ ========== ===========
Total return (c)........................... 2.32% 8.49% 4.64%
============ ========== ===========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) ........ $ 613 $ 1,244 $ 472
Ratio of expenses to average net assets .. 0.73%(a) 0.63%(a) 0.84%(a)
Ratio of net investment income (loss) to
average net assets ...................... (0.10)%(a) 0.61%(a) 1.69%(a)
Portfolio turnover rate.................... 108% 55% 190%
Average commission rate paid .............. $0.0263 $0.0565 $0.0495
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(RESTUBBED TABLE CONTINUED FROM ABOVE)
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ALLIANCE
ALLIANCE ALLIANCE MONEY
GLOBAL HIGH YIELD MARKET
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Net asset value, beginning of period ..... $ 16.57 $10.25 $10.16
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INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ............ 0.02 0.19 0.11
Net realized and unrealized gain on
investments and foreign currency
transactions ........................... 0.81 0.15 0.01
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Total from investment operations ........ 0.83 0.34 0.12
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LESS DISTRIBUTIONS:
Dividends from net investment income .... -- (0.03) (0.02)
Dividends in excess of net investment
income ................................. (0.11) (0.25) (0.10)
Distributions from realized gains ....... (0.10) (0.01) --
Distributions in excess of realized gains (0.28) (0.29) --
Tax return of capital distributions ..... (0.00) -- --
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Total dividends and distributions ....... (0.49) (0.58) (0.12)
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Net asset value, end of period ............ $ 16.91 $10.01 $10.16
========== ============ ==========
Total return (c)........................... 4.98% 3.32% 1.29%
========== ============ ==========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) ........ $ 290 $ 685 $3,184
Ratio of expenses to average net assets .. 0.86%(a) 0.82%(a) 0.67%(a)
Ratio of net investment income (loss) to
average net assets ...................... 0.48%(a) 8.71%(a) 4.94%(a)
Portfolio turnover rate.................... 59% 485% --
Average commission rate paid .............. $0.0418 -- --
</TABLE>
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* 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) Annualized.
(b) Net investment income and capital changes per share are based upon
monthly average shares outstanding.
(c) Total return is calculated assuming an initial investment made at the
net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period. Total return calculated for a
period of less than one year is not annualized.
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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 that are currently
divided into fourteen Portfolios, although the Trust may, from time to time,
establish additional Portfolios. 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.
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 IB shares
are offered pursuant to this prospectus at net asset value and are subject to
distribution fees imposed pursuant to a distribution plan (the "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, 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'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 99.7% and 100% 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.
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 Alliance 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 Alliance Growth Investors Portfolio's fundamental investment
objective is to achieve the highest total return consistent with
the investment adviser's determination of reasonable risk. It will
pursue this objective by investing in a diversified mix of publicly
traded equity and fixed income securities, including at times
common stocks issued by intermediate and small-sized companies and
at times lower quality fixed income securities commonly known as
"junk bonds."
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THE EQUITY SERIES
o The Alliance 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 Alliance 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 Alliance Global Portfolio's fundamental investment objective is
to achieve long-term growth of capital. The Alliance Global
Portfolio will pursue this objective by investing primarily in
equity securities of non-U.S. companies as well as U.S. issuers.
o The Alliance 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-U.S. companies with
prospects for growth.
o The Alliance Aggressive Stock Portfolio's fundamental investment
objective is to achieve long-term growth of capital. The Alliance
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 that, in the
opinion of Alliance Capital Management L.P. ("Alliance"), have
strong growth prospects and in covered options on those securities.
o The Alliance Small Cap Growth Portfolio's fundamental investment
objective is to achieve long-term growth of capital. The Alliance
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 that, in the opinion of Alliance, have
favorable growth prospects.
THE FIXED INCOME SERIES
o The Alliance Money Market Portfolio's fundamental investment
objective is to obtain a high level of current income, preserve its
assets and maintain liquidity. The Alliance Money Market Portfolio
will pursue this objective by investing in primarily high quality
U.S. dollar-denominated money market instruments.
o The Alliance 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 Alliance Intermediate Government Securities
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 Alliance 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 Alliance High Yield Portfolio will pursue this
objective by investing primarily in a diversified mix of high
yield, fixed income securities, which generally involve greater
volatility of price and risk of principal and income than higher
quality fixed income securities. Lower quality debt securities are
commonly 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 SAI.
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THE ASSET ALLOCATION SERIES
The Alliance Conservative Investors Portfolio and the Alliance 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 selecting specific securities 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
equity market strength. Consequently, the asset mix for the Alliance
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 Alliance
Growth Investors Portfolio attempts to provide for upside potential without
excessive volatility.
Alliance Capital Management L.P., the Trust's investment adviser
("Alliance"), has established an asset allocation committee (the
"Committee"), all the members of which are employees of Alliance, 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 Alliance
Conservative Investors Portfolio particularly emphasize risk assessment of
each asset class viewed over the shorter term, while decisions for the
Alliance 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 it appears that cash flow will, in the
opinion of Alliance, be 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 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 the securities
in which the Portfolios in the Asset Allocation Series may invest, these
Portfolios bear the risk that Alliance will not accurately assess and respond
to changing market conditions. While Alliance 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, these
Portfolios may incur additional operating expenses during periods of
frequently changing asset mix ranges.
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ALLIANCE CONSERVATIVE INVESTORS PORTFOLIO--INVESTMENT POLICIES
The Alliance 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 U.S. and non-U.S. 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"). The Portfolio may invest in the types of equity
securities in which the Alliance Common Stock Portfolio may invest, including
convertible securities. No more than 15% of the Portfolio's assets will be
invested in securities of non-U.S. 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, as determined by
Alliance, that is 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. In
some cases, Alliance's calculation of duration will be based on certain
assumptions (including assumptions regarding prepayment rates, in the case of
mortgage-backed or asset-backed securities, and foreign and domestic interest
rates). As of December 31, 1996, the duration of a 10-year Treasury bond was
considered by Alliance to be 7.2 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.
ALLIANCE GROWTH INVESTORS PORTFOLIO--INVESTMENT POLICIES
The Alliance 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 both exchange-traded and
over-the-counter common stocks and equity-type securities, which may include
preferred stock and convertible securities, and may include securities issued
by intermediate-and small-sized companies that, in the opinion of Alliance,
have favorable growth prospects. More risk is associated with investment in
intermediate and small-sized companies because they are often dependent on
limited product lines, financial resources or management groups. They may be
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, and may trade
infrequently or in limited volume. The prices of these stocks often fluctuate
more than those of larger, more established companies. 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, 1996, approximately 19% 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-U.S. 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
Alliance 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
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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
ALLIANCE GROWTH AND INCOME PORTFOLIO--INVESTMENT POLICIES
The Alliance 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 Alliance 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 Alliance. 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 Alliance Growth and Income Portfolio may invest without limit in
securities convertible into common stocks, which include convertible bonds,
convertible preferred stocks and convertible warrants. The Alliance 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 yield that is higher than that of
the underlying stock but lower than that of 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 A.
The Alliance 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 Alliance 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 Alliance 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 Alliance Growth and Income Portfolio
may invest in certain money market instruments. See "Investment
Techniques--Certain Money Market Instruments," below.
ALLIANCE COMMON STOCK PORTFOLIO--INVESTMENT POLICIES
The Alliance Common Stock Portfolio attempts to achieve its investment
objective by investing primarily in common stocks and other equity-type
securities that Alliance believes will share in the growth of the nation's
economy over a long period.
Most of the time, the Alliance 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 Alliance
Common Stock Portfolio
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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 Alliance Common Stock Portfolio
may also use part of its assets to make nonequity investments. These could
include buying securities such as nonparticipating and nonconvertible
preferred stocks and certain fixed income securities. Fixed income securities
will include investment grade bonds and debentures and money market
instruments, as well as securities that have a high current yield because
they are either rated in the lower categories by NRSROs (i.e., Baa or lower
by Moody's or BBB or lower by S&P) or are unrated. For a discussion of the
risks associated with investment in these higher yielding securities, see
"Investment Techniques--Fixed Income Securities" and "Investment
Techniques--Risk Factors of Lower Rated Fixed Income Securities," below. For
the fiscal year ended December 31, 1996, less than 1% of the average assets
of the Portfolio were invested in higher yielding securities.
The Alliance Common Stock Portfolio may make temporary investments in money
market instruments of the same type and credit quality as those in which the
Alliance 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 Alliance 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.
ALLIANCE GLOBAL PORTFOLIO--INVESTMENT POLICIES
The Alliance 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-U.S. companies that,
in the opinion of Alliance, have prospects for growth, as well as in
securities issued by United States companies. These non-U.S. companies may
have operations in the United States, in their country of incorporation or in
other countries. The Alliance 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 Alliance Global
Portfolio may at times invest substantially all of its assets in securities
issued by U.S. companies or in cash or cash equivalents, including money
market instruments issued by foreign entities.
The Alliance 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 Alliance Global Portfolio intends under normal conditions to invest in
equity securities. The Portfolio may make secured loans of up to 50% of its
total portfolio securities. See "Investment Techniques--Securities Lending,"
below. The Alliance 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 Alliance 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.
ALLIANCE INTERNATIONAL PORTFOLIO--INVESTMENT POLICIES
The Alliance International Portfolio attempts to achieve its objective by
investing primarily in a diversified portfolio of equity securities selected
principally to permit participation in non-U.S. companies
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or foreign governmental enterprises that, in the opinion of Alliance, have
prospects for growth. These non-U.S. companies may have operations in the
United States, in their country of incorporation and/or in other countries.
The Alliance 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 Alliance International Portfolio may purchase
securities of developing countries, which include, among others, Mexico,
Brazil, Hong Kong, India, Poland, Turkey and South Africa. The Alliance
International Portfolio intends to diversify investments among several
countries, although for temporary defensive purposes, the Alliance
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 Alliance 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 Alliance
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 Alliance International Portfolio intends under normal
market conditions to invest primarily in equity securities. The Alliance
International Portfolio may make loans of up to 50% of its portfolio
securities. See "Investment Techniques--Securities Lending," below. The
Alliance 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 Alliance 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.
ALLIANCE AGGRESSIVE STOCK PORTFOLIO--INVESTMENT POLICIES
The Alliance 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 that, in the opinion of Alliance,
have favorable growth prospects. The Alliance 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 Alliance 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
Alliance 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 Alliance 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 Alliance 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 Alliance 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 limited product
lines, financial resources or management groups. They may be more vulnerable
to competition from larger companies with greater resources and to
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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, and may trade
infrequently or in limited volume. The prices of these stocks often fluctuate
more than those of larger more established companies.
ALLIANCE SMALL CAP GROWTH PORTFOLIO--INVESTMENT POLICIES
The Alliance 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 Alliance
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.
The Alliance 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 Alliance
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 Alliance 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 Alliance Small Cap
Growth Portfolio may make secured loans of up to 50% of its total portfolio
securities. See "Investment Techniques--Securities Lending," below. The
Alliance 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 Alliance 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.
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 limited product lines,
financial resources or management groups. 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, and may trade infrequently or in limited volume. The prices of
these stocks often fluctuate more than those of larger, more established
companies.
THE FIXED INCOME SERIES
ALLIANCE MONEY MARKET PORTFOLIO--INVESTMENT POLICIES
The Alliance 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
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$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 (see
"Investment Techniques--Repurchase Agreements," below). Time deposits with
maturities greater than seven days are considered to be illiquid securities.
Investments by the Alliance Money Market Portfolio are limited to those which
present minimal credit risk. If a security held by the Alliance Money Market
Portfolio is no longer deemed to present minimal credit risk, the Alliance
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, 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
Alliance 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.
ALLIANCE INTERMEDIATE GOVERNMENT SECURITIES PORTFOLIO--INVESTMENT POLICIES
The Alliance Intermediate Government Securities 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 Alliance Intermediate Government Securities 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 Alliance Intermediate Government Securities 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
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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.
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
Alliance Intermediate Government Securities Portfolio's shares.
The Portfolio buys and sells securities with a view to maximizing current
return without, in the view of Alliance, 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 Alliance's
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 securities held by the Portfolio. However, at all times, each instrument
held by the Portfolio will have either a final maturity of not more than ten
years or a duration, as determined by Alliance, 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. In some cases, Alliance's calculation of duration
will be based on certain assumptions (including assumptions regarding
prepayment rates, in the mortgage-backed or asset-backed securities, and
foreign and domestic interest rates). As of December 31, 1996, the duration
of a 10-year Treasury bond was considered by Alliance to be 7.2 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 Alliance Intermediate Government Securities
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.
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Other Investments. The Alliance Intermediate Government Securities Portfolio
may also purchase collateralized mortgage obligations ("CMOs") issued by
non-governmental issuers and securities issued by a real estate mortgage
investment conduits ("REMICs"). See "Investment Techniques--Mortgage-Backed
and Asset-Backed Securities," below. The Alliance Intermediate Government
Securities Portfolio will purchase only CMOs only if they 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 Alliance Intermediate Government Securities 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 Alliance, such investment is 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. Because U.S. Government Securities with shorter maturities
generally have a lower yield to maturity, however, 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.
ALLIANCE HIGH YIELD PORTFOLIO--INVESTMENT POLICIES
The Alliance High Yield Portfolio attempts to achieve its objective by
investing primarily in a diversified mix of high yield, fixed income
securities, which generally involve greater volatility of price and risk of
principal and income than high quality fixed income securities.
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Ordinarily, the Portfolio will invest a portion of its assets 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 Alliance
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 Alliance, 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 Alliance; however, this restriction will not apply to (i)
fixed income securities which, in the opinion of Alliance, 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 Alliance, has
similar characteristics to securities which are so rated. See Appendix A,
"Description of Bond Ratings," for a description of each rating category. In
the event that any securities held by the Alliance 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
Alliance, such investment is considered appropriate under the circumstances.
For the fiscal year ended December 31, 1996, 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: 0% in
securities rated AAA or its equivalent, 13.4% in securities rated BB or its
equivalent and 58.6% in securities rated B or its equivalent. Of these
securities, 89.8% were rated by an NRSRO and 10.2% 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. The Portfolio 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 Alliance High Yield Portfolio will attempt 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 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 Alliance Money
Market Portfolio, may write (i.e., sell) covered put and call options and buy
put and call options on securities and securities indexes. The Portfolios,
other than the Alliance Money Market and Alliance Intermediate Government
Securities Portfolios, may also write covered put and call options and buy
put and call options on foreign currencies. The Alliance Common Stock,
Alliance Aggressive Stock, Alliance Small Cap Growth, Alliance High Yield,
Alliance Global, Alliance International, Alliance Conservative Investors,
Alliance Growth Investors, Alliance Intermediate Government Securities and
Alliance Growth and Income Portfolios may buy and sell 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.
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MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
The Portfolios may invest in mortgage-backed securities, which are mortgage
loans made by banks, savings and loan institutions and other lenders that are
assembled into pools, that are (i) issued by an agency of the U.S. Government
(such as GNMA) whose securities are guaranteed by the U.S. Treasury, (ii)
issued by an instrumentality of the U.S. Government (such as FNMA) whose
securities are supported by the instrumentality's right to borrow from the
U.S. Treasury, at the discretion of the U.S. Treasury, though not backed by
the full faith and credit of the U.S. Government itself, or (iii)
collateralized by U.S. Treasury obligations or U.S. Government agency
securities. Interests in such pools are described in this prospectus as
mortgage-backed securities. The Portfolios may invest in (i) mortgage-backed
securities, including GNMA, FNMA and FHLMC certificates, (ii) CMOs that are
issued by non-governmental entities and collateralized by U.S. Treasury
obligations or by U.S. Government agency or instrumentality securities, (iii)
REMICs and (iv) other asset-backed securities. Other asset-backed securities
(unrelated to mortgage loans) may include securities such as certificates for
automobile receivables ("CARS") and credit card receivable securities
("CARDS") as well as other asset-backed securities that may be developed in
the future.
The rate of return on mortgage-backed securities, such as GNMA, FNMA and
FHLMC certificates and CMOs, and, to a lesser extent, asset-backed securities
may be affected by early prepayment of principal on the underlying loans or
receivables. Prepayment rates vary widely and may be affected by changes in
market interest rates. It is not possible to predict with certainty 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
Alliance 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 invest in money market instruments, including
certificates of deposit, time deposits, bankers' acceptances, bank notes and
other short-term debt obligations issued by commercial banks or savings and
loan associations ("S&Ls"). Certificates of deposit are receipts from a bank
or an S&L for funds deposited for a specified period of time at a specified
rate of return. Time deposits in banks or S&Ls are generally similar to
certificates of deposit, but are uncertificated. Bankers' acceptances are
time drafts drawn on commercial banks by borrowers, usually in connection
with international commercial transactions.
The Portfolios may also invest in 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
or 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).
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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 but of comparable quality 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 Alliance'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 Portfolio 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 also reduce their current yield and total
return. However, Alliance 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 Alliance, subject to the
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%
(10% in the case of the Alliance Money Market Portfolio) of the Portfolio's
net assets would be invested in "illiquid securities."
LOAN ASSIGNMENTS AND PARTICIPATIONS
The Alliance 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 are often not rated and
may also be less liquid than other debt interests.
16
<PAGE>
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, and the Portfolio will generally 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
Alliance considers 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 an advantageous price or yield. Forward commitments
and when-issued and delayed delivery transactions are generally expected to
settle within four 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, liquid assets 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 Alliance Money Market Portfolio, may write
(sell) covered put and call options and buy put and call options, including
options relating to individual securities and securities indexes. The
Portfolios, other than the Alliance Money Market and Alliance Intermediate
Government Securities 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
17
<PAGE>
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 Alliance Money Market and Alliance Intermediate
Government Securities 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 Alliance High Yield, Alliance Global, Alliance International, Alliance
Conservative Investors, Alliance Growth Investors and Alliance Intermediate
Government Securities 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 Alliance
Intermediate Govenment Securities Portfolio) as well as the Alliance Common
Stock, Alliance Aggressive Stock, Alliance Small Cap Growth and Alliance
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). As described below under "Foreign
Securities and Currencies," the Alliance High Yield, Alliance Global,
Alliance International, Alliance Conservative Investors, Alliance Growth
Investors, Alliance Common Stock, Alliance Aggressive Stock, Alliance Small
Cap Growth and Alliance 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 Alliance 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
18
<PAGE>
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) the sum of amounts of initial margin deposits and premiums required to
establish non-hedging positions would not exceed 5% of the Portfolio's
liquidation value. When a Portfolio purchases or sells a futures contract or
writes a put or call option on a futures contract, the Portfolio will
segregate with its custodian liquid assets (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 Alliance Money Market and Alliance
Intermediate Government Securities 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 U.S. dollar value of securities
denominated in a foreign currency or protecting the U.S. 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 Alliance Intermediate Government Securities
Portfolio, 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.
19
<PAGE>
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 Alliance High Yield and
Alliance Intermediate Government Securities 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 Alliance to be of good standing and will not be made unless,
in the judgment of Alliance, the consideration to be earned from such loans
would justify the risk.
PORTFOLIO TURNOVER
Portfolio turnover rates are set forth under "Financial Highlights." These
rates of portfolio turnover may be greater than those of most other
investment companies. A high rate of portfolio turnover involves
correspondingly greater brokerage and other expenses than a lower rate, which
must be borne by the Portfolio.
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.
The Alliance High Yield and Alliance Intermediate Government Securities
Portfolios may make secured loans of portfolio securities or cash without
limitation. None of the other Portfolios will make loans, except that each
such Portfolio may make loans of portfolio securities not exceeding 50% of
the value of that Portfolio's total assets. This restriction does not prevent
a Portfolio from purchasing debt obligations in which a Portfolio may invest
consistent with its investment policies, or from buying government
obligations, short-term commercial paper or publicly traded debt, including
bonds, notes, debentures, certificates of deposit, and equipment trust
certificates, nor does this restriction apply to loans made under insurance
policies or through entry into repurchase agreements to the extent they may
be viewed as loans.
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 total assets.
However, this restriction does not apply to investments by the Alliance 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 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 Alliance 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 Alliance 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 Alliance Money Market
20
<PAGE>
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 Agreement and Declaration of Trust and By-laws.
THE INVESTMENT ADVISER
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 (the "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, administrative and other services, other than investor
services or accounting 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>
Alliance International...................... 0.900% 0.825% 0.800% 0.780% 0.770%
Alliance Global............................. 0.675% 0.600% 0.550% 0.530% 0.520%
Alliance Aggressive Stock................... 0.625% 0.575% 0.525% 0.500% 0.475%
Alliance Common Stock....................... 0.475% 0.425% 0.375% 0.355% 0.345%*
Alliance Growth and Income.................. 0.550% 0.525% 0.500% 0.480% 0.470%
Alliance Small Cap Growth................... 0.900% 0.850% 0.825% 0.800% 0.775%
Alliance Growth Investors................... 0.550% 0.500% 0.450% 0.425% 0.400%
Alliance Conservative Investors............. 0.475% 0.425% 0.375% 0.350% 0.325%
Alliance High Yield......................... 0.600% 0.575% 0.550% 0.530% 0.520%
Alliance Intermediate Government
Securities................................. 0.500% 0.475% 0.450% 0.430% 0.420%
Alliance 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 Alliance
Common Stock Portfolio is reduced to 0.335% of average daily net assets.
THE PORTFOLIO MANAGERS
THE ASSET ALLOCATION SERIES
ALLIANCE CONSERVATIVE INVESTORS AND ALLIANCE GROWTH INVESTORS PORTFOLIOS
Robert G. Heisterberg has been the person principally responsible for the
Alliance Conservative Investors and Alliance Growth Investors Portfolios'
investment programs since February 12, 1996. Mr. Heisterberg, a Senior Vice
President of Alliance and Global Economic Policy Analysis, has been
associated with Alliance since 1977.
21
<PAGE>
THE EQUITY SERIES
ALLIANCE GROWTH AND INCOME PORTFOLIO
Paul Rissman and W. Theodore Kuck have been the persons principally
responsible for the Alliance Growth and Income Portfolio's investment
program, Mr. Rissman since February 12, 1996 and Mr. Kuck since 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.*
ALLIANCE COMMON STOCK PORTFOLIO
Tyler J. Smith has been the person principally responsible for the Alliance
Common Stock Portfolio's investment program since 1977. Mr. Smith, a Senior
Vice President of Alliance, has been associated with Alliance since 1970.*
ALLIANCE GLOBAL AND ALLIANCE INTERNATIONAL PORTFOLIOS
Ronald L. Simcoe has been the person principally responsible for the Alliance
Global Portfolio's investment program since 1988 and the Alliance
International Portfolio's investment program since its inception. Mr. Simcoe,
a Vice President of Alliance, has been associated with Alliance since 1978.*
ALLIANCE AGGRESSIVE STOCK PORTFOLIO
Alden M. Stewart and Randall E. Haase have been the persons principally
responsible for the Alliance 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.*
ALLIANCE SMALL CAP GROWTH PORTFOLIO
Michael F. Gaffney has been the person principally responsible for the
Alliance Small Cap Growth Portfolio's investment program since its inception.
Mr. Gaffney, a Senior Vice President of Alliance, has been associated with
Alliance since 1987.*
THE FIXED INCOME SERIES
ALLIANCE MONEY MARKET PORTFOLIO
Raymond J. Papera has been the person principally responsible for the
Alliance Money Market Portfolio's investment program since 1990. Mr. Papera,
a Vice President of Alliance, has been associated with Alliance since 1990.*
ALLIANCE INTERMEDIATE GOVERNMENT SECURITIES PORTFOLIO
Patricia J. Young and Jeffrey S. Phlegar have been the persons principally
responsible for the Alliance Intermediate Government Securities Portfolio's
investment program, Ms. Young since 1995 and Mr. Phlegar since 1997. Ms.
Young, a Senior Vice President of Alliance, has been associated with Alliance
since 1992. Mr. Phlegar, a Vice President of Alliance, has been associated
with Alliance since 1988.
ALLIANCE HIGH YIELD PORTFOLIO
Wayne C. Tappe has been the person principally responsible for the Alliance
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.
22
<PAGE>
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 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 estimated expenses, is based on
information for Class IA shares 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.
No information has been provided with respect to Alliance Small Cap Growth
Portfolio because such Portfolio has not yet completed its first fiscal year.
<TABLE>
<CAPTION>
ALLIANCE
ALLIANCE ALLIANCE GROWTH ALLIANCE
CONSERVATIVE GROWTH AND COMMON ALLIANCE
INVESTORS INVESTORS INCOME STOCK GLOBAL
TYPE OF EXPENSE PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------- -------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Investment Advisory Fees 0.48% 0.53% 0.55% 0.38% 0.65%
12b-1 Fees ............... 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses ........... 0.07% 0.06% 0.05% 0.03% 0.08%
-------------- ----------- ----------- ----------- -----------
Total Expenses ........... 0.80% 0.84% 0.85% 0.66% 0.98%
============== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
ALLIANCE
ALLIANCE ALLIANCE INTERMEDIATE ALLIANCE
AGGRESSIVE MONEY GOVERNMENT HIGH ALLIANCE
STOCK MARKET SECURITIES YIELD INTERNATIONAL
TYPE OF EXPENSE PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------- ------------ ----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Investment Advisory Fees 0.55% 0.35% 0.50% 0.60% 0.90%
12b-1 Fees ............... 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses ........... 0.03% 0.04% 0.09% 0.06% 0.18%
------------ ----------- -------------- ----------- ---------------
Total Expenses ........... 0.83% 0.64% 0.84% 0.91% 1.33%
============ =========== ============== =========== ===============
</TABLE>
Actual investment advisory fees, other expenses and total expenses for the
period ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
ALLIANCE
ALLIANCE ALLIANCE GROWTH ALLIANCE
CONSERVATIVE GROWTH AND COMMON ALLIANCE
INVESTORS INVESTORS INCOME STOCK GLOBAL
TYPE OF EXPENSE PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------- -------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Investment Advisory Fees 0.55% 0.52% 0.55% 0.36% 0.53%
12b-1 Fees ............... 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses ........... 0.06% 0.05% 0.03% 0.02% 0.07%
-------------- ----------- ----------- ----------- -----------
Total Expenses ........... 0.86% 0.82% 0.83% 0.63% 0.85%
============== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
ALLIANCE
ALLIANCE ALLIANCE INTERMEDIATE ALLIANCE
AGGRESSIVE MONEY GOVERNMENT HIGH ALLIANCE
STOCK MARKET SECURITIES YIELD INTERNATIONAL
TYPE OF EXPENSE PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------- ------------ ----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Investment Advisory Fees 0.46% 0.40% 0.50% 0.55% 0.90%
12b-1 Fees ............... 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses ........... 0.02% 0.03% 0.06% 0.04% 0.16%
------------ ----------- -------------- ----------- ---------------
Total Expenses ........... 0.73% 0.68% 0.81% 0.84% 1.31%
============ =========== ============== =========== ===============
</TABLE>
23
<PAGE>
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, 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 equal pro rata interests 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
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
24
<PAGE>
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 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 be 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.
25
<PAGE>
HOW ASSETS ARE VALUED
Values are determined according to accepted accounting practices and all laws
and regulations that apply. The assets of each Portfolio are generally valued
as follows, 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 Alliance
Money Market Portfolio which mature in 60 days or less are valued at
amortized cost, which approximates market value. Securities held in the
Alliance 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 (the "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 Portfolios.
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.
26
<PAGE>
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 Alliance 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 Alliance 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 Alliance Intermediate Government Securities and Alliance 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.
27
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS
Bonds are considered to be "investment grade" if they are in one of the top
four ratings.
S&P's ratings are as follows:
o Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
o Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
o Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
o Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in higher
rated categories.
o Debt rated BB, B, CCC, CC or C is regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the
obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse debt conditions.
o The rating C1 is reserved for income bonds on which no interest is
being paid.
o Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
Moody's ratings are as follows:
o Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt-edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
o Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks
appear somewhat larger than in Aaa securities.
o Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
some time in the future.
o Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
A-1
<PAGE>
o Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
o Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
o Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
o Bonds which are rated Ca represent obligations which are speculative to
a high degree. Such issues are often in default or have other marked
shortcomings.
o Bonds which are rated C are the lowest class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies modifiers to each rating classification from Aa through B to
indicate relative ranking within its rating categories. The modifier "1"
indicates that a security ranks in the higher end of its rating category; the
modifier "2" indicates a mid-range ranking; and the modifier "3" indicates
that the issue ranks in the lower end of its rating category.
A-2
<PAGE>
APPENDIX B
PERFORMANCE INFORMATION
The following tables provide performance results for The Hudson River Trust
Portfolios (except for the Alliance Small Cap Growth Portfolio), 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.
Investment operations commenced with respect to Class IB shares of the
Alliance Aggressive Stock, Alliance Common Stock, Alliance Growth Investors,
Alliance Global, Alliance High Yield and Alliance Money Market Portfolios on
October 2, 1996. Returns shown for Class IB shares for periods prior to
October 2, 1996 and returns shown for Class IB shares of other Portfolios are
derived from the historical performance of Class IA shares. These returns
have not been adjusted to reflect the 12b-1 fees, currently paid at an annual
rate of 0.25% of average net assets, applicable to Class IB shares; Class IA
shares are not subject to any 12b-1 fees. All other things being equal,
returns for Class IB shares would have been adversely affected (i.e.,
reduced) by the amount of such higher expenses, compounded over the relevant
period.
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 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.
B-1
<PAGE>
The Lehman Treasury Bond Index ("Lehman Treasury") represents an unmanaged
group of securities consisting of all currently offered public obligations of
the U.S. Treasury intended for distribution in the domestic market.
The Standard and Poor's 500 Composite Stock Price 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 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 Alliance Common Stock Portfolio on June 16, 1975; the Alliance
Money Market Portfolio on July 13, 1981; the Alliance Aggressive Stock
Portfolio on January 27, 1986; the Alliance High Yield Portfolio on January
2, 1987; the Alliance Global Portfolio on August 27, 1987; the Alliance
Conservative Investors and Alliance Growth Investors Portfolios on October 2,
1989; the Alliance Intermediate Government Securities Portfolio on April 1,
1991; the Alliance Growth and Income Portfolio on October 1, 1993; and the
Alliance 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 Alliance 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 Alliance Common Stock Portfolio's separate account
predecessor; for the Lipper Money Market Funds Average, from June 1, 1981;
for the Lipper Small Company Growth Funds Average, 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.
B-2
<PAGE>
TABLE I
ANNUALIZED RATES OF RETURN
PERIODS ENDING DECEMBER 31, 1996
<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
ALLIANCE CONSERVATIVE INVESTORS ............. 5.21% 6.70% 7.32% -- -- 9.03%
Lipper Flexible Portfolio Average ........... 13.59 11.78 10.84 -- -- 10.68
70% Lehman Treasury/30% S&P 500.............. 8.78 10.14 9.64 -- -- 10.42
- -------------------------------------------- -------- --------- --------- ---------- ---------- -----------
ALLIANCE GROWTH INVESTORS.................... 12.54 11.27 10.75 -- -- 15.56
Lipper Flexible Portfolio Average ........... 13.59 11.78 10.84 -- -- 10.68
70% S&P 500/30% Lehman Gov't Corp. .......... 16.94 15.84 13.02 -- -- 12.73
- -------------------------------------------- -------- --------- --------- ---------- ---------- -----------
THE EQUITY SERIES
ALLIANCE GROWTH AND INCOME................... 20.09 14.00 -- -- -- 12.77
Lipper Growth & Income Funds Average ........ 20.78 16.15 -- -- -- 15.71
75% S&P 500/25% Value Line Convertible ...... 21.28 17.93 -- -- -- 17.24
- -------------------------------------------- -------- --------- --------- ---------- ---------- -----------
ALLIANCE COMMON STOCK........................ 24.20 17.20 15.71 15.82% 16.50% 15.21
Lipper Growth Equity Mutual Funds Average ... 19.24 15.23 13.04 13.47 14.58 15.06
S&P 500...................................... 22.96 19.66 15.20 15.28 14.85 14.63
- -------------------------------------------- -------- --------- --------- ---------- ---------- -----------
ALLIANCE GLOBAL ............................. 14.53 12.71 13.49 -- -- 11.69
Lipper Global Mutual Funds Average........... 16.51 9.61 11.36 -- -- 8.69
MSCI World .................................. 13.48 12.91 10.82 -- -- 7.44
- -------------------------------------------- -------- --------- --------- ---------- ---------- -----------
ALLIANCE INTERNATIONAL....................... 9.82 -- -- -- -- 12.14
Lipper International Mutual Funds Average ... 11.78 -- -- -- -- 13.12
MSCI EAFE.................................... 6.05 -- -- -- -- 8.74
- -------------------------------------------- -------- --------- --------- ---------- ---------- -----------
ALLIANCE AGGRESSIVE STOCK.................... 22.13 15.64 11.82 18.59 -- 20.21
Lipper Small Company Growth Funds
Average..................................... 20.20 15.31 15.10 14.22 -- 13.46
50% S&P 400/50% Russell 2000................. 17.85 14.14 14.80 14.29 -- 13.98
- -------------------------------------------- -------- --------- --------- ---------- ---------- -----------
THE FIXED INCOME SERIES
ALLIANCE MONEY MARKET ....................... 5.27 5.01 4.30 5.89 7.08 7.28
Lipper Money Market Mutual Funds
Average..................................... 4.80 4.63 3.96 5.52 6.66 7.01
3 Month T-Bill .............................. 5.25 5.07 4.37 5.67 6.72 6.97
- -------------------------------------------- -------- --------- --------- ---------- ---------- -----------
ALLIANCE INTERMEDIATE GOVERNMENT SECURITIES 3.78 3.99 5.60 -- -- 6.95
Lipper Intermediate Government Funds
Average..................................... 2.68 4.55 5.66 -- -- 6.96
Lehman Intermediate Government Bond ........ 4.06 5.37 6.23 -- -- 7.43
- -------------------------------------------- -------- --------- --------- ---------- ---------- -----------
ALLIANCE HIGH YIELD.......................... 22.81 12.71 14.64 -- -- 11.40
Lipper High Current Yield Mutual
Funds Average............................... 13.67 8.30 12.10 -- -- 9.38
ML Master.................................... 11.06 9.59 12.76 -- -- 11.24
- -------------------------------------------- -------- --------- --------- ---------- ---------- -----------
</TABLE>
B-3
<PAGE>
TABLE II
CUMULATIVE RATES OF RETURN
PERIODS ENDING DECEMBER 31, 1996
<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
ALLIANCE CONSERVATIVE INVESTORS............. 5.21% 21.49% 42.36% -- -- 87.12%
Lipper Flexible Portfolio Average .......... 13.59 40.15 68.94 -- -- 112.84
70% Lehman Treasury/30% S&P 500 ............ 8.78 33.60 58.40 -- -- 105.23
- ------------------------------------------- -------- --------- --------- ---------- ---------- -----------
ALLIANCE GROWTH INVESTORS................... 12.54 37.75 66.62 -- -- 185.38
Lipper Flexible Portfolio Average. ........ 13.59 40.15 68.94 -- -- 112.84
70% S&P 500/30% Lehman Gov't Corp. ........ 16.94 55.46 84.42 -- -- 138.49
- ------------------------------------------- -------- --------- --------- ---------- ---------- -----------
THE EQUITY SERIES
ALLIANCE GROWTH AND INCOME.................. 20.09 48.14 -- -- -- 47.77
Lipper Growth & Income Funds Average ...... 20.78 56.95 -- -- -- 60.96
75% S&P 500/25% Value Line Convertible .... 21.28 63.99 -- -- -- 67.75
- ------------------------------------------- -------- --------- --------- ---------- ---------- -----------
ALLIANCE COMMON STOCK....................... 24.20 60.98 107.42 334.40% 888.31% 1,848.15
Lipper Growth Equity Mutual Funds Average .. 19.24 53.78 87.06 266.86 705.20 2,152.74
S&P 500..................................... 22.96 71.34 102.85 314.34 925.25 1,655.74
- ------------------------------------------- -------- --------- --------- ---------- ---------- -----------
ALLIANCE GLOBAL............................. 14.53 43.20 88.25 -- -- 181.24
Lipper Global Mutual Funds Average ........ 16.51 32.17 72.23 -- -- 120.81
MSCI World ................................. 13.48 43.95 67.12 -- -- 95.62
- ------------------------------------------- -------- --------- --------- ---------- ---------- -----------
ALLIANCE INTERNATIONAL...................... 9.82 -- -- -- -- 22.21
Lipper International Mutual Funds Average .. 11.78 -- -- -- -- 24.22
MSCI EAFE................................... 6.05 -- -- -- -- 15.78
- ------------------------------------------- -------- --------- --------- ---------- ---------- -----------
ALLIANCE AGGRESSIVE STOCK................... 22.13 54.63 74.83 450.29 -- 647.76
Lipper Small Company Growth Funds Average . 20.20 54.13 104.43 288.11 -- 309.45
50% S&P 400/50% Russell 2000................ 17.85 48.69 99.38 280.32 -- 318.19
- ------------------------------------------- -------- --------- --------- ---------- ---------- -----------
THE FIXED INCOME SERIES
ALLIANCE MONEY MARKET....................... 5.27 15.79 23.44 77.24 178.99 196.51
Lipper Money Market Mutual Funds Average .. 4.80 14.54 21.42 71.13 163.30 185.78
3 Month T-Bill.............................. 5.25 15.99 23.86 73.61 165.31 184.26
- ------------------------------------------- -------- --------- --------- ---------- ---------- -----------
ALLIANCE INTERMEDIATE GOVERNMENT
SECURITIES................................. 3.78 12.47 31.33 -- -- 47.16
Lipper Intermediate Government Funds
Average ................................... 2.68 14.32 31.82 -- -- 47.39
Lehman Intermediate Government Bond ....... 4.06 16.98 35.30 -- -- 51.07
- ------------------------------------------- -------- --------- --------- ---------- ---------- -----------
ALLIANCE HIGH YIELD......................... 22.81 43.17 98.03 -- -- 194.42
Lipper High Current Yield Bond Funds
Average ................................... 13.67 27.12 77.40 -- -- 146.99
ML Master .................................. 11.06 31.63 82.29 -- -- 190.43
- ------------------------------------------- -------- --------- --------- ---------- ---------- -----------
</TABLE>
B-4
<PAGE>
TABLE III
ANNUAL RATES OF RETURN
<TABLE>
<CAPTION>
ALLIANCE ALLIANCE ALLIANCE ALLIANCE ALLIANCE
YEAR ENDING COMMON MONEY AGGRESSIVE HIGH ALLIANCE CONSERV.
DECEMBER 31 STOCK MARKET STOCK YIELD GLOBAL INVESTORS
- ----------- -------- -------- ---------- -------- -------- ---------
<S> <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%*
1987........ 7.5 6.6 7.3 4.7%* -13.3%*
1988........ 22.4 7.3 1.1 9.7 10.9
1989........ 25.6 9.2 43.5 5.1 26.7 3.1%*
1990........ -8.1 8.2 8.2 -1.1 -6.1 6.3
1991........ 37.9 6.2 86.9 24.5 30.5 19.8
1992........ 3.2 3.6 -3.2 12.3 -0.5 5.6
1993........ 24.8 3.0 16.8 23.2 32.1 10.8
1994........ -2.1 4.0 -3.8 -2.8 5.2 -4.1
1995........ 32.5 5.7 31.6 19.9 18.8 20.4
1996........ 24.2 5.3 22.1 22.8 14.5 5.2
- ----------- -------- -------- ---------- -------- -------- ---------
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ALLIANCE
ALLIANCE ALLIANCE GROWTH
YEAR ENDING GROWTH INTERMEDIATE AND ALLIANCE
DECEMBER 31 INVESTORS GOVT. SECURITIES INCOME INTERNATIONAL
- ----------- --------- ---------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
1976 .......
1977 .......
1978 .......
1979 .......
1980 .......
1981 .......
1982 .......
1983 .......
1984 .......
1985 .......
1986 .......
1987 .......
1988 .......
1989........ 4.0%*
1990........ 10.7
1991........ 48.8 12.1%*
1992........ 4.9 5.5
1993........ 15.3 10.6
1994........ -3.2 -4.4 1.1%*
1995........ 26.4 13.3 36.5 11.3%*
1996........ 12.5 3.8 22.4 9.8
- ----------- --------- ---------------- -------- ------------- --------
</TABLE>
- ------------
*Unannualized from the inception date described in the Prospectus through the
end of the calendar year indicated.
B-5
<PAGE>
PERFORMANCE OF PORTFOLIOS MANAGED SIMILARLY TO THE ALLIANCE SMALL CAP GROWTH
PORTFOLIO
In addition to managing the assets of the Alliance Small Cap Growth
Portfolio, Alliance manages six 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 Alliance Small Cap Growth Portfolio. The
Historical Portfolios are not subject to certain limitations, diversification
requirements and other restrictions to which the Alliance 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 fourteen 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 a 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 Alliance 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 Alliance Small Cap Growth
Portfolio and will result in a higher expense ratio for the Alliance Small
Cap Growth Portfolio. Expenses associated with the distribution of Class IB
shares of the Alliance Small Cap Growth Portfolio in accordance with the plan
adopted by the Trust's Board of Trustees pursuant to Rule 12b-1 under the
Investment Company 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 returns, 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 Index is compiled by Frank Russell Company and
consists of the 2000 smallest of the 3000 largest capitalization U.S.
companies. The Russell 2000 Growth Index is compiled by Frank Russell Company
and consists of that half of the 2000 smallest of the 3000 largest
capitalization U.S. companies that has higher price-to-book ratios and higher
forecasted growth values. The Russell Indices reflect changes in market
prices, but excludes investment income.
To the extent the Alliance Small Cap Growth Portfolio does not invest in U.S.
common stocks or utilizes investment techniques such as futures or options,
the Russell Indices may not be substantially comparable to the Alliance Small
Cap Growth Portfolio. The Russell Indices are included to illustrate material
economic and market factors that existed during the time period shown. The
Russell Indices do not reflect the deduction of any fees. If the Alliance
Small Cap Growth Portfolio were to purchase a portfolio of securities
substantially identical to the securities comprising the Russell Indices, the
Alliance Small Cap Growth Portfolio's performance relative to the Russell
Indices would be reduced by the Alliance 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 Alliance Small Cap Growth Portfolio's
shareholders of sales charges and income taxes.
B-6
<PAGE>
The Lipper Small Company 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 Small Company 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 Alliance 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.
SCHEDULE OF COMPOSITE INVESTMENT PERFORMANCE--HISTORICAL PORTFOLIOS
FOR THE FOURTEEN YEARS ENDED DECEMBER 31, 1996*
<TABLE>
<CAPTION>
RUSSELL LIPPER SMALL CO.
HISTORICAL RUSSELL 2000 GROWTH GROWTH
PORTFOLIOS 2000 INDEX INDEX FUND INDEX
TOTAL RETURN TOTAL RESEARCH TOTAL RETURN TOTAL RETURN
-------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Year ended:
December 31, 1996 ................. 36.91% 16.50% 11.26% 20.00%
December 31, 1995 ................. 54.59% 28.45% 31.04% 32.02%
December 31, 1994 ................. -3.47% -1.82% -2.43% -0.58%
December 31, 1993 ................. 14.35% 18.88% 13.36% 17.41%
December 31, 1992 ................. 4.85% 18.41% 7.77% 13.39%
December 31, 1991 ................. 40.96% 46.04% 51.19% 51.56%
December 31, 1990 ................. -23.46% -19.48% -17.41% -9.49%
December 31, 1989 ................. 25.81% 16.26% 20.17% 25.26%
December 31, 1988 ................. 25.63% 25.02% 20.37% 19.87%
December 31, 1987 ................. -7.66% -8.80% -10.48% -3.87%
December 31, 1986 ................. 15.30% 5.68% 3.58% 9.76%
December 31, 1985 ................. 42.57% 31.05% 30.97% 30.84%
December 31, 1984 ................. -11.73% -7.30% -15.83% -9.78%
December 31, 1983 ................. 32.53% 29.13% 20.13% 26.28%
Cumulative total return for the
period January 1, 1983 to December
31, 1996 ............................. 641.74% 434.41% 285.48% 492.59%
</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, 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
--------------------------------------------------------
RUSSELL LIPPER SMALL CO.
HISTORICAL RUSSELL 2000 GROWTH GROWTH
PORTFOLIOS 2000 INDEX INDEX FUND INDEX
------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C>
Three years ........... 26.89% 13.68% 12.47% 15.32%
Five years ............ 19.62% 15.64% 11.69% 15.24%
Ten years ............. 14.45% 12.42% 10.88% 14.34%
Since January 1, 1983 15.38% 12.72% 10.12% 13.15%
</TABLE>
B-7
